Optimal Income Taxation with Present Bias
Benjamin B. Lockwood
- American Economic Journal: Economic Policy (Forthcoming)
Work often entails up-front effort costs in exchange for delayed benefits, and mounting evidence
documents present bias over effort in the face of such delays. This paper studies the implications
for the optimal income tax. Optimal tax rates are computed for present-biased workers who
choose multiple dimensions of labor effort, some of which occur prior to compensation. Present
bias reduces optimal tax rates, with a larger effect when the elasticity of taxable income is high.
Optimal marginal tax rates may be negative at low incomes, providing an alternative, corrective
rationale for work subsidies like the Earned Income Tax Credit.
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