Wage inequality, labor income taxes, and the notion of social status

Ennio Bilancini and Leonardo Boncinelli

No 2018-41, Economics Discussion Papers from 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.

Keywords: social status; relative standing; consumption externalities; labor income; income tax; signalling; conspicuous consumption; income inequality (search for similar items in EconPapers)
JEL-codes: D6 H3 J2 (search for similar items in EconPapers)
Date: 2018
New Economics Papers: this item is included in nep-lma and nep-pbe
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Journal Article: Wage inequality, labor income taxes, and the notion of social status (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:ifwedp:201841

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