Article ID Journal Published Year Pages File Type
969765 Journal of Public Economics 2013 15 Pages PDF
Abstract

•Households form consumption reference levels.•Reference levels are specified in a generalized way: asymmetric and non-atmospheric.•First-best tax rates are highly sensitive with respect to the nature of externalities.•Second-best tax rates barely respond to the nature of consumption externalities.•Altruism has no offsetting effect on corrective taxes, but implies a fairness condition.

We analyze the effects of a generalized class of negative consumption externalities (asymmetric and non-atmospheric) on the structure of efficient commodity tax programs. Households are not only concerned about consumption reference levels — that is, they gain utility from “keeping up with the Joneses” — but they also exhibit altruism. Two sets of efficient tax regimes are compared, based, on a welfarist- and a non-welfarist optimality criterion, respectively. Altruism turns out not to be at odds with the consumption externalities. Rather, altruism implicates a bound on efficient utility allocations. A non-welfarist government tolerates less inequality than a welfarist one. In the welfarist (non-welfarist) case, first-best personalized commodity tax rates respond highly sensitively (barely) to whether or not a consumption externality is asymmetric or non-atmospheric. If personalized commodity tax rates are not available (second-best case), the tax rate on a non-positional good is typically different from zero for corrective reasons. For plausible functional forms and parameter values, numerical simulations suggest that second-best tax rates are rather insensitive with respect to both the optimality criterion and the “nature” of the consumption externality.

Related Topics
Social Sciences and Humanities Economics, Econometrics and Finance Economics and Econometrics
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