Scandinavian Working Papers in Economics

Working Papers in Economics,
University of Gothenburg, Department of Economics

No 621: Keeping up with the Joneses, the Smiths and the Tanakas: On International Tax Coordination and Social Comparisons

Thomas Aronsson () and Olof Johansson-Stenman
Additional contact information
Thomas Aronsson: Dept of Economics, Umeå School of Business and Economics, Umeå University, Postal: SE – 901 87 Umeå, Sweden
Olof Johansson-Stenman: Department of Economics, School of Business, Economics and Law, Göteborg University, Postal: P.O. Box 640, SE 40530 Gothenburg, Sweden

Abstract: Much evidence suggests that between-country social comparisons have become more important over time due to globalization. This paper analyzes optimal income taxation in a multi-country economy, where consumers derive utility from their relative consumption compared with both other domestic residents and people in other countries. The optimal tax policy in our framework reflects both correction for positional externalities and redistributive aspects of such correction due to the incentive constraint facing each government. If the national governments behave as Nash competitors to one another, the resulting tax policy only internalizes the externalities that are due to within-country comparisons, whereas the tax policy chosen by the leader country in a Stackelberg game also to some extent reflects between-country comparisons. We also derive globally efficient tax policies in a cooperative framework, and conclude that there are potentially large welfare gains of international tax policy coordination resulting from cross-country social comparisons.

Keywords: Optimal taxation; relative consumption; inter-jurisdictional comparison; asymmetric information; status; positional goods.

JEL-codes: D03; D62; D82; H23

40 pages, May 2015

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