Scandinavian Working Papers in Economics

Umeå Economic Studies,
Umeå University, Department of Economics

No 1031: Income Taxation and Ability Rank

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: Department of Economics, School of Business, Economics and Law, University of Gothenburg

Abstract: A substantial body of empirical and theoretical research suggests that individuals care about, and derive instrumental benefits from, their rank in society. This paper extends the Mirrleesian model of optimal income taxation to a framework where individuals derive utility from their perceived ability rank. Such concerns generate externalities that tend to increase the optimal marginal tax rates for both corrective and redistributive reasons. While empirical evidence on the magnitude of these concerns is limited, their potential impact on optimal income taxation could be substantial, with top marginal income tax rates potentially exceeding 90%.

Keywords: Redistributive taxation; ability; ordinal comparisons; externalities

JEL-codes: D62; D82; D90; H21; H23

Language: English

27 pages, December 17, 2024

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