Abstract
Can rising income inequality be reduced by taxation without harming incentives? Yes, it can, when account is taken of man as a social animal who therefore seeks social status. What counts for social status is not our absolute resources but where we stand relative to others. The more incomes surpass subsistence needs, the more grows most people’s desire for social standing. Therefore, any tax that leaves our rank unaffected will not harm our effort. Consequently, at very high incomes proportional taxes, despite maintaining progressivity and reducing inequality, should not distort incentives. A status game provides the paper’s theoretical framework.
