Philosophy and income inequality

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]

8 thoughts on “Philosophy and income inequality”

  1. I don’t agree with your conclusion on the ownership issue. Surely the question turns on how you came to own the factory. Let’s say you had been a factory worker and saved your money until you could buy the business. Is it then fair that your spoils are taxed higher than those who weren’t as thrifty?

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  2. I would rank the goals that society thinks are worth pursuing.  One goal might be to ensure that everyone has a basic capacity to live with dignity (e.g., no one starves, basic health and education, etc).  Another goal might be that each person is compensated for his/her marginal contribution to society’s well-being.  Some goals will tend to have greater support than other goals.  For example, eliminating infant mortality would likely be judged more important than ensuring that we receive compensation for our marginal contribution to society.  We could prioritise the goal of ensuring that everyone has a basic capacity to live with dignity over the goal of ensuring equality in other dimensions.

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  3. PS:  I would add that the fact wealthy countries do not do more to alleviate poverty elsewhere represents a failure of logistics (i.e., we are still trying to work out a solution to a complex problem), and not a reflection of our values.  Humans have managed to develop efficient (albeit imperfect) tools (e.g., taxation, democratic institutions, bureaucracy) to tackle poverty within a country.  We are still in the process of developing tools to tackle poverty across the world.

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  4. “Deserving” is like “fair”: it has “motherhood” popularity, but is too subjective or nebulous to guide economic policy.
     
    Which of the following are “deserving”?
     
    (a) a lottery winner
    (b) a business heir
    (c) a homeless junkie
    (d) a millionaire bond trader
     
    Discuss the implications for taxation policy.

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  5. The invariant historical circumstances bit is tough nut.
    “In particular, what people deserve is a function of their wealth.” Isn’t it more accurate that what people deserve is a function of their wealth relative to opportunity?
    The really difficult thing when developing a  just deserts theory and application is in assesing and weighting the role of opportunity. Surely some redistribution is desirable if it leads to improving equality of opportunity by pulling the bottom up, and this in turn leads to better aggregate economic outcomes, if not at all for the sake of fairness. Examples would be access to some minimum standard of health care and education. If the individual (a minor) can’t access this through there own means, then it should be provided, which ultimately requires redistribution. Of course, these examples are more or less how it is already done in rich countries and it is difficult to make a case against them no matter how small a role is assigned to government.
    Will read the paper

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  6. The factory can’t sell anything to people with no wealth, nor can it own anything or sell in a society with no public order.  The success of the factory has as much to do with the society in which it functions as with the factory itself.  Microsoft selling software in the middle ages would not have made much money.  A factory with no access to transport or communications to get it’s products to the customer is also of no use.  You can go on and on – legal rights, police, education, medical care, and so on all contribute to the ability of the factory to make money.
    50% taxation is fair, practical, and about right since the factory’s profit is as much due to the factory as the rest of society.  This is roughly the top rate of tax in most developed countries.  Lower rates of tax for poorer people is mathematically equivalent to taxing them at 50% and then letting them vote themselves some benefits back due to their being part of the society that enables rich people to be rich.  Experience and practicality show it to be about right, theory needs to catch up.

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  7. PS:
    our feelings that we experience when we see or hear about a deserving hard luck story are also economically on average roughly correct.  They have evolved over time because people who were surrounded by individuals that were easily disabled by bad luck died out when they didn’t get help themsleves, while those who were part of a group and felt like helping other individuals in their group through bad luck episodes survied better.  Most people will feel quite good about helping others in many circumstances to some extent, but not too much, and also with wariness about being taken for a ride.  This is most likely reasonably close to an economically optimum use of our own resources for reproductive success.

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  8. Well all I can say is thank god for the middle class. Without them the decision would be political and easy. Just tax the hell out of the wealthy and redistribute that wealth to the poor, after all without the middle class they would have all of the voting power – BUT the middle class hold the balance, and being neither wealthy or poor they tend to have a much more balanced view on this subject.

    Nevertheless it is fair and befitting for a government to ensure that all wealth is not concentrated in the hands of the few, and that the wealth of the few is put to the future benefit of all via education and health.

    We could consider death duties, higher stamp duties on property transactions, higher gst levels, and higher land tax.

    Yes thank god for the middle class.

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