Skip to Main Content
HBS Home
  • About
  • Academic Programs
  • Alumni
  • Faculty & Research
  • Baker Library
  • Giving
  • Harvard Business Review
  • Initiatives
  • News
  • Recruit
  • Map / Directions
Working Knowledge
Business Research for Business Leaders
  • Browse All Articles
  • Popular Articles
  • Cold Call Podcast
  • Managing the Future of Work Podcast
  • About Us
  • Book
  • Leadership
  • Marketing
  • Finance
  • Management
  • Entrepreneurship
  • All Topics...
  • Topics
    • COVID-19
    • Entrepreneurship
    • Finance
    • Gender
    • Globalization
    • Leadership
    • Management
    • Negotiation
    • Social Enterprise
    • Strategy
  • Sections
    • Book
    • Podcasts
    • HBS Case
    • In Practice
    • Lessons from the Classroom
    • Op-Ed
    • Research & Ideas
    • Research Event
    • Sharpening Your Skills
    • What Do You Think?
    • Working Paper Summaries
  • Browse All
    De Gustibus non est Taxandum: Theory and Evidence on Preference Heterogeneity and Redistribution
    13 Jul 2012Working Paper Summaries

    De Gustibus non est Taxandum: Theory and Evidence on Preference Heterogeneity and Redistribution

    by Benjamin Lockwood and Matthew Weinzierl
    Individuals differ in the value they place on consumption relative to leisure. These preference differences help explain why some earn more than others, and they are a central part of popular and scholarly debates over taxation. In this paper, Benjamin Lockwood and Matthew Weinzierl show that variation in these preferences may also help explain why the extent of redistribution varies across countries and US states, and why (at least in the case of the United States) redistribution is weaker than conventional theory would suggest. More generally, Lockwood and Weinzierl argue that neglecting the role of preferences substantially impairs our understanding of both optimal and existing tax policy. Overall, findings suggest that this paper's generalized normative optimal tax model may be a better guide to policy advice than the conventional one. Key concepts include:
    • A proper understanding of the role of preference differences improves our ability not only to design taxation but also to understand existing tax policies.
    • Surprisingly, preference differences are absent from conventional optimal tax theory. That theory, instead, attributes all variation in earnings to differences in income-earning ability.
    • More variance in reported preferences is significantly associated with less redistribution across both countries and US states, conditional on observed variation in incomes and the correlation of income with preferences.
    LinkedIn
    Email

    Author Abstract

    Preferences over consumption and leisure play no role in the standard optimal tax model, which attributes all variation in earnings to differences in income-earning ability. We show how to incorporate these preferences, which like ability are publicly unobservable, into the standard model in a tractable way. In this more general model, the policy designer must guess at the relative importance of ability and preferences in explaining variation in earnings. We show that such preferences could, in principle, increase or decrease optimal redistribution. In the most plausible specifications of the model, however, the result is clear: greater variation in preferences lowers the optimal extent of redistribution. To generate more redistribution than in standard results, one must assume that the desire for income is inversely related to income earned. This result holds even when the conventional model accurately describes the average individual, and it suggests one potential resolution to the puzzle of why observed redistribution is in some cases weaker than conventional theory would suggest. We then establish a new empirical finding that confirms this model's central policy prediction across developed countries and U.S. states. In countries and states with more heterogeneous tastes for consumption relative to leisure, redistribution is statistically significantly lower.

    Paper Information

    • Full Working Paper Text
    • Working Paper Publication Date: January 2012
    • HBS Working Paper Number: 12-063
    • Faculty Unit(s): Business, Government and International Economy
      Trending
        • 25 Jan 2022
        • Research & Ideas

        More Proof That Money Can Buy Happiness (or a Life with Less Stress)

        • 25 Feb 2019
        • Research & Ideas

        How Gender Stereotypes Kill a Woman’s Self-Confidence

        • 14 Mar 2023
        • In Practice

        What Does the Failure of Silicon Valley Bank Say About the State of Finance?

        • 15 Nov 2022
        • Book

        Stop Ignoring Bad Behavior: 6 Tips for Better Ethics at Work

        • 17 May 2017
        • Research & Ideas

        Minorities Who 'Whiten' Job Resumes Get More Interviews

    Matthew C. Weinzierl
    Matthew C. Weinzierl
    Joseph and Jacqueline Elbling Professor of Business Administration
    Senior Associate Dean, Chair, MBA Program
    Contact
    Send an email
    → More Articles
    Find Related Articles
    • Economics
    • Government and Politics

    Sign up for our weekly newsletter

    Interested in improving your business? Learn about fresh research and ideas from Harvard Business School faculty.
    This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.
    ǁ
    Campus Map
    Harvard Business School Working Knowledge
    Baker Library | Bloomberg Center
    Soldiers Field
    Boston, MA 02163
    Email: Editor-in-Chief
    →Map & Directions
    →More Contact Information
    • Make a Gift
    • Site Map
    • Jobs
    • Harvard University
    • Trademarks
    • Policies
    • Accessibility
    • Digital Accessibility
    Copyright © President & Fellows of Harvard College