Higher tax and less work: reverse “Keep up with the Joneses” and rising inequality

Felix FitzRoy (), Jim Jin () and Michael Nolan ()
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Felix FitzRoy: School of Economics and Finance, University of St Andrews
Jim Jin: University of St Andrews
Michael Nolan: University of Hull

Journal of Economics, 2023, vol. 139, issue 3, No 1, 177-190

Abstract: Abstract To counteract excessive effort due to relative income comparison among identical agents, the literature suggests a tax response equal to the negative externality. Assuming a general income distribution, we show that an optimal tax must be higher under a general social welfare function, to not only reduce inefficiency but also inequality. We recommend a practical tax response to stronger comparison – to hold employment constant, which does not require unrealistic information including unobservable comparison. Surprisingly, the tax response will dominate the comparison effect and reduce labour supply or reverse “keeping up with the Joneses” on intensive margins, and also reverse the otherwise rising inequality.

Keywords: Income comparison; Maxi-min; Inequality; Unemployment (search for similar items in EconPapers)
JEL-codes: D63 H24 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:kap:jeczfn:v:139:y:2023:i:3:d:10.1007_s00712-023-00821-2

DOI: 10.1007/s00712-023-00821-2

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