Fairness of U.S. tax system


K

Kevin

In rec.arts.sf.composition David Friedman said:
And the top ten percent pay a rate of about 18.8%, and the top 1% about
23%. I think those are closer to her "the rich" than the top quarter.
I don't know exactly how she defines "the rich." Obviously
any sharp cutoff will be arbitrary. My point is that if, for
whatever reason, the top quartile pays a true average tax rate
equal to the overall average tax rate, then the rates do indeed
fail to be graduated in practice.

To begin with, as I pointed out earlier in the thread--perhaps before
you joined it--Ron Paul is running for a federal office, so state taxes
aren't relevant to the question of what he intends to do about fairness
or unfairness.
True enough as far as it goes. But Crowfoot was raising a
larger issue, and the larger issue is an important one. State and
local taxes are part of the overall system, and if they're not fair
then the overall system is not fair.

There are some further complications that I have omitted. For one thing,
there is the employer's half of the payroll taxes. The split between
employee half and employer half is fake--if you work through the
economics what matters is the total. But how that total is really
divided between employer and employee is complicated.
It's a pretty important complication. In addition to the
payroll tax of 7.65% paid by the employee, there is an additional
7.65% paid by the employer, for a total of 15.3%. As far as I can
tell, there is a broad consensus that the portion paid by the employer
is mostly passed on to the employee. For example, the following
sources agree on that point: http://www.mises.org/story/1350 and
http://www.urban.org/UploadedPDF/1001065_Tax_Units.pdf , even
though they come from organizations with very different political
orientations.
This will vastly alter the numbers. Let us start with the
income-tax figures at
http://www.taxfoundation.org/news/show/22652.htm and then add a
rough estimate for payroll tax. I will only take full-time
wage-earners into account, so that when I write e.g. "top 50%" I am
referring to full-time wage-earners in the top 50% of adjusted
gross income. The question will be whether true progressivity
exists among this large subset of the population.
I will take an estimated effective payroll tax on employees of
13% up to an AGI of $100,000/yr, which by coincidence happens to be
very close to the cutoff for the highest-income tenth of the
population. The results are as follows:


Total Income Income Payroll Total
AGI taxes tax rate tax rate tax rate

Top 1% 1.591 0.368 23.1 4 27.1
5%-1% 1.092 0.189 17.3 7 24.3
10%-5% 0.804 0.100 12.4 11 23.4
25%-10% 1.582 0.146 9.22 13 22.2
50%-25% 1.475 0.103 6.98 13 20.0
Bottm50% 0.963 0.028 2.91 13 15.9


where the first column is in trillions of dollars. "5%-1%" refers
to taxpayers who are in the top 5% but not in the top 1%, and so
on. The fourth column is my estimate as discussed above.
The total tax rate shown above does still increase for higher
income levels. But it doesn't increase very fast. It seems
possible to me that, after taking everything into consideration, it
won't increase at all. In other words, it seems possible that the
total tax structure isn't progressive at all.
Among the other factors that need to be taken into
consideration:

1) Number of wage-earners per household. This may vary significantly
between income levels. If there are more wage-earners per household
at the lower levels, then their payroll tax burden will be increased.
2) At the higher income levels, much more income is in forms other than
wages subject to payroll tax. The payroll tax rate estimates of "4"
and "7" above may be overestimates.
3) I suspect that higher-income workers have a bit less of the
employer's share of the payroll tax passed on to them.
4) Sales taxes. Lower income levels may wind up paying a higher total
rate, though I agree the difference is unlikely to be very large.
5) There are numerous legal and extralegal tax dodges, as Crowfoot was
so emphatic about. Taxpayers at the higher levels are likely to make
much more vigorous use of these.

I will agree that the rich almost certainly do pay a higher
total rate than the working poor. The real question in my mind is
whether they pay a higher rate than the middle class, and whether
the upper middle class pays a higher rate than the lower middle
class.
And I should emphasize that I am not being dogmatic. For all
I know, you are right and the overall tax structure really is
progressive at all income levels. I just haven't seen any firm
evidence of it.

I asked her what she meant--whether she was talking about percentage of
income, or whether she had some other standard. I don't believe she ever
answered that question. The problem with "what they ought to pay" is
that it can mean anything, so the assertion stops being a factual one at
all.
I don't understand your point above. Normative statements are
_never_ purely factual. They are perfectly meaningful
nevertheless. There is just a need to explain the standards on
which the statement rests.

(Crowfoot)
I think the clear implication was that she thought the rich paid a lower
share of their income--not that they didn't pay as much higher as she
thinks they ought to. You will note that she didn't say "yes they pay
more than proportionally more, but ... " in response to my post.
That implication is simply not clear to me. I'll leave it at
that.

Not unless you are willing to offer some definition of what a fair
burden is. Crowfoot claimed to be making a statement about the tax
system, not about her own preferences.
I believe she was making a statement about the tax system in
light of her own preferences. And that is a perfectly reasonable
sort of statement to make.

150,000 gets you to about the top 5%, who are paying about 20% (federal
income tax). $30,000 is about the cutoff for the bottom 50%, who are
paying about 3% (ditto). Putting in employee payroll taxes gets that to
about 10.65% and 25%, allowing for the higher income people getting
above the cutoff.
This post already has enough number-crunching, so I will just
point out that those making $30,000 a year will certainly pay
higher income taxes than the aggregate of all those making less
than that.

But since you have taken it up, tell me--how would you decide what was
fair? I can imagine an argument for saying everyone should end up with
the same income. I can see an argument for saying that people should pay
taxes roughly proportioned to benefits received from government--which I
think would result in rich people paying a larger amount but a smaller
proportion than poor. Other than those, on what principle would you base
the rule that led you to conclude that what we have now is "in the
definitely unfair area?"
My starting point is that we should be concerned about the
well-being of the individuals in society. I don't assume that
well-being can be either precisely defined or precisely measured.
It may be the same thing as happiness (i.e., utilitarianism) or it
may be something broader. I do assume that we have a rough
intuitive idea of what it is, and that we can treat it as roughly
quantifiable. We may then ask how well-being depends on income.
My answer is that at low income levels, well-being is a
sharply rising function of income, and then it flattens out at
higher levels. I don't think this should be terribly controversial.
I base my answer on my own personal experience and on what I have
observed about the behavior of others. For what it's worth, it
also seems to be supported by survey data in which people are asked
about the quality of their lives. (That sort of research is
covered by Richard Layard, _Happiness_ and Daniel Gilbert,
_Stumbling on Happiness_.)
It follows that taxes should be very heavily concentrated
towards the top of the income range. Not only are the rich most
able to pay, but they are also the least discomforted by having to
pay. Suppose you have one person who makes $300,000/yr and ten
people who each make $30,000/yr. Let's say you want to obtain
$60,000 in tax revenue from this group. You could get it _all_
from the one rich individual. Or you could get $60,000-x from the
rich individual and get $0.1x from each of the other ten
individuals. Raising x will improve the well-being of the rich
individual by only a tiny amount, while it will produce a
significant detriment to the well-being of _each_ member of a
larger group.
In short, if the rich are less burdened by a 30% tax rate than
the poor are burdened by a 10% tax rate, then fairness calls for
the rich to pay the higher rate.
There are, of course, plenty of other considerations that
should go into tax policy. You have to worry about incentives for
investment and productivity, the danger of encouraging fraud
further, etc. If not for those other considerations, I would
support a quite steep tax regime indeed--with maybe only income
above $125,000 or so taxable, and that at a high marginal rate.
I don't claim to be an expert on tax policy. I don't know
what _the_ ideal system would be like. The reason I think our
current system definitely needs to be changed is that over the past
twenty years or so, the well-off (roughly the top 5% or 10%) have
done extremely well, while incomes at lower levels have stagnated.
This trend has been well documented. A modest increase in rates on
a relatively small number of taxpayers who can well afford it would
allow tax relief for a much larger section of the population.


Kevin Nelson
 
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P

Paul Thomas, CPA

Kevin said:
It's a pretty important complication. In addition to
the payroll tax of 7.65% paid by the employee,
there is an additional 7.65% paid by the employer,
for a total of 15.3%. As far as I can tell, there is
a broad consensus that the portion paid by the
employer is mostly passed on to the employee.




It's not "passed on", but an employer looks at a total cost picture for
their employee. Gross wages, matching and other payroll taxes, workers
comp, insurance and other benefits, training and other work related costs,
etc and so on based on the specifics of the employer and job position.

So the employee decides on what *total costs* they are willing to pay for
the extra help. From there it's a matter of the job posting, interviews and
offers.
 
D

David Friedman

There are some further complications that I have omitted. For one thing,
there is the employer's half of the payroll taxes. The split between
employee half and employer half is fake--if you work through the
economics what matters is the total. But how that total is really
divided between employer and employee is complicated.
It's a pretty important complication. In addition to the
payroll tax of 7.65% paid by the employee, there is an additional
7.65% paid by the employer, for a total of 15.3%. As far as I can
tell, there is a broad consensus that the portion paid by the employer
is mostly passed on to the employee. For example, the following
sources agree on that point: http://www.mises.org/story/1350 and
http://www.urban.org/UploadedPDF/1001065_Tax_Units.pdf , even
though they come from organizations with very different political
orientations.[/QUOTE]

That's the wrong way to think of it. The consensus--I would be reluctant
to describe anyone who disagreed as an economist--is that the split
between the two portions is irrelevant to the effect of the tax. The
actual burden on employer and employee depends on the total of the two
and the elasticity of supply and demand for labor, which will be
different for different sorts of labor.

Reading the Mises Institute piece, I don't think it is taking a position
on how much of the payroll tax is passed on to the employee, merely on
the fact that it is a tax which someone is paying and so should be
included in the cost of social security. The article isn't about
distributional effects.

