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AGGREGATE AND DISTRIBUTIONAL EFFECTS OF TAX POLICY WITH INTERDEPENDENT PREFERENCES: THE ROLE OF “CATCHING UP WITH THE JONESES”

Published online by Cambridge University Press:  01 October 2010

Murat Koyuncu  and
Stephen J. Turnovsky
Murat Koyuncu
Affiliation:
Bogazici University
Stephen J. Turnovsky*
Affiliation:
University of Washington
*
Address correspondence to: Stephen Turnovsky, Department of Economics, University of Washington, Box 353330, Seattle, WA 98195, USA; e-mail: sturn@u.washington.edu.
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Abstract

This paper analyzes the aggregate growth and distributional effects of tax policy using an endogenous growth model with heterogeneous agents having “catching up with the Joneses” (CUJ) types of preferences. We characterize the aggregate equilibrium of this economy, as well as its distributional properties, and show that the consumption externality present with CUJ preferences produces greater income inequality than is obtained with conventional time-separable preferences. The consumption externality substantially alters the effects of tax policy, mostly quantitatively, but in some cases qualitatively as well. Extensive numerical simulations are conducted and used to compare the consequences of different modes of taxation, highlighting the tradeoffs involved.

Keywords

GrowthInterdependent PreferencesWealth InequalityIncome InequalityDynamics
Type
Articles
Information
Macroeconomic Dynamics , Volume 14 , Supplement S2: Public Policy, Externalities, and Economic Growth , November 2010 , pp. 200 - 223
Copyright
Copyright © Cambridge University Press 2010

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