Tuesday, November 20, 2012

To hell with fairness

Listen to just about any liberal speak about the budget and taxes these days, and it won't be long before you hear the phrase "The rich need to pay their fair share." This is one of those standard lines in politics that has become so universal and commonplace in the progressive world that it's barely noticed any more. It's a mental checkbox that everyone on the Left ticks without thinking about it. Of course the rich should pay their fair share: only a sociopath would disagree with a statement like that, in the abstract anyway.

But there's the rub: the statement is only widely acceptable because everyone gets to define it however they like. "What's fair is fair," we sometimes say. Well, not really…

Frankly, for a while now, the call for "fair share" taxation has been making me vaguely uncomfortable every time I hear it. Whenever some liberal icon like Paul Krugman or Bernie Sanders would repeat it, I'd give the obligatory mental nod, but somewhere in the back of my mind I'd feel a tiny tug of rebellion—and then I'd dismiss it and move on with whatever I was reading or listening to. To the extent that this feeling received conscious articulation, it was along the lines of "They need to come up with a better argument than 'fair share'."

And they do. Because—it should be obvious, really—it's going to be a frosty day in Miami before Americans achieve anything approaching a consensus about what constitutes an appropriate tax level for the top echelons of society. And while a majority of Americans agree that the rich should pay more, the devil is in the details of just how much more would be "fair."

We all believe that we care about fairness. But it's such an inherently squishy concept that it can be used to justify virtually anything. I suspect Hitler sold his ideology on the grounds that it wasn't "fair" that Jews should have power or influence in Germany. Closer to home, we hear that it isn't fair to make employers who have a religious objection to contraception pay for its coverage in their employee health plans. The basic formula seems to be: it's fair if you support it; it's unfair if you don't. And good luck ever getting the rich (with a few honorable exceptions) to support higher taxes on themselves. Why, that would be unfair!

So, basically, we're stuck. We might be able to enact the President's goal of bumping up taxes a bit on the wealthy, but we'll never get them to agree that this is anything but a totally unwarranted and unfair confiscation of their property. Which means, of course, that the "fair share" argument will only work on the people who are already convinced. And the 1% will continue to wield their daunting and ever-growing influence to subvert any further attempts to augment government revenue at their expense (as Krugman has noted, this has become practically the entire reason for the existence of the Republican party). Thus my sense that the Left needs to come up with a better argument for anything more than token tax increases. When all is said and done, the fairness argument is a loser (Have you ever heard a conservative use it when advocating lower taxes? I don't think I have; they're too savvy to get caught in an endless and ultimately fruitless wrangle about what's fair. No, conservatives tell us that lowering taxes will boost the economy, that a rising tide lifts all boats, and that ultimately we'll all be better off. "Fairness" doesn't even enter into it. If you accept their framing, it's all about enlightened self-interest.)

Then, some days ago, something crossed my inbox: a piece in the American Prospect by Liam Malloy and John Case entitled "Want Less Inequality? Tax It". It recast the whole fairness issue in a new light, and pointed the way to the solution I'd been wishing for. In a word, the answer to the "fairness" problem is to ignore it. Let me explain:

I'm going to touch only lightly on the article's opening section, which recounts the career of British economist Arthur Pigou. Pigou was once considered that country's leading economist, but these days his chief claim to fame is that he was a mentor of the legendary John Maynard Keynes. He was, say the authors, "one of the earliest classical economists to notice that markets do not always produce the best possible social outcomes." In fact, markets often give rise to externalities, or unintended side effects that can impact—either positively or negatively—people who aren't involved in the original transactions (the classic example of a negative externality is pollution from a factory, which affects everyone's health but isn't accounted for in the price of the factory's products).

Pigou said, very simply, that society should deal with externalities by taxing the bad ones and subsidizing the good ones. This may seem obvious today, but was a novel idea in the early 20th century. Among the modern incarnations of the principle is the carbon tax, which is designed to make companies pay for the privilege of dumping greenhouse gases into the atmosphere we all share.

Now along come Malloy and Case, proposing to treat out-of-control income inequality as a problem of externalities. They argue that excessive wealth concentration imposes costs on all of society, and that society should therefore act to discourage it, namely by taxing the wealthy more aggressively.

What exactly are these negative externalities that concentrated wealth leads to? The authors offer three examples, which I have rephrased somewhat and augmented with a fourth:

  1. Workers are deprived of sharing in the fruits of their labor. Back in America's "Golden Age" (the post-WW II era up until about 1973), workers' pay tracked their growing productivity closely, doubling the median income and creating a broadly shared prosperity. Since then, productivity has nearly doubled again, but wages are up only 20%. Meanwhile, the average income of the top 1% has tripled. If the income distribution during the Golden Age still held, the median income today would be over $86,000 instead of $50,000. That yawning gap is a direct cost imposed on the 99% by the outsized incomes of the 1%. 
  2. Society loses the skills of many talented people to the narrow goal of getting rich. The more rich people there are, and the more wealth they have (and the lower their taxes), the more attractive the idea of getting rich becomes. It's been argued that the decline of American manufacturing is due in part to the "brain drain" that leads our most capable people to pursue the much bigger rewards of the finance industry. In 1986, only 18% of Harvard graduates planned a career in business. Last year, the figure was 41%, with 17% going into finance. And the prospect of making a ton of money—and getting to keep most of it—provides a powerful incentive to pursue high-risk deals with potentially disastrous consequences (see: the recent financial crisis).
  3. The rich gain undue power and influence. We've seen ad nauseam how politicians march to the beat of the wealthiest segment of society. Members of Congress have to spend hours every day cultivating the well-to-do. The richest banksters got a taxpayer-financed bailout—seemingly without much effort—while the rest of us were left to fend for ourselves. And there has been essentially zero accountability for the Masters of the Universe who crashed the economy in the pursuit of obscene wealth. As Joseph Stiglitz writes in his new book The Price of Inequality: "Political rules of the game have not only directly benefited those at the top, ensuring that they have a disproportionate voice, but have also created a political process that indirectly gives them more power." And every perk and government preference the rich engineer for themselves is both a threat to our democracy and a net loss to the rest of us—another negative externality. We should ask ourselves: is "too big to fail"—one of the consequences of wealth concentration—really the best way to structure our economy? 
  4. Entrenched wealth and power act to suppress innovation. Great wealth will make a conservative out of almost anyone. We've seen plenty of examples of how the rich use their influence to promote conservative causes and attack progressive ones. People and companies at the top of the economic pile, raking in huge profits, have little incentive to innovate, and large incentives to keep the gravy train rolling. Often they get laws and regulations passed to perpetuate the status quo, protect their monopolies, and suppress upstart competitors and fresh-thinking innovators. Again, the rest of society loses when they win. 

