Optimal Redistribution with Heterogeneous Preferences for Leisure RobinBOADWAY 1 , Maurice MARCHAND 2 , Pierre PESTIEAU 3 and Mar ´ ia del Mar RACIONERO 4 December 2000 Abstract This paper examines the properties of the optimal nonlinear income tax when preferences are quasilinear in leisure and heterogeneous. Individuals differ in their ability and in their preferencesforleisure. Thegovernmentseekstoredistributeincome. Itcanperfectlyobservethe level of endogenous income but cannot observe either ability or preferences. The heterogeneity of preferences leads to problems of comparability between individual utilities which challenge the design of redistributive schemes. In particular, we analyze the consequences of adopting a utilitarian social welfare function where the government is allowed to give different weights to individuals with different preferences. Under this particular social objective and given the quasilinearity of preferences, we are able to obtain closed-form solutions for the marginal tax rates and to examine the progressivity of the tax system according to the weights used. Keywords: Optimal income taxation, quasi-linear preferences, asymmetric information JEL Classification: H21, H41 1 Queen’s University, Canada. 2 CORE, Universit´ e catholique de Louvain, Belgium. 3 CREPP, Universit´ e de Li` ege, and CORE, Universit´ e catholique de Louvain, Belgium. 4 School of Economics, Deakin University, Australia. Research of the last author was supported by a “Marie Curie” fellowship of the European Community. We are grateful to Jean Hindriks, Fran¸cois Maniquet and John Roemer for their helpful comments. We have also benefited from comments of participants at the Public Economic Theory 2000 Conference in Warwick (July 2000) and the 56th Congress of the International Institute of Public Finance in Seville (August 2000).