Relevant and even prescient commentary on news, politics and the economy.

Plutocracy Rising

Via reader rjs news and Naked Capitalism comes this excerpt on income inequality and programs to address the issue:

Bill Moyers: Plutocracy Rising – via Yves Smith – Bill Moyer’s latest show, with Matt Taibbi and and Chrystia Freeland, focuses on how the super rich have established a yawning chasm between themselves and ordinary Americans, both in financial and physical terms. One major focus is view the rich are where they are by virtue of their talents and efforts, not (say) by regulatory and tax arbitrage, and how they’ve convinced themselves and a large swathe of society of this myth.
One place where I quibble is where and Freeland argues that “progressives” have dropped the ball by focusing on manufacturing jobs as a solution to the woes of the fallen middle class. That’s hardly the first or best remedy; more progressive taxation (on the order, say, of what we had in Reagan’s day) and getting rid of the favorable treatment of “carried interest” would have far more short term impact. And if I’ve heard the weak tea lefties correctly, the preferred fix for creating more manly jobs (remember Obama’s fixation with that?) is infrastructure spending, where the US has fallen way behind its advanced economy peers, and lousy infrastructure is an impediment to commerce. Freeland has spent too much time in Davos and is unduly enamored of the big multinational corporation business models of extended supply chains. But that aside, there is a lot of good stuff in this show

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Defining Rich VI: 1936 tax tables

Today we are continuing to look at the historical tax tables to see how we viewed and possibly defined rich. I introduced this idea with my post: Defining Rich III.
 
I found a source for all sorts of historical data from the Census Bureau. You can down load it or the better way is to click on the PDF file which brings up the Intro and then click on any of the listings of the table of contents which takes you to that set of PDF data.  For this posting regarding income data I am using this section.
 
The average weekly income for all manufacturing was $22.82 per week on 39.1 hours work. The highest paid was printing/publishing newspapers/periodicals at $35.15 per week on 37 hours work. The lowest was cotton goods at $13.80 per week on 37.5 hours of work.
 
In the non-manufacturing sector the I calculated the average weekly income to be $23.76 on 40.28 hours of work. The highest earnings were electric power/lights manufactured gas at $31.70 per week on 40.2 hours work. The lowest was hotels at $13.97 per week on 48.3 hours of work. For the Walmart greeter retail trade-general merchandising it was $17.51 per week on 40.8 hours work.
 
There were regional differences also. The most glaring is the north/south difference. The hourly wage ranges from 12.5 cents to 19 cents less if you worked in the south. The greatest differences being between the East South Central and the Pacific North.

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The Effect of Individual Income Tax Rates on the Economy, Part 7: 1988 – 2010

by Mike Kimel

[UPDATE: Graphic title corrected below. h/t Eric Whitaker]

This post is the seventh in a series that looks at the relationship between real economic growth and the top individual marginal tax rate. The first looked at the period from 1901 to 1928, the second from 1929 to 1940, the third from 1940 to 1950, the fourthh looked at 1950 – 1968, and the fifth from 1968 to 1988. Because the Reagan era is so pivotal in the American psyche, it was also covered again in the sixth post, which looked at the period from 1981 to 1993. This post will look at the period from 1988 to the present.

Before I begin, a quick recap… both the 1901 – 1928 period and the 1929 – 1940 failed to show the textbook relationship between taxes and growth. In fact, it seems that for both those periods, there was at least a bit of support for the notion that growth was faster in periods of rising tax rates than in periods when tax rates were coming down. It is worth noting that growth from 1933 to 1940 was generally quite a bit faster than at any other peacetime period since data has been available, both on average and for individual years. Not remotely what people believe, but that’s what it is.

In the 1940 – 1950 period, we did observe slower economic growth following a tax hike and faster economic growth followed a tax reduction. However, that happened when the top marginal tax rate was boosted above 90%.

