Monday, December 13, 2010

Jonathan Weinstein on Fairness in Tax Policy

It is worth reading the whole thing; here is the conclusion:

As a 1st approximation, someone in a highly scalable profession would keep roughly

half their income, since they enter the game with, on average, half the population

present. (See a more carefully worked out example in the appendix.) There are

many possible adjustments to this estimate; for one, if the inventor or entertainer

is extracting rents from network e ects and they are not actually much better than

a replacement, their Shapley value might be much less than half their income. On

the other hand, someone in a non-scalable profession creates roughly the same value

regardless of the size of society, so they would keep more of their income. Whether

these considerations re
ect fairness is, of course, ultimately a value judgment, but a

50% top marginal tax rate is well within the historical range, so such an outcome

would not be radical.

The great intellectual advances that illuminated the enormous bene ts of the free

market, starting with Adam Smith and continuing into the 20th century, have long

since been assimilated into our political discourse. The danger is that in some circles

the lessons have been learned just a bit too well. The free market then becomes a

21st-century deity whose dictates are perfectly fair and should not be questioned,

lest its manna of prosperity cease to rain down upon us. Warning about this is, of

course, unnecessary for economists, who, whatever their political stripe, understand

perfectly the limits of core equivalence and welfare theorems. Keeping any nuance

is very di cult when intellectual advances are distilled for a larger population, so

responsible academics always have to be very careful in how they discuss the practical

impact of abstract results.
(Full disclosure: Jon is my cousin).