Optimal Income Taxation with Aspirations

• In Event: Optimal Income Taxation with Career Choices and Aspirations

Abstract

I examine how socially-determined aspirations reshape the standard equity-efficiency tradeoff in optimal income taxation. Embedding preferences with endogenous aspirational thresholds (Ray and Genicot, 2017) into a Mirrleesian framework, I derive empirically implementable sufficient statistics formulas for linear and nonlinear taxes capturing both externality effects and novel aspiration-driven labor‐supply responses. Compressing the income distribution dampens socially-determined aspirations and demotivates higher-income earners, creating distortions beyond the standard labor-leisure tradeoff. It may simultaneously encourage “frustrated” individuals to supply more labor by bringing their aspirational threshold within reach and reducing the distortionary costs of taxation. As a result, societies with predominantly “attainable” or “satisfied” aspirations warrant lower optimal marginal tax rates than those with mainly “frustrated” aspirations. Under a nonlinear income tax, standard income effects from higher bracket earners raise aspirations, thereby generating an efficiency rationale for lower bottom-bracket tax rates. The sufficient statistics map to quasi‑experimental estimates from pay‑transparency, peer‑information shocks, and custom survey experiments, providing an empirical agenda.

Author

• Thomas Lloyd, University of Michigan