Interestingly enough, though the so-called “Kennedy Tax Cuts” are often used as one of the prime exhibits on the benefits of cutting taxes, a look at the 1950 – 1968 period yields no such conclusion. Growth rates were already rising before the tax cuts occurred in 1964 and 1965, reached a peak when the tax cuts took place, and started shrinking immediately afterwards. The other period that is always pointed to as evidence that tax cuts spur growth is the Reagan years, which showed up in the 1968 – 1988 and the 1981-1993 posts. It turns out that put into context, the Reagan years produced one year of rapid but not particularly extraordinary growth a few years after tax cuts began. That’s it. In fact, its worse than that… during the Reagan Bush 1 years, aside from that one good year, growth tended to shrink as tax rates were slashed.

Real GDP figures used in this post come from Bureau of Economic Analysis. Top individual marginal tax rate figures used in this post come from the IRS. As in previous posts, I’m using growth rate from one year to the next (e.g., the 1980 figure shows growth from 1980 to 1981) to avoid “what leads what” questions. If there is a causal relationship between the tax rate and the growth rate, the growth rate from 1980 to 1981 cannot be causing the 1980 tax rate. Let me stress this point again as I’ve been getting people e-mailing me to tell me I’ve got the growth rates shifted a year. That is correct, and is being done on purpose (and is shown on the graph labels). To avoid questions of causality, the growth rate in year X used in this post is the growth rate from year X to year X+1. And when I say “to avoid questions of causality” – you’d be amazed at how many people write me when I don’t do this and insist that sure, higher tax rates seem to be correlated with faster growth, but that’s because when growth is faster governments feel more willing to charge higher tax rates.

So here’s what the period from 1988 to the present looks like [update: Graphic Title Corrected; h/t Eric Whitaker)

Once again, the data fails to show anything resembling the old “lower taxes = faster growth” story. In fact, once again, it kind of looks like things go the other way. The two biggest dips in the graph occur when tax rates are at low points (28% and 35%). The highest tax rates also coincide with the fastest overall growth. But no doubt next week’s post looking at the next period will be the one that finally shows what everyone believes is there. Oh wait, we’ve run out of years.

Now, I’m sure someone will bring up the fact that there was a tech boom and the internet in the late 1990s. And no doubt there was some of that. But that doesn’t explain why only once did the graphs appear to show that cutting tax rates correlates with faster economic growth, and that one time occurred in the middle of WW2 during what was essentially a command economy when tax rates were above 90%. Talk about a special case. Conversely, most of the other graphs that we’ve seen in this series have not shown any relationship between tax rates and economic growth. And then there were a few, such as those showing the Reagan era, that seem to at least suggest that faster growth was more likely when tax rates were higher. None of this matches what we hear in the liberal (ha ha) media. None of this matches what I see in econ textbooks. It doesn’t match what I read in economics journals. But anyone, and I mean anyone, can do these graphs. Not sure many people can replicate Barro.

Next post in the series… what it all means.

As always, if you want my spreadsheets, drop me a line. I’m at my first name which is mike and a period and my last name which is kimel (note that I’m not from the wealthy branch of the family that can afford two “m”s – make sure you only put one “m” in there) at gmail period com.

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Investment, Consumption, and Progressive Taxation

Hey remember me? Just a quick driveby to start some discussion.

Classical, neo-classical, and neo-liberal economics all share a common mistaken psychological premise, one that is simple but deep, and in itself explains why they don’t understand the aims of Progressive Taxation.

Label it how you like, the academic discipline that emerged from England in the 18th and 19th century implicitly, hell I’ll make it stronger, explicitly assumed that the goal of capitalism is accumulation, i.e. getting more an more numbers on the right side of the ledger sheet. Which assumption seems blindingly obvious, which is why it is simple and goes so deep. In this model taxation on gains from capital serve to displace investment on the equally simple assumption that if you tax something people do less of it. Again perhaps blazingly obvious.