Calculating actual tax burdens would be the right way of looking at the
question, but it's much more complicated than your discussion assumes,
because it isn't limited to the payroll tax. Consider the corporate
income tax, another significant source of revenue. It can't be actually
paid by corporations, because corporations don't have any consumption to
reduce--they are merely a convenient legal fiction. It's actually paid,
in some complicated way, by consumers in higher prices, investors in
lower return on their capital, workers in lower wages. Similarly for
property taxes.
This will vastly alter the numbers. Let us start with the
income-tax figures at
http://www.taxfoundation.org/news/show/22652.htm and then add a
rough estimate for payroll tax. I will only take full-time
wage-earners into account, so that when I write e.g. "top 50%" I am
referring to full-time wage-earners in the top 50% of adjusted
gross income. The question will be whether true progressivity
exists among this large subset of the population.
I don't think that is the question. And putting it that way biases the
answer, because payroll taxes have an upper limit, so they affect
progressivity within the top fifty percent but not within the bottom
fifty percent, or even (roughly) the bottom 90%. The original claim, as
I interpreted it, was that rich people paid a smaller fraction of their
income as taxes than poor people, not that rich people didn't pay a much
larger fraction than middle income people.
I will take an estimated effective payroll tax on employees of
13% up to an AGI of $100,000/yr, which by coincidence happens to be
very close to the cutoff for the highest-income tenth of the
population. The results are as follows:


Total Income Income Payroll Total
AGI taxes tax rate tax rate tax rate

Top 1% 1.591 0.368 23.1 4 27.1
5%-1% 1.092 0.189 17.3 7 24.3
10%-5% 0.804 0.100 12.4 11 23.4
25%-10% 1.582 0.146 9.22 13 22.2
50%-25% 1.475 0.103 6.98 13 20.0
Bottm50% 0.963 0.028 2.91 13 15.9


where the first column is in trillions of dollars. "5%-1%" refers
to taxpayers who are in the top 5% but not in the top 1%, and so
on. The fourth column is my estimate as discussed above.
The total tax rate shown above does still increase for higher
income levels. But it doesn't increase very fast. It seems
possible to me that, after taking everything into consideration, it
won't increase at all. In other words, it seems possible that the
total tax structure isn't progressive at all.
Or in other words, you agree that your calculations show the tax
structure to be progressive rather than regressive, you have no data to
lead to the opposite conclusion, and your only claim is that you can
imagine causes, most of which could go either direction, which could
conceivably change the conclusions. That's indeed possible, but I don't
think it qualifies as a defense of Crowfoot's original claim.
Among the other factors that need to be taken into
consideration:

1) Number of wage-earners per household. This may vary significantly
between income levels. If there are more wage-earners per household
at the lower levels, then their payroll tax burden will be increased.
2) At the higher income levels, much more income is in forms other than
wages subject to payroll tax. The payroll tax rate estimates of "4"
and "7" above may be overestimates.
3) I suspect that higher-income workers have a bit less of the
employer's share of the payroll tax passed on to them.
Why? Do you think supply of labor is more elastic at higher or low wage
levels, and why? What about demand?
4) Sales taxes. Lower income levels may wind up paying a higher total
rate, though I agree the difference is unlikely to be very large.
And could go either direction, given that some things are exempt. My
guess is that the result is mildly regressive on income but not on
consumption, but I don't know.
5) There are numerous legal and extralegal tax dodges, as Crowfoot was
so emphatic about. Taxpayers at the higher levels are likely to make
much more vigorous use of these.
A few points you are omitting.

1. Payroll taxes are a better deal if you work fewer years, since you
can get the full return in Social Security with considerably less than a
lifetime worth of wages. This probably favors both the welfare poor--I'm
thinking of people who do work, but on and off--and the professional
classes (who start work later because of longer education) over the
working poor.

2. You have omitted state income taxes, which are graduated, and so may
more than balance the mildly regressive effect of state sales taxes,
assuming it exists.

3. A good deal of the "loopholes" consist of paying the tax to a state
or locality instead of to the federal government, by investing in tax
exempt securities--which pay a lower return than taxable securities. In
that case, the tax paid by the upper income people, who are the ones for
whom it pays to invest in tax exempts, is actually more than the figures
we have been using show, meaning that the structure in that regard is
more graduated than you calculated, not less. It makes no sense to count
employer taxes passed on to employees as lower wages but not count the
implicit tax in owning tax exempt securities, passed on as a lower
return.

....
My starting point is that we should be concerned about the
well-being of the individuals in society. I don't assume that
well-being can be either precisely defined or precisely measured.
It may be the same thing as happiness (i.e., utilitarianism) or it
may be something broader. I do assume that we have a rough
intuitive idea of what it is, and that we can treat it as roughly
quantifiable. We may then ask how well-being depends on income.
If your objective is utilitarianism or something similar, I don't think
you ought to be using the word "fair," since that isn't what
utilitarianism is about. Consider the case of a utility monster--someone
who is much better than the rest of us at converting income into
happiness. Utilitarianism implies that we should give that person much
more than his share of income, resulting in much much more than his
share of happiness. It may be a defensible position, but it has nothing
to do with fairness.

(Standard utilitarian argument for redistribution based on declining
marginal utility of income omitted)

There are number of problems with this argument.

1. It relies on the implicit assumption that everyone has the same
utility function, so that differences in income are entirely due to
differences in ability to earn money, inheritance, and the like. That's
surely an exaggeration--given equal opportunities, people who value
material goods more will be more willing to sacrifice other things, such
as leisure, to get them. If we reverse the assumption and assume that
all differences in income are due to different utility functions, we
also reverse the conclusion--with only a little effort you can show that
higher income people then have higher marginal utility for income, not
lower.

In reality, both factors come in, so while my guess is that the
conventional conclusion--declining MU of income--is correct, it's less
clearly correct than usually assumed.

2. You are ignoring at this point (but in some form bring back in later)
the whole question of excess burden--the difference between amount
collected and cost to taxpayer. To see the most obvious case, imagine a
tax rate so high that it results in the taxpayer quitting his job and
living on his savings. That imposes a high cost on the taxpayer but
collects no revenue. Real taxes have a similar but smaller effect.

It's fairly straightforward to show that excess burden per dollar
collected tends to increase with the tax rate--I can point you at a
chapter in my webbed price theory text that works out the argument in a
simple case. So it isn't a question of collecting a dollar from a middle
income person at a cost of a dollar or doing the same from a high income
person. It's more like a dollar at a cost of two dollars from the middle
income, at a cost of three dollars from the high (actual numbers
invented--the point is only the difference in effect).

3. Your attempt to put the argument in terms of fairness ignores the
fact that declining MU of income, if true, holds on the receiving end as
well as the paying end. The clearest case is a tax for a monetary
benefit, such as social security. The rich person may value the dollars
he pays at less than the poor person does, but he also values the
dollars he receives at less, so making him pay more but receive the same
amount is, on your own implicit standard--utility instead of
dollars--unfair. From the standpoint of fairness, the payroll tax, which
you brought in to make the system less progressive, is actually unfair
to the richer. That's complicated by actuarial considerations--rich
people live longer to collect--but as best I can tell is still true on
net.

4. You are missing the fact that complications in the system introduce
serious costs of two different sorts. The first is rent seeking--people
spending resources trying to either change the system or game the system
in their favor. The second is an increase in the informational problem
faced by voters. With a progressive tax, and especially a complicated
one--from this standpoint, whether the real incidence is progressive or
not is almost irrelevant--politicians can get programs whose cost is
much larger than their benefit passed by persuading the voters that
someone else will pay for them. You can see this tactic pretty routinely
in political speeches, especially at the moment. One advantage of a flat
rate tax or something similar is that it eliminates this tactic.

Note, for instance, that the whole point of the division of Social
Security payments between employee and employer is to make social
security look like a better deal than it really is--i.e. to hide the
real cost.

....
In short, if the rich are less burdened by a 30% tax rate than
the poor are burdened by a 10% tax rate, then fairness calls for
the rich to pay the higher rate.
So your definition of fairness is not utility maximization but something
like equal total disutility of taxation across taxpayers. That at least
provides a better justification for the term "fairness." But if that is
your argument, I think you are making a simple mathematical mistake.

Consider two people, one making $40,000 and one $80,000. Suppose the
marginal utility of income is 2 utiles/$ for the former and 1 utile/$
for the latter, consistent with your belief in declining marginal
utility of income. Consider a flat rate tax at 10%. The poorer taxpayer
is paying $4000 and sacrificing 8000 utiles ($4000x2 utiles/$). The
richer is paying $8000 and also sacrificing 8000 utiles
($8000x1utile/$). Hence, for those numbers, a flat rate tax would, by
your definition, be fair,and a progressive tax unfair, since the latter
would lead to the richer taxpayer bearing a larger utility burden.

Or in other words, I think you have confused a flat rate tax with a lump
sum tax--forgotten that even under a flat rate, the richer taxpayer pays
more dollars, which balances the assumed lower marginal utility of
dollars. In order to get the conclusion you want you need not merely
declining marginal utility of income, but some reason to believe that
MUI falls faster than 1/Income.

So your conclusion doesn't follow from your premise--equal utility
burden plus declining marginal utility is consistent with regressive,
flat rate or progressive taxation, depending on the details of the
utility function.

But it's an interesting premise anyway--the question is why you think it
is true. Why should everyone pay the same utility price to support the
U.S. government?

To take the obvious extreme case, you surely don't believe that the
citizens of (say) Canada or India should bear their share of the
disutility of supporting the US government. So why should everyone in
the US bear an equal share? If person A can contribute much more to the
support of the US for a given utility cost than person B, thus
conferring much greater benefit on other citizens (supposing that the
government provides net benefits, which you presumably believe), why is
it fair for him to do be required to do so? Why, in other words, is
fairness judged only by utility cost to the payer and not by utility
gain to the payee?

Consider a two person version. You offer to pay me to mow your lawn. I
argue that your disutility from the payment should equal my disutility
from the lawn mowing; since you are much richer than I am, that implies
paying me $100/hour. Do you find that persuasive? I think if you work
through that case, with the not unreasonable assumption that the utility
cost of an hour of effort is roughly the same for rich and poor, you
will notice that the transaction gives me a much larger utility gain
than it does you.

In any case, thanks for making this a more interesting discussion than
the previous segment.
 
M

Michael R N Dolbear

(removed one NG)
4. You are missing the fact that complications in the system introduce
serious costs of two different sorts. The first is rent seeking--people
spending resources trying to either change the system or game the system
in their favor. The second is an increase in the informational problem
faced by voters. With a progressive tax, and especially a complicated
one--from this standpoint, whether the real incidence is progressive or
not is almost irrelevant--politicians can get programs whose cost is
much larger than their benefit passed by persuading the voters that
someone else will pay for them. You can see this tactic pretty routinely
in political speeches, especially at the moment. One advantage of a flat
rate tax or something similar is that it eliminates this tactic.
Thanks David.

An early example of this was the British Liberal party slogan that sold
a worker health payroll tax about 1910 "Ninepence for fourpence" (9d
for 4d).
 
K

Kevin

In rec.arts.sf.composition David Friedman said:
Reading the Mises Institute piece, I don't think it is taking a position
on how much of the payroll tax is passed on to the employee, merely on
the fact that it is a tax which someone is paying and so should be
included in the cost of social security. The article isn't about
distributional effects.
It looks to me like that article takes a very definite position.
Speaking of 7.65% versus 15.3%, it says: "Since your employer is
paying the tax on your behalf, it certainly is reasonable to include
the higher figure....Anyone who doubts that the tax is actually
15.30%, who believes tall stories of our leviathan loving pols and
administrators who never have a bad word for this system, is invited
to speak with the average independent contractor." As an independent
contractor myself, I can testify that the self-employed are indeed hit
with the full rate.

