Responses on Taxes and Inequality-BECKER

I am not usually as diligent as Posner, so I need not apologize too much. But I regret that other commitments kept me from replying to the comments on several weeks' postings. I will discuss taxes and inequality now, and on one or two more of the past discussions tomorrow or Tuesday. TAX COMPLIANCE My estimate of the total cost is crude, but it is not that different from several others, and is much lower than say the Tax Foundation estimates. Some commentators went wrong in not appreciating that tax compliance costs, as most costs, are highly skewed. As I pointed out, many people fill out the short form and spend relatively little time. I adjusted for that by lowering the number of hours for me-which I believe understates my annual hours- by 50 per cent. I did indicate that various tax complications encourage inefficient behavior to take advantage of special treatments. I also indicated that lobbying led to many of the special deductions and provisions. But that does not mean that an economy with restrictions on campaign contributions will have a simpler tax system since groups that spend a relatively large amount of time or money lobbying, even if much less money than under an uncontrolled system, will exert greater influence. I do have to comment on the issue of efficiency and special interests. That the political system responds to more powerful interest groups is clear enough. That may define the efficiency of the political system-given the lobbying- but the power of various special interests may still reduce the efficiency of the economy. Many of the special tax provisions obviously make the economy less efficient, even if the political system is responding efficiently to the demands of various interests. Casey Mulligan and I have an article in the Journal of Law and Economics where we argue, and present some evidence, that a simpler less complicated tax system tends to lead to greater taxes. So perhaps tax complexities help to keep down total taxes. But one still has to count as harmful the cost in efficiency produced by tax complexity and other tax complications. On the wholly different subject of Raymond Aron, I greatly admire the various articles and books of his that I read, but I did not read the book mentioned. Aron pointed out the weaknesses and horrors of communism while most French intellectuals were great admirers of say the Soviet Union. THE GROWTH IN EARNINGS INEQUALITY There are many studies of the causes of the rise in earnings inequality- see for example papers by Kevin M. Murphy (my colleague) or Lawrence Katz of Harvard. These studies suggest, they do not definitively prove, that globalization and especially new technologies are the most important factors. Illegal and legal immigration played a role in keeping down the earnings of the less skilled, but it is not the dominant factor. As readers of this blog know, I strongly support increased legal immigration, especially of skilled immigrants. That would tend to lower earnings differences by skill, but not by a lot. Signaling and credentialism are not causing the rise in earnings inequality by education. Whatever the effects of such considerations, they were as important to college earnings in the 1970's as at present. Indeed, partly for this reason, the signaling interpretation of the earnings premium to college education has been in retreat as earnings differentials rise, and knowledge becomes more and more important in an economy. Some of you deny that college education teaches much. This is obviously false when considering learning by students of engineering, physics, modern finance, or many other specialties in various areas. But college education also helps students process information more effectively since they get so much practice doing this through readings and exams. In the information and knowledge age, the ability to process information efficiently is increasingly valued not only in the labor market, but also in obtaining good information about health, using the Internet more effectively, etc. To be sure, not everyone can profit from a college education or from finishing high school. But that does not mean that the numbers going on to college or graduating high school is the efficient or optimal number. The quality of k-12 schools and encouragement from family and friends to continue education can make a big difference. Some people remarkably rise above terrible circumstances, but sometimes sufficiently gifted boys and girls cannot, and that is what society should be working on. Some of you discussed more general questions about justice, capitalisms' effects on inequality, inequality in access to health (which incidentally has gone down, not up), and what are attractive statistical measures of inequality. These are all very interesting questions, but go far beyond my focus on the rise in earnings inequality. Earnings inequality is clearly the most important determinant of overall income inequality-for example, far more important than inequality in inheritances- so a concentration on earnings is getting at the main source of the change in overall inequality

Comments

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What is your opinion on what to do about those sufficiently gifted children who can't rise above the circumstances? Today, I see and hear a lot of complaints on the educator's part about parents not motivating their kids, but rarely is the establishment questioned. Is school choice the answer? How would school choice (and specialized high schools) affect the motivational factor?

(Sorry if I am asking something that's been previously covered, I'm new to the blog, yet already addicted.)

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