Optimal Nonlinear Income Taxation with Habit Formation
It has recently been shown that incorporating "keeping up with the Joneses" preferences into a prototypical two-ability-type optimal nonlinear taxation model leads to higher marginal income tax rates for both types of agents. Specifically, the high-skill type faces a positive marginal income tax rate, rather than zero as in the conventional case. In this paper, agents' utility functions are postulated to exhibit "habit formation in consumption" such that the prototypical two-ability-type optimal nonlinear taxation model becomes a dynamic analytical framework. We show that if the government can commit to its future fiscal policy, the presence of consumption habits does not affect the standard results on optimal marginal income tax rates. By contrast, if the government cannot pre-commit, the high-skill type will face a negative marginal income tax rate, whereas the effect of habit formation on the low-skill type's marginal tax rate is ambiguous.
|Date of creation:||Aug 2008|
|Date of revision:||Aug 2008|
|Contact details of provider:|| Postal: 4128 Sproul Hall, Riverside, CA 92521-0427|
Phone: (951) 827-3266
Fax: (951) 827-5685
Web page: http://economics.ucr.edu
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- 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.
- Carroll, Christopher D., 2000.
"Solving consumption models with multiplicative habits,"
Elsevier, vol. 68(1), pages 67-77, July.
- Christopher D Carroll, 2000. "Solving Consumption Models with Multiplicative Habits," Economics Working Paper Archive 421, The Johns Hopkins University,Department of Economics.
- G. Constantinides, 1990.
"Habit formation: a resolution of the equity premium puzzle,"
Levine's Working Paper Archive
1397, David K. Levine.
- Constantinides, George M, 1990. "Habit Formation: A Resolution of the Equity Premium Puzzle," Journal of Political Economy, University of Chicago Press, vol. 98(3), pages 519-43, June.
- Hotz, V Joseph & Kydland, Finn E & Sedlacek, Guilherme L, 1988. "Intertemporal Preferences and Labor Supply," Econometrica, Econometric Society, vol. 56(2), pages 335-60, March.
- Jaime Alonso-Carrera & Jordi Caballé & Xavier Raurich, 2004.
"Consumption Externalities, Habit Formation and Equilibrium Efficiency,"
Scandinavian Journal of Economics,
Wiley Blackwell, vol. 106(2), pages 231-251, 06.
- Jaime Alonso-Carrera & Jordi Caballe & Xavier Raurich, 2001. "Consumption Externalities, Habit Formation, and Equilibrium Efficiency," UFAE and IAE Working Papers 499.01, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
- Jang-Ting Guo & Zuzana Janko, 2009. "Reexamination of Real Business Cycles in a Small Open Economy," Southern Economic Journal, Southern Economic Association, vol. 76(1), pages 165-182, July.
- Marcus Berliant & John Ledyard, 2004.
"Optimal Dynamic Nonlinear Income Taxes with No Commitment,"
0403004, EconWPA, revised 21 Jun 2005.
- Marcus Berliant & John O. Ledyard, 2014. "Optimal Dynamic Nonlinear Income Taxes with No Commitment," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 16(2), pages 196-221, 04.
- Berliant, Marcus & Ledyard, John, 2011. "Optimal Dynamic Nonlinear Income Taxes with No Commitment," MPRA Paper 31749, University Library of Munich, Germany.
- Jody Overland & Christopher D. Carroll & David N. Weil, 2000.
"Saving and Growth with Habit Formation,"
American Economic Review,
American Economic Association, vol. 90(3), pages 341-355, June.
- Christopher D. Carroll & Jody Overland & David N. Weil, 2000. "Mathematica code for 'Saving and Growth with Habit Formation' and 'Comparison Utility in a Growth Model'," QM&RBC Codes 43, Quantitative Macroeconomics & Real Business Cycles.
- Christopher D. Carroll & Jody Overland & David N. Weil, 1995. "Saving and growth with habit formation," Finance and Economics Discussion Series 95-42, Board of Governors of the Federal Reserve System (U.S.).
- Bill Dupor & Wen-Fang Liu, 2003. "Jealousy and Equilibrium Overconsumption," American Economic Review, American Economic Association, vol. 93(1), pages 423-428, March.
When requesting a correction, please mention this item's handle: RePEc:ucr:wpaper:200810. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Kelvin Mac)
If references are entirely missing, you can add them using this form.