483. Conspicuous Consumption, Conspicuous Health, and Optimal Taxation

Redzo Mujcic and Paul Frijters, School of Economics Discussion Paper No. 483 August 2013, School of Economics, The University of Queensland. Australia.

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Abstract

We present a simple model of status-seeking over multiple socioeco- nomic 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 in- crease in concerns for conspicuous health to have an opposite effect on the marginal tax rate, compared to an increase in concerns for conspic- uous 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 com- parison health effect.