Affiliation:
1. University of Bologna , Bologna , Italy
2. Sciences po , Paris , France
Abstract
Abstract
This paper shows that inattention to taxes generates a time-inconsistency problem in the choice of tax policy, leading to higher taxes in equilibrium. These discretionary tax increases are inefficient as they are deviations from the socially optimal commitment policy. We call these deviations a taxation bias. Combining sufficient statistics and structural approaches, we quantify the magnitude of this policy distortion for the U.S. redistributive tax-transfer system. We find that the taxation bias ranges between 3 and 8 percentage points, alters tax-transfer progressivity, and has significant welfare effects. Overall, our findings shed new light on the implications of inattention and misperceptions.
Funder
Labex OSE
UniCredit Foundation
CREST
Deutsche Forschungsgemeinschaft
UC Berkeley
Publisher
Oxford University Press (OUP)
Subject
General Economics, Econometrics and Finance
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