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.