It used to be (and perhaps still is) fashionable among the well to do to have fancy dinner parties with silverware made of real silver.
Most cutlery is made of stainless steel. It works quite well–lasts a long time, is easy to clean. Real silverware certainly doesn’t help you eat any better. While it does have a slightly superior aesthetic it has to be polished frequently to make it look any better than it’s stainless steel counterpart.
So why do people use real silverware instead of stainless steel? It’s not because the expense and hassle of polishing is worth the extra shine. It’s because it shows others they can afford it! (That’s why it’s only brought out for dinner parties.) It’s an example of conspicuous consumption–goods that are only bought to display wealth.
In fact, if real silverware didn’t exist, people would be better off. Rich people wouldn’t have to buy an otherwise pointless good and go through the trouble of polishing it. No one would think “huh, this guy isn’t using real silverware he’s must not be as rich as me” because no one would have it. On the other hand taking it away from one individual person would make them worse off.
Unfortunately there’s no time machine that could go back in time and uninvent real silverware. But government could tax the rich enough that no one could afford it.
If tax rates on the highest earners meant that rich people would simply cut back spending that has no other use than showing how rich they are, no one would be hurt. Taking away the same percentage of wealth for everyone doesn’t change anyone’s position on the hierarchy.
If this sounds a little too good to be true it’s because it is. The problem with the logic thus far is rich people don’t spend most of their money on stuff that’s like real silverware. Real silverware is unique for being purely about displaying your wealth–it has no other purpose. Most stuff rich people buy has some purpose outside just displaying wealth. There are few goods that are purely about conspicuous consumption.
Take a Ferrari sportscar. Sure a large part of the point of buying a Ferrari is to display your wealth. But it’s also functionally better than your average car. It goes faster, it travels smoother, and needs less maintenance. If we raise taxes so no one can afford them, it’ll lower their happiness.
But the upshot is that a significant portion of a rich person’s spending is just about displaying wealth. Sure you’ll go a little slower if you don’t have a Ferrari, but at least no one else has one!*
*Obviously higher taxes won’t make Ferraris unaffordable for everyone, but it doesn’t change anyone’s position in the wealth hierarchy. Before and after higher taxes, any given person’s conspicuous consumption is equal to their peers.
**Apparently Marx didn’t invent conspicuous consumption, but I’ll give him points for the general sentiment.
***This article was inspired by the Econtalk podcast with Robert Frank