Undercover Economist

May 29, 2010 12:23 am

Everybody wants fair play – shame we can’t agree what it is

When it comes to income and taxes, it is not merely about equitable distribution and fair processes. Some are just born lucky

Labour’s election slogan, “a future fair for all”, was vacuous. No surprise there, I suppose: it was an election slogan after all. Fairness is one of those ideas that fails a basic test in a slogan or a mission statement – could you imagine anyone campaigning for unfairness? Moreover, fairness means very different things to different people.

For instance, if Sue earns £20,000 and Jane earns five times as much, £100,000, what’s the fair burden of tax? An extreme libertarian view is that all tax is armed robbery from the biggest gangster of all, the government. An extreme utilitarian view is that as long as Jane’s post-tax income is greater than Sue’s she has less need of the money and should be the first port of call for any extra taxation. It would be perfectly fair, under this view, for Jane to pay 75 per cent tax and Sue to pay nothing, and the only objection would be the practicalities.

I have a grudging respect for both sides of this argument. But in reality, we fudge a middle ground. Most people seem to think that it’s reasonable for Jane to pay a higher percentage of her income as tax than Sue does. But some would say that if Jane pays £10,000 and Sue pays £3,000, Jane has contributed more than her fair share, even if the average tax rate she faces is lower. Further confusing the issue are taxes on fuel, cigarettes, air fares and other items which are correlated – imperfectly – with a particular level of income.

Greg Mankiw, a Harvard economist, author of a bestselling textbook and a former adviser to George W. Bush, has published an essay arguing that the utilitarian viewpoint, even in a mild form, is wrong. He thinks most people would agree with him once they thought about the implications. One such implication is that the US should impose a heavy tax on all its citizens and send the cash to much poorer people in the developing world. Mankiw is right to think that few Americans would support such a policy; he’s wrong to regard this as a strong argument against utilitarianism. It might equally be an argument against treating casually held moral intuitions too seriously.

“Fairness”, in Mankiw’s view, is not about distribution, but about people getting what they deserve. But that naturally raises other questions. I’m not convinced by Mankiw’s various arguments, but another Harvard academic, the late Robert Nozick, produced a much better one: the famous “Wilt Chamberlain” thought experiment.

Imagine, said Nozick, a “fair” distribution of income. After the government somehow imposes that distribution, then imagine that a million people are willing to pay 25 cents each to see basketball games featuring Wilt Chamberlain, a star of the day. Each is now 25 cents poorer and Chamberlain is a quarter of a million dollars richer. Everyone has been made happier by this voluntary set of transactions. How, then, can we say that the original distribution was “fair” and the new distribution is “unfair”? Leaning on this logic, Nozick argued that fairness must be more a matter of fair processes rather than fair shares.

The difficulty with both the Wilt Chamberlain argument and Mankiw’s vaguer claim that people should get what they deserve is that people have different starts in life. Chamberlain had talent. Others have expensive educations, or the good fortune to be born in the right country. All these things have real economic value. Do any of them mean that the lucky winners deserve more?

The lesson I draw from Nozick’s argument is not that redistribution is always unjust. It is that the earlier in life all talents can be nurtured, the less we will have to worry about spreading the wealth around later.

Tim Harford’s latest book is ‘Dear Undercover Economist’ (Little, Brown)

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