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10/14/2012

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James Baker

I'd just like to say here that this blog is without doubt in the top two most interesting I read, and I'd like to thank the both of you for giving me this frequent dose of learned opinion.

Lgatch

"Will, therefore, is the last appetite in deliberating"--Hobbes.

Account Deleted

Starting with something a bit off-topic here,just a few days ago i was thinking how terrible is for companies to be listed.Once listed ,it's all about the numbers,all about margins ,all about keeping investors happy.
So many companies,mostly the ones that deal with consumers are afraid to innovate.Innovation equals risks and investments and Wall Street doesn't like that.
Being listed pushes companies to try and get higher and higher margins,often to an unethical level and also leading to higher prices,lower wages for the employees,less jobs and so on.
Competition is also hurt greatly.Today ,in fact,there is very little real competition and in most sectors there is a tacit understanding to not engage in real competition,hurting margins.

"including handouts that reduce recipients’ work incentives" -is that all that bad,in the end? There needs to be a certain balance but if the budget allows it,if the state of the economy allows it (last week you looked at how much one works in a week) there are certain benefits to it too.A better life,less desperation to generate income could lead to more creativity,or enable the individual to take more risks into creating it's own business.
The goal shouldn't be a better economy but a better life,a better society,the economy just enables that.
Ofc it is all a balancing act but had to point out that reducing one work incentives is not all evil, going too far (like communist nations did, leading to their collapse)is.One could argue that a better economy leads to less pressure on people as it is(see stay at home parents) and that is true but that doesn't mean that everything else that reduces our hunger (or greed) is nocive.


"the major loopholes and deductions and exemptions are sacred cows, leaving changes in tax rates and spending levels as the only feasible methods of achieving fiscal discipline."
- is anything a real solution as long as political corruption is legal? The sacred cows,sacred as they are, must be killed sooner or later and sooner tends to be better.At what point is it safe to say that this is not a democracy anymore but an oligarchy and when is it feasible to ,at least, acknowledge it.

Sabhlok

Richard, I almost choked when I read this: "I think that ultimately everything is attributable to luck, good or bad."

I'm afraid it is one thing to attribute weights to "luck" and "effort", but another to discount it so comprehensively. Such an approach completely eliminates the need for any economic science. It would imply that whether Bill Gates earned $1 or $1 trillion, he would produce the same. It would also justify communism. Need I say more to point out total absurdity of your assertion?

Terry Bennett

This is the most fantastic post in the history of your blog, at least in the six-plus years I've been reading. We finally learn, there is no ghost in the machine after all - Judge Posner is a Calvinist, and everything emanates mechanistically from the Big Bang to the present and beyond, regardless of what we think or do.

PAUL

On this issue, I believe Prof. Becker is closer to the mark. If luck leads to the generation of higher incomes and the concentration of wealth for some, the appopriate policy response is to foster the application and functioning of genuinely competitive markets and the removal of barriers to entry and exit so as to maximise both consumer surplus and participation in this 'lottery' - and to minimise the size and incidence of the gains made by the lucky.

Apart from expenditure on exported goods and services, citizens, as consumers and taxpayers, pay for every activity in the supply chains that produce and deliver goods and services. To the greatest extent possible, market mechanisms should be applied to induce efficiency in these supply chains. And this applies to the public provision of services even when there is some a priori evidence of market failure - drawing, for example, from the insights of our newly garlanded Nobel economic laureates.

Taxation policy is an entirely different matter. Paying tax is an act of solidarity. It assumes the existence of a common bond which means that those with the wherewithal are willing to pay in to a common pot for the benefit of all. This common bond ideally chould be congruent with the extent of moral sentiment shared by all citizens. But this is rarely the case and the imposition of taxation must be enforced. The greed, selfishness and unwillingness to pay - particularly for benefits awarded to those deemed in some way 'undeserving' - of many of those with the wherewithal conflicts with the efforts of liberal or left-leaning progressives to enforce certain universal rights and entitlements.

