A Note on Optimal Taxation under Status Consumption and Preferences for Equality

This note analyzes optimal taxation when (i) a fraction of people has positional preferences, and (ii) concerns for relative consumption and preferences for equality are operative simultaneously. We show that incentive compatibility motivates a regressive marginal tax structure, which in the end implies that people with positional preferences are taxed at a lower marginal rate than people without such preferences. A counteracting mechanism arises if those who are not concerned with their relative consumption have preferences for income-equality, even if people with positional preferences should still be taxed at a lower marginal rate than motivated by their contributions to externalities.