Tall tales of taxing talent

Matt’s post on equity and efficiency reminds me of a paper by Greg Mankiw and Matthew Weinzierl on optimal taxation. The idea is as follows. Suppose that we think equity means a society where everyone has the opportunity to earn income proportional to the effort that they exert. The hardest workers are those who succeed in earning the most money, while others may choose a life of leisure and earn less. Well, to establish such a utopian place we’d have to do a lot more than eliminate racism, sexism and xenophobia from the human race.

After all, one’s endowment of ‘talent’ is determined by a lottery at birth. Some people are more intelligent, more athletic, more beautiful and, because of it, they are more successful than others. Since we reward not effort but success, those people have a natural advantage. It is simply not possible to say that everyone has equal opportunities when one person’s marginal productivity is far higher than another’s merely because of the talents with which they were born. To engineer a society where effort was rewarded at an equal rate we’d have to tax all of those innate characteristics of the talented and transfer the wealth as a subsidy for those who are less gifted.

Clearly this proposal runs into some observability problems: beauty and intelligence, for example, are not observable or measurable in any meaningful sense. However, some characteristics, such as an individual’s height, are observable and can be taxed. Mankiw and Weinzierl run the numbers on height and estimate that a tall person could pay up to 10% more income tax than a short person of the same income. Interestingly, they use this as evidence that standard optimal taxation models don’t accord with our natural ideas about fairness and equity. I see it the other way: those who are born talented start with an unfair advantage over the rest. Taxing them at a higher rate merely levels the playing field. So why is it that taxing men more than women and tall people more than short people seems unfair?

  • Luca

    I read that paper. Honestly, their idea is not a big deal (just a clever implementation of a very old one, actually): taxing height is a form of taxation that comes as close as it gets to lump sum taxation. It is well known that lump sum taxation induces more efficiency than any other form of income taxation.
    At the same time it is also well known that lump sum taxation is extremely unlikely to achieve political viability. Margaret Thatcher tried to introduce a form of lump sum taxation in the early ’80s in UK and there were serious riots in the streets. Nice posting though.

  • “So why is it that taxing men more than women and tall people more than short people seems unfair?”

    Rule of thumb I would guess.

    With the women men thing there is an additional issue – choice. Although a person cannot choose their height they can (to some degree) choose their involvement in the labour market. If women on average are less involved the labour market it might be more important to ask why – after all what happens if we tax women less (given that their labour supply is more elastic) and then the household structure changes to take advantage of this tax structure? In that case we would end up chasing our own tail moving the tax around.

  • CPW

    Harrison Bergeron fan rauparaha ?

  • I hadn’t read Harrison Bergeron, but it does paint an awfully bleak picture. Luckily that’s not what I suggested here 😉

  • CPW

    Sorry, meant to respond earlier. My response was tongue-in-cheek, but I think you should define exactly what is wrong with Vonnegut scenario. He’s met your equity principle: return on effort is equalized (at zero). You might say he’s met an even stronger equity principle of equal utility for all. Since your original post indicated your support for such a principle, what’s there to object to?

    Perhaps you think there is a pareto superior alternative to the society Vonnegut envisages, but it is hard to guarantee that. If you had the lowest initial endowment of talent, you might prefer total equality to any alternative.

    For what it’s worth, I both agree with Mankiw (the tax system doesn’t conform to any consistent set of equity principles) and you (if such an equity principle existed, it would makes sense to tax more observables than income).

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