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A NOTE ON OPTIMAL CAPITAL TAXATION WITH PREFERENCE EXTERNALITIES

  • Cheng-Wei Chang (a1) and Ching-Chong Lai (a2) (a3) (a4) (a5)

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.

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Corresponding author

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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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.

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References

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