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WHAT ECONOMICS CAN AND CANNOT SAY ABOUT EGALITARIAN REDISTRIBUTION

Published online by Cambridge University Press:  14 June 2017

Lawrence H. White
Lawrence H. White*
Affiliation:
Economics, George Mason University
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Abstract:

I critically consider four purported economic-efficiency arguments for egalitarian redistribution of income or wealth. (1) Jeremy Bentham’s “greatest aggregate happiness” criterion has been used (by Bentham, John Stuart Mill, Alfred Marshall, A. C. Pigou, Abba Lerner, and more recently Richard Layard) to argue for wealth transfers toward the poor based on the supposition that they register higher happiness from a marginal dollar. Drawing from Vilfredo Pareto and Lionel Robbins, however, I argue that modern economic theory is not about individual happiness, let alone aggregate happiness, and therefore does not support (nor refute) any happiness-based case for wealth redistribution. (2) Theories based on a “social welfare function” misapply the economic way of thinking in a different way. (3) Other writers have framed redistribution as a public good, and public goods provision by the state as a voluntary collective means of satisfying individual preferences, thereby using modern economic theory to formulate a rationale for redistributive policies based on Pareto-efficiency. I criticize this rationale for resting on suppositions about actual preferences that are self-immunized against falsification. (4) James Buchanan made a related case for taxing inheritances based on the supposition that in constitutional deliberation behind a veil of ignorance we would agree to such a policy based on our preference for a certain kind of fairness. I find this argument non-economic, equally unfalsifiable, and no more plausible than alternative suppositions about our common preferences. The economic way of thinking does speak clearly, however, about how taxes on income or wealth discourage its production, the more so the higher the marginal tax rate.

Keywords

egalitarianismredistributionutilityPareto efficiencysocial welfarepreferences
Type
Research Article
Information
Social Philosophy and Policy , Volume 34 , Issue 1 , Summer 2017 , pp. 56 - 78
Copyright
Copyright © Social Philosophy and Policy Foundation 2017 

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References

1 Michael Kinsley, “The Improbable Dream,” Vanity Fair (July 2014), http://www.vanityfair.com/news/business/2014/07/thomas-piketty-wealth-money-redistribution; Piketty, Thomas, Capital in the Twenty-First Century (Cambridge, MA: Harvard University Press, 2014), 513, 517CrossRefGoogle ScholarPubMed. Recognizing that income tax brackets as high as 80 percent typically raise little revenue (because they induce strong tax avoidance efforts), Piketty comments that “the primary goal [of imposing such rates] is obviously not to raise additional revenue.” If so, it follows that the goal is not to transfer resources to the poorest. He explains: “It is rather to put an end to such incomes and large estates, which lawmakers have for one reason or another come to regard as socially unacceptable and economically unproductive” (p. 505).

For an analysis of the probable practical impact of Piketty’s proposed taxes on the economy, see Michael Schyler, “What Would Piketty’s 80 Percent Tax Rate Do to the US Economy?” Tax Foundation Special Report No. 221 (July 2014), http://taxfoundation.org/sites/taxfoundation.org/files/docs/SR221.pdf, and Schyler, “The Impact of Piketty’s Wealth Tax on the Poor, the Rich, and the Middle Class,” Tax Foundation Special Report No. 225 (October 2015), http://taxfoundation.org/sites/taxfoundation.org/files/docs/TaxFoundation_SR225.pdf.

2 The Supplemental Nutrition Assistance Program (“food stamps”) disbursed $70 billion to 47 million recipients; Supplemental Security Income, $54 billion to about 8 million recipients (calendar year 2014); Temporary Assistance to Needy Families, $32 billion; federal housing assistance programs, $50 billion; federal child care assistance, $9 billion (FY 2013, the most recent figure available); means-tested employment training programs (not already counted as part of TANF or SNAP), $15 billion. An older study of US transfer programs is provided by Robert Moffitt, ed., Means-Tested Transfer Programs in the United States (Chicago: University of Chicago Press for the National Bureau of Economic Research, 2003). The dollar figures come from the appropriate federal agency websites, except job training program expenditures from Burt S. Barnow and Jeffrey Smith, “Employment and Training Programs,” NBER conference paper (29 September 2015), https://www.nber.org/chapters/c13490.pdf, 152, Table 8.7.

