Inequality and consistency

by on July 18, 2009 at 4:46 am in Philosophy | Permalink

I agree with Will Wilkinson's point that real social inequality has (mostly) been falling for some time in the United States.  Today many an upper middle class person is plausibly happier than many a billionaire.  Yet most self-made billionaires work very hard to get to that position, which creates a possible tension between cardinal and "observed choice" or "ordinal" metrics of welfare.  Why work so hard for so little?  Presumably many of these billionaires really want to "be there," even if they are only marginally better off or in some cases worse off.

Here are a few possible implications, not all of which are (or can be) true:

1. Higher marginal tax rates aren't very unjust, because lower incomes don't make wealthy people much less worse off.

2. Higher marginal tax rates are very unjust, because they undo results that the wealthy have worked very hard for and cared very deeply about.

3. Work is fun for the (self-made) wealthy, so higher marginal tax rates won't much discourage their work effort.

4. Greater wealth is barely worth it for the wealthy, so higher marginal tax rates will very much discourage their work effort.

Will's paper convinces me that the distinction between ordinal and cardinal measures of human welfare is more important than ever. Conservatives often cite #2 and #4, or in other words they have an ordinal normative theory and a cardinal predictive theory.  Liberals are more likely to cite #1 and #3, giving them a cardinal normative theory and an ordinal predictive theory.  In neither case is there an outright contradiction, but arguably both groups end up holding an odd mix of positions.

It would be interesting to take each group aside and present them with the abstract questions of cardinal vs. ordinal understandings of well-being, yet without explaining to them the possible policy implications of their answers.

1 Finnsense July 18, 2009 at 6:41 am

I’m sympathetic to the idea that it’s not inequality per se that is the problem. However, I have yet to come across a county with significant inequalities of income that has as good social mobility as countries with less inequality of income. It’s possible, of course, that social mobility is not an important component of “well-being” but I think that’s unlikely.

Liberty is all very well but allowing people to cluster is polarising – whether they cluster based on income or race or whatever. The question is whether it makes more sense to fight to clustering (as we do in Finland by building council houses in the middle of expensive areas) or whether it’s better to mitigate the effects of the clustering. I don’t see how either is possible without government intervention but the former is certainly cheaper even if it does come at a cost to liberty.

2 bjk July 18, 2009 at 7:52 am

People in professions where prestige or security is more important than financial compensation (academia, arts, government service, law, journalism) tend to favor higher marginal rates because prestige and security aren’t taxed. People in lower-status but higher compensation lines of work tend to emphasize the importance of marginal rates, especially if they are paid by the hour or on commission (contracting and sales, for instance).

3 DK July 18, 2009 at 8:18 am

I’m sure I’m happier than many billionaires,but, I’d be even happier with a 100 foot yacht.

You are leaving out #5 — higher tax rates hurt the aspiring, not the wealthy, because the super-wealthy still don’t have to worry about health care or kids’ education, while the marginally affected person has to work X more years to put the kids through college and will be able to provide their kids fewer choices in life. Yes, this is nothing compared to the suffering of parents struggling to keep their kids fed and in homes, but, the right framing is in terms of the lowest-wealth people hit by the tax, not the super-wealthy.

4 mark July 18, 2009 at 9:23 am

“2. Higher marginal tax rates are very unjust, because they undo results that the wealthy have worked very hard for and cared very deeply about.”

The second part of this isn’t really true, though. Whose wealth would be undone (billionaires turned into millionaires?) by the higher marginal rates that are under discussion?

5 songar July 18, 2009 at 9:41 am

“4. Greater wealth is barely worth it for the wealthy, so higher marginal tax rates will very much discourage their work effort.”
I’m not sure I understand this. If “Greater wealth is barely worth it for the wealthy” (meaning, I assume, that they have sufficient wealth, so no further wealth is needed)it would seem that taxation, higher or lower, would not factor into their desire to work/produce.

