Conspicuous Leisure: Optimal Income Taxation when both Relative Consumption and Relative Leisure Matter

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

No 358, Working Papers in Economics from Göteborg University, Department of Economics

Abstract: Previous studies on public policy under relative consumption concerns have ignored the role of leisure comparisons. This paper considers a two-type optimal nonlinear income tax model where people care both about their relative consumption and their relative leisure. Increased consumption positionality typically implies higher marginal income tax rates for both the high-ability and the low-ability type, whereas leisure positionality has an offsetting role. However, this offsetting role is not symmetric; concern about relative leisure implies a progressive income tax component, i.e., a component that is larger for the high-ability than for the low-ability type. Moreover, leisure positionality does not modify the policy rule for public good provision when the income tax is optimally chosen.

Keywords: Optimal taxation; redistribution; public goods; relative consumption; status; positional goods (search for similar items in EconPapers)
JEL-codes: D62 H21 H23 H41 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ltv and nep-pbe
Date: 2009-04-21

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Working Paper: Conspicuous Leisure: Optimal Income Taxation when both Relative Consumption and Relative Leisure Matter (2009)
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