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

FitzRoy, Felix; Jin, Jim; Nolan, Michael

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., Jin, J., & Nolan, M. (in press). Higher tax and less work: reverse “Keep up with the Joneses” and rising inequality. Journal of Economics, https://doi.org/10.1007/s00712-023-00821-2

• Journal Article Type: Article
• Acceptance Date: Feb 27, 2023
• Online Publication Date: Mar 29, 2023
• Deposit Date: Apr 3, 2023
• Publicly Available Date: Apr 3, 2023
• Journal: Journal of Economics/ Zeitschrift fur Nationalokonomie
• Print ISSN: 0931-8658
• Electronic ISSN: 1617-7134
• Publisher: Springer
• Peer Reviewed: Peer Reviewed
• DOI: https://doi.org/10.1007/s00712-023-00821-2
• Keywords: Income comparison; Maxi-min; Inequality; Unemployment
• Public URL: https://hull-repository.worktribe.com/output/4255084