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Positional Preferences for Housing: Income Taxation as a Second-Best Policy?

Author

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  • Aronsson, Thomas

    () (Department of Economics, Umeå School of Business and Economics)

  • Mannberg, Andrea

    () (Department of Economics, Umeå School of Business and Economics)

Abstract

This paper analyzes whether marginal taxation of labor and capital income might be useful second best instruments for internalizing the externalities caused by conspicuous housing consumption, when the government is unable to implement a first best corrective tax on housing wealth. The rationale for studying income taxation in this particular context is that first best taxes on housing wealth may be infeasible (at least in a shorter time perspective), while income taxes indirectly affect both the level and composition of accumulated wealth. We show that a suboptimally low tax on housing wealth provides an incentive for the government to subsidize financial saving and tax labor income at the margin.

Suggested Citation

  • Aronsson, Thomas & Mannberg, Andrea, 2014. "Positional Preferences for Housing: Income Taxation as a Second-Best Policy?," Umeå Economic Studies 890, Umeå University, Department of Economics.
  • Handle: RePEc:hhs:umnees:0890
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    Keywords

    Relative consumption; housing; taxation; behavioral economics;

    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

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