Implications of Behavioural Economics for Tax policy

This paper assesses how behavioural economics can be applied in the area of tax policy. A brief introduction to behavioural economics is followed by a summary of the existing rules-of-thumb that standard economics provides for tax policy design, focusing on the tax policy objectives of raising revenue efficiently and corrective taxation. Four behavioural economics concepts are then addressed in the context of these tax policy objectives and the Irish tax system: salience; bounded rationality; reference dependence and loss aversion; and time inconsistency. The paper finishes by summarising the main tax policy insights coming from behavioural economics and concludes on its value addition in Irish tax policy design.

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