Optimal Income Redistribution When Individual Welfare Depends Upon Relative Income

21 Pages Posted: 19 Jun 2004

See all articles by Michael J. Boskin

Michael J. Boskin

Stanford University - The Hoover Institution on War, Revolution and Peace; National Bureau of Economic Research (NBER)

Eytan Sheshinski

Hebrew University of Jerusalem; National Bureau of Economic Research (NBER); CESifo (Center for Economic Studies and Ifo Institute)

Date Written: August 1976

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

Boskin, Michael J. and Sheshinski, Eytan, Optimal Income Redistribution When Individual Welfare Depends Upon Relative Income (August 1976). NBER Working Paper No. w0144. Available at SSRN: https://ssrn.com/abstract=260333

Michael J. Boskin (Contact Author)

Stanford University - The Hoover Institution on War, Revolution and Peace ( email )

Stanford, CA 94305-6010
United States
(650) 723-6482 (Phone)
(650) 723-6494 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Eytan Sheshinski

Hebrew University of Jerusalem ( email )

Department of Economics
Jerusalem 91905
Israel
972-2-588-3144 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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