Boosting taxes for boasting about houses? Status concerns in the housing market *

In this paper we investigate the implications for housing taxation when households have status concerns for residential housing. For this purpose we introduce a residential hous-ing sector and status concerns for housing into a neoclassical model with heterogeneous agents. First, finding that status concerns exert a negative externality, we calculate a pro-gressive Pigovian tax schedule that corrects for the externality. Implementing the tax schedule is associated with a moderate aggregate welfare gain, but has a sizable and di-verse impact on household groups' welfare. Second, we find that when the utilitarian so-cial planner is constrained to housing taxes, Pigovian taxation is not constraint efficient. We show that the welfare maximizing tax of the constrained optimum is always higher than the Pigovian tax, and we analyze the mechanism behind this finding. Our results have strong implications for the optimal taxation of residential housing. (c) 2022 Elsevier B.V. All rights reserved.