Scandinavian Working Papers in Economics

Umeå Economic Studies,
Umeå University, Department of Economics

No 891: Social Identity, Education and Tax Policy

Thomas Aronsson (), Stefanie Heidrich () and Magnus Wikström ()
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Thomas Aronsson: Department of Economics, Umeå School of Business and Economics, Postal: Umeå University, S 901 87 Umeå, Sweden
Stefanie Heidrich: Department of Economics, Umeå School of Business and Economics, Postal: Umeå University, S 901 87 Umeå, Sweden
Magnus Wikström: Department of Economics, Umeå School of Business and Economics, Postal: Umeå University, S 901 87 Umeå, Sweden

Abstract: This paper analyzes the implications of social identity and self-categorization in the context of optimal redistributive income taxation. A two-type model is supplemented by an assumption that individuals select themselves into social categories, in which norms are formed and education effort choices partly depend on these norms. Optimal tax policy is analyzed under two different assumptions about the social objective function: a welfarist objective based on consumer preferences and a paternalist objective that does not reflect the consumer preference for social identity. We show how the welfarist government implements a tax policy to internalize the externalities arising from social norms, while the paternalist government uses tax policy to make individuals behave as if their preferences for social identity were absent.

Keywords: Optimal income taxation; education; social identity; self-categorization

JEL-codes: D03; H21; I21; Z13

32 pages, August 19, 2014

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