Income Taxation with Habit Formation and Consumption Externalities

Jaime Alonso-Carrera (), Jordi Caballe () and Xavier Raurich

UFAE and IAE Working Papers from Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC)

Abstract: We analyze the dynamic behavior and the welfare properties of the equilibrium path of a growth model where both habits and consumption externalities affect the utility of consumers. We discuss the effects of flat rate income taxes and characterize the optimal income taxation policy. We show that, when consumption externalities and habit adjusted consumption are not perfect substitutes, a counter-cyclical income tax rate allows the competitive equilibrium to replicate the efficient path. Our analysis highlights the crucial role played by complementarities between externalities and habits in order to generate an inefficient dynamic equilibrium.

Keywords: Habit Formation; Consumption Externalities; Optimal Taxation. (search for similar items in EconPapers)
JEL-codes: D91 E62 O40 (search for similar items in EconPapers)
Pages: 41
Date: 2001-10-03
New Economics Papers: this item is included in nep-dge and nep-pub
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:aub:autbar:496.01

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