Paternalism versus Veblen: How Should the Government Address the Concern for Relative Consumption in Housing?

Abstract

This paper compares the optimal tax policies of welfarist and paternalistic governments to address the concern for relative consumption in housing, where the former respects such concern, whereas the latter does not. The results of our analysis suggest that the optimal tax policies are identical. More specifically, we show that irrespective of a welfarist or a paternalistic government, the concern should be addressed with a property tax; the optimal property tax rate is proportional to the degree of the concern; and whereas the concern leads to higher income guarantees, it does not result in higher marginal income tax rates.