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Relativity, Inequality, And Optimal Nonlinear Income Taxation

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  • RAVI KANBUR
  • MATTI TUOMALA

Abstract

How does concern for consumption relative to others (”relativity”) affect the progressivity of the optimal income tax structure? In this paper we revisit this literature and present a more detailed analysis of the solution to the non-linear income tax problem with consumption interdependence than is currently available, generalizing some results and developing other results for cases with special objective functions and special distributions, as well as numerical simulations. Of particular interest for us is the interplay between inequality and relativity in determining the optimal tax schedule. We find support for greater progressivity in the tax structure as relative concern increases. But our numerical calculations show that this incremental impact is less at higher levels of inequality. We also explore what happens when the government does not accept the relative concerns of individuals and maximizes a non-welfarist objective function.
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Suggested Citation

  • Ravi Kanbur & Matti Tuomala, 2013. "Relativity, Inequality, And Optimal Nonlinear Income Taxation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 54, pages 1199-1217, November.
  • Handle: RePEc:wly:iecrev:v:54:y:2013:i::p:1199-1217
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    File URL: http://hdl.handle.net/10.1111/iere.2013.54.issue-4
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    Cited by:

    1. Leites, Martin & Ramos, Xavier, 2018. "The Effect of Relative Concern on Life Satisfaction: Relative Deprivation and Loss Aversion," IZA Discussion Papers 11404, Institute for the Study of Labor (IZA).
    2. Gallice, Andrea, 2018. "Social status, preferences for redistribution and optimal taxation: A survey," Economics Discussion Papers 2018-31, Kiel Institute for the World Economy (IfW).
    3. 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.
    4. repec:spr:soinre:v:133:y:2017:i:2:d:10.1007_s11205-016-1385-3 is not listed on IDEAS
    5. Gerritsen, Aart, 2016. "Optimal taxation when people do not maximize well-being," Journal of Public Economics, Elsevier, vol. 144(C), pages 122-139.
    6. Kalinina Olga, 2016. "An Innovative Approach to the Formation of a Progressive Taxation Probabilistic Model on Personal Incomes," International Journal of Economics and Financial Issues, Econjournals, vol. 6(3), pages 995-1002.
    7. Marjit, Sugata, 2012. "Conflicting Measures of Poverty and Inadequate Saving by the Poor," WIDER Working Paper Series 058, World Institute for Development Economic Research (UNU-WIDER).
    8. Bierbrauer Felix J., 2016. "Effizienz oder Gerechtigkeit?," Perspektiven der Wirtschaftspolitik, De Gruyter, vol. 17(1), pages 2-24, April.
    9. Felix FitzRoy & Michael Nolan, 2016. "Welfare Policies, Relative Income and Majority Choice," Manchester School, University of Manchester, vol. 84(1), pages 81-94, January.
    10. Sugata Marjit & Lei Yang, 2015. "Accumulation with Malnutrition - The Role of Status Seeking Behavior," Discussion Papers Series 544, School of Economics, University of Queensland, Australia.
    11. Felix Bierbrauer, 2016. "Effizienz oder Gerechtigkeit? Ungleiche Einkommen, ungleiche Vermögen und die Theorie der optimalen Besteuerung," Discussion Paper Series of the Max Planck Institute for Research on Collective Goods 2016_03, Max Planck Institute for Research on Collective Goods.
    12. repec:unu:wpaper:wp2012-58 is not listed on IDEAS

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