Tax Policy and Aggregate Demand Management Under Catching Up with the Joneses

Abstract

This paper examines the role for tax policies in productivity-shock driven economies with catching-up-with-the-Joneses utility functions. The optimal tax policy is shown to affect the economy countercyclically via procyclical taxes, i.e., “cooling down” the economy with higher taxes when it is “overheating” in booms and “stimulating” the economy with lower taxes in recessions to keep consumption up. Thus, models with catching-up-with-the-Joneses utility functions call for traditional Keynesian demand-management policies but for rather unorthodox reasons. (JEL E21, E62, E63)

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

“…With mean value comparisons, each consumer contributes to the positional externalities to the same extent and the average degree of positionality, α , represents the value of the marginal externality per unit of consumption, which explains the second formula in the proposition. This welfarist tax formula is analogous to results derived in the context of representative agent models by, e.g., Ljungqvist and Uhlig (2000) and Dupor and Liu (2003), and of course also to the two-type model in Aronsson and Johansson-Stenman (2008).…”

“…The present paper thus supplements earlier research based on the welfarist approach to first-best (e.g., Persson, 1995;Ljungqvist and Uhlig, 2000;Dupor and Liu, 2003) and second-best optimal income taxation (e.g., Johansson-Stenman, 2008, 2010) by considering the case where consumer preferences for relative standing are of no concern to the government. The point of departure is the discrete variant of the Mirrleesian optimal income tax model with two productivity types developed by Stern (1982) and Stiglitz (1982), which will be extended to accommodate consumer preferences for relative consumption, and where information asymmetries typically prevent the government from implementing a first-best resource allocation.…”

“…(1 ) 9 A utility function consistent with the second part of the corollary has been analyzed by Ljungqvist and Uhlig (2000) and later discussed by Dupor and Liu (2003),…”

“…1 Tax and other policy implications of such comparisons have more recently been explored from different points of departure in a number of studies, including Boskin and Sheshinski (1978), Oswald (1983), Tuomala (1990), Persson (1995), Corneo and Jeanne (1997), Ljungqvist and Uhlig (2000), Dupor and Liu (2003), Abel (2005), Frank (2008), and Aronsson and JohanssonStenman (2008. 2 A typical finding in this literature is that the externalities generated by relative consumption concerns motivate considerably higher marginal tax rates than in the conventional model of optimal taxation without social comparisons.…”

Taxation and Balance of Payments in Nigeria (1970 – 2008)

“…The regulative role of taxation is one of the most pronounced roles from the fiscalists. The optimal tax policy turns out to affect the economy countercyclically via procyclical taxes, that is, "cooling down" the economy with higher taxes when it is "overheating" due to a positive productivity shock (Ljungqvist & Uhlig 2000). The explanation is that agents would otherwise end up consuming too much in boom times since they are not taking into account the "addiction effect" of a higher consumption level.…”