September 6, 2006
From the desk of Jane Galt:But what about power demands Jim:
The idea that the rich rig the system in their favour might explain the apparent relationship between higher inequality and lower social mobility, and low mobility in turn justifies the perception that the rich got where they are more by being born and raised rich than by talent and hard work. Again, this is about justice, not envy.The effect of inequality on institutions is behind the conclusion arrived at by none other than Tim’s favourite economist William Easterly that “Inequality Does Cause Underdevelopment“. And not only does inequality lower growth, it makes what growth there is less pro-poor, as the 2006 World Development Report showed:
the impact of (the same amount of) growth on poverty reduction is significantly greater when initial income inequality is lower. On average, for countries with low levels of income inequality, a 1 percentage point growth in mean incomes leads to about a 4 percentage-point reduction in the incidence of $1 per day poverty. That power falls to close to zero in countries with high income inequality. Policies that lead to greater equity thus lead to lower poverty—directly through expanding the opportunities of the poor and indirectly through higher levels of sustained development.
So, it’s not just envy - the poor (and indeed the middle-classes) have good reasons to want less inequality. Do these apply to the two phenomena Tim et al seem to think are logically equivalent, namely beauty and height?
Generally, no. Inequality in beauty or height don’t appear to corrode our political institutions and slow growth, and we don’t tend to begrudge the beautiful or tall these characteristics because they are more or less randomly distributed within a particular population in each new birth cohort. The main thing upsetting the randomness is in fact income inequality, because plain rich people often get to mate with beautiful non-rich people, which might eventually make beauty more a preserve of the rich. Likewise, one of the main sources of jealousy against the pretty or athletically freakish comes when they manage to gain incredibly riches for no other reason - again, this wouldn’t be so much of a problem if there was less income inequality.
But do beautiful people make life harder for the rest of us mingers by depriving us of potential mates? I suppose we’ve all been there, but fortunately beauty appears to be no more common in either sex, which means there is an equally large proportion of mingers of the opposite sex with helpfully lowered expectations who are therefore more likely to want to ming with you. Plus, I don’t know about you, but I quite like having beautiful people around - it improves the view.
And this is where I am brought up short by astonishment. Are we living in the same world? The one where beauty and height confer substantial income premia? The one where the taller candidate almost always wins presidential elections? You see any buck-toothed, acne-scarred, short, bald, morbidly obese senators with a club foot stumping around Capitol Hill? Suddenly, liberals seem to be the ones arguing that nature is an oasis of fairness that society shouldn't try to tamper with.
Stumbling and Mumbling piles on:
Jim's called it right. The anti-egalitarian attack on Brad De Long is just silly. There are two further points they are missing:1. Justice is not a matter of preferences. Imagine a ruthless dictatorship which had brainwashed its subjects. No-one would then envy the Great Leader his wealth and power. But we would all agree that this society was unjust. Absence of envy, then, is no evidence of justice. Nor is envy evidence of injustice. I envy Martin Simpson's talent for playing the guitar. But there's no injustice at all here.
2. What troubles many of us egalitarians is the origin of inequalities, not merely their existence. And this is where Jane Galt's analogy with beauty collapses. No-one worries about inequalities of beauty (though in the UK we do offer free plastic surgery to the extremely ugly) because they arose from a fair process - nature. And nature rarely deals anyone a full house. Sure, Tim might be shorter and less pulchritudinous than me. But he more than compensates for it in extra charm. No problem.
However, we can't be sure that inequalities of wealth are so just. Some of them have arisen from historic thefts, rent-seeking, exploitation of monopolies, capturing the state and suchlike. When Greg Mankiw says:
Again, I am flabbergasted. Chris and I seem to have spent the last thirty years in two different universes. His is a sorty of Edwardian storybook where the Angel of Endowments flits gracefully from baby to baby, ensuring that the clever one who plays tennis well doesn't get to also be the swell dancer with the heart-stopping face.
In my universe, however, endowments cluster: the tall also tend to be smarter, better looking, and healthier, in part because being short, slow, ugly and unhealthy are all side effects of problems in early development, thought often to be related to unnoticed infections.
(In my universe, also, most of the rich people on, say, Forbes 400 got there because they built a successful company, not because they got a government monopoly over the toll road to Plymouth; a majority of them did not inherit their wealth; and bank-robbers are noticeably absent. This scales down, roughly to what I find in the affluent neighbourhood where I live. But that difference of opinion is not as unexpected as the believe that non-financial natural endowments are distributed fairly.)
Posted by Jane Galt at September 6, 2006 8:49 AM | TrackBack | Technorati inbound links"); ?>There is truth to the contention that past injustices have led to current inequality. Nonetheless, we can only apply today the code of justice that we have agreed upon. Now, if we should agree (via our democratic process) that a past injustice can be and should be corrected, then we have in effect changed our current code of justice. Agreement is what matters. Agreement is the standard of justice.
Posted by: Randy on September 6, 2006 10:22 AMThough it does kinda alter the aphorism to say "If you so tall why ain't you rich?"
Posted by: Michael Tinkler on September 6, 2006 10:59 AMThey must live in the universe where the blind can compensate with their other senses and become superheroes, and where the crippled can develop freakishly powerful telepathy. Anyway, since the correlation between height and income is such a venerable and well-studied phenomenon, why can't we just solve the problem with a redistributive tax on height? Start at $1,000 for the first standard deviation, then increase by a factor of 10 for each standard deviation after that.
Posted by: AT on September 6, 2006 11:02 AMAnd if non-wealth endowments are now fair and unthreatening, are we now allowed to research correlations between intelligence or aptitude for certain subjects and things like race and sex?
Posted by: AT on September 6, 2006 11:08 AMSome of the difficulty lies in the difference in social mobility between the United States and the United Kingdom. People in the US really do move up and down the income scale, as the numbers posted at Clayton Cramer's site yesterday clearly show.
Thus, Jane really does live in a different world to some extent from some of her interlocutors, who reside in part of the European Union. Of course, if they think there's a shortage of social mobility now, they might want to take a peek at the Koran & Hadith, in order to find out what life under Sharia is going to be like when the EU becomes EUrabia...
Posted by: ellipsis on September 6, 2006 11:09 AMYour critics seem opposed to the very idea of talking about one thing at a time. While it's become sadly unclear what exactly DeLong is claiming, it's clearly something to do with inequality being bad per se for some reason or other that's connected with how it makes people feel. Coming back with "What about desert?" or "What about power?" isn't defending the proposition; it's changing the subject.
Posted by: Paul Zrimsek on September 6, 2006 11:14 AMEven if -- for arguments sake -- we postulate the unrealistic world where natural endowments are just, what makes Brad's defenders think that non-monetary dimensions are all just?
After all, political inequality is at least as devastating as economic. Yet the former is extremely hard to measure and much harder to tax. The Easterly studies don't correct for socio-political inequality, they show that it's correlated with income inequality. But prior income inequality in many poor nations is a function of prior social inequality, not the other way around.
It's worth noting that successful western countries did not begin their industrial transformation in the late eighteenth and early nineteenth centuries by promoting income inequality. FIRST they promoted socio-political equality (rights of man, universal suffrage, free markets, protection of private property, weakening of aristocracy) without regard to income inequality. Only in the 20th century did the movement to promote income equality really begin. Note that this came after at least a century of high growth and usually rising income inequality followed by greater income equality (aka the Kuznets curve).
Posted by: ghost on September 6, 2006 11:21 AMI think we're at cross purposes here. My point was that nature follows a fair(ish) process. It doesn't, for example, give people great talent simply because they are born into a rich family - more often, the opposite, in my experience.
I was merely echoing a point that libertarians should accept - justice is an attribute of processes, not outcomes. If you draw low natural endowments, you've suffered bad luck, but no injustice.
As for whether natural endowments cluster, they don't do so often enough to worry my egalitarian instincts - correlations aren't that high. To adapt your analogy, the world's best tennis player, Roger Federer has a face like a bulldog licking piss off a nettle (as we say in England).
That said, there of course many people who are short, ugly and stupid - they become politicians.
"a fair process - nature." Here speaks someone who was never picked last when dividing into teams.
"Some of the difficulty lies in the difference in social mobility between the United States and the United Kingdom. People in the US really do move up and down the income scale, as the numbers posted at Clayton Cramer's site yesterday clearly show." So the effect of socialism is to freeze inequalities.
