Wednesday, July 23, 2008
Taxes and income: What is fair?
When it comes to income and taxes, what is fair? In 2006, the most recent year for which data are available, the 1% of Americans with the highest incomes earned 22% of the total income reported by taxpayers and paid 40% of the taxes. Is this state of affairs, in its entirety, "fair," or "unfair" according to your personal morality? In rough terms, Barack Obama says it is unfair -- the several percent at the top should pay an even higher proportion of the federal income tax collected -- and John McCain says that it is fair. It is not clear whether Obama would agree that the top 1% should pay a lower proportion of total federal taxes if they earned a lower proportion of total reported income.
Looking at the linked article and accompanying graph, it seems to me that the more troubling problem is not that the top 1% are earning too much of the total income or paying too little of the total tax, but that the bottom 50% earns only 12% of the total income. There are several questions that one might ask. First, how much movement is there between the top half and the bottom half of the population? If many people spend some time in both then perhaps there is nothing unfair about it. If most people spend their entire lives in either the top or bottom half, then the justice in that result turns on whether you believe that such different outcomes are inherently unjust. If, however, you believe that the injustice of (relative) poverty is a function of its causation, then you need to decide whether the people in the bottom half are there by dint of choices they made or their families made for them, or whether they have, in effect, been coerced into their economic station.
Release the hounds.
9 Comments:
By 
, at
Thu Jul 24, 01:04:00 AM:
Two surprising but well-accepted results of modern empirical economics are the relatively high proportion of time spent in leisure for blue collar workers compared to white collar and the higher value blue collar workers give to their own lives (in concrete terms, i.e. dollars).
Neither fact is dispositive in this debate, of course, but they do help focus on the real question at issue. We are not asking whether the bottom 50% would rather have more money (of course they would). Instead, we need to ask whether they want to earn more money, with all the associated costs and benefits. At least to me, when you put it that way the answer isn't so clear. The present standard of living in America is sufficiently high that even the poor can enjoy things like cable TV , computers and (some) disposable income. In return for abstaining from the more expensive pleasures, they (on average) enjoy more time to themselves.
It is shockingly narrow-minded to assume that everyone must share your preference to choose work over leisure, but that's exactly what tends to happen in this debate. The people arguing by and large chose work, and they apparently cannot get their minds about someone making a different decision. Yet the economic data indicates that that might be exactly what's happening.
By 
SR, at
Thu Jul 24, 01:04:00 AM:
It would be a question of "fairness" is this was the result of some dole-out of income from a source which had control over where the income went after it was produced. These results happen in "planned economies." Planned economies produce very little so that even the "rich" don't have so very much.
In the case of the US, the distribution is largely a factor of productivity (ie to each the value of which he/she produces). There is no source which controls the distribution, so it seems as if fairness can't really come into the equation. History shows that as long as government doesn't confiscate too much of the production of the most productive(at the margin) those producers will continue to produce more and more (with correspondingly greater revenue to the government). This is a win / win that liberals just can't accept, because they can't control it.
By TigerHawk, at
Thu Jul 24, 06:38:00 AM:
Anon, great comment. SR, you seem to have assumed the answer to the last question, which is whether the distribution of wealth is a function of coercion rather than choices. The assumption in virtually all other countries is that it is, which accounts for the popularity of socialism. In America, the assumption outside of major universities and NGOs is that it is not.
By , at
Thu Jul 24, 09:12:00 AM:
I will tell you what is unfair, taxing me for a generation for a "war on poverty", and then allowing millions of poor illegal aliens into the country and counting them among the "poor". Any study or poll on the status of America that doesn't identify how they eliminated or at least identified the illegal aliens from the sample should be ignored. We should not be forced to fix poverty among illegal aliens.
By , at
Thu Jul 24, 09:23:00 AM:
Probably using the word "coercion" is loaded. But it's not clear that PERSONAL choice creates 100% class/income mobility. Certainly some people move up through hard work/determination/luck and some move down through sloth/lack of ability/high-maintenance family members/health problems (including addiction)/lack of luck . . . but this is difficult and takes time (even generations). There are a lot of lazy rich kids who are handed a lot of advantages that keep them afloat. There are also a lot of highly motivated and capable folks in the lower income realm who cannot make meaningful upward progress. If you know enough people with different skills and circumstances, this is evident.
On the question of relative contribution: It used to be that CEOs & other upper-managers keyed their compensation to a multiple of the lowest compensated employee -- it was a matter of principle. Those days are gone. Sure the high level guys (and they are still mostly guys -- so this could be another aside about personal choice & its sufficiency to create wealth mobility) may be worth "more." But it's also true that they can't run the world alone (each function is important and work as a whole) and that they are probably NOT truly "worth" THAT much more (multiples of hundreds or thousands) over others in their organizations.
So a tax code that moderates the senior guys' hubris does not keep me up at night.
By Andrew Hofer, at
Thu Jul 24, 04:53:00 PM:
Most of the really rich (top half %) risked *everything* on a business (as opposed to the salaried fat cats anon 9:23 refers to. It is not clear they should tether there comp to anybody's salary.
Yes there are a handful of CEOs and inherited money types up there, but if you look through the Forbes list, these are people who took, and take, huge risk.
By , at
Thu Jul 24, 06:23:00 PM:
This country is largely a meritocracy, and transitions through the quintiles of income is common through the course of one's life. Some of the research cited by DMN columnist Scott Burns [www.scottburns.com]and syndicated Walter Williams has highlighted this mobility feature.
By , at
Thu Jul 24, 07:40:00 PM:
Alright, fine, I will make the stock argument.
Each additional dollar has diminishing utility for the person receiving it in light of the total number of dollars received and accumulated wealth, so if you want to tax people equitably (as in impact-on-lifestyle equitably, ie sharing the hurt, rather than nominal value equitably,) you tax differentially. The green for our wars must come from somewhere, and taking $100 from a multi-millionaire probably has less impact than taking $10 from someone well below the poverty line when you accept some sort of utility calculus. The fleshing out of this calculus is the hard part, (and deriving the taxation function is just algebra afterward,) but this thought experiment does provide meaningful conclusions:
1) Tax brackets are silly. A taxation function is much simpler and solves for the long-tailed upper end of the income distribution by taxing those people differentially even within the "bracket".
2) Of course the top tiny fraction making some huge slice of the pie should pay more than that ratio in taxation, because 10% from some != 10% for all. (You just need to figure out the diminishment multiplier to evaluate the lost utility for those top-end dollars as compared to low-end dollars.
3)One must carefully distinguish between a "fair share" being "1/n times the total amount of stuff where n is the number of people" and a "impact on lifestyle" fairness. They aren't the same.
By , at
Fri Jul 25, 12:13:00 AM:
Of course "transitions through the quintiles of income is common through the course of one's life" -- because people who have high or moderate earnings at some point in life probably scooped ice cream one summer or had an entry-level job out of college and then earn less during retirement. That is not the same thing as full economic mobility based on desire, hard work, or anything else solely within one "rugged individualist"'s control (or even so-called "merit").
I'm surprised that the top 1% of earners are largely entrepreneurial types who literally bet the farm on a better mousetrap. Most of the top "earners" in my circle are either blessed with the right parents or with options in a public company at the right moment in some insustainable mass delusion. So, like the eponymous play: "Other People's Money." Guess I don't know the right people . . . .
