Person:

Lockwood, Benjamin B.

Calculating the welfare implications of changes to economic policy or shocks to the economy requires economists to decide on a normative criterion. One way to make that decision is to elicit the relevant moral criteria from real-world policy choices, converting a normative decision into a positive inference exercise as in, for example, the recent surge of so-called “inverse-optimum” research. We find that capitalizing on the potential of this approach is not as straightforward as we might hope. We perform the inverse- optimum inference on U.S. tax policy from 1979 through 2010 and identify two broad explanations for its evolution. These explanations, however, either undermine the reliability of the inference exercise's conclusions or challenge conventional assumptions upon which economists routinely rely when performing welfare evaluations. We emphasize the need for better evidence on society's positive and normative judgments in order to resolve the questions these findings raise.

Policy often differs from the recommendations of theoretical optimal tax models in substantial and enduring ways. Such differences are sometimes surely because policy is suboptimal; however they may also be driven by alternative objectives which shape policy in practice, but which do not appear in the benchmark theoretical model. This dissertation considers three cases of such alternative objectives. The first chapter supposes that work subsidies like the Earned Income Tax Credit may be justified by corrective considerations, rather than the usual redistributive rationale for income taxation, if people are present biased and some benefits from work are delayed. The second chapter explores the role of income taxes in directing talented individuals into professions which are beneficial for the rest of society, such as teaching or medical research, and away from professions with negative externalities. The third paper considers the common concern that "sin taxes" on harmful goods—such as cigarettes or soda—are regressive, by incorporating redistributive concerns into a model of optimal corrective commodity taxation.

The prominent but unproven intuition that preference heterogeneity reduces redistribution in a standard optimal tax model is shown to hold under the plausible condition that the distribution of preferences for consumption relative to leisure rises, in terms of first-order stochastic dominance, with income. Given familiar functional form assumptions on utility and the distributions of ability and preferences, a simple statistic for the effect of preference heterogeneity on marginal tax rates is derived. Numerical simulations and suggestive empirical evidence demonstrate the link between this potentially measurable statistic and the quantitative implications of preference heterogeneity for policy.