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

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  • Aronsson, Thomas

    () (Department of Economics, Umeå University)

Abstract

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.

Suggested Citation

  • Aronsson, Thomas, 2007. "When the Joneses’ Consumption Hurts: Optimal Income Taxation and Public Good Provision in an OLG Model," Umeå Economic Studies 711, Umeå University, Department of Economics.
  • Handle: RePEc:hhs:umnees:0711
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    References listed on IDEAS

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    More about this item

    Keywords

    Optimal taxation; redistribution; public goods; relative consumption; status; positional goods;

    JEL classification:

    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • H41 - Public Economics - - Publicly Provided Goods - - - Public Goods

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