A note on optimal capital taxation with preference externalities

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.