letterstomycountry

Redistributionists And Voluntary Taxation

letterstomycountry:

via JeffMiller, I landed on this Karl Smith post responding to Steve Landsburg’s criticism of wealthy Redistributionists who believe their rich bretheren should pay more taxes:

[Steven Landsburg argues]:

Just a couple of days ago, President Obama excoriated the Republican Congress for wanting to keep tax rates low for “people like me” — that is, people who, like the President, have very high incomes.

Now we learn that on an income of $1.7 million, the Obamas paid $450,773 in taxes, taking full advantage of the Bush tax cuts. I think it is fair to ask: If the President believes that people like him ought to be paying more, then why didn’t he pay more? There is absolutely no rule against sending in more money than you owe.

Smith responds:

Landsburg goes on to argue that while the extra contributions from the Obamas would be small, so would their sacrifice, since they are only one family as opposed to many. Indeed, the Obama sacrifice would give more bang for the buck since it would go to the most underfunded areas of the government.

What this highlights is a breakdown in the way we talk about taxes. Its convenient to make simply moral plays – the rich should pay more taxes. Where in this case we use the word should like we do when we say you should call your grandmother more often. That is, the rich have a moral obligation to help the country by paying more taxes.

Some people may mean this and its certainly good for intensifying the debate. What is more likely meant by thoughtful commentators is that the world would be a better place if the law required the rich to pay more in taxes.

If we want to be truly honest then most people mean something like this: I would prefer a world in which all other rich people paid more taxes and I paid less. However, I doubt that anyone is going to go for this. So I am willing to settle for a world in which all rich people including me pay more in taxes. I am not willing to settle for a world where I am the only rich person paying more in taxes.

This is often how public decisions work. I would prefer a world in which everyone else had to obey speed limits but I could speed when I felt it necessary. Yet, its unlikely that anyone is going to go for this. So I will settle for a world in which everyone including me is subject to speed limits. I am not willing to settle for a world in which I am the only person obeying the speed limits.

Tyler Cowen believes that Karl Smith’s response to Sternberg is insufficient:

Karl Smith is irritated by the argument, but I don’t see that he offers a good response.  In general the responses I read or hear to this argument show a lot of emotion and not a lot of recognition of the strongest versions of the claim.  Even if this argument has a chance of truth of only 20 percent, that still should have force to alter behavior at the margin.  “There is a twenty percent chance I am morally compelled to give” is a real nudge toward “I should give more now,” if only, say, giving a fifth of what the full argument requires.  So “downgrade and dismiss” — a common rhetorical strategy — won’t work here.  If the argument has any life at all, it should hang like a millstone around the neck of egalitarians.

Aside from the fact that Smith’s response is pretty clearly *not* an emotional one, I think Cowen failed to address the moral calculus that Smith lays out in his post.  The same self-interested morality that makes markets work in the first place will also make those most capable of giving to charity less pre-disposed to do so.  Even if we grant, for the sake of argument, that a redistributionist *should* voluntarily give more, Cowen’s theoretical “millstone” would hang even heavier on the necks of those who give little, or refuse to give anything at all.  If a wealthy redistributionist is guilty of the sin he proselytizes against, then the non-redistributionist is even more culpable.  The redistributionist’s moral failing in this regard does not excuse the non-redistributionist.  In other words, Sternberg’s response is no response at all.

The perceived hypocrisy here is merely a distraction from the real issue, which is identifying those people in our society who are capable of bearing a greater tax burden without suffering a correlative loss in their standard of living.  When we talk about Redistribution, of course, we usually talk about Progressive Taxation.  And the moral calculus of Progressive Taxation is relatively straight-forward: The declining marginal utility of money ensures that wealthy individuals feel the loss of expendable income much less than those below them.  So it makes sense, from a utilitarian standpoint, to ask them to pay more so the most vulnerable citizens in society can keep more of their money, which is more likely to be utilized for need rather than want.

This moral calculus is not difficult to illustrate:  let’s assume there’s a flat tax of 10%.  Taxpayer A makes $10,000, and Taxpayer B makes $100,000.  10% of Taxpayer B’s income will leave him with $90,000 to live on.  Taxpayer A, however, will have $9,000.  

The loss of $10,000 to Taxpayer B, while substantial, will still leave him in an admirable position; his after-tax income still greatly exceeds the cost of necessities.  

