Optimal Taxation when Consumers Have Endogenous Benchmark Levels of Consumption | Zendy

Abel Andrew B. | Zendy

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Optimal Taxation when Consumers Have Endogenous Benchmark Levels of Consumption

Author(s) -

Abel Andrew B.

Publication year - 2005

Publication title -

review of economic studies

Language(s) - English

Resource type - Journals

SCImago Journal Rank - 15.641

H-Index - 141

eISSN - 1467-937X

pISSN - 0034-6527

DOI - 10.1111/0034-6527.00322

Subject(s) - economics , consumption (sociology) , benchmark (surveying) , capital income , microeconomics , golden rule , overlapping generations model , autonomous consumption , social security , personal consumption expenditures price index , capital (architecture) , public economics , personal income , macroeconomics , international taxation , tax reform , market economy , aggregate expenditure , social science , philosophy , theology , geodesy , sociology , geography , history , archaeology

I examine optimal taxes in an overlapping generations economy in which each consumer's utility depends on consumption relative to a weighted average of consumption by others (the benchmark level of consumption) as well as on the level of the consumer's own consumption. The socially optimal balanced growth path is characterized by the Modified Golden Rule and by a condition on the intergenerational allocation of consumption in each period. A competitive economy can be induced to attain the social optimum by a lump‐sum pay‐as‐you‐go social security system and a tax on capital income.

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