What Is "Fair"?

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When taxes are under discussion, we often hear a call for rich people to “pay their fair share.” The message is that tax rates on those with higher incomes should be raised to make sure that fairness is achieved. However, if we look at this honestly, as a real-life ethical issue, we will have to conclude that people with higher incomes are already paying more than their fair share. Let’s try a thought experiment.

Suppose we are part of a group of friends from work who decide to go out to dinner together. “We” includes the owner of the business, the new person in the mailroom, and two of us in between. We choose a nice restaurant and enjoy our meal together. For some reason we cannot get separate checks and are given one large bill. What are some fair ways to pay for this meal — and what are some unfair ways?

Normally what happens is this: each person puts money into the kitty based on what he or she ordered. Often after the check goes around the table it isn’t quite enough because people forget to add in enough money to cover the tip or their second drink or the taxes or something. So the check goes around again while everyone refigures the cost and puts in a little more. So each pays based on what each received. That is what we ordinarily regard as fair.

Now suppose the bill isn’t itemized and we can’t find out what each person received and therefore what each person owes. People might try to guess, but generally we feel that one fair way is for each to pay the same amount. If we do that, we recognize that people who ordered a more lavish dinner or an extra bottle of wine will be getting more than their fair share, but still the same amount for each person seems close to fair. So each person paying the same amount without regard to any other criterion looks fair to us. This is equivalent to a per capita or per person tax. But that is not how we do taxes in America. We don’t all pay the same amount or the same amount per person, do we, despite the fact that it’s impossible to construct an itemized list of each taxpayer’s liability for government services received?

So let’s go back to the arrival of the unitemized bill for the group’s dinner. How should we divide it up fairly?

When the check came, the boss could offer to pay for everyone’s dinner. That would be voluntary, private charity. But imagine if, when that happened, the new mail oom guy said, “Wow. This is great. I got this fabulous meal for free. I propose we do this every night! How many people are in favor?” Perhaps most of us who received the boss’ charity would vote to make him give it more often, but that would be clearly unfair.

No one would dream that three people should “vote” to make the fourth person pay for them. Why does it become right when we do it through the government?

The boss would be well within his rights to say, “You guys can do this again if you want, but count me out. I’m not interested in paying for everyone’s meal night after night.” Would it be fair or right to claim that he must do so because it was a “majority vote?” People shouldn’t just be able to vote to oblige others to give them things, should they? In normal, face-to-face interactions, in a small group of four people no one would dream that three people should “vote” to make the fourth person pay for them. Why does it become right when we do it through the government?

Now imagine this. Imagine that someone in the group said, “Let’s take a vote. Who thinks we should base what we pay on how much income each of us has? Wouldn’t that be fair?” Several things come to mind right away. First, it’s extremely rude to require people to tell you what they earn. It is simply not anyone else’s business. But we do it as a country when we make people fill out their income tax returns so that a progressive tax can be levied. We intrude in a way we ordinarily don’t think is right or fair — because we do it through the government. Does that make it fair?

Second, voting on this proposition doesn’t seem right, because the boss makes more than any of the rest of the group, and will always have to pay more, yet he has only one vote. So of course, voting for this proposition is self-serving for everyone else. It is the same as the other case, when the boss was made to pay the whole tab: we are voting to force the boss to subsidize us.

Charity performed voluntarily is one thing. It is common for people who are better off to pay a bit more than their equal share, voluntarily. But where do the lower paid people get the right to vote to force the higher paid person to pay more? Does that strike you as fair? Again, what if we voted to regularize it by law, so that he had to do it every night? Would that make it fair?

This unfair situation is equivalent to the flat income tax that people propose from time to time. The flat tax would have everyone pay the same percentage. If you made more money, you would therefore pay more, whether you received more from the government or not. When we take this down to the personal level in our thought experiment, basing the fair share calculation on someone’s income level is embarrassingly unfair, yet it is criticized as being not fair enough. They aren’t paying their fair share, that’s true. They are paying more than their fair share.

But instead of having a flat tax, which requires people to pay more if they earn more, we have a tax system in which the percentage goes up as they earn more. The harder they work, the more money they make, the higher the percentage of their income is taken. The federal income tax percentage goes up to 35% for some people, while others, with lower incomes, pay 10%, and many pay nothing at all. Yet people are calling for the top tax brackets to go even higher, so that wealthy people will be required to “pay their fair share.”

