z6dczkj9-1399391728

‘Out of the Box’ thinking on inequality

by

Whatever you might think about it, good or bad, there is ample evidence that, in countries all around the world, the rich are getting richer. Best-selling economist, Thomas Piketty, has confirmed it using a wealth of data, alongside an admittedly more controversial opinion that it will continue. But ultimately, whatever the concerns about wealth disparities are, those concerned have a starting place for action: they want the rich to pay more in taxes.

To be sure, there have been ample periods in history where such calls to tax the rich have been successful. This is why I am sure that many rich, who would prefer not to hand over their income or wealth to the government, are themselves concerned. Either they will end up paying more or start to exist in a broader society where many people think they are gaming the system to their own ends.

I’m here to propose a fresh perspective at this issue. It is one that asks people to give a little in their attitude but otherwise not take any actions other than ones that are purely voluntary. To do this, the government should take a leaf out of the private sector’s book and learn better ways to extracting money from wealthy people.

Whatever you might think about how markets lead to situations where the wealthy have benefits, it is also the case that they have been very imaginative at convincing the rich to part with that wealth. Let’s begin with the airlines.

As David Owen recently investigated, airlines spend up to a half a million dollars to install first class seats to attract rich patrons. The tickets for those seats can run up to $20,000 for perhaps 14 hours of use. Better still, they are rated highly by their users even though, in effect, stripped of glamour, it is not much more than a dorm room shared with 10 or so other people. That you can ask people to shell out that much for so little should give us pause.

This type of phenomenon occurs everywhere. Airlines have continued it by awarding ‘status’ associated with frequent flyer use as have credit card companies. Luxury products in jewellery, fashion, cars and other things sell for well above their cost of manufacturer or their functional value. And, as so many have noted, it is often the conspicuous nature of such expenditures — especially what they tell the rich about each other — that drives demand. After all, in first class, the rich check out who else is with them. I don’t see that happening in coach.

A new approach

Which brings me back to taxes. The issue with taxes is that they are an inherently private activity. We have set ourselves up to ensure no one outside of the IRS, and potentially not even they, know about our income and wealth. While a rich person may lament being under-appreciated for the tax contributions they do make, the system drives a lack of transparency. This is not a choice the private sector would make. After all, charities who target the wealthy rarely do so with a plea that all remains private. A gala ball and big awards remain standard fare.

Put this way, there is no reason why the government could not to the same. It knows precisely how many dollars each individual has paid. And it could use that knowledge to set up their own status and recognition system. Imagine, for instance, a ‘US Platinum’ status which is conferred on individuals who have made one billion dollars in actual tax payments over the last decade. Each year those who had reached this threshold would receive their recognition at the White House or Capitol. Of course, if one wanted to keep such things private, they could opt out of the program. Hence, it is purely voluntary.

The new status could come with other benefits beyond public recognition. Taking a leaf from the airlines, recipients would receive a Platinum card entitling them to various perks, from an easy time at airports and wherever government lines are (such as the DMV) but also to favoured treatment in dealing with government agencies. To be sure, they might receive those things already but this would allow it all to be transparent.

More importantly, the government could be imaginative about how status may be used so that recipients could receive their due recognition. As I already mentioned, it is by playing on the conspicuous nature of consumption amongst other rich people that private businesses extract more from the rich. The government could do the same thing by ensuring that wherever the rich congregate, it is clear who has status and who does not. The British have a system that, while not tied to taxes as I have proposed here, does that by awarding knights and dames. Australia has recently decided to re-adopt the same system (that’s the benefit of outsourcing your head of state to a millennium old dynasty). In the tax-based system, the same recognition would arise with the, I’ll admit, consciously manipulative: “you say your rich but I don’t see you with your Platinum pin, what gives?” I suspect opting out will be rare.

At the margin, one could imagine that this would change the attitudes of the rich towards spending money on activities designed to reduce the amount of tax they had to pay. Of course, once you have got your one billion dollar threshold, you might tax avoid with abandon thereafter but let’s face it, extracting more from those at that level is hardly worth the effort. There is a sense in which a fair share has been paid.

Potential Objections

There would, of course, be things to object to with all of this. First, there is the notion that the government would be celebrating the pure rich. That is, of course, a feature here so seeing it as so requires an attitude change. It is not unprecedented for the government to confer status: it does so for veterans and could do more there. Would it be so bad if those who paid for the tanks also received some recognition too? Remember, the award only goes to those who have signed checks to the US government.

Second, what about charities? Shouldn’t contributions to charities or non-profits also count toward the US Platinum status? It is true that they give but they receive separate recognition for that already. What I am arguing for here is for balance in that recognition with whatever consequence that means for the balance of contributions.