Calculating actual tax burdens would be the right way of looking at the
question, but it's much more complicated than your discussion assumes,
because it isn't limited to the payroll tax. Consider the corporate
income tax, another significant source of revenue. It can't be actually
paid by corporations, because corporations don't have any consumption to
reduce--they are merely a convenient legal fiction. It's actually paid,
in some complicated way, by consumers in higher prices, investors in
lower return on their capital, workers in lower wages. Similarly for
property taxes.
And it is at least conceivable that it is lower-income workers
and consumers who wind up bearing the brunt of the burden. I can't
find a cite, but I've heard suggestions that such is the case. In any
case, corporate income taxes are now a rather small slice of federal
revenue.

I don't think that is the question. And putting it that way biases the
answer, because payroll taxes have an upper limit, so they affect
progressivity within the top fifty percent but not within the bottom
fifty percent, or even (roughly) the bottom 90%. The original claim, as
I interpreted it, was that rich people paid a smaller fraction of their
income as taxes than poor people, not that rich people didn't pay a much
larger fraction than middle income people.
I had a different interpretation of the original claim. But
regardless of what _the_ question was that started this discussion, I
submit that _an_ important question is now at issue.
I'm not sure what you mean by "bias." I am trying to take into
account all aspects of the tax system. That is a very difficult task,
and I wouldn't dream of claiming I have all the answers. But the
existence of the upper-income limit on payroll taxes is a significant
aspect of the current system, so taking it into account hardly seems
to constitute bias.

Or in other words, you agree that your calculations show the tax
structure to be progressive rather than regressive, you have no data to
lead to the opposite conclusion, and your only claim is that you can
imagine causes, most of which could go either direction, which could
conceivably change the conclusions. That's indeed possible, but I don't
think it qualifies as a defense of Crowfoot's original claim.
It's clear that we have different interpretations of what
Crowfoot was saying but what really sparked my interest was the
following categorical assertion you made in response to her: "The
existence of loopholes means that taxes are less graduated in practice
than on paper--they don't mean that they aren't graduated in
practice." Are you now acknowledging that might not be the case? Or
are you at least acknowledging that _most_ of the graduations visible
in the federal income tax might be entirely erased when the total tax
burden and all loopholes are taken into account?
Crowfoot was certainly not claiming that the rich and the middle
class both used loopholes to get their tax rate below that paid by the
poor. Her focus was on the loopholes used by the rich. If there is a
lack of progressivity in a broad range that includes the middle class
and the rich, then I would take that as a vindication of her claim.

Why? Do you think supply of labor is more elastic at higher or low wage
levels, and why? What about demand?
It's merely a suspicion. Higher-paying jobs require more
training; if they start paying somewhat less, then it seems likely
that fewer people will go through the often lengthy training required.
If jobs at the lower end start paying less, on the other hand,
unskilled workers will have few other options and are more likely to
continue working at those jobs. So the employers of low-income
workers will find it easier to pass on their share of the payroll tax.
I suppose this amounts to the supply of labor being more elastic
for employment categories at high wage levels. As for demand, I don't
know.

2. You have omitted state income taxes, which are graduated, and so may
more than balance the mildly regressive effect of state sales taxes,
assuming it exists.
State income taxes generally do try to give a break to the poor,
but my impression (slightly confirmed by cursory googling) is that
once you get into the middle-class range they are much less
progressive than the federal income tax. Individual states, I am
guessing, are worried about driving the rich out, while the federal
government is less worried about driving the rich out of the country
altogether.

3. A good deal of the "loopholes" consist of paying the tax to a state
or locality instead of to the federal government, by investing in tax
exempt securities--which pay a lower return than taxable securities. In ...
more graduated than you calculated, not less. It makes no sense to count
employer taxes passed on to employees as lower wages but not count the
implicit tax in owning tax exempt securities, passed on as a lower
return.
A fair enough point. I acknowledge uncertainty about the overall
progressivity of the tax system; I'd just like you to also acknowledge
uncertainty about it.

If your objective is utilitarianism or something similar, I don't think
you ought to be using the word "fair," since that isn't what
utilitarianism is about. Consider the case of a utility monster--someone
who is much better than the rest of us at converting income into
happiness. Utilitarianism implies that we should give that person much
more than his share of income, resulting in much much more than his
share of happiness. It may be a defensible position, but it has nothing
to do with fairness.
First of all, what I am arguing for is similar to utilitarianism
only in a very broad sense. (Though utilitarianism will hold as a
special case of it.) I am allowing a variety of conceptions of
well-being, which is why I stayed away from the word "utility." For a
utilitarian, things like virtue, understanding, etc. are not valuable
in themselves, but only insofar as they promote happiness. But even
if you do value those things in and of themselves, my argument will be
valid so long as those other elements of well-being are less dependent
on income at higher income levels.
I also allow that there may be social goods whose value cannot be
arrived at simply by summing their effect on the well-being of all
individuals.
Secondly, even from the standpoint of strict utilitarianism, I do
think fairness is important. Strict utilitarians will not value
fairness as an end in itself, but they can regard it as one very
useful means for promoting utility. Sometimes other considerations
may outweigh fairness in the quest to maximize utility, but in normal
circumstances fairness will always be very important.
The idea of a utility monster seems fanciful to me, but if we
could somehow confirm that such a person actually existed then I think
it would indeed be fair to impose a lower tax rate on him/her. By
analogy, suppose that in some public emergency people were drafted to
perform strenuous and sometimes painful physical labor. If a few
people had a health problem such that the physical labor was far
_more_ painful to them than to anyone else, then it would be fair to
exempt them.

(Standard utilitarian argument for redistribution based on declining
marginal utility of income omitted)
There are number of problems with this argument.
1. It relies on the implicit assumption that everyone has the same
utility function, so that differences in income are entirely due to
differences in ability to earn money, inheritance, and the like. That's
surely an exaggeration--given equal opportunities, people who value
material goods more will be more willing to sacrifice other things, such
as leisure, to get them. If we reverse the assumption and assume that
all differences in income are due to different utility functions, we
also reverse the conclusion--with only a little effort you can show that
higher income people then have higher marginal utility for income, not
lower.
I don't see why it's necessary to assume that everyone has the
same utility function. It's adequate to assume that most people have
roughly similar utility functions, and I think that's a plausible
assumption. The opposite assumption, that all income differences are
due to utility-function differences, I find thoroughly implausible.

2. You are ignoring at this point (but in some form bring back in later)
the whole question of excess burden--the difference between amount
collected and cost to taxpayer. To see the most obvious case, imagine a
tax rate so high that it results in the taxpayer quitting his job and
living on his savings. That imposes a high cost on the taxpayer but
collects no revenue. Real taxes have a similar but smaller effect.
I agree that the above effect is real and should be taken into
account. My suspicion however is that the effect is quite small for
tax rates less than 50% or so. If there is hard data to the contrary,
I will certainly be willing to look at it.

3. Your attempt to put the argument in terms of fairness ignores the
fact that declining MU of income, if true, holds on the receiving end as
well as the paying end.
Discussed further below.

Note, for instance, that the whole point of the division of Social
Security payments between employee and employer is to make social
security look like a better deal than it really is--i.e. to hide the
real cost.
I'm not too sure about your political analysis here. The
employers' share is certainly visible to the employers themselves, and
they have political muscle.

Or in other words, I think you have confused a flat rate tax with a lump
sum tax--forgotten that even under a flat rate, the richer taxpayer pays
more dollars, which balances the assumed lower marginal utility of
dollars. In order to get the conclusion you want you need not merely
declining marginal utility of income, but some reason to believe that
MUI falls faster than 1/Income.
So your conclusion doesn't follow from your premise--equal utility
burden plus declining marginal utility is consistent with regressive,
flat rate or progressive taxation, depending on the details of the
utility function.
I do think it falls faster than 1/Income. For ease of discussion
I will use the word "utility" here, with the caveat that I am not
endorsing strict utilitarianism.
If it fell at 1/Income or slower, then utility would approach
infinity as income went to infinity. I find that highly implausible.
We are not considering science-fictional scenarios like brain implants
that allow you to experience unbounded happiness--the relevant utility
function is the one that holds in the real world, given the goods and
services that are actually available. And it seems to me that there
is only so much happiness you can get from those goods and services.
There is an upper bound.
To put some numbers on it, my feeling is that an after-tax income
of $50,000/yr may give you a substantially better life than
$25,000/yr; but $300,000/yr is unlikely to be much better than
$150,000/yr. I can't prove that. It's a gut feeling based on my own
life and observations. You may think that gut feelings of that sort
are a bad basis for policy, but we have to rely on them if we to
concern ourselves with individual well-being at all. There is no way
to directly observe well-being.

To take the obvious extreme case, you surely don't believe that the
citizens of (say) Canada or India should bear their share of the
disutility of supporting the US government. So why should everyone in
the US bear an equal share? If person A can contribute much more to the
support of the US for a given utility cost than person B, thus
conferring much greater benefit on other citizens (supposing that the
government provides net benefits, which you presumably believe), why is
it fair for him to do be required to do so? Why, in other words, is
fairness judged only by utility cost to the payer and not by utility
gain to the payee?
Based on my argument, international transfers of the sort you
mention would have to go from richer countries to poorer ones. And
the world's richer countries do indeed provide aid to the poorer ones,
at the rate of tens of billions of dollars per year. I find that to
be entirely justifiable, to the extent that the aid does indeed help
the residents of the poorer countries.
Should the citizens of the US and the citizens of Bangladesh
routinely pay an equal utility price for supporting the government of
Bangladesh? There are several reasons why it would be a bad idea for
foreign aid to go that far, even if it were politically realistic.
Most notably, it would tend to make the government of Bangladesh more
responsive to another government rather than to its own people.
Within a single country, the situation is rather different.
Maybe this is the sort of situation you have in mind. Say that
government program X mainly benefits the poor, and that all taxpayers
pay an equal utility price to support that program. It may be
objected that the since the poor receive a greater benefit from the
program, the overall setup is now unfair to the rich. Or you might
even raise that objection for program Y that provides equal dollar
benefits to everyone but provides a greater utility benefit to the
poor.
One response is that in evaluating fairness, you need to look at
the situation as a whole. If there are additional government programs
that provide equal utility benefits to everyone, or that actually
provide greater utility benefits to the rich, then that will help
balance out the programs that mainly benefit the poor. (To say
nothing of those government programs that fail to benefit anyone.)
The main response, however, is that when a government program is
adopted in the first place, that means society is collectively
choosing to regard that program as intrinsically valuable for whatever
reason. The value of the program may have nothing in particular to do
with fairness; even if the goal is to help the poor, the motive may be
altruism rather than fairness. (Not that such a motive has been
terribly prominent in US politics lately.) The point is that after
such a decision has been made, support for the program should be
distributed in a fair manner. And fairness means that everyone
invited to contribute to the collective decision pays their share,
rather than that everyone who benefits pays their share. You
shouldn't, IMO, say "the program is just benefiting others, so it's
unfair that I have to help pay for it." That holds regardless of
whether the benefits and tax payments are calculated in dollar or
utility amounts. Of course, there are still plenty of bad government
programs that you can make all sorts of legitimate objections to.
Note that this is quite different from the international
situation. The US and Bangladesh have not entered into a collective
decision-making process whereby mandatory taxes can be imposed on the
residents of both.

