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Optimal nonlinear redistributive taxation and public good provision in an economy with Veblen effects

  • Micheletto, Luca

    ()

    (Department of Economics)

This paper deals with the consequences of the assumption of negatively interdependent preferences for the shape of the optimal nonlinear income tax and the effcient level of public good provision in a setting where the policy maker maximizes an inequality averse social welfare function and the agents’ market ability is private information. The analysis points out that the terms added in the tax formulas due to the presence of Veblen effects might justify a reduction in the optimal marginal tax rates faced by the different individuals. Also, the desirability of negative marginal tax rates cannot be ruled out. With respect to the issue of the optimal level of public good provision, we derive a modfied Samuelson rule and highlight the fact that the Veblen-based part of the formula might require to distort downwards the efficient level of public good provision.

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Paper provided by Uppsala University, Department of Economics in its series Working Paper Series with number 2009:3.

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Length: 26 pages
Date of creation: 30 Mar 2009
Date of revision:
Handle: RePEc:hhs:uunewp:2009_003
Contact details of provider: Postal: Department of Economics, Uppsala University, P. O. Box 513, SE-751 20 Uppsala, Sweden
Phone: + 46 18 471 25 00
Fax: + 46 18 471 14 78
Web page: http://www.nek.uu.se/
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  1. Samuel Bowles & Yongjin Park, 2004. "Emulation, Inequality, and Work Hours: Was Thorsten Veblen Right?," UMASS Amherst Economics Working Papers 2004-14, University of Massachusetts Amherst, Department of Economics.
  2. Guesnerie, Roger & Seade, Jesus, 1982. "Nonlinear pricing in a finite economy," Journal of Public Economics, Elsevier, vol. 17(2), pages 157-179, March.
  3. Micheletto, Luca, 2008. "Redistribution and optimal mixed taxation in the presence of consumption externalities," Journal of Public Economics, Elsevier, vol. 92(10-11), pages 2262-2274, October.
  4. 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.
  5. Alessandro Balestrino, 2006. "Tax Avoidance, Endogenous Social Norms, and the Comparison Income Effect," CESifo Working Paper Series 1758, CESifo Group Munich.
  6. Alpizar, Francisco & Carlsson, Fredrik & Johansson-Stenman, Olof, 2005. "How much do we care about absolute versus relative income and consumption?," Journal of Economic Behavior & Organization, Elsevier, vol. 56(3), pages 405-421, March.
  7. Corneo, Giacomo, 2002. "The efficient side of progressive income taxation," European Economic Review, Elsevier, vol. 46(7), pages 1359-1368, July.
  8. Robin Boadway & Michael Keen, 1991. "Public Goods, Self-Selection and Optimal Income Taxation," Working Papers 828, Queen's University, Department of Economics.
  9. Persson, Mats, 1995. " Why Are Taxes So High in Egalitarian Societies?," Scandinavian Journal of Economics, Wiley Blackwell, vol. 97(4), pages 569-80, December.
  10. Luttmer, Erzo F. P., 2004. "Neighbors as Negatives: Relative Earnings and Well-Being," Working Paper Series rwp04-029, Harvard University, John F. Kennedy School of Government.
  11. Efe A. Ok & Levent KoÚkesen, 2000. "Negatively interdependent preferences," Social Choice and Welfare, Springer, vol. 17(3), pages 533-558.
  12. Blomquist, Sören & Micheletto, Luca, 2005. "Optimal Redistributive Taxation when Government’s and Agents’ Preferences Differ," Working Paper Series 2005:7, Uppsala University, Department of Economics.
  13. Fredrik Carlsson & Olof Johansson-Stenman & Peter Martinsson, 2007. "Do You Enjoy Having More than Others? Survey Evidence of Positional Goods," Economica, London School of Economics and Political Science, vol. 74(296), pages 586-598, November.
  14. Oswald, Andrew J., 1983. "Altruism, jealousy and the theory of optimal non-linear taxation," Journal of Public Economics, Elsevier, vol. 20(1), pages 77-87, February.
  15. Sara J. Solnick & David Hemenway, 2005. "Are Positional Concerns Stronger in Some Domains than in Others?," American Economic Review, American Economic Association, vol. 95(2), pages 147-151, May.
  16. Boskin, Michael J & Sheshinski, Eytan, 1978. "Optimal Redistributive Taxation when Individual Welfare Depends upon Relative Income," The Quarterly Journal of Economics, MIT Press, vol. 92(4), pages 589-601, November.
  17. Layard, Richard, 1980. "Human Satisfactions and Public Policy," Economic Journal, Royal Economic Society, vol. 90(363), pages 737-50, December.
  18. Mirrlees, James A, 1971. "An Exploration in the Theory of Optimum Income Taxation," Review of Economic Studies, Wiley Blackwell, vol. 38(114), pages 175-208, April.
  19. Ferrer-i-Carbonell, Ada, 2005. "Income and well-being: an empirical analysis of the comparison income effect," Journal of Public Economics, Elsevier, vol. 89(5-6), pages 997-1019, June.
  20. 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.
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