By James Kwak
I disagree with Richard Posner—the old Richard Posner behind the law and economics movement—on so many things that I always worry when he seems to agree with me. Did I do write something stupid? I wonder.
A friend forwarded me Posner’s latest blog post, “Luck, Wealth, and Implications for Policy,” parts of which sound vaguely like a post I wrote three years ago, “Do Smart, Hard-Working People Deserve To Make More Money?“* In that post, I argued that even if differences in incomes are due to things that people ordinarily think of as “merit,” like intelligence and hard work, that doesn’t mean that rich people have a moral entitlement to their wealth, because they didn’t do anything to deserve their intelligence or their propensity to work hard. In summary, “I have little patience for the idea that rich people deserve what they have because they worked for it. It’s just a question of how far back you are willing to acknowledge that chance enters the equation.”
Posner now goes even further than I did: “I think that ultimately everything is attributable to luck, good or bad,” he writes, including the propensity for working hard, a low discount rate, and so on. “In short, I do not believe in free will. I think that everything that a person does is caused by something. . . . If this is right, a brilliant wealthy person like Bill Gates is not ‘entitled’ to his wealth in some moral, Ayn Randian sense.”
He goes on—he is still Richard Posner, after all—to argue that tax policy should be concerned solely with incentive effects. High taxes on the wealthy are not unfair in any meaningful sense, and it is meaningless to say that rich people pay a disproportionate share of their income in taxes, absent some incentive-based argument. It does make sense to tax inherited wealth more than earned income, because of the incentives it creates. The same goes for investment profits, either because they are the product of luck (in the ordinary sense) or because people with lots of money are going to invest it anyway rather than consuming it all in the current period.
But I don’t think it’s quite right to say that tax policy should be entirely utilitarian. Right now, our country faces large federal government deficits, the prospect of growing spending on social insurance programs, and sorely inadequate expenditures on infrastructure and the safety net. To fix those problems, money has to come from somewhere. If rich people don’t have any particular moral entitlement to their wealth because that wealth is the product of luck in one form or another, isn’t it obvious that they should pay more in taxes than poor and middle-class people? Imagine three people stranded on a desert island and a genie that gives one person ten coconuts, the second person two coconuts, and the third zero coconuts. Who should share with the third person: the first or the second? You can get the same result by looking at the marginal utility of wealth, à la Diamond and Saez.
Now redistribution can go too far because of the incentive effects, but that doesn’t mean that redistribution is not an appropriate objective of the tax system. It just means that it has to be balanced against incentive considerations. There is a moral dimension to tax policy (although Diamond and Saez would call it part of utility maximization). It’s just the opposite of what Paul Ryan thinks it is.
* Of course, I’m not saying that Posner is copying my ideas, since (a) there’s virtually no chance that he knows who I am and (b) the ideas in that post, like most of my ideas, are pretty obvious.