Scandinavian Working Papers in Economics

Umeå Economic Studies,
Umeå University, Department of Economics

No 901: Paternalism against Veblen: Optimal Taxation and Non-Respected Preferences for Social Comparisons

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

JEL-codes: D62; H21; H23; H41

34 pages, November 20, 2014

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