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Conspicuous Leisure: Optimal Income Taxation when both Relative Consumption and Relative Leisure Matter

  • Aronsson, Thomas

    ()

    (Department of Economics, Umeå University)

  • Johansson-Stenman, Olof

    ()

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

Previous studies on public policy under relative consumption concerns have ignored the role of leisure comparisons. This paper considers a two-type optimal nonlinear income tax model where people care both about their relative consumption and their relative leisure. Increased consumption positionality typically implies higher marginal income tax rates for both the high-ability and the low-ability type, whereas leisure positionality has an offsetting role. However, this offsetting role is not symmetric; concern about relative leisure implies a progressive income tax component, i.e., a component that is larger for the high-ability than for the low-ability type. Moreover, leisure positionality does not modify the policy rule for public good provision when the income tax is optimally chosen.

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Paper provided by Umeå University, Department of Economics in its series Umeå Economic Studies with number 774.

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Length: 21 pages
Date of creation: 11 May 2009
Date of revision:
Handle: RePEc:hhs:umnees:0774
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/
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