Posted by: markm on September 6, 2006 11:41 AMRandy: "There is truth to the contention that past injustices have led to current inequality."
Please explain. What injustices accounted for the wealth accumulated by Sam Walton, Fred Smith (Fedex), Warren Buffet, Herb Kelleher (Southwest Airlines), Oprah Winfrey, Larry Ellison (Oracle), Michael Dell, Reginald Lewis, Larry Page (Google), or Bob Johnson (B.E.T.)?
Posted by: JohnDewey on September 6, 2006 11:52 AMJohnDewey: Obviously, *obviously* Sam Walton's entire fortune was due to Hicksville, Alabama's use of emininent domain to seize a 10' x 10' parcel to give to a Wal-Mart store, and if not for this action, he would have failed miserably in every venture he would have attempted and then resigned to pauperism.
On a more serious note, I'm (as much so as Jane) baffled by Mumble's point here: "What troubles many of us egalitarians is the origin of inequalities, not merely their existence." That really doesn't differ from the libertarian position. In my experience, libertarians adhere to entitlement/historical theories of justice that say "If this result was obtained without violation of rights, the result is necessarily just." So obviously, libertarians are going to be sympathetic to claims that some injustice led to some person's current wealth, and would want it rectified where feasible. They merely differ about what constitutes an injustice. Typically, it's the non-libertarian egalitarians that look at narrow slices of time and deduce an injustice from an inequality.
So, yeah, thanks for finally coming around, guys.
Posted by: Person on September 6, 2006 12:44 PMI'm assuming that Dr. De Long would be vociferously opposed to genetic engineering.
On the issue of money, however, the envying by the poor breaks that 10th commandment (thou shalt not covet . . .). Isn't there a bit of gall to demand that the rich follow another religous precept?
Posted by: Half Canadian on September 6, 2006 12:56 PMOne can accept, as I do, that people who contribute more to society should receive more from society while questioning whether the current distribution of rewards is optimal. Jane Galt seems to characterize any questioning of the current, in many ways quite arbitrary, distribution of rewards as a call for complete equality. I think this is disingenuous.
Posted by: James B. Shearer on September 6, 2006 1:10 PMEllipsis,
RE: Social mobility - I've seen a lot of evidence of that social mobility in Europe is comparable - in same cases even greater - than in the US. Here is what the Economist says:
http://www.economist.com/world/na/displayStory.cfm?story_id=3518560
A growing body of evidence suggests that the meritocratic ideal is in trouble in America. Income inequality is growing to levels not seen since the Gilded Age, around the 1880s. But social mobility is not increasing at anything like the same pace: would-be Horatio Algers are finding it no easier to climb from rags to riches, while the children of the privileged have a greater chance of staying at the top of the social heap. The United States risks calcifying into a European-style class-based society...
...There is also growing evidence that America is less socially mobile than many other rich countries. Mr Solon finds that the correlation between the incomes of fathers and sons is higher in the United States than in Germany, Sweden, Finland or Canada. Such cross-national comparisons are rife with problems: different studies use different methods and different definitions of social status. But Americans are clearly mistaken if they believe they live in the world's most mobile society.
What is really different, however, is perception:
In Europe, majorities of people in every country except Britain, the Czech Republic and Slovakia believe that forces beyond their personal control determine their success. In America only 32% take such a fatalistic view.
Very good article.
Posted by: MS on September 6, 2006 1:12 PMJames B. Shearer wrote:
One can accept, as I do, that people who contribute more to society should receive more from society while questioning whether the current distribution of rewards is optimal. Jane Galt seems to characterize any questioning of the current, in many ways quite arbitrary, distribution of rewards as a call for complete equality. I think this is disingenuous.
There's a number of premises sticking up from the grass, here, in the semantically loaded terms "contribute to society" and "rewards". Contrary to those premises, there's no Big Daddy deciding that Edward Kennedy and Ned Lamont should receive bigger "rewards" for their "contribution", no, both of them merely inherited substantial wealth from rum-runners and robber-barons, respectively. As has been pointed out over and over again, millionaires in the United States since the end of WW II tend to be people that provide something the rest of us want, be it overnight package delivery, inexpensive regional air travel, a magazine devoted to a particular niche market, what have you. Their "service" to "society" is to take advantage of an opportunity that others do not see, and their "reward" is when a lot of other people decide that whatever is being sold is worth the cost.
Hidden under terms like "service" and "reward" are the premises that somehow, someway, The Rich got their wealth via some sneaky back-channel, some political connection, some underhanded Protocol of the Elders of Richy Rich, rather than by doing hard work that others didn't want to do, in a clever and efficient manner.
Sometimes I wonder if liberals and leftists aren't really closet monarchists, the way they go on about "rewards" for "service".
Posted by: ellipsis on September 6, 2006 1:30 PMMS cited the Economist:
Income inequality is growing to levels not seen since the Gilded Age, around the 1880s. But social mobility is not increasing at anything like the same pace: would-be Horatio Algers are finding it no easier to climb from rags to riches, while the children of the privileged have a greater chance of staying at the top of the social heap.
This is a cute sleight-of-hand. If social mobility isn't increasing at the same pace as "income inequality", does it therefore follow that social mobility is decreasing? No, it does not. Comparing apples and potato(e)s in this fashion doesn't tell me much, and calling the latter an "apple of the earth" in the French fashion won't change that.
I'll have to look at the article and the numbers to see what's really there, and thanks for the pointer, but colo(u)r me skeptical...
Posted by: ellipsis on September 6, 2006 1:40 PMWhile it's become sadly unclear what exactly DeLong is claiming, it's clearly something to do with inequality being bad per se for some reason or other that's connected with how it makes people feel.
I sense the workings of a plan.
Is anyone actually defending DeLong's notion about a spite-based tax code? (He does not seem to be).
Or has the debate really shifted to "Inequality is bad because..." and "Jane's metaphor was bad because...".
If so, I suppose I can see why - its smart to fight on a battlefield where you might win.
Posted by: Tom Maguire on September 6, 2006 1:45 PMIt does say that social mobility might in fact be decreasing further down in the article. I couldn't paste the entire article - it is quite long and I had to skim through most of it. But I think most people here will find it good reading.
Posted by: MS on September 6, 2006 1:51 PMYou haven’t answered Jim’s main point, that unlike wealth inequality, “Inequality in beauty or height don’t appear to corrode our political institutions and slow growth.” The point you do answer is tangential to the overall argument. So beauty is correlated with wealth, so what? It’s still possible to reduce wealth inequality without reducing beauty inequality, and there is really no point in trying to reduce beauty inequality.
Posted by: knzn on September 6, 2006 1:58 PMI'm confused. Its OK that you inherit good looks, but not money?
Posted by: Chris on September 6, 2006 2:02 PMJohn Dewey,
Re; "What injustices accounted for the wealth accumulated by Sam Walton..."
I was thinking more along the lines of Africans forced into slavery, Native Americans forced onto reservations, women not having the right to vote, etc. Do any of these have anything to do with Sam Walton's success? Yes, indirectly. He (and you and I) are benficiaries of the conquest of North America. But my point is that the fact of the conquest has no meaning unless we agree to incorporate it into our current code of justice. And no matter how disagreeable it may seem to some, the current agreement is that the past is irrelevant.
Posted by: Randy on September 6, 2006 2:26 PMBeauty and height are overrated.
There are actually quite a few ugly (or at least incredibly plain) people walking around Capitol Hill. Speaker of the House Dennis Hastert is a fat slob. Former Sen. Max Cleland was hideously disabled and disfigured, but he still managed to get elected (once, anyway.) Joe Lieberman is no one's idea of a male model. Dianne Feinstein is getting on in years now, but I just cannot equate her to Joan of Arc, even when she was in the full flower of her youth and beauty. Ted Kennedy -- well, we all know what he looks like. Colin Powell is an impressive man, but he's not handsome, not at all, he's as average-looking as it is possible to be. Dick Cheney looks like a generic middle aged guy. Madeline Albright was a total dog (sorry , but it's true.) Harry Reid does not exactly radiate sex appeal and charisma.
And these are just the SUCCESSFUL politicians -- the above list is limited to people who are at or near the top of the Washington pyramid, like the Vice President, Secretary of State, Speaker of the House, etc. There are plenty of ordinary looking back bench legislators and lower level staffers, too. See, e.g. Ari Fleischer, Jack Murtha.