But it doesn’t hold up well against the historical record either narrowly considered in relation to 18th and 19th century England or more broadly across cultures and across history. Instead in most of those cultures and most definitely in Georgian and then Victorian England the evidence is strong that capitalists saw investment as the means to different ends, those of consumption and display that in turn would lead to societal status. You only have to look at the great Country Houses that were built during this period, with no expenses spared inside or out whether that be on landscape architects or silversmiths. And even a passing familiarity with say English literature of the time shows this on full display, the manufacturing classes rushing to build those country houses and buy their daughters way into society as soon as they could afford it, the facts on the ground clearly show that the driving goal of most investors was to finance consumption and display in the form of dress and habitations. Let us put it this way Scrooge was not then or now considered the hero, and throughout history the miser has been a despised and mocked figure.

Now this runs directly against the “blindingly obvious” assumption that the goal of investment is purely accumulation. So what happens when we substitute ‘consumption and display’? Well a couple of things. First we can recognize that under some circumstances accumulation IS display, rankings on the list of ‘the most wealthy X of Y’s’ being just as important as more explicit displays of status on the British and European pattern. And since the U.S. doesn’t have patents of nobility, this aspect of accumulation as display has an outside importance. But in any case none of it seems to effect the other side of the equation, very few billionaires not named Warren Buffet actually resist the temptation to buy the multiple mansions, the penthouse apartments on Central Park, the yacht, the vacations in the South of France, the jewelry, the trophy or society wives (depending on whether they are new or old money). You just don’t have the MOTUs reinvesting every single penny, instead when given an opening they can and do spend and often in the most conspicuous ways possible, there not being much difference between an American billionaire of today and a 16th century British Duke or more to the point a 19th century Manchester industrialist in this regards. Instead re-investment is often seen as just the vehicle needed to climb to the next consumption level.

So what does this have to do with progressive taxation? Well once you accept the assumption that the fundamental goal of investment among the upper classes is consumption and display and further that in most cases that consumption doesn’t have the multiplicative effects on the wider economy that re-investment would then the goal of progressive taxation becomes obvious, and by the way a lot less socialist than the old shibboleth of redistribution. The goal of progressive taxation in the classical political liberal position dominate in this country from 1913-1980 was to penalize consumption and favor re-investment. After all at least under current law gains on capital are by and large not exposed to federal taxation until they are realized, if instead they are plowed back into productivity improvements they are at the corporate or individual level largely tax exempt. It is only when you take the equity out in the form of interest, dividends or simply cashing out equity that tax is encured.

The logical conclusion of this model is that if we accept the principle that to tax something is to induce people to do it less, if nothing else by increasing its marginal cost, then Supply Side becomes the Voodoo the Elder Bush always said it was. Lowering top marginal rates and taxing capital gains at half the rates of capital income would under my model have the effect of encouraging consumption and discouraging reinvestment. Whereas high rates would have the opposite effect. Which has the advantage of being testable, if we had to constrast the 50s and the 80s in terms of the consumption patterns of the near the top level of capitalists and managers we see a lot less conspicuous consumption among the former than we do in the post Reagan-era. In the 50s and 60s only Greek shipping magnates could afford the kind of consumption patterns that became common in before, during, and after the Enron era and certainly continuing today. From my perspective all Supply Side did was to lower the cost of consumption in pre-tax dollars, purchases that were inconceivable in the days of 90 and then 70% top rates have become routine in the days of 15%.

Which suggests that the current neo-liberal surrender to the idea that any increase in tax on capital inevitably will lead to disinvestment, almost as if it were an accounting identity, when history suggests the effects are the other way around, capitalists wanting to maintain the same level of consumption in a higher tax environment simply needing to intensify their re-investment rather than lazily take those gains out in the form of salaries, bonuses, and dividends.

You could sum up the whole argument by saying that Manchester and allied schools of economics assumes that everyone behaved like a Northern European Calvinist Burgher, or more narrowly that the triumph of capitalism was represented in the premises of Scrooge and Marley.