And for the purposes of this list, it might help to define the word “wealthy”. In your opinion, what is a “wealthy” person’s minimum yearly income and minimum total worth?

6 odograph July 18, 2009 at 10:31 am

More 1: I think DK is right that tax is most frustrating to people trying to build wealth.

More 2: In the mid to lower-upper incomes there is still a distinction between wealth and income.

7 jim July 18, 2009 at 10:58 am

#1 and #3 are both ordinal, I think. The claim that higher marginal tax rates don’t make the wealthy much worse off is the claim that they still preserve the ordering of the wealthy. If you’re on top before taxes, you’re still on top (though by less cardinality) after taxes.

So I would say that liberals argue from an ordinal measure (though they might not accept one from first principles) and conservatives from a cardinal measure: more is more.

8 Ward July 18, 2009 at 11:07 am

I think there is some common confusion going here. Income taxes are on income, not wealth, although obviously that is going to affect how wealthy you can become. So increases in taxes are going to have more effect on motivation than most liberals think.

It also seems to be that Tyler is proposing a utilitarian conception of justice. One that focussed on property rights would look at things differently.

Still, if you had a Rawlesian conception, I think you would end up with differences in tax rates. A not insignificant number of factors giving persons the ability to earn high incomes are based on luck, such as intelligence, personality, starting points, etc. In a just society, we would want to mitigate for those factors. In other words, the society we set up is necessarily going to favor certain people (or at least our capitalistic society has done so…not that there are any real alternatives).

9 Mario Rizzo July 18, 2009 at 1:17 pm

I don’t think tax rates should have anything to do with hedonic psychology. First, this deflects from the imperative of lower tax rates for everyone. Second, the notion of “happiness” is so complex and convoluted that to make policy on its basis is really a joke. I hope discussions such as these will convince people that the implications of such an approach are fundamentally indeterminate.

As to the “problem of inequality,” there is none — aside from the consequences of all sorts of state distortions and interventions. But I’ll go further and roughly quote Mandville, “Even the poor lived better than the rich before.” Certainly by this standard there are no poor in the United States, thanks largely to “capitalism.”

10 songar July 18, 2009 at 1:57 pm

“. . .you are rich if you can retire and live richly.” “High income tax rates penalize those who aren’t yet rich.”

Thus, high taxes penalize anyone who can not yet “retire and live richly”? You’ve created here a moving, subjective target that would seem to preclude high taxes on “anyone”, since it’s easy for one to claim that one cannot “live richly” on any sum one wishes to name and difficult to disprove one’s claim because it’s so subjective.

Fact is, I think the 25% marginal tax rate is too high for me because 1/ I can’t retire at this point and 2/ I can’t live comfortably now (and likely will not be able to at any point in the future). You might ask what I mean by comfortably. What do you mean by “richly”?

I believe we need to settle on a much more concrete definition of the words “rich” and “richly” before any discussion about raising or not raising the upper tax rates has any meaning at all.

11 DG Lesvic July 18, 2009 at 2:50 pm

The only thing that can be logically said about inequality is that the market, always tending toward the optimal state of equilibrium, always tends toward the inequalities that will bring it about, and that any attempts to alter them will be like any interference with the market, completely counterproductive, and not reducing but increasing inequality.

12 David C July 18, 2009 at 5:43 pm

I would agree with most that one seems the most likely. Four seems the next most likely, but I think that the value of point four varies depending on how high taxes are. If tax rates are already very low (such as they are in the US relative to other countries), then higher taxes are unlikely to discourage work. However, if you already have a lot of distribution going on, then more distribution is likely to substantially discourage work. Point three should be constant regardless of the tax rate, and I’m sure it’s true of a significant number of people. Point two seems bogus.

Ward and happyjuggler make good points about the distinction between wealth and income. Their arguments would seem to be for a higher estate tax instead of a higher income tax.

