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Optimal Nonlinear Redistributive Taxation and Public Good Provision in an Economy with Veblen Effects

  • LUCA MICHELETTO

This paper deals with the consequences of the assumption of negatively interdependent preferences for the shape of the optimal nonlinear income tax and the efficient level of public good provision in a setting where the policy maker maximizes an inequality averse social welfare function and the agents´market ability is private information. The analysis points out that the terms added in the tax formulas due to the presence of Veblen e¤ects might justify a reduction in the optimal marginal tax rates faced by the different individuals. Also, the desir- ability of negative marginal tax rates cannot be ruled out. With respect to the issue of the optimal level of public good provision, we derive a modified Samuelson rule and highlight the fact that the Veblen-based part of the formula might require to distort downwards the efficient level of public good provision.

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Article provided by Association for Public Economic Theory in its journal Journal of Public Economic Theory.

Volume (Year): 13 (2011)
Issue (Month): 1 (02)
Pages: 71-96

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Handle: RePEc:bla:jpbect:v:13:y:2011:i:1:p:71-96
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  1. Samuel Bowles & Yongjin Park, 2003. "Emulation, Inequality, and Work Hours: Was Thorsten Veblen Right," Department of Economics University of Siena 409, Department of Economics, University of Siena.
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  4. Sören Blomquist & Luca Micheletto, 2005. "Optimal Redistributive Taxation when Government’s and Agents’ Preferences Differ," CESifo Working Paper Series 1429, CESifo Group Munich.
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  6. Fredrik Carlsson & Olof Johansson-Stenman & Peter Martinsson, 2007. "Do You Enjoy Having More than Others? Survey Evidence of Positional Goods," Economica, London School of Economics and Political Science, vol. 74(296), pages 586-598, November.
  7. Giacomo Corneo, 2000. "The Efficient Side of Progressive Income Taxation," CESifo Working Paper Series 364, CESifo Group Munich.
  8. Sara J. Solnick & David Hemenway, 2005. "Are Positional Concerns Stronger in Some Domains than in Others?," American Economic Review, American Economic Association, vol. 95(2), pages 147-151, May.
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  14. Persson, Mats, 1995. " Why Are Taxes So High in Egalitarian Societies?," Scandinavian Journal of Economics, Wiley Blackwell, vol. 97(4), pages 569-80, December.
  15. Layard, Richard, 1980. "Human Satisfactions and Public Policy," Economic Journal, Royal Economic Society, vol. 90(363), pages 737-50, December.
  16. 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.
  17. Guesnerie, Roger & Seade, Jesus, 1982. "Nonlinear pricing in a finite economy," Journal of Public Economics, Elsevier, vol. 17(2), pages 157-179, March.
  18. Oswald, Andrew J., 1983. "Altruism, jealousy and the theory of optimal non-linear taxation," Journal of Public Economics, Elsevier, vol. 20(1), pages 77-87, February.
  19. Mirrlees, James A, 1971. "An Exploration in the Theory of Optimum Income Taxation," Review of Economic Studies, Wiley Blackwell, vol. 38(114), pages 175-208, April.
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