I think that we are moving away from the "square jaw and a good head of hair" model in poltiics. This is actually a credit to our society.
Posted by: Joe Schmoe on September 6, 2006 2:57 PM"we don’t tend to begrudge the beautiful or tall these characteristics"
This is a joke, right?
Posted by: mr.x on September 6, 2006 2:58 PMDianne Feinstein is getting on in years now, but I just cannot equate her to Joan of Arc, even when she was in the full flower of her youth and beauty.
And Diane Feinstein thanks you for the back-handed compliment. The real Joan of Arc (i.e. not the glowing angel of the paintings) is suggested to have possessed a genetic disorder that gave her a vaguely masculine physique and voice, very small breasts, and severely underformed genitalia. As a further side note, in the present day this disorder can be compensated for if discovered very early.
Posted by: anony-mouse on September 6, 2006 3:24 PMIt would greatly clarify these discussions to remember that "fair" means exactly what the speaker chooses it to mean. You can argue that nature's distribution of beauty is fair, or not, or that the economy's distribution of wealth is fair, or not, and be right all four times, because the meaning of fair is up to you.
It is also rather frustrating, though not at all astonishing, that those taking the egalitarian side continue to forget (or ignore) that the distribution of income is not a control variable, but rather an emergent result of the choices of 6 billion people. There is not a knob you can turn that will adjust the income distribution more to your liking while leaving everything else constant. You can move money around ex post but that has really nasty effects on all the processes that generated the initial distribution. And when you start to look at what you can do ex ante to change how the distribution is generated, it starts to look like an even worse idea.
Posted by: Noah Yetter on September 6, 2006 3:33 PMDevils advocate.
Let's say that utiltiy can be devided into material utility, that is utility derived from the innate qualities of the good or service, and social utility, utility that is contingent on the perceptions of others. While the total amount of material utility is flexible, the total amount of social utility is fixed. Humans exist in a pecking order, any expenditure of resources that moves a person up the pecking order necessarily displaces and equal amount of people down the pecking order. Nike's are not in any material way better than sneakers that cost 1/3 as much but they help one move up the social ladder. A luxury car provides little more material utility than a economy car, but a great deal more social utility.
The second big assumption is that the rich allocate a greater percentage of their resources to accumulating social utility than the poor. The reason is that material utility increases on a different scale than social utility. A reliable automobile, comfortable home, three tasty meals a day, health care and entertainment can all be had on a pretty modest salary. But as one's income increases it is really hard to accrue more real utility, a fancy car can cost more than 4 times as much as an economy car an provides a pretty modest increase in material utility. Jewlery provides practically no material utility. Designer clothes don't actually look better than other clothes (as an experiment look at clothing catalogs from other decades and try and determine which clothes were designer and which clothes weren't.) (Actually, up to this point, I more or less buy my own argument that changes next paragraph.)
The point of this is that every dollar spent on increasing an individual's social utility is a dollar lost as far as a society's aggregate utility is concerned. Because the only gains in utility the very rich can hope to experience are gains to social utility, which as far as society as whole is concerned aren't gains at all there is a utilitarian argument to confiscate a certain amount of wealth to redistribute to those that can more effieciently spend the money on material increases to their own utility.
Posted by: Michael F on September 6, 2006 4:05 PMWhat troubles many of us egalitarians is the origin of inequalities, not merely their existence. And this is where Jane Galt's analogy with beauty collapses.
If that were the case, then the left would adopt socially conservative positions towards marraige. It was former Clinton advisor William Galston who found that to avoid poverty you only have to do three things: (1) graduate from high school, (2) wait until getting married to have children, and (3) wait until age 20 to have children. I do not see the left showing concern about any of these issues.
Poverty and the breakdown of marriage
Posted by: Justin on September 6, 2006 4:19 PMOops I meant Helen of Troy. Although I am an ultra-conservative Republican, I actually sort of like Dianne Feinstein. But let's face it, she ain't no Helen of Troy.
Posted by: Joe Schmoe on September 6, 2006 4:32 PMellipsis said:
There's a number of premises sticking up from the grass, here, in the semantically loaded terms "contribute to society" and "rewards". ...
If you think my terms are "loaded", what terms would you prefer?
Noah Yetter said:
It is also rather frustrating, though not at all astonishing, that those taking the egalitarian side continue to forget (or ignore) that the distribution of income is not a control variable, but rather an emergent result of the choices of 6 billion people. There is not a knob you can turn that will adjust the income distribution more to your liking while leaving everything else constant. You can move money around ex post but that has really nasty effects on all the processes that generated the initial distribution. And when you start to look at what you can do ex ante to change how the distribution is generated, it starts to look like an even worse idea.
I think the discussion is about the US distribution of income. There are many knobs affecting the US distribution of income, every law and regulation has some effect. People spend millions lobbying for changes to their advantage. Yet you want to pretend that the current income distribution is some natural occurrence completely independent of the social and political choices we as a society have collectively made.
James,
I actually read exactly the opposite in Noah's post, e.g., "an emergent result of the choices of 6 billion people". Some of those choices were indeed political. And the political choices resulted in consequences, some foreseen, and some not.
Posted by: Randy on September 6, 2006 5:18 PMJames B. Shearer: "One can accept, as I do, that people who contribute more to society should receive more from society while questioning whether the current distribution of rewards is optimal."
"Redistribution of income" is not "distribution of rewards", Mr. Shearer. It's stealing of property. There is no "optimal" distribution of rewards for a nation. There is merely exchange of property and labor, performed at an individual level based on individual preferences. Every interference with those individual transactions - at least every one I can think of - results in stealing of property or labor from someone.
Posted by: JohnDewey on September 6, 2006 5:20 PMAnyone besides me having Harrison Bergeron flashbacks?
Posted by: Slartibartfast on September 6, 2006 5:31 PMSlartibartfast wondered:
Anyone besides me having Harrison Bergeron flashbacks?
I'd be able to answer that if this damned government-issue earpiece would quit making noise so often...
Posted by: ellipsis on September 6, 2006 5:53 PMRandy, so the US might make a political choice to adopt rules and regulations which lead to a different perhaps more equal distribution of income.
Posted by: James B. Shearer on September 6, 2006 5:54 PMellipsis said:
There's a number of premises sticking up from the grass, here, in the semantically loaded terms "contribute to society" and "rewards". ...
James B. Shearer replied:
If you think my terms are "loaded", what terms would you prefer?
Terms that are semantically neutral.
James B. Shearer: "Yet you want to pretend that the current income distribution is some natural occurrence completely independent of the social and political choices we as a society have collectively made."
I'm not speaking for Mr. Yetter, but I will respond.
The problem is that we've made too many "collective" choices, leading to too much stealing of property. Property rights have gradually been nullified.
The progressive income tax may be the worst of those choices. It is outrageous that the majority of voters can enact, through representatives, a law that steals from a minority of the population, without any direct cost to that majority.
The progressive income tax required, of course, a constitutional amendment to be enacted. That is did indicates such taxation did not reflect the values that guided us the first 150 years.
Ramsey McCulloch in 1845 expressed very well my views on progressive taxation:
“The moment you abandon . . . the cardinal principle of exacting from all individuals the same proportion of their income or their property, you are at sea without rudder or compass and there is no amount of injustice or folly you may not commit.”
Very soon after, Karl Marx and Frederick Engels advocated progressive taxation as a step leading to dictatorship of the proletariat. We can simply look back at Communism in the 20th century to see the result of "from each according to his abilities to each according to his needs".
We do not need, nor should we desire, management of incomes by the government. Rather than using past interference policies to justify further intereference, we should be casting off as many government favors and econmomic penalties as we possibly can.
Posted by: JohnDewey on September 6, 2006 6:03 PMJohnDewey, so you oppose all government regulation? All collection of taxes, all regulation of weights and measures, all enforcement of copyrights and patents, all laws against fraud, all laws against child prostitution or pornography etc.? These are all forms of theft?
What if anything may government legitimately do in your view?
Posted by: James B. Shearer on September 6, 2006 6:10 PMellipsis said:
James B. Shearer replied:
If you think my terms are "loaded", what terms would you prefer?
Terms that are semantically neutral.
Examples please.