3 See for example Plotnick, Robert D. and Winters, Richard F., “A Politico-Economic Theory of Income Redistribution,” American Political Science Review 79, no. 2 (1985): 458–73;CrossRefGoogle Scholar Dixit, Avinash K. and Londregan, John B., “Redistributive Politics and Economic Efficiency,” American Political Science Review 89, no. 4 (1995): 856–66CrossRefGoogle Scholar; Gordon Tullock, Economics of Income Redistribution, 2nd ed. (Boston: Kluwer, 1997); and Daron Acemoglu and James A. Robinson, “Inefficient Redistribution,” American Political Science Review 95, no. 3 (2001): 649–61. Tullock (p. 1) observes that “taking money from the rich and giving it to the poor” is “a comparatively small phenomenon if we compare [such] redistribution to the other transfers that modern government makes, not to the poor but to people who are politically well organized.”

4 Nozick, Robert, Anarchy, State, and Utopia (New York: Basic Books, 1974), 174–75.Google Scholar

5 Jeremy Bentham, An Introduction to the Principles of Morals and Legislation [1907; first ed. 1789], http://www.econlib.org/library/Bentham/bnthPML.html, ch. 1, para. VI. I discuss Bentham’s views more broadly in White, Lawrence H., The Clash of Economic Ideas (Cambridge: Cambridge University Press, 2012), chap. 7CrossRefGoogle Scholar.

6 Pigou, A. C., Economics in Practice (London: Macmillan, 1935), 121–22Google Scholar; Abba P. Lerner, The Economics of Control (New York: Macmillan, 1941), 29, 32. Lerner wrote “probable” because he assumed that the assignment of marginal utilities of income across individuals has an unobservable stochastic element. For discussion of Lerner’s argument see Breit, William and Culbertson, William P., “Distributional Equality and Aggregate Utility: Comment,” American Economic Review 60, no. 3 (1970): 435–44.Google Scholar

7 Many researchers today regard questionnaires (“How happy are you on a scale from 1 to 6?”) as an adequate way of measuring happiness. I leave this issue aside, and in what follows discuss utilitarian arguments on the assumption that happiness can in fact be measured.

8 Jeremy Bentham, Principles of the Civil Code, in The Works of Jeremy Bentham, Vol. 1, published under the Superintendence of his Executor, John Bowring (Edinburgh: William Tait, 1843), chap. 11; http://oll.libertyfund.org/titles/2009 at #Bentham_0872-01_2217.

9 For a prominent example see Helliwell, John F., Layard, Richard, and Sachs, Jeffrey D., eds., World Happiness Report 2015 (New York: Earth Institute, 2015).Google Scholar

10 By “neoclassical microeconomics” I mean the orthodox post-1871 economics of individual consumers and firms interacting in markets. Excluded is classical or Marxian economics built on the labor theory of value.

11 As quoted by Schmidtz, David, Elements of Justice (Cambridge: Cambridge University Press, 2006), 146.CrossRefGoogle Scholar

12 Ibid. Schmidtz’s references are to Hare, R. M., “Ethical Theory and Utilitarianism,” in Sen, Amartya and Williams, Bernard, eds., Utilitarianism and Beyond (Cambridge: Cambridge University Press, 1982), 27Google Scholar; and Thomas Nagel, Equality and Partiality (New York: Oxford University Press, 1991), 63.

13 For example Jevons, William Stanley, The Theory of Political Economy, 3rd ed. (London: Macmillan, 1888)Google Scholar, begins a chapter on “Theory of Utility” by declaring that “Pleasure and pain are undoubtedly the ultimate objects of the Calculus of Economics” (p. 37). This was a mistake in the now-standard Pareto-Robbins view.

14 Huston McCulloch, J., “The Austrian Theory of the Marginal Use and of Ordinal Marginal Utility,” Zeitschrift für Nationalökomie 37, nos. 3–4 (1977): 249–80Google Scholar; Jack High and Howard Bloch, “On the History or Ordinal Utility Theory: 1900–1932,” History of Political Economy 21, no. 2 (1989): 351–65.

15 Vilfredo Pareto, Manuale di Economia Politica [1906], ed. Aldo Montesano, Alberto Zanni, and Luigino Bruni (Milan: EGEA – Università Bocconi Editore, 2006); J. R. Hicks and R. G. D. Allen, “A Reconsideration of the Theory of Value,” Parts 1–2, Economica N. S. 1, nos. 1-2 (1934): 52–76, 196–219; White, Lawrence H., “Is There an Economics of Interpersonal Comparisons?” Advances in Austrian Economics 2, pt. A (1995): 138–46Google Scholar.

16 Robbins, Lionel, The Nature and Significance of Economic Science (London: Macmillan, 1932): 122Google Scholar; White, “Is There An Economics of Interpersonal Comparisons.” The in-quote citation refers to Israel M. Kirzner, Market Theory and the Price System (Princeton, NJ: D. Van Nostrand, 1963).

