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When the Joneses’ Consumption Hurts: Optimal Income Taxation and Public Good Provision in an OLG Model

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Author Info
Aronsson, Thomas () (Department of Economics, Umeå University)
Abstract

This paper considers a two-type, self-selection, overlapping generations model with nonlinear labor income and capital income taxation and public good provision, when people care about their relative consumption compared to others. In each case, the standard optimality expressions are modified by terms that reflect the extent to which people care about relative consumption. The modified tax formulas imply substantially higher marginal labor income tax rates than in the conventional case, under plausible assumptions and available empirical estimates regarding comparison consumption concerns. The extent to which the public good provision rule should be modified is shown to depend critically on the preference elicitation format. The effects of positionality on the marginal capital income tax rates are ambiguous.

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Publisher Info
Paper provided by Umeå University, Department of Economics in its series Umeå Economic Studies with number 711.

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Length: 38 pages
Date of creation: 16 May 2007
Date of revision:
Handle: RePEc:hhs:umnees:0711

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Postal: Department of Economics, Umeå University, S-901 87 Umeå, Sweden
Phone: 090 - 786 61 42
Fax: 090 - 77 23 02
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Web page: http://www.econ.umu.se/
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Related research
Keywords: Optimal taxation; redistribution; public goods; relative consumption; status; positional goods;

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Find related papers by JEL classification:
D62 - Microeconomics - - Welfare Economics - - - Externalities
H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
H41 - Public Economics - - Publicly Provided Goods - - - Public Goods

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References listed on IDEAS
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    Other versions:
  3. Wendner, Ronald & Goulder, Lawrence H., 2008. "Status Effects, Public Goods Provision, and the Excess Burden," MPRA Paper 8260, University Library of Munich, Germany. [Downloadable!]
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    Other versions:
  5. Ronald Wendner, 2004. "Frames of reference, the environment, and efficient taxation," Economics of Governance, Springer, vol. 6(1), pages 13-31, January. [Downloadable!] (restricted)
  6. 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. [Downloadable!] (restricted)
  7. Boadway, Robin & Marchand, Maurice & Pestieau, Pierre, 2000. " Redistribution with Unobservable Bequests: A Case for Taxing Capital Income," Scandinavian Journal of Economics, Blackwell Publishing, vol. 102(2), pages 253-67, June. [Downloadable!] (restricted)
    Other versions:
  8. Marceau, Nicolas & Boadway, Robin, 1994. " Minimum Wage Legislation and Unemployment Insurance as Instruments for Redistribution," Scandinavian Journal of Economics, Blackwell Publishing, vol. 96(1), pages 67-81.
  9. 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, Göteborg University, Department of Economics. [Downloadable!]
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  10. Christiansen, Vidar, 1981. "Evaluation of Public Projects under Optimal Taxation," Review of Economic Studies, Blackwell Publishing, vol. 48(3), pages 447-57, July. [Downloadable!] (restricted)
  11. Stiglitz, Joseph E., 1982. "Self-selection and Pareto efficient taxation," Journal of Public Economics, Elsevier, vol. 17(2), pages 213-240, March. [Downloadable!] (restricted)
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  12. 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. [Downloadable!] (restricted)
  13. Stutzer, Alois, 2004. "The role of income aspirations in individual happiness," Journal of Economic Behavior & Organization, Elsevier, vol. 54(1), pages 89-109, May. [Downloadable!] (restricted)
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  14. Andrew E. Clark & Paul Frijters & Michael A. Shields, 2006. "Income and happiness: Evidence, explanations and economic implications," PSE Working Papers 2006-24, PSE (Ecole normale supérieure). [Downloadable!]
  15. Stern, Nicholas, 1982. "Optimum taxation with errors in administration," Journal of Public Economics, Elsevier, vol. 17(2), pages 181-211, March. [Downloadable!] (restricted)
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    Other versions:
  17. Ordover, J. A. & Phelps, E. S., 1979. "The concept of optimal taxation in the overlapping-generations model of capital and wealth," Journal of Public Economics, Elsevier, vol. 12(1), pages 1-26, August. [Downloadable!] (restricted)
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