Optimal nonlinear redistributive taxation and public good provision in an economy with Veblen effects

Luca Micheletto ()
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Luca Micheletto: Department of Economics, Postal: Uppsala University, P.O. Box 513, SE-751 20 Uppsala, Sweden

No 2009:3, Working Paper Series from Uppsala University, Department of Economics

Abstract: This paper deals with the consequences of the assumption of negatively interdependent preferences for the shape of the optimal nonlinear income tax and the effcient level of public good provision in a setting where the policy maker maximizes an inequality averse social welfare function and the agents’ market ability is private information. The analysis points out that the terms added in the tax formulas due to the presence of Veblen effects might justify a reduction in the optimal marginal tax rates faced by the different individuals. Also, the desirability of negative marginal tax rates cannot be ruled out. With respect to the issue of the optimal level of public good provision, we derive a modfied Samuelson rule and highlight the fact that the Veblen-based part of the formula might require to distort downwards the efficient level of public good provision.

Keywords: optimal nonlinear income taxation; modified Samuelson rule; Veblen effects (search for similar items in EconPapers)
JEL-codes: H21 H23 H41 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-pbe
Date: 2009-03-30
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