17 Tyler Cowen, “The Differential Marginal Utility of Money,” Marginal Revolution blog (May 20, 2015), http://marginalrevolution.com/marginalrevolution/2015/05/the-differential-marginal-utility-of-money.html; Henderson, David. 2015. “Tyler Cowen on Interpersonal Utility Comparisons,” Econlog blog (May 20), http://econlog.econlib.org/archives/2015/05/tyler_cowen_on_14.html. In another recent example of confusion between happiness and the economist’s choice-theoretic utility, commentator Ben Stein, insisting that he is faithful to his wife despite his reported involvement in sexting other women, wrote to a reporter that “The real issue, as Milton Friedman said often, is maintaining a positive utility function . . . I try to do that but often fail. My wife is the main contributor to my utility function.” Hunter Walker, “Ben Stein Explains How A Woman Who Wanted To Stay At A Five-Star Hotel Got Him In A Fake ’Sexting Scandal’,” Business Insider (July 3, 2014), http://www.businessinsider.com/ben-stein-woman-five-star-hotel-fake-sexting-scandal-2014-7.

18 Richard Layard, “Happiness and Public Policy: A Challenge to the Profession,” The Economic Journal 116 (March Richard): C25-C26; Layard, “Happiness: Has Social Science a Clue?” Lionel Robbins Memorial Lectures, London School of Economics (March 3–5, 2003), http://cep.lse.ac.uk/events/lectures/layard/RL030303.pdf, 13. To his credit, Layard does recognize (ibid., 2) that he is “taking a very different line from the one [Robbins] took on the subject of happiness.” But he fails to acknowledge that Robbins’s line is the standard line.

19 Deaton, Angus, The Great Escape (Princeton, NJ: Princeton University Press, 2013), 207, 214.Google Scholar

20 Nozick, Anarchy, State, and Utopia, 160–64.

21 I have elsewhere noted that the Pareto efficiency criterion cannot even judge slavery to be inefficient relative to free labor, in the sense that from the standpoint of a slave-owning property rights system unilaterally freeing slaves is taking people’s property, and the Pareto criterion by itself does not favor one set of property rights over another (White, Lawrence H., “Can Economics Rank Slavery Against Free Labor in Terms of Efficiency?” Politics, Philosophy, and Economics 7, no. 3 [2008]: 327–40)CrossRefGoogle Scholar.

22 The public goods argument for redistribution, to be discussed below, considers the possibility of a redistributive program to which every taxpayer does consent.

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24 See the very large literature on Kenneth Arrow’s “Impossibility Theorem.”

25 Mirrlees, J. A., “An Exploration in the Theory of Optimum Income Taxation,” Review of Economic Studies 38, no. 2 (1971): 175–208CrossRefGoogle Scholar; Peter Diamond and Emmanuel Saez, “The Case for a Progressive Tax: From Basic Research to Policy Recommendations,” Journal of Economic Perspectives 25, no. 4 (2011): 165–90.

26 Rather than (say) “values a higher standard of living for the poorest, regardless of how much richer are the rich who came by their wealth honestly”; or, “has mixed views about the long-run net benefits of any tax and transfer program for reducing inequality of income.”

27 Some writers speak of income rather than wealth redistribution. The same arguments apply on both sides.

28 Mill, John Stuart, Principles of Political Economy: With Some of Their Applications to Social Philosophy, 7th ed., Ashley, William James, ed. (London: Longmans, Green and Co., 1909), 201.Google Scholar

29 Pigou, A. C., Economics in Practice (London: Macmillan, 1935), 121–22Google Scholar.

30 Here “leisure” can stand for any non-monetary benefit that the individual trades off against higher income, such as greater intellectual stimulation or autonomy or lower stress on the job, or living in a more pleasant location. When different people choose different combinations of income and happiness from non-monetary sources, observed income is an unreliable proxy for happiness. (I am indebted to Todd Zywicki for discussion here.)

31 Strictly speaking, the theoretical result follows for a tax on income from the marginal hour of work, while holding the individual’s disposable income (or total tax burden) constant. For example, it holds when the marginal income tax rate is increased but other taxes are reduced to keep the average tax rate and thus disposable income constant. A higher marginal income tax rate not offset by tax reductions elsewhere reduces the individual’s total disposable income, and it is possible that the taxed individual would then choose more work effort to return toward his original disposable income level. In other words, at a lower disposable income level the marginal preference for income over leisure is stronger. This “income effect” could in principle dominate the “substitution effect.” But econometric evidence for the United States indicates that the substitution effect dominates the income effect in practice. That is, a higher tax rate reduces hours worked (especially for women, who more often work part-time) despite lowering disposable income.

