Conspicuous consumption is perfect candidate for taxation
It is interesting to see Conspicuous Consumption in the light of the Handicap Principle, and how it could lead to more efficient taxing.
Conspicuous consumption is the lavish spending on goods and services acquired mainly for the purpose of displaying income or wealth, as a means of attaining or maintaining social status.
How does it work? Buy a new hand bag for $1,000. Or buy a $200,000 car. Or a $10,000,000 yacht. Whatever it is, make sure your neighbors see it.
In doing so, you are displaying that you can afford a squander $1,000 on a hand bag. If you were poor, or tight on financial resources, you couldn’t. This behavior is costlier to poor individuals, to whom $1,000 represents a much larger portion of their income, than to better off ones. In other words, a behavior that costs more for someone with less of a trait than someone with more of it.
Sound familiar? That’s because conspicuous consumption is an honest signal. Is it a signal for richness, and the social status that accompanies it.
A perfect candidate for taxation
Since cost is not an issue for conspicuous consumption -quite the contrary, cost is a key element- it is a perfect candidate for being taxed. By heavily taxing goods that signal wealth -lets call these luxury goods- you make it even harder to attain, and hence more exclusive and attractive.
Countries like Denmark are very smart to have high taxes on luxury cars, for example. Likewise, the European Union has two rates for VAT, a normal one not to deceed 15%, and a reduced one not to deceed 5%. The reduced rate applies to first necessity goods, and the normal rate to the rest. The US in some states has no or close to no taxes on food, because food represents a large portion or a poor person’s budget, and taxing food taxes them a disproportionate amount.
I would like to see that taken a step further, and see different rates for different categories of purchases. We want to use taxation to improve people’s welfare in general. To do so, we must tax bad behaviors, and subsidize good ones (as a side-note, I’ve often heard that taxes is punishing not sharing. As such, taxing income is punishing people for creating wealth). If we combine this with the other goal of taxing the wealthy more than the poor, we end up with a matrix of items that should be taxed and subsidized differently.
Take alcohol. I think we can agree that drinking alcohol is a bad behavior (antioxidants can be found elsewhere, if beneficial at all). However, a uniform tax on alcohol disproportionately affects poor people over better off ones. But it also happens to be that poor people drink more beer, and wealthy people drink more wine. Therefore a good tax system should tax wine at a higher rate than beer.
Or take food. Some foods are more nutritious than others, while some better for a particular diet. Red meat should be taxed higher than fish (CO2 emissions per kg of red meat > fish), and even within these categories, some products should be taxed higher than others. For instance, salmon should be taxed higher than sardines.
While this system would be quite complex, this is increasingly made feasible as we move towards the computerized and networked economy. Tax revisions could be pushed out to super market chains, then updated on their electronic pricing system. Or why not have an API for value added tax? Maybe a bit too much, but technically feasible.
Another interesting thought is to make the amount someones pays out in taxes an honest signal about wealth.
So Governments should pay attention to goods and services that signal wealth, whether a byproduct (behavior) or a deliberate status-seeking choice, and tax them accordingly.