That's Not Fair!

Fairness matters:

If You Think Your Taxes Are Unjust, Just Think Again, by Kwame Anthony Appiah, Commentary, Washington Post: Is the U.S. tax code fair? That question is always in the air at this time of year... But how do we decide what's "fair"?

It's a trickier question than it appears at first. Over the past few decades, behavioral economists and social psychologists have shown that our sense of fairness is both powerful and easily manipulated.

In the 1970s, the Nobel Prize-winning economist Thomas Schelling used to put some questions to his students ... to show how people's ethical preferences on public policy can be turned around. Suppose, he said, that you were designing a tax code and wanted to provide a credit -- a rebate, in effect -- for couples with children. ... In a progressive tax system such as ours, we try to ease the burden on the less well off, so it might make sense to adjust the child credit accordingly. Would it be fair, do you think, to give poor parents a bigger credit than rich parents? Schelling's students were inclined to think so. ... It would certainly be unfair, they agreed, for richer families to get a bigger one.

Then Schelling asked his students to think about things in a different way. Instead of giving families with children a credit, you'd impose a surcharge on couples with no children. ... Would it be fair to make the childless rich pay a bigger surcharge than the childless poor? Schelling's students thought so.

But -- hang on a sec -- a bonus for those who have a child amounts to a penalty for those who don't have one. ... So when poor parents receive a smaller credit than rich ones, that is, in effect, the same as the childless poor paying a smaller surcharge than the childless rich. To many, the first deal sounds unfair and the second sounds fair -- but they're the very same tax scheme.

That's a little disturbing, isn't it? Especially if your judgments about social justice and taxation are central to your moral and political beliefs. Intuitions about fairness are some of the most basic moral sentiments we have -- arising, developmental psychologists tell us, soon after we're toddlers. Stanford psychologist William Damon has conducted studies in which he asked groups of children to make bracelets. Afterward, the group got a pile of candies as a reward and was told to divvy them up among themselves. From the age of 5 on, the arguments kids had about dividing the loot were all about what was truly "fair" -- equal amounts for everybody or more candy for more productive bracelet-makers?

One thing we know is that our sense of what's fair can be hard to reconcile with a "rational" assessment of costs and benefits. Not least in the realm of taxation, policymakers ignore the workings of moral psychology at their peril.

Consider the first major defeat of the Clinton presidency. In the spring of 1993, the administration proposed, and the House passed, the nation's first comprehensive energy tax, a BTU-based levy on fossil fuel consumption...

Surveys showed that most Americans were swiftly convinced that the tax was unfair because some people, such as truck drivers or farmers with their tractors, had no choice but to burn more fuel than others. When the president tried to assuage the noisiest opponents with a host of exemptions, he only made things worse. (What, special breaks for coal, natural gas and jet fuel? No fair!)

How, in the first Bush administration, did the movement to repeal the estate tax prevail? Not just because it was craftily renamed the "death tax." The number of Americans who told pollsters that they opposed the "death tax" was just a few percentage points higher than the number who said they opposed the "estate tax." As Yale scholars Michael Graetz and Ian Shapiro have shown, it mattered more that proponents of repeal made a moral argument (however specious): that the tax was unfair because, for one thing, it involved taxing earnings twice.

Defenders of the tax typically countered with an appeal to self-interest: But you're not paying it, because it applies to just 2 percent of households. They didn't quite grasp how powerful appeals to fairness are. In fact, when the barnstorming Teddy Roosevelt proposed the tax a century ago, he made the case for it precisely in terms of fairness: He talked about what the wealthy owe to a nation that made their success possible. ...

[O]nce you start thinking about how powerfully affected we are by our sense of fairness -- and about how powerfully that sense can be affected by the way issues are described to us -- it's hard to dodge the fact that whiffy moral rhetoric can have practical consequences when April 15 rolls around.

At some level, we're those kids with the candy bars. We may change our minds about what's truly just, but not about how much fairness matters. As faltering as our intuitions about fairness in public policy are, success comes to the politician who can enlist them effectively. It's not enough to craft good policies, you have to convince people that they're wise and just. ...

