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Optimal Redistributive Taxation$
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Matti Tuomala

Print publication date: 2016

Print ISBN-13: 9780198753414

Published to Oxford Scholarship Online: March 2016

DOI: 10.1093/acprof:oso/9780198753414.001.0001

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Relativity and optimal non-linear labour income taxation

Relativity and optimal non-linear labour income taxation

(p.185) 7 Relativity and optimal non-linear labour income taxation
Optimal Redistributive Taxation

Matti Tuomala

Oxford University Press

Chapter 7 analyses how concern for consumption relative to others (‘relativity’) affects the structure of optimal non-linear income taxation. Relative consumption (or income) concern or status-seeking creates negative externalities because a gain in one’s status is a loss to someone else. If these externalities are important as empirical research seems to suggest, taxing consumption externalities might be welfare-enhancing just in the same way as any other Pigouvian tax. The main focus of Chapter 7 is the interplay of relativity and inequality in determining the optimal structure of income taxes. The special analytical cases and more general numerical calculations support the conclusion that higher inequality dampens the positive impact of greater relativity on the level and progression of marginal tax rates.

Keywords:   relativity, negative externality, envy, status-seeking, Veblen effect, Pigouvian tax, inequality

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