Samano, Daniel (2009): Explaining Taxes at the Upper Tail of the Income Distribution: The Role of Utility Interdependence.
Download (478Kb) | Preview
Optimal tax theory has difficulty rationalizing high marginal tax rates at the upper end of the income distribution. In this paper, I construct a model of optimal income taxation in which agents' preferences are interdependent. I derive a simple expression for optimal taxes that accommodates consumption externalities within Mirrlees (1971) framework. Using this expression, I conduct a positive analysis of taxation: assuming that observed taxes are optimal, I derive analytic expressions for i) a parameter that measures the degree of agents' utility interdependence and ii) a function that quantifies the consumption externality agents of different income impose to society. Using these expressions, I rationalize income taxes in the United States and the United Kingdom for the 1995-2004 period. I show that only a moderate amount of utility interdependence is su±cient for this. My estimations indicate that the progressivity of tax schedules may be driven by corrective considerations.
|Item Type:||MPRA Paper|
|Original Title:||Explaining Taxes at the Upper Tail of the Income Distribution: The Role of Utility Interdependence|
|Keywords:||optimal non-linear taxation, relative consumption, utility interdependence, rationalization.|
|Subjects:||H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H21 - Efficiency; Optimal Taxation
D - Microeconomics > D6 - Welfare Economics > D62 - Externalities
H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H23 - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
|Depositing User:||Daniel Samano|
|Date Deposited:||11. Dec 2009 08:30|
|Last Modified:||15. Feb 2013 08:53|
Abel, A. (1990): "Asset prices under habit formation and catching up with the Joneses," The American Economic Review, 80(2), 38-42.
Abel, A. (2005): "Optimal Taxation when Consumers Have Endogenous Benchmark Levels of Consumption," Review of Economic Studies, 72(1), 21-42.
Alpizar, F., F. Carlsson, and O. Johansson-Stenman (2005): "How much do we care about absolute versus relative income and consumption?," Journal of Economic Behavior and Organization, 56(3), 405-421.
Atkinson, A. (1990): "Public economics and the economic public," European Economic Review, 34(2-3), 225-248.
Bault, N., G. Coricelli, and A. Rustichini (2008): "Interdependent utilities: How social ranking affects choice behavior," PLoS ONE, 3(10).
Blanchflower, D., and A. Oswald (2004): "Well-being over time in Britain and the USA," Journal of Public Economics, 88(7-8), 1359-1386.
Boskin, M., and E. Sheshinski (1978): "Optimal redistributive taxation when individual welfare depends upon relative income," The Quarterly Journal of Economics, 94(2), 589-601.
Campbell, J., and J. Cochrane (1999): "By force of habit: A consumption-based explanation of aggregate stock market behavior," Journal of Political Economy, 107(2), 205-251.
Carlsson, F., O. Johansson-Stenman, and P. Martinsson(2007): "Do You Enjoy Having More than Others? Survey Evidence of Positional Goods," Economica, 74(4).
Clark, A., and A. Oswald (1996): "Satisfaction and comparison income," Journal of Public Economics, 61(3), 359-381.
Clark, A., and C. Senik (2008): "Who compares to whom? The anatomy of income comparisons in Europe," Working Paper 65, Paris School of Economics.
Coddington, E. (1989): An Introduction to Ordinary Differential Equations. Courier Dover Publications.
Cole, H., G. Mailath, and A. Postlewaite (1992): "Social Norms, Savings Behavior, and Growth," Journal of Political Economy, 100(6).
Constantinides, G. (1990): "Habit Formation: A Resolution of the Equity Premium Puzzle," Journal of Political Economy, 98(3), 519.
Diamond, P. (1998): "Optimal Income Taxation: An Example with a U-Shaped Pattern of Optimal Marginal Tax Rates," American Economic Review, 88(1), 83-95.
Duesenberry, J. (1949): Income, Saving, and the Theory of Consumer Behavior. Harvard University Press.
Dupor, B., and W. Liu (2003): "Jealousy and Equilibrium Overconsumption," American Economic Review, 93(1), 423-428.
Dynan, K., and E. Ravina (2007): "Increasing income inequality, external habits, and self-reported happiness," American Economic Review, 97(2), 226-231.
Evers, M., R. Mooij, and D. Vuuren (2005): "What Explains the Variation in Estimates of Labour Supply Elasticities?," CESifo Working Paper 1633.
