Keeping up with the Joneses, the Smiths and the Tanakas: Optimal Taxation with Social Comparisons in a Multi-Country Economy

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

No 862, Umeå Economic Studies from Umeå University, Department of Economics

Abstract: Recent empirical evidence suggests that between-country social comparisons have become more important over time. This paper analyzes optimal income taxation in a multi-country economy, where consumers derive utility from their relative consumption compared with both other domestic residents and people in other countries. The optimal tax policy in our framework reflects both correction for positional externalities and redistributive aspects of such correction due to the incentive constraint facing each government. If the national governments behave as Nash competitors to one another, the resulting tax policy only internalizes the externalities that are due to within-country comparisons, whereas the tax policy chosen by the leader country in a Stackelberg game also reflects between-country comparisons. We also derive a globally efficient tax structure in a cooperative framework. Nash competition typically implies lower marginal income tax rates than chosen by the leader country in a Stackelberg game, and cooperation typically leads to higher marginal income tax rates than the non-cooperative regimes.

Keywords: Optimal taxation; relative consumption; inter-jurisdictional comparison; asymmetric information; status; positional goods (search for similar items in EconPapers)
JEL-codes: D03 D62 D82 H21 (search for similar items in EconPapers)
Pages: 45 pages
Date: 2013-08-13
New Economics Papers: this item is included in nep-acc, nep-cta, nep-ltv and nep-pbe
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Citations: View citations in EconPapers (1)

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