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Social Status and Optimal Income Taxation

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  • Jang-Ting Guo

    ()
    (Department of Economics, University of California Riverside)

  • Juin-Jen Chang

    (Institute of Economics, Academia Sinica)

Abstract

This paper examines the optimal (first-best) fiscal policy in a stochastic, infinite-horizon representative agent model that exhibits consumption-enhanced as well as wealth-enhanced social status in the household utility. We show that the optimal labor tax rate is a positive constant that is used to correct negative consumption externalities. The optimal capital tax rate is also positive in order to overturn agents' status-seeking capital over-accumulation. Moreover, we find that in contrast to a conventional automatic stabilizer, the optimal capital tax moves in the opposite direction with shocks to firms' production technology. This result turns out to be qualitatively consistent with the discernible empirical evidence that many countries have implemented procyclical fiscal policies.

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File URL: http://economics.ucr.edu/papers/papers08/08-14.pdf
File Function: First version, 2008
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Bibliographic Info

Paper provided by University of California at Riverside, Department of Economics in its series Working Papers with number 200814.

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Length: 14 pages
Date of creation: Dec 2008
Date of revision: Dec 2008
Handle: RePEc:ucr:wpaper:200814

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Keywords: Social Status; Optimal Income Taxation;

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  1. Jang-Ting Guo, 2004. "Tax Policy Under Keeping Up with the Joneses and Imperfectly Competitive Product Markets," Econometric Society 2004 North American Winter Meetings, Econometric Society 17, Econometric Society.
  2. A. Abel, 2010. "Asset prices under habit formation and catching up with the Jones," Levine's Working Paper Archive 1395, David K. Levine.
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  5. Corneo, Giacomo & Jeanne, Olivier, 1997. "On relative wealth effects and the optimality of growth," Economics Letters, Elsevier, Elsevier, vol. 54(1), pages 87-92, January.
  6. Jaime Alonso-Carrera & Jordi Caballe & Xavier Raurich, 2001. "Consumption Externalities, Habit Formation, and Equilibrium Efficiency," UFAE and IAE Working Papers, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC) 499.01, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
  7. Heng-fu Zou, 1998. "The spirit of capitalism, social status, money, and accumulation," Journal of Economics, Springer, Springer, vol. 68(3), pages 219-233, October.
  8. Reinhart, Carmen & Kaminsky, Graciela & Vegh, Carlos, 2004. "When it rains, it pours: Procyclical capital flows and macroeconomic policies," MPRA Paper 13883, University Library of Munich, Germany.
  9. Talvi, Ernesto & Vegh, Carlos A., 2005. "Tax base variability and procyclical fiscal policy in developing countries," Journal of Development Economics, Elsevier, Elsevier, vol. 78(1), pages 156-190, October.
  10. Michael Rauscher, 1997. "Conspicuous consumption, economic growth, and taxation," Journal of Economics, Springer, Springer, vol. 66(1), pages 35-42, February.
  11. Chang, Wen-ya & Tsai, Hsueh-fang & Lai, Ching-chong, 2004. "Taxation, growth, and the spirit of capitalism," European Journal of Political Economy, Elsevier, vol. 20(4), pages 1011-1025, November.
  12. Michael Gavin & Roberto Perotti, 1997. "Fiscal Policy in Latin America," NBER Chapters, in: NBER Macroeconomics Annual 1997, Volume 12, pages 11-72 National Bureau of Economic Research, Inc.
  13. Gurdip S. Bakshi & Zhiwu Chen, 1996. "The Spirit of Capitalism and Stock-Market Prices," CEMA Working Papers, China Economics and Management Academy, Central University of Finance and Economics 511, China Economics and Management Academy, Central University of Finance and Economics.
  14. Gali, J., 1992. "Keeping Up with the Joneses: Consumption Externalities, Portfolio Choice and Asset Prices," Papers, Columbia - Graduate School of Business 92-22, Columbia - Graduate School of Business.
  15. Fisher, Walter H. & Hof, Franz X., 2001. "Status Seeking in the Small Open Economy," Economics Series, Institute for Advanced Studies 106, Institute for Advanced Studies.
  16. Benhabib, Jess & Rustichini, Aldo, 1997. "Optimal Taxes without Commitment," Journal of Economic Theory, Elsevier, Elsevier, vol. 77(2), pages 231-259, December.
  17. Hung-Ju Chen & Jang-Ting Guo, 2009. "Social Status And The Growth Effect Of Money," The Japanese Economic Review, Japanese Economic Association, Japanese Economic Association, vol. 60(1), pages 133-141.
  18. Aiyagari, S Rao, 1995. "Optimal Capital Income Taxation with Incomplete Markets, Borrowing Constraints, and Constant Discounting," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 103(6), pages 1158-75, December.
  19. Jang-Ting Guo, 2005. "Tax Policy Under Keeping Up with the Joneses and Imperfect Competition," Annals of Economics and Finance, Society for AEF, vol. 6(1), pages 25-36, May.
  20. Bill Dupor & Wen-Fang Liu, 2003. "Jealousy and Equilibrium Overconsumption," American Economic Review, American Economic Association, American Economic Association, vol. 93(1), pages 423-428, March.
  21. Futagami, Koichi & Shibata, Akihisa, 1998. "Keeping one step ahead of the Joneses: Status, the distribution of wealth, and long run growth," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 36(1), pages 109-126, July.
  22. Tournemaine, Frederic & Tsoukis, Christopher, 2008. "Relative consumption, relative wealth and growth," Economics Letters, Elsevier, Elsevier, vol. 100(2), pages 314-316, August.
  23. Harald Uhlig & Lars Ljungqvist, 2000. "Tax Policy and Aggregate Demand Management under Catching Up with the Joneses," American Economic Review, American Economic Association, American Economic Association, vol. 90(3), pages 356-366, June.
  24. Walter Fisher & Franz Hof, 2000. "Relative consumption, economic growth, and taxation," Journal of Economics, Springer, Springer, vol. 72(3), pages 241-262, October.
  25. Heng-fu Zou, 1995. "The spirit of capitalism and savings behavior," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 28(1), pages 131-143, September.
  26. Chang, Wen-ya & Hsieh, Yi-ni & Lai, Ching-chong, 2000. "Social status, inflation, and endogenous growth in a cash-in-advance economy," European Journal of Political Economy, Elsevier, vol. 16(3), pages 535-545, September.
  27. Correia, Isabel H., 1996. "Should capital income be taxed in the steady state?," Journal of Public Economics, Elsevier, Elsevier, vol. 60(1), pages 147-151, April.
  28. Chris Tsoukis, 2007. "Keeping Up With The Joneses, Growth, And Distribution," Scottish Journal of Political Economy, Scottish Economic Society, vol. 54(4), pages 575-600, 09.
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