In case the example isn't clear, suppose that the second tax scheme described above, the one where there is a penalty for not having children, looks like this:

	0 Children	> 0 Children
Poor	Pay $10	No tax or credit
Rich	Pay $20	No tax of credit

Under this tax scheme, if a poor person moves from no children to having children, they gain (avoid a tax of) $10. But a rich person gains $20. So, in effect, the rich person is paid more for having children than the poor.

If we change it to the first example, that is no longer a problem:

	0 Children	> 0 Children
Poor	No tax or credit	Credit of $20
Rich	No tax or credit	Credit of $10

Now it's the opposite problem, it costs the poor $20 to go childless, but it only costs the rich $10.

Combining the two schemes could avoid this altogether so it doesn't have to come out this way, this example is only intended to show that the perception of fairness can be altered by how the question is framed. But I think this example arises because people have not thought through the problem and realized there is a contradiction of their equity principle (the rich should pay more than the poor) in each of the two proposed tax schemes. They wouldn't think of it as fair if they realized the contradiction from the start. If they were aware of the problems, and presented with a third alternative with no such contradiction, then this example would come out differently.

To show it's possible to avoid contradictions, consider:

	0 Children	> 0 Children
Poor	Pay $10	Credit of $20
Rich	Pay $15	Credit of $10

Now, within each column there is the desired equity - the rich always pay more than the poor (or get a smaller credit), and when moving from no children to having children, the poor gain $30 (avoid a tax of $10, get a credit of $20), while the rich only get $25 (avoid $15 in tax, get a credit of $10).

Thus, it seems like all that is going on here is that people did not thoroughly understand the equity consequences of the policies, and with only two options available, there was no possible way to avoid a contradiction (i.e., in the first two example above, there will either be a contradiction within a column, or from moving between columns).

But while I'm not so sure about the example, I want to sign onto the main message - the perception of fairness matters (a point I made here with respect to carbon taxes). Economists think mainly in terms of the efficiency properties of policy alternatives, and often forget the importance equity considerations in the actual implementation of public policy.

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[I've never liked what the editor did to my opening and closing in this piece, but here's an op-ed from almost exactly three years ago on this topic: Principles of Taxation.]

Comments

[anne]

http://www.nytimes.com/2006/02/16/international/africa/16appiah.html?ex=1297746000&en=363d1c2d0df3d2ef&ei=5090&partner=rssuserland&emc=rss

February 16, 2006

Peggy Appiah, Author Who Bridged Two Cultures
By NADINE BROZAN

Peggy Appiah, who as a daughter of a British chancellor of the exchequer defied the conventions of her time by marrying an Ashanti political leader and who went on to become an author and a revered figure in her adopted homeland, Ghana, died Saturday in Kumasi, Ghana. She was 84.

The cause was a heart attack at Akomfo Anokye Hospital, according to her son, the philosopher Kwame Anthony Appiah.

Reared in upper-crust Britain, the youngest of four children of Sir Stafford Cripps, a Labor party leader and cabinet officer in the Clement Attlee government (1945-51), Peggy Cripps caused an international sensation when she announced plans to marry in July 1953. Her fiancé was Joseph Emmanuel Appiah, who was in London as a law student and representative of Kwame Nkrumah, prime minister of the Gold Coast, the British colony that became Ghana in 1957.

Nkrumah was Ghana's first president, and Mr. Appiah was a close associate and his choice for vice president, until political differences led Nkrumah to imprison him several times.

The Appiahs are said to have been the inspiration, along with another African-British couple, Seretse Khama and Ruth Williams, for the 1967 film "Guess Who's Coming to Dinner," which dealt with a California couple's reaction to their daughter's engagement to a black doctor.

That view was lent support by Henry Louis Gates Jr., chairman of the department of African and African-American studies at Harvard, and a friend of Mr. Appiah's since their student days, who noted that it was a marriage of equals at the highest levels of their societies.

"She was to the manner born and he was an aristocrat related to the king of the Ashanti," Mr. Gates said in a telephone interview on Tuesday. "He was the John Adams of his country; its founding father with Kwame Nkrumah."

The couple met at a gathering of the West African Students Union, of which Mr. Appiah was president. From the start, Miss Cripps made it clear that she would not be intimidated by the firestorm of criticism the couple endured.

"If we experience any difficulties in mixing with Europeans, I shall throw in my lot with the colored people," she told The Sunday Express of London.

