Social Comparisons and Optimal Taxation in a Small Open Economy

Thomas Aronsson (), Olof Johansson-Stenman () and Tomas Sjögren
Additional contact information
Thomas Aronsson: Department of Economics, Umeå University, Postal: Department of Economics, Umeå University, S 901 87 Umeå, Sweden, http://www.econ.umu.se

No 933, Umeå Economic Studies from Umeå University, Department of Economics

Abstract: Almost all previous studies on optimal taxation and status consumption are based on closed model-economies. This paper analyzes how international capital mobility – which may constrain the use of capital income taxation – affects the optimal redistributive income tax policy in a small open economy when consumers care about their relative consumption. If the government can perfectly observe (and tax) returns on savings abroad, it is shown that the policy rules for marginal labor and capital income taxation derived for a closed economy largely carry over to the small open economy analyzed here. However, if these returns are unobserved by the government, the marginal tax policy rules will be very different from those pertaining to closed model-economies. In this case, capital income taxes on domestic savings will be completely ineffective, since such taxes would induce the consumers to move their savings abroad. The labor income tax must then indirectly also reflect the corrective purpose that the absent capital income tax would otherwise have had.

Keywords: Optimal taxation; relative consumption; positional goods; capital mobility; small open economy (search for similar items in EconPapers)
JEL-codes: D03 D60 D62 F21 H21 H23 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2016-05-31
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.usbe.umu.se/digitalAssets/181/181633_ues933.pdf (application/pdf)

Related works:
Journal Article: Social Comparisons and Optimal Taxation in a Small Open Economy (2019)
Working Paper: Social Comparisons and Optimal Taxation in a Small Open Economy (2016)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:hhs:umnees:0933

Access Statistics for this paper

More papers in Umeå Economic Studies from Umeå University, Department of Economics Department of Economics, Umeå University, S-901 87 Umeå, Sweden. Contact information at EDIRC.
Bibliographic data for series maintained by David Skog ().