Scandinavian Working Papers in Economics
Working Papers in Economics,
University of Gothenburg, Department of Economics
No 606: Paternalism against Veblen: Optimal Taxation and Non-Respected Preferences for Social Comparisons
Thomas Aronsson () and Olof Johansson-Stenman ()
Additional contact information
Thomas Aronsson: Dept of Economics, Umeå School of Business and Economics, Umeå University
Olof Johansson-Stenman: Department of Economics, School of Business, Economics and Law, Göteborg University, Postal: Göteborg University, P.O. Box 640, SE 40530 Gothenburg, Sweden
Abstract: This paper deals with optimal income taxation and relative consumption under a welfarist government that fully respects people’s preferences and a paternalist government that does not share the consumer preference for relative consumption. Consistent with previous findings, relative consumption concerns typically lead to higher marginal income tax rates in the welfarist case. A remarkable result is that the optimal tax rules turn out to be very similar when people’s preferences for social comparisons are not respected. Indeed, if the relative consumption concerns are based on mean value comparisons and all consumers are equally positional, or if they are driven by within-type comparisons, the paternalist and welfarist governments can implement their respective first-best allocations through exactly the same marginal income tax formulas. Yet, also in these cases, there are some remaining differences that follow from second-best considerations.
Keywords: Paternalism; nonlinear taxation; redistribution; status; positional goods
35 pages, November 2014
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