Social Status and Optimal Income Taxation

No 200814, Working Papers from University of California at Riverside, Department of Economics

Abstract: This paper examines the optimal (first-best) fiscal policy in a stochastic, infinite-horizon representative agent model that exhibits consumption-enhanced as well as wealth-enhanced social status in the household utility. We show that the optimal labor tax rate is a positive constant that is used to correct negative consumption externalities. The optimal capital tax rate is also positive in order to overturn agents' status-seeking capital over-accumulation. Moreover, we find that in contrast to a conventional automatic stabilizer, the optimal capital tax moves in the opposite direction with shocks to firms' production technology. This result turns out to be qualitatively consistent with the discernible empirical evidence that many countries have implemented procyclical fiscal policies.

Keywords: Social Status; Optimal Income Taxation (search for similar items in EconPapers)
JEL-codes: E21 E62 H21 (search for similar items in EconPapers)
Pages: 14 pages
Date: 2008-12, Revised 2008-12
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https://economics.ucr.edu/papers/papers08/08-14.pdf First version, 2008 (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:ucr:wpaper:200814

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