The marriage came to symbolize far more than the union of two individuals. Richard Weight, a British historian who is making a documentary about interracial marriage, said: "For a lot of people, it drew the line between those who thought Britain had an integrated postcolonial future and those who didn't. And it became an international story with particular resonance because it involved the daughter of a former chancellor."

Born in 1921, Enid Margaret Cripps, who used the name Peggy, was the youngest of four children of Sir Stafford and Lady Isobel Swithenbank Cripps. On her father's side she could trace her lineage back to William the Conqueror. She was reared at a rambling country house, Goodfellows, and spent much of World War II in Moscow, where her father served as ambassador. After the war, she went to Iran, where she worked for the British Army, which ran the railways.

She is survived by her son, the Laurance Rockefeller professor of philosophy at Princeton, who lives in Manhattan and Princeton, N.J., and three daughters, Isabel Endresen, an economist, of Windhoek, Namibia, Adwo Edun, a landscape gardener, of Lagos, Nigeria, and Abena Appiah of Kumasi; and eight grandchildren. Settling in Kumasi, the capital of the Ashanti people, shortly after her wedding, she shunned the traditional British — and Ghanaian— role of homemaker, even as she reared her children, served as helpmate to her husband, kept the family going when he was in prison and established several philanthropies.

"At one time there was an effort to deport her," said Henry Finder, editorial director of The New Yorker, who is Professor Appiah's companion. "She said the airport was a long way away and she would kick and scream every inch of the way. Fearful of the publicity that would engender, they backed down."

Known to many in Ghana as Auntie Peggy, Mrs. Appiah was a prolific writer of children's books, many of them based on the Ghanaian folk tales her husband told their children, as well as of novels, poetry and most recently a collection of 7,000 Ashanti proverbs, on which she collaborated with her son.

The book, published in English and Ashanti, had its origins in her collection of gold weights.

"She collected weights used for weighing gold but made of brass," Professor Appiah said. "Many of them had figurative art that came from proverbs. When a dealer came to the house, she would ask, 'What is the proverb?' and if he didn't know, she would eventually travel to the village to find out." ...

[anne]

http://www.nytimes.com/2008/02/03/books/review/Bloom-t.html

February 3, 2008

Morality Studies
By PAUL BLOOM

EXPERIMENTS IN ETHICS
By Kwame Anthony Appiah.

Imagine that you are standing next to a railway track and you see a runaway trolley, with nobody on board, heading toward a group of five people down the track. The only way to save these people is to throw a switch that will divert the train to another track. This will save the five, but unfortunately will kill another person standing on the second track. Now imagine the same runaway trolley and the same five people, but this time you are standing on a bridge above the track, next to a very large stranger. The only way to stop the trolley is to shove the man off the bridge and into the trolley's path, killing him but saving the five. (It won't help to jump yourself; you're too small to stop the trolley.) What is interesting is that both situations present the option of saving five by killing one, but most people respond to them differently. Most believe that you would be right to throw the switch, yet wrong to push the man. But why do we think this? And are we right to do so?

It used to be that the only people who had even heard of such dilemmas were professional philosophers, but now it seems as if everyone is doing trolleyology. Neuroscientists have used brain-imaging techniques to see which parts of the brain light up when people reason about such problems, and psychologists have conducted Web-based surveys to monitor the intuitions of hundreds of thousands of people from different countries and cultures. More generally, scientists around the world are exploring how we reason about right and wrong, looking not only at the usual pool of undergraduate volunteers but also at specialized populations like hunter-gatherers, children and psychopaths. And there is a rich body of theoretical work in behavioral economics and evolutionary psychology that attempts to explore the rationale behind our moral thoughts and feelings.

If I were a philosopher, I'd find this flattering but also a bit worrying, particularly since some of the scientists see their work as ultimately replacing traditional philosophy. For them, it is not a collaboration; it is a hostile takeover.

In the short and brilliant "Experiments in Ethics," the Princeton philosopher Kwame Anthony Appiah discusses this research and what it means for ethics. Appiah isn't worried at all. He starts by pointing out that philosophy has almost always had an experimental side. David Hume, for instance, was adamant that moral philosophy had to be grounded in facts about human nature, in psychology and history. Even Kant, among the most abstract and abstruse of scholars, mixed his moral philosophy with practical observations and suggestions, on topics including child raising ("games with balls are among the best for children"). The idea of philosophy as an isolated discipline, Appiah argues, is a relatively newfangled idea, and not a good one.

