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Subjective well‐being, consumption comparisons, and optimal income taxation
Author(s) -
Slack Sean,
Ulph David
Publication year - 2018
Publication title -
journal of public economic theory
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.809
H-Index - 32
eISSN - 1467-9779
pISSN - 1097-3923
DOI - 10.1111/jpet.12281
Subject(s) - economics , consumption (sociology) , distortion (music) , productivity , consumption function , wage , consumption tax , function (biology) , production (economics) , microeconomics , econometrics , public economics , labour economics , macroeconomics , international taxation , tax reform , computer science , computer network , amplifier , bandwidth (computing) , evolutionary biology , sociology , biology , social science
We introduce reference consumption into the standard utility function from optimal tax analysis. Individuals compare their consumption “narrowly” with those of the same productivity, or “broadly” with the average consumption across society. In both narrow and broad equilibria reference consumption is an increasing function of the tax parameters, so generating new theoretical results. Individual well‐being decreases with the net wage (net‐of‐tax) rate for low productivity workers under narrow (broad) comparisons, thus adjusting redistributive taxation considerations. Further, in both cases reference consumption distorts labor supply away from the social optimum level, giving a distortion‐correcting role for taxation.