This paper examines the role for tax policies in productivity-shock driven
economies with catching-up-with-the-Joneses utility functions. The optimal
tax policy is shown to affect the economy countercyclically via procyclical
tares, i.e., "cooling down" the economy with higher taxes when it is "over
heating" in booms and "stimulating" the economy with lower taxes in recessi
ons to keep consumption up. Thus, models with catching-up-with-the-Joneses
utility functions call for traditional Keynesian demand-management policies
but for rather unorthodox reasons. (JEL E21, E62, E63).