Identification of income-leisure preferences and evaluation of income tax policy

Research output: Contribution to journalArticlepeer-review

19 Scopus citations

Abstract

The merits of alternative income tax policies depend on the population distribution of preferences for income and leisure. Standard theory, which supposes that persons want more income and more leisure, does not predict how they resolve the tension between these desires. Empirical studies of labor supply have imposed strong preference assumptions that lack foundation. This paper examines anew the problem of inference on income-leisure preferences and considers the implications for evaluation of tax policy. I first perform a basic revealed-preference analysis assuming only that persons prefer more income and leisure. This shows that observation of a person's time allocation under a status quo tax policy may bound his allocation under a proposed policy or may have no implications, depending on the tax schedules and the person's status quo time allocation. I next explore the identifying power of two classes of assumptions that restrict the distribution of income-leisure preferences. One assumes that groups of persons who face different choice sets have the same preference distribution. The second restricts the shape of this distribution. The generic finding is partial identification of preferences. This implies partial prediction of tax revenue under proposed policies and partial knowledge of the welfare function for utilitarian policy evaluation.

Original languageEnglish (US)
Pages (from-to)145-174
Number of pages30
JournalQuantitative Economics
Volume5
Issue number1
DOIs
StatePublished - Mar 2014

Keywords

  • Labor supply
  • Partial identification
  • Revealed preference analysis

ASJC Scopus subject areas

  • Economics and Econometrics

Fingerprint

Dive into the research topics of 'Identification of income-leisure preferences and evaluation of income tax policy'. Together they form a unique fingerprint.

Cite this