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NRO’s domestic-policy blog, by Reihan Salam.

Quick Note on Taxes and Normative Diversity



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Matt Yglesias observes that cap-and-dividend would probably have an uneven impact on labor force participation:

Imagine a stiff carbon tax where instead of using the revenue to offset existing taxes, it’s simply returned to the public as lump sum checks à la the “cap and dividend” approach lately being championed by Theda Skocpol. What’s going to happen here is that on the one hand people will reduce their consumption of pollution-intensive goods and services. But on the other hand, folks are going to work less hard since in effect we’ve created a small guaranteed basic income system. People with high-status prestigious jobs they love will just pocket the cash to offset the higher taxes they’re paying, but people with unattractive job opportunities will take advantage of higher incomes to work less and enjoy more leisure.

Consequently, the GDP impact of cap-and-dividend is going to look much worse than the GDP impact of a program where the revenue is used to finance an offsetting payroll tax cut. But that’s not exactly because cap-and-dividend is wreaking havoc with the core drivers of prosperity. Rather, America would become a bit more like a northern European country. Our output-per-hour-worked would rise (because low productivity workers would disproportionately shed hours) and on average people would have somewhat fewer material goods (most visible in Europeans’ small houses and cars) and more leisure time. [Emphasis added]

This reminds me of David Autor’s work on the unsustainable rise in the disability rolls. One of the reasons a growing number of workers collect Social Security disability insurance (SSDI) is that the labor market position of less-skilled men has deteriorated considerably in recent years, and so the meager income and guaranteed health benefits provided by SSDI look more attractive than on-the-books employment at the bottom of the labor market. Something like cap-and-dividend, according to Matt, would have a similar, albeit less destructive, effect: instead of the binary nature of SSDI, in which the decision to collect SSDI or not operates on the extensive margin (I’m either in the labor force or not), cap-and-dividend would impact decisions at the intensive margin (how many hours will I work). 

One potential implication of this approach, however, is an increase in pre-tax-and-transfer or market inequality, as workers at the low end will decrease their hours while workers at the high end will not. Matt recognizes this — hence his reference to Europeans’ small houses and cars — yet it’s easy for me to imagine a scenario in which this decrease in market income at the low end leads to … calls for a bigger dividend, or more redistribution more broadly. A bigger dividend will tend to decrease work hours even further, and so on. Eventually, workers in high-status prestigious jobs might shift from accepting compensation in the form of market income to accepting compensation in the form of untaxed fringe benefits or consumption opportunities that are distributed through social networks rather than via market prices. 

Matt’s post reminded me of a paper by Matthew Weinzierl of Harvard Business School and Benjamin Lockwood of Harvard’s Department of Economics, which has had a big influence on my thinking:

Preferences over consumption and leisure play no role in the standard optimal tax model, which attributes all variation in earnings to differences in income-earning ability. We show how to incorporate these preferences, which like ability are publicly unobservable, into the standard model in a tractable way. In this more general model, the policy designer must guess at the relative importance of ability and preferences in explaining variation in earnings. We show that such preferences could, in principle, increase or decrease optimal redistribution. In the most plausible specifications of the model, however, the result is clear: greater variation in preferences lowers the optimal extent of redistribution. To generate more redistribution than in standard results, one must assume that the desire for income is inversely related to income earned. This result holds even when the conventional model accurately describes the average individual, and it suggests one potential resolution to the puzzle of why observed redistribution is in some cases weaker than conventional theory would suggest. We then establish a new empirical finding that confirms this model’s central policy prediction across developed countries and U.S. states. In countries and states with more heterogeneous tastes for consumption relative to leisure, redistribution is statistically significantly lower.

Matt (Yglesias)’s thesis is that preferences over work and leisure vary in part according to the quality of the work available for workers across the skill spectrum. But what if underlying preferences over consumption and leisure influence — among many other things, of course — the decision to acquire human capital in the first place? 

I am of the view that the relationship between tax rates and labor supply are more complicated than is commonly understood, as Arpit Gupta often argues. The elasticity of taxable income is higher for young workers without family responsibilities than it is for middle-aged workers with family responsibilities, mortgages, and rigid consumption expectations, hence Matt Weinzierl’s work on how “tagging” (a term first used by George Akerlof to refer to identifying particularly needy groups and applying different tax schedules to them) might improve the efficiency of a tax system. So the same tax system might be more conducive to economic growth in one society (an older society full of prime-age workers burdened by family obligations) and less conducive in another (a youthful society full of unattached nomads).

One of the reasons I tend to think that the U.S. should have a more “work-biased” tax-and-transfer system — in Matt Yglesias’s terms, a system that uses cap-and-dividend to offset payroll taxes — is that I am persuaded by the Judith Shklar thesis, i.e., that earning and voting are the central pillars of American citizenship:

The dignity of work and of personal achievement, and the contempt for aristocratic idleness, were from colonial times onward at the very heart of  American  civic self-identification.  The opportunity to work and to be paid an earned reward for one’s labor was a social right,  because it was  a primary  source of  public respect. It was seen as such, however, not only because it was a defiant cul- tural and moral departure from the corrupt European past, but also because paid labor separated the free man from the slave. Under  these conditions citizenship in America has never been just a matter  of  agency  and  empowerment;  it has  always been  a matter  of  social standing as well

Under these conditions citizenship in America has never been just a matter of agency and empowerment; it has always been a matter of social standing as well.

Some argue that whether or not the Shklar thesis is true as a matter of political and social history, the place of work in American civic self-identification is a bad thing and we should embrace a more social-democratic view. I disagree, obviously, but it is an interesting and increasingly common point of view.



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