In most developed economies this conflict is fraying the common bond required to sustain tax-paying as an act of solidarity - and to minimise the need for draconian and often counter-productive enforcement. I would contend that that bond is more frayed and closer to the point of snapping in the U.S than it is in any other developed economy. `

Thomas Rekdal

Judge Posner's comments on moral luck and wealth seem to me to be not only reasonable but commonplace. I would only add that if it is unclear in what sense the wealthy can be said to "deserve" their wealth, it is even less clear in what sense others can be entitled to redistribute it.

The most interesting questions about the distribution of wealth relate to its efficiency: who is most likely to make the best use of it? And the primary questions about taxation, as both Becker and Posner point out, should be questions about its incentive effects: how can we squeeze the greatest amount of socially productive effort out of the cash cows inhabiting the earth?

I am surprised, however, that Judge Posner addresses only the issue of incentive effects upon labor, and entirely ignores the problem of capital formation. Security of property rights is one of the important elements in economic development precisely because it is not easy to get people to save, preserve, and invest capital, rather than simply consume it. This, too, is not a question of moral desert.

Jon Jewett

Posner's observation that the concern that additional tax revenue may be squandered on unproductive governmental activities "disappears" if the additional revenue is "earmarked" for deficit reduction seems naive. Revenue is revenue, and such "earmarking" is more likely to simply enable more deficit spending. The discussion also seems to assume that ubut for the negative incentives that would be created society would benefit from a transfer of wealth from individuals to the government. This ignores the fact that the great educational, cultural, and charitable institutions that contribute so much to our society exist because the individuals who created and sustain them were allowed to accumulate great wealth. The University of Chicago, which employs both Posner and Becker, exists because of the beneficence of John D. Rockefeller and Marshall Field. Who believes that society would be better served if the fortunes accumulated by Bill Gates and Warren Buffett were given to Congress to spend?

jim kirby

I keep reading that the mortgage-interest deduction distorts the homeowner vs. rental equation, but I have never been treated to an explanation.

I think that the homeowner mortgage interest deduction merely serves to partially level the playing field that is already so distorted by tax law: The landlord of a rental is likely to be a wealthy person in a 35% marginal tax bracket, while the typical young renter might be in a 15% (and likely 0%) marginal bracket. The fact is that the landlord can deduct all expenses incurred in the rental, including depreciation, mortgage-interest, real-estate taxes and Repair and Maintenance. Deductions for depreciation and R&M are not at all available to any homeowner and the others are available only to homeowners who itemize; it is the rich landlord, not the young adult homeowner, who is likely to itemize.

In a freely functioning market, some of the benefit of the landlord's current tax deductions for these expenses flow indirectly to the renter, artificially favoring renting over homeownership for the young low-wage earner. Granting him a mortgage-interest deduction only partly compensates for this artificial tax bias, and even allowing him automatic deductions for depreciation and R&M would not completely level the playing field on account of the naturally differing tax brackets of the typical landlord and renter.

