Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/18883 
Year of Publication: 
2004
Series/Report no.: 
CESifo Working Paper No. 1244
Publisher: 
Center for Economic Studies and ifo Institute (CESifo), Munich
Abstract: 
Non-linear income taxes and linear commodity taxes are analysed when people differ with respect to ability, high-skilled agents have heterogeneous preferences, and neither individual abilities nor preferences are observable. The paper highlights how informational constraints may motivate differential treatment of people with different preferences for leisure even if unequal treatment is not desirable per se. Which preference type will be better or worse off is shown to depend on the self-selection constraints associated with the information asymmetry. We characterize pure income tax optima, which may be bunching or separating optima. In particular, the income tax may not be able to distinguish between those lowincome people who are low-skilled and those who have strong preference for leisure. As is shown, there may still be an impact on the optimum income tax schedule as it will depend on the composition of the population with respect to types of individuals. Finally, the paper addresses what can be achieved by commodity taxes when preferences are heterogeneous, in particular, in terms of targeting groups that the income tax is incapable of discriminating between.
Subjects: 
optimum taxation
heterogeneous preferences
asymmetric information
JEL: 
H23
H21
Document Type: 
Working Paper
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