Consider a two person version. You offer to pay me to mow your lawn. I
argue that your disutility from the payment should equal my disutility
from the lawn mowing; since you are much richer than I am, that implies
paying me $100/hour. Do you find that persuasive? I think if you work
through that case, with the not unreasonable assumption that the utility
cost of an hour of effort is roughly the same for rich and poor, you
will notice that the transaction gives me a much larger utility gain
than it does you.
Voluntary transactions of that sort are a quite different matter
from taxes. If you dislike a proposed voluntary transaction for any
reason, you can simply refuse it. When a mandatory transaction like
tax-paying is proposed, on the other hand, it is reasonable to say "If
this is going to be mandatory, we had better make sure that it's
fair."

In any case, thanks for making this a more interesting discussion than
the previous segment.
Stormcrow may have sometimes expressed herself in a way that left
her open to misinterpretation, but IMO her basic points were sound.
I am just trying to present more detailed arguments on behalf of those
points.


Kevin Nelson
 
D

David Friedman

Kevin said:
In rec.arts.sf.composition David Friedman said:
It looks to me like that article takes a very definite position.
Speaking of 7.65% versus 15.3%, it says: "Since your employer is
paying the tax on your behalf, it certainly is reasonable to include
the higher figure....Anyone who doubts that the tax is actually
15.30%, who believes tall stories of our leviathan loving pols and
administrators who never have a bad word for this system, is invited
to speak with the average independent contractor." As an independent
contractor myself, I can testify that the self-employed are indeed hit
with the full rate.
You may be correct about the author's view; if so I misread the piece.
But if so, he is wrong. The case of the self-employed doesn't tell us
about other cases. And the quoted bit is wrong even about the
self-employed, since the author isn't considering the effect of the
existence of the tax on the equilibrium price of their services.
And it is at least conceivable that it is lower-income workers
and consumers who wind up bearing the brunt of the burden. I can't
find a cite, but I've heard suggestions that such is the case. In any
case, corporate income taxes are now a rather small slice of federal
revenue.
It's conceivable, but I don't think it is very plausible. Higher prices
will affect consumers roughly in proportion to their income--note that
money invested is used to buy things too, just capital goods rather than
consumer goods, and both would be affected. And lower return on capital
would tend to have a larger impact on higher income people.

....
It's clear that we have different interpretations of what
Crowfoot was saying but what really sparked my interest was the
following categorical assertion you made in response to her: "The
existence of loopholes means that taxes are less graduated in practice
than on paper--they don't mean that they aren't graduated in
practice." Are you now acknowledging that might not be the case?
"X doesn't mean that Y" isn't equivalent to "I know that Y is false." My
statement that you quoted is correct--the existence of loopholes doesn't
mean that taxes are not graduated in practice. Of course it's logically
possible that if there were enough loopholes that could wipe out
graduation, although I don't think it is true and neither of you has
offered any evidence at all that it is true.
Or
are you at least acknowledging that _most_ of the graduations visible
in the federal income tax might be entirely erased when the total tax
burden and all loopholes are taken into account?
I agree that federal income tax is more graduated than total taxes, at
least if we calculate them by who pays what--actual tax burden, as I
pointed out above, is a much more complicated problem, so I don't have
any opinion on how graduated it is. Judging by the figures we have just
gone through, it seems quite unlikely that the result is to make the
total tax burden proportional or regressive. What "most of the
graduations ... entirely erased" means I don't know.
Crowfoot was certainly not claiming that the rich and the middle
class both used loopholes to get their tax rate below that paid by the
poor. Her focus was on the loopholes used by the rich. If there is a
lack of progressivity in a broad range that includes the middle class
and the rich, then I would take that as a vindication of her claim.
Even if both pay a substantially higher fraction of their income than
the poor?
It's merely a suspicion. Higher-paying jobs require more
training; if they start paying somewhat less, then it seems likely
that fewer people will go through the often lengthy training required.
If jobs at the lower end start paying less, on the other hand,
unskilled workers will have few other options and are more likely to
continue working at those jobs. So the employers of low-income
workers will find it easier to pass on their share of the payroll tax.
I suppose this amounts to the supply of labor being more elastic
for employment categories at high wage levels. As for demand, I don't
know.
It does amount to the supply being more elastic; I don't know if it is
true or not. One could argue, in the other direction, that employers at
the low end may lose workers due to the alternative of welfare and may
be constrained by minimum wage laws.
State income taxes generally do try to give a break to the poor,
but my impression (slightly confirmed by cursory googling) is that
once you get into the middle-class range they are much less
progressive than the federal income tax. Individual states, I am
guessing, are worried about driving the rich out, while the federal
government is less worried about driving the rich out of the country
altogether.
At a slight tangent ... . Doesn't your "driving the rich out" have
something to do with at least one plausible definition of "fairness?"
The states are, after all, providing the rich, like everyone else, with
various benefits paid for by the taxes. If what the state charges rich
people is more than what the benefits the state provides are worth to
rich people, wouldn't that be one reasonable sense of "unfair"--one to
which the term "exploitation" might reasonably be applied?
A fair enough point. I acknowledge uncertainty about the overall
progressivity of the tax system; I'd just like you to also acknowledge
uncertainty about it.
I'm uncertain about how progressive it is--I argued in a book published
more than thirty years ago that social security might on net transfer
from poor to rich, although I gather current estimates suggest it
doesn't. But neither of you has provided any numbers at all on the
"massive loopholes [that let the rich] drive much of their (untaxed)
fortunes through." Just rhetoric.

Given that one of the two biggest such "loopholes" I can think of--tax
exempts--doesn't actually get one out of taxes, although it does let one
avoid the highest rates, and the other (deductibility of mortgage
interest and the failure to impute as income the value of an owner
occupied home) applies to the middle class about as much as to the rich,
I would be quite surprised if the net result was that rich people failed
to pay a larger fraction of their income than middle income, or middle
income than poor.
First of all, what I am arguing for is similar to utilitarianism
only in a very broad sense. (Though utilitarianism will hold as a
special case of it.) I am allowing a variety of conceptions of
well-being, which is why I stayed away from the word "utility." For a
utilitarian, things like virtue, understanding, etc. are not valuable
in themselves, but only insofar as they promote happiness. But even
if you do value those things in and of themselves, my argument will be
valid so long as those other elements of well-being are less dependent
on income at higher income levels.
I did say "or something similar."
I also allow that there may be social goods whose value cannot be
arrived at simply by summing their effect on the well-being of all
individuals.
Secondly, even from the standpoint of strict utilitarianism, I do
think fairness is important. Strict utilitarians will not value
fairness as an end in itself, but they can regard it as one very
useful means for promoting utility. Sometimes other considerations
may outweigh fairness in the quest to maximize utility, but in normal
circumstances fairness will always be very important.
I think that claim requires a definition of fairness. I don't see any
reason to think that your particular version, if I understand it
correctly, would increase total utility.
The idea of a utility monster seems fanciful to me, but if we
could somehow confirm that such a person actually existed then I think
it would indeed be fair to impose a lower tax rate on him/her.
I'm not just talking about a lower tax rate. If someone has a
sufficiently high ability to convert income into utility, utilitarianism
implies that the rest of us ought to be taxed in order to subsidize that
person. I think that feels unfair to most people.

Does your skepticism about the existence of utility monsters imply that
you have never been a parent? I would have said that children,
especially one's own children, qualify, although not to the degree of
the usual hypothetical version. They seem to feel pleasure or pain very
intensely and their parents, at least, have a tendency to sacrifice
their own welfare for the welfare of their children accordingly. It's
true that the children's declining MUI usually cuts in before the
results become catastrophic.

....
I don't see why it's necessary to assume that everyone has the
same utility function. It's adequate to assume that most people have
roughly similar utility functions, and I think that's a plausible
assumption. The opposite assumption, that all income differences are
due to utility-function differences, I find thoroughly implausible.
Sure. Both alternatives are implausible. People don't have identical
utility functions and they don't have identical production
functions--abilities to turn leisure into money. To get a clean argument
for declining MUI you need the former assumption, to get a clean
argument for rising MUI you need the latter. Hence, on theoretical
grounds, we don't know which occurs on net. That's a fact that most
people who make the conventional argument are unaware of, so it's worth
pointing out, even if one agrees that the conventional conclusion is
probably correct.
I agree that the above effect is real and should be taken into
account. My suspicion however is that the effect is quite small for
tax rates less than 50% or so. If there is hard data to the contrary,
I will certainly be willing to look at it.
Note that the relevant rate is the marginal tax rate, not the
average--and it's the latter that all the numbers we have been
discussing refer to. Given the combined effect of federal and state
taxes, and including both halves of the payroll tax, I think someone
with an income just below the cutoff for the payroll tax will, in some
states, be paying a marginal rate of more than 50%. But I haven't done
precise calculations.

And I expect that quite a lot of people receiving money from government
face an implicit tax rate of more than fifty percent--lose more than
fifty cents for every dollar they earn. The incentive problems exist on
both ends.

....
I'm not too sure about your political analysis here. The
employers' share is certainly visible to the employers themselves, and
they have political muscle.
So what is your explanation? Do you agree that the distinction between
the two shares is entirely bogus? If so, why does it exist?

By your account, the tax is really all on the employee. If so, doesn't
the existence of the division imply that it is politically more costly
to have a tax perceived as paid entirely by workers than to have a tax
perceived as paid partly by employers?
I do think it falls faster than 1/Income. For ease of discussion
I will use the word "utility" here, with the caveat that I am not
endorsing strict utilitarianism.
So you agree that your conclusion did not follow from the argument you
offered? Were you aware of that when you offered the argument--which
said nothing about MUI falling faster than 1/I? You are now amending the
argument by adopting a stronger premise.
If it fell at 1/Income or slower, then utility would approach
infinity as income went to infinity. I find that highly implausible.
We are not considering science-fictional scenarios like brain implants
that allow you to experience unbounded happiness--the relevant utility
function is the one that holds in the real world, given the goods and
services that are actually available. And it seems to me that there
is only so much happiness you can get from those goods and services.
There is an upper bound.
Could be. But what matters isn't what happens at infinity but what
happens over the actual range of incomes we are considering. Your
argument tells us nothing about that.

....
Based on my argument, international transfers of the sort you
mention would have to go from richer countries to poorer ones. And
the world's richer countries do indeed provide aid to the poorer ones,
at the rate of tens of billions of dollars per year. I find that to
be entirely justifiable, to the extent that the aid does indeed help
the residents of the poorer countries.
But to the extent that the "aid" injures the residents of the poorer
countries, which is probably more often the case ...