"JohnDewey, so you oppose all government regulation? All collection of taxes, all regulation of weights and measures, all enforcement of copyrights and patents, all laws against fraud, all laws against child prostitution or pornography etc.? These are all forms of theft?"
I never said that at all. I referred to interference with willing exchanges of property and labor. Certainly a state/nation has a right to protect citizens from fraud and protect children from abuse and perversion.
I also have no problem with simple taxes that are applied equally to all.
What I do oppose, Mr. Shearer, is tyranny of the majority. As John Stuart Mill argued:
"There is a limit to the legitimate interference of collective opinion with individual independence; and to find that limit, and maintain it against encroachment, is as indispensable to a good condition of human affairs as protection against political despotism."
IMO, we long ago exceeded that limit in the United States. The 16th Amendment led to Progressive Taxation's theft of incomes. Kelo vs City of New London led to theft of property.
Posted by: JohnDewey on September 6, 2006 6:42 PMJames B. Shearer, do you accept any limitations on governmental power to confiscate property at all? Or is everything we own, with the possible exception of the clothing currently worn, actually government property that we get to use as long as we are allowed to do so?
Posted by: ellipsis on September 6, 2006 7:51 PMSemantically neutral terms could be "invest", "earn" , "receive", and others, depending of course upon the context. As I'm sure James B. Shearer is aware, context matters quite a lot. For example, "needs" can be semantically neutral, as in "A thirsty person needs a drink of water", or it can have a lot of freight as in "...to each according to his needs". Thus care in writing the larger text can reduce the tendency to semantically loaded terms, if actual communication is the goal. If browbeating heathens is the intent, well, the words will be used rather differently...
Posted by: ellipsis on September 6, 2006 7:54 PMHas anyone pointed out that the tall, beautiful, and muscular frequently take themselves out of competition by becoming ski bums or sailing bums or circuit boys or whatever their outstandingly-attractive-packages-over-their-shallow-hearts wish to pursue?
I teach at a lovely and high-priced liberal arts college where a certain percentage of our students are exceedingly genetically privileged. Luckily for the strivers amongst us they sometimes want to create individually tailored majors in personal fitness or some such - leaving the less beautiful to inherit the earth. I'm really not exaggerating much - one of my best students from a few years ago showed up for Reunion this summer; he's still playing squash full-time.
Now I don't doubt that he can pull out of this and become a lawyer or something like that eventually - but there you go. He's 5 years behind that track already.
Posted by: Michael Tinkler on September 6, 2006 7:56 PMJames,
Re; "...so the US might make a political choice to adopt rules and regulations which lead to a different perhaps more equal distribution of income."
Of course. Indeed it has. Though the justification for existing programs has been either to provide for basic needs or to invest in people. Only the extreme left is seriously talking about achieving equality for its own sake.
Of course, we are talking about it here - but this is just idle chatter for the sake of feeling intelligent. Nobody with a lick of sense expects equality to emerge in such a random world, or believes for a second that human action can somehow bring it about, or for that matter even wants it. I mean, just for a second, try to picture a world where everyone is equal. I don't know about you, but the image I'm getting is kind of horrifying.
Posted by: Randy on September 6, 2006 8:17 PMRandy, a world in which one person owns everything is kind of horrifying also. These extreme cases don't say much about what the optimal policy should be.
Posted by: James B. Shearer on September 6, 2006 8:49 PMJust had a thought, James. What if what is happening in the US, with some thinking that wages are stagnant or falling, is that we really are on the road to equality - worldwide equality. You see, to much of the rest of the world, we're the rich. How's that grab you? Its a good thing, right? Seriously, what is the logic of people who complain about inequality with one breath and jobs going overseas with the next?
But back to your point about absolute equality not being the goal, that is a common counterpoint. But isn't the absolute kind of a reduction to absurdity for the idea that equality to any degree is inherently good? Personally, I think equality is inherently meaningless.
Posted by: Randy on September 6, 2006 9:07 PMellipsis, I am pragmatic, I favor rules for society which produce a society in which I would like to live. Unlimited government power does not appear to produce attractive or successful societies.
However if you don't trust the good sense of the citizens and wish to establish barriers that prevent even an overwhelming majority from doing certain things that you oppose I suspect the cure will be worse than the disease.
Btw I think the biggest current danger of excessive government power is in the area of "national security" but strangely many libertarian types seem indifferent to this.
Posted by: James B. Shearer on September 6, 2006 9:17 PM"...this is about justice, not envy."The envious always say that. Posted by: Paco Wové on September 6, 2006 9:19 PM
Randy, I care about the United States, I don't favor policies that benefit the rest of the world at the expense of Americans.
And I don't favor equality for its own sake, however I think inequality is sometimes a indication of inefficiency.
Posted by: James B. Shearer on September 6, 2006 9:42 PMProperty rights have gradually been nullified.
Actually a lot of what government does is protect property. Property laws and their enforecment, copyright laws, printing currency, the millitary, infrastructure and even the education system all exist for people to create or maintain wealth. The rich disproportionally benefit from this. As Adam Smith once said, "Civil government, so far as it is instituted for the security of property, is in reality instituted for the defense of the rich against the poor, or of those who have some property against those who have none at all."
It is outrageous that the majority of voters can enact ... a law that steals from a minority of the population
That's awful. Those poor rich people! Imagine all the sacrifices they have to make! Forgive me if I dont shed a tear...
Actually the reason behind progressive taxation is much more pragmatic than philosophical. If we are to have taxes, then we should collect them in a way that is least damaging to the economy. If we were to have a flat tax and aimed to collect the same revenue, the burden on the middle class would go WAY WAY up. Consumer spending would go way down. All the wealth would concentrate at the top (even more so than today). I dont think it is healthy in a democracy for a small minority of people to have most of the wealth. Real John Dewey once said "Talk of democracy has little content when big business rules the life of the country through its control of the means of production, exchange, the press and other means of publicity, propaganda and communication."
MS:
So, what percent of the taxes do the richest 1% pay now, and how would that be affected if we went to a flat tax? I have a hard time seeing how the rich would suddenly pay a huge amount less with such a change.
Of course, the real benefit to various flat-tax plans is the surrounding plans to simplify the tax code and eliminate most of the giveaways, loopholes, tax dodges, etc. That would probably shift more tax burden onto rich people, while also killing a whole unproductive industry of tax specialists.
Posted by: albatross on September 7, 2006 12:39 AMThis site explains it very well
http://www.savewealth.com/taxes/rates/single/
So the richest 1% pay $94,727 tax on the first $326,450 of their income, plus 35% of anything over that. So if their income in 1,000,000 they pay 94,727+(1,000,000-326,450)x.35
Since the 1,000,000-326,450 is a large figure (673,550), changing the tax on it by even 1 percent will reduce tax revenue by 6735.5, which is a lot. Keeping in mind that there are many people in this bracket and that many of them make more than 1 million, reducing taxes for them will have quite an inpact - and somebody is going to have to pick up the slack. Taxes on the poor and the middle class will go up significantly.
As far as simplicity goes, progressive tax isnt that much more complicated than flat. As long as you have a small table at hand, you can do the math on a post-it sized piece of paper in about 30 seconds. Most of the compexity in our current tax code comes from deductions, tax credits, etc.
Posted by: MS on September 7, 2006 1:26 AMIf one believes that "unfairness" is a problem, and that the best solution to that problem is forcible intervention by the state, then you have to either contort your mind so much that you believe beauty and talent to be "fairly" distributed by nature, or else believe that "Harrison Bergeron" depicts something other than a horrific dystopia. Even leftists usually aren't capable of the latter.
Even the looniest of the loony left doesn't believe state action can make people more intelligent, beautiful, or athletic. The only way to reduce inequality in these areas is to hobble the gifted, in ways which don't benefit the ungifted but do reduce the variance from the mean. Such a notion is unsaleable as public policy. But _wealth_, on the other hand, is at least theoretically amenable to forcible redistribution by the state in a way which would (theoretically) lead to better conditions for those to whom it was redistributed. So crying foul over "unfair" wealth distribution is a much easier way to get power.
Posted by: Matt on September 7, 2006 1:56 AMActually the reason behind progressive taxation is much more pragmatic than philosophical. If we are to have taxes, then we should collect them in a way that is least damaging to the economy. If we were to have a flat tax and aimed to collect the same revenue, the burden on the middle class would go WAY WAY up. Consumer spending would go way down. All the wealth would concentrate at the top (even more so than today).