Ferrer-i Carbonell, A. (2005): "Income and well-being: an empirical analysis of the comparison income effect," Journal of Public Economics, 89(5-6), 997-1019.
Frank, R. (2008): "Should public policy respond to positional externalities?," Journal of Public Economics, 92(8), 1777-1786.
Gali, J. (1994): "Keeping up with the Joneses: Consumption Externalities, Portfolio Choice, and Asset Prices," Journal of Money, Credit and Banking, 26(1), 1-8.
Heaton, J. (1995): "An empirical investigation of asset pricing with temporally dependent preference specifications," Econometrica, 63(3), 681-717.
HM Revenue & Customs (1998-2007): Survey of Personal Incomes, Several Years: Public Use Tape [computer file]. Colchester, Essex: UK Data Archive [distributor].
Hopkins, E. (2008): "Inequality, happiness and relative concerns: What actually is their relationship?," Journal of Economic Inequality, 6(4), 351-372.
Internal Revenue Service (1995-2004): Statistics of Income: Individual Tax Returns. Washington, D.C: U.S. Government Printing Office.
Ireland, N. (2001): "Optimal income tax in the presence of status effects," Journal of Public Economics, 81(2), 193-212.
J. Solnick, S., and D. Hemenway (1998): "Is more always better?: A survey on positional concerns," Journal of Economic Behavior and Organization, 37(3), 373-383.
Ljungqvist, L., and H. Uhlig (2000): "Tax Policy and Aggregate Demand Management Under Catching Up with the Joneses," American Economic Review, 90(3), 356-366.
Luttmer, E. (2005): "Neighbors as Negatives: Relative Earnings and Well-Being," The Quarterly Journal of Economics, 120(3), 963-1002.
Maccheroni, F., M. Marinacci, and A. Rustichini (2009): "Social Decision Theory: Choosing within and between Groups," Mimeo, Universita Bocconi, Collegio Carlo Alberto and University of Minnesota.
McBride, M. (2001): "Relative-income effects on subjective well-being in the cross-section," Journal of Economic Behavior and Organization, 45(3), 251-278.
Mirrlees, J. (1971): "An Exploration in the Theory of Optimum Income Taxation," Review of Economic Studies, 38(114), 175-208.
Neumark, D., and A. Postlewaite (1998): "Relative income concerns and the rise in married women's employment," Journal of Public Economics, 70(1), 157-183.
Oswald, A. (1983): "Altruism, jealousy and the theory of optimal nonlinear taxation," Journal of Public Economics, 20(1), 77-87.
Pencavel, J. (1986): "Labor Supply of Men: A Survey," Handbook of Labor Economics, 1, 3-102.
Postlewaite, A. (1998): "The social basis of interdependent preferences," European Economic Review, 42(3-5), 779-800.
Rustichini, A., and A. Vostroknutov (2007): "Competition with Skill and Luck," Mimeo, University of Minnesota.
Sadka, E. (1976): "On income distribution, incentive effects and optimal income taxation," Review of Economic Studies, 43(2).
Saez, E. (2001): "Using Elasticities to Derive Optimal Income Tax Rates," Review of Economic Studies, 68(1), 205-229.
Salanié, B. (1997): The Economics of Contracts: A Primer. MIT Press.
Samano, D. (2009): "Optimal Linear Taxation of Positional Goods," Mimeo, University of Minnesota.
Seade, J. (1977): "On the Shape of Optimal Tax Schedules," Journal of Public Economics, 7(2), 203-235.
Senik, C. (2008): "Ambition and Jealousy: Income Interactions in the Old Europe Versus the New Europe and the United States," Economica, 75(299), 495-513.
Silverman, B. (1986): Density Estimation for Statistics and Data Analysis. Chapman & Hall/CRC.
Stokey, N. (2008): Economics of Inaction: Stochastic Control Models with Fixed Costs. Princeton University Press.
Tuomala, M. (1990): Optimal Income Tax and Redistribution. Oxford University Press, USA.
Veblen, T. (1899): The Theory of the Leisure Class, 1934 edition.
Wand, M., J. Marron, and D. Ruppert (1991): "Transformations in density estimation," Journal of the American Statistical Association, 86(414), 343-353.
Werning, I. (2007): "Pareto Efficient Income Taxation," Mimeo, MIT.