Decision-Making In Poverty, Savings and Redistribution

TitreDecision-Making In Poverty, Savings and Redistribution
Publication TypeWorking Paper
AuthorsBouchard St-Amant, P-A., & Perrault L.
Behavioral economics, Endogenous preferences, Non-welfarism, Optimal taxation, Redistribution

We conduct an optimal taxation analysis on a population of heterogenous individuals whose perceptions of savings' are linked to their contemporaneous disposable income and that of their parents. Individuals coming from poorer families see savings as less important than those from richer families. Perception of savings thus evolve because of cultural transmission through families, but also because of their current productivity. Aside from the standard equity/efficiency trade-off, optimal taxes account for this cultural transmission of perceptions through two additional channels. First, taxing labor decreases income, which decreases the perception of savings through time, generating a behavioural inefficiency. Second, taxation on savings corrects for the (ill)-perceived value of savings and thus savings' and labor decisions. Numerical simulations suggests the second effect is more important. An increase of 600 basis points on labour tax rates and a subsidy on savings of an order of 30% is shown to increase welfare.