Academic journal article Journal of Housing Research

How Should the Government Address the Concern for Relative Consumption in Housing: Property Tax or Income Tax?

Academic journal article Journal of Housing Research

How Should the Government Address the Concern for Relative Consumption in Housing: Property Tax or Income Tax?

Article excerpt

(ProQuest: ... denotes formulae omitted.)

The idea that people may additionally care about their relative consumption in status goods (also known as positional goods) was first pronounced by Veblen (1899).1 By status good, I mean that the owner of a status good not only derives intrinsic utility by consuming the good itself, but also derives social utility from comparing its value with the values of the status goods owned by the members of his comparison group. Although Veblen's view of social preferences was soon eclipsed by the simpler neoclassical theory of consumer behavior, Duesenberry (1949) reintroduced relative preferences to mainstream consumer theory.

In standard housing economics, housing is regarded as an asset and a consumption good. However, housing might be better regarded as a status good. Frank (2007) and Marsh (2011) invoke the possibility of housing representing a status good to explain why Americans have chosen to live in ever larger and ever more expensive houses over the last five decades, even though the average household size has simultaneously declined over the same period. A piece of recent anecdotal evidence vividly illustrates that housing might be a status good especially in the marriage market. According to a survey of Chinese mothers with young daughters by Shanghai Daily in March 2010, about 80% of the mothers indicate that they would object to their daughters marrying a man who does not own a house, which implies that those young men with their own houses are considered more attractive than those without. Presumably, even among those young men owning their own houses, those with more expensive houses are considered more attractive. The empirical evidence provided by Wei, Zhang, and Liu (2012) rigorously corroborates the hypothesis that housing is a status good. They estimate that due to the status good feature of housing, a rise in the sex ratio accounts for 30%-48% of the rise in real urban housing prices in China in 2003-2009, where sex ratio is a proxy measure for the competition intensity in the marriage market, and could also be taken as a proxy measure for the degree of the concern for relative consumption in housing.

Frank (1985) shows that the concern for relative standing in the consumption of status goods results in over-consumption of status goods and under-consumption of non-status goods since each person wants to have a higher relative standing in the consumption of status goods. In addition, the concern for relative standing in the consumption of status goods generates negative externalities because the gains in one's relative standing lower someone else's. The idiom of "Keeping up with the Joneses" might demonstrate these two points vividly: Jones has bought a new prestigious car. In order to keep up with the Joneses, the Smiths sell their old car and buy a new and even more prestigious one. The Joneses, realizing this, retaliate and so forth. Hence, intuitively, the rat race in the consumption of status goods in general equilibrium would potentially cause large welfare losses.

The above discussion motivates me to raise and answer the following questions: How should the government address the concern for relative consumption in housing? Should the government use a property tax or an income tax? What is the optimal property tax or income tax to address the concern for relative consumption in housing? Clearly, answers to these questions are very important for both academic researchers and policy makers.

Several researchers have studied the impact of the concern for relative standing in the consumption of status goods on the optimal income tax schedule. For example, Boskin and Sheshinski (1978) derive the optimal linear negative income tax. They find that the concern for relative standing in the consumption of status goods leads to both higher income guarantees and a higher marginal income tax rate. Oswald (1983) examines the consequences for the optimal non-linear income tax schedule of the concern for relative standing in the consumption of status goods. …

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