Umeå Economic Studies, Department of Economics, Umeå University
No 711:
When the Joneses’ Consumption Hurts: Optimal Income Taxation and Public Good Provision in an OLG Model
Thomas Aronsson ()
Abstract: This paper considers a two-type, self-selection,
overlapping generations model with nonlinear labor income and capital
income taxation and public good provision, when people care about their
relative consumption compared to others. In each case, the standard
optimality expressions are modified by terms that reflect the extent to
which people care about relative consumption. The modified tax formulas
imply substantially higher marginal labor income tax rates than in the
conventional case, under plausible assumptions and available empirical
estimates regarding comparison consumption concerns. The extent to which
the public good provision rule should be modified is shown to depend
critically on the preference elicitation format. The effects of
positionality on the marginal capital income tax rates are ambiguous.
Keywords: Optimal taxation; redistribution; public goods; relative consumption; status; positional goods; (follow links to similar papers)
JEL-Codes: D62; H21; H23; H41; (follow links to similar papers)
38 pages, May 16, 2007
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