Take another look at these four points, which we might collectively refer to as costs to society of not doing anything about wealth concentration (no doubt there are others, too). Notice something? The word "fair" doesn't appear anywhere in them. And in a way, that's the whole point: when excessive wealth concentration is objectively and demonstrably detrimental to a democratic society, then society can, and should, act to reduce that harmful concentration. And the way to do that is with higher—in some cases, much higher—taxes. Fairness. Be. Damned.

Notice another thing: this line of thinking doesn't come within a mile of the argument that the government needs more revenue and the rich should supply it. It says nothing at all about what the government should do with the money. In fact, the main goal of this policy—to reduce the concentration of wealth—would be achieved if the additional tax revenue was simply poured down a rathole. Of course that wouldn't happen, and progressives have plenty of ideas about what to do with it. My personal choice would be to mount a serious assault on the problem of global warming, a truly life-threatening emergency that the "free market" has so far failed miserably to address. But, as they say, that's another discussion.

On the surface, of course, this new regime of taxation would look very much like just about any other progressive tax, with a series of brackets and rates that increase for higher levels of marginal income (and, for perspective, we shouldn't forget that the top tax rate in the Eisenhower "Golden Years" was 91%). The difference—which has more to do with how we talk about the plan than with what the plan looks like—is to be found in its philosophical underpinnings:

  • First, as I've already alluded to, is the stated purpose of the plan. Emphatically, it is not to make everyone pay their "fair share." Its purpose is simply to reduce harmful levels of inequality. We don't have to defend it on any other basis. 
  • Second, the plan is designed to achieve its purpose by changing incentives. A series of higher and higher tax brackets would essentially put a "soft cap" on income. Multi-hundred-million-dollar compensation packages would lose some of their appeal—both for the CEOs who get them and for the companies that pay them. Talented people might consider something besides their personal bottom lines when choosing how to deploy their talents. 
But would limiting pay this way deprive us of the talents of our best people? Well, first you have to ask whether engineering ever more complex and risky financial deals is the best use of that talent for society, and secondly, past experience suggests that we would still have plenty of qualified applicants for the top jobs. There would still be no shortage of super-rich Americans, and the top earners could still enjoy a lifestyle the rest of us can only dream of. And remember, in America's heavily-taxed Golden Age, we still managed to enjoy the strongest quarter-century of growth in our history. Evidently the incentives were adequate to keep American business humming.

Economists have studied the impact of taxes on productivity, and there are actually two countervailing forces in play. One is the notion beloved of conservatives that taxes reduce the incentive to work. The other is the motivation to work more as taxes rise, in order to maintain your current level of take-home pay. According to Malloy and Case, for most workers these two effects roughly cancel out, meaning that people tend to produce the same amount, independent of changes in marginal tax rates. They concede that high earners may dial back their efforts a bit as their tax rates go up, but in many cases this doesn't have the expected effect of reducing total output of the economy. The explanation is that a lot of what the rich do consists of "zero-sum" activities, in which one person's loss is another's gain. In fact, Malloy and Case note, "some individuals in the top income group pursue quite a number of activities that others might be glad to see them spending less time on." Examples might include increasing corporate earnings by holding down wages, or lobbying Congress for protection from competition. The bottom line is likely to be a welcome increase in earnings for the middle class, with essentially no effect on overall output.

Malloy and Case acknowledge that the kind of tax reform they envision is, for the time being, off the table. Their near-term hope is that citizens may begin to see the continuing concentration of wealth at the very top as an externality with broader negative consequences—almost like, say, pollution—and to entertain the idea of fighting it the same way we might fight pollution, by means of the tax system. As they put it, "the lack of any limit to outsize economic rewards turns out to have a measurable cost, which Americans who aren't so wealthy keep getting asked to pay." Their recommended tax strategy "might start to do what has lately seemed impossible: give the best-paid Americans an interest in common again with the men and women with whom they work, and remind us that we're all in this together."

And to hell with fairness.


At 7:39 AM, Blogger egrove12 said...

Hey Rob - good post, but I would argue that you leave out of your analysis one of the strongest supporting arguments for the "fair share" claim: the argument that much of the income received by the highest earners was actually created by external factors, not themselves. As a result, it would be unfair (and highly irrational) for society to let them keep it all.

I explain this idea in more detail in my own post, found at www.concernedcitizenx.com. I'd love to get your thoughts.

Thanks, and keep up the good writing!


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