Well, how will we know when fairness is achieved? How will we establish the “fair share”? We will take a vote, of course — because that’s really the fair way to decide.




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Comments

NO FREE (TO EXPLOIT THE POOR) MARKETS!!!!!

I believe Adam Smith would tell you you are full of S!@#...
Let me prove it to you...

What improves the circumstances of the greater part can never be regarded as an inconveniency to the whole. No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable.

To feel much for others and little for ourselves; to restrain our selfishness and exercise our benevolent affections, constitute the perfection of human nature.

The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities...

How selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortune of others, and render their happiness necessary to him, though he derives nothing from it, except the pleasure of seeing it.

"All for ourselves, and nothing for other people, seems, in every age of the world, to have been the vile maxim of the masters of mankind."

The government of an exclusive company of merchants is, perhaps, the worst of all governments for any country whatever.

"The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities, that is, in proportion to the revenue which they respectively enjoy under the protection of the state."

"It is not very unreasonable that the rich should contribute to the public expence, not only in proportion to their revenue, but something MORE THAN IN THAT PROPORTION." - Adam Smith, The Wealth of Nations

Visitor

http://daviddfriedman.blogspot.com/2011/03/misrepresenting-adam-smith.html

Tuesday, March 29, 2011
Misrepresenting Adam Smith

David Friedman

Visitor

Mr Crawford,
Enjoyed the article on "fairness". Would you consider writing about charter schools?

J Eyon

very useful metaphor Don - wouldnt it be nice if every restaurant table would engage in this "game" - it might change some minds

there would be different outcomes of course - whereas you provided your judgement on the scenarios - other people wouldnt come to the same conclusion - imagine a party that included avowed socialists - but that discourse would probably be even more illuminating

for the deeper thinking - the dinner premise would soon need to be refined - since taxation is more than buying someone else's product - but it zeros in on the ethics of the matter - which you correctly IMO discerned as the favorite argument for progressive taxation

Visitor

I have some question about the "fairness" of the starting point of many families (including children) who live in poverty for generations. Fair and equal are not always the same. Could paying more be a compensation for the institutional inequities that many face simply because they were born in the wrong zip code?

Jim Henshaw

re this: "Could paying more be a compensation for the institutional inequities that many face simply because they were born in the wrong zip code?"

To take the restaurant analogy as the state runs things: Someone who ate dinner, in the purported interest of "fairness", hires some people with guns who go out in the street when the bill is due, and force some rich people into the restaurant at gunpoint, and make them pay for most of the bill for the meal they didn't consume. And then, when this coercion is complete, they pocket the money they've stolen and make the short speech above about how this theft was "compensation" for those "born in the wrong zip code". Do you think anyone would perceive this behavior as benevolent and enlightened?

Visitor

Who gets to decide? Is what I earn my own? I was born in the wrong zip code. Both my parents are alcoholic and felons (non drug related convictions) I made my own choices and suffered my own failures. I am now successful and have children of my own. Why is it so repulsive to progressives and "liberals" that I want to provide for my own family instead of the state? If more of us worried about taking care of our own situations and quit looking at others with greed, envy, or guilt, we all would see that there is no rational to who gets born when or where. The best thing our society can do is provide liberty in personal choices and economic freedom to all.

J Eyon

this would be one of the "refinements" i mentioned in my comment - the dinner metaphor appears to assume that the diners were there voluntarily and that all could afford the dinner they ordered

to successfully model the state - the dinner should include attendees who aren't there voluntarily - and who might not be able to afford anything on the menu - what then

would the popular choice echo our current tax laws - where an arbitrary boundary separates those who pay from who dont

chibiabo

Just how long would the boss, or any other individual, paying the maximum for the meals of others and themselves decide to remain a member of any club, "institution", requiring that person to pay more then the real cost of his order?

J Eyon

quite a long time - judging by history

of course - there has to be an alternative restaurant - and the cost benefit analysis of the current one must show a loss - cuz the funny thing is - staying in place in the same "unfair" situation can still be profitable - damn

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