The loss of $1,000 to Taxpayer A, however, is catastrophic.  Even though both taxpayers are paying the same tax rate, and Taxpayer A is paying 10x less in real taxes than Taxpayer B, Taxpayer A’s welfare loss from that smaller real value is larger by several orders of magnitude.

This is where the moral calculus of Progressive Taxation comes into play.  If we make Taxpayer B absorb 90% of Taxpayer A’s tax burden, Taxpayer B’ after-tax income will be reduced to $89,100.  Taxpayer A’s after-tax income goes up to $9,900.  The gain of $900 to Taxpayer A results in a substantially larger change in material welfare than the loss of $900 does to Taxpayer B.  Taxpayer B’s after-tax income, even after absorbing Taxpayer A’s tax burden, still allows him to enjoy a substantially better standard of living than Taxpayer A.

What does this mean?  It means that when we talk about “fair taxation” in its moral sense, we have to consider the consequences of said taxation relative to the position of the taxpayer. Taxing all people equally has very different consequences on a case-by-case basis, and as I’m sure my Act Utilitarian peers will agree, applying one broad rule to everyone, regardless of individual circumstances, results in inevitable injustice.

But what about Taxpayer B’s hard work?  What about keeping the value of one’s labor?  Many people who get wealthy in this country do so by providing some sort of service in return.  And furthermore, Taxpayer B is not directly responsible for Taxpayer A’s poverty.  So why shouldn’t he be able to keep what he earns?  This, of course, is where the moral calculus gets murky.  Inevitably, we will argue ourselves down to two fundamentally opposed moral principles which cannot be reconciled (assumedly having to do with Luck vs. Merit).  At that point, there’s little to do but shrug, shake hands, and then change the subject…at which point we might talk about the fact that Nickelback sucks, the fact that the Lions and the Bills are having an amazing season this year.

This inevitable moral impasse is why I’ve argued that Redistributionists should stop relying on moral arguments for Redistributionism, and start relying on the economic arguments.  As I said in October:

Progressives need to stop harping on the old “social justice” trope when making arguments for progressive taxation.  Supporters of progressive taxation have to be able to convince the average voter that redistributive tax schemes are actually good for the economy.  It’s not a new argument, but it’s not one that gets very much public face time.  I suspect this is because most Progressives don’t actually believe in their heart-of-hearts that taxing the rich is economically sound.  They just feel that the wealthy can afford to be taxed at far greater rates than the working class; i.e. they take a Consequentialist perspective.  And by itself, there’s nothing wrong with that.  But that perspective also tells us nothing about whether taxing the rich and redistributing their earnings to the working class via social service programs and robust government services is economically sound.

I think the best anecdotal evidence for this comes from a video posted by ThinkProgress:  at present, the 400 richest families in America have enough assets to pay off every single student loan in America, and still be left with $900 million in assets per household.  The distribution of wealth in America is so lop-sided that our wealthiest citizens could single-handedly end the coming student loan bubble before it bursts, and still have more left-over wealth per capita than most people can even imagine. 

Meanwhile, the resulting increase in aggregate demand that would inure from the release of millions of workers from debt liability would have demonstrably positive effects on the economy, given the fact that right now our biggest problem is that we’re severely over-leveraged, in both the public and private sector.  It follows that crafting a system that allows people to go to college without accumulating massive amounts of debt makes economic sense.  In fact, letting people go to college for virtually nothing makes the most sense.  If you don’t believe me, look at Sweden’s 4.6% economic growth rate and budget surplus.  University Tuition for Swedish nationals?  zero.

None of this means there aren’t better and worse ways to do redistribution.  I’ve been a pretty consistent advocate of abolishing the minimum wage and welfare benefits, and replacing them with a Guaranteed Minimum Income.  The money we’d save on gate-keeping and enforcement alone would be worth it.  And the confidence of knowing that you’ll always have enough to pay for basic needs would increase vocational mobility, which has well-recognized economic benefits.

So at the end of the day, I re-affirm my belief that Progressives can and should abandon the moral case for redistribution; it’s a distraction.  There are perfectly sound economic reasons for redistributive policies.  And the success of our Scandinavian cousins proves that it works.

