Positional preferences in time and space: Optimal income taxation with dynamic social comparisons

Thomas Aronsson and Olof Johansson-Stenman ()

Journal of Economic Behavior & Organization, 2014, vol. 101, issue C, 1-23

Abstract: This paper concerns optimal redistributive non-linear income taxation in an OLG model, where people care about their own consumption relative to (i) other people's current consumption, (ii) own past consumption, and (iii) other people's past consumption. We show that both (i) and (iii) affect the marginal income tax structure whereas (ii) does not. We also derive conditions under which atemporal and intertemporal consumption comparisons give rise to exactly the same tax policy responses. On the basis of the available empirical estimates, comparisons with other people's current and past consumption tend to substantially increase the optimal marginal labor income tax rates. Yet, such comparisons may either increase or decrease the optimal marginal capital income tax rates.

Keywords: Optimal income taxation; Asymmetric information; Relative consumption; Status; Habit formation; Positional goods (search for similar items in EconPapers)
JEL-codes: D62 H21 H23 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (19)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jeborg:v:101:y:2014:i:c:p:1-23

DOI: 10.1016/j.jebo.2014.01.004

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