The fairness error

In the Wheatsheaf last night, I was struck by an obvious injustice. The pub was charging everybody the same price for beer, regardless of their income. This is obviously unfair: why should the millionaire picking up his children from the posh school pay the same as a low-wage worker? Beer prices must be means-tested, so the rich pay more.

Astute readers might spot a problem with that paragraph. It’s bollocks. It would be grotesquely inefficient for barkeeps to check everybody’s income before serving their Tiger*. A far easier way of addressing this unfairness – if such it be – would be to tax the millionaire and give income support to the poorer customer. This would have the same effect as means-testing – the millionaire would be less able to buy beer and the poor person more able – but would be more efficient.

You might think this is childishly obvious. It should be. But it’s not. People are judging manifesto promises in the same bonkers way as I’m alleging beer prices to be unfair. Take three examples:

 - Iain Martin says about social care: “Someone aged 25 should pay masses more tax so someone with a £1.5m house aged 75 gets free care? Really?”

 - Giving a winter fuel allowances to all pensioners, rich and poor, seems unfair – hence Tory plans to means-test the payment.

 - Labour’s plan to abolish tuition fees has been called a subsidy to (future) middle classes at the expense or poorer workers.

All these examples are of people making the same error I made with beer prices. They are expecting each individual transaction to be egalitarian and are overlooking the costs of doing so.

So for example, if you think it unfair that some rich folk get free social care, the solution is to tax them more: an inheritance or land tax would make sense for several reasons. The serious question is how to best pool the risk that some will need lots of social care and some not – a question the Tories haven’t addressed. If you think it unfair that rich pensioners get a winter fuel allowance, you should get them to pay higher income tax, not faff around with expensive and intrusive means-testing. And it posh people get subsidised by abolishing tuition fees, the answer is to get them to pay more income tax.

When it comes to judging inequality, what matters is the system as a whole, not individual actions. Expecting each individual policy to increase inequality would be inefficient, just like asking barkeeps to conduct means-tests. As Nicholas Barr says in a standard textbook on the welfare state:

It is frequently the overall system which is important...Taxation and expenditure should be considered together. (The Economics of the Welfare State, 2nd ed, p185, his emphasis)

Instead, the test of individual policies should be based in efficiency. Personally, I think winter fuel payments are daft: just have a higher state pension instead. Similarly, whether to impose tuition fees upon students is also a matter of efficiency: what’s the best way of financing universities? Do tuition fees (as I fear) have baleful effects upon the character of universities? And so on.  These are genuine issues. What’s not a serious concern is that specific policies are inegalitarian. In the cases I’m considering here, equality concerns should be tackled by the overall tax and benefit system, not by each single policy in isolation.

* Other beers are available. But they’re not as good.

Comments

[David]

Obvious.... but not to those with an envious nature.

[Luis Enrique]

see also Mirrlees: "the tax system
needs to be seen as just that—a system" and argues progressive systemic goals are sometimes best achieved with regressive elements, on efficiency grounds. .

is there any sense in sometimes looking at policies in isolation, if what we are really talking about is adding (or removing) policies without any offsetting changes?

[Aaron Headly]

In the U.S., we have an additional layer of faff to deal with: Congress, always avoiding anything that looks like a tax increase OR a payout of public money, supports various policies with targeted tax-cuts.

I much prefer your approach.

[TickyW]

"Other beers are available. But they’re not as good."

Am surprised to hear you say this Chris, given the very excellent Bishop's Farewell ale made by Oakhams, your superb local brewery.

And yes, bring back universal benefits funded by progressive taxation. That is, bring back a similar system we had before it was unpicked by Thatcher and her henchman, and thereafter by successive governments. If it ain't broke, don't fix it.

[PD]

We already have the highest marginal rate of income tax in the world (at 62% inc NI). Other taxes should be used.

[TickyW]

@PD

The top marginal rate of tax on income is 47%, made up of the 45% rate of income tax and the 2% National Insurance contribution.

Even if the top rate of National Insurance was equalised at 12%, the top rate of tax on income would be 57%, which is below the 62% you have quoted. But of course, top incomes only pay 2% NICs, whereas plebs pay 12%.

Tut tut

[AG]

"The pub was charging everybody the same price for beer, regardless of their income"

That's why many pubs used to have a public bar and a saloon bar with different prices, isn't it?

[PaulS]

There is a more "efficient" way to sort people by income, which the airline industry has infamously deployed to the tune of numerous headlines about the side-effects. Supply the plebs with awful swill at a low price, and supply halfway-decent beer (costing maybe 20% more to supply, on the airline model) at two or three or five or ten times the price.

To rake in even more while (falsely) advertising a low price, add a myriad of semi-concealed surcharges. Charge for the glass, for a napkin, for use of the table, for use of the barstool, for use of the door handle to enter and leave, for use of the floor to walk on, for use of AG's saloon bar, and for who knows what else. A computer kiosk of the sort now found in some fast-food places could handle that "efficiently", and anybody whose time was worth anything at all would probably default expensively rather than tap and tap and tap through the whole mess.

Voila!

[Patrick Kirk]

Is the notion that you can tax people more and then give them the same money back in the form of social care reasonable? You have to pay 2 sets of admin costs that way. You also are intruding on the choice of what care people can buy with the money you give back to them. Surely the idea that only those who can't afford care get help is a more sensible way to do things?

[Leon]

Isn't there a solid behavioral econ reason for winter fuel payments? If we take it as a given that hard up pensioners dying of hypothermia is bad then a nudge to spend money on heating makes sense.

[D]

Tiger?

[reason]

YES! And strangely (looked at now) Milton Friedman said exactly the same thing.

[gastro george]

Nothing has been sadder than the sight of New Labour types complaining that universalist policies are a "subsidy to the rich". Is that how far it has gone.

[efcdons]

@gastro george

The same here has happened with the Democratic party here in the US. Clinton was saying we shouldn't have tuition free college because then trump's kids might be able to go to college for free!

[botogol]

@tickyw you have neglected the withdrawal of personal allowance that kicks in at £100,000 making the effective marginal rate over 60%
https://www.gov.uk/income-tax-rates/income-over-100000

[Tony Holmes]

@tickyw @botogol Presumably it's also just about possible that you could be paying another 3% to repay student loans ?

[TickyW]

@botogol

No. On incomes above £130k the marginal rate of tax on income is 47% (45% income tax + 2% National Insurance).

The withdrawal rate applies to income between £100k and £126k (approx). The withdrawal of personal allowance when income reaches £100k is a total nonesense and the personal allowance should be restored.

Restoring the personal allowance would get rid of that stupid marginal rate anomaly which of course in incident only on a very narrow band of income. It makes more sense to restore the personal allowance and to increase the marginal rate to 50% for ALL incomes above a specific threshold, say £150k.

Using the anomalous marginal rate levied on that very narrow band of income to argue the top marginal rate should not be increased is not sustainable when seriously thought about.

[john]

It's easy to imagine a law requiring all transactors to present a "payment multiple card", which would display a factor to multiply times price, the factor based on the last tax return.

[UnlearningEcon]

Your point is an important one, but I want to add to something Luis said - we need to be aware of individual policies because often politics is about individual policies. Say we had 10 mildly regressive regulatory policies counterbalanced by a hugely progressive tax system - clearly that would be vulnerable to a relatively straightforward political reversal. IMO we need to combine both perspectives to have politically viable leftist policies.

[Doug]

There's a reason why working class people in the 1930s hated means testing. Any politicos who advocate any type of means testing, particularly ones who claim to be left wing, should be boiled in their own juices.