Third, what about those who aren’t rich? Don’t they contribute? Of course they do, but one issue at a time. There can be other awards for other contributions. What I am suggesting here is that there is a new awarded tied objectively and unapologetically to pure money given to the US government. It is a missing element in public recognition.

Fourth, won’t this just entrench rich dynasties with more benefits? This is a concern but I would ensure the status is only conferred to individuals. That means that if you should pass away, the status would not be given to your children. The private sector doesn’t do that and neither should the government. They would have to earn it the same way as everyone else although they could get a head start by paying their share of any inherited estate to the government with an estate tax.

Fifth, even one billion dollars seems a tad high a threshold, shouldn’t there be others? Yes, that number was pulled out of the air but my goal was to start at the long tail of the income distribution. One can imagine that different levels may occur for different tax payments. The precise details would require study but the model the airlines use is a pretty good place to start.

Finally, if this works, won’t it mean that the rich will end up paying more taxes in total? Sometimes the rich travel more just to improve their airline status. Might some just pay more than they have to in order to do the same? Won’t that reduce incentives as much as higher tax rates would?

To which I say, if that occurs, bravo! Our job is done. Self-redistribution is the ultimate voluntary act and because it is something people choose to do rather than are forced to do, it must be something they prefer. In other words, how great would it be for incentives if the rich tried to get richer so they could pay more taxes and earn the benefits that accrue from it? That sounds like a win-win for the political and economic ages.

An edited version of this article first appeared at The Conversation.

Inspiration for this idea came from Scott Adams who made a convincing but sadly ignored (until now) call to start thinking in more innovative ways about taxing the rich.

5 Responses to "‘Out of the Box’ thinking on inequality"
  1. fairly easy to organise, so I dont mind giving it a go, but I would worry about the opposite dynamic: once the super-rich know who amongst them gets away with paying very little tax (which they will know by seeing who is clearly rich but not on the list) then a game of catch-up ensues whereby social status amongst the goes the other way. Conspicuous punishment is the normal way of preventing that from happening. Hence if you are going to single out the super-rich for special recognition when they toe the societal line, you will pretty quickly need to start making sure there are no conspicuous super-rich getting away with playing the tax system.

  2. I’d be somewhat worried about corruption and lobbying. If you tell people they can have something for a certain amount of money, they’ll look for ways to get it for less money. I know this is a pretty simple ‘pay up, get status items’ sort of deal, but I’d want some way to make sure it stays that simple.

  3. It’s quite easy to tax the rich – inheritance taxes, wealth taxes etc. We’ve done it before, we can do it again. The problem is political. Had we kept inheritance taxes at 1960s levels in Australia we’d get $9billion per year extra tax revenue in a highly progressive way. No need to pretend that rich people are tops just for following the laws that apply to everyone.

  4. I think it’s great to try and incentivise rich people to pay taxes. If that can be achieved in a relatively costless way (i.e. prestige), fantastic. I love the idea of potentially introducing a voluntary ‘tax’ contribution that removes distortions at the margin from labour income. This could improve the allocation of time between work (taxed at the margin) and leisure (untaxed at the margin), and peoples’ choices between different income sources.

    My primary concern would be the sign of the net impact on welfare, principally driven by the level of government revenue after the change. On the one hand, there would definitely be people eager to demonstrate their charity (or wealth) by paying their way in (group 1). On the other hand, some people might not like the idea of being seen to brag (especially in a country like Australia) (group 2). I could see group 2 being populated by people at the ‘top’ of communities – e.g. the person earning $150k in a community with an average income of $70k.

    ‘Opt out’ provisions could obviously help to reduce the concerns of group 2 people, but I’m still not sure how it would all come out in the wash, relative to the alternative.

    Removing marginal distortions between income sources/labour-leisure and removing the incentive to avoid tax would be awesome. If total government revenue collections contract it might not be a welfare enhancing policy change (assuming each dollar of tax revenue is spent on something with a net social benefit … a big assumption, I know).

    I think the more people you cover with such a scheme, the greater the scope to benefit from the removal of distortions, and the minimisation of tax evasion. So perhaps you’d want to have various ‘tiers’ of awards for contributions. However, I think as you hit lower income brackets, more people would fall into group 2, potentially reducing total revenue collections. I’d imagine that group 1 would be largely occupied by the very wealthy.

    The optimal level to set such thresholds could prove really tricky.

  5. That’s an interesting idea. Another way of thinking outside the box would be to limit the opportunities of the wealthy to separate themselves from the rest of the population. They might be more willing to chip in and pay their taxes if they couldn’t escape being subjected to the same services and infrastructure as the everybody else. Imagine the improvements in transport, education and health services if the rich had to participate.

%d bloggers like this:
PageLines