Isn't a further implication of your argument, at this point, that the
poorer citizens of the U.S.--say from the 5th to the 50th
percentile--should be heavily taxed in order to subsidize the large
number of people abroad who are much poorer than they are? Yet federal
income taxes, which are what pay for foreign "aid," collect very little
from that group. Would you support such a change--say an additional 20%
tax on everyone above the very poorest (along, of course, with increased
taxes on higher income groups) for that purpose?

....
Within a single country, the situation is rather different.
Maybe this is the sort of situation you have in mind. Say that
government program X mainly benefits the poor, and that all taxpayers
pay an equal utility price to support that program. It may be
objected that the since the poor receive a greater benefit from the
program, the overall setup is now unfair to the rich. Or you might
even raise that objection for program Y that provides equal dollar
benefits to everyone but provides a greater utility benefit to the
poor.
Yes. That is the sort of situation I am imagining. You were, I think,
arguing that "fair" was not merely a description of your preferences but
in some sense an objective term, and I was pointing out problems with it.
One response is that in evaluating fairness, you need to look at
the situation as a whole. If there are additional government programs
that provide equal utility benefits to everyone, or that actually
provide greater utility benefits to the rich, then that will help
balance out the programs that mainly benefit the poor. (To say
nothing of those government programs that fail to benefit anyone.)
Sure. But since there is no reason to expect government programs in
total to provide the same utility benefit to everyone, there is no basis
for your claim that equal utility cost to everyone would be fair.
Following out the argument you have just made, "fair" would be equal
ratio, or perhaps difference, of utility benefit to utility cost.
The main response, however, is that when a government program is
adopted in the first place, that means society is collectively
choosing to regard that program as intrinsically valuable for whatever
reason.
I don't know what it means for society to collectively choose something.
If the program is adopted, that means that a majority of both houses
voted for it and the President signed it. It is evidence that supporting
it was politically profitable to the politicians who did support it.

If you have to fall back on some version of "it's true because the
government did it," you have conceded the argument. The current tax
system, on the principle you have stated just above, was collectively
chosen by society because it was intrinsically valuable, so how can you
question it?
The value of the program may have nothing in particular to do
with fairness; even if the goal is to help the poor, the motive may be
altruism rather than fairness.
Or, more likely than either, buying the votes of the poor and of the
people employed to hand out the money.
(Not that such a motive has been
terribly prominent in US politics lately.) The point is that after
such a decision has been made, support for the program should be
distributed in a fair manner. And fairness means that everyone
invited to contribute to the collective decision pays their share,
rather than that everyone who benefits pays their share.
I can make no sense of that argument. How do we decide what "their
share" is? Couldn't one at least as plausibly say "my share consists of
providing the same support--the same number of dollars--as everyone
else"? That implies a head tax. Indeed, aren't you assuming your
conclusion here?

And in any case, why is it fair that I should have to pay to support a
program that injures me for the benefit of other people who happened to
outvote me?
You
shouldn't, IMO, say "the program is just benefiting others, so it's
unfair that I have to help pay for it." That holds regardless of
whether the benefits and tax payments are calculated in dollar or
utility amounts. Of course, there are still plenty of bad government
programs that you can make all sorts of legitimate objections to.
Note that this is quite different from the international
situation. The US and Bangladesh have not entered into a collective
decision-making process whereby mandatory taxes can be imposed on the
residents of both.
Is your "can be" a normative or a positive term? If the latter, you have
just justified country A conquering and taxing country B--because it
can. If what you mean is "can justly be," you now need some theory to
explain how the government of the U.S. came to be the legitimate owner
of the population of the U.S., along with all land and valuables.

Do you think the outcome of a political process can't be unfair? If the
program itself is unfair, why is it fair that everyone, including the
victims, pay an equal (dollar or utility) share of it?
Voluntary transactions of that sort are a quite different matter
from taxes. If you dislike a proposed voluntary transaction for any
reason, you can simply refuse it. When a mandatory transaction like
tax-paying is proposed, on the other hand, it is reasonable to say "If
this is going to be mandatory, we had better make sure that it's
fair."
The question I was asking was not whether voluntary transactions had to
be, or even ought to be, fair, but what would be fair in the voluntary
transaction. I was imagining that I am trying to persuade you, my
employer, with philosophical arguments. Is the argument I (inside the
story) proposed correct--would the fair terms be the payment of
$100/hour, which (hypothetically) imposes an equal utility cost on each
party? Or, if we are going to talk about fairness, would it be more fair
to have (say) an equal division of the utility gain from the transaction
between the parties? The latter is inconsistent with the definition of
fairness you are offering in the political context.

Incidentally, I have picked up one part of the discussion in my blog.
You are, of course, welcome to comment there if you wish.

http://daviddfriedman.blogspot.com/2008/03/declining-marginal-utility-pro
gressive.html
 
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C

Crowfoot

My starting point is that we should be concerned about the
well-being of the individuals in society. I don't assume that
well-being can be either precisely defined or precisely measured.
It may be the same thing as happiness (i.e., utilitarianism) or it
may be something broader. I do assume that we have a rough
intuitive idea of what it is, and that we can treat it as roughly
quantifiable. We may then ask how well-being depends on income.
My answer is that at low income levels, well-being is a
sharply rising function of income, and then it flattens out at
higher levels. I don't think this should be terribly controversial.
I base my answer on my own personal experience and on what I have
observed about the behavior of others. For what it's worth, it
also seems to be supported by survey data in which people are asked
about the quality of their lives. (That sort of research is
covered by Richard Layard, _Happiness_ and Daniel Gilbert,
_Stumbling on Happiness_.)
It follows that taxes should be very heavily concentrated
towards the top of the income range. Not only are the rich most
able to pay, but they are also the least discomforted by having to
pay. Suppose you have one person who makes $300,000/yr and ten
people who each make $30,000/yr. Let's say you want to obtain
$60,000 in tax revenue from this group. You could get it _all_
from the one rich individual. Or you could get $60,000-x from the
rich individual and get $0.1x from each of the other ten
individuals. Raising x will improve the well-being of the rich
individual by only a tiny amount, while it will produce a
significant detriment to the well-being of _each_ member of a
larger group.
In short, if the rich are less burdened by a 30% tax rate than
the poor are burdened by a 10% tax rate, then fairness calls for
the rich to pay the higher rate.
There are, of course, plenty of other considerations
Indeed; but what you have stated is exactly the point I intended
to make, however clumsily. I knew if I stood back a bit (not difficult,
as I was traveling at the time) somebody would come up with a
clearer formulation. Thank you.
I don't claim to be an expert on tax policy. I don't know
what _the_ ideal system would be like. The reason I think our
current system definitely needs to be changed is that over the past
twenty years or so, the well-off (roughly the top 5% or 10%) have
done extremely well, while incomes at lower levels have stagnated.
This trend has been well documented. A modest increase in rates on
a relatively small number of taxpayers who can well afford it would
allow tax relief for a much larger section of the population.


Kevin Nelson
Precisely. The recent extreme polarization of remuneration rates
and of accumulated wealthe -- tables on how much faster managerial
pay has risen than worker pay has make the point -- creates
destabilizing tensions, particularly in a society that boasts of how
well and fairly it rewards its citizens for their efforts Me, I'm just
way too old to live through a revolution from the outraged and
exploited bottom up. These things tend to be violent, destructive,
and to lead to worse repression than before (French Revolution,
Russian Revolution, and probably Cuban Revolution come to mind).
I'd rather see a tax rate that doesn't aggrandize the rich while
keeping the poor running faster and faster in their effort to stay in
the same place, which is what we seem to have going now. Taxes
can be used to defuse this tension, and I think, in the best interests
of all of us, they should be.

Just an opinion, of course.

SMC
 
D

David Friedman

As a bit of data--not one what the system should be, a question to which
I don't see any clear answer, but on what it is--I came across the
following:

http://ajayshahblog.blogspot.com/2008/03/progressivity-of-taxation.html

It shows the incidence of all federal taxes, but not state and local,
1979-2005. Assuming it is correct, the top quintile currently pay about
five times as large a fraction of their income as the bottom quintile.
Over the period, the effective tax rate on the top quintile has been
roughly constant--down, up, down. The lower rates for the lower four
quintiles have trended somewhat down.
 
R

Richard Eich

(e-mail address removed) wrote...
As a bit of data--not one what the system should be, a question to which
I don't see any clear answer, but on what it is--I came across the
following:

http://ajayshahblog.blogspot.com/2008/03/progressivity-of-taxation.html

It shows the incidence of all federal taxes, but not state and local,
1979-2005. Assuming it is correct, the top quintile currently pay about
five times as large a fraction of their income as the bottom quintile.
How great is the multiple of their income over the average?
Over the period, the effective tax rate on the top quintile has been
roughly constant--down, up, down. The lower rates for the lower four
quintiles have trended somewhat down.
That's good. A society can be well judged by how it treats those at
the lower end of its socio-economic strata, rather than how it treats
those at the higher end.

--
"The president has said that American lives will be sacrificed if
Congress does not change FISA.

"But he has also said that he will veto any FISA bill that does not
grant retroactive immunity. No immunity, no FISA bill.

"So if we take the president at his word, he's willing to let
Americans die to protect the phone companies."

-- Senator Ted Kennedy (who I never thought I'd quote for anything)
 
D

David Friedman

Richard Eich said:
(e-mail address removed) wrote...

How great is the multiple of their income over the average?
According to the graph, all federal taxes combine take about 25% of the
income of the top quintile, about 5% of the income of the bottom
quintile.
That's good. A society can be well judged by how it treats those at
the lower end of its socio-economic strata, rather than how it treats
those at the higher end.
Except that during the same period the number of people in prison has
risen sharply, which I think represents more of a bottom end of outcomes
than people who happen to be at the 20th percentile of the income
distribution at the moment.

Which raises a different point that hasn't been discussed in the thread.
All of these figures--distribution of tax burden and distribution of
income--are misleading because they represent current, not lifetime,
data. Someone at the tenth percentile may be mired in poverty. He may
also be a reasonably well off elderly person who owns his own house, has
retired, and is living on a modest pension, Social Security, and his
savings. He may also be a graduate student/T.A. in a field that will put
him in the top quarter of the income distribution. Or he may be someone
in a profession where income varies a lot year to year who happens to be
having a bad year.

I've seen attempts to measure income distribution by consumption
expenditure rather than by income, which reduces the problem some, since
people whose income varies over time tend to spend some of the money
accumulated in good years in bad years. As best I recall, inequality
measured by income is higher in the U.S. than in other developed
countries, but measured by consumption it's about the same.

I should add that the work I'm remembering is probably from at least
fifteen years ago.

I'm trimming alt.gossip.celebrities, since it seems to be the least
relevant group, and not where you post.
 
