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A NOTE ON OPTIMAL CAPITAL TAXATION WITH PREFERENCE EXTERNALITIES

Published online by Cambridge University Press:  06 August 2018

Cheng-Wei Chang  and
Ching-Chong Lai
Cheng-Wei Chang*
Affiliation:
Tunghai University
Ching-Chong Lai
Affiliation:
Academia Sinica National Cheng-Chi University National Sun Yat-Sen University Feng Chia University
*
Address correspondence to: Dr. Cheng-Wei Chang, Department of Economics, Tunghai University, Taichung 40704, Taiwan; e-mail: d95323010@ntu.edu.tw
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Abstract

This paper extends the Chamley–Judd framework by introducing preference externalities in a neoclassical growth model, and finds that the optimal capital tax increases with the extent of social-status seeking or negative leisure externalities. Furthermore, this paper finds that differences in leisure externalities lead to a distinct impact on optimal factor income taxes, and hence may serve as a plausible vehicle to explain the empirical differences in factor income taxation in the United States and Europe.

Keywords

Leisure externalitiesSocial statusOptimal taxation
Type
Note
Information
Macroeconomic Dynamics , Volume 24 , Issue 3 , April 2020 , pp. 729 - 746
Copyright
© Cambridge University Press 2018

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Footnotes

We are deeply grateful to William A. Barnett (Editor), an Associate Editor, and two anonymous referees for their constructive comments that substantially improved the paper. We are also indebted to Kuan-jen Chen, Ping-ho Chen, Hsun Chu, Mei-ying Hu, Wei-chi Huang, and Shi-fu Liu, who provided us with helpful suggestions in relation to earlier versions of this article. Any shortcomings are, however, the authors’ responsibility.

References

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