Income Taxation and Ability Rank

Thomas Aronsson () and Olof Johansson-Stenman ()
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Thomas Aronsson: University of Umea, Sweden and University of Graz, Austria
Olof Johansson-Stenman: University of Gothenburg, Sweden

No 2024-21, Graz Economics Papers from University of Graz, Department of Economics

Abstract: A substantial body of empirical and theoretical research suggests that individuals care about, and derive instrumental benefits from, their rank in society. This paper extends the Mirrleesian model of optimal income taxation to a framework where individuals derive utility from their perceived ability rank. Such concerns generate externalities that tend to increase the optimal marginal tax rates for both corrective and redistributive reasons. While empirical evidence on the magnitude of these concerns is limited, their potential impact on optimal income taxation could be substantial, with top marginal income tax rates potentially exceeding 90%.

Keywords: Redistributive taxation; ability; ordinal comparisons; externalities. (search for similar items in EconPapers)
JEL-codes: D62 D82 D90 H21 H23 (search for similar items in EconPapers)
Date: 2024-12
New Economics Papers: this item is included in nep-pbe, nep-pub and nep-upt
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