K

Kevin

Returning to this discussion after having been busy a while,
I'd like to summarize my main points (which otherwise might get
obscured by tangents).

1. After taking all taxes into account, the total effective
tax burden in the U.S. is at most slightly progressive
over a broad income range that includes the rich and
most of the middle class. It is even possible that it
may fail to be progressive at all in that range.

2. In a fair tax system, everyone will bear their fair
share of the tax burden.

3. The best way to conceptualize such fairness is as equal
sacrifice of utility (or, more generally, of well-being).

4. In the current U.S. tax system, middle-income taxpayers
make a greater utility sacrifice than higher-income ones.
Therefore, the current U.S. tax system is unfair.

You will note that #1 above is a purely factual and empirical
claim. #2 and #3 are general normative principles, and they are
independent of each other. You can accept one without the other.
Finally, #4 is the result of applying those principles to the factual
situation described in #1.
Ultimately, we seem to differ only mildly on #1. But you seem
to disagree strongly with #2, on the grounds that the tax system
cannot be considered in isolation when evaluating fairness; rather,
you think that net benefits must be taken into account. And I do
certainly agree that other policy areas than the tax system raise
issues of fairness. What I am saying is that it makes sense to
consider the fairness of the tax system in itself, more or less
independently of other policy areas.
As for #3, your complaint seems to be that it is just an
arbitrary personal preference. Given your position on #2 and #3, it
is pretty clear that you will not endorse #4.
I will further defend the above four points below.

"X doesn't mean that Y" isn't equivalent to "I know that Y is false." My
statement that you quoted is correct--the existence of loopholes doesn't
mean that taxes are not graduated in practice. Of course it's logically
possible that if there were enough loopholes that could wipe out
graduation, although I don't think it is true and neither of you has
offered any evidence at all that it is true.
In this context, I did interpret you to imply "I know that Y is
false."
Now that you have clarified your meaning, one issue has been
resolved.

any opinion on how graduated it is. Judging by the figures we have just
gone through, it seems quite unlikely that the result is to make the
total tax burden proportional or regressive. What "most of the
graduations ... entirely erased" means I don't know.
There are various income-tax brackets: 35%, 33%, 28%, etc. By
"erasing a graduation" I mean that after taking the overall tax
burden into account, people in some of the higher brackets pay a
total rate no higher than those in some of the lower brackets. So
for example if the total effective rate paid by those in the 33%
bracket is no higher than that paid by those in the 28% bracket, I
would say that the graduation between them has been erased.

Even if both pay a substantially higher fraction of their income than
the poor?
Under my interpretation of what she was saying, yes. Also note
that the working poor may still pay a greater utility sacrifice even
if their effective tax rate is lower.

At a slight tangent ... . Doesn't your "driving the rich out" have
something to do with at least one plausible definition of "fairness?"
The states are, after all, providing the rich, like everyone else, with
various benefits paid for by the taxes. If what the state charges rich
people is more than what the benefits the state provides are worth to
rich people, wouldn't that be one reasonable sense of "unfair"--one to
which the term "exploitation" might reasonably be applied?
Suppose I join a bird-watching club. The club sets its own dues
based on a vote in which each member gets one vote. But the club
winds up setting its dues so high that I decide I would rather quit.
Does that mean the club must have treated me unfairly?

I'm uncertain about how progressive it is--I argued in a book published
more than thirty years ago that social security might on net transfer
from poor to rich, although I gather current estimates suggest it
doesn't. But neither of you has provided any numbers at all on the
"massive loopholes [that let the rich] drive much of their (untaxed)
fortunes through." Just rhetoric.
In the very nature of the phenomenon, accurate numbers will be
almost impossible to obtain. This is like trying to get numbers
about extramarital sex. (In fact, probably even harder.) But there
is certainly more than just rhetoric here. Crowfoot gave a specific
example with details of how someone she knew evaded taxes. I have
heard other similar stories. You may be inclined to dismiss all of
that as mere anecdotal evidence. And if we tried to base definite
numbers on that sort of evidence, you would be right to dismiss it.
But if the conclusion is merely "phenomenon X exists and is of
substantial importance," then anecdotal evidence should carry weight.

I did say "or something similar."
To most philosophers, "virtue ethics" (i.e., an ethical theory
that values virtue as an end in itself) is quite different from
utilitarianism. But I do see how you might regard them as similar in
some ways.

I think that claim requires a definition of fairness. I don't see any
reason to think that your particular version, if I understand it
correctly, would increase total utility.
Clearly people have major disagreements over what's fair. But I
do think they have a shared basic conception of fairness that boils
down to equal treatment. More specifically, a policy is fair when it
treats everyone equally in the ways that are important, unless there
is a good reason to treat some people differently. The disagreements
are about which ways count as truly important, and about which sorts
of reasons might justify unequal treatment.
Now suppose that you're a utilitarian, trying to raise some sum
of revenue Q which you will then use to promote utility. Your goal
is to raise the sum Q at a minimum total utility cost. If individual
marginal utility decreases as a function of income, then you will
want to raise the sum from higher-income members of the community.
Fairness per se is not your ultimate goal, but if you regard equal
utility sacrifice as the relevant measure of equal treatment, then a
commitment to fairness will go part of the way towards giving you the
result you want.
There is no guarantee, of course. It is possible, for example,
that the sum Q you raise will fail to be spent in a useful manner.
But I submit that a utilitarian should regard fairness of this sort
as _one_ desirable policy element.

I'm not just talking about a lower tax rate. If someone has a
sufficiently high ability to convert income into utility, utilitarianism
implies that the rest of us ought to be taxed in order to subsidize that
person. I think that feels unfair to most people.

Does your skepticism about the existence of utility monsters imply that
you have never been a parent? I would have said that children,
especially one's own children, qualify, although not to the degree of
the usual hypothetical version. They seem to feel pleasure or pain very
intensely and their parents, at least, have a tendency to sacrifice
their own welfare for the welfare of their children accordingly. It's
true that the children's declining MUI usually cuts in before the
results become catastrophic.
True, I have never had children. Going by my own experience, I
certainly felt many intense pleasures and pains as a child---but I
have also done so as an adult. In fact, the period in my life
containing the most intense pleasures and pains was unquestionably
the ages from 17 through 22. What income had to do with that is a
bit hard to say.
But let's suppose you're correct about children being at least
moderate utility monsters. I would point out that there _is_
widespread political support for subsidizing children in various ways
from public education to CHIP. That seems to undercut your assertion
that people feel it's unfair to subsidize utility monsters.

Sure. Both alternatives are implausible. People don't have identical
utility functions and they don't have identical production
functions--abilities to turn leisure into money. To get a clean argument
for declining MUI you need the former assumption, to get a clean
argument for rising MUI you need the latter. Hence, on theoretical
grounds, we don't know which occurs on net. That's a fact that most
people who make the conventional argument are unaware of, so it's worth
pointing out, even if one agrees that the conventional conclusion is
probably correct.
My argument for declining marginal utility doesn't rely on what
you call "theoretical grounds." It is based partly on my own
personal experience and partly on survey research (e.g. as reported
in the articles and books of Daniel Gilbert.) Then there are the
numerous stories about lottery winners who found that their winnings
failed to improve their life all that much. None of this is
absolutely conclusive evidence, but it's about as good as you can get
for something as inherently unobservable as the utility function.

And I expect that quite a lot of people receiving money from government
face an implicit tax rate of more than fifty percent--lose more than
fifty cents for every dollar they earn. The incentive problems exist on
both ends.
I entirely agree with you on that one.

So what is your explanation? Do you agree that the distinction between
the two shares is entirely bogus? If so, why does it exist?
I agree that the distinction winds up making very little
difference in practice. "Entirely bogus" may be a bit strong. (For
one thing, the legally mandated division may interact with other laws
like minimum wage laws, as you mentioned yourself.)
I suspect the distinction was instituted to give the impression
of fairness, as if to say "Employers and employees are both
contributing to the system." At best it was a symbolic measure, and
it might be defended as such; symbolism does matter sometimes.

By your account, the tax is really all on the employee. If so, doesn't
the existence of the division imply that it is politically more costly
to have a tax perceived as paid entirely by workers than to have a tax
perceived as paid partly by employers?
On the contrary, I carefully avoided saying that it was _all_ on
the employee. I said that most of the employer's share was passed
on. My guesstimate was for an effective payroll tax of 13% on
employees as opposed to the 15.3% you would get if it all was passed
on.
If politicians had been determined to curry favor with
economically illiterate workers by proposing an expensive program
financed with a hidden tax, then they would have had employers pay
the whole thing.

So you agree that your conclusion did not follow from the argument you
offered? Were you aware of that when you offered the argument--which
said nothing about MUI falling faster than 1/I? You are now amending the
argument by adopting a stronger premise.
I may have been a bit unclear. If the goal is to minimize the
total utility sacrifice, then declining marginal utility is enough by
itself to entail that higher-income people should pay higher marginal
rates, provided that you neglect considerations such as excess
burden, effect on incentives, etc. As far as I can tell, you don't
really disagree with that.
My further point is that fairness in the form of equal utility
sacrifice is a good rule to follow in order to determine more
specifically what the rates should be. I am arguing that this rule
will approximately minimize the total utility sacrifice even after
taking into account the effect on incentives, etc.
In order to reach my final conclusion that marginal rates should
therefore increase with income, a stronger premise is indeed
needed---namely that marginal utility decreases faster than 1/Income.
I stand by that stronger premise.

Could be. But what matters isn't what happens at infinity but what
happens over the actual range of incomes we are considering. Your
argument tells us nothing about that.
Occam's Razor indicates that the function is unlikely to take
one form over a broad range of interest, then roll over to another
quite different form outside of that range.
And what exactly is the income range we are considering? From
$30,000/yr to the highest-income person in America? That is one
broad range.

But to the extent that the "aid" injures the residents of the poorer
countries, which is probably more often the case ...
A debatable issue that I would rather not get into at the moment.

Isn't a further implication of your argument, at this point, that the
poorer citizens of the U.S.--say from the 5th to the 50th
percentile--should be heavily taxed in order to subsidize the large
number of people abroad who are much poorer than they are? Yet federal
income taxes, which are what pay for foreign "aid," collect very little
from that group. Would you support such a change--say an additional 20%
tax on everyone above the very poorest (along, of course, with increased
taxes on higher income groups) for that purpose?
My argument doesn't imply that at all. A utilitarian who was
very confident about the benefits of foreign aid might very well
support this additional tax, but fairness does not require it. The
sort of fairness I am talking about only requires that _if_ some sum
of revenue is raised through taxes, then the burden must be shared
fairly.

Yes. That is the sort of situation I am imagining. You were, I think,
arguing that "fair" was not merely a description of your preferences but
in some sense an objective term, and I was pointing out problems with it.
I don't see what's bothering you here. "Fair" is no more and no
less objective than any other normative term. If your goal is just
to describe the tax system, then you can do without normative terms
altogether. But if you want to discuss what's better or worse, you
need normative terms. _Of course_ your use of normative terms will
reflect your own preferences.

