Behavioral Optimal Taxation: The Case of Aspirations

Abstract

<p>I provide a simple two-period model comparing lump-sum taxes with proportional labor taxes. The difference to the classical optimal taxation literature is that I introduce a behavioral twist according to which people’s aspirations change from one period to another as suggested by empirical evidence. It turns out that the policy implication from this model can differ significantly from the one assuming full rationality. In the behavioral model, a lump-sum tax is much less attractive. This paper does not aim at providing a full-fledged quantitative model, it should rather be seen as a cautionary tale about the robustness of classical optimal taxation results when deviating from full rationality.</p>

From Individual Human Decisions to Economic and Financial Policies

“…A smaller theoretical contribution to public finance is contained in Weber (2021). In that paper, I illustrate how the policy implications of classical optimal taxation literature can change when a behavioral effect is present.…”

Collective versus individual interests: The varying effects of public goods and services on tax attitudes in Africa

“…2012). Extensions of this theory or neoclassical economic models (as they are called) still present a framework called non‐expected utility theory that accounts for taxpayers’ compliance decision as a risk‐taking choice but with known information on the probability of being caught and penalized (Weber, Fooken, and Herrmann 2014). The crux of the economic approach evaluates decision making and risk‐taking both in uncertainty and with perfect information as driving taxation among individuals.…”