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Optimal Income Redistribution When Individual Welfare Depends Upon Relative Income

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  • Michael J. Boskin
  • Eytan Sheshinski

Abstract

The purpose of the present note is to explore the structure of optimal income taxation/redistribution in an economy where the welfare of individuals depends in part on relative after-tax consumption, i.e., we specify individual welfare as a function of absolute and relative after-tax consumption, with diminishing marginal utility to each. With such a specification, of course, an additional incentive for income redistribution from wealthy to poor citizens is created and the logical impossibility of increasing tax rates to the point where disincentive effects actually reduce tax revenues is potentially removed. The analysis highlights the importance of the marginal valuation placed on upward social mobility in various ranges of the income distribution and its interaction with the elasticity of the marginal utility of consumption; of course, "labor supply" elasticities, the form of the social welfare function, and the skill distribution continue to play an important role.

Suggested Citation

  • Michael J. Boskin & Eytan Sheshinski, 1976. "Optimal Income Redistribution When Individual Welfare Depends Upon Relative Income," NBER Working Papers 0144, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:0144
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    References listed on IDEAS

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    1. Lazear, Edward P, 1980. "Family Background and Optimal Schooling Decisions," The Review of Economics and Statistics, MIT Press, vol. 62(1), pages 42-51, February.
    2. Sandmo, Agnar, 1976. "Optimal taxation : An introduction to the literature," Journal of Public Economics, Elsevier, vol. 6(1-2), pages 37-54.
    3. J. A. Mirrlees, 1971. "An Exploration in the Theory of Optimum Income Taxation," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 38(2), pages 175-208.
    4. Stern, N. H., 1976. "On the specification of models of optimum income taxation," Journal of Public Economics, Elsevier, vol. 6(1-2), pages 123-162.
    5. Ray C. Fair, 1971. "The Optimal Distribution of Income," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 85(4), pages 551-579.
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    Cited by:

    1. Ravi Kanbur & Jukka Pirttilä & Matti Tuomala, 2006. "Non‐Welfarist Optimal Taxation And Behavioural Public Economics," Journal of Economic Surveys, Wiley Blackwell, vol. 20(5), pages 849-868, December.
    2. Michael J. Boskin, 1976. "Optimal Tax Theory: Econometric Evidence and Tax Policy," NBER Working Papers 0152, National Bureau of Economic Research, Inc.
    3. Stiglitz, Joseph E., 1987. "Pareto efficient and optimal taxation and the new new welfare economics," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 2, chapter 15, pages 991-1042, Elsevier.
    4. Jerry A. Hausman, 1980. "Income and Payroll Tax Policy and Labor Supply," NBER Working Papers 0610, National Bureau of Economic Research, Inc.

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