Optimal Dynamic Taxation with Distinctive Forms of Social Status Attainment

We examine the role of both consumption- and wealth-induced social comparisons in setting dynamic optimal income taxation. Under complete information, state-invariant labor income taxes are used to remedy the externality caused by consumption-induced social comparisons, while state-contingent capital income taxes are used to remedy the externalities caused by both consumption- and wealth-induced social comparisons. Under incomplete information, distinct types of agents are subject to an identical marginal capital income tax, which removes social comparisons. To solve the information problem, low-productivity agents could be subject to a lower marginal labor tax than high-productivity agents, which contradicts the traditional result in the Mirrlees-Stiglitz models.