• Open Access

Identification of income–leisure preferences and evaluation of income tax policy

Authors

  • Charles F. Manski

    1. Department of Economics and Institute for Policy Research, Northwestern University; cfmanski@northwestern.edu
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    • This research was supported in part by National Science Foundation Grant SES-0911181. I am grateful to Matthew Masten for excellent research assistance and to Jörg Stoye for sharing computer code used in the computational experiments in Section 3. I am grateful to Masten, Stoye, and Richard Blundell for helpful comments and discussions. I am likewise grateful to the editor and two referees for their constructive comments. I have benefited from the opportunity to present this work at the December 2011 UCL Workshop on Consumer Behaviour and Welfare Measurement, a September 2012 conference at the University of Pennsylvania, and in seminars at EIEF, Northwestern, Ohio State, Pittsburgh, Queen's, Stockholm School of Economics, and Yale.


Abstract

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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