Alternatively, the 50% that currently pay no taxes, when forced to pay their fair share, might decide that the government doesn't need to spend 30% of the GDP after all, and quickly vote in massive spending cuts. Sure, we have to have taxes. The details are negotiable.
Posted by: AT on September 7, 2006 2:46 AMJames,
Re; "...inequality is sometimes a indication of inefficiency..."
Interesting thought. It depends on what one believes the purpose of society to be.
I would say that the most we can expect from society is security and order, and that such is its purpose. Is inequality an indicator of a lack of security or order? I think not. Inequality has been a constant in human history, but disorder has not. Further, insecurity and disorder, when they do occur, are most often the result of power struggles between those with the most, and not an uprising of those with the least.
On the other hand, if one believes that a purpose of society is to produce equality, then certainly inequality would be an indicator of inefficiency.
Posted by: Randy on September 7, 2006 2:57 AMMS,
Re; "Actually the reason behind progressive taxation is much more pragmatic than philosophical. If we are to have taxes, then we should collect them in a way that is least damaging to the economy."
Agreed, to some extent. I happen to believe that the lower classes ultimately pay all taxes, just as the serfs actually paid the taxes that the king collected from the nobles. I see progressive taxation as a subtle method of getting the lower classes to pay more in taxes than they would agree to pay if taxed directly.
But on the other hand, the method of taxes that did the least damage to the economy would be the method that took the smallest amount that would provide for the necessary functions of government, and unfortunately, the current system encourages those who are taxed to wish for ever higher taxes. This assumes, of course, that government is an inefficient provider of most goods and services. But that's another debate...
Posted by: Randy on September 7, 2006 3:10 AMThe point of this is that every dollar spent on increasing an individual's social utility is a dollar lost as far as a society's aggregate utility is concerned.
Unless you are advocating a rigid communist state which will ensure that every dollar beyond bare necessities is absolutely spent on society's "aggregate utility" (1. whatever that is and 2. in which case, prepare to be consigned to the virtual nuthouse), this is nonsense.
The individuals in question are generally not increasing their social utility by shoveling bills into the basement incinerator; therefore, every dollar spent has a plethora of trickle-down effects starting with immediate tax revenues, and spreading outward into the employment of numerous other individuals. Society benefits.
Posted by: anony-mouse on September 7, 2006 3:29 AMI happen to believe that the lower classes ultimately pay all taxes, just as the serfs actually paid the taxes that the king collected from the nobles. I see progressive taxation as a subtle method of getting the lower classes to pay more in taxes than they would agree to pay if taxed directly.
Well then you and JohnDewey have a major disagreement. He seems to think the rich are getting royally screw. I think empirically you are going to have a hard time justifying that statement. If all taxes ultimately fall on the poor, then they must have it especially bad in countries like Sweeden right?
Posted by: MS on September 7, 2006 8:39 AMMS,
No, just harder than they would have it if they weren't funding unnecessary government.
As for John, yes he will probably pull out statistics showing that the checks turned in by the wealthy are much bigger than the checks turned in by others. My response will be that taxes aren't paid in dollars. They are paid in the form of a reduced standard of living.
Posted by: Randy on September 7, 2006 8:56 AM“However if you don't trust the good sense of the citizens and wish to establish barriers that prevent even an overwhelming majority from doing certain things that you oppose I suspect the cure will be worse than the disease.”
Um, ever heard of the constitution? One of the major functions of the constitution is to protect the minority from “even an overwhelming majority”.
Randy: "My response will be that taxes aren't paid in dollars. They are paid in the form of a reduced standard of living"
Actually, Randy, I agree somewhat with the second statement. When taxes are used to increase government spending, then that government spending will consume resources that would have been used by the private sector. As I believe the private sector is more efficient and more effective in most activity, then I do agree that tax-financed government spending must reduce standard of living.
But here's my point: while such reductions in standard of living apply immediately to all consumers, taxes on high incomes initially reduce the standard of living of only high income earners.
The multiplier effect will no doubt impact some of the non-rich as well. I don't dispute that. But that multiplier effect of taxation - income loss - occurs whether the taxes are taken all from the rich or proportionately from everyone. So why should those with high incomes bear nearly all the burden of the initial impact of taxes?
Posted by: JohnDewey on September 7, 2006 12:01 PMJohn,
Re; "So why should those with high incomes bear nearly all the burden of the initial impact of taxes?"
Good question. But I don't think they really do. Here's an illustration.
If I am very rich, and I want to buy a yacht (or a mansion, diamonds, art, travel, etc.), I am still going to buy them, even if my taxes are raised. I'm just going to pay less for them. And the providers of these luxuries are still going to sell them to me because they have no one else to sell them to. It isn't my standard of living that is reduced, but the standard of living of those who provide me with luxuries, and of course the snowball keeps rolling on down the hill.
Of course, it is possible to raise taxes extremely high, in which case, I may not be able to buy the yacht at all. But how much does that hurt me in relation to how much it hurts the yachtmaker, or his employees, or the pizza maker that the employees used to buy pizza from, or the pizza delivery guy who no longer has a job. It is possible to make the rich pay some taxes, but only after doing considerable damage to the lower classes first.
Randy, You’re assuming that the yachtmakers behave like monopolists, so they will charge whatever price people are willing and able to pay. Although I’m not an expert on luxury goods industries, I would guess that there is a fair amount of competition. If so, that competition will already keep profit margins down. So if yachtmakers were to charge less, the profit margins would likely go negative, or at least be too small to justify any further investment in those industries. Without new investment, production levels would gradually decline, which ultimately would produce a seller’s market and drive prices back up.
Posted by: knzn on September 7, 2006 12:37 PMMaybe that pizza delivery guy will be instead delivering to a senior citizen who just got his social security check. So he might end up keeping his job after all. Maybe government is inefficient but it doesnt exactly funnel money into a giant furnace. Plus as I remember you saying before, government usually provides services that the private sector is not really intersted in so as great as it would be to have private sector do the job, it's just not going to happen. So we must choose the lesser of 2 evils.
Posted by: MS on September 7, 2006 12:56 PMknzn,
There are really only two possibilities. When taxes are raised, either the rich guy pays less for his luxuries, or he doesn't buy them at all. In either case, the snowball hits harder at the bottom of the hill than at the top.
Posted by: Randy on September 7, 2006 1:08 PMMy point is not to say that we don't need government, or even that its a horrible thing that the lower classes are actually bearing the burden of government. What I would say is that its worth taking another look at our cost benefit analysis. Income redistribution, for example, looks a whole lot different when we realize the recipient is paying a dollar for every 95 cents he recieves in aid.
Posted by: Randy on September 7, 2006 1:13 PMMaybe that pizza delivery guy will be instead delivering to a senior citizen who just got his social security check.
Fair point, but wrong example. Most of the senior citizens I know are increasingly unable to stomach rich, spicy, or acidic foods. The pizza delivery guy had instead better learn how to wait tables at the local Village Inn restaurant.
Posted by: anony-mouse on September 7, 2006 1:58 PM"There are really only two possibilities. When taxes are raised, either the rich guy pays less for his luxuries, or he doesn't buy them at all. "
Do you really believe those are the only two possibilities? How about these:
- the rich take their money to another nation where taxes are lower;
- the rich have less money to invest in those businesses they've built, and so the expansion of those businesses, and the expansion of the economy, doesn't happen;
- the rich stop trying so hard to build businesses because the after-tax income is not worth the extra effort.
But as I said before, the impact of removing money from the private sector will hurt the economy no matter who gets taxed. So why should the rich pay proportionally more taxes than everyone else?
Posted by: JohnDewey on September 7, 2006 3:32 PM"Income redistribution, for example, looks a whole lot different when we realize the recipient is paying a dollar for every 95 cents he recieves in aid. "
What? How did you arrive at this conclusion?
Posted by: JohnDewey on September 7, 2006 3:35 PMJohn,
Those are indeed possibilities. I was just trying to follow through on the specific example of the yacht.
As for how I reached the conclusion; if the lower classes are ultimately paying all taxes, then income redistribution is simply money given back to the people it was taken from - minus a cut for operating expenses. The numbers are a wag of course.
"The king is merciful and good", cried the serfs. "We were starving and he has dispensed alms from the treasury". Dumbass serfs.
