A note on optimal taxation, status consumption, and unemployment

•Optimal taxation under relative concerns and low-skilled unemployment is analyzed.•Positional externalities induce lower marginal tax rates among the low-skilled.•The pattern among the high-skilled is the opposite.•Here, the marginal tax rates increase even more than without unemployment.•Thus, rel...

Full description

Saved in:
Bibliographic Details
Published in:Journal of public economics 2021-08, Vol.200, p.104458, Article 104458
Main Authors: Aronsson, Thomas, Johansson-Stenman, Olof
Format: Article
Language:English
Subjects:
Business & Economics
Economics and Business
Ekonomi och näringsliv
Externalities
income
inequality
jealousy
optimal labor
Optimal taxation
positional concerns
preferences
provision
Relative consumption
Unemployment
Citations: Items that this one cites
Items that cite this one
Online Access:Get full text
Tags: Add Tag
No Tags, Be the first to tag this record!
Description
Summary:•Optimal taxation under relative concerns and low-skilled unemployment is analyzed.•Positional externalities induce lower marginal tax rates among the low-skilled.•The pattern among the high-skilled is the opposite.•Here, the marginal tax rates increase even more than without unemployment.•Thus, relative concerns under unemployment induce progressive marginal taxes. Existing research on optimal taxation in economies with status-driven relative consumption (implicitly) assumes that there is no involuntary unemployment, despite ample evidence that real world labor markets are typically characterized by such unemployment. We show how the marginal tax policy ought to be modified to simultaneously account for positional consumption externalities and equilibrium unemployment, and find that interaction effects between these two market failures are crucial determinants of the marginal tax structure. In certain cases, the policy incentive to tax away positional externalities vanishes completely, and negative positional externalities may even lead to lower marginal taxation, under involuntary unemployment.
ISSN:0047-2727
1879-2316
1879-2316
DOI:10.1016/j.jpubeco.2021.104458