“I think you have to distinguish between different groups of wealthy people. Wealthy professionals (MDs, lawyers) who earn high compensation for their services are affected by #4 — for them, long hours are not inherently fun, and we have to expect that they will cut back and/or retire earlier in response to high marginal rates.”

Bruce Webb at Angry Bear recently had an interesting post, which came to a very different conclusion based on the work of Alexander Chayanov.
http://angrybear.blogspot.com/2009/07/reversed-psychology-tax-cuts-and-work.html

13 DG Lesvic July 18, 2009 at 7:13 pm

Anaonymous,

I’m sorry, but I can’t get anything out of what you’re saying.

Here is my statement again.

“The only thing that can be logically said about inequality is that the market, always tending toward the optimal state of equilibrium, always tends toward the inequalities that will bring it about, and that any attempts to alter them will be like any interference with the market, completely counterproductive, and not reducing but increasing inequality.”

Could you pinpoint exactly where I am in conclict, not with Pareto, but with logic.

I will surely appreciate your trouble and your instruction.

14 babar July 18, 2009 at 7:42 pm

i think income inequality is a double edged sword. sure,

income equality has gone up in nominal terms, but the value of what there is to buy not reflect that difference.

vs

the income of high income workers outstrips their productive value

the problem is with the nominal. if high income workers were sufficiently productive, the market would provide things for them to purchase in line with that. the fact that it hasn’t means that they aren’t sufficiently productive.

15 Anonymous July 18, 2009 at 11:43 pm

DG Lesvic: Well, markets tend towards an equilibrium (mostly), but they don’t tend towards some some magical unique equilibrium which is the best of all possible worlds, just one which is Pareto optimal given the options available. Policy to encourage increased level of equality, although yeah it can prevent the market from functioning properly, can also simply direct the market towards a different equilibrium which is also Pareto efficient but may be favorable in other ways.

And if you stick the original topic of whether taxes should be more or less progressive, all taxes distort the market to some extent, (although obviously some are more distortive than others so that’s an oversimplification) it becomes an even safer proposition: we are going to be interfering with the market anyway, so trying to aspire towards a slightly more egalitarian economy while we’re at it might be turning lemons into lemonade.

16 DG Lesvic July 19, 2009 at 12:44 am

Anonymous,

I don’t know what you mean by equilibriium, but this is what I mean by it:

Neither relative oversupplies nor undersupplies but equilibrium between the supply of and demand for everything.

The market either tends toward it or it doesn’t.

In simple language, please, which is it?

17 DG Lesvic July 19, 2009 at 1:30 am

Ward,

I appreciate your response, but am not completely satisfied with it.

I asked a simple question:

The market either tends toward equilibrium or it doesn’t.

Which is it?

18 ryan yin July 19, 2009 at 10:46 am

DG Lesvic,
I think you’re assuming that there’s only one such equilibrium. There are many possible equilibriums as you define equilibrium. Don’t forget about income effects: if some of your wealth is transferred to me, that will change your demand for a lot of things, and possibly your labor supply as well. I probably don’t do the same job as you nor would I change my demand in an equal and opposite manner, so that income effect changes what the equilibrium is.

As to the larger question of taxes, I wonder how the debate got trapped into the question of marginal rates, as if increasing progressivity is the only way to increase redistribution (e.g. does a flat tax not redistribute? Or if I really really care about redistribtuion, would that overturn the “zero marginal tax at the top” result for bounded productivity distributions?).

19 DG Lesvic July 19, 2009 at 12:06 pm

Ryan Yin,

You wrote,

“There are many possible equilibriums as you define equilibrium.”

I agree completely. For the world is constantly changing, and equilibrium with it; but, at any one point in time, there would just be one. So, the question remains:

Does the market tend toward it or not?

Ihsuan,

You wrote,

“Theory aside, what does data tell us?”

I don’t know. I’m an economist, not an historian.

