Subjective well-being, consumption comparisons, and optimal income taxation
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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.
Slack , S & Ulph , D 2018 , ' Subjective well-being, consumption comparisons, and optimal income taxation ' , Journal of Public Economic Theory , vol. 20 , no. 4 , pp. 455-476 . https://doi.org/10.1111/jpet.12281
Journal of Public Economic Theory
© 2017 Wiley Periodicals, Inc. This work has been made available online in accordance with the publisher’s policies. This is the author created, accepted version manuscript following peer review and may differ slightly from the final published version. The final published version of this work is available at https://doi.org/10.1111/jpet.12281
DescriptionFinancial support from the AXA Research Fund is gratefully acknowledged.
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