Scandinavian Working Papers in Economics
Working Papers in Economics,
University of Gothenburg, Department of Economics
No 355: POSITIONAL CONCERNS IN AN OLG MODEL: OPTIMAL LABOR AND CAPITAL INCOME TAXATION
Thomas Aronsson () and Olof Johansson-Stenman ()
Additional contact information
Thomas Aronsson: Department of Economics, Umeå University, Postal: 901 87 Umeå, Sweden
Olof Johansson-Stenman: Department of Economics, School of Business, Economics and Law, Göteborg University, Postal: Box 640, SE 40530 GÖTEBORG
Abstract: This paper concerns optimal income taxation under asymmetric information in a two-type overlapping generations model, where people care about their relative consumption compared to others. The appearance of positional concerns affects the policy choices via two channels: (i) the size of the average degree of positionality and (ii) positionality differences between the (mimicked) low-ability type and the mimicker. Under plausible empirical estimates, the marginal labor income tax rates become substantially larger, and the absolute value of the marginal capital income tax rate implemented for the low-ability type becomes substantially smaller, compared to the conventional optimal income tax model. In addition to measures of reference consumption based on the average consumption, results for the cases of withingeneration and upward comparisons are also presented.
Keywords: Optimal income taxation; asymmetric information; relative consumption; status; positional goods
41 pages, April 16, 2009
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