20 Brian July 19, 2009 at 6:08 pm

Wilkinson’s article is that old conservative versus liberal argument about whether to have more government or a lot more government. It leads to contradictions and confusion. Thus, Cowen’s remark about his list of “implications†: “†¦but arguably both groups end up holding an odd mix of positions.† Cowen frames these positions as “very unjust† versus “not very unjust.†

The degree of injustice of either of these positions is apparently dependent on the hedonic psychology of the imposers and beneficiaries of these taxes versus the hedonic psychology of the victims and payers. Since it is impossible to measure the hedonic psychology of the beneficiaries versus the victims it is impossible to know the degree of injustice. But it is possible to know whether it is just or unjust.

While I sympathize with Mario Rizzo who doesn’t believe “tax rates should have anything to do with hedonic psychology†, it might be useful to use them as a guide. It is after all generally agreed that we all have a right to the “pursuit of happiness† but no right to its achievement. If we had a right to its achievement we could force others to give us happiness. And forcing others to give us happiness is surely unjust.

21 DG Lesvic July 19, 2009 at 9:46 pm

ryan,

Though I don’t understand all of the details of your question, I think I know what you’re getting at.

As you see it, if I understand you correctly, there would be one equilibrium between the supply of and demand for potatoes, and another between the supply of and demand for carrots, and, so on, through the whole array of fungible goods on the market, with an “uncountably infinite number of equilibria.”

But the maximum satisfaction of the consumers depends upon one equilibrium, between the supply of and demand for carrots and potatoes and everything else, such that no demand of theirs is left unsatisfied because the factors of production needed for it were allocated instead to the satisfaction of a lesser demand.

22 DG Lesvic July 20, 2009 at 5:44 am

It is my logic that is on trial here, not myself, and your attack upon me rather than the logic vindicates it.

My mother thanks you, my father thanks you, and my logic thanks you.

23 Geoffrey July 20, 2009 at 8:37 am

My sense is that at the top brackets, it’s (almost) all about the ordinal, and at the bottom, it’s all about the cardinal. As this sense has grown more certain, I have become more liberal.

People at the top (especially in the top 1%) use money in large part to keep score in a very competitive way. I don’t think athletes, say tennis players, would work any less hard if you automatically deducted 30%, 40% or 50% of their points during a match – they’re not trying for a specific cardinal target, they’re trying to have more points than the other guy.

24 Nat G. July 20, 2009 at 9:33 am

If one is concerned about happiness, one should realize that some portion of the rich may have a problem with obsessive wealth gathering. Just like we think that the kid with the ice cream cone is probably happy but the kid who downs a gallon of ice cream a day probably has a problem… or the guy who sneaks off with a cute gal for a quicky at lunch is a lucky SOB, but when we find out he does this four times a day always with different girls, he’s perhaps a sad SOB… the person who is obsessed with getting enough money may have no level of money that would actually bring him happiness. For such a person (however useful for society they happen to be) the raise of the marginal tax rate would be a source of voiced complaint but have no actual effect on his happiness, as that end of the rainbow he’s chasing is still just as far off.

If it turns out that there is a happiness gap, and if ultimately it is discovered that the middle class are -generally- happier than the very rich, it seems that the only fair thing to do is happiness redistribution. Middle class people should be required, whenever the opportunity arises, to tickle the rich.

25 Right Wing-nut July 20, 2009 at 9:50 am

I think that those who have indicated that the various statements might be more or less true for various individual are very much on the right track. And that the joker who thinks that it is unjust for the more intelligent to be allowed to achieve more wealth on the basis of their intelligence is dangerous.

I categorically reject the premise that inequity implies injustice, as I am not a Marxist. I am outraged that anyone would presume to seriously argue about the happiness effects of mess theft on people who have demonstrated their utility to society a hundred times over those doing the speculating. Be honest and stage your bloody revolution.

