I do not believe that differences in value judgments are the main source of the disagreement among economists over how much to tax individual with different levels of wealth and income. These value judgments include beliefs about how much of high incomes are due to good luck, whether high-income individuals “deserve” their incomes, or whether there is “free will”. Such considerations, however, may be more important among the general public since, for example, they may not want to tax heavily a Steve Jobs or Brad Pitt because they admire these (and some other) successful individuals and their accomplishments.
For economists, differences in views on what the tax structure should be and on other policies mainly come down to different beliefs about how taxes and other policies affect behavior. For example, economists who support much greater taxes on higher income individuals believe that higher taxes will not much affect how hard these individuals work, their propensity to start businesses, or other kinds of behavior. On the other hand, other economists, including me, believe that high marginal tax rates not only discourage effort and other choices by those being taxed, but also affect the form in which they take their incomes. These adjustments include increases in non-taxable perquisites, such as greater use of a company’s plane, hiring expensive accountants and lawyers to search for loopholes in the tax code, converting income into capital gains when these gains are taxed at lower rates, and investing abroad if the income earned there is taxed at lower rates.
Unfortunately, the empirical evidence accumulated so far does not conclusively support either approach. That is, it is unclear how large is the effect of higher income taxes on the behavior of richer individuals. The relevant evidence is growing, but so far different perceptions of these effects prevent the resolution of the sharp differences in opinions among even a-political economists on the damage done by high marginal income tax rates.
The important point for our discussion is that beliefs about the importance of good or bad luck in determining high or low incomes is not usually the decisive source of differences in attitudes about tax rates and other public policies. For example, one may correctly believe that luck has a major role in determining the genes, education, and other opportunities of highly successful individuals, and yet believe as well that high tax rates on their income and wealth would induce major changes in their behavior. Conversely, one can believe that luck is unimportant in determining success, and at the same time believe that high tax rates on rich individuals would little affect their behavior. And, of course, various other combinations are possible about the relation between the role of luck in achievement and induced responses to taxes and other policies.
A well-known illustration of the link between luck and behavior is the advocacy of a single tax on unimproved land proposed in the 19th century by the American economist Henry George. His argument was that the intrinsic quality of land was entirely due to the luck of its location with respect to soil, rainfall, sunshine, and other relevant determinants of land productivity. This led George to argue that taxing heavily the higher value of unimproved better land would raise considerable revenue, and yet cause no harm since the value of unimproved land is determined entirely by its good luck in location. Critics of this “single tax” proposal responded that while George deid not want to tax the value due to heavy use of fertilizers, machinery, and other agricultural investments, in practice it is impossible to separate accurately the unimproved value from the total value. As a result, some of the investments in land would also be taxed. These agricultural investments would surely be affected by taxes on land, even though the location of land with regard to sunshine, soil, etc. is entirely a matter of luck.
My conclusion is that even though luck plays a huge role in determining genes, family, education, and other determinants of success or failure, this does not imply very much about the desirable tax rates and other public policies.
May want to consult a molecular biologist on this -- but "chance" not luck determines genetic makeup -- while "methylation" of your genes is a mixture of "luck", and processes/environments over which we have some control.
...and on the trading floor, the managing director in charge would say: "I'd rather be lucky than smart." and he certainly proved this in some of his unfortunate life-choices.
Posted by: Jdwalton | 10/15/2012 at 08:18 AM
I would agree that people do not deserve their possessions or, at least, it is really hard to determine such issues objectively. There are philosophical problems as well as practical problems with a merit-based theory of social justice. The practical problem is who is to judge who deserves more and along what lines are people to be judged? Is it work effort, intelligence, virtue, diligence, or some combination of these qualities and perhaps others? And then if we could specify some formula of desirable qualities that we collectively want to reward, what would happen to liberty of association, contract, bequest, and charity? Would they be outlawed? We can see how these considerations can become at odds with merit by recounting Jesus' parable of hiring workers for the vineyard in Matthew 20:
“For the kingdom of heaven is like a landowner who went out early in the morning to hire workers for his vineyard. 2 He agreed to pay them a denarius[a] for the day and sent them into his vineyard.
3 “About nine in the morning he went out and saw others standing in the marketplace doing nothing. 4 He told them, ‘You also go and work in my vineyard, and I will pay you whatever is right.’ 5 So they went.
“He went out again about noon and about three in the afternoon and did the same thing. 6 About five in the afternoon he went out and found still others standing around. He asked them, ‘Why have you been standing here all day long doing nothing?’
7 “‘Because no one has hired us,’ they answered.
“He said to them, ‘You also go and work in my vineyard.’
8 “When evening came, the owner of the vineyard said to his foreman, ‘Call the workers and pay them their wages, beginning with the last ones hired and going on to the first.’
9 “The workers who were hired about five in the afternoon came and each received a denarius. 10 So when those came who were hired first, they expected to receive more. But each one of them also received a denarius. 11 When they received it, they began to grumble against the landowner. 12 ‘These who were hired last worked only one hour,’ they said, ‘and you have made them equal to us who have borne the burden of the work and the heat of the day.’
13 “But he answered one of them, ‘I am not being unfair to you, friend. Didn’t you agree to work for a denarius? 14 Take your pay and go. I want to give the one who was hired last the same as I gave you. 15 Don’t I have the right to do what I want with my own money? Or are you envious because I am generous?’
16 “So the last will be first, and the first will be last.”
As Robert Nozick argued, an entitlement theory of social justice is superior to either a meritocratic principle or an egalitarian principle. Entitlement avoids the problems I have pointed to withe merit as it protects individual liberty. We also avoid the problems posed by Judge Posner and Professor Becker about luck and free will. Further, we side-step issues relating to exactly how much people need to induce them to continue socially productive activities, viz. incentives.
The entitlement theory also avoids the intrinsic problems present in egalitarian notions of social justice that center on continually attempting to measure the degree of inequality of result and tinkering with institutions and individuals' lives to force people into the specified social pattern. We have a long track record of the intrusive, and in many cases, tyrannical tendency of regimes founded upon egalitarian notions of social justice.
On Nozick's view, which he derived from John Locke, people are entitled to whatever they gain as a result of a fair process. People are endowed with certain abilities, which they rightfully own based on the principle of self-ownership. People mix their labor with nature or they trade with others who have acquired their property either by appropriating it from nature or by fair trade or bequest. This process allows for the free play of individuals and, over time, organic social institutions and practices to develop to regularize these acquisitions in a flexible but stable manner. Government's role on the entitlement view is limited to protecting private property and enforcing contracts. This is the conception of social justice that the United States is founded upon, and we can see the results in terms of personal liberty and prosperity over two centuries.
Posted by: Christopher Graves | 10/19/2012 at 11:10 PM
I think you are right about issues of "luck" versus hard-work having little impact on the issue of tax rates and tax bases. It is nevertheless useful to counter the rhetoric -often heard in Republican circles including by its most recent presidential candidate- around taxes being in some way a penalty or punishment for being rich.
Posted by: Gordon Longhouse | 11/13/2012 at 01:52 AM