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Optimal Tax Systems with Behavioral Agents

We develop an optimal tax framework that combines two recent extensions of tax analysis: a taxsystems emphasis on non-rate policy instruments, and taxation with behavioral biases. Although the implications of taxpayers’ biases for optimal tax rates has received considerable attention, a complete analysis of this aspect of optimal tax theory must account for the fact that such biases may be endogenous to the non-rate aspects of a tax system. We extend optimal tax systems analysis to incorporate behavioral biases, illustrating the implications of this perspective using two simple models. We characterize the optimal tax system in this setting under a fairly general formulation of taxpayer bias and (potentially costly) non-rate policies. We also discuss the implications of our framework for applied welfare analysis with behavioral agents, documenting new possibilities and challenges for such work that a tax-systems