About the only informative observation in this thread has been just how pervasive tax distortions are. But even then, the attitude of, “Well, since we’re going to distort the economy (do more damage than we planned) anyway, we might as well have fun (do even more)” is again outrageous. Since any tax is going to be distortive, we need to see forms which are less to become more distortive over time. Specifically, we need to focus on minimizing rent seeking.

Sales tax keeps looking better all the time, although I do wonder where the yacht business went.

26 Russell July 20, 2009 at 10:06 am

To the notion that redistribution is polarizing, it’s curious that here in the US the middle class leans more Republican than the wealthy. From my experience, the ideological intensity is even greater than the raw demographic difference. Whenever I have heard someone talking about any kind of tax progressivity as communism, the speaker is someone who is, at best, upper middle class. The truly rich people I have known are almost always more moderate in how they frame their positions.

Which suggests that the polarization isn’t so much class, as it is fictional class association. It’s not the rich who are talking about going John Galt over a few percent change in marginal tax rate, but the IT consultant or shop owner or engineer or middle manager, who won’t be affected much by that tax change, if at all. They imagine the rich to be like the characters in Atlas Shrugged, and themselves to be smaller but aspiring versions of those. Which also explains why they have so much ire for the rich who violate their expectations. Warren Buffett, Bill Gates, and George Soros remind them that John Galt, Hank Reardon, and Midas Mulligan are fictions.

27 John Dewey July 20, 2009 at 10:18 am

Russell: “The truly rich people I have known are almost always more moderate in how they frame their positions.”

No idea what you mean by “truly rich people”, or what makes up your experience with them. I’ve played golf recently with $700-800K per year entreprenuers who are damned unhappy about the Democrats plans to raise marginal tax rates.

We can throw around anecdotal evidence all day long. But the truth is this: if high income persons didn’t care about the income they earned, they would already be giving away most of it.

28 John Dewey July 20, 2009 at 11:25 am

The Wall Street Journal explained in Soak the Rich, Lose the Rich that high income earners appear to be very sensitive to marginal tax rates:

“Examining IRS tax return data by state, E.J. McMahon, a fiscal expert at the Manhattan Institute, measured the impact of large income-tax rate increases on the rich ($200,000 income or more) in Connecticut, which raised its tax rate in 2003 to 5% from 4.5%; in New Jersey, which raised its rate in 2004 to 8.97% from 6.35%; and in New York, which raised its tax rate in 2003 to 7.7% from 6.85%. Over the period 2002-2005, in each of these states the “soak the rich” tax hike was followed by a significant reduction in the number of rich people paying taxes in these states relative to the national average

Further, it’s fairly simple for the “truly rich” to change their residency. Most own several residences, and can simply designate as primary residence the state or nation offerring lower tax rates.

29 John July 20, 2009 at 11:54 am

Half of the country struggles with food or housing insecurity on a monthly basis. That means that at least once a month, half the country has difficulty finding rent or money for food.

Taking an extra 1% of these people’s income would devastate their budgets. They exist precariously as it is.

Let’s say you make 500,000 a year; taking another 1% of your income would mean little to nothing to your budget or outlook.

This is ultimately why progressive taxation is the only moral choice; at the end of the day, the ability of a working class family to put food on the table trumps the ideological right of a wealthy person to a flat tax.

30 smack July 20, 2009 at 12:54 pm

DG lesvic —

Your argument seems to rely on discounting as “not simple” any counterargument that would dispose it. You claim to be an economist, but you say you don’t know what “pareto” means. On at least one of those two counts you’re being dishonest.

Here’s a simple argument: the market is not a one-dimensional space. If it were, you would be correct that there was only one equilibrium at any moment in time. In a two-dimensional space, the set of equilibria is a 1-dimensional contour containing an infinite number of points, each of which is “an equilibrium.”

Even a simple supply/demand model is two-dimensional, so there are multiple equilibria. The only thing market forces do is tend toward one of them, and there’s all kinds of concerns (equality, environment, humaneness, piety, etc. etc.) that will prefer the properties of one equilibrium to those of another.