32 Koester, Reinhard B. and Kormendi, Roger C.. “Taxation, Aggregate Activity and Economic Growth: Cross Country Evidence on Some Supply-Side Hypotheses,” Economic Inquiry 27, no. 3 (1989): 367–86CrossRefGoogle Scholar.

33 Again, strictly speaking, the result follows while holding the saver’s or investor’s total lifetime tax burden constant to isolate the substitution effect.

34 Schmidtz, Elements of Justice, 172.

35 Engin, Eric and Skinner, Jonathan, “Taxation and Economic Growth, National Tax Journal 49, no. 4 (1996): 635–36Google Scholar.

36 Schmidtz, Elements of Justice, 140–49; Nagel, Equality and Partiality. To avoid ambiguity, I speak of happiness and DMH where the literature often speaks of “diminishing marginal utility” or DMU, using “utility” in the Benthamite sense of happiness.

37 Michael Cox, W. and Alm, Richard, “By Our Bootstraps: Economic Opportunity and the Dynamics of Income Distribution,” Federal Reserve Bank of Dallas Annual Report (1995), 20Google Scholar.

38 Smith, Adam, Theory of Moral Sentiments (Indianapolis: Liberty Classics, [1759] 1976), 184–85Google Scholar.

39 Samuelson, Paul A., “The Pure Theory of Public Expenditure,” Review of Economics and Statistics 36, no. 4 (1954): 387–89CrossRefGoogle Scholar.

40 Because this is not a tax on earning income, progressive or otherwise, it does not have any disincentive effects on work. Note that payments would not be the same for any two individuals if the project organizer were to have willingness-to-pay information allowing individualized price discrimination.

41 Hochman, Harold M. and Rodgers, James D., “Pareto Optimal Redistribution,” American Economic Review 59, no. 3 part 1 (1969): 542–57Google Scholar; Lester C. Thurow, “The Income Distribution as a Pure Public Good,” Quarterly Journal of Economics 85, no. 2 (1971): 327–36. In parts of this section I draw on White, Clash of Economic Ideas, 353–55.

42 Hochman and Rodgers, “Pareto Optimal Redistribution,” 543.

43 Thurow, “The Income Distribution as a Pure Public Good,” 327–28.

44 Thurow, “The Income Distribution as a Pure Public Good,” 335.

45 Samuelson, “The Pure Theory of Public Expenditure,” 388–89.

46 If we magically had a demand revelation mechanism, we might still need collectively arranged rather than ordinary user-pays provision because of a strategic problem: I won’t pay my share unless I know that others will also pay theirs. But collective provision could proceed voluntarily, on the basis of actual consent, via a binding agreement to contribute that does not go into effect until all sign it (what Schmidtz, David, The Limits of Government [Boulder, CO: Westview Press, 1991Google Scholar] calls an assurance contract). We would not be asked to regard mere suppositions about willingness to pay as a justification for what, in the absence of actual consent to pay, is coercive taxation.

47 Buchanan, James M., Liberty, Market, and State: Political Economy in the 1980s (New York: New York University Press, 1986), 130.Google Scholar

48 Gordon, David, “Justice and Redistributive Taxation: James Buchanan versus Ludwig von Mises,” Review of Austrian Economics 8, no. 1 (1994): 117–31CrossRefGoogle Scholar, notes that Buchanan’s fairness argument does not rest on economic theory, and that his recommended redistributive policies can be framed as insurance.

49 Thus Leggett, William, “True Functions of Government” [1834], in Leggett, Democratick Editorials, ed. White, Lawrence H. (Indianapolis, IN: Liberty Press, 1984), 3–4Google Scholar, wrote, from such a contractarian perspective: “The fundamental principle of all governments is the protection of person and property from domestic and foreign enemies; in other words, to defend the weak against the strong. . . . The functions of Government, when confined to their proper sphere of action, are therefore restricted to the making of general laws, uniform and universal in their operation, for these purposes, and for no other. . . . . Whenever a Government assumes the power of discriminating between the different classes of the community, it becomes, in effect, the arbiter of their prosperity, and exercises a power not contemplated by any intelligent people in delegating their sovereignty to their rulers. . . . No nation, knowingly and voluntarily, with its eyes open, ever delegated to its Government this enormous power, which places at its disposal the property, the industry, and the fruits of the industry, of the whole people.”