Consumer behavior, cost of living measures, and the income tax
type: Item
instance of: scholarly article
title: Consumer behavior, cost of living measures, and the income tax
zbMATH Open document ID: 0604.90001
author: Michael R. Baye
author: Dan A. Black
published in: Lecture Notes in Economics and Mathematical Systems
publication date: 1986-01-01T00:00:00Z
review text: The theory of cost of living indices is generalized in such a way that income tax is taken into account. After a general introduction, in part II first a short introduction into consumer theory is given, for the case where income consists of wage and non labor income and consequently, leisure is a consumption good, but where there is no income tax. Then, along the same lines, consumer behavior is studied when there is a (progressive) income tax on total income (nonlabor income and earned wages) which implies that the budget set becomes smaller and that there is a tax deductibility on leisure. For this case known concepts from consumer theory, e.g. indirect utility, Marshallian and Hicksian demand functions are defined, and the different versions of the expenditure function that now exist. Many properties of the original theory remain valid (e.g. theorems of Shephard and Roy), but others are lost, particularly the homogeneity of the budget and of the two types of demand functions. In part III some theory on index numbers (in the absence of tax and without the distinction between labor and nonlabor income) is summarized, emphasizing the Konus and Frisch indices (true cost of living indices). This theory is first generalized so as to take care of the two types of income, which leads to the definition of both a ''nonlabor income-based cost of living index'' and a ''real wage index'', giving the increases of non-wage income (wages) necessary to maintain the level of utility after an increase of prices of goods and of the wage rate (nonlabour income). Then in Part IV the income tax is introduced and the indices are defined again for that case. Different cost of living indices exist, serving different purposes. Particularly, indices giving changes of non-wage income or of the wage rate, necessary to maintain a given level of utility after price changes, are defined while indices based on taxable income or on expenditures are distinguished. In part V some remarks are made o…
Mathematics Subject Classification ID: 91B82
Mathematics Subject Classification ID: 91B10
Mathematics Subject Classification ID: 90-02
zbMATH DE Number: 3976681
zbMATH Keywords: cost of living indices
zbMATH Keywords: income tax
zbMATH Keywords: consumer theory
reviewed by: Claus Weddepohl
MaRDI profile type: Publication
description: scientific article; zbMATH DE number 3976681