BTW this substitution of ‘consumption’ for ‘accummulation’ has explanatory powers far outside the narrow confines of capitalist taxation. A great deal about peasant economies that have historically baffled both branches of liberal economics, that which led to Chicago and that which gave us Marx, in my view stemmed from not getting that most peasants even in the strictest systems organized their economic life around consumption targets rather than growing net worth (say by acquiring more fields). You get a strong whiff of this with the modern bafflement that the French would substitute 35 hour weeks with seven weeks of vacation for longer hours that would lead to higher net worth. Do they not want to get rich? Well yes, but to what end? Adopt a consumption based model and lots about the European system and early retirement here starts making perfect sense.

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Robert Reich’s After Shock and Corey Robin’s Freedom Arguments

by Linda Beale

In earlier posts on ataxingmatter (here and here), I reviewed Robert Reich’s 2010 book, After Shock, and wrote about his suggested cures for the problems made most visible in the 2007 crash and the Great Depression that followed.

The gist of the book is summed up in the following quote:

“[L]eft to its own devices, the market concentrates wealth and income–which is
disastrous to an economy as well as to a society.” at 59

Corey Robin writes in the Nation about the same problem, Reclaiming the Politics of Freedom, The Nation, Apr. 26, 2011. But he notes that harping on the distributional inequality doesn’t resonate with voters. If the left wants to influence policies and capture the hearts of voters, he suggests, it needs to demonstrate that this distributional mayhem, which leaves everybody but the rich vulnerable, has even broader consequences that reach to the very fundamental creation myths of our society–the desire to be our own masters, to free ourselves from a tyrannical monarchy and colonial overlords who seemed to want to dictate how we could work, what we could drink, and where we could live. That is, to make what we are saying comprehensible at the “yeah, that’s what counts for me” level, we need to connect to America’s own Founding Moment. We need to “reclaim[] the politics of freedom.”

And I think he is correct. Because the problem we are facing today, with corporate lobbying and campaign contributions reinforcing the elite class’s wining and dining of politicians, is more than the dysfunction of the economy. Yes, there is too much money at the top where there is not enough ability to spend it. Yes, there is too little money at the bottom where there is no way to provide for basic needs. Yes, there is barely enough in the middle, resulting in stagnation in local businesses who don’t have enough customers to sell to and can’t afford to give credit to those who want to buy.

It is not just that banks, connected to power through their managers and shareholders, are able to speculate with other people’s money (our money!) in the international derivatives casino and then push their losses off on us. It is not just that corporate bosses rake in as much in a day as many of their workers make in an entire year of hard labor. It is not just that we can no longer talk to anybody local when there is a problem with our phone or our order from a company. It is not just that ordinary people are ignored, disregarded, almost shunned, because the elite really are only comfortable in the company of other elites. It is not just that we can’t get an appointment with a doctor unless we have (expensive) health insurance, or can’t get that crown we need on the broken tooth because it costs as much as some of us make in half a year.

No. These things are real, they affect us every day, they make us angry every day because we recognize our powerlessness to deal with the highly impersonal Big Business world that has been fostered by the four decades of reaganomics’ deregulation, privatization, tax cuts and militarization. But still, the problem goes much deeper than these things.

Our very freedom is threatened. When we are economically powerless, we are also powerless in our lives because we lose our freedom to make choices that are right for us.

  • we lose our rights to bargain with our employers (look at how Wisconsin and Ohio have treated their public employees or how WalMart treats its workers and anyone who talks unions),
  • we lose the power to improve ourselves by pulling ourselves up by the bootstraps through publicly funded education from grade school through university,
  • we are dominated in the marketplace by powerful businesses that use automated systems to turn us off, ignore our calls and letters seeking redress for a mischarge or a poorly done job,
  • we lose our jobs, are forced to accept paycuts or furloughs, when the company claims times are tought, yet we watch the same public companies to pay their CEOs millions more

Our freedom to improve ourselves, freedom to choose the kind of work we want to do, freedom to prepare for our retirement and then retire with some security about our future, freedom from worry about whether or not a catastrophic medical emergency will eat up all our savings and leave family without an adequate living–all these freedoms are being threatened today by the concentration of wealth in the hands of an elite few who thereby become emplowered to set the market terms as they choose.

