Working Paper | HBS Working Paper Series | 2013

De Gustibus non est Taxandum: Heterogeneity in Preferences and Optimal Redistribution

by Benjamin B Lockwood and Matthew Weinzierl

Abstract

The prominent but unproven intuition that preference heterogeneity reduces redistribution in a standard optimal tax model is shown to hold under the plausible condition that the distribution of preferences for consumption relative to leisure rises, in terms of first-order stochastic dominance, with income. Given mainstream functional form assumptions on utility and the distributions of ability and preferences, a simple statistic for the effect of preference heterogeneity on marginal tax rates is derived. Numerical simulations and suggestive empirical evidence demonstrate the link between this potentially measurable statistic and the quantitative implications of preference heterogeneity for policy.

Keywords: Spending; Policy; Taxation; Theory; United States;

Citation:

Lockwood, Benjamin B., and Matthew Weinzierl. "De Gustibus non est Taxandum: Heterogeneity in Preferences and Optimal Redistribution." Harvard Business School Working Paper, No. 12-063, January 2012. (Updated April 2014. NBER Working Paper Series, No. 17784. Revise and Resubmit, Journal of Public Economics.)