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Optimal Dynamic Taxation with Distinctive Forms of Social Status Attainment
Author(s) -
Chang JuinJen,
Tsai HsuehFang,
Tsai TsungSheng
Publication year - 2019
Publication title -
the scandinavian journal of economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.725
H-Index - 64
eISSN - 1467-9442
pISSN - 0347-0520
DOI - 10.1111/sjoe.12283
Subject(s) - economics , externality , consumption (sociology) , productivity , microeconomics , marginal utility , marginal product , conspicuous consumption , capital (architecture) , capital income , optimal tax , labour economics , international taxation , public economics , production (economics) , macroeconomics , tax reform , history , social science , emerging markets , archaeology , sociology
We examine the role of both consumption‐ and wealth‐induced social comparisons in setting dynamic optimal income taxation. Under complete information, state‐invariant labor income taxes are used to remedy the externality caused by consumption‐induced social comparisons, while state‐contingent capital income taxes are used to remedy the externalities caused by both consumption‐ and wealth‐induced social comparisons. Under incomplete information, distinct types of agents are subject to an identical marginal capital income tax, which removes social comparisons. To solve the information problem, low‐productivity agents could be subject to a lower marginal labor tax than high‐productivity agents, which contradicts the traditional result in the Mirrlees–Stiglitz models.