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Social Comparisons and Optimal Taxation in a Small Open Economy


  • Aronsson, Thomas

    () (Department of Economics)

  • Johansson-Stenman, Olof

    () (Department of Economics, School of Business, Economics and Law, Göteborg University)

  • Sjögren, Tomas

    (Department of Economics)


Almost all previous studies on optimal taxation and status consumption are based on closed model-economies. This paper analyzes how international capital mobility – which may constrain the use of capital income taxation – affects the optimal redistributive income tax policy in a small open economy when consumers care about their relative consumption. If the government can perfectly observe (and tax) returns on savings abroad, it is shown that the policy rules for marginal labor and capital income taxation derived for a closed economy largely carry over to the small open economy analyzed here. However, if these returns are unobserved by the government, the marginal tax policy rules will be very different from those pertaining to closed model-economies. In this case, capital income taxes on domestic savings will be completely ineffective, since such taxes would induce the consumers to move their savings abroad. The labor income tax must then indirectly also reflect the corrective purpose that the absent capital income tax would otherwise have had.

Suggested Citation

  • Aronsson, Thomas & Johansson-Stenman, Olof & Sjögren, Tomas, 2016. "Social Comparisons and Optimal Taxation in a Small Open Economy," Working Papers in Economics 658, University of Gothenburg, Department of Economics.
  • Handle: RePEc:hhs:gunwpe:0658

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    More about this item


    Optimal taxation; relative consumption; positional goods; capital mobility; small open economy;

    JEL classification:

    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • D60 - Microeconomics - - Welfare Economics - - - General
    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies

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