Positional Concerns in an Olg Model: Optimal Labor and Capital Income Taxation*

Abstract

This article concerns optimal income taxation under asymmetric information in a two-type OLG model when individuals' relative consumption matters. Positional concerns affect the policy choices via two channels: (i) the average degree of positionality and (ii) positionality differences between the low-ability type and the mimicker. Under plausible empirical estimates, the marginal labor income tax rates become substantially larger, and the absolute value of the marginal capital income tax rate of the low-ability type becomes substantially smaller, than in the conventional model. In addition to measures of reference consumption based on average consumption, we also address within-generation and upward comparisons.

Ramsey, Pigou, Heterogenous Agents, and Non-Atmospheric Consumption Externalities

“…Although other authors have raised this point 3 , I know of no prior study that rigorously analyzes how a non-atmospheric consumption externality influences the optimal first-best and second-best levels of public good provision. 4 This is the focus of the present paper. I develop a theoretical model to examine a generalized Ramsey rule and optimal rules and levels of public good provision in the presence of a generalized consumption externality.…”

Paternalism against Veblen: Optimal Taxation and Non-respected Preferences for Social Comparisons

“…Exceptions are Aronsson and Johansson-Stenman (2010), who also analyze the policy implications of withingeneration and upward comparisons, respectively, faced by a welfarist policy maker, and Micheletto preferences between types. The separable structure is convenient, as it makes it easy to distinguish between a welfarist government (which respects consumer preferences for relative consumption) and a paternalist government (which does not).…”

Asymmetric and non-atmospheric consumption externalities, and efficient consumption taxation

“…In this paper, we focus on the case of a keeping up with the Joneses (KUJ-) externality. Dupor and Liu (2003) define preferences exhibiting a KUJ externality 6 Johansson (1997) refers to this form of altruism as genuine altruism. 7 Intuitively a household considers her own contribution to the reference level and to the average utility in the population as extremely small and therefore negligible.…”

“…6 The strength of altruism is reflected by ϕ. Both the reference level and the average utility of all households are considered to be exogenous by a household.…”