Ethics @ Work: High taxes and height taxes

What if people were taxed based on their height?

By ASHER MEIR
January 22, 2010 00:12
4 minute read.
Ethics @ Work: High taxes and height taxes

Business ethics 88. (photo credit: )

 
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What are the limits of legitimate tax policy? This column generally focuses on contemporary newsworthy issues, but every so often I prefer to discuss more fundamental issues of economic ethics.



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A fascinating paper designed to make economists re-examine basic economic assumptions was published a few months ago by Harvard professors Gregory Mankiw, author of one of the most popular introductory economics textbooks, and Matthew Weinzierl. The title is "The optimal taxation of height". (It is worth noting that Mankiw is impressively tall; I have never met Weinzierl.)  



The basic principle is so simple that if the authors hadn't revealed their provocative intention the paper could have passed for an ordinary public finance study. In public finance, the basic idea is to attempt to raise revenue without discouraging work effort. But this is a problem. Low taxes don't raise much revenue, and high ones discourage work. One enticing solution is "lump sum" taxes: just charge everyone a flat amount, and every single shekel they earn above that is theirs. Now there is no disincentive to work!



The problem is that most people could never pay the tax. Israel's annual tax revenues amount to over 100,000 NIS per household. Many households don't even make that much, not to mention being able to pay that much in taxes.



What we would like to do is be able to predict in advance who will make lots of money and who little. We would put a high lump-sum tax on the high-earning "types" and a low tax on the low-earning types. Everyone would benefit. Tax revenue would be unaffected but every person would pay zero taxes on all additional income and would probably work, and earn, much more. Taxing high-ability people also improves equity. These people can pay additional taxes with less effort than other people, so taxes on them reduce total welfare less than taxes on low-ability folks. (Note that high-ability people already pay more than others but now they do so on every single hour of work.)  



The problem, of course, is identifying the types. You can't just see how much people are making now. That translates into a very high marginal tax rate: if every additional shekel I make this year translates into a 30-agorot lump sum tax every subsequent year, then I am paying a marginal tax of many hundreds of percent. I would almost certainly be better off not working at all. (For the same reason you can't base it on parents' income; good parents would go on welfare in order to create low tax rates for their kids.) 



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But, say Mankiw and Weinzierl, all is not lost. One correlate of ability is easy to measure and impossible to game: your height. Studies consistently show that each additional inch of height translates into about a 2% increase in earnings. It is possible to structure a tax so that tall people pay more and total welfare is greatly increased. The calculations the authors carry out conform in every detail to the accepted paradigm for public finance policy.




A few orthodox utilitarians take the research at face value and indeed advocate a height tax. But, as the authors point out, most practitioners feel very uneasy about this. Why? The authors suggest a number of reasons: Perhaps it is an intrusiveness issue: government shouldn't know too much about us. Having your height on file at the income tax authority might just be the beginning of an encompassing information-gathering agenda. In places where height is correlated with ethnicity, the tax could be considered racist.



Another theory is stigma. The authors quote Nobel laureate Amartya Sen to the effect that being the beneficiary of subsidies imposes a stigma; according to this approach, a tax on height would ironically work to discriminate against the short.



Libertarians view the entire project of finding an optimal mix of equity and efficiency to be an illegitimate form of wealth transfer. To them, the height tax paradigm can serve as a reductio ad absurdum to show how far our tax system already goes in the direction of social engineering.



Finally, there is the fairness issue. It is true that the height tax is fair "on average"; people with higher ability pay more than others. But it is still true that any given tall person pays more tax than a short person of the same ability.



When I explain economics to non-economists, I have two kinds of difficulty. Some ideas are easy for economists to grasp, but difficult for lay people. It can be hard to get the concepts across. Other ideas are easy for lay people to grasp, but difficult for economists. It can be hard to explain why economists think that a concept is novel. (For example, trying to explain how Amos Kahneman got a Nobel Prize for showing that people aren't always rational.) Perhaps the dumbness of a height tax is in the second category. But I do think that the height tax is a thought-provoking concept that can make us reflect on the many different aspects of fairness we consider when we set out to make a tax system.

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