Scandinavian Working Papers in Economics

Umeå Economic Studies,
Umeå University, Department of Economics

No 890: Positional Preferences for Housing: Income Taxation as a Second-Best Policy?

Thomas Aronsson () and Andrea Mannberg ()
Additional contact information
Thomas Aronsson: Department of Economics, Umeå School of Business and Economics, Postal: Umeå University, S 901 87 Umeå, Sweden
Andrea Mannberg: Department of Economics, Umeå School of Business and Economics, Postal: Umeå University, S 901 87 Umeå, Sweden

Abstract: This paper analyzes whether marginal taxation of labor and capital income might be useful second best instruments for internalizing the externalities caused by conspicuous housing consumption, when the government is unable to implement a first best corrective tax on housing wealth. The rationale for studying income taxation in this particular context is that first best taxes on housing wealth may be infeasible (at least in a shorter time perspective), while income taxes indirectly affect both the level and composition of accumulated wealth. We show that a suboptimally low tax on housing wealth provides an incentive for the government to subsidize financial saving and tax labor income at the margin.

Keywords: Relative consumption; housing; taxation; behavioral economics

JEL-codes: D62; H21; H23

16 pages, August 19, 2014

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