Beyond redistributive tax

Is there an egalitarian argument against sharply progressive income tax? I’m prompted to ask by John McDonnell’s plan to raise tax those earning more than £70,000.

From the point of view of raising revenue, he’s bang right to target these rather than the mega-rich. For one thing, there’s more of them. And for another, they are a slow-moving target. Whereas a multi-millionaire hedge fund manager might react to higher taxes by retiring, downshifting, emigrating or fiddling the books, middle managers and head teachers have much less wiggle room. Optimal taxation theory thus says we should target them.

And Ben Chu is dead right to say that people earning over £70,000 a year are rich - they’re in the top 5% of earners – and that denying this fact tends to serve the interests of the really rich.

There is, though, a problem here. People on higher incomes aren’t happier than others. In fact, ONS research (pdf) shows that those in higher income deciles are actually less happy (albeit not statistically significantly so) than those on middle incomes.

Yes, they enjoy higher life satisfaction and a sense of worth than others. And yes, net financial wealth more strongly correlated with subjective well-being. But higher earners aren’t happier than middling earners.

There are two reasons for this. One is that the richer you are, the more options you have, and so you’ll feel more regret about what you’re missing.

Another was pointed out by Adam Smith. It’s that high wages are often offset by other disadvantages, such as the disagreeableness of the work. Headteachers and middle managers are often stressed out; bankers and lawyers work stupid hours in unfulfilling jobs; and successful people, especially the minority who come from poor backgrounds, often suffer from imposter syndrome or a sense of alienation.

Yes, some lefties might think I’m bringing bring out the world’s smallest violin here – but that just shows a narcissistic lack of empathy. I’ve tried earning big wages. And it’s pretty unpleasant.

From a welfare egalitarian point of view, big taxes on high incomes aren’t altogether satisfactory.

In saying all this, I’m not merely parroting right-wing clichés against taxation. For one thing, the same data that tell us that high income earners aren’t happy also tell us that the poor are unhappier, more anxious and less satisfied with their lives than the average earner. This is an argument for redistribution – or at least for paying more heed to the mental health of the worst-off. And for another, there might well come a time when higher spending on schools and education requires higher taxes rather than more borrowing.

Instead, I’m questioning here whether income is the right base for taxation. I suspect instead that – at least in efficiency terms – there’s a case for shifting the burden onto land. (Yes, Tim’s right that the UK taxes property more than most countries, but we don’t do so terribly efficiently or equitably).

But there’s a bigger point I’m making. There must be much more to leftist thinking than redistributive tax. In particular, what matters is inequalities of power and autonomy. The tyrannical boss oppressing his staff might not be far up the income distribution, but he’s well up the power ladder. That matters. And one reason why many of the rich – yes, the 95^th percentile is rich – don’t feel good is that they lack power and autonomy, in part because of the conquest by managerialism over professionalism and craft skills.

For me, proper leftist politics would speak to these issues – and in doing so create a common interest between many of the financially well-off and the worst off. Traditional social democracy, however, has failed in this regard.

Another thing. I’ve never been happy with the utilitarian argument for higher taxes on the rich – that diminishing marginal utility means a rich man values £1 less than the poor one. The rich are different people than the poor, so we can’t so easily compare marginal utilities.

Comments

[Luis Enrique]

your 'another thing' is making the perfect the enemy of the good imo. Sure, interpersonal comparisons of utility are difficult (impossible) but the basic idea of £ being worth less to the rich then the poor is probably 95% right, fussing over the 5% error is a mistake.

[Achim]

"those in higher income deciles are actually less happy (albeit not statistically significantly so)"

Then they are not less happy or we don't know it.

[Luis Enrique]

just a thought, but does the point that people are different (interpersonal utility comparison are hard) work against your argument that the case for redistribution is weakened once you account for the lifestyle price people pay to earn those high wages?

so, I happen to find the responsibilities of senior roles onerous. It's not just about hours, the psychological burden that comes with climbing the ladder are, for me at least, considerable. You would have to pay me very large sums to persuade me to be a CEO because I'd find the stress almost unbearable.

But what if the people who actually become CEOs love that stuff, and don't get stressed out of their minds etc.?

Or, on the other hand, if we are pretty much alike and find what it typically takes to earn big bucks equally unpleasant, well the crude utilitarian case is stronger?

[TickyW]

"In particular, what matters is inequalities of power and autonomy."

Yes, I agree. Fiddling with tax rates is just tinkering at the edges. It's structural, or institutional change, that is needed if improvements are to endure. The trick is to transfer power to workers.

One way of transferring power to workers is to reconstitute company boards so that at least 50% are elected workers. Not only would this redistribute power to workers, it could well set in train a trend to reduce the pay gap between top and bottom earners. Moreover, board composition under elected worker control is more likely to be more representative of the demographics of a particular workforce (gender, race, age, disability, et al).

It should not be hard to achieve this. The parliamentary draughtsmen and women should be able to modify company law quite easily to give effect to worker control.

And since companies, in English law at any rate, are not owned by the shareholders, shareholder primacy could be replaced by worker primacy without upsetting the legal cart. Companies would need only satisfice with respect to shareholder returns, added to which, rendering shareholder primacy obsolete could also curb City induced short-termism with consequent increases in investment and productivity.

What's not to like?

