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Income Taxation and Ability Rank

Author

Listed:
  • Thomas Aronsson

    (University of Umea, Sweden and University of Graz, Austria)

  • Olof Johansson-Stenman

    (University of Gothenburg, Sweden)

Abstract

A substantial body of empirical and theoretical research suggests that individuals care about, and derive instrumental benefits from, their rank in society. This paper extends the Mirrleesian model of optimal income taxation to a framework where individuals derive utility from their perceived ability rank. Such concerns generate externalities that tend to increase the optimal marginal tax rates for both corrective and redistributive reasons. While empirical evidence on the magnitude of these concerns is limited, their potential impact on optimal income taxation could be substantial, with top marginal income tax rates potentially exceeding 90%.

Suggested Citation

  • Thomas Aronsson & Olof Johansson-Stenman, 2024. "Income Taxation and Ability Rank," Graz Economics Papers 2024-21, University of Graz, Department of Economics.
    • Handle: RePEc:grz:wpaper:2024-21
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    More about this item

    Keywords

    Redistributive taxation; ability; ordinal comparisons; externalities.;
    All these keywords.

    JEL classification:

    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D90 - Microeconomics - - Micro-Based Behavioral Economics - - - General
    • 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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