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Positional Preferences, Endogenous Growth, and Optimal Income- and Consumption Taxation

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  • Ghosh, Sugata
  • Wendner, Ronald

Abstract

This paper analyzes the impact of positional preferences, exhibiting conspicuous consumption and conspicuous wealth, on optimal consumption- and income taxes, for an endogenous growth model with public capital. Positional preferences raise the endogenous growth rate if the elasticity of intertemporal substitution is larger than one. Even if labor supply is exogenous, the consumption externalities introduce distortions so long as preferences are wealth-dependent, and with or without the presence of conspicuous wealth. Consequently, optimal consumption- and income taxes differ from zero. Numerical simulations present the effects of fiscal policy on the balanced growth path and transitional dynamics.

Suggested Citation

  • Ghosh, Sugata & Wendner, Ronald, 2014. "Positional Preferences, Endogenous Growth, and Optimal Income- and Consumption Taxation," MPRA Paper 60337, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:60337
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    4. 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.
    5. Wendner, Ronald, 2015. "Do positional preferences for wealth and consumption cause inter-temporal distortions?," MPRA Paper 64086, University Library of Munich, Germany.
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    7. Florian Brugger, 2017. "The Effect of Foreign and Domestic Demand on U.S. Treasury Yields," Graz Economics Papers 2017-02, University of Graz, Department of Economics.

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    More about this item

    Keywords

    Conspicuous consumption; conspicuous wealth; endogenous growth; public capital; optimal consumption tax;
    All these keywords.

    JEL classification:

    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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