The idea of the “free market” is a bill of goods sold to replace the real concepts of freedom we should be considering. Markets, of course, can only function well for the people where government constraints prevent the owners and managers from setting all the terms to suit themselves, leaving externalities of their profitmaking to be borne by the people. literally ripping them off. The sloganeers have persuaded ordinary Americans to think that the American Dream of freedom is encapsulated in that little bitty notion of a “free market” so that they will unknowingly throw away the big idea of freedom–the freedom to set one’s own course in life, in a cooperative society that works to provide those tools.

The reason we need a progressive tax policy–including at the least progressive tax rates with brackets that reach much higher into the stratosphers of the ultra rich (55% for those making $1 million or more annually) ; elimination of the capital gains preference (so that all income is taxed under the same rate structure); and an estate tax with bite (meaning a graduated rate that protects a reasonable nest egg for the next generation while serving as one method of limiting the concentration of wealth)– is to ensure the freedom of each and every one of us, from rich to poor, from newly arrived immigrant to elderly Native American.

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Justifying Progressive Tax Rates

by Mike Kimel

Justifying Progressive Tax Rates
Cross posted at the Presimetrics blog.

The Atlantic’s website carries a blog by a conservative/libertarian who writes very well on a wide variety of topics, and who sometimes covers economic issues with great insight. Of course, I’m talking about Andrew Sullivan. (What, you didn’t think… of course not. Don’t be ridiculous.)

A smart writer – even one you don’t always agree with – also has smart readers. (Of course, the flip side is that a clueless writer who gets the facts wrong all the time also has clueless readers who get the facts wrong all the time.) Here’s a bit of a letter one of Sullivan’s readers readers sent him, reproduced on Sullivan’s blog:

I’m a bit late with this, but I wanted to respond to your post yesterday in which you wrote:

“To many on the right, this inequality is a non-issue, and in an abstract sense, I agree. Penalizing people for their success does not help the less successful.”

Let’s look at this issue another way: A homeowner who owns a $1 million home will pay more for insurance than will the owner of a $200,000 home. The insurer is not penalizing the first homeowner for his success. The first homeowner simply has more to lose and therefore pays more. If you believe the core function of government is to provide a stable environment (physical, financial, legal, social) in which society can flourish, the wealthy have more to lose from government’s absence. Penalizing the successful wouldn’t help anyone. Underwriting the successful costs money.

Later in the post, Sullivan goes on to inadvertently disrespect Hauser’s Law. Sullivan’s blog is not an “econ blog” but I think it has better economic insights than a lot of blogs that are, even if I often disagree with his politics.

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Declining Progressivity in US Taxes

by Linda Beale

Maybe at this juncture, when Congress is beginning to talk about what to do about the sunsetting Bush tax provisions, it’s an appropriate time to remind ourselves about our historic commitment to progressivity in our tax system. A good source for thinking about this is an article by Tom Piketty and Emmanuel Saez, How Progressive is the U.S. Federal Tax System? A Historical and International Perspective, 21 J. Econ. Perspectives 3 (2007).

What they show by looking at income and taxes over the period from 1960 to 2004 is revealing. While our system remains progressive to some extent, the progressivity has declined significantly. This is primarily, they say, because of the cuts in the corporate tax and the estate tax–taxes that impact the very wealthiest more than others because of their high ownership of financial assets. Our concept of distributive justice has always demanded that we should determine the tax burden based on individuals’ relative abilities to pay–that means that those with lots more should pay proportionately more of their income, since those with very little need all of their income just to meet daily needs, and those with considerable wealth won’t even notice whether they have another few dollars or not.