See also:

The Nature of Money and the Incentive to Work

Rising Income Inequality Correlates Negatively With Economic Growth

J.S. Mill on the Distribution of Wealth

Redistribution: It Works!

Will Higher Taxes Tank The Economy?

Share of Wealth By Percentile Roughly Equivalent To Share Of Tax Burden In America

I have said before, though not on tumblr, that I have never seen a well-laid argument made against a reasonably progressive tax code, nor have I seen any data that indicates it is the crushing blow to business that is often claimed.  In fact, the opposite seems true in many countries.

corruptpolitics-deactivated2011

excerpt from The Myth of the “Culture of Poverty” by Paul Gorski

brute-squad:

MYTH: Poor people are unmotivated and have weak work ethics.

The Reality: Poor people do not have weaker work ethics or lower levels of motivation than wealthier people (Iversen & Farber, 1996; Wilson, 1997). Although poor people are often stereotyped as lazy, 83 percent of children from low-income families have at least one employed parent; close to 60 percent have at least one parent who works full-time and year-round (National Center for Children in Poverty, 2004). In fact, the severe shortage of living-wage jobs means that many poor adults must work two, three, or four jobs. According to the Economic Policy Institute (2002), poor working adults spend more hours working each week than their wealthier counterparts.

MYTH: Poor parents are uninvolved in their children’s learning, largely because they do not value education.

The Reality: Low-income parents hold the same attitudes about education that wealthy parents do (Compton-Lilly, 2003; Lareau & Horvat, 1999; Leichter, 1978). Low-income parents are less likely to attend school functions or volunteer in their children’s classrooms (National Center for Education Statistics, 2005) — not because they care less about education, but because they have less access to school involvement than their wealthier peers. They are more likely to work multiple jobs, to work evenings, to have jobs without paid leave, and to be unable to afford child care and public transportation. It might be said more accurately that schools that fail to take these considerations into account do not value the involvement of poor families as much as they value the involvement of other families.

MYTH: Poor people are linguistically deficient.

The Reality: All people, regardless of the languages and language varieties they speak, use a full continuum of language registers (Bomer, Dworin, May, & Semingson, 2008). What’s more, linguists have known for decades that all language varieties are highly structured with complex grammatical rules (Gee, 2004; Hess, 1974; Miller, Cho, & Bracey, 2005). What often are assumed to be deficient varieties of English — Appalachian varieties, perhaps, or what some refer to as Black English Vernacular — are no less sophisticated than so-called “standard English.”

MYTH: Poor people tend to abuse drugs and alcohol.

The Reality: Poor people are no more likely than their wealthier counterparts to abuse alcohol or drugs.Although drug sales are more visible in poor neighborhoods, drug use is equally distributed across poor, middle class, and wealthy communities (Saxe, Kadushin, Tighe, Rindskopf, & Beveridge, 2001). Chen, Sheth, Krejci, and Wallace (2003) found that alcohol consumption is significantly higher among upper middle class white high school students than among poor black high school students. Their finding supports a history of research showing that alcohol abuse is far more prevalent among wealthy people than among poor people (Diala, Muntaner, & Walrath, 2004; Galea, Ahern, Tracy, & Vlahov, 2007). In other words, considering alcohol and illicit drugs together, wealthy people are more likely than poor people to be substance abusers.

The Culture of Classism

The myth of a “culture of poverty” distracts us from a dangerous culture that does exist — the culture of classism. This culture continues to harden in our schools today. It leads the most well intentioned of us, like my friend Janet, into low expectations for low-income students. It makes teachers fear their most powerless pupils. And, worst of all, it diverts attention from what people in poverty do have in common:inequitable access to basic human rights.

Very interesting.  I am hesitant to put a big “I Agree” stamp on here because: 1.) I want to agree and 2.)  Each bullet seems based upon a single study, which I might add I am probably never going to read.

This is a common argument I hear from conservatives though, that the poor are poor because they deserve it or are too dumb and lazy to get anything done.  They point to the very rare and exceptional people who come from nothing to make tons of money.  Kudos to them, but there is a reason that they are rare and exceptional.

letterstomycountry

californiacornbread:

The economic theories we hold true today were ideas developed at the inception of modern capitalism. The failure to take modern science and environmental knowledge into account is a failure of human logic. While the foundations of our prevailing capitalist ideals are…