jwl

I don’t want this to devolve into mere semantics, but Posner misunderstands the ‘moral’ issue. He argues that because ‘everything is based on luck’ , including wealth, no one is ‘entitled’ to it in some moral way. But this mischaracterizes the idea of morality . The world is certainly random at its deepest level , so absolutely everything really is based on luck. Posner says that what is acquired by luck cannot be retained based on a moral right. But if morality has any meaning whatsoever, this is clearly not true. Most people would easily agree that if there is anything that is quintessentially immoral it is murder. But being born and being alive has to be the purest example of complete dumb luck. Your life was not the result of any kind of effort on your part whatsoever. Posner would argue that therefore taking it from you is merely some utilitarian decision. Most people would instinctively reject that. Certain actions are felt to be so intrinsically ‘wrong’ that they are largely removed from the realm of utilitarianism and placed in the realm we call morality.
Now Posner is a great jurist and will rightly respond that in fact even the decision to kill someone is not really a moral decision but is purely utilitarian. The most obvious case is the death penalty or imprisonment. Life and liberty may be taken by the state whenever it feels like it so long as it follows due process. So is there really any role left for morality? I would argue, yes. The very fact that we demand such extraordinary processes for depriving persons of certain things acquired by dumb luck-like life ,liberty and property- proves that these things are in a different category. In fact, in certain cases like the death penalty for children, the moral repugnance is so strong that we do not let the utilitarian argument be considered at all, even though a purely utilitarian view might strongly suggest the opposite result. (life imprisonment is very expensive). I do recognize we could change this via a constitutional amendment, but requiring that extraordinary hurdle proves just how strong the countervailing ‘moral’ instinct is.
This argument does suggest that since even life can be taken by the state, there is no such thing as a moral absolute. If that is what Posner means by morality, he is technically correct , but completely misses the bigger point. It may be that there is no absolute moral right to life or property, but that is not what we commonly mean by morality. I think most people would agree that when we associate a moral value with an action we are simply putting it into a different category that requires higher levels of proof or starts with different presumptions. Because it is ‘immoral’ to kill , we require high hurdles for the state to do so. The ‘presumption’ is not to kill. Because we recognize an intrinsic moral right to the fruits of one’s labor, the presumption should be that we cannot take property without really compelling reasons. The constitution recognizes this in the takings clause.
Perhaps this is all merely a short hand way to get at the ‘utility’ arguments Posner is making with respect to incentives and disincentives, but I don’t think so. Perceptions of fairness and unfairness, independently affect incentives and disincentives. An incentive that is also perceived as fair will elicit a response that is very different than a quantitatively equivalent incentive that is perceived as unfair. A tax that is perceived as fair will be collected more easily than one which is perceived as unfair. Even how a tax is described will affect this. I might willingly pay one tax if imposed without any moral characterization, and ferociously avoid the exact same tax if it was said to be imposed on me because I had not been paying my fair share or was otherwise a bad citizen. Even worse, justifying a taking based on the idea that ‘you didn't earn it anyway’ or it was all luck, will elicit a response similar to the idea that I can kill you if I want because your birth was just dumb luck. Posner may be correct at some metaphysical level, but somehow I don’t think we would like to live in a world like that, and we don’t.

Terry Bennett

I continue to marvel at this astounding revelation. If the universe is imagined as a great mechanical event and nothing more, then an observer at the Big Bang or whatever creationist event who had adequate data capturing and computational capabilities could have perfectly predicted, all those billions of years ago, that on October 14th, 2012 A.D. in a place that would come to be known as Chicago, a big molecule named Posner would formulate the thought that there is no free will. Free will is the only non-Newtonian force postulated to impact the outcomes of the original trajectories of matter. If there is no free will, then there is pre-destination, and Bill Gates is just a mindless drone creating wealth according to the molecular destiny that supercedes the appearance of his ephemeral ego. I will state for the record that the above is not an accurate understanding of what the universe is, but I agree with our hosts that the answer to this question isn't necessarily dispositive on the main topic.

A colleague once chided Wilhelm Steinitz, "You think think because you are chess champion of the world, you have all the answers." The feisty Steinitz responded, "And do you think, because you are NOT chess champion of the world, that YOU have all the answers?!" If Gates has no moral entitlement to the outcomes that appear to flow from his choices, then as Thomas mentions, a fortiori neither do I, and neither do you. I'll have to wait for the third movie to find out to what degree I agree with Ayn Rand.

The seductive immorality of the Communist / Obama point of view works something like this: There are these other guys with lots of money, more than they need, and if we take some of it away from them and use it for the things we think are important, imagine all the good we can do in the world. This is nothing but the hubris of a man who has never produced anything, presupposing his moral superiority, and it is reprehensible. Thou shalt not covet.

Christopher Graves

There is fundamental problem that I see with Judge Posner's discussion of incentives and that is his assertion that there is no free will. His contention is based on the claim that all events are caused. In a way this is true. But not every aspect of every action is caused in a materialistic sense. There is a causal nexus that produces actions and events, but human action is largely brought about by 'reasons' and not 'causes,' even though there is a causal chain involved in human action.

So, when I decide to, say, to type this post, my body moves in a certain manner stimulated by a chemical, physical chain of causes that produces the motion of my fingers that type the respective keys of my keyboard that set off another chain of physical causes in my computer that links with the Internet, etc.

