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Optimal Nonlinear Redistributive Taxation and Public Good Provision in an Economy with Veblen Effects

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  • LUCA MICHELETTO

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.

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Bibliographic Info

Article provided by Association for Public Economic Theory in its journal Journal of Public Economic Theory.

Volume (Year): 13 (2011)
Issue (Month): 1 (02)
Pages: 71-96

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Handle: RePEc:bla:jpbect:v:13:y:2011:i:1:p:71-96

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References

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  1. Alpizar, Francisco & Carlsson, Fredrik & Johansson-Stenman, Olof, 2001. "How Much Do We Care About Absolute Versus Relative Income and Consumption?," Working Papers in Economics 63, University of Gothenburg, Department of Economics.
  2. Micheletto, Luca, 2008. "Redistribution and optimal mixed taxation in the presence of consumption externalities," Journal of Public Economics, Elsevier, vol. 92(10-11), pages 2262-2274, October.
  3. Ng, Yew-Kwang, 1987. "Relative-Income Effects and the Appropriate Level of Public Expenditure," Oxford Economic Papers, Oxford University Press, vol. 39(2), pages 293-300, June.
  4. Ferrer-i-Carbonell, Ada, 2005. "Income and well-being: an empirical analysis of the comparison income effect," Journal of Public Economics, Elsevier, vol. 89(5-6), pages 997-1019, June.
  5. Guesnerie, Roger & Seade, Jesus, 1982. "Nonlinear pricing in a finite economy," Journal of Public Economics, Elsevier, vol. 17(2), pages 157-179, March.
  6. Alessandro Balestrino, 2009. "Tax avoidance, endogenous social norms, and the comparison income effect," CHILD Working Papers wp15_09, CHILD - Centre for Household, Income, Labour and Demographic economics - ITALY.
  7. Robin Boadway & Michael Keen, 1991. "Public Goods, Self-Selection and Optimal Income Taxation," Working Papers 828, Queen's University, Department of Economics.
  8. Erzo F.P. Luttmer, 2004. "Neighbors as Negatives: Relative Earnings and Well-Being," NBER Working Papers 10667, National Bureau of Economic Research, Inc.
  9. Giacomo Corneo, 2000. "The Efficient Side of Progressive Income Taxation," CESifo Working Paper Series 364, CESifo Group Munich.
  10. Sara J. Solnick & David Hemenway, 2005. "Are Positional Concerns Stronger in Some Domains than in Others?," American Economic Review, American Economic Association, vol. 95(2), pages 147-151, May.
  11. Carlsson, Fredrik & Johansson-Stenman, Olof & Martinsson, Peter, 2003. "Do You Enjoy Having More Than Others? Survey Evidence of Positional Goods," Working Papers in Economics 100, University of Gothenburg, Department of Economics.
  12. Boskin, Michael J & Sheshinski, Eytan, 1978. "Optimal Redistributive Taxation when Individual Welfare Depends upon Relative Income," The Quarterly Journal of Economics, MIT Press, vol. 92(4), pages 589-601, November.
  13. Ireland, N. J., 2001. "Optimal income tax in the presence of status effects," Journal of Public Economics, Elsevier, vol. 81(2), pages 193-212, August.
  14. Mirrlees, James A, 1971. "An Exploration in the Theory of Optimum Income Taxation," Review of Economic Studies, Wiley Blackwell, vol. 38(114), pages 175-208, April.
  15. Oswald, Andrew J., 1983. "Altruism, jealousy and the theory of optimal non-linear taxation," Journal of Public Economics, Elsevier, vol. 20(1), pages 77-87, February.
  16. Blomquist, Soren & Micheletto, Luca, 2006. "Optimal redistributive taxation when government's and agents' preferences differ," Journal of Public Economics, Elsevier, vol. 90(6-7), pages 1215-1233, August.
  17. Persson, Mats, 1995. " Why Are Taxes So High in Egalitarian Societies?," Scandinavian Journal of Economics, Wiley Blackwell, vol. 97(4), pages 569-80, December.
  18. Samuel Bowles & Yongjin Park, 2003. "Emulation, Inequality, and Work Hours: Was Thorsten Veblen Right," Department of Economics University of Siena 409, Department of Economics, University of Siena.
  19. Efe A. Ok & Levent KoÚkesen, 2000. "Negatively interdependent preferences," Social Choice and Welfare, Springer, vol. 17(3), pages 533-558.
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Cited by:
  1. Paul Eckerstorfer & Ronald Wendner, 2013. "Asymmetric and Non-atmospheric Consumption Externalities, and Efficient Consumption Taxation," Graz Economics Papers 2013-01, University of Graz, Department of Economics.
  2. Paul Eckerstorfer, 2011. "Relative Consumption Concerns and the Optimal Tax Mix," Economics working papers 2011-14, Department of Economics, Johannes Kepler University Linz, Austria.
  3. Thomas Aronsson & Olof Johansson‐Stenman, 2010. "Positional Concerns In An Olg Model: Optimal Labor And Capital Income Taxation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 51(4), pages 1071-1095, November.
  4. Alessandro Balestrino, 2012. "Taxes, Status Goods, and Piracy," CESifo Working Paper Series 3704, CESifo Group Munich.
  5. Thomas Aronsson & Olof Johansson-Stenman, 2013. "Veblen’s theory of the leisure class revisited: implications for optimal income taxation," Social Choice and Welfare, Springer, vol. 41(3), pages 551-578, September.

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