Scandinavian Working Papers in Economics

Working Papers in Economics,
University of Gothenburg, Department of Economics

No 658: Social Comparisons and Optimal Taxation in a Small Open Economy

Thomas Aronsson (), Olof Johansson-Stenman () and Tomas Sjögren
Additional contact information
Thomas Aronsson: Department of Economics, Postal: Umeå School of Business and Economics, Umeå University, SE – 901 87 Umeå, Sweden
Olof Johansson-Stenman: Department of Economics, School of Business, Economics and Law, Göteborg University, Postal: P.O Box 640, SE 40530 GÖTEBORG, Sweden
Tomas Sjögren: Department of Economics, Postal: Umeå School of Business and Economics, Umeå University, SE – 901 87 Umeå, Sweden

Abstract: Almost all previous studies on optimal taxation and status consumption are based on closed model-economies. This paper analyzes how international capital mobility – which may constrain the use of capital income taxation – affects the optimal redistributive income tax policy in a small open economy when consumers care about their relative consumption. If the government can perfectly observe (and tax) returns on savings abroad, it is shown that the policy rules for marginal labor and capital income taxation derived for a closed economy largely carry over to the small open economy analyzed here. However, if these returns are unobserved by the government, the marginal tax policy rules will be very different from those pertaining to closed model-economies. In this case, capital income taxes on domestic savings will be completely ineffective, since such taxes would induce the consumers to move their savings abroad. The labor income tax must then indirectly also reflect the corrective purpose that the absent capital income tax would otherwise have had.

Keywords: Optimal taxation; relative consumption; positional goods; capital mobility; small open economy

JEL-codes: D03; D60; D62; F21; H21; H23

34 pages, May 2016

Full text files

44418 HTML file 

Download statistics

Questions (including download problems) about the papers in this series should be directed to Jessica Oscarsson ()
Report other problems with accessing this service to Sune Karlsson ().

RePEc:hhs:gunwpe:0658This page generated on 2024-10-31 13:22:59.