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Thomas Aronsson, Tomas Sjögren, Sonal Yadav, Optimal taxation under status consumption and preferences for equality, Oxford Economic Papers, Volume 77, Issue 2, April 2025, Pages 584–595, https://doi.org/10.1093/oep/gpae039
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Abstract
This article analyses optimal taxation when (1) a fraction of people has positional preferences, and (2) concerns for relative consumption and preferences for equality are operative simultaneously. We show that incentive compatibility motivates a regressive marginal tax structure, which in the end implies that people with positional preferences are taxed at a lower marginal rate than people without such preferences. A counteracting mechanism arises if those who are not concerned with their relative consumption have preferences for income-equality, even if people with positional preferences should still be taxed at a lower marginal rate than motivated by their contributions to externalities.