He sees it as obvious that studies of the way people think and act can never replace ethics. You don't solve moral problems with a show of hands. But he also believes that philosophers do need to take this research seriously. It would be a lousy moral philosophy that was inattentive to the facts about human capabilities. "What would be the point," he asks, "of norms that human beings were psychologically incapable of obeying?"

Many philosophers, for example, argue that doing good, and living a good life, consists of possessing virtues like honesty and kindness, and that a good society should aspire to cultivate these virtues in its citizens. But a large body of evidence suggests that these enduring character traits, to the extent that they even exist, may not play much of a role in moral action. Instead, our behavior is determined to a surprising extent by the situation.

Appiah points out that we are usually not conscious that this is happening. If you are standing outside a bakery with the smell of fresh bread in the air, one study showed, you are more likely to help a stranger than if you are standing outside a "neutral-smelling dry goods store." If someone drops some papers outside a phone booth, you will be more willing to help if you have just found a dime in the coin-return slot. If you read sentences with words like "honor" and "respect" you tend to be more polite, minutes later, than if you had read sentences with words like "obnoxious" and "bluntly." And then there are a host of well-known demonstrations, like the classic obedience experiments of Stanley Milgram, that you can get your average person to do terrible things, even to torture and murder, just by configuring the situation in a certain way.

This has implications for how we think of moral responsibility. Social psychologists argue, for instance, that the atrocities of wartime are usually not the acts of terrible people, but are instead what normal people do when put in a terrible situation. Talking about the genocide of the Tutsis in Rwanda in 1994, Appiah suggests that "if you or I had been planted on this earth as Hutus at that time and place, we too would probably have been participants." While I think this point is often somewhat overstated (after all, there are those who behave nobly regardless of where they are, as well as those who are monsters in the best of times), Appiah is probably right when he concludes that we should place less emphasis on "character education" and focus more on trying to establish situations in which people's better selves can flourish.

Appiah believes that experimental research has an even deeper connection to morality....

[robertdfeinman]

Mark Thoma:
I like your explanation, which just goes to show that many commentators actually have an ax to grind and set up examples to support their aims.

I'm specifically thinking of the inclusion of the estate tax issue where the description of what went on is completely misleading. The tax isn't "unfair", there is no double taxation, but there was a propaganda blitz by a handful of super wealthy individuals designed to mislead the public.

There is a report available on how this was accomplished:
Spending Millions to Save Billions (PDF)

The truism in the article is that the public can be manipulated when there is an effective disinformation campaign created to do this. If disinformation didn't work it wouldn't be so popular. We have seen it in everything from cigarettes to the threats posed by foreign states. Elsewhere it has been used as a justification for genocide. Appeals to "fairness" are just one weapon in the arsenal of propagandists.

The same trick is used by pollsters. One is presented with slanted choices and the results are then used to justify some policy or other: do you wish to be hung or shot?

[save_the_rustbelt]

Since a huge majority of Americans really do not know what is in the tax code, beyond the areas immediately relevant to their own situation, it is easy for any one of many sides and interest to mislead the public.

"Fair" is one of the reasons (not the only reason) we have a tax system that few could comprehend even if they had the time and tried.

[peterbob]

In a progressive tax system such as ours, we try to ease the burden on the less well off, so it might make sense to adjust the child credit accordingly.

This really confuses two important goals of tax policy. The first is equity considerations, which often results in progressive taxation. This means that the rich pay more in taxes, especially as a percent of income. If you want to be progressive, then do it with income taxes and rising average tax rates.

The second goal of tax policy is to encourage specific activities, such as reduced usage of fossil fuels and a carbon tax. To accomplish that, you tax the activity to discourage it. If you want to encourage population growth, then you give tax breaks for children.

But I don't see why you would give greater tax breaks to the poor compared to the rich for having children (again, if you want to tax the poor less, then do it with marginal tax rates, not deductions for children). In fact, you could really argue that the rich should get bigger tax breaks for having children. For one thing, the rich pay a lot more for rearing children than the poor, and it would be more "fair" to reimburse them for it.

