Scandinavian Working Papers in Economics
Working Papers in Economics,
University of Gothenburg, Department of Economics
No 358: Conspicuous Leisure: Optimal Income Taxation when both Relative Consumption and Relative Leisure Matter
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: Previous studies on public policy under relative consumption concerns have ignored the role of leisure comparisons. This paper considers a two-type optimal nonlinear income tax model where people care both about their relative consumption and their relative leisure. Increased consumption positionality typically implies higher marginal income tax rates for both the high-ability and the low-ability type, whereas leisure positionality has an offsetting role. However, this offsetting role is not symmetric; concern about relative leisure implies a progressive income tax component, i.e., a component that is larger for the high-ability than for the low-ability type. Moreover, leisure positionality does not modify the policy rule for public good provision when the income tax is optimally chosen.
Keywords: Optimal taxation; redistribution; public goods; relative consumption; status; positional goods
22 pages, April 21, 2009
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