Social Status and Optimal Income Taxation Juin-Jen Chang Academia Sinicay

This paper examines the optimal (\u85 rst-best) \u85 scal policy in a stochastic, in\u85nite-horizon representative agent model that exhibits consumption-enhanced as well as wealth-enhanced social status in the household utility. We show that the optimal labor tax rate is a positive constant that is used to correct negative consumption externalities. The optimal capital tax rate is also positive in order to overturn agentsstatus-seeking capital over-accumulation. Moreover, we \u85nd that in contrast to a conventional automatic stabilizer, the optimal capital tax moves in the opposite direction with shocks to \u85rmsproduction technology. This result turns out to be qualitatively consistent with the discernible empirical evidence that many countries have implemented procyclical \u85scal policies