But there is no causal explanation of why I decided to write this post or the logic that I present in the content of this post. A more appropriate way to consider the content of this post is with regard to my reasons for disagreeing with Judge Posner on this issue. While there is a physical substrate to a person's thinking and feeling, we would be missing the substance of Judge Posner's essay and my response if we simply discussed the pattern of neurons firing in our respective brains and the functioning of our nervous systems as we wrote our comments. Our thoughts are distinct from the way our thoughts are instantiated in our brains, and the truth claims that we make must be evaluated in terms of the reasons for our views. There is always a de facto dualism to the human mind and its interaction with our brain and the rest of our bodies. The Identity Theory of the mind always runs into this problem and that is how do we distinguish thoughts, by looking to the state of a person's brain or to the substance of their conscious experience?

If anyone is tempted to answer the former, then consider this realistic thought experiment: Two people think the same thought, say they are both asked to think of a waterfall as they are placed in a brain scan machine of the most sophisticated sort. In one person a specified nodule of the brain is identified and in the other person, another portion of the brain is stimulated. How do we know they are having the same thought? The only answer is by asking them to report on their conscious experience. The brain scan cannot make this distinction. This problem applies to both versions of the Identity Theory--the Type and the Token Identity Theory. In fact, the Token Identity theory is widely recognized as a version of dualism due to the very problem that I just touched on, which takes us away from the language of causality and into the discourse of reasons.

Now, if one reason is more compelling than another, does not this logically entail that the person who feels the weight of that reason must act on it, thereby denying his free will? This is a strange way, in my view, to characterize what is going on when we make a judgement. Isn't the very nature of free will to make rational judgements? So, when we see one course of action is more likely to succeed in achieving our goals, then we decide to follow it. In what way has our judgement been determined other than by recognizing the truth? Again, this is not a causal chain of physical dominoes falling in place so that our brains are simply one of the dominoes. Rather, we see what is true and we act on our judgement. The physical substrate is not determining the content of our judgement, so there is no deterministic chain that necessitates any particular course of action for an individual.

Thomas Rekdal

From each according to his productivity, to each according to his incentive structure. I am guessing Judge Posner does not have it quite right yet. But perhaps the French will help to clarify the picture.

TANSTAAFL

While not too great a surprise, given the evolution of his writings over the last 30 years, it nonetheless is disappointing to see Posner succumb to nihilism in this way.

Christopher Graves

Playing off of TANSTAAL's insight about the nihilistic quality of Judge Posner's philosophical paradigm, the Darwinism, randomness, and materialism inherent in Judge Posner's foundations lead no where else but to nihilism. On this point, consider the thesis of the latest book by philosopher Thomas Nagel, *Mind and Cosmos: Why the Materialist Neo-Darwinian Conception of Nature Is Almost Certainly Wrong,* Oxford University Press, 2012.

Once we abandon teleology and reduce rational reflection, intuitions, insights, and all of consciousness to purely naturalistic, materialistic epiphenomena, and view the world as being without intrinsic order then moral realism vanishes as does rationality in general. Darwin himself realized this radical ramification of his speculations as have a number of contemporary philosophers such as Allan Gibbard and Sharon Street (who continue to accept Darwin). Nagel has come to understand that the Darwinistic account, when fully considered, reduces to absurdity.

Jack

Posner theorizes:

"An example is the mortgage-interest deduction, which incentivizes people to own rather than rent their homes—andwhy encourage home ownership?"

Yikes! Is it too late for Posner to wander over to the sociology side of the campus? or walk through a residential neighborhood largely "in rental?" and has it been so long since he, perhaps? lived in an apartment building that he'd become a bit tone deaf on this one?

Well........ I "guess" that he'd argue that those finding joy and pride in having, maintaining and tailoring their homes for themselves should pay "full pop" for the "privilege" but surely there are benefits to "the government" and society at large.

I will agree that the subsidy has gone too far. It's original intent was that of helping working folk "get into" their first or subsequent home, but not to create an industry out of deducting interest costs at the top marginal rate for a million buck home and perhaps another "at the lake" and not recapping the capital gains on flip after flip.

Some will recall only being forgiven cap gains once over 55 and only once in a lifetime.

Cure? Only the interest on loans up to the FHA max (which differs by region) should be deductible and only on ONE home. What we don't need is subsidizing more than one home!


Posner:
"Another example is the exemption of employer-paid employee health benefits from federal income tax, which encourages excessive expenditures on health care."

