Scandinavian Working Papers in Economics

Umeå Economic Studies,
Umeå University, Department of Economics

No 800: POSITIONAL PREFERENCES IN TIME AND SPACE: IMPLICATIONS FOR OPTIMAL INCOME TAXATION

Thomas Aronsson () and Olof Johansson-Stenman ()
Additional contact information
Thomas Aronsson: Department of Economics, Umeå University, Postal: S 901 87 Umeå, Sweden
Olof Johansson-Stenman: Department of Economics, Postal: School of Business, Economics and Law, University of Gothenburg, SE – 405 30 Gothenburg, Sweden

Abstract: This paper concerns optimal nonlinear taxation in an OLG model with two ability-types, where people care about their own consumption relative to (i) other people’s current consumption, (ii) own past consumption, and (iii) other people’s past consumption. We show that intertemporal consumption comparisons affect the marginal income tax structure in the same qualitative way as comparisons based on other people’s current consumption. Based on available empirical estimates, comparisons with other people’s current and previous consumption tend to substantially increase the optimal marginal labor income tax rates, while they may either increase or decrease the optimal marginal capital income tax rates.

Keywords: Optimal income taxation; asymmetric information; relative consumption; status; habit formation; positional goods

JEL-codes: D62; H21; H23; H41

38 pages, January 31, 2010

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