Journal Article

Optimal Taxation when Consumers Have Endogenous Benchmark Levels of Consumption

Andrew B. Abel

in The Review of Economic Studies

Published on behalf of Review of Economic Studies Ltd

Volume 72, issue 1, pages 21-42
Published in print January 2005 | ISSN: 0034-6527
Published online January 2005 | e-ISSN: 1467-937X | DOI: http://dx.doi.org/10.1111/0034-6527.00322
Optimal Taxation when Consumers Have Endogenous Benchmark Levels of Consumption

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  • General Aggregative Models
  • Intertemporal Choice and Growth
  • Taxation, Subsidies, and Revenue

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I examine optimal taxes in an overlapping generations economy in which each consumer's utility depends on consumption relative to a weighted average of consumption by others (the benchmark level of consumption) as well as on the level of the consumer's own consumption. The socially optimal balanced growth path is characterized by the Modified Golden Rule and by a condition on the intergenerational allocation of consumption in each period. A competitive economy can be induced to attain the social optimum by a lump-sum pay-as-you-go social security system and a tax on capital income.

Keywords: D91; E13; H21; H25

Journal Article.  11260 words.  Illustrated.

Subjects: General Aggregative Models ; Intertemporal Choice and Growth ; Taxation, Subsidies, and Revenue

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