A couple of weeks ago, I was on Bloggingheads TV discussing Robert Frank's Luxury Fever hypothesis with Mark Kleiman. In brief, Robert Frank points to evidence that extra income doesn't make us happier. Instead, we are engaged in competition over positional goods that serve mostly to signal our wealth and taste to others--the $20,000 slate shower, the expensive car, etc. One can argue that higher taxes, by raising the cost of each extra hour spent working towards the acquisition of another positional good (and thereby encouraging people to consume some more hedonically beneficial leisure), actually make everyone better off.
Enter Daniel Kahneman, the Nobel prizewinning founder of behavioral economics--the very work from which Robert Frank draws his conclusions.
. . . recent findings from the Gallup World Poll raise doubts about the puzzle itself. The most dramatic result is that when the entire range of human living standards is considered, the effects of income on a measure of life satisfaction (the "ladder of life") are not small at all. We had thought income effects are small because we were looking within countries. The GDP differences between countries are enormous, and highly predictive of differences in life satisfaction. In a sample of over 130,000 people from 126 countries, the correlation between the life satisfaction of individuals and the GDP of the country in which they live was over .40 – an exceptionally high value in social science. Humans everywhere, from Norway to Sierra Leone, apparently evaluate their life by a common standard of material prosperity, which changes as GDP increases. The implied conclusion, that citizens of different countries do not adapt to their level of prosperity, flies against everything we thought we knew ten years ago. We have been wrong and now we know it. I suppose this means that there is a science of well-being, even if we are not doing it very well.
The positional competition may not be doing you any good directly, but if it raises national GDP, it will indirectly help you, and everyone else in the country. If you don't want to conspicuously consume just to aggrandize yourself, you should carefully consider whether you don't owe at least it to your neighbors to install the new granite countertops. Dulce et decorum est pro patria emere . . .