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

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FitzRoy_2023_JE_Highertax_CC.pdf (923.1Kb)
Date
29/03/2023
Author
FitzRoy, Felix R
Jin, Jim Y.
Nolan, Michael
Keywords
Income comparison
Maxi-min
Inequality
Unemployment
HG Finance
T-NDAS
SDG 8 - Decent Work and Economic Growth
MCP
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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.
Citation
FitzRoy , F R , Jin , J Y & Nolan , M 2023 , ' Higher tax, less work reverse “keep up with the Joneses” and rising inequality ' , Journal of Economics , vol. First Online . https://doi.org/10.1007/s00712-023-00821-2
Publication
Journal of Economics
Status
Peer reviewed
DOI
https://doi.org/10.1007/s00712-023-00821-2
ISSN
0931-8658
Type
Journal article
Rights
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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  • University of St Andrews Research
URI
http://hdl.handle.net/10023/27315

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