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Optimal tax policy in the presence of productive, consumption, and leisure externalities

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  • Escobar-Posada, Rolando A.
  • Monteiro, Goncalo

Abstract

This paper presents the optimal tax policy in an economy featuring consumption, production, and leisure externalities. This extends prior models that only consider consumption and production externalities. The immediate consequence is labor income should be taxed (subsidized) if the leisure externality is positive (negative). In addition, numerical simulations show that in the presence of positive production externalities, and irrespective of the sign of consumption externalities, an increase in the importance of the leisure externality reduces the distortion generated by consumption and production externalities. This effect is reversed if production externalities are negative.

Suggested Citation

  • Escobar-Posada, Rolando A. & Monteiro, Goncalo, 2017. "Optimal tax policy in the presence of productive, consumption, and leisure externalities," Economics Letters, Elsevier, vol. 152(C), pages 62-65.
  • Handle: RePEc:eee:ecolet:v:152:y:2017:i:c:p:62-65
    DOI: 10.1016/j.econlet.2016.12.033
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    References listed on IDEAS

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    1. Romer, Paul M, 1986. "Increasing Returns and Long-run Growth," Journal of Political Economy, University of Chicago Press, vol. 94(5), pages 1002-1037, October.
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    6. John Y. Campbell & John Cochrane, 1999. "Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behavior," Journal of Political Economy, University of Chicago Press, vol. 107(2), pages 205-251, April.
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    More about this item

    Keywords

    Time non-separable preferences; Consumption; Leisure and production externalities; Capital accumulation; Optimal tax policy;

    JEL classification:

    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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