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Social Comparisons and Optimal Taxation in a Small Open Economy

Journal article
Authors T. Aronsson
Olof Johansson-Stenman
T. Sjögren
Published in Scandinavian Journal of Economics
ISSN 0347-0520
Publication year 2019
Published at Department of Economics
Language en
Keywords Capital mobility, optimal taxation, positional goods, relative consumption, small open economy
Subject categories Economics and Business


In this paper, we analyze how international capital mobility affects the optimal labor and capital income tax policy in a small open economy when consumers care about relative consumption. The main results crucially depend on whether the government can tax returns on savings abroad. If the government can use flexible residence-based capital income taxes, then the optimal policy rules from a closed economy largely carry over to the case of a small open economy. If it cannot, then capital income taxes become completely ineffective. The labor income taxes must then indirectly also reflect the corrective purpose that the absent capital income tax would have had. © The editors of The Scandinavian Journal of Economics 2018.

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