Behavioral optimal taxation: Aspirations

Abstract

I show the results of a novel simple two-period model comparing lump-sum taxes with proportional labor taxes. The difference to the classical optimal taxation literature is that people’s aspirations change from one period to another, as suggested by empirical evidence. It turns out that the policy implication from this model differs considerably from the one assuming full rationality. In the behavioral model, a lump-sum tax is much less attractive. The model does not aim to be a full-fledged quantitative model, it should rather be seen as a cautionary tale about the robustness of classical optimal taxation results when deviating from full rationality.