Robert Frank, Conspicuous Consumption, and Taxes

I just ran across a slightly old – and by slightly old, I mean 10 years – review in Vanity Fair of Robert Frank‘s book, Luxury Fever: Why Money Fails to Satisfy in an Era of Excess. I know him because I had to read The Economic Naturalist: In Search of Solutions to Everyday Enigmas in an economics class (it was part of the post-Levitt wave of popular economic books), but most of his work has focuses on the problem of conspicuous consumption.

As a lot of recent research in behavioral economics, and a few minutes of reflection, has proven, there is little to no marginal benefit that comes from consumption past a Maslowian threshold.  Frank is aware of this phenomenon, and he realizes that it makes few people better off and market forces won’t really resolve the issue.  If everyone jumps off the overconsumption treadmill, there is a first-mover advantage to more consumption, and pretty soon we’ll be back to our current overconsumption threshold. Cass Sunstein, the book’s reviewer, makes the same point:

At the level of theory, Frank’s claim can be reduced to a single sentence: since people make many luxury-type expenditures largely or only to improve relative position, we should adopt policies that produce more savings, and more equity, while breaking a form of competition that does little good for anyone, including the rich.

The answer, according to Frank, is a consumption tax: families would be taxed on the difference of their gross income and their savings.  As Sunstein points out, there would be a lot of problems with this scheme:  savings is a hard term to define, it would be regressive unless combined with other legal changes (like a wealth tax), it would have to be integrated into our current regime of taxes, and it would tax a lot of necessary goods (cereal and soap, for example).  (Sunstein also argues that Frank’s survey data is largely unreliable and not consistent across time and place; this may have been true in 1999, but it’s pretty well-established fact by now.)  Most of Sunstein’s argument isn’t unique to a consumption tax, so those parts are not valid objections.  But if his interpretation is correct, a tax on soap, cereal, water, etc. is of course misspirited; a luxury tax surcharge would accomplish most of the same goals without the administrative, distributional, or definitional headaches.  It’s hard to argue against taxing Mercedes, Patek Phillipe watches, or Viking kitchen ranges (though that probably wouldn’t keep the Senate from not wanting a luxury tax).

I agree with Frank’s larger point and sympathies, but I think his solution is an example of the perfect killing the good.  Who does most of the conspicuous consumption of luxury goods?  People who can afford to buy Prada, Aston Martins, and first-class tickets.  Who can afford those goods?  Primarily rich people (middle and upper-middle class people don’t have the income to make those purchases on a regular basis).  Who has seen their income explode and their effective tax rates decline?  If you guessed rich people, you’re right!  In other words, instead of taxing people if they buy a yacht or a cashmere suit, we could tax them if they make a lot of money; this concept is often referred to as a progressive income tax.  A consumption tax does seem too difficult and a luxury tax is just a new tax that leaves a lot of room for wriggling, but we already have an income tax.

Sunstein on Frank again:

Frank proposes a link between this phenomenon and the practices of the rich. “It is natural for people at all income levels to experience new desires in the presence of others who spend more than they do. And even apart from any changes in what we consciously desire, our individual spending decisions are often influenced by the fact that our menu of available choices is so strongly shaped by what others spend.” Thus most people spend more, and for more luxurious items, because of the trends set by those at the top.

I might only be able to afford a Honda Civic, but I buy an Accord if I see my neighbor with a BMW 5  series.  If my neighbor can now only afford a 3 series, I’m more likely content with my Civic.