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 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.

Income Status and Life Satisfaction.

The importance of both income rank and relative income, as indicators of status, has long been recognised in the literature on life satisfaction and happiness. Recently, several authors have made explicit comparisons of the relative importance of these two measures of income status, and concluded that rank dominates to the extent that reference income becomes insignificant in regressions including both these explanatory variables, and that even absolute or household income, otherwise always positively related to happiness, may lose statistical significance. Here we test this hypothesis with a large UK panel (British Household Panel Survey and Understanding Society) for 1996-2017, split by age and retirement status, and find, contrary to previous results, that rank, household income and reference income are all usually important explanatory variables, but with significant differences between subgroups. This finding holds when rank is in its often-used relative form, and also with absolute rank.