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

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 r...

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Detalles Bibliográficos
Autores principales: FitzRoy, Felix, Jin, Jim, Nolan, Michael
Formato: Online Artículo Texto
Lenguaje:English
Publicado: Springer Vienna 2023
Materias:
Acceso en línea:https://www.ncbi.nlm.nih.gov/pmc/articles/PMC10050818/
https://www.ncbi.nlm.nih.gov/pubmed/37324503
http://dx.doi.org/10.1007/s00712-023-00821-2
Descripción
Sumario: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. SUPPLEMENTARY INFORMATION: The online version contains supplementary material available at 10.1007/s00712-023-00821-2.