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Relative Consumption Concerns and the Optimal Tax Mix

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Abstract

This articles studies the optimal tax mix (taxes on income and commodities) under asymmetric information in a two-type model, when individuals make relative consumption comparisons. The model includes both positional and nonpositional goods, taking into account the fact that relative concerns matter for some but not for all commodities. We find that in general the whole tax system is affected by the externalities caused by the consumption of positional goods, notably also the taxes on income and on a non-positional good. The tax rates on positional goods are higher than in the absence of status effects, reflecting their Pigouvian role. The sign of the Pigouvian part in the income tax schedule is ambiguous and depends crucially on whether status goods are complements or substitutes to leisure.

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Bibliographic Info

Paper provided by The Austrian Center for Labor Economics and the Analysis of the Welfare State, Johannes Kepler University Linz, Austria in its series NRN working papers with number 2011-12.

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Length: 31 pages
Date of creation: Oct 2011
Date of revision:
Handle: RePEc:jku:nrnwps:2011_12

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Keywords: Optimal Taxation; Externalities; Relative Consumption;

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Citations

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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, vol. 41(3), pages 551-578, September.
  2. Aronsson, Thomas & Johansson-Stenman, Olof, 2013. "Publicly Provided Private Goods and Optimal Taxation when Consumers Have Positional Preferences," Working Papers in Economics 558, University of Gothenburg, Department of Economics.
  3. Eckerstorfer, Paul & Wendner, Ronald, 2013. "Asymmetric and non-atmospheric consumption externalities, and efficient consumption taxation," Journal of Public Economics, Elsevier, vol. 106(C), pages 42-56.

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