Paternalism against Veblen: Optimal Taxation and Non-respected Preferences for Social Comparisons

Abstract

This paper deals with optimal income taxation and relative consumption under a welfarist government that fully respects people's preferences and a paternalist government that does not share the consumer preference for relative consumption.Consistent with previous findings, relative consumption concerns typically lead to higher marginal income tax rates in the welfarist case. A remarkable result is that the optimal tax rules turn out to be very similar when people's preferences for social comparisons are not respected. Indeed, if the relative consumption concerns are based on mean value comparisons and all consumers are equally positional, or if they are driven by within-type comparisons, the paternalist and welfarist governments can implement their respective first-best allocations through exactly the same marginal income tax formulas. Yet, also in these cases, there are some remaining differences that follow from second-best considerations.

Social Comparisons and Optimal Taxation in a Small Open Economy

“… Based on the estimates of the average degree of positionality referred to in footnote 3, we would typically expect that relative consumption concerns imply much higher marginal labor income tax rates than standard economic models (where such concerns are absent). This is also verified by recent numerical simulations that show that relative concerns might motivate much higher marginal labor income tax rates (e.g., Kanbur and Tuomala, ; Aronsson and Johansson‐Stenman, ). …”

Envy-Free Pricing for Impure Public Good

“…Following Harsanyi, the non-welfarist literature on relative consumption considers that the government excludes such preferences from the social objective function even if individuals care about social comparisons. For example, Micheletto (2011) and Aronsson and Johansson-Stenman (2018) investigate optimal nonlinear income tax policies under the welfarist and paternalist cases. Finally, non-welfarist approaches have also been used in a framework with multi-dimensional heterogeneity.…”

Social status, preferences for redistribution and optimal taxation: a survey

“…These authors use survey data from Australia to show that health is indeed a status-bearing object. 17 See Aronsson and Johansson-Stenman (2018) for an analysis of the case in which the government instead adopts a paternalistic approach and thereby does not internalize the welfare effects of relative consumption in the social objective function.…”