In a paper that is worthy of some blogosphere discussion, Greg Mankiw writes about “Spreading the Wealth Around: Reflections Inspired by Joe the Plumber.” The title initially gave me an “uh oh” feeling but the paper is a serious attempt to frame the political debate on taxation.
For starters, the title is a little inaccurate. The reflection is actually about Barack Obama who was responding the ‘Joe the Plumber’s’ question about Obama’s desire to tax the wealthy:
It’s not that I want to punish your success. I just want to make sure that everybody who is behind you, that they’ve got a chance at success, too…. I think when you spread the wealth around, it’s good for everybody.
This led to the question asked by Mankiw: “when is spreading the wealth around” a proper function of government? Put simply, if you need to raises taxes to meet government expenditure or debt, whose taxes should go up?
The paper is well worth reading because it is a nice, level-headed presentation of trends in income inequality in the US and their likely relationship to tax policy. I am sure it will inspire many out there to disagree with the narrative but I am also pretty confident that the basic story — in particular, the relevant part for the question at hand — is sound.
The issue that Mankiw grapples with is what political philosophy should we adhere too in deciding these issues? Usually, utilitarianism is at the heart of a desire for progressive taxation and a redistributive role for the government. Mankiw points out that is all very well except that no one appears to adhere to that philosophy.
First, it would imply that the US government should tax itself and give to the poorer parts of the world. This is a notion that came up in the debate following the Stern report on climate change policy (that is, if you believe that we should pollute today because future generations will be better off due to technological progress then you should also believe we should redistribute wealth to poorer countries — a set of positions that those against climate change policy did not seem to hold).
Second, it implies that it should use observables correlated with income to set taxation rates (e.g., height); a notion that people find repugnant.
Mankiw then proposes an alternative political philosophy that he regards as one that people seem to adhere too — Just Desserts Theory (actually in the paper it is Just Deserts Theory which I think is a play on words for ‘deserve’) [Update: Actually, the paper’s version is accurate. I guess you learn something everyday). The guiding principle is that “people should get what they deserve.” And the principle leads to some things that economists can actually say something about. For instance, welfare economics works well because people are paid their marginal product which is the definition of what they deserve. And market failure comes into play here because correcting it is usually about moving to the right price signals and payments. Finally, you can still care about the very poor because that is something people do but it also explains why they care about the poor in their own country rather than the poor elsewhere.
So the argument that this is what many people hold as political philosophy is a strong one and the idea that we can orient economic policy recommendations towards this goal is certainly analytically possible. But the problem is whether political philosophy should be so ‘democratic’ or not. Frankly, I have no clear idea about how to think about that one but it doesn’t mean it isn’t worth thinking about. (Actually, I think it is worthy enough to raise in my favourite economics textbook).
The issue I have is that there is more ambiguity with regard to how to apply Just Deserts Theory than the paper can do justice too. In particular, what people deserve is a function of their wealth. If you happen to own a factory, then your marginal product is high because without your effort the factory is worthless. If you are just a worker in a factory, then your marginal product is lower because the factory can run without you. Just Deserts Theory seems to suggest that the owner should receive more income than the worker because of that fact. But transfer the ownership between the two individuals and what they deserve changes. It seems to me that there is a strong sense in which, as a political philosophy, getting what you deserve ought to be invariant historical circumstances (and specifically, what you own). The difficulty is that once you admit this sort of issue, then it becomes really hard to apply the theory.
[Update: Today’s Doonesbury]