The decades since Reagan took office have taken a huge toll on that sense of shared commitment. Fueled by a religious-like belief in the mathematically elegant but unrealistic assumptions of the “free market” economists from the Chicago School (see Yves Smith’s book, Econned, for a good take-down of the freshwater economists), the GOP in Congress passed huge tax cuts for the wealthy accompanied by increasingly heavy payroll taxes for others at the same time that spending continued apace–in fact, Reagan, Bush1 and Bush2 all greatly increased the military budgets and the Bushes embarked on wars of choice that imposed significant budgetary demands. The wealthy have fought for laws that favor them–deregulation, zero capital gains taxation, lower corporate taxes, the ability to offshore businesses and assets freely, privatization of social security and other programs (that would put more dollars under direct control of investment bankers and insurers), and lowering of individual tax rates and provisions that phased out deductions for the wealthy (like the phase out of the itemized deduction, which was repealed under Bush, etc.).

There are some really great graphs in the article–so look at it rather than just reading these excerpts. But if you only have time for excerpts, here are some key ideas.

Progressivity of the overall tax code has unambiguously declined in the United States and in the United Kingdom. The average share of income paid by those at the very top of the income distribution has dropped substantially. Id. at 21

***

Large reductions in tax progressivity since the 1960s took place primarily during two periods: the Reagan presidency in the 1980s and the Bush administration in the early 2000s. The only significant increase in tax progressivity since 1960 took place in the early 1990s during the first Clinton administration. Id. at 23

***

many of the recent tax provisions that are currently hotly debated in Congress, such as whether there should be a permanent reduction in tax rates for capital gains and dividends, or whether the estate tax should be repealed, affect primarily the top percentile of the distribution—or even just an upper slice of the top percentile. This pattern strongly suggests that, in contrast to the standard political economy model, the progressivity of the current tax system is not being shaped by the self-interest of the median voter .12 Id. at 23.

12 Permanent reductions in dividend and capital gains combined with a repeal in the estate tax would certainly reduce the current progressivity of federal taxes and favor large wealth holders. The Alternative Mininum Tax, which is not indexed for inflation and hits more and more tax filers, will mostly increase tax burdens on the upper middle class but will not affect much the top 0.1 percent.

***

The federal individual income tax is the largest tax, typically collecting 7–10 percent of GDP in most years since the 1960s. Individual income taxes declined sharply from 2000 to 2004 following the tax cuts of the Bush administration, falling from 10.3 percent of GDP in 2000 to 7.0 percent of GDP in 2004. The payroll tax financing Social Security and Medicare has increased significantly, climbing from about 2 percent of GDP in the 1960s to 6.4 percent of GDP by 2004. The corporate income tax has shrunk dramatically: it was typically 3.5– 4.0 percent of GDP in the 1960s, but had fallen to 1.6 percent of GDP by 2004. The estate and gift tax has always been very small relative to the other taxes, although it is important for distributional analysis because it disproportionately affects those with higher incomes. The estate tax collected about 0.6 percent of GDP in the 1960s, and 0.25 percent of GDP in 2004.

***

The greater progressivity of federal taxes in 1960, in contrast to 2004, stems from the corporate income tax and the estate tax. The corporate tax collected about 6.5 percent of total personal income in 1960 and only around 2.5 percent of total income today. [emphasis added] Because capital income is very concentrated, it generated a substantial burden on top income groups. The estate tax has also decreased from 0.8 percent of total personal income in 1960 to about 0.35 percent of total income today. As a result, the burden of the estate tax relative to income has declined very sharply since 1960 in the top income groups.

[Hat tip to fellow Angry Bear rdan for reminding me about this article.]

crossposted at ataxingmatter

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Taxing wealthy to pay for health care

by divorced one like Bush

As we are talking about taxes and health care this is The Real News Network article regarding raising taxes on the wealthy to pay for health care. (The Real News Network is a global online video news network that listens to and is dependent on its audience. No ads. No government subsidies, no corporate sponsorship. Check out our site.)

Make sure you catch Presidents Obama’s response to the obligatory question framed as “punishing the rich”. The article interviews Professor Richard Wolff, economist, U of Massachusetts.

