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?