A Note on Optimal Taxation, Status Consumption, and Unemployment

Thomas Aronsson () and Olof Johansson-Stenman ()
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Thomas Aronsson: Department of Economics, Umeå University, Postal: Department of Economics, Umeå University, S 901 87 Umeå, Sweden, https://www.umu.se/handelshogskolan
Olof Johansson-Stenman: Department of Economics, School of Business, Economics and Law, University of Gothenburg, https://www.gu.se/handelshogskolan

No 983, Umeå Economic Studies from Umeå University, Department of Economics

Abstract: Existing research on optimal taxation in economies with status-driven relative consumption assumes that the labor market is competitive, despite the fact that real world labor markets are typically characterized by involuntary unemployment. We show how the marginal tax policy ought to be modified to simultaneously account for positional consumption externalities and equilibrium unemployment, and find that interaction effects between these two market failures are crucial determinants of the marginal tax structure. In certain cases, the policy incentive to tax away positional externalities vanishes completely, and negative positional externalities may even lead to lower marginal taxation, under involuntary unemployment.

Keywords: Optimal taxation; relative consumption; externalities; unemployment (search for similar items in EconPapers)
JEL-codes: D62 D90 H21 H23 J64 (search for similar items in EconPapers)
Pages: 20 pages
Date: 2020-12-03
New Economics Papers: this item is included in nep-pbe, nep-pub and nep-res
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