Matthew Weinzierl of Harvard Business School has a new essay in National Affairs on the roots of our disagreements on tax policy. It is really, really good. One of the issues he raises is that if we assume that everyone works to the limit of their earning potential, redistribution starts to look more attractive. But if we instead assume that some people earn less than they otherwise might because they value leisure or more stimulating but less remunerative work, the case gets fuzzier, as it’s not obvious that those who do work to the limit of their earning potential ought to subsidize those who do not.
If people differ in their tastes and not just in their abilities, then taxing high incomes and redistributing the revenue to others is not an ideal tool for maximizing overall well-being. Hard workers derive a lot of well-being from the last dollar they have earned, more perhaps than do people with lower incomes who have greater preferences for leisure. In that case, redistribution may even reduce overall well-being, especially if it has the side effect of shrinking the overall size of the pie.
The political philosopher Robert Nozick put this point especially vividly in his 1974 book, Anarchy, State, and Utopia: “Why should we treat the man whose happiness requires certain material goods or services differently from the man whose preferences and desires make such goods unnecessary for his happiness? Why should the man who prefers seeing a movie (and who has to earn money for a ticket) be open to the required call to aid the needy, while the person who prefers looking at a sunset (and hence need earn no extra money) is not?” Nozick’s concern was that an income tax — especially one that redistributes from those with high incomes to those with low incomes — assigns to two individuals two different levels of responsibility for providing for their fellow citizens, even if the only way in which the two differ is in how they want to spend their time.
This argument suggests that an awareness of different tastes and priorities among our fellow citizens will lead us to believe that, when a person has a high income, it is the result not merely of talent but of hard work. This, in turn, ought to make us less inclined to redistribute income through taxes.
The available evidence indeed confirms this expectation. The World Values Survey asks representative samples of individuals from a wide range of countries for their opinions on an array of questions pertaining to economics, politics, society, religion, and other topics. One of its questions asks respondents to say where they would place themselves on a work-leisure scale. This scale ranges from 1 to 5, where 1 corresponds to the statement “it’s leisure that makes life worth living, not work” and 5 corresponds to the belief that “work is what makes life worth living, not leisure.”
As the logic above would predict, in countries where answers vary more among respondents, standard measures of redistribution are statistically significantly lower. Sweden and the United States offer an illustrative comparison: The variance (a measure of the spread) of answers to the question above about the value of leisure versus work is about twice as large in the United States as it is in Sweden. Consistent with the logic that greater differences ought to lead to less redistribution, the ratio of government transfer payments (a common measure of redistribution) to total national economic output is more than twice as high in Sweden as it is in the United States. And this pattern holds more generally: Countries with less consensus about how to best use one’s time, such as South Korea and Canada, have less redistributive tax policies than those with greater consensus, such as Finland and Germany.
Weinzierl doesn’t end with a particular policy prescription. Rather, he observes that our tax policy debates are heated for the good reason that we are reckoning with challenging moral questions, over which we can expect honest, thoughtful interlocutors to disagree.