Scandinavian Working Papers in Economics
Working Paper Series, Center for Fiscal Studies,
Uppsala University, Department of Economics
No 2009:2: Optimal nonlinear redistributive taxation and public good provision in an economy with Veblen effects
Luca Micheletto ()
Additional contact information
Luca Micheletto: Uppsala Center for Fiscal Studies, Postal: Department of Economics, Uppsala University, P.O. Box 513, SE-751 20 Uppsala, Sweden
Abstract: This paper deals with the consequences of the assumption of negatively interdependent preferences for the shape of the optimal nonlinear income tax and the efficient level of public good provision in a setting where the policy maker maximizes an inequality averse social welfare function and the agents´market ability is private information. The analysis points out that the terms added in the tax formulas due to the presence of Veblen e¤ects might justify a reduction in the optimal marginal tax rates faced by the different individuals. Also, the desir- ability of negative marginal tax rates cannot be ruled out. With respect to the issue of the optimal level of public good provision, we derive a modified Samuelson rule and highlight the fact that the Veblen-based part of the formula might require to distort downwards the efficient level of public good provision.
Keywords: optimal nonlinear income taxation; modified Samuelson rule; Veblen effects
26 pages, March 30, 2009
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