Optimal Taxation with Behavioral Agents / Emmanuel Farhi, Xavier Gabaix.

Format:

Book

Author/Creator:

Farhi, Emmanuel.

Contributor:

National Bureau of Economic Research.

Gabaix, Xavier.

Series:

Working Paper Series (National Bureau of Economic Research) no. w21524.

NBER working paper series no. w21524

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2015.

Summary:

This paper develops a theory of optimal taxation with behavioral agents. We use a general behavioral framework that encompasses a wide range of behavioral biases such as misperceptions, internalities and mental accounting. We revisit the three pillars of optimal taxation: Ramsey (linear commodity taxation to raise revenues and redistribute), Pigou (linear commodity taxation to correct externalities) and Mirrlees (nonlinear income taxation). We show how the canonical optimal tax formulas are modified and lead to a rich set of novel economic insights. We also show how to incorporate nudges in the optimal taxation frameworks, and jointly characterize optimal taxes and nudges. We explore the Diamond-Mirrlees productive efficiency result and the Atkinson-Stiglitz uniform commodity taxation proposition, and find that they are more likely to fail with behavioral agents.

Notes:

Print version record

September 2015.