« links for 2008-04-13 | Main | Savings Glut or Investment Drought? »

Sunday, April 13, 2008

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.

[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.]

    Posted by on Sunday, April 13, 2008 at 10:27 AM in Economics, Taxes | Permalink  TrackBack (0)  Comments (18)


    TrackBack URL for this entry:

    Listed below are links to weblogs that reference That's Not Fair!:


    Feed You can follow this conversation by subscribing to the comment feed for this post.