Distortive Taxation can Increase Welfare: If Relative Consumption Matters
1993 (English)Report (Other academic)
Contrary to what is assumed in traditional microeconomic theory, social rank seems to play a large role in actual human interaction. In the present paper I analyze the implications of a relative consumption, or relative income, externality (i.e., relative consumption ci/cj, and not only absolute consumption ci, enters into the utility function of agent i). This means that people will tend to work too much. In an optimal taxation framework, i show that a fairly high marginal tax rate can be Pareto efficient.
Place, publisher, year, edition, pages
Stockholm: IIES , 1993. , 20 p.
Seminar Paper / Institute for International Economic Studies, Stockholm University, ISSN 0347-8769 ; 543
IdentifiersURN: urn:nbn:se:su:diva-41862OAI: oai:DiVA.org:su-41862DiVA: diva2:338034