Conspicuous Consumption - Solutions

Solutions

A luxury tax applied to goods and services that are considered commodities for conspicuous consumption is a type of progressive sales tax that internalizes the negative externality associated with the conspicuous consumption of positional goods. In which case, the externality is associated with the loss of status suffered by people whose stock of high-status (positional) goods is diminished, in relation to the stocks of other conspicuous consumers, as they increase their consumption of such goods and services; effectively, status-seeking is a zero-sum game—by definition, the rise of one person in the social hierarchy can occur only at the expense of other people. Therefore, collectively, expenditure on luxury goods and services (positional goods) is an economic loss, like competitive military spending (an arms race)—wherein each country must match the military expenditures of other countries in the arms race, or suffer a loss of relative military power. In the case of conspicuous consumption, taxes upon luxury goods diminish societal expenditures on high-status goods, by rendering them more expensive than non-positional goods. In this sense, luxury taxes can be seen as a form of market failure correcting Pigovian tax.

This economic case for the taxation of positional, luxury goods has a long history, for example, in Principles of Political Economy with some of their Applications to Social Philosophy (1848), John Stuart Mill said that:

I disclaim all asceticism, and by no means wish to see discouraged, either by law or opinion, any indulgence which is sought from a genuine inclination for, any enjoyment of, the thing itself; but a great portion of the expenses of the higher and middle classes in most countries . . . is not incurred for the sake of the pleasure afforded by the things on which the money is spent, but from regard to opinion, and an idea that certain expenses are expected from them, as an appendage of station; and I cannot but think that expenditure of this sort is a most desirable subject of taxation. If taxation discourages it, some good is done, and if not, no harm; for in so far as taxes are levied on things which are desired and possessed from motives of this description, nobody is the worse for them. When a thing is bought not for its use but for its costliness, cheapness is no recommendation.

As an alternative to luxury taxes, the economist Robert H. Frank proposed the application of a progressive consumption tax. In the New York Times newspaper article “The Big City: Rich and Poor, Consumed by Consuming” (1998), to remedy the social and psychological malaise that is conspicuous consumption, Frank proposed eliminating the personal income tax, and replacing it with a progressive tax upon the yearly sum of discretionary income spent on consumption of goods and services. Another economic option is to increase the supply of public goods, which are non-rivalrous, because the consumption of public goods is not a competitive matter of prestige. For example, whilst luxurious private gardens and personal art collections can be high-status goods, when similar goods and services are provided to the public, either as free or low-cost public parks and art galleries, they lose their 'positional' quality. Another economic option, ideally in conjunction with the provision of public goods, is the redistribution of wealth either by means of an incomes policy or by progressive taxation. Because conspicuous consumption, itself, is a form of superior good, diminishing income inequality, by means of an egalitarian policy, which diminishes the incomes at the top strata of the income distribution of a society, will lead to the reduced conspicuous consumption of luxury goods and services.