When the Joneses’ Consumption Hurts: Optimal Income Taxation and Public Good Provision in an OLG Model

Thomas Aronsson ()
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Thomas Aronsson: Department of Economics, Umeå University, Postal: S 901 87 Umeå, Sweden

No 711, Umeå Economic Studies from Umeå University, Department of Economics

Abstract: This paper considers a two-type, self-selection, overlapping generations model with nonlinear labor income and capital income taxation and public good provision, when people care about their relative consumption compared to others. In each case, the standard optimality expressions are modified by terms that reflect the extent to which people care about relative consumption. The modified tax formulas imply substantially higher marginal labor income tax rates than in the conventional case, under plausible assumptions and available empirical estimates regarding comparison consumption concerns. The extent to which the public good provision rule should be modified is shown to depend critically on the preference elicitation format. The effects of positionality on the marginal capital income tax rates are ambiguous.

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-dge and nep-pbe
Date: 2007-05-16
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