31 DG Lesvic July 20, 2009 at 1:31 pm

John Dewey,

You’re right as far as you go, but that isn’t far enough. For the redistributionist could agree that his policy reduces the size of the cake, yet still contend that it increases the poor’s proportional share of it. The question, then, would they be better off with the larger proportion of the smaller cake or smaller proportion of the larger cake?

Mises thought that the answer was beyond economics. I have tried to show how it was not.

32 John Dewey July 20, 2009 at 1:43 pm

smack: “Why don’t you do some reading and shut your smug, self-satisfied, idiot mouth?”

Well, that was an intelligent comment, wasn’t it?

33 John Dewey July 20, 2009 at 1:59 pm

Frank Pasquale: “once people got rich enough, they didn’t really want to work much more. (I guess this would support #4 above.). Has anyone researched that hypothesis?”

I haven’t seen research, but there’s too many examples of very wealthy people continuing to work extremely hard.

I’ve witnessed first-hand the work habits of billionaires Fred Smith (FedEx) and Herb Kelleher (Southwest Airlines). Neither one slowed down once they became billionaires. Other conversations with well-paid corporate officers have convinced me that high income people just like work more than the rest of us do.

Soon to be billionaire Tiger Woods may not play as many tournaments as he once did, but he still works hard on his game. From what I’ve read, he devotes much of his “spare” time to the Rainforest Foundation, to the Tiger Woods Learning Center, and to the other work of his foundation.

34 John July 20, 2009 at 3:43 pm

I’m not talking about starving masses dying in the streets – I’m talking about food and housing insecurity, which is pervasive in our country.

Those with means, who have never asked themselves the question “if I buy a pair of shoes without holes, can I eat next week?” cannot understand this concept. It is a QOL issue, and an economic one.

If we measure the strength of our economy through the strength of our middle class – which is how many do it – then we’re in trouble. The issue is savings and spending: if the middle class is sliding into insecure territory on basic necessities (which they are) they will find it difficult to save and impossible to spend. A consumer based economy would find that hard to survive.

Abject poverty is a completely different issue than financial insecurity, the latter being invisible and pervasive in a country like ours with a relatively high QOL.

35 DG Lesvic July 20, 2009 at 10:22 pm

I must confess that I haven’t read through all the comments above, so perhaps I’ve missed something. But from a cursory runthrough I gather that some of you are questioning one of the funamental axioms of economics, the disutility of labor, the fact that it is not a pleasure but a pain.

Even outright pain may be a pleasure to some, and surely work is to many. But that doesn’t change the fundamental fact that for most people, work is a pain, and to be avoided if possible.

Nor does it in any way change the conclusion that taking from the rich to give to the poor can not make the poor richer but poorer, and can not reduce but only increase income inequality and “social injustice.”

36 John Dewey July 21, 2009 at 10:00 am

derek young: “Given that our social construct has created conditions for the billionaire to exist,”

Really? Then why aren’t we all billionaires? Sorry, but this argument makes no sense.

37 DG Lesvic July 22, 2009 at 8:42 am

Well, that’s not exactly what I have been saying. Here, again, equilibrium.

Remember Ireland, with but one crop, potatoes. Imagine a nation with but two crops, potatoes and carrots. The consumers want them in a particular proportion to one another, say, three carrots for every potatoe. If the farmers are producing them in a ratio of four to one, rather than three to one, there will be more carrots than the consumers want, and fewer potatoes, an oversupply of carrots and undersupply of potatoes, a disequilibrium between the supply of and demand for both carrots and potatoes. I am saying that the market will tend toward an equilibrium (a single one) between the supply of and demand for both potatoes and carrots, and everything else.

And you can tell that to Pareto.

38 pochette September 1, 2010 at 11:18 am

all depends on attitude! …Attitude makes altitude. …Attitude is everything. …

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