This paper studies the impact of redistributive income taxation in a society where only some individuals are motivated by relative consumption concerns. Introducing this heterogeneity raises theoretical challenges since (i) earned income becomes an imperfect indicator of underlying ability and (ii) relative concerns may be inadmissable in the social objective. A new behavioural model is developed in which only relatively-concerned individuals choose work effort strategically. Linear tax/transfer systems schemes are then characterized and simulated for a series of welfarist and non-welfarist social objectives, and for different degrees of preference heterogeneity. A key result is that a government which understands the extent of relative consumption concerns-but places no social weight on individuals with such preferences-nevertheless sets a significantly more progressive tax system than a government which ignores relative consumption motivations altogether.
Canadian Journal of Economics is edited by David Green
More articles in Canadian Journal of Economics from Canadian Economics Association Address: Canadian Economics Association Prof. Steven Ambler, Secretary-Treasurer c/o Olivier Lebert, CEA/CJE/CPP Office C.P. 35006, 1221 Fleury Est Montréal, Québec, Canada H2C 3K4 Contact information at EDIRC. Series data maintained by Prof. Werner Antweiler ().