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When the Joneses’ Consumption Hurts: Optimal Income Taxation and Public Good Provision in an OLG Model

  • Aronsson, Thomas

    ()

    (Department of Economics, Umeå University)

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    This paper considers a two-type, self-selection, overlapping generations model with nonlinear labor income and capital income taxation and public good provision, when people care about their relative consumption compared to others. In each case, the standard optimality expressions are modified by terms that reflect the extent to which people care about relative consumption. The modified tax formulas imply substantially higher marginal labor income tax rates than in the conventional case, under plausible assumptions and available empirical estimates regarding comparison consumption concerns. The extent to which the public good provision rule should be modified is shown to depend critically on the preference elicitation format. The effects of positionality on the marginal capital income tax rates are ambiguous.

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    File URL: http://www.econ.umu.se/DownloadAsset.action?contentId=48305&languageId=3&assetKey=ues711
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    Paper provided by Umeå University, Department of Economics in its series Umeå Economic Studies with number 711.

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    Length: 38 pages
    Date of creation: 16 May 2007
    Date of revision:
    Handle: RePEc:hhs:umnees:0711
    Contact details of provider: Postal: Department of Economics, Umeå University, S-901 87 Umeå, Sweden
    Phone: 090 - 786 61 42
    Fax: 090 - 77 23 02
    Web page: http://www.econ.umu.se/Email:


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    1. Ordover, J. A. & Phelps, E. S., 1979. "The concept of optimal taxation in the overlapping-generations model of capital and wealth," Journal of Public Economics, Elsevier, vol. 12(1), pages 1-26, August.
    2. BOADWAY, Robin & MARCHAND, Maurice & PESTIEAU, Pierre, 1997. "Redistribution with unobservable bequests: a case for taxing capital income," CORE Discussion Papers 1997070, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    3. Ng, Yew-Kwang, 1987. "Relative-Income Effects and the Appropriate Level of Public Expenditure," Oxford Economic Papers, Oxford University Press, vol. 39(2), pages 293-300, June.
    4. Ronald Wendner, 2004. "Frames of reference, the environment, and efficient taxation," Economics of Governance, Springer, vol. 6(1), pages 13-31, January.
    5. Aronsson, Thomas & Blomquist, Sören, 2000. "Optimal Taxation, Global Externalities and Labor Mobility," Working Paper Series 2000:15, Uppsala University, Department of Economics.
    6. Andrew E. Clark and Andrew J. Oswald, . "Satisfaction and Comparison Income," Economics Discussion Papers 419, University of Essex, Department of Economics.
    7. Tuomala, Matti, 1990. "Optimal Income Tax and Redistribution," OUP Catalogue, Oxford University Press, number 9780198286059, March.
    8. George A. Akerlof, 1997. "Social Distance and Social Decisions," Econometrica, Econometric Society, vol. 65(5), pages 1005-1028, September.
    9. Marceau, Nicolas & Boadway, Robin, 1994. " Minimum Wage Legislation and Unemployment Insurance as Instruments for Redistribution," Scandinavian Journal of Economics, Wiley Blackwell, vol. 96(1), pages 67-81.
    10. Andrew E. Clark & Paul Frijters & Michael A. Shields, 2006. "Income and happiness: Evidence, explanations and economic implications," PSE Working Papers halshs-00590436, HAL.
    11. Wendner, Ronald & Goulder, Lawrence H., 2008. "Status Effects, Public Goods Provision, and the Excess Burden," MPRA Paper 8260, University Library of Munich, Germany.
    12. Christiansen, Vidar, 1981. "Evaluation of Public Projects under Optimal Taxation," Review of Economic Studies, Wiley Blackwell, vol. 48(3), pages 447-57, July.
    13. 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.
    14. Joseph E. Stiglitz, 1981. "Self-Selection and Pareto Efficient Taxation," NBER Working Papers 0632, National Bureau of Economic Research, Inc.
    15. Stern, Nicholas, 1982. "Optimum taxation with errors in administration," Journal of Public Economics, Elsevier, vol. 17(2), pages 181-211, March.
    16. Stutzer, Alois, 2004. "The role of income aspirations in individual happiness," Journal of Economic Behavior & Organization, Elsevier, vol. 54(1), pages 89-109, May.
    17. Carlsson, Fredrik & Johansson-Stenman, Olof & Martinsson, Peter, 2003. "Do You Enjoy Having More Than Others? Survey Evidence of Positional Goods," Working Papers in Economics 100, University of Gothenburg, Department of Economics.
    18. Larry Samuelson, 2004. "Information-Based Relative Consumption Effects," Econometrica, Econometric Society, vol. 72(1), pages 93-118, 01.
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