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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. Kockesen, Levent & Ok, Efe A., 1997. "Negatively Interdependent Preferences," Working Papers, C.V. Starr Center for Applied Economics, New York University 97-02, C.V. Starr Center for Applied Economics, New York University.
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  14. Alpizar, Francisco & Carlsson, Fredrik & Johansson-Stenman, Olof, 2001. "How Much Do We Care About Absolute Versus Relative Income and Consumption?," Working Papers in Economics, University of Gothenburg, Department of Economics 63, University of Gothenburg, Department of Economics.
  15. Mirrlees, James A, 1971. "An Exploration in the Theory of Optimum Income Taxation," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 38(114), pages 175-208, April.
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Cited by:
  1. Thomas Aronsson & Olof Johansson-Stenman, 2013. "Veblen’s theory of the leisure class revisited: implications for optimal income taxation," Social Choice and Welfare, Springer, Springer, vol. 41(3), pages 551-578, September.
  2. Eckerstorfer, Paul & Wendner, Ronald, 2013. "Asymmetric and Non-atmospheric Consumption Externalities, and Efficient Consumption Taxation," MPRA Paper 45521, University Library of Munich, Germany.
  3. Paul Eckerstorfer, 2011. "Relative Consumption Concerns and the Optimal Tax Mix," Economics working papers, Department of Economics, Johannes Kepler University Linz, Austria 2011-14, Department of Economics, Johannes Kepler University Linz, Austria.
  4. Aronsson, Thomas & Johansson-Stenman, Olof, 2009. "Positional Concerns In An Olg Model: Optimal Labor And Capital Income Taxation," Working Papers in Economics, University of Gothenburg, Department of Economics 355, University of Gothenburg, Department of Economics.
  5. Alessandro Balestrino, 2012. "Taxes, Status Goods, and Piracy," CESifo Working Paper Series 3704, CESifo Group Munich.

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