Second, economic growth may be higher when the rich have more children as opposed to the poor. I know that I may get roasted for saying this, but Greg Clark's book "A farewell to alms" suggests that the Industrial Revolution happened in Britain because the British upper class had relatively more children, and this led to more savings, investment, and GDP growth.

So, rich kids may be better in the long run for the economy than poor kids. Does that sound fair?

[Icarus]

Plus, don't we want to discourage the poor from having children?

[Fair]

It is certainly not fair to tax away the inflation adjust portion of interest and capital gains, since they are not real gain. It is also not fair to heavily tax the less well off with various hidden taxes.

[eightnine2718281828mu5]

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It is certainly not fair to tax away the inflation adjust portion of interest and capital gains, since they are not real gain.
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If a janitor gets a cost-of-living increase to keep up with inflation, his taxes shouldn't go up either.

But the think-tanks and capital-gains lobbyists don't issue many position papers crying about it.

[eightnine2718281828mu5]

If you believe in income mobility, there is no such thing as 'unfair' progressivity; you pay less when you're young and working your way up the ladder, and you pay more when you're older and more successful, so it all balances out.

[gc]

Didn't you remark some time a while ago on a monkey study where two monkeys worked side by side, doing fine when each received something ok like a cheerio, but when the one getting a cheerio saw the other get a better reward, a grape, the one paid with a cheerio stopped working? There seems more prospect for understanding fair by watching monkeys than by looking at the tax code, and it doesn't seem like there is going to be a hard and fast answer.

[wogie]

I know little about taxation, but the rationale of "Fair" laid out here sounds very much like the old "from each according to ability; to each according to need" slogan of socialism. If that is what it is, why don't we call it that. Exemptions,tax credits for education, mortgage insurance, etc. Certainly, the unmarried, never mind the chlidless, carry a consistently higher tax burden than the married with children -- yet they consume fewer resources. So, why mask it with the terms like progressive taxation?

[eightnine2718281828mu5]

---
but when the one getting a cheerio saw the other get a better reward, a grape, the one paid with a cheerio stopped working?
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Lucky for him his species hasn't evolved sufficiently to invent the Pinkertons.

But this behavior explains why salaries are treated as trade secrets at most large institutions, and this information asymmetry gives companies a decisive advantage when it comes to salary negotiations.

Free-marketers should be calling for public disclosure of salaries since it's such a critical economic signal; keeping it secret produces a sub-optimum labor allocation.

[eightnine2718281828mu5]

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Exemptions,tax credits for education, mortgage insurance, etc.
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Corporations consume lots of resources too.

Why does IBM get to write off meals, shelter, transportation, utilities, insurance, etc., while its employees cannot?

[wogie]

eightnine2718281828mu5

Not the same issue as the personal progressive income tax and its unequal treatment depending on marital and family status. One could say it supports lower prices than otherwise would be the case, fostering output. Perhaps a better point would be why lower capital gains tax, but there are arguments for that too.

[donna]

I think "fair" would be to let the poor use the tax lawyers of the rich, and get the tax breaks they do, while the rich have to use H%R Block or figure out their own taxes, and get no tax breaks.....

[eightnine2718281828mu5]

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One could say it supports lower prices than otherwise would be the case, fostering output.
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By the same token, lowering taxes on labor provides additional incentives to work, also fostering output.

[wogie]

eightnine2718281828mu5

"By the same token, lowering taxes on labor provides additional incentives to work, also fostering output"

Not necessarily. I had a prof who was on the War Production Board in WWII. They determined their was a pool of labor, mostly farm wives, in southern Illinois. So, they built a plant an offered top wages to attrct their labor. They had a lot of absentyism and determined the employees felt they only needed so much money and traded off more for time off. The solution -- they cut the wages, employees worked full time and production increased

[eightnine2718281828mu5]

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The solution -- they cut the wages, employees worked full time and production increased
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It's a great idea! Cormorant fisherman do this too; they 'tax' the cormorant at a 90% rate and only allow the birds to eat one out of every ten fish they catch.

So apparently we should tax the bejeesus out of CEO's, and force these highly talented captains of industry to manage ten companies just to make a subsistence living.