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

Felix R FitzRoy; Jim Y. Jin; Michael Nolan

doi:10.1007/s00712-023-00821-2

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

Felix R FitzRoy, Jim Y. Jin, Michael Nolan^*

^*Corresponding author for this work

Research output: Contribution to journal › Article › peer-review

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.

Original language	English
Pages (from-to)	177-190
Number of pages	14
Journal	Journal of Economics
Volume	139
Early online date	29 Mar 2023
DOIs	https://doi.org/10.1007/s00712-023-00821-2
Publication status	Published - 1 Aug 2023

Keywords

Income comparison
Maxi-min
Inequality
Unemployment

UN SDGs

This output contributes to the following UN Sustainable Development Goals (SDGs)

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10.1007/s00712-023-00821-2Licence: CC BY

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Copyright © The Author(s) 2023. Open Access. This article is licensed under a Creative Commons Attribution 4.0 International License, which permits use, sharing, adaptation, distribution and reproduction in any medium or format, as long as you give appropriate credit to the original author(s) and the source, provide a link to the Creative Commons licence, and indicate if changes were made. The images or other third party material in this article are included in the article's Creative Commons licence, unless indicated otherwise in a credit line to the material. If material is not included in the article's Creative Commons licence and your intended use is not permitted by statutory regulation or exceeds the permitted use, you will need to obtain permission directly from the copyright holder. To view a copy of this licence, visit http://creativecommons.org/licenses/by/4.0/.
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Cite this

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

Abstract

Keywords

UN SDGs

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