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Keeping up with the Joneses, the Smiths and the Tanakas: On International Tax Coordination and Social Comparisons

Thomas Aronsson () and Olof Johansson-Stenman ()
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Thomas Aronsson: Dept of Economics, Umeå School of Business and Economics, Umeå University, Postal: SE – 901 87 Umeå, Sweden

No 621, Working Papers in Economics from University of Gothenburg, Department of Economics

Abstract: Much evidence suggests that between-country social comparisons have become more important over time due to globalization. This paper analyzes optimal income taxation in a multi-country economy, where consumers derive utility from their relative consumption compared with both other domestic residents and people in other countries. The optimal tax policy in our framework reflects both correction for positional externalities and redistributive aspects of such correction due to the incentive constraint facing each government. If the national governments behave as Nash competitors to one another, the resulting tax policy only internalizes the externalities that are due to within-country comparisons, whereas the tax policy chosen by the leader country in a Stackelberg game also to some extent reflects between-country comparisons. We also derive globally efficient tax policies in a cooperative framework, and conclude that there are potentially large welfare gains of international tax policy coordination resulting from cross-country social comparisons.

Keywords: Optimal taxation; relative consumption; inter-jurisdictional comparison; asymmetric information; status; positional goods. (search for similar items in EconPapers)
JEL-codes: D03 D62 D82 H23 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-pbe
Date: 2015-05
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