English, Article, Journal or magazine article edition: Optimal Nonlinear Income Taxation with Habit Formation Jang-Ting Guo; Alan Krause

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Bookmark: http://trove.nla.gov.au/version/40365
Physical Description
  • preprint
Language
  • English

Edition details

Title
  • Optimal Nonlinear Income Taxation with Habit Formation
Author
  • Jang-Ting Guo
  • Alan Krause
Physical Description
  • preprint
Notes
  • It has recently been shown that incorporating "keeping up with the Joneses" preferences into a prototypical two-ability-type optimal nonlinear taxation model leads to higher marginal income tax rates for both types of agents. Specifically, the high-skill type faces a positive marginal income tax rate, rather than zero as in the conventional case. In this paper, agents' utility functions are postulated to exhibit "habit formation in consumption" such that the prototypical two-ability-type optimal nonlinear taxation model becomes a dynamic analytical framework. We show that if the government can commit to its future fiscal policy, the presence of consumption habits does not affect the standard results on optimal marginal income tax rates. By contrast, if the government cannot pre-commit, the high-skill type will face a negative marginal income tax rate, whereas the effect of habit formation on the low-skill type's marginal tax rate is ambiguous.
  • Income Taxation; Habit Formation; Commitment
  • RePEc:ucr:wpaper:200810
Language
  • English
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