Subjective well-being, consumption comparisons, and optimal income taxation

Sean Slack, David Ulph

    Research output: Contribution to journalArticlepeer-review

    2 Citations (Scopus)

    Abstract

    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.
    Original languageEnglish
    Pages (from-to)455-476
    JournalJournal of Public Economic Theory
    Volume20
    Issue number4
    Early online date23 Nov 2017
    DOIs
    Publication statusPublished - Aug 2018

    Keywords

    • Optimal income taxation
    • Relative consumption
    • Well-being

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