Ethics @ Work: High taxes and height taxes

What if people were taxed based on their height?

taxes 88 (photo credit: )
taxes 88
(photo credit: )

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

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

The basic principle is so simple that if the authors hadn'trevealed their provocative intention the paper could have passed for anordinary public finance study. In public finance, the basic idea is toattempt to raise revenue without discouraging work effort. But this isa problem. Low taxes don't raise much revenue, and high ones discouragework. One enticing solution is "lump sum" taxes: just charge everyone aflat 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 topay that much in taxes.

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

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

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

A few orthodox utilitarians take the research at face value andindeed advocate a height tax. But, as the authors point out, mostpractitioners feel very uneasy about this. Why? The authors suggest anumber of reasons: Perhaps it is an intrusiveness issue: governmentshouldn't know too much about us. Having your height on file at theincome tax authority might just be the beginning of an encompassinginformation-gathering agenda. In places where height is correlated withethnicity, the tax could be considered racist.

Another theory is stigma. The authors quote Nobel laureateAmartya Sen to the effect that being the beneficiary of subsidiesimposes a stigma; according to this approach, a tax on height wouldironically work to discriminate against the short.

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

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

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