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 language | English |
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Pages (from-to) | 455-476 |
Journal | Journal of Public Economic Theory |
Volume | 20 |
Issue number | 4 |
Early online date | 23 Nov 2017 |
DOIs | |
Publication status | Published - Aug 2018 |
Keywords
- Optimal income taxation
- Relative consumption
- Well-being
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David Tregear Ulph
- Economics (Business School) - Emeritus Professor
- Centre for Energy Ethics
Person: Emeritus Professor