I’ve skimmed Greg Mankiw and Matthew Weinzierl’s “Tall Tax” paper , which has just been getting attention, most (but not all) of it sorta negative. The claim is that, based on what is apparently the prevalent Utilitarian theory of “optimal taxation,” (due mostly to 1996 Nobel laureates William Vickrey and James Mirrlees) we should tax tall people more than short people.
In all that follows, bear in mind I know nothing at all about economics and that nothing I say on the subject is to be trusted. That said, here’s the argument, as I understand it.
- We want to design a tax system to maximize “utility,” which I think of as something akin to the sum the happinesses of all the individual taxees.
- Each individual has a certain amount of “wages” from external sources, and chooses to work at a certain level of productivity, or “labor effort”. Actual income is the product of wages and labor effort.
- An individual’s Utility is a function only of after-tax income, or “consumption,” and labor effort. It’s increasing in income and decreasing in labor effort; i.e. we want to make lots of money by doing as little as possible.
- The government can’t observe (and hence tax based upon) wages or labor effort, only income and other externally visible features, such as in this case height.
- (This part that is based on observed data, not on the Vickrey-Mirrlees framework) Tall people make more money than short people, correcting for all other factors.
Based on that, it follows that tall people should be taxed more than short. Intuitively, short people have to work harder than tall people for the same amount of income, and giving them a tax break at the expense of the tall increases their utility more than it decreases that of the tall.
Now Mankiw, a former chair of the current administration’s Council of Economic Advisers, certainly doesn’t really approve of this sort of “from each according to his ability, to each according to his need” idea. Indeed,
Before proceeding, a note about our own (the authors’) interpretation of the results. One of us takes from this reductio ad absurdum the lesson that the modern approach to optimal taxation, such as the Vickrey-Mirrlees model, poorly matches people’s intuitive notions of fairness in taxation and should be reconsidered orreplaced. The other sees it as clarifying the scope of the framework, which nevertheless remains valuable for the most important questions it was originally designed to address. The paper presents both interpretations and invites readers to make their own judgments.
I agree with the second view, presumably Weinzierl’s. Like any model, the Vickrey-Mirrlees framework ignores many things, and is valid only in a certain regime. (I am reminded of the economist’s analysis of dairy production: “Assume a spherical cow of uniform density…”). In this case an obvious thing the model ignores is the sense of “fairness” that is deeply ingrained into the human psyche. It may not be rational, but it’s there. Perhaps it could be included in the V-M framework by making the utility function depend on relative tax rates, or in some other way. Or not, and some other framework would be needed to analyze it effectively, I don’t know. But that’s no reason to think the framework doesn’t work perfectly well in many applications.
On his blog, Mankiw says “It seems to me that if you are going to reject a logical inference from a model, you have to explain why. That is not so easy for a height tax, which is precisely the point of the paper.” He’s right about explaining why you have to explain rejecting inferences from a model, but (I think) wrong about that not being easy for a height tax.