I don't know what it means for society to collectively choose something.
If the program is adopted, that means that a majority of both houses
voted for it and the President signed it. It is evidence that supporting
it was politically profitable to the politicians who did support it.
There is a broad consensus in U.S. society as to the legitimacy
of the constitutionally specified procedures for enacting programs.
Therefore, when the president and Congress duly enact a program
following those procedures, it does indeed count as a collective
decision by society.
You are correct that it is also evidence of what is politically
profitable to the politicians involved. Part of the point of
elections is to make it politically profitable for politicians to
follow the wishes of the majority.

If you have to fall back on some version of "it's true because the
government did it," you have conceded the argument. The current tax
system, on the principle you have stated just above, was collectively
chosen by society because it was intrinsically valuable, so how can you
question it?
I don't understand your point above at all. When I spoke of
society collectively choosing to regard something as valuable, I made
no assumption that the choice was _right_. My point is that _given_
that a choice (right or wrong) has been made to spend some amount of
public revenue, the revenue should be raised in a fair manner.

Or, more likely than either, buying the votes of the poor and of the
people employed to hand out the money.
If that were a major motivator for politicians, they would spend
a whole lot more on the poor than they do. From what I can tell,
politicians are vastly more concerned to curry favor with wealthy
campaign contributors.

And in any case, why is it fair that I should have to pay to support a
program that injures me for the benefit of other people who happened to
outvote me?
Fairness does not mean that you get your way on everything. If
you have your equal share of input into the decision-making process,
and if you bear your equal share (by some appropriate measure) of the
burdens that result, then you are being treated fairly.
Also, it's not quite true that you _have_ to pay. Thousands of
wealthy U.S. citizens have emigrated to escape taxes.

Is your "can be" a normative or a positive term? If the latter, you have
just justified country A conquering and taxing country B--because it
can. If what you mean is "can justly be," you now need some theory to
explain how the government of the U.S. came to be the legitimate owner
of the population of the U.S., along with all land and valuables.
My "can be" above is a matter of descriptive fact. Are you
saying my argument would justify the U.S. conquering Bangladesh, or
vice versa? In either case, I fail to see why. I am taking it as a
given that certain groups of people have entered into collective
decision-making processes, and I am then asking when those processes
are fair. I have said nothing about which groups _should_ enter into
such processes.

Do you think the outcome of a political process can't be unfair? If the
program itself is unfair, why is it fair that everyone, including the
victims, pay an equal (dollar or utility) share of it?
Because how the money is spent and how it is raised are two
different things. You can have an unfair program paid for with money
that was unfairly raised, or an unfair program paid for with money
that was fairly raised. Neither situation will be desirable all in
all, but the latter will be preferable.

The question I was asking was not whether voluntary transactions had to
be, or even ought to be, fair, but what would be fair in the voluntary
transaction. I was imagining that I am trying to persuade you, my
employer, with philosophical arguments. Is the argument I (inside the
story) proposed correct--would the fair terms be the payment of
$100/hour, which (hypothetically) imposes an equal utility cost on each
party? Or, if we are going to talk about fairness, would it be more fair
to have (say) an equal division of the utility gain from the transaction
between the parties? The latter is inconsistent with the definition of
fairness you are offering in the political context.
The very fact that it is voluntary and mutually agreeable is
what makes it fair. I won't say that _all_ such transactions are
fair, but voluntariness counts for a lot. If the government were
requiring you to perform lawnmowing duty, then the argument for
$100/hour would make some sense. (More specifically, it would make
sense to demand that rich people pay at least $100/hour to buy out of
their lawnmowing duty, if they were allowed to buy out at all.) As a
voluntary transaction, $100/hour will not be needed for fairness.



Kevin Nelson
 
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F

forbisgaryg

As a bit of data--not one what the system should be, a question to which
I don't see any clear answer, but on what it is--I came across the
following:

http://ajayshahblog.blogspot.com/2008/03/progressivity-of-taxation.html

It shows the incidence of all federal taxes, but not state and local,
1979-2005. Assuming it is correct, the top quintile currently pay about
five times as large a fraction of their income as the bottom quintile.
Over the period, the effective tax rate on the top quintile has been
roughly constant--down, up, down. The lower rates for the lower four
quintiles have trended somewhat down.
The difficulty I have with the graph is that it obviously doesn't
include the matching employer contributions even though employers
will see it as part of the compensation package. On the other
hand it does include self-employment tax which in escence is the
combination of the employee and employer paid payroll taxes.
 
F

forbisgaryg

The difficulty I have with the graph is that it obviously doesn't
include the matching employer contributions even though employers
will see it as part of the compensation package.  On the other
hand it does include self-employment tax which in escence is the
combination of the employee and employer paid payroll taxes.
And another thing about the graph. Since the bottom quintile shows
less than 5% tax the counting of income must include things one
doesn't normally think of as income and cases you've already mentioned
such as elderly who are living off their savings. To bring this kind
of information into sharper focus those at the bottom due to their
age, young or old, should be separated out. Maybe those who are
discouraged workers should be separated out as well.
 
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D

David Friedman

Kevin said:
Returning to this discussion after having been busy a while,
I'd like to summarize my main points (which otherwise might get
obscured by tangents).

1. After taking all taxes into account, the total effective
tax burden in the U.S. is at most slightly progressive
over a broad income range that includes the rich and
most of the middle class. It is even possible that it
may fail to be progressive at all in that range.
May well be true, but I think determining if it is true is harder than
you suppose. For instance, I don't think anywhere in our calculations
was there an estimate including the effective tax on people whose
marginal rate is high enough so that they invest in tax exempt
securities. That shows up in the figures as zero tax, but in fact is
pretty substantial, given the difference in yield between tax exempts
and otherwise equivalent securities.
2. In a fair tax system, everyone will bear their fair
share of the tax burden.
Supposing that there is such a thing as either a fair tax system or a
fair share of the tax burden.
3. The best way to conceptualize such fairness is as equal
sacrifice of utility (or, more generally, of well-being).
Suppose we were talking, not about taxes, but some other
interaction--perhaps a two person one. Further suppose that equal
sacrifice of utility on the paying end means wildly unequal receipt of
utility on the receiving end. Why is that fair?

In case it isn't obvious, I'm thinking of the case where, following your
rule, the rich taxpayer pays 50% of his income in taxes, the poor 5%,
supposing that marginal utility of income falls so steeply as to make
that equal sacrifice. The state receives $100,000 from the rich
taxpayer, $1,000 from the poor taxpayer. However the money gets used,
assuming it is used in some desirable way, the rich taxpayer is
providing other people a hundred times the utility benefit the poor
taxpayer is. Why is that fair? Isn't he being exploited--bearing a 1000
utile cost while providing a 10,000 utile benefit, compared to the poor
taxpayer bearing a 1000 utile cost while providing a 100 utile benefit?
4. In the current U.S. tax system, middle-income taxpayers
make a greater utility sacrifice than higher-income ones.
Therefore, the current U.S. tax system is unfair.

You will note that #1 above is a purely factual and empirical
claim.
Yes. But one that is moderately hard to confirm or refute, although one
can find relevant evidence.
#2 and #3 are general normative principles, and they are
independent of each other. You can accept one without the other.
Finally, #4 is the result of applying those principles to the factual
situation described in #1.
Ultimately, we seem to differ only mildly on #1.
Correct. So far as I can judge, low income tax payers in the U.S. pay a
substantially smaller fraction of their income as taxes than middle and
high. I wouldn't be astonished if high income people paid significantly
more than middle, nor if they didn't.
But you seem
to disagree strongly with #2, on the grounds that the tax system
cannot be considered in isolation when evaluating fairness; rather,
you think that net benefits must be taken into account. And I do
certainly agree that other policy areas than the tax system raise
issues of fairness. What I am saying is that it makes sense to
consider the fairness of the tax system in itself, more or less
independently of other policy areas.
Would you consider the fairness of the price you pay for some service
without thinking about either the cost of providing it to the provider
or the value of the service to you? I'm not optimistic about the
possibility of deriving a "fair" tax system. But if you could do it,
surely you would want to consider the benefit the taxpayer receives as
well as the cost, and the benefit the tax collector or the people the
money is spent on receive.
As for #3, your complaint seems to be that it is just an
arbitrary personal preference. Given your position on #2 and #3, it
is pretty clear that you will not endorse #4.
As I pointed out earlier, the claim that 4 starts with depends not
merely on declining marginal utility of income but on MU declining more
than linearly with income. Beyond that, since I see no basis for 3--and
some obvious arguments against it--I indeed do not endorse 4. I see no
reason to think that a more steeply graduated system would, or wouldn't,
be "fairer." I have serious doubts that there is a useful definition of
fairness in this context, and if there is serious doubts that yours
qualifies.

....
Suppose I join a bird-watching club. The club sets its own dues
based on a vote in which each member gets one vote. But the club
winds up setting its dues so high that I decide I would rather quit.
Does that mean the club must have treated me unfairly?
If the club used that fact as an argument for forcing you to join, yes.
If not, the "fairness" comes from the fact that you don't have to join,
not the one man one vote feature.

Wouldn't you agree that the division of costs and benefits proposed by
the club was in some sense an unfair division if it was a division at
which some members wanted to stay in and others left--because the former
were getting benefits larger than cost and the latter cost larger than
benefits? The whole process may not be unfair because people can opt
out, but the proposed division is unfair, which is part of the reason
people opt out.

And why did you bring in one man one vote in the example, if the
fairness depended on the voluntariness of membership? Do you think
democracy can't be unfair? Suppose your one man one vote system is a
government, and decides that the minority should be enslaved for the
benefit of the majority. Does the fact that they did it by majority vote
make it any less unfair?
I'm uncertain about how progressive it is--I argued in a book published
more than thirty years ago that social security might on net transfer
from poor to rich, although I gather current estimates suggest it
doesn't. But neither of you has provided any numbers at all on the
"massive loopholes [that let the rich] drive much of their (untaxed)
fortunes through." Just rhetoric.
In the very nature of the phenomenon, accurate numbers will be
almost impossible to obtain. This is like trying to get numbers
about extramarital sex. (In fact, probably even harder.)
People have done that. Genetic studies can give quite reliable figures
on one outcome of extramarital sex.

Similarly here. One can do calculations on the distributional effect of
social security, it's just a lot of work because of the complicating
role of life expectancy and years worked.
But there
is certainly more than just rhetoric here. Crowfoot gave a specific
example with details of how someone she knew evaded taxes. I have
heard other similar stories. You may be inclined to dismiss all of
that as mere anecdotal evidence. And if we tried to base definite
numbers on that sort of evidence, you would be right to dismiss it.
But if the conclusion is merely "phenomenon X exists and is of
substantial importance," then anecdotal evidence should carry weight.
Not the "substantial importance" part. Anecdotal evidence might carry
weight in a small town. But with populations in the hundred of millions,
even very uncommon things happen.

