Conspicuous Leisure: Optimal Income Taxation When Both Relative Consumption and Relative Leisure Matter* (original) (raw)

Veblen’s theory of the leisure class revisited: implications for optimal income taxation

Social Choice and Welfare, 2013

Almost all previous studies on public policy under relative consumption concerns have ignored the role of leisure for status comparisons. Inspired by Veblen (1899), this paper considers a two-type optimal income tax model, where people care about their relative consumption, and where the importance of relative consumption increases with the use of leisure due to increased consumption visibility. We show that increased consumption positionality typically implies higher marginal income tax rates for both ability-types. Using a leisure-weighted measure of reference consumption, rather than a measure where leisure plays no role as in the previous literature, increases the marginal income tax rate implemented for the low-ability type and decreases the marginal income tax rate implemented for the high-ability type, i.e., it gives rise to a regressive tax component.

Education, preferences for leisure and the optimal income tax schedule

Journal of Public Economics, 2008

Recent advances in dynamic Mirrlees economies have incorporated the treatment of human capital investments as an important dimension of government policy. This paper adds to this literature by considering a two period economy where agents are differentiated by their preferences for leisure and their productivity, both private information. The fact that productivity is only learnt later in an agent's life introduces uncertainty to agent's savings and human capital choices and makes optimal the use of multi-period tie-ins in the mechanism that characterizes the government policy. We show that optimal policies are often interim inefficient and that the introduction of these inefficiencies may take the form of marginal tax rates on labor income of varying sign and educational policies that include the discouragement of human capital acquisition. With regards to implementation, state-dependent linear taxes implement optimal savings, while human capital policies may require labor income taxes that depend directly on agents' schooling.

Optimal taxation with consumption time as a leisure or labor substitute

Journal of Public Economics, 2006

This paper studies the optimal commodity taxation problem when time taken in consumption is a perfect substitute for either labor or leisure. It shows that while labor substitutability affects the optimal tax structure, leisure substitutability leaves the classical optimal tax results intact. In the Ramsey tax framework with linear income taxes, whether the consumers have the same or different earning abilities, labor substitutes tend to be taxed at a higher rate than leisure substitutes with the tax differential being increasing in consumption time. This is not necessarily the case when one allows for nonlinear income taxation.

Optimal Redistribution with Heterogeneous Preferences for Leisure

Journal of Public Economic Theory, 2002

This paper examines the properties of the optimal nonlinear income tax when preferences are quasilinear in leisure and heterogeneous. Individuals differ in their ability and in their preferences for leisure. The government seeks to redistribute income. It can perfectly observe the level of endogenous income but cannot observe either ability or preferences. The heterogeneity of preferences leads to problems of comparability between individual utilities which challenge the design of redistributive schemes. In particular, we analyze the consequences of adopting a utilitarian social welfare function where the government is allowed to give different weights to individuals with different preferences. Under this particular social objective and given the quasilinearity of preferences, we are able to obtain closed-form solutions for the marginal tax rates and to examine the progressivity of the tax system according to the weights used.

Subjective well-being, consumption comparisons, and optimal income taxation

Journal of Public Economic Theory, 2017

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 labour supply away from the social optimum level; giving a distortion-correcting role for taxation.

Positional Preferences in Time and Space: Implications for Optimal Income Taxation

2010

This paper concerns optimal nonlinear taxation in an OLG model with two ability-types, where people care about their own consumption relative to (i) other people’s current consumption, (ii) own past consumption, and (iii) other people’s past consumption. We show that intertemporal consumption comparisons affect the marginal income tax structure in the same qualitative way as comparisons based on other people’s current consumption. Based on available empirical estimates, comparisons with other people’s current and previous consumption tend to substantially increase the optimal marginal labor income tax rates, while they may either increase or decrease the optimal marginal capital income tax rates.

The Effect of Income Taxation on Consumption and Labor Supply

Journal of Labor Economics, 2005

We estimate the incentive effects of income taxation in a life-cycle model of consumption and labor supply that relaxes the standard assumption of strong separability within periods. Our model permits identification of both within-period preference parameters and lifecycle preference parameters such as the inter-temporal substitution elasticity. Results indicate that consumption and hours worked are direct complements in utility, and both increase with an increase in the after-tax share and with a compensated increase in the net wage. The compensated net wage elasticity is about 0.3, nearly double the standard estimates for men in the United States that ignore within-period non-separability between consumption and hours and rely on linear preferences. Given our estimated inter-temporal elasticity of substitution of about-0.96, the Frisch specific substitution elasticities of consumption and labor supply with respect to the after-tax wage are about 0.1 and 0.5, indicating significant inter-temporal smoothing of utility. Depending on consumption measure, static estimates of the marginal welfare cost of revenue-neutral taxation are 6-20 percent, which is about half the estimated welfare cost when additivity between consumption and leisure is incorrectly imposed.

Macroeconomic Impacts of Consumption and Income Taxes: A General Equilibrium Analysis

2006

Macroeconomic impacts of consumption and income taxes are higher when both of them rather than only one of them are employed to raise a fixed amount of revenue that is given back to households as transfers. We apply a general equilibrium model to assess no tax, only consumption tax or only labour income tax policy alternatives in comparison to a benchmark economy in which both taxes apply to the consumption and labour income of a representative household in an economy. We find that switching to only consumption tax would improve efficiency while raising the target level revenue than in the mix of two tax case. These gains are about 80 percent of the no tax scenario. Taxing only on consumption to raise a given amount of revenue is better in terms of labour supply, lower optimal tax rates and level of utility of the household from consumption and leisure. Model applied to the UK also confirms that the consumption taxes have significantly lower burden than the labour income tax or of the combination of both consumption and labour income taxes.

Optimal public goods provision: implications of endogenizing the labor/leisure choice

Land Economics, 2008

Conventional analysis of public goods provision aggregates individual wiltitigne.ss to pay while treatitig income as exogenous, ignoring the fact that we generate income to allow us to purclia.se utility-generating goods. We explore the implicatiotis of endogenizing the lahorlleisure decision hy explicitly considering leisure detnami in a model of public goods provision. We consider benefit analysis of public goods provision atul JÍtul that increments of the public good will generally be under-valued using conventiotial attaly.sis while decrctncnts to the public good (rare in public good settings) will be overvalued (JELC91,D61,Q5I)

Tax Attitudes and Optimal Income Taxation

2019

Recent studies have put forward evidence that individuals not only have independent (personal) but also interdependent (interpersonal) reasons to pay taxes. Besides standard objective reasons to explain individuals’ tax behavior and compliance (e.g., the tax system), there are also subjective, person-bound factors such as taxpayers’ preferences and relationship with others. This paper studies optimal labor and capital income taxation under asymmetric information in a two-type OLG model when individuals’ tax concerns matter. Individuals’ attention to these concerns can range from full attention to complete inattention. In addition to consumption and leisure, individuals obtain utility from their own tax payments and the average tax payments in the economy. Tax concerns affect the policy choices via two novel channels: (i) the average (interdependent) degree of tax concern and (ii) the individual (independent) tax concerns differences between the low-ability type and the mimicker. Und...