Discussion Paper

No. 2018-41 | May 18, 2018
Wage inequality, labor income taxes, and the notion of social status
(Published in Special Issue The economics of social status)

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.

JEL Classification:

D6, H3, J2

Assessment

  • Downloads: 127

Links

Cite As

Ennio Bilancini and Leonardo Boncinelli (2018). Wage inequality, labor income taxes, and the notion of social status. Economics Discussion Papers, No 2018-41, Kiel Institute for the World Economy. http://www.economics-ejournal.org/economics/discussionpapers/2018-41


Comments and Questions