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Status effects, public goods provision, and excess burden

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  • Wendner, Ronald
  • Goulder, Lawrence H.

Abstract

Most studies of the optimal provision of public goods or the excess burden from taxation assume that individual utility is independent of other individuals' consumption. This paper investigates public good provision and excess burden in a model that allows for interdependence in consumption in the form of status (relative consumption) effects. In the presence of such effects, consumption and labor taxes no longer are pure distortionary taxes but have a corrective tax element that addresses an externality from consumption. As a result, the marginal excess burden of consumption taxes is lower than in the absence of status effects, and will be negative if the consumption tax rate is below the "Pigouvian" rate. Correspondingly, when consumption or labor tax rates are below the Pigouvian rate, the second-best level of public goods provision is above the first-best level, contrary to findings from models without status effects. For plausible functional forms and parameters relating to status effects, the marginal excess burden from existing U.S. labor taxes is substantially lower than in most prior studies, and is negative in some cases.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Public Economics.

Volume (Year): 92 (2008)
Issue (Month): 10-11 (October)
Pages: 1968-1985

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Handle: RePEc:eee:pubeco:v:92:y:2008:i:10-11:p:1968-1985

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Web page: http://www.elsevier.com/locate/inca/505578

Related research

Keywords: D62 H23 H41 Status effects Excess burden Deadweight loss Public goods provision Corrective taxation Consumption externality First best Second best;

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Citations

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Cited by:
  1. 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.
  2. Thomas Aronsson & Olof Johansson-Stenman, 2013. "Conspicuous Leisure: Optimal Income Taxation When Both Relative Consumption and Relative Leisure Matter," Scandinavian Journal of Economics, Wiley Blackwell, vol. 115(1), pages 155-175, 01.
  3. Inga Hillesheim, 2012. "Relative consumption and majority voting: supplementing Oates’ “Decentralization Theorem”," Journal of Economics, Springer, vol. 105(1), pages 29-43, January.
  4. Pezzey, John C.V. & Jotzo, Frank, 2010. "Tax-Versus-Trading and Free Emission Shares as Issues for Climate Policy Design," Research Reports 95049, Australian National University, Environmental Economics Research Hub.
  5. Casado, Jose Maria & Alvarez-Cuadrado, Francisco & Labeaga, Jose Maria & Sutthiphisal, Dhanoos, 2012. "Envy and habits: Panel data estimates of interdependent preferences," MERIT Working Papers 054, United Nations University - Maastricht Economic and Social Research Institute on Innovation and Technology (MERIT).
  6. Eckerstorfer, Paul & Wendner, Ronald, 2013. "Asymmetric and Non-atmospheric Consumption Externalities, and Efficient Consumption Taxation," MPRA Paper 45521, University Library of Munich, Germany.
  7. repec:dgr:unumer:2012054 is not listed on IDEAS
  8. Johansson-Stenman, Olof & Sterner, Thomas, 2013. "Discounting and Relative Consumption," Working Papers in Economics 559, University of Gothenburg, Department of Economics.
  9. Pezzey, John C.V. & Jotzo, Frank, 2012. "Tax-versus-trading and efficient revenue recycling as issues for greenhouse gas abatement," Journal of Environmental Economics and Management, Elsevier, vol. 64(2), pages 230-236.
  10. Hans Lind & Roland Granqvist, 2010. "A Note on the Concept of Excess Burden," Economic Analysis and Policy (EAP), Queensland University of Technology (QUT), School of Economics and Finance, vol. 40(1), pages 78-88, March.
  11. Ronald Wendner, 2011. "Ramsey, Pigou, heterogenous agents, and non-atmospheric consumption externalities," Graz Economics Papers 2012-01, University of Graz, Department of Economics.
  12. Aronsson, Thomas & Johansson-Stenman, olof, 2013. "State-Variable Public Goods and Social Comparisons over Time," Working Papers in Economics 555, University of Gothenburg, Department of Economics.
  13. Welsch, Heinz, 2009. "Implications of happiness research for environmental economics," Ecological Economics, Elsevier, vol. 68(11), pages 2735-2742, September.
  14. 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.
  15. Alvarez-Cuadrado, Francisco & Van Long, Ngo, 2011. "Relative consumption and renewable resource extraction under alternative property-rights regimes," Resource and Energy Economics, Elsevier, vol. 33(4), pages 1028-1053.

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