Scandinavian Working Papers in Economics

Umeå Economic Studies,
Umeå University, Department of Economics

No 945: Paternalism against Veblen: Optimal Taxation and Non-Respected Preferences for Social Comparisons

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

Abstract: This paper compares optimal nonlinear income tax policies of welfarist and paternalist governments, where the latter does not respect individual preferences regarding relative consumption. Consistent with previous findings, relative consumption concerns under welfarism typically imply higher marginal income tax rates. Remarkably, the optimal marginal tax rules are very similar in the paternalist case. For example, if relative consumption concerns are based on mean value comparisons and all consumers are equally positional, then the first-best tax rules are identical between the governments. Extensive numerical simulations supplement the theoretical results, and make it possible to compare also tax levels and overall redistribution.

Keywords: nonlinear taxation; redistribution; status; positional goods

JEL-codes: D62; H21; H23

58 pages, February 10, 2017

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