Scandinavian Working Papers in Economics
Umeå Economic Studies,
Umeå University, Department of Economics
No 1009: A Note on Optimal Taxation under Status Consumption and Preferences for Equality
Thomas Aronsson (), Tomas Sjögren () and Sonal Yadav ()
Additional contact information
Thomas Aronsson: Department of Economics, Umeå University, Postal: Department of Economics, Umeå University, S 901 87 Umeå, Sweden
Tomas Sjögren: Department of Economics, Umeå University, Postal: Department of Economics, Umeå University, S 901 87 Umeå, Sweden
Sonal Yadav: Department of Economics, Umeå University, Postal: Department of Economics, Umeå University, S 901 87 Umeå, Sweden
Abstract: This note analyzes optimal taxation when (i) a fraction of people has positional preferences, and (ii) concerns for relative consumption and preferences for equality are operative simultaneously. We show that incentive compatibility motivates a regressive marginal tax structure, which in the end implies that people with positional preferences are taxed at a lower marginal rate than people without such preferences. A counteracting mechanism arises if those who are not concerned with their relative consumption have preferences for income-equality, even if people with positional preferences should still be taxed at a lower marginal rate than motivated by their contributions to externalities.
Keywords: Optimal taxation; relative consumption; equality
Language: English
14 pages, September 13, 2022
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