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Redistributive taxation with heterogeneous relative consumption concerns

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  • Stefan Dodds

Abstract

This paper studies the impact of redistributive income taxation in a society where only some individuals are motivated by relative consumption concerns. Introducing this heterogeneity raises theoretical challenges since (i) earned income becomes an imperfect indicator of underlying ability and (ii) relative concerns may be inadmissable in the social objective. A new behavioural model is developed in which only relatively-concerned individuals choose work effort strategically. Linear tax/transfer systems schemes are then characterized and simulated for a series of welfarist and non-welfarist social objectives, and for different degrees of preference heterogeneity. A key result is that a government which understands the extent of relative consumption concerns-but places no social weight on individuals with such preferences-nevertheless sets a significantly more progressive tax system than a government which ignores relative consumption motivations altogether.

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Bibliographic Info

Article provided by Canadian Economics Association in its journal Canadian Journal of Economics.

Volume (Year): 45 (2012)
Issue (Month): 1 (February)
Pages: 220-246

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Handle: RePEc:cje:issued:v:45:y:2012:i:1:p:220-246

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Cited by:
  1. Inga Hillesheim & Laszlo Goerke, 2013. "Relative Consumption, Working Time, and Trade Unions," IAAEU Discussion Papers 201310, Institute of Labour Law and Industrial Relations in the European Union (IAAEU).
  2. Laszlo Goerke, 2013. "Relative Consumption and Tax Evasion," CESifo Working Paper Series 4077, CESifo Group Munich.

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