Optimal Taxation with Behavioral Agents

By Emmanuel Farhi, Xavier Gabaix. The American Economic Review, 2020

249 citations recorded by the source corpus.

This paper develops a theory of optimal taxation with behavioral agents. We use a general framework that encompasses a wide range of biases such as misperceptions and internalities. 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 novel economic insights. We also show how to incorporate nudges in the optimal taxation framework, and jointly characterize optimal taxes and nudges. (JEL D62, D91, H21)

Subfields: Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/b6ddc552717f54023fc7fd995380cf688ea3a918

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In Economics and Econometrics

1. Armenak Antinyan
2. Zareh Asatryan

Citations in the corpus

• Nudging for Tax Compliance: A Meta-Analysis (2019, background): “…iv) Are nudges effective also in the longer horizon? v) Which groups of taxpayers 4Motivated by mounting evidence on various behavioral biases of taxpayers, Farhi and Gabaix (2019) develops a theory of optimal taxation with behavioral agents also incorporating nudges into this framework.”