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Redistributive taxation with heterogeneous relative consumption concerns

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  • Stefan Dodds

Abstract

This paper studies the impact of redistributive income taxation in a society where only some individuals are motivated by relative consumption concerns. Introducing this heterogeneity raises theoretical challenges since (i) earned income becomes an imperfect indicator of underlying ability and (ii) relative concerns may be inadmissable in the social objective. A new behavioural model is developed in which only relatively-concerned individuals choose work effort strategically. Linear tax/transfer systems schemes are then characterized and simulated for a series of welfarist and non-welfarist social objectives, and for different degrees of preference heterogeneity. A key result is that a government which understands the extent of relative consumption concerns-but places no social weight on individuals with such preferences-nevertheless sets a significantly more progressive tax system than a government which ignores relative consumption motivations altogether.

Suggested Citation

  • Stefan Dodds, 2012. "Redistributive taxation with heterogeneous relative consumption concerns," Canadian Journal of Economics, Canadian Economics Association, vol. 45(1), pages 220-246, February.
  • Handle: RePEc:cje:issued:v:45:y:2012:i:1:p:220-246
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    Cited by:

    1. Aronsson, Thomas & Johansson-Stenman, Olof, 2014. "Paternalism against Veblen: Optimal Taxation and Non-Respected Preferences for Social Comparisons," Umeå Economic Studies 901, Umeå University, Department of Economics.
    2. Goerke, Laszlo, 2013. "Relative consumption and tax evasion," Journal of Economic Behavior & Organization, Elsevier, vol. 87(C), pages 52-65.
    3. Goerke, Laszlo & Hillesheim, Inga, 2013. "Relative consumption, working time, and trade unions," Labour Economics, Elsevier, vol. 24(C), pages 170-179.

    More about this item

    JEL classification:

    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies

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