Well H/C is such a mess it's hard to critique any one aspect. but general agreement. It wouldn't be equitable to make H/C insurance deductible to the (really) small biz folk as the deduction wouldn't amount to anything -- another cruel joke like the 401-K and Med "savings accounts".

But! do "we" know that the tax deductible H/C benefit "encourages excessive expenditures?" Do folks go to the doc more just because the copays are small? Or does going with some regularity actually save us money? Now I know that the system is abused with corporate execs having "H/C" that includes spa memberships et al but our wonkish in a nice way, President seeks to tax those luxury H/C programs as should be the case.

Ha! while musing on the "right amount of H/C" to consume; I suppose an "economist" might lean to that minimal amount of care that, on average, produces the greatest well-being at the lowest societal cost and comes close to bringing dear Sarah P's imaginative "death panels" to mind. But! when it is me or thee who is hurting or even hoping to participate in pre-emptive H/C we'd surely like to decide the "right amount" ourselves.

Jack

Chris: I think Posner gets close to something else. For an example a Series winning baseball team will be held in far higher esteem and more riches will often accrue to them than the one coming in 2nd. But quite a while back a Scientific American article posited that the teams were so closely matched that the wins were no more predictable than that of flipping a coin.

Free will surely plays a role.. but consider moving through a crowded place, and airport or exiting a sports arena; once in a while you can find a gap to speed your exit, but more often it's next to impossible to do more than move with and at the speed of the crowd.

Not long ago after yet on MORE horrendous death of a young Text while driving crash, it occurred to me that an I-phone (and likely other phones) could have an "app" that used the GPS speedometer to lock out texting when the phone was moving at any speed. Great idea, eh? while those cashing in on the costly textaholic addicts wouldn't like it surely every parent of a teen or college aged kid would insist on such a feature and perhaps for their spouses as well.

After not too long of a net search I found some concerned organization expecting to release exactly that app this past summer. The point? Perhaps like the crowded exit the thought comes to many but luck is in the timing and ability to execute.

From econ: There is a theory that a quarter could never be found at the top of the escalator at Grand Central Station as someone would have picked it up long before your arrival and the odds of it being you are very small. It's supposed to be about NOT finding profitable inefficiencies in the stock market as they too would have been snapped up before you got there.

Account Deleted

Brilliant post. Stephen Pinker alludes to something he calls the "Leftist Darwinist" political axis - one that acknowledges that many differences in outcomes arise from one's natural inheritance.

Studies both formal and informal have replicated the benefits of another kind of natural inheritance: physical beauty. The attractive are perceived as smarter, more kind and even taller. For the most part physical attractiveness is the luck of the draw.

Living in an age where a tendency towards Obsessive Compulsive Disorder (OCD) coupled with a big brain make for a life where success is yours to lose. If anything this undermines the argument that it's unfair to tax the economically successful moreso than others. Not only are they more capable of shouldering the burden a lot of their success is attributable to factors unrelated to their own level of effort.

Talk about unfairness - imagine being born with 100 million fewer neurons and very weak competitive tendencies in the information age?

D


The truly lucky are those not predestined to find themselves reading the subject article. As I cannot help myself, I am compelled to offer up draft language for a new tax on wealth obtained by luck (the WOBL Tax).

New Section 7 of the Internal Revenue Code of 1986:

§ 7 Tax imposed on wealth obtained by luck.
(a) General rule.
Except as provided in Subsection (b), income and wealth shall be deemed to have been obtained by individual effort, and America will be known as the land of the free.
(b) Regulations relating to exceptions to the general rule.
Notwithstanding any provision in Title 26 (or the Constitution for that matter), the Secretary may provide by regulations that subsection (a) shall not apply in order that from each according to his ability, to each according to his need.

Gordon Longhouse

This post is way out there! I love it!

Eric Rasmusen

"The economic significance of the disagreement has mainly to do with taxation. Taxing success
that is attributable to pure luck does not have disincentive effects, and so is
a cheap away of financing government."

Caveat: One must be careful taxing risk-taking--- of putting oneself in a position to benefit from luck. This is much of what people mean when they say that variance in income depends on luck.

Of course, some people are more risk tolerant than others because of luck.

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