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Cowen, Gates, Boudreaux, and Regressive Taxation

Each of Tyler Cowen’s New York Times columns is worth a careful read.  But today’s column is one of his best (in my opinion).  He covers a lot of ground on the income-inequality debate, and covers it skillfully.

Here are his concluding paragraphs:

The broader philosophical question is why we should worry about
inequality — of any kind — much at all. Life is not a race against
fellow human beings, and we should discourage people from treating it
as such. Many of the rich have made the mistake of viewing their lives
as a game of relative status. So why should economists promote this
same zero-sum worldview? Yes, there are corporate scandals, but it
remains the case that most American wealth today is produced rather
than taken from other people.

What matters most is how well
people are doing in absolute terms. We should continue to improve
opportunities for lower-income people, but inequality as a major and
chronic American problem has been overstated.


Earlier in this same column, Tyler notes that

Happiness, possibly the most relevant variable for a study of
inequality, is also the hardest to measure. Nonetheless, inequality of
happiness is usually less marked than inequality of income, at least in
wealthy societies. A man earning $500,000 a year is not usually 10
times as happy as a man earning $50,000 a year. The $50,000 earner
still enjoys most of the conveniences of the modern world. Even if more
money makes people happier, it appears to do so at a declining rate,
which places a natural check on the inequality of happiness.

Although I share Arnold Kling’s skepticism of "happiness studies," the general point of the above reported finding is compelling.  Indeed, that same point is the one that has long led many people to argue for "progressive" income taxation.  It’s the idea that an extra dollar of income to someone earning $500,000 annually is "worth less" to that high-income earner than is an extra dollar of income earned by someone earning $50,000 annually.

It’s never been clear to me, though, why this fact (if it be a fact — as I suspect it, generally, to be) — was ever taken to support so unambiguously a case for "progressive" taxation of incomes.  First is the point Tyler makes: if an extra dollar of income in Bill Gates’s pocket means less to Bill Gates than would mean to me, then the genuine economic difference between Gates’s position and my position is less than it appears if monetary incomes or wealth is taken to be a precise and full measure of economic well-being.  While "redistributing" this dollar from Gates to Boudreaux might still increase "happiness" equality between Gates and myself, the alleged need for such "redistribution" in the first place is less pressing.

Second, given that Bill Gates almost surely has a greater talent for contributing to the happiness of humankind than I have, it’s especially important that he continue to confront keen incentives to continue contributing to that happiness.  Precisely because an extra dollar in Gates’s wallet means less to him the more dollars he earns, he needs to earn ever-more dollars per year in order to keep keen his incentives to innovate and produce and sweat the details of satisfying consumer demands.

While I do not support regressive income taxation, a theoretical case can be made in favor of it — a case that has at least as much cogency and economic merit as does the case for "progressive" taxation of incomes.