Tuesday, April 17, 2007

Why Instrument Taxation Just Seems Wrong

Greg's new working paper demonstrates that social welfare can be enhanced by placing an extra tax on people who are tall. To public finance nerds the underlying logic is obvious if odd, to everyone else its probably repugnant.

Greg's Question is Why?

Is it because Public Finance Nerds think about the world the wrong way or is it because there is something special about taxing height.

I'd say its a little of both.

First, though here is the logic behind taxing height. If the government wants to make everyone as well off as possible then it wants to take a little from people who experience good luck and give it to people who experience bad luck. This is because we feel more bad when we are unlucky then we feel good when we are lucky.

The problem is that it is hard to tell when something good happened because the person was lucky or because they worked hard. Is the wealthy doctor who just passed you in his Jaguar rich because he was born into the right family with the right smarts, or is he rich because he worked his butt off to get into medical school.

The truth is that its most often a little of both.

So usually the government is between a rock and a hard place.

Height, however, is a different story. Few people actively choose their height yet it turns out that height makes a fair bit of difference in terms of ones earning potential. Clearly then the extra earnings you get from being tall is the result of luck. (This isn't so clear but lets gloss over that for now)

So why not take a little from the lucky tall people of the world and give to the unlucky short. Why not? Well, its seems just wrong for starters.

Part of the reason that it seems wrong is that some tall people will also be unlucky. Some short people on the other hand will be very lucky. Height may help, but its one of only many factors. It seems particularly cruel for the government to add insult to injury by placing an extra tax on an already unlucky tall person just to turn around and give it to some lucky short person.

Indeed, most people find injustice created by the government to be far worse than an equal injustice solved by the government. In a sense people are risk averse when it comes to policy action. I think this features prominently in most peoples notion of what is "fair". How and why this result occurs is the topic of the paper I am working on now.

Incidentally, the results also show why most people are skeptical of free trade although on net it benefits us.

Note: Kling also gets in on the action.

17 comments:

Jeremy McKibben-Sanders said...

I don't think the important distinction is between luck and effort--after all, inheriting or acquiring the ability to exert effort is also a matter of "luck." The difference between effort and height is that an individual can modify his effort, but not his height. The height tax makes logical sense to me because it increases social welfare on net without blunting the efforts of the most productive individuals.

Although some injustice is done to "unlucky" tall people, the tax does away with more injustice than it creates. Eventually we will find a variable, or a combination of variables, with an even better correlation to productivity.

The criticisms that Greg points out in the second half of the paper are what ultimately convinced me that the tax wouldn't work. Namely, that such a tax would reduce the self-respect of both tall and short.

I'm looking forward to that paper on notions fairness.

-Greg Mankiw said...

I think someone here is jealous of a 6'2", 198 lb economist.

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