This essay started as a short post responding to an article by Greg Mankiw and grew longer than I expected, so to avoid cluttering the blog I switched formats. As you might guess from the potpourri in the title, the essay is intended to be readable by a broad audience. The portions which discuss the use or misuse of economic theory in the tax debate are, it is my fond hope, of interest to economists and accessible to non-economists, as is Mankiw’s article. I began this last week, so it doesn’t refer directly to this week’s big news of the Great Tax Compromise of 2010, but the ongoing negotiations were a major motivation.
Here's the introduction to the essay:
Fairness and Tax Policy -- a response to Mankiw's proposed "Just Deserts", by Jonathan Weinstein, Kellogg School of Management, Northwestern University: I recently came across an address by Greg Mankiw, "Spreading the Wealth Around: Reflections Inspired by Joe the Plumber." With the famous exchange between Samuel "Joe" Wurzelbacher and Barack Obama as his launching point, Mankiw suggests that the utilitarian framework1 commonly used by economists to analyze optimal taxation conflicts with moral intuition. Mankiw argues, and I agree, that most people believe that taxation should be decided by principles of fairness: the pay people keep should be proportional to their contribution to society. He calls this "Just Deserts2 Theory." He makes a very good point this far, but I must debate some implications he draws. In fact, I believe Mankiw has identified the strength of conservative rhetoric in the public debate on tax policy, and given one answer to "What's the matter with Kansas?", i.e. why the working class vote against their own interests. Conservatives have successfully caricatured the progressive position as placing value on equality of outcomes for its own sake, and this is a value which most Americans find distasteful.
In fact, I think life in a world with equality of outcomes is fundamentally unappealing; the struggle to do better, and to be recognized fairly for achievement and productivity, is a basic human drive we would not want to lose. This is why, when conservatives convince the public of Mankiw's basic position that the free market is the ideal, perfectly fair arbiter of Just Deserts, they win broad support for their policies, even when these policies favor the few over the many. Just as serfs once accepted that their position was allotted to them by a divine order, today's growing inequality in wealth is considered acceptable if it is the outcome decreed by the ideal, uncorrupted free market. Progressives must make it clear that they support the premise of fair compensation for the contributions of each individual, but dispute the notion that fairness is best achieved by an extreme laissez-faire version of capitalism. I'll start with some verbal arguments, then, on a slightly more technical level, will point out the flaws in Mankiw's applications of classic economic theorems before suggesting a different formal approach to fairness.
Mankiw's concluding sentence (which he is careful to qualify with "it is very possible") implies that Obama comes to his tax policy by utilitarian considerations while Joe's are based on fairness. While Mankiw is fair enough to briefly acknowledge that one could make a Just Deserts case for progressive taxation, his main argument is that fairness would favor Joe the Plumber's preferred (less progressive) tax plan over Obama's. Let's look at these claims. ...[continue reading]...