Positional concerns in an OLG model: optimal labor and capital income taxation

Abstract

This article concerns optimal income taxation under asymmetric information in a two-type OLG model when indi-viduals ’ relative consumption matters. Positional concerns affect the policy choices via two channels: (i) the average degree of positionality and (ii) positionality differences between the low-ability type and the mimicker. Under plausible empirical estimates, the marginal labor income tax rates become substantially larger, and the absolute value of the marginal capital income tax rate of the low-ability type becomes substantially smaller, than in the conventional model. In addition to measures of reference consumption based on average consumption, we also address within-generation and upward comparisons. 1