Answers, however specious, on a postcard please to Mark Littlewood at the IEA.

[Mark]

One reason why high earners are less happy might be the high marginal taxation rates to which they are subject. They work hard, and perceive that much of their income goes to subsidise those who, in their minds, do not.

At the other end of the distribution, the poor are unhappy because they don't enjoy dependency, lack of agency and insecurity.

Solution? Dial back taxes and benefits and instead focus on re-engineering the market for labour to eliminate rent-seeking at the top and boost the marketability of the skills of those at the bottom.

[Staberinde]

Capitalism is stagnant.

Income and wealth are highly concentrated in the hands of people who can avoid tax easily and pay for the tax regime they prefer.

The elderly middle class is spending inheritances on health and care.

In this scenario, the working middle class sees any tax rise as an attack on their ability to convert income into wealth. What's the point of being a high earner if you're just paying someone else's parents' mortgage / care bills?

Or put it this way: middle class people are delaying having kids and delaying purchasing property. Meanwhile, property and childcare costs are inflating rapidly. At the very moment when they can afford to do these things, they suddenly become the 5% and are told they must be squeezed. This will feel like a punishment for 'responsible' behaviour and the values they were taught to cherish, such as deferred gratification (saving), both partners working, and only having children when you can support them financially.

These people may not mind bearing a greater tax burden, but I'll bet what they really want is a tax system that validates their values. They feel they've sacrificed the hedonistic, short-termist lifestyle choices they could have made in order to do things 'properly' and 'responsibly' - and they don't want to see a greater tax bill as their reward for doing so.

That's why I think you're right about land tax, Chris - I don't think it would be seen as an attack on middle class values. Indeed, I think it could be positioned as a rebuke to the big land owners and flash-Harry leveraged landlords created in the late 90s - the people who made it so difficult for everyone else to be middle class.

[Dave Timoney]

Re people on £70k not feeling rich, I hate to be the sort of monomaniac who has to drag house prices into every discussion on economics, but, you know, house prices.

[Ahmed Fares]

Tax dollars are not fungible.

The rich, having a low marginal propensity to consume, do not cut back on consumption when their taxes are raised. It simply reduces their savings.

The poor however, who receive the proceeds of taxation, have a high marginal propensity to consume and will try to increase consumption. In an economy operating at full capacity, that means a rise in inflation. The central bank than steps in with higher interest rates which means the extra tax dollars the poor receive are offset by higher interest payments on mortgages and such. Higher interest payments which end up in the hands of the rich.

Worse yet, the rich will, in light of higher taxes exchange work for leisure. This reduces output and shifts the aggregate supply curve leftwards, intersecting the aggregate demand curve at a higher point, i.e., higher inflation which means higher interest rates.

Even worse yet, it is the savings of the rich which maintain and grow the capital stock. Less savings, i.e., less investment, i.e., less capital formation, means the capital stock declines, as per the Solow Growth Model. Once again, the aggregate supply curve shifts leftwards with the same effects as above.

Rather than focus on taxes, we have to think about real resources. When we increase consumption at the expense of investment, i.e., less capital goods, the economy shrinks. This hurts the poor, not the rich, who as I've mentioned, spend very little of their money. It's the consumption of the poor that has to fall.

[derrida derider]

Certainly there are strict practical limits to the degree you can soak the rich with income tax - and the routine ignoring of those limits by people on the left represents, like climate denialism, wishful denial of a very inconvenient set of facts.

But that's not at all the same as saying soaking the rich isn't desirable. Very sharply diminishing marginal utility at upper incomes is a well established empiric fact.

This is almost certainly a product of RANK utility - ie Veblenesque psychology (another term for rank utility is, of course, enjoyment from displaying power). So if we want to minimise the adverse incentive effects of taxation - income or otherwise - on our rich we should take care when we soak them that we do not disturb the rankings among themselves - that is, we should be concerned with horizontal, as well as vertical, equity. Tax the s**t out of private jets, but go to great pains to tax ALL private jets.

[john smith]

"I’ve tried earning big wages. And it’s pretty unpleasant." you seem pretty successful already so I'm curious as to what you consider big wages

[TickyW]

@Ahmed

The act of saving does not equate to the formation of (productive)capital, unless you count government borrowing as capital formation.

And what do you have against consumption? If consumption of goods and services increases then firms, both domestic and foreign, have increased their sales, and global "GDP" will have increased. Is that not a good thing?

[Ahmed Fares]

@TickyW,

An economy can produce either consumption goods or capital goods. More consumption goods means less capital goods. I do understand that there are times when there is too much saving and we are currently in one of those times, i.e., the global savings glut.

Your second point about consumption misses the idea of where the extra consumption comes from, assuming an economy operating at full capacity. If capital and labor are fully utilized, then all you get is inflation.

But if the economy is operating below capacity, then we can increase demand by printing money and giving it to the poor. There is no need to tax anyone.

The purpose of taxation is to suppress private sector demand. In a demand-constrained economy, there is not reason to tax. Just print and spend.

[DavidM]

"There must be much more to leftist thinking than redistributive tax"

Yes, yes, yes.

Which is the reason I don't buy Chris' arguments about basic income. Sure basic income is nothing more than redistribution of income? It's defeatist: there's nothing we can do to build an economy that actually distributes incomes fairly.