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Veblen’s Theory of the Leisure Class Revisited: Implications for Optimal Income Taxation

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  • Aronsson, Thomas

    ()
    (Department of Economics, Umeå University)

  • Johansson-Stenman, Olof

    ()
    (Department of Economics, School of Business, Economics and Law, Göteborg University)

Abstract

Almost all previous studies on public policy under relative consumption concerns have ignored the role of leisure for status comparisons. Inspired by Veblen (1899), this paper considers a two-type optimal income tax model, where people care about their relative consumption, and where the importance of relative consumption increases with the use of leisure due to increased consumption visibility. We show that increased consumption positionality typically implies higher marginal income tax rates for both ability-types. Using a leisure-weighted measure of reference consumption, rather than a measure where leisure plays no role as in the previous literature, increases the marginal income tax rate implemented for the low-ability type and decreases the marginal income tax rate implemented for the high-ability type, i.e., it gives rise to a regressive tax component.

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Bibliographic Info

Paper provided by University of Gothenburg, Department of Economics in its series Working Papers in Economics with number 466.

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Length: 30 pages
Date of creation: 19 Aug 2010
Date of revision:
Handle: RePEc:hhs:gunwpe:0466

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Postal: Department of Economics, School of Business, Economics and Law, University of Gothenburg, Box 640, SE 405 30 GÖTEBORG, Sweden
Phone: 031-773 10 00
Web page: http://www.handels.gu.se/econ/
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Keywords: optimal taxation; redistribution; public goods; relative consumption; status; positional goods;

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