Robert Brown said:
Um, ever heard of the constitution? One of the major functions of the constitution is to protect the minority from “even an overwhelming majority”.
An overwhelming majority can amend the constitution which is how we got the income tax to which some of you object.
Randy said:
Interesting thought. It depends on what one believes the purpose of society to be.
I would say that the most we can expect from society is security and order, and that such is its purpose. Is inequality an indicator of a lack of security or order? I think not. Inequality has been a constant in human history, but disorder has not. Further, insecurity and disorder, when they do occur, are most often the result of power struggles between those with the most, and not an uprising of those with the least.
On the other hand, if one believes that a purpose of society is to produce equality, then certainly inequality would be an indicator of inefficiency.
People band together into groups because a group of people working together can accomplish more than isolated individuals working separately. So roughly speaking I think the purpose of society is to allow people to accomplish as much as possible.
If all you expect from society is security and order then you should be fine with places like Castro's Cuba which do provide security and order. I expect more.
I don't think a purpose of society is to produce equality. However I think sometimes inequality is a signal that society is organized in a suboptimal way. For example in 1940 black Americans earned substantially less then white Americans. Part of the reason was that black Americans were barred from jobs like major league baseball player which they were perfectly capable of performing. Removing such barriers helps society as a whole while reducing inequality somewhat.
James,
Good point about groups. What is achievable depends greatly upon the size of the group. For example, I read somewhere that 150 is the maximum size group which can effectively practice socialism. At 300 million and climbing, we may have to lower our expectations somewhat, or perhaps divide up into smaller groups for specific purposes.
Posted by: Randy on September 7, 2006 5:50 PMYou see any buck-toothed, acne-scarred, short, bald, morbidly obese senators with a club foot stumping around Capitol Hill?
Well, Ted Kennedy seems to disprove your hypothesis, if you substitute clob soda and scotch for club foot. His appearance can legitimately described as "grotesque."
Posted by: TallDave on September 7, 2006 6:09 PMRe the forbes 400: I don't know about the whole 400 but in the top ten you have two monopolists, one insider trader, five Walton heirs, Michael Dell, and Warren Buffett.
Posted by: Retief on September 7, 2006 6:15 PMAs for how I reached the conclusion; if the lower classes are ultimately paying all taxes, then income redistribution is simply money given back to the people it was taken from - minus a cut for operating expenses.
Seeing as how I don't really have the capacity to, say, individually invest in my own comprehensive fire protection facilities, nor do I wish for those facilities to be only available to those income brackets that can afford to hire a private service of the same, I consider that nickle to be well-spent.
Posted by: anony-mouse on September 7, 2006 6:46 PManony-mouse,
Agreed. We need some government. Even if that government is actually paid for by the lower classes. But does it makes sense to redistribute income from the lower classes back to the lower classes? A case can be made, but its a little harder to make than the need for firemen.
Posted by: Randy on September 7, 2006 8:12 PMRandy,
Why do you argue that the lower class ultimately pay the personal income tax? I can understand that ALL classes ultimately pay the corporate income tax. Or that ALL classes directly pay the sales tax. But what is the mechanism by which the LOWER class - and not the middle class and the upper class - ultimately pays the personal income tax?
Posted by: JohnDewey on September 8, 2006 6:24 AMJohn,
I read most of your posts - here and at Cafe Hayek. You have a really good grasp of the seen and the unseen, and this is in the realm of the unseen. Here are the basics;
Where do the rich get the money they turn in for taxes?
Who pays a sales tax? - the buyer or the seller? Isn't income just another perspective of a sale?
Is it possible that more than one person pays the taxes on any given transaction? If so, is the person with greater or lesser power more likely to pay?
Are taxes really taken from profit? Or are they calculated into the expected return on investment?
Is the dollar an objective standard of wealth? If not, then what is? Because taxes are truly "paid" in the form of an objective standard - though they are collected in dollars.
Randy,
Sorry, but I'm not going to answer all those questions.
Your assertion that the poor ultimately pay the income taxes of the rich doesn't make any sense to me. The poor who are operated on at non-profit hospitals do not pay the surgeon. In many cases taxpayers pay the surgeon if it's a public, governemnt-funded hospital. Or non-poor pay the surgeon in the form of higher surgical fees - the fees he must charge to make up for non-payment from the poor. In the first case, it's the taxpayers - primarily the higher income workers - who pay the taxes. In the second case, it's all the non-poor - rich and middle class alike - who pay more for health care.
You seem to believe that rich people can pass on the cost of income taxes to everyone else. It's somewhat true that business owners can do so, as long as they can simply raise prices. But those individual business owners often compete with big corporations, or with foreign firms, and generally cannot simply raise prices.
The high income folks employed by others are not able to raise any prices to make up for their income taxes. Income taxes come straight out of their wallets and are never returned.
Posted by: JohnDewey on September 8, 2006 12:00 PMJames B. Shearer writes:
And I don't favor equality for its own sake, however I think inequality is sometimes a indication of inefficiency.
Ah, "efficiency", how nice. Time and motion studies, anyone? Hmm. Sparta was a rather efficient state, by some metrics, the Union of Soviet Socialist Republics produced all manner of statistics proving high efficiency and equality for years...
Please tell us what you mean by "efficiency" and "inefficiency". After all, the Khmer Rouge were quite efficient at meeting their primary goals...
John,
I didn't really expect you to answer the questions. Just trying to spark your interest.
To me, the key question is the third; Is it possible that more than one person pays the taxes on any given transaction? And if so, is the person with greater or lesser power most likely to pay the greater share of the tax?
You are correct that power - to include pricing power, but also political and other forms of power, is key. I would say, for example, that over the past few years, the owners of Microsoft haven't really paid much in taxes - they're customers have. Why? Because they have pricing power. As competition grows, assuming that it will at some point, they're pricing power will diminish, and the amount of taxes they actually have to pay will increase. The same is true of Walmart. Same for the best doctors, lawyers, and used car salesmen. Their customers are paying their taxes. As their power declines, their taxes will increase. And what of low-skilled laborers? When do they ever have pricing power? - or any kind of power? So in any transaction they participate in, they will be paying all or most of the taxes.
Perhaps the assertion that the lower classes are paying "all" of the taxes is a bit of a reach, but it certainly seems that progressive taxation is nowhere near as progessive as is usally assumed, and I suspect that all taxes, regardless of form, are ultimately regressive.
Posted by: Randy on September 8, 2006 12:56 PMI mostly support Randy's view. All taxes fall on people in two ways- reduced income and in reduced purchasing power. Your fraction of taxes is almost certainly a function of the demand for your labor or capital- the higher the demand for your labor/capital, the smaller fraction that ultimately is "paid" by you. Now who wants to guess at how we rank the demand for labor/capital?
Posted by: Yancey Ward on September 8, 2006 1:55 PMYancey,
Wwe're not talking about all taxes, but specifically about the progressive income tax. I still don't see how that tax can be transferred from the income earner to anyone else. Certainly others are harmed by that tax as well, as the high income earner reduces his purchases. But the income tax first directly hurts the person who pays it. Just because Randy argues that the rich man can purchase a smaller yacht doesn't mean the rich man is not harmed.
Posted by: JohnDewey on September 8, 2006 2:18 PMRandy: "Why? Because they have pricing power. ... The same is true of Walmart. Same for the best doctors, lawyers, and used car salesmen."
What pricing power does WalMart have? It competes with every other retailer on price.
How can we say lawyers have pricing power? Many have resorted to advertising on television and in newspapers. There must be a glut of lawyers these days.
Used car salesmen? This I really don't understand. Price information - and cost information - is widely available now. People shop for cars on the internet. The number of competing brands is higher than 30 years ago. What power does the lowly salesman have?
The pricing power of doctors has been severely eroded. Insurance companies and Medicare pretty much dictate what they'll pay for each type surgery and office visit.
Posted by: JohnDewey on September 8, 2006 3:01 PMActually, my point was that the rich guy will probably be able to buy exactly the same yacht, and he will buy it for less money.
Why? For the same reason that SUV prices drop as gas prices rise. The yacht maker needs to sell the yacht and there just aren't that many people to sell yachts too. The buyer's apparent misfortune has reduced the pricing power of the provider of luxury items. Bottom line, the rich guy still has his yacht. Its the yacht maker who's standard of living has been reduced. Of course depending on his power, he may be able to pass it on. Maybe hold back on wages for his employees or apply the yacht principal to the guy he buys his SUV from. And these will do the same within the limits of their power. The snowball effect.
