Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/178673 
Year of Publication: 
2018
Series/Report no.: 
Economics Discussion Papers No. 2018-41
Publisher: 
Kiel Institute for the World Economy (IfW), Kiel
Abstract: 
The authors investigate the desirability of income taxes when the objective is to mitigate wasteful conspicuous consumption generated by people's status-seeking behavior. They consider the joint role of pre-tax wage inequality and of social norms determining how social status is assigned. They find that if social status is ordinal (i.e., only one's rank in the income distribution matters) then an income tax can decrease waste in conspicuous consumption only if the inequality of pre-tax wages (or earning potentials) is low enough - i.e., inequality and taxation are substitutes. Instead, if status is cardinal (i.e., also the shape of the income distribution matters) then the relationship between the inequality of pre-tax wages and the change in waste can be positive - i.e., inequality and taxation can be complements - although it is in general non-monotonic. This is because the value of social status is endogenous, potentially giving rise to a perverse self-reinforcing mechanism where more waste in conspicuous consumption induces a greater competition for status and vice versa.
Subjects: 
social status
relative standing
consumption externalities
labor income
income tax
signalling
conspicuous consumption
income inequality
JEL: 
D6
H3
J2
Creative Commons License: 
cc-by Logo
Document Type: 
Working Paper

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