....
Clearly people have major disagreements over what's fair. But I
do think they have a shared basic conception of fairness that boils
down to equal treatment. More specifically, a policy is fair when it
treats everyone equally in the ways that are important, unless there
is a good reason to treat some people differently. The disagreements
are about which ways count as truly important, and about which sorts
of reasons might justify unequal treatment.
You miss the difference in definition of "equal." And your "unless there
is a good reason" makes the whole argument empty in the utilitarian
context. You could just as easily say "we should treat people
differently by income, unless there is a good reason not to" or "we
should treat people the same by income, unless there is a good reason
not to." In either case, "good reason to/not to" reduces, in the
utilitarian context, to "unless doing/not doing it increases utility."
Now suppose that you're a utilitarian, trying to raise some sum
of revenue Q which you will then use to promote utility. Your goal
is to raise the sum Q at a minimum total utility cost. If individual
marginal utility decreases as a function of income, then you will
want to raise the sum from higher-income members of the community.
Fairness per se is not your ultimate goal, but if you regard equal
utility sacrifice as the relevant measure of equal treatment, then a
commitment to fairness will go part of the way towards giving you the
result you want.
On the contrary. Ignoring disincentive problems, as you are now doing,
and assuming everyone has the same utility of income function, you want
to raise all of the money from the higher income members. The clear
implication is a 100% tax on all income above some line, with the line
chosen so that income above it totals Q. Isn't that obvious?

Does that strike you as fair--a few people pay the entire amount, nobody
else pays anything?
There is no guarantee, of course. It is possible, for example,
that the sum Q you raise will fail to be spent in a useful manner.
But I submit that a utilitarian should regard fairness of this sort
as _one_ desirable policy element.
A utilitarian would entirely eliminate fairness from his considerations,
except to the extent that perceived fairness enters the individual
utility functions. As your example properly analyzed shows, fairness
will prevent the utility maximizing solution to your problem, since it
will seem unfair that someone with an income of $60,000 pays $5,000 in
taxes while someone with an income of $55,000 pays zero--which is what
you need in order that the money be collected in the way which minimizes
the utility burden of collecting it.

....

I suspect the distinction was instituted to give the impression
of fairness, as if to say "Employers and employees are both
contributing to the system." At best it was a symbolic measure, and
it might be defended as such; symbolism does matter sometimes.
Even if what is symbolized is false, as I think you have agreed it is?
Public lies are a good thing?

....
I may have been a bit unclear. If the goal is to minimize the
total utility sacrifice, then declining marginal utility is enough by
itself to entail that higher-income people should pay higher marginal
rates, provided that you neglect considerations such as excess
burden, effect on incentives, etc. As far as I can tell, you don't
really disagree with that.
I disagree only with the moderation of your conclusion. As I pointed out
above, if you neglect the effects you mentioned and wish to minimize
total utility sacrifice, then declining marginal utility implies 100%
tax above some cutoff, zero tax below it. Isn't that obvious?
My further point is that fairness in the form of equal utility
sacrifice is a good rule to follow in order to determine more
specifically what the rates should be. I am arguing that this rule
will approximately minimize the total utility sacrifice even after
taking into account the effect on incentives, etc.
Why? You seem to have just pulled that claim out of the blue. Your
argument at this point amounts roughly to A>0, B>0, hence A-B must be
approximately equal to zero--with A and B the effects of the unrelated
deviations from the strict utilitarian rule implied by disincentives
etc. in one direction and your definition of fairness in the other.

That isn't an argument, it's an assertion.
In order to reach my final conclusion that marginal rates should
therefore increase with income, a stronger premise is indeed
needed---namely that marginal utility decreases faster than 1/Income.
I stand by that stronger premise.
And were you aware of that requirement when you initially made the
argument without including it?

....
My argument doesn't imply that at all. A utilitarian who was
very confident about the benefits of foreign aid might very well
support this additional tax, but fairness does not require it. The
sort of fairness I am talking about only requires that _if_ some sum
of revenue is raised through taxes, then the burden must be shared
fairly.
Then we can happily agree on the fairness of zero taxes and zero
expenditure. But why are you so limited in your definition of fairness?

A highway robber stops a coach and demands money from the occupants. Is
there some fair rule for how much each pays? Doesn't the whole argument
about fairness have to start with some argument for the justifiability
of taxation, in which case fairness has to consider not only burden but
what happens to the money?
There is a broad consensus in U.S. society as to the legitimacy
of the constitutionally specified procedures for enacting programs.
Therefore, when the president and Congress duly enact a program
following those procedures, it does indeed count as a collective
decision by society.
There is also a pretty broad consensus that congressmen are supposed to
vote for what is in the national interest, not be swayed by political
contributions from interest groups, opportunities for demagogic
arguments or risks of such arguments by opponents, and lots of other
things. Yet real politics routinely violates that consensus.

In any case, I still don't know what "society collectively decides"
means beyond "the existing institutions result in it happening." Did
society collectively decide that alcohol should or should not be
consumed during prohibition--when it was illegal but the law was
routinely violated by many, very likely a majority? How about the 55 mph
speed limit?
You are correct that it is also evidence of what is politically
profitable to the politicians involved. Part of the point of
elections is to make it politically profitable for politicians to
follow the wishes of the majority.
So "society collectively decides" now means "the majority wants?" In
1855, Virginia society had collectively decided in favor of slavery?
What if one happened to know that the sum of the (non-voting) blacks and
the whites opposed to slavery was 52% of the population--would society
have collectively decided against?
I don't understand your point above at all. When I spoke of
society collectively choosing to regard something as valuable, I made
no assumption that the choice was _right_. My point is that _given_
that a choice (right or wrong) has been made to spend some amount of
public revenue, the revenue should be raised in a fair manner.
You seem to have missed my point, that insofar as fairness comes into
it, the fairness of how you raise the revenue depends in part on how you
spend it.

Suppose I and my wealthy friends, having suitably invested in political
assets, get the government to vote a subsidy to yachts. You are saying
that in deciding how it should be funded, the fact that the benefit goes
to the wealthy is simply irrelevant--poor people should contribute the
same fraction as if they subsidy were to potatoes? Why? That isn't how
we judge fairness in any other context I can think of.
If that were a major motivator for politicians, they would spend
a whole lot more on the poor than they do. From what I can tell,
politicians are vastly more concerned to curry favor with wealthy
campaign contributors.
They do both. Given rational ignorance, it pays to bribe everyone with
everyone else's money, provided that in each case the nature of the
transaction is clearer to the recipient than to the payer. Since poor
people are less likely to be well informed than rich people, it makes
sense to concentrate the oratory on helping the poor, and help the
not-poor in less obvious ways.

Do you have any actual figures on how much government expenditure
consists of a subsidy to high income vs low income people? If we had the
figures, would you be in favor of applying the same "utility rather than
income" standard to judging the fairness of expenditure that you want to
apply to the fairness of taxes?

Note also that the real distinction you want in order to explain
political outcomes isn't between rich and poor but between concentrated
and dispersed interest groups. The two distinctions are related, but
they aren't the same. A tariff on something that is consumed mainly by
high income people may still transfer from a dispersed interest group
(lots and lots of high income people) to a concentrated interest group
(the domestic producers that the tariff benefits--including stockholders
and workers with specialized human capital in that industry) while
transferring from richer to poorer people. I suspect that back in the
days of airline regulation, airline travel was sufficiently expensive so
that the burden of high prices due to CAB cartellization of the industry
was born mainly by higher income people--but they were a dispersed group
relative to the airline industry.
Fairness does not mean that you get your way on everything.

I said nothing about getting my way.
If
you have your equal share of input into the decision-making process,
and if you bear your equal share (by some appropriate measure) of the
burdens that result, then you are being treated fairly.
Consider a society in which it happens that everyone has the same
income. It happens that 40% of the population are redheads. The majority
vote to tax everyone equally and spend all the money on the non-red
heads. That meets both of your requirement, yet I cannot believe that
you consider it fair. Do you?

I also don't know what "equal share of input into the decision-making
process" means. We have one man one vote, but I happen to be a very
persuasive writer and speaker, which is why it is the non-red heads who
got the subsidy (I'm not a redhead) rather than the tall people (I'm
short).

All of this feels to me like an attempt after the fact to make up moral
justifications for existing political systems. What is fair about two
wolves and a sheep voting on what's for dinner? Is it sufficient that
they agree to equally share in paying the butcher's fee?
Also, it's not quite true that you _have_ to pay. Thousands of
wealthy U.S. citizens have emigrated to escape taxes.
True--although I'm not sure why you don't disapprove of letting them do
so. But to turn that into a moral argument, you need some justification
for the existing state's claim of territorial sovereignty--its claim to
make rules that everyone within the borders must obey.
My "can be" above is a matter of descriptive fact.
Thanks.

Are you
saying my argument would justify the U.S. conquering Bangladesh, or
vice versa? In either case, I fail to see why.
In the case of the U.S. conquering Bangladesh, because they can.

You've just agreed that that's how you are using "can be." And you seem
to be saying that the fact that mandatory taxes are imposed by the U.S.
government on people in the U.S. is justified by the fact that they can
be. So the same argument would seem to justify the U.S. conquering and
exploiting Bangladesh. Or, to take a real world case where we know what
could be done, England conquering India in the 18th and 19th centuries.
I am taking it as a
given that certain groups of people have entered into collective
decision-making processes, and I am then asking when those processes
are fair. I have said nothing about which groups _should_ enter into
such processes.
Did the slaves in the U.S. south enter into a collective decision-making
process? They were part of a society in which, in your sense, collective
decisions were made, and in which the results could be imposed on people.
Because how the money is spent and how it is raised are two
different things. You can have an unfair program paid for with money
that was unfairly raised, or an unfair program paid for with money
that was fairly raised. Neither situation will be desirable all in
all, but the latter will be preferable.
How about a program that is unfair if funded in one way and fair in
another? You seem to be implying that user fees never make sense, at
least in terms of fairness. Why? And why limit your criterion to your
imaginary social decisions? Why isn't it also unfair that people who go
to the supermarket and buy steak have to pay a larger share of the
supermarkets costs than people who buy potatoes?

How about "since there is no sensible way of making it fair, it ought
not to be mandatory?"
The very fact that it is voluntary and mutually agreeable is
what makes it fair.
So then the criteria of fairness for voluntary transactions are simply
unrelated to those for involuntary ones? Why do you use the same word
for both?

And since you seem to be arguing that somehow people have agreed to the
collective transactions, that the choice is a "collective decision by
society," why doesn't that solve the issue of fairness for you as well,
making any outcome, including the present one, fair?

In any case, thanks for an interesting defense of your position.
 

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