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Identification of income–leisure preferences and evaluation of income tax policy
Author(s) -
Manski Charles F.
Publication year - 2014
Publication title -
quantitative economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 4.062
H-Index - 27
eISSN - 1759-7331
pISSN - 1759-7323
DOI - 10.3982/qe262
Subject(s) - economics , status quo , preference , public economics , tax policy , tax revenue , income tax , microeconomics , distribution (mathematics) , identification (biology) , population , income distribution , social welfare function , welfare , labour economics , tax reform , inequality , mathematical analysis , demography , mathematics , sociology , market economy , botany , biology
The merits of alternative income tax policies depend on the population distribution of preferences for income and leisure. Standard theory, which supposes that persons want more income and more leisure, does not predict how they resolve the tension between these desires. Empirical studies of labor supply have imposed strong preference assumptions that lack foundation. This paper examines anew the problem of inference on income–leisure preferences and considers the implications for evaluation of tax policy. I first perform a basic revealed‐preference analysis assuming only that persons prefer more income and leisure. This shows that observation of a person's time allocation under a status quo tax policy may bound his allocation under a proposed policy or may have no implications, depending on the tax schedules and the person's status quo time allocation. I next explore the identifying power of two classes of assumptions that restrict the distribution of income–leisure preferences. One assumes that groups of persons who face different choice sets have the same preference distribution. The second restricts the shape of this distribution. The generic finding is partial identification of preferences. This implies partial prediction of tax revenue under proposed policies and partial knowledge of the welfare function for utilitarian policy evaluation.

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