The 1970s saw two important and influential publications in the long debate over justice, equality and public policy. In 1971, there was Rawls Theory of Justice, commonly described in terms like “magisterial”. Then in 1974, at lunch with Jude Wanniski, Dick Cheney and Donald Rumsfeld, Arthur Laffer drew his now-eponymous curve on a napkin. Of course there was nothing new about the curve: it’s pretty obvious that an income tax levied at rates of either zero or 100 per cent isn’t going to raise any money, and interpolation does the rest. What was new was the Laffer hypothesis, that the US at the time was on the descending side of the curve, where a reduction in tax rates would raise tax revenue.
I’ve always understood Rawls in terms of the Laffer curve, as arguing in essence that we should be at the very top of the curve, maximizing the resources available for transfer to the poor, but not (as, say, Jerry Cohen might have advocated) going further than this to promote equality.
A couple of interesting Facebook discussions have led me to think that I might be wrong in my understanding of Rawls and that the position I’ve imputed to him is actually far closer to that of classical utilitarianism in the tradition of Bentham (which is, broadly speaking, my own view).
Facebook has its merits, but promoting open public discussion isn’t one of them, so I thought I’d throw this out to the slightly larger world of blog readers.
It started out with a post by Ingrid, mentioning a paper she’d presented on limitarianism (a new term to me, though not a new idea), the proposition that as a matter of public policy or of individual ethics, there ought to be a maximum limit on individual incomes. I’m hoping Ingrid might write something more about this here, but she shouldn’t be blamed for any errors I make.
On my interpretation of Rawls, it seems as his difference principle implies a kind of limitarianism. If high income earners are taxed to yield the maximum possible revenue, then their incomes will be bounded above. This won’t be an absolute bound, but will depend on their earning capacity which in turn will reflect both the general level of technology and the extent of “pre-distribution”, that is whether the economic organization of society yields highly unequal market incomes.
That got me thinking about utilitarianism. One way of looking at Rawls (not one he accepted, but still defensible) is as putting forward an extremely egalitarian rank-dependent version of utilitarianism, with all the weight on the bottom of the distribution. But it turns out that you don’t need this to advocate a tax system very close to the Laffer maximum. On the default utilitarian assumption of log utility, additional income to someone on $1 million a year yields 1 per cent of the utility of additional income to someone on $10 000. So, a costly tax-transfer system taking from money the $1 million group and giving it the $10 000 is beneficial as long as the proportion lost through incentive effects, collection costs and so on is less than 99 per cent. Diamond and Saez did the sums properly a while back and concluded that
the social marginal utility at the $1,364,000 average income of
the top 1 percent in 2007 (Piketty and Saez, 2003) is only 3.9 percent of the social
marginal utility of the median family,
The implied policy is a progressive tax system with a top marginal rate of 73 per cent.
I got two things out of the discussion. The first is that Rawls had some mistaken ideas about economics, logically unrelated to his difference principle, which contributed to his scepticism about progressive taxes. The intellectual atmosphere of the 1970s, which gave rise to the Laffer curve and the “tax revolt” may have had something to do with this.
The second is his focus on “ideal theory” which I don’t fully understand, but which seems to me to be unhelpful, partly for the reasons put forward by Jacob Levy. The general claim made by Rawls is that, whatever the case for progressive income taxes in society as it is, a properly organized society with limits on inheritance, open access to education and no unfair market power wouldn’t need them.
I don’t buy this. In any society sufficiently close to reality to need a taxation system at all, there are going to be inequalities of pre-tax income large enough that an egalitarian would want to redistribute that income. Given that nearly all taxes are regressive, a progressive income tax is an essential part of such a policy.