Social Comparisons and Optimal Taxation in a Small Open Economy

Thomas Aronsson (), Olof Johansson-Stenman () and Tomas Sjögren
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Thomas Aronsson: Department of Economics, Postal: Umeå School of Business and Economics, Umeå University, SE – 901 87 Umeå, Sweden

No 658, Working Papers in Economics from University of Gothenburg, Department of Economics

Abstract: Almost all previous studies on optimal taxation and status consumption are based on closed model-economies. This paper analyzes how international capital mobility – which may constrain the use of capital income taxation – affects the optimal redistributive income tax policy in a small open economy when consumers care about their relative consumption. If the government can perfectly observe (and tax) returns on savings abroad, it is shown that the policy rules for marginal labor and capital income taxation derived for a closed economy largely carry over to the small open economy analyzed here. However, if these returns are unobserved by the government, the marginal tax policy rules will be very different from those pertaining to closed model-economies. In this case, capital income taxes on domestic savings will be completely ineffective, since such taxes would induce the consumers to move their savings abroad. The labor income tax must then indirectly also reflect the corrective purpose that the absent capital income tax would otherwise have had.

Keywords: Optimal taxation; relative consumption; positional goods; capital mobility; small open economy (search for similar items in EconPapers)
JEL-codes: D03 D60 D62 F21 H21 H23 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2016-05
New Economics Papers: this item is included in nep-ltv, nep-pbe and nep-pub
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http://hdl.handle.net/2077/44418 (text/html)

Related works:
Journal Article: Social Comparisons and Optimal Taxation in a Small Open Economy (2019)
Working Paper: Social Comparisons and Optimal Taxation in a Small Open Economy (2016)
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