But let's say we get really punitive and raise taxes to 95%. Now the rich guy really is taking a hit, and probably won't buy the yacht at all. Now his standard of living does take a hit - he really is paying taxes. But the yachtmaker, his employees, the SUV dealer, etc., are taking an even bigger hit. A bigger snowball effect.
Thus, at moderate rates of taxation, those with the least power pay all the taxes. At higher rates of taxation, those with the least power pay only most of the taxes, and the upper income folks start to pay at least some. Is this an argument for higher rates? Hell no. The higher the rate, the more the least powerful have to pay. Its hardly a price worth paying just to punish the wealthy.
Posted by: Randy on September 8, 2006 3:14 PMRandy,
I cannot agree that high income earners pass in their losses from progressive taxation. It doesn't matter whether the top rate is 35% or 95%. High income earners have neither the pricing power nor the buying power you suggest.
The rich guy may be able to pick a bargain priced yacht immediately after income taxes are raised on the wealthy. I doubt this, because income taxes won't be raised on the rich all over the globe. But any bargain purchase is a one time windfall only available to a small few. The yacht builder - and the Hummer maker - will stop producing the high end product and make something cheaper instead. The high income earner gets less yacht - or less SUV - than he would get if taxed less.
Posted by: JohnDewey on September 8, 2006 3:34 PMJohn,
Pricing power;
Walmart; Huge crowds at Walmart. Much bigger than at K-Mart. Prices are low, but still high enough to make significant profits. But as Target gets better, Walmart will lose pricing power. The percentage of all costs, including the cost of taxes, that they are forced to eat will rise.
Lawyers, Doctors, and Used Car Salesmen; I said the "best" lawyers, doctors, and used car salesmen. People seek them out, for whatever reason, which gives them pricing power. And thus a better chance of recovering their costs, again, including the cost of taxes. We can toss in CEOs here as well.
And you're right that all of the above may lose their position due to effects that reduce their pricing power - competition, regulation, etc. But it will also drop them out of the ranks of the most wealthy. And that's the point. That the more power you have (which generally correlates to wealth) the lower the odds that you will have to pay your own taxes.
Posted by: Randy on September 8, 2006 3:37 PMWhat pricing power does WalMart have? It competes with every other retailer on price.
Actually, Wal-Mart's pricing power is not in the retail sale, but in the supplier purchase. Because Wal-Mart deals in enormous volumes, it can correspondingly negotiate razor thin margins and extensive custom product lines (and in the case of produce, stringent quality-control standards) back upon its suppliers, to a greater degree than any other retailer.
Posted by: anony-mouse on September 8, 2006 3:41 PMJohn,
Good point about the one time effect on the yacht. And you may be right that I am overreaching. This is just a thought experiment, of course. I wouldn't know how to measure it even if I did have the time. I do think I'm on to something though. What if the core of progessive philosophy, the progressive tax, is a myth?
Posted by: Randy on September 8, 2006 3:51 PMRandy,
I still think you are wrong on empirical grounds. Going back to Sweden, I think despite Sweden having much higher taxes than the US and being a somewhat poorer country per capita, most people would still rather be in the bottom 10% of Sweden's polulation and ours. The same probably goes for most devolped "socialist" countries. It is just hard to argue that the generous safety net and welfare programs in those countries hurt the poor more than they help.
It may be true that some wealthy people in not very competitive industries will be able to pass their taxes on to others but I doubt they are the majority.
Posted by: MS on September 8, 2006 5:34 PMAs a matter of fact a tax on yachts was tried a few years back, based on the assumptions in the comments above. The revenues generated were one tenth the projection, and approximately 3000 shipyard workers lost their jobs.
Posted by: triticale on September 8, 2006 6:15 PMRandy, while it is plausible that wealthy can sometimes shift some of the impact of taxes aimed at them to the poor I think it is absurd to argue that they can always shift all of the impact.
For example consider a monopolist with zero costs per unit. He can set prices wherever he wants but will pick the profit maximizing price. Suppose the government imposes a percentage tax on his profit. The monopolist cannot make up any of the tax by increasing his prices as he is already charging the profit maximizing price and increasing it will reduce his pretax and hence after tax profit.
Posted by: James B. Shearer on September 8, 2006 6:25 PMellipsis, the United States is a group of 300 million people who have banded together because they can collectively produce much more working together than they could working separately. Obviously coordinating the actions of 300 million people is tricky. There are two main problems, how to organize 300 million people to produce the maximum feasible amount of wealth and how to then allocate that wealth among the 300 million people who have collectively produced it. These problems are related of course as the allocation method can provide incentives that direct what people produce. Ideally the allocation method will encourage people (perhaps by Smith's invisible hand) to do what is best for society as a whole. Unfortunately some people find it easier to become rich by gaming the wealth allocation system than by actually making great contributions to society. This is inefficient as it leads to misallocation of resources and reduces total wealth. So inequality arising from mistakes in the system for allocating wealth is an indication of inefficiency.
By the way one way to game the system is to arrange to be overcompensated for real contributions to society. For example I believe high corporate officers should be paid well but not at the extraordinary levels prevalent in recent years.
Posted by: James B. Shearer on September 8, 2006 6:58 PMMS,
Re; "It is just hard to argue that the generous safety net and welfare programs in those countries hurt the poor more than they help."
Good point. But does it really matter where the money comes from in terms of whether social programs work? Assume for a second that I'm right or even partially right. That is, that much more (if not most) of the money for welfare programs comes from the lower and middle classes than the theory of progressive taxation would predict. Still, the programs exist, and those in need are helped. What it would mean is that we can skip all the class warfare rhetoric and use payroll taxes to fund welfare programs. Also, that we're probably better off to stick with purely needs based programs to keep the amount of money passing through the bureaucracy to a minimum. The rich aren't paying, the middle class is. And the middle class would be better off to simply contribute to welfare programs for the unfortunate while taking care of their own needs personally.
Posted by: Randy on September 8, 2006 7:31 PMJames,
Re; "...I think it is absurd to argue that they can always shift all of the impact."
Agreed. But it kicks off the conversation faster when I start with absolutes. I do think my argument is on the right track though. For example, I think a good case could be made that the very wealthiest, as a result of their power, pay much less in real taxes than the size of the checks they turn in would indicate. I think a good case can be made that the poor pay much more in real taxes than is generally assumed. Consider that everything they buy contains a hidden sales tax (paying the taxes of people with power). The middle gets hazier. I would guess, that if it could somehow be measured, that those hovering around the median income probably pay the bulk of the real taxes. This is the group that would be helped the most by a more efficient government.
James,
Re; "There are two main problems, how to organize 300 million people to produce the maximum feasible amount of wealth and how to then allocate that wealth among the 300 million people who have collectively produced it."
The problem is that the 300 million did not freely choose to belong to a monolithic group. We just happen to live in the same geopolitical construct. Whether a group is freely joined matters greatly. An illustration;
I work with a group of people who have freely chosen to work together. We do share the profit of our cooperation and divide it in a manner roughly corresponding to individual contribution. We also contribute part of our shares to take care of those within the group who through no fault of their own find themselves unable to contribute anymore - those who are injured, retired, etc. But we see no reason to contribute part of the profit to those who refuse to do their jobs. These aren't really part of the group at all. Indeed, they often act in opposition to the group. They get fired.
The idea of equality in a group is meaningful. But equality of outcome is forever tied to equality of contribution. And membership in the group must be voluntary. Just a thought, but perhaps citizenship is something which one should have to apply for.
Posted by: Randy on September 8, 2006 8:02 PMRandy, I consider US citizenship to be effectively voluntary (at least for adults) since there are few restrictions on leaving if you like the way things are organized somewhere else better.
If nothing like your ideal society exists anywhere in the world perhaps it is not really practical.
As for applying for citizenship, most citizens want their children to be automatically citizens so I don't think trying to deny citizenship to any substantial number of children of citizens is practical. It would make more sense to try to encourage desirable parents to have more children and undesirable parents to have fewer. However forcing children to affirmatively apply for citizenship (even if granted automatically) upon their majority might reduce whining about not having freely chosen to be a citizen of the United States subject to its laws and be desirable for that reason. As for immigrants, I think the US should make more effort to select for valuable immigrants.
