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Relative consumption of housing: Marginal saving subsidies and income taxes as a second-best policy?

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  • Aronsson, Thomas
  • Mannberg, Andrea

Abstract

This paper analyzes whether marginal taxation of labor and capital income are useful second best instruments for internalizing the externalities caused by conspicuous housing consumption, when the government is unable to implement a first best corrective tax on housing wealth. The rationale for studying income taxation in this particular context is that first best taxes on housing wealth may be infeasible (at least in a shorter time perspective), while income taxes indirectly affect both the level and composition of accumulated wealth. We show that a suboptimally low tax on housing wealth provides an incentive for the government to subsidize financial saving and tax labor income at the margin.

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  • Aronsson, Thomas & Mannberg, Andrea, 2015. "Relative consumption of housing: Marginal saving subsidies and income taxes as a second-best policy?," Journal of Economic Behavior & Organization, Elsevier, vol. 116(C), pages 439-450.
    • Handle: RePEc:eee:jeborg:v:116:y:2015:i:c:p:439-450
    DOI: 10.1016/j.jebo.2015.05.011
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    Cited by:

    1. Bastani, Spencer & Waldenström, Daniel, 2018. "How Should Capital Be Taxed? Theory and Evidence from Sweden," IZA Discussion Papers 11475, Institute of Labor Economics (IZA).
    2. Schünemann, Johannes & Trimborn, Timo, 2023. "Boosting taxes for boasting about houses? Status concerns in the housing market," Journal of Economic Behavior & Organization, Elsevier, vol. 205(C), pages 120-143.
    3. Hof, Franz X. & Prettner, Klaus, 2019. "Relative consumption, relative wealth, and long-run growth: When and why is the standard analysis prone to erroneous conclusions?," Hohenheim Discussion Papers in Business, Economics and Social Sciences 12-2019, University of Hohenheim, Faculty of Business, Economics and Social Sciences.
    4. Spencer Bastani & Daniel Waldenström, 2020. "How Should Capital Be Taxed?," Journal of Economic Surveys, Wiley Blackwell, vol. 34(4), pages 812-846, September.
    5. Spencer Bastani & Daniel Waldenström, 2018. "How should capital be taxed? The Swedish experience," World Inequality Lab Working Papers hal-02878153, HAL.
    6. Juin‐Jen Chang & Hsueh‐Fang Tsai & Tsung‐Sheng Tsai, 2019. "Optimal Dynamic Taxation with Distinctive Forms of Social Status Attainment," Scandinavian Journal of Economics, Wiley Blackwell, vol. 121(2), pages 808-842, April.
    7. Li, Shiyu & Lin, Shuanglin, 2023. "Housing property tax, economic growth, and intergenerational welfare: The case of China," International Review of Economics & Finance, Elsevier, vol. 83(C), pages 233-251.
    8. Mageli, Ingvild & Mannberg, Andrea & Heen, Eirik Eriksen, 2022. "With whom, and about what, do we compete for social status? Effects of social closeness and relevance of reference groups for positional concerns," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 98(C).

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    More about this item

    Keywords

    Relative consumption; Housing; Taxation; Behavioral economics;
    All these keywords.

    JEL classification:

    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies

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