Higher tax, less work : reverse “keep up with the Joneses” and rising inequality
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. 139 , pp. 177-190 . https://doi.org/10.1007/s00712-023-00821-2
Publication
Journal of Economics
Status
Peer reviewed
ISSN
0931-8658Type
Journal article
Collections
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