If President Obama and Professor Wolff have piked your interest, or you would like to understand why they talked about taxing the rich as they did, you can read my series on taxation starting here, moving to the second one, moving to the final post.
Then you can go here and read Linda Beale’s appeal for support of eduction regarding tax literacy.

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Fairness as a concern of economics

by Linda Beale

There is an interesting book that I am just beginning, by George A. Akerlof & Robert J. Shiller. It’s called “Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism”. The jacket says that the authors “challenge the economic wisdom that got us into this mess, and put forward a bold new vision that will transform economics and restore prosperity.” It is clearly a Keynesian approach–the jacket, again, says they make the case for “a more robust, behaviorally informed Kenyesianism”.

Sounds like a tall order, and I have not yet read or thought about enough of the book to know whether it is satisfied or not. But I do find the emphasis on fairness of considerable interest.

Fairness has long been a keystone of tax policy, and yet there are a number of tax scholars who consider efficiency the quintessential policy consideration and sometimes appear to relegate fairness to the corner for hobgoblins of small minds. So I wonder if this book, and its recognition of the overriding importance of fairness to economic analysis, is indicative of a fundamental change in the academic approach to economics and related fields that have tended to push fairness aside.

Here’s a quote from Albert Rees (Chicago PhD in labor economics) that starts off the second chapter on fairness.

The neoclassical theory of wage determination, which I taught for 30 years and have tried to explain in my textbook…has nothing to say about fairness. … Beginning in the mid-1970s, I began to find myself in a series of roles in which I have participated in setting or controlling wages or salaries. … In none of htese roles did I find the theory that I taught so long to be the slightest help. The factors involved in setting wages and salaries in the real world seemed to be very different from those specified in the neoclassical theory. The one factor that seemed to be of overwhelming importance in all these situations was fairness. (Akerlof & Shiller at 20, quoting Rees, The Economics of Trade Unions, Univ. of Chicago Press, 1973).

The authors go on to admit that Rees exaggerates, but then they provide a critical insight.

However many articles there have been on fairness, and however important economists may consider fairness, it has been continually pushed into a back channel in economic thinking. … But fairness may be just as important as the economic motivations that are given prime time. (Akerlof & Shiller at 20.)

So what economic theories of fairness do the authors suggest merit consideration? They highlight socilogy’s equity theory of exchanges, which consider far more than the monetary value of the counterparties’ positions, adding subjective evaluations about status, gratitude and similar factors. Another if the theory of social norms, that suggests that people are happiest when they live up to what they think they should be doing, including conducting themselves fairly with others (and being treated fairly by others).

And how should fairness be taken into account? Essentially, Alerkoff and Shiller argue that the old way of treating “real” economics as fundamental and fairness as an afterthought has to go. In stead, if fairness motivations are discounted, justification must be provided for doing so.

This approach, they say, explains much better than traditional economics the reality of unemployment and the fact that most firms pay their workers more than the market would require. It has to do with one’s sense of fairness–if workers sense they are being treated more than fairly (and their wage is the ulimate symbol of this treatment), they will fully buy into the goals of their employers.” If they are treated unfairly, they will tend to shirk. Id. at 105.

The difficulty of course, is in settling upon a definitive theory of fairness. In tax, we often talk about “ability to pay”, in a relative sense, as the critical definition, which is in turn the justification for a progressive rate schedule that taxes wealthy people at a rate considerably (or, after 40 years of rate lowering, somewhat) higher than it taxes middle income people. Libertarians, among others, have pushed back against the ability to pay concept of fairness, arguing for one version or another of a flat tax. It is one of the critical struggles, from my perspective, in the current class warfare whereby some groups are pushing for zero taxation on capital income (through a national sales tax or consumption-base rather than an income-based tax system). In other words, though there is a long-held consensus position about fairness in tax, there is currently considerable foment around the very concept of fairness. I’m glad to see fairness appropriately emphasized, but that is just the first step to developing a fairer tax system or a more complete economic theory.

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