Conspicuous Consumption, Conspicuous Health, and Optimal Taxation

Is there a health-status race in Australia whereby people get joy from being healthier and fitter than others? And what are the general implications for public policy if there is? My PhD student Redzo Mujcic and myself brought out a new working paper recently on how a health status race can be good for the public purse and furthermore reduces the case for taxing work in order to give people an incentive to take more leisure time.

The abstract:

We present a simple model of status-seeking over multiple socioeconomic domains by introducing the concept of conspicuous health as an argument in the utility function, in addition to the well-established conspicuous consumption term. We explore the implications of such a utility function for optimal income taxation, where we show an increase in concerns for conspicuous health to have an opposite effect on the marginal tax rate, compared to an increase in concerns for conspicuous consumption. Using life satisfaction panel data from Australia, along with an improved measure of exogenous reference groups (that accounts for the time-era of respondents), we find evidence of a comparison health effect.

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One Response to Conspicuous Consumption, Conspicuous Health, and Optimal Taxation

  1. Well, status races usually come out in favour of some industry, q.v. cars. The moment some guy invents a gizmo/cream/bed, whatever, that leaves you a frontrunner in the “health race”, people are going to flock to it instead, e.g., working out. Which brings me to another thought: if the state were not meddling with health care then maybe people would take things into their own hands. They do so, e.g., with their cars, their buns they buy etc. And as for health costs in general: I’ve read a study whereby HALF of the overall insurance payouts go towards the last half year of patients’ lives – the so-called terminal illness problem. And that despite many not wanting to use all these machines that are responsible for these bills. They’d rather leave the money in the insurer’s purse for the benefit of their grandchildren …

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