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 journalArticlepeer-review

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    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 languageEnglish
    Pages (from-to)177-190
    Number of pages14
    JournalJournal of Economics
    Volume139
    Early online date29 Mar 2023
    DOIs
    Publication statusPublished - 1 Aug 2023

    Keywords

    • Income comparison
    • Maxi-min
    • Inequality
    • Unemployment

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