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A note on optimal taxation, status consumption, and unemployment

Thomas Aronsson and Olof Johansson-Stenman

Journal of Public Economics, 2021, vol. 200, issue C

Abstract: Existing research on optimal taxation in economies with status-driven relative consumption (implicitly) assumes that there is no involuntary unemployment, despite ample evidence that real world labor markets are typically characterized by such unemployment. We show how the marginal tax policy ought to be modified to simultaneously account for positional consumption externalities and equilibrium unemployment, and find that interaction effects between these two market failures are crucial determinants of the marginal tax structure. In certain cases, the policy incentive to tax away positional externalities vanishes completely, and negative positional externalities may even lead to lower marginal taxation, under involuntary unemployment.

Keywords: Optimal taxation; Relative consumption; Externalities; Unemployment (search for similar items in EconPapers)
JEL-codes: D62 D90 H21 H23 J64 (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1016/j.jpubeco.2021.104458

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