Taxation as Social Justice

Or, Taxation as Economic Efficiency?

The Blog here today was stirred by an AIER Essay titled Taxation as Social Justice (Munger, Sept. 24, 2023). And, as we will see, it is far more complex and intriguing than the Image suggests, in that taxation, paying tax T, is a shared responsibility, part of the shared other-interest that makes for both efficiency & justice.

Also, to put the following comments in a frame, essays posted on the American Institute of Economic Research (AIER) website regularly apply Single Interest Theory (SIT) in mainstream (Micro)economics, more often than not with a Libertarian twist. Because of the latter, ethics are generally always if not always left out of the essay. And, as always with an ideology (SIT in Microeconomics has become a political ideology in disguise), well, the answer is generally the same: No matter the question, the answer is always to find ways to support the pursuit of unfettered self-interest facilitated by non-attenuated (do as you please) private property rights without ethical considerations, without bounds. It is all about the presumption of Leave Me Alone and I’ll Make You Rich, after McCloskey and Carden (2020), albeit McCloskey (2006; see Review in Khachaturyan and Lynne 2010) sees the key role of ethics, not just unfettered self-interest: To McCloskey, it is about an Ethical Bourgeois, in the Bourgeois Deal: It is about jointly pursuing Efficiency & Ethics, Efficiency & Justice, not just Social Justice or lack thereof.

As McCloskey says it, the Bourgeois Deal evolving out of the 1700s was about "... the new permission to have a go, inspired by the shocking new ethics and rhetoric and ideology of (classical) liberalism (McCloskey and Carden 2020, p. 86)." Well, sure, makes sense, McCloskey provides convincing rhetoric, but having a go is not an unfettered pursuit of self-interest: Said self-interest has to be tempered by the widely shared other-interest, the shared ethic. And, paying tax T is part of that ethic.

Only the Leave Me Alone part is in the AIER frame, supported by the ideology of SIT in Microeconomics frame. So, the AIER essays are about Leave Me Alone and I’ll Make Me (not You) Rich. Ethics are set aside, with outright opposition to ethical reflection generally the case.

The Blog, today, is about making sense of Taxation as Social Justice, and, actually, about Taxation as Economic Efficiency, using an alternative frame. So, instead of SIT, the Blog uses Dual Interest Theory (DIT) in Metaeconomics, an alternative theory and framework which has a placeholder for ethical reflection. As a result, DIT generally points in better, more workable, more reality-based (i.e., based on a foundation of science & ethics) directions.

Specifics on the Essay

The essay on Taxation as Social Justice (Munger, Sept. 24, 2023), well, it is well-done, as Munger generally does solid work. And, within the frame of the essay, as in whoever frames the debate tends to win the debate, Munger (and we might suppose the AIER, in that the essay is hosted by the AIER) wins. It reminds a MetaEcon of the Munger Podcast TAITC, The Answer is Transaction Costs, which is especially worth a go, and, it wins a lot of debates. Although, as we will see, Munger does not use TAITC to solve the matter of Taxation as Social Justice. The issue is: What Theory and Frame --- in this case SIT or DIT --- is Best to Use to Consider Taxation? And, the answer relates directly to the fact that TAITC, and, that answer is supported by DIT, but TAITC is not applied in the essay, for some unknown reason.

The reason the essay fails to see TAITC: While the essay sees the “We” it does not see how the matter of taxation is about finding the best balance in the “I&We,” the self & other-interest, the private & public interest, the private & public good, the best balance in Market & Community:Government. Seeing the I&We, well, then, TAITC. Said somewhat differently, the essay sees the “We” but does not adequately integrate it with the “I” and, only when integrated as “I&We” can one claim TAITC.

DIT is a frame that transcends self-interest (only the “I”) and brings in the shared other-interest (the “We” and, thus, the ethics, including justice). DIT makes clear that the tax T question relates directly to finding the best balance in such things as Private Automobiles (the I) & Public Roads (the We), SpaceX & NASA, Industrial Farms & Land Grant University (Publicly Funded) Research. It is about good balance in the joint price P & value V, the latter giving rise to the best level of tax T. Such things have something to do with Social Justice, but have a lot more to do with Economic Efficiency, as in taxation is about Efficiency & Justice, with the ethic of justice tempering the pursuit of efficiency.