Posted by: James B. Shearer on September 8, 2006 9:02 PMJames,
Re; "However forcing children to affirmatively apply for citizenship... might reduce whining about not having freely chosen to be a citizen of the United States..."
Precisely. It would also be an affirmation of the acceptance of a responsibility to contribute.
Posted by: Randy on September 9, 2006 5:32 AMP.S. James, I agree with your characterization of citizenship as "effectively voluntary" - the world is what it is. This is enough to justify enforcement of the law, including laws which involve income redistribution, but I don't think its enough to enforce a theory of equality other than one which equates outcome to contribution. Why? Because the majority of citizens expect both social responsibility and personal responsibility - and recognize that the former is dependant on the latter.
Posted by: Randy on September 9, 2006 5:52 AMJames:
forcing children to affirmatively apply ... might reduce whining about not having freely chosen
Please, tell me you were joking. After that Gladwell thing, I think I have lost my ability to detect irony.
Posted by: Person on September 9, 2006 1:16 PMJames B. Shearer: "I consider US citizenship to be effectively voluntary (at least for adults) since there are few restrictions on leaving if you like the way things are organized somewhere else better."
I don't understand, James. There are certainly restrictions on entering the U.S. and living or working here. Are there not similar restrictions on entering other nations? I think my employer had to obtain permission from the Italian government for me to live and work in Milan. I was not allowed to stay there indefinitely.
Posted by: JohnDewey on September 9, 2006 9:37 PMRandy,
I think Mr. Shearer is correct that neither monopolists nor highly valued professionals can pass on all taxes to customers.
Consider your example of a top lawyer - one so talented that his services seem vital to customers. We must assume he charges the hourly rate which maximizes his revenue - for the hours he wishes to work. If the government suddenly increased the top income tax rate from 38% to 50%, that lawyer cannot increase his hourly rate 12% (or whatever) to achieve the same revenues. His revenue will be reduced. I think it likely he will pay all the tax increase himself. After all, he cannot raise his revenue even one dollar.
One could argue that the lawyer would just work more hours. But that still represents the same loss. After all, he apparently values his current free time at a higher rate than his billable hour rate. Otherwise he'd already be working more.
Sorry, but I just don't see how individuals can pass on personal income taxes to anyone else.
Posted by: JohnDewey on September 9, 2006 9:59 PMJohn,
Good point. In response I will drag in another question from the earlier post.
Are taxes really taken from profit? Or are they calculated into the expected return on investment?
A person starting a business is an investor. Their expectation of return determines whether or not they will start the business. In calculating the expected return he or she will factor in all costs, including the cost of taxes. In other words, he or she includes the necessity of recovering taxes from paying customers in order to achieve the return necessary to make going into business worth the time.
Those of us who collect a paycheck do the same. Part of the calculation in accepting a job includes the necessity of recovering the costs of working, including the cost of taxes. If you didn't have to pay income taxes, would you be willing to work for less? - or if you own a business, would you be willing to charge less for your services?
Again, pricing power pays a key role. A new successful business or a highly skilled worker is likely to be capable of achieving their objectives. A business at a later phase of the business cycle or a less skilled worker is much less likely to be able to do so, and is therefore more likely to be paying his or her own costs - including the cost of taxes.
That said, time is a factor. What happens if taxes are raised. What if the initial calculation of return on investment is made invalid by government intervention? Here, all the arguments against the minimum wage kick in. In time, those with power adapt, and those without power do not. Likewise, in time, raising taxes has a greater impact on those with less power than it does on those with more.
Posted by: Randy on September 10, 2006 6:04 AMRandy,
I don't think it matters whether the entrepreneur has factored in the cost of income taxes. Those taxes are costing him regardless.
If the entreprenuer's tax rate were 18% instead of 38%, he'd be able to keep 20% more of his income.
The so-called "pricing power" you refer to is already being exercised by the entrepreneur. He will charge the same price for his product or service or labor whether his tax rate is 18% or 38%. There is no reason to believe he would price lower if his taxes were lower. Why should he?
The only argument I see for income tax rates changing a price is on the supply side. It is possible that a few additional competitors may enter if a lower income tax rate inproved the profitability of a business. However, that seems unlikely if the change in tax rates is small, say a reduction by 10% or an increase by 10%. Remember, we're talking about the high income earners already. It's not clear to me that an after-tax income change from $250,000 to $300,000 is going to make any difference in the number of competitors.
Posted by: JohnDewey on September 10, 2006 11:10 PMJohn,
Re; "If the entreprenuer's tax rate were 18% instead of 38%, he'd be able to keep 20% more of his income."
Well, that was the thought that got it all started for me. I think if the entrepreneur's tax rate, or my tax rate for that matter, were lower, that we would have roughly the same standard of living. We would simply adjust the numbers to match our expectations. I think that what would happen is that we would have a smaller more efficient government, and that the standard of living of those below median income would rise as more resources were allowed to remain in the private sector of the economy.
But, there is a thought that holds me back from actually recommending a lower tax strategy. What if those whom the government is supporting are simply not capable of being productive? - that is, if provided with more resources, they would simply waste them. If this is the case, and I have a strong suspicion that it is, then it makes good sense to remove resources from them in order to dole them back out in a rational manner. High tax rates can then be seen as an expensive but necessary means of maintaining order.
Posted by: Randy on September 11, 2006 3:46 AMRandy: "then it makes good sense to remove resources from them in order to dole them back out in a rational manner."
Now, I know you're not suggesting that central planners determine the allocation of resources. So please explain what you mean by "dole them out in a rational manner".
Posted by: JohnDewey on September 11, 2006 12:03 PMJohn,
Well, this is taking a new course - and I do like conversations that lead me to a new idea - thanks.
Here goes;
Hypothesis; A society will function best when the most resources are in the hands of the most productive citizens. A free market economy does this very well. That is, inequality is a solution, not a problem.
However, given basic human nature, it will be necessary to control those who find themselves with fewer resources. Therefore, the primary purpose of redistribution is to maintain order. It is not to reallocate resources. We have already decided that we want the most resources to go to the most productive.
Now, do I imply the need for central planners in order to dole out resources to the less productive? To some extent, yes. The idea is to decide what level of needs must be met to meet the objective of maintaining order. To the degree that the political process is a form of central planning, yes some central planning is needed. Though its sort of a decentraliced centralization. I am absolutely not recommending any significant degree of state control of resources as this would violate the primary goal of distributing the most resources to the most productive people.
To tie this back to our prior discussion, it doesn't really matter whether the funds for the redistribution are taken primarily from the lower classes (as I propose) or from the upper classes (as you believe). All that matters is that the objective of maintaining order be achieved, while also meeting the objective of efficiently allocating resources.
Posted by: Randy on September 11, 2006 12:53 PMrandy: "it will be necessary to control those who find themselves with fewer resources. Therefore, the primary purpose of redistribution is to maintain order."
Well, we've been redistributing incomes in huge amounts for about 40 years, and in smaller amounts for 30 years before that. I suppose one could argue the process is working: order has been maintained - at least in the suburbs. But has order really been maintained everywhere? Do the elderly poor in center cities feel more safe of less safe than they did 50 years ago?
IMO, the way to maintain order in the U.S. is to spend huge amounts of money on crime control and on prisons. Because disorder is not coming from "disadvantaged" people, but rather from criminals.
Posted by: JohnDewey on September 11, 2006 2:33 PMJails and police are needed as well. But I don't think it takes a lot of redistribution to maintain order - just enough to let people believe they will not be abandoned.
Posted by: Randy on September 11, 2006 4:02 PMrandy: "But I don't think it takes a lot of redistribution to maintain order - just enough to let people believe they will not be abandoned."
What about these suggestions for Federal Government redistribution:
- food stamps;
- subsidized housing;
- Earned income Tax "Credits";
- Temporary Assistance for Needy Families;
- Pell Grants;
- SBA low interest loans to low-income owners;
- Medicaid for low income families;
- Head Start programs;
- WIC (women, infant, chidren) nutrition benefits.
Those are just the federal programs I know about. Dozens more at the federal, state, and local level are hard at work redistributing income every day.
How on earth is anyone in the U.S. justified in feeling abandoned today? American citizens can, and do, receive transfers from the hard-working for all of their lives.