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Paternalism against Veblen: Optimal Taxation and Non-Respected Preferences for Social Comparisons

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This paper compares optimal nonlinear income tax policies of welfarist and paternalist governments, where the latter does not respect individual preferences regarding relative consumption. Consistent with previous findings, relative consumption concerns under welfarism typically imply higher marginal income tax rates. Remarkably, the optimal marginal tax rules are very similar in the paternalist case. For example, if relative consumption concerns are based on mean value comparisons and all consumers are equally positional, then the first-best tax rules are identical between the governments. Extensive numerical simulations supplement the theoretical results, and make it possible to compare also tax levels and overall redistribution.

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File URL: http://www.usbe.umu.se/digitalAssets/193/193468_ues945.pdf
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Paper provided by Umeå University, Department of Economics in its series Umeå Economic Studies with number 945.

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Length: 58 pages
Date of creation: 10 Feb 2017
Handle: RePEc:hhs:umnees:0945
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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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