Think about economic efficiency arising on the best path 0Z in typical DIT in Metaeconomics analytics (like in Figure 1 and Figure 2 at the beginning of the What is Dual Interest Theory? page in the Metaeconomics.info website; also see Lynne 2020, as well as Lynne and Czap 2023). Think of the budget line RoRo as representing the budget for spending price P for the Private Automobile pursued on path 0G and tax T for the Public Road pursued on path 0M, and, well, the best road is on path 0Z, with TAITC. And, all Private Goods have an overlapping Public Goods set of iso-curves, so economic efficiency (only possible on path 0Z) can only be achieved by everyone paying tax T for Public Roads, and all manner of other Public Goods. And, Social Justice is served by the best balance in the Private & Public decided in value V space of Figure 2 in DIT, the Other Forums space of Community:Government, which works to temper the price P (and Efficiency achieved) in the Market Forum space of Figure 1.

Taxation as Prudent Policy

Using DIT in Metaeconomics, then, some specific suggestions on tax T, commenting on various points made in Munger (Sept. 24, 2023), who frames the story with some questions “How much tax should be collected, and who should pay it? Why?” Munger goes on to claim that taxes can have only one of two broad purposes:

1. “We” want to reduce the amount of the thing being taxed

2. “We” want to increase the revenue that “we” want to spend on good things

I have put “we” in quotes, because I’m not going to talk about the political process by which tax policy is decided.

Actually, the main purpose of taxes is:

3. “We” want to achieve economic efficiency, political (economic stability), and, yes, happiness. Said "We" is worked out in the Other Forums of Community:Government, that temper the Market Forum. Paying a tax T reflecting value V from Figure 2 space of DIT, represents that which people can go along with coming out of Community:Government, and is essential to achieving all purposes in the Market as represented in Figure 1 space of DIT. So, the “We” is key, and the tax policy reflecting the shared other-interest of the “We,” well, it cannot just be set aside while trying to make sense of tax T.

Said somewhat differently, not talking about the matter of the content of the “We” and where it comes from, well, that is to eliminate the role of the frame coming out of value V space, the Community:Government space, about that which the other can go along with, the ethic. It eliminates the whole reason that Taxation as Social Justice (resolved in value V space) is even an issue.

So, taking each purpose in turn, Munger does not say much about #1, other than it is about taxing bads, taxing externalities:

Taxing externalities, according to the wisdom of economic orthodoxy, is a way to reduce pollution, smoking drinking alcohol, and so on.

Easy to set purpose #1 aside: As DIT makes clear, there is no such thing as an externality on path 0Z, the economically efficient path. People who temper the excesses of self-interest only path 0G just automatically resolve such matters on path 0Z. Period. So, said purpose for a tax T is not of any use, except in the frame of SIT in Microeconomics, where the Market has failed, which it does regularly: Actually, it is Leave Me Alone to do as a “I” please without regard for the shared interest with the “We” which is why it fails, and, it is a common failure in Libertarian (and AIER) framing: Externalities, anyone? External to Libertarian framing, anyone?

Munger continues on, regarding purpose #2:

But in taxing to raise revenue, we want to minimize the effects on the amount of the thing being taxed. Income is good, and we want people to have more, not less. So when we tax income, we are hoping that income will be reduced only by the amount of the tax. Of course, there is some negative impact—distortion—on income from the negative incentive effects, but reducing income is a side effect, not the main objective. For taxes whose goal is to raise revenue, there is some effort to “minimize distortion,” in fact.

Well, now the main problem of the SIT frame Munger (and AIER) is using starts to show. Any influence on a path 0G choice, a choice driven almost exclusively by self-interest, is considered a distortion, an inappropriate intervention. Well, it depends on who one asks, a MetaEcon would say. As DIT makes clear, and Adam Smith would agree, it is not a distortion to take action based on what the other deems reasoned and reasonable, what is ethical (Moral Sentiments, anyone?) reflected in path 0M. It is not a distortion to operate on the economically efficient path 0Z, and, the value V influence, perhaps reflected in a tax T, is the reason one is on that path. Ironically, it is the SIT (and AIER frame in general) choice of path 0G that is distorted, caused by inadequate attention to value V and the tax T required to bring it forward as a public good.

Staying with the notion of distortion, which has essentially no meaning in the context of DIT, but has meaning to someone seeing it in SIT terms, so it is about Leave Me Alone and if you don’t, the economy is inherently distorted: Really? So, Munger is

---focusing on minimizing distortion because I’m assuming income, and wealth, are good things, and we don’t want to reduce them more than we have to.

1. Head tax—each person pays a fixed amount. Obvious, this is the least distorting tax, because there are no incentive effects, just a price of membership, like paying dues for a club.

2. Sales tax—this tax is ad valorem, meaning that it is strictly proportional to spending. It’s (say) 6 percent of the four dollars you spend at Starbuck’s, or the same 6 percent of the $50,000 you spend on a new car.

3. Income tax—a proportion of your income, the same percentage, regardless of the amount.

Well, even a substantial tax T on income and wealth could also be a good thing as it is essential to achieving the best path 0Z. TAITC, and, sometimes the TC can be high, which is not always bad, but naturally one wishes to minimize same.

And, on income tax, Munger sees distortion in deductions (e.g., for mortgage interest) and especially sees distortion in progressive taxes, like the progressive income taxes, with progressive here meaning higher taxes at the margin (not taxes to do Progressive things, like sustain the Spaceship against excessive overload of the atmosphere with carbon dioxide, the Progress based in both science & ethics).

Well, is a deduction for mortgage interest to buy a family home a distortion? Hardly. Reasoned people will say such a deduction is something that the other can go along with, well within the realm of a widely accepted ethic about home ownership. Now, is it a distortion for mortgage interest on 2nd, and 3rd, and 4th houses and dwellings which are used only occasionally just because said use is possible for extremely wealth people? Well, now, runs right (or is that left) into the content of the “We” asking if that ethic is reasoned and reasonable.

And, on higher tax T rates at the margin of income earnings, well, now a MetaEcon points to the matter of Optimal Inequality. Based in DIT, extreme inequality is not necessary in order to provide adequate incentives to make wealth, and the natural resentment operating down the income and wealth ladder is resolved when the inequality is optimal. And, with Optimal Inequality, higher tax rates at the higher income levels become passe, as more compensation down the ladder means the higher rates are hardly ever paid. So, again, it is about what the other can go along with, the ethic of Inequality. And, as a case in point, it is highly doubtful that a CEO compensation package at the ratio of 300:1 relative to the median worker fits the ethic of inequality, albeit an empirical question.

One of the most dramatic demonstrations of Optimal Inequality working better is in the performance of sports teams. If one pays the top players too much as compared to the standard player resentment sets in, and sports performance (measured mainly in wins for the season), well, it drops. Performance also drops if pay and compensation become too equal: Incentive matters, but it must also be ethical. Best performance comes out of Optimal Inequality.

Research on factory lines supports the same contention: The factory with Optimal Inequality performs better than one with Extreme Inequality or Extreme Equality. The distortion is in not having a high marginal tax rate, which will nudge people at the top to pay higher compensation down the income and wealth ladder to avoid paying the progressive (even when used to accomplish Progressive things) tax. The distortion is from Extreme Inequality facilitated by not tempering the top (and, distortion also occurs if the compensation is in the realm of Extreme Equality).

Taxation as Social Justice

Munger then goes to the matter of fairness in tax T. Each tax is taken in turn.

Head Tax: Well, the Head Tax seems fair on the superficial surface, in that everyone pays the same tax. But, the matter of the shared other-interest, the ethic at play, immediately arises in the burden of a head tax relative to the ability to pay it by each and every person. It is highly unlikely a substantive head tax, like in the $1000s of dollars, would stand any reasonable Community standard for that which the other can go along with. Perhaps some small amount, like $10 per head to pay for city-park in local area of a city or some such, well, that might work. The point here is that it depends on the content of the shared other-interest at play, and, is very much an empirical question involving both the facts (scientific-method source) about relative burden & the ethics of that burden.

Flat Tax: Well, a Flat Tax, too, seems fair on superficial examination, as in everyone paying the same proportion of income. Munger provides an example:

Let there be a proportional tax, and a standard deduction for the first $10k of income. One family makes $20k in income, and the other makes $100k. The (flat) tax rate is 25 percent.

Tax bill for poor family: ($20k income -$10k standard deduction) X 25 percent tax rate = $2,500

Tax bill for wealthy family: ($100k income -$10k standard deduction) X 25 percent tax rate = $22,500

The wealthy family has 5 times the income, but pays 9 times as much tax. And that’s with a proportional income tax! Already, the wealthy are paying a percentage, making the system “progressive.” Is that enough? Is that fair?

Well, again, it is about the “We” represented in the ethic held in the shared other-interest. And, it is also back to considering Optimal Inequality, leaving enough incentive for the wealthier family to keep earning more income while reducing, minimizing the political (economic) turmoil from too wide a disparity in the income. Paying 9-times as much tax is likely quite reasonable on an Optimal Inequality frame. It is about a shared other-interest spread widely, regarding what is left to live on after the tax T is paid, the amount left to live on by both poor and wealthy, and, everyone in between.

Munger than goes after the fairness priesthood, going after AOC in particular, as though fairness in the sense of that which the other can go along with has some kind of religious or cult-like frame (priests, and others of a hood, after all). Well, maybe, but as DIT suggests, it is more likely about #3 above --- efficiency, stability, and happiness, even for the extremely wealth who, under Optimal Inequality, no longer have to live behind moats and guard towers (like the Authoritarianism & Religionism & Oligarchism of the pre-Enlightenment period led to, also)?

The usual answer among the fairness priesthood is “no.” The reason is that the wealthy still have a lot left. It’s a bit like the famous Willy Sutton quip that the reason he robbed banks is “that’s where the money is!” (Okay, he didn’t say that, but I’m pretty sure that AOC did, at the Met Gala.) And that’s right: the poor family lives on $7,500, and the wealthy family enjoys $78,500. If “we” need more revenue, we should take it from who that’s got more, right? It seems only fair.

Well, ok, but a reminder here: The goal is to move the system to path 0Z, one that reflects, as Adam Smith framed it, a tempering down of the arrogance of self-love --- which seemingly drives the self-proclaimed right to have all the wealth frame of mind --- by that which the other can go along with: Ethics. Seems both Munger and the AIER in general need to seriously consider what Adam Smith had in mind, and not distort Smith, which has been done over and over and over again (see Liu 2022; for a Review see Lynne 2023). Smith never said greed was good, and talked specifically to tempering the arrogance. Perhaps AOC is about tempering the arrogance, and sees path 0Z? AOC seems to be about nudging the system toward path 0Z? Empirical question here, that needs to be asked and then pondered on a foundation of science & ethics, not SIT and AIER ideology.

Munger continues:

The new fairness movement wants to use taxation as a means of achieving “social justice,” and the cost is not a consideration, because this is no longer an issue of public finance. The goal is not to raise … revenue so we can support the poor; instead, the US is pursuing the simpler goal of eliminating private concentrations of wealth… This impulse is hardly new. It can be heard in the hit 1971 song by the rock group 10 Years After, “Change the World.” The song contains a command: “Tax the rich—feed the poor—’Til there are no—rich no more.” Have you thought about that? Shouldn’t it be, “till there are no poor no more”?

Well, a MetaEcon does not think in such terms, the matter of “this is no longer an issue of public finance,” “not to raise revenue so we can support the poor,” and “no poor no more” is not the point. Poverty does need to be eliminated, which takes commitment to a shared other-interest in no more poverty, like in the Viking economies, who decided to eliminate it after the 1930s, after WWII when it could be done (see Lakey 2016). Also, Extreme Equality (til there no--- rich no more) does not work any better than Extreme Inequality. Rather, the point is: Find Optimal Inequality on some path 0Z, on which some people will be “poor” relative to the “rich” virtually by definition, but efficiency is achieved with a reasoned access to income and wealth, in order to be and to do (as Amartya Sen talks about it) for everyone. It seems the notion of The Go put forth by McCloskey and Carden (2020) also requires such opportunity. The goal is to work at finding the Adam Smith kind of Wealth of Nations, a Wealth tempered by the Moral Sentiments, not just the Wealth of the Few.

And, the Left, or is it the Right, Gets it Completely Wrong

Which leads to the Munger claim that the attention needs to be shifted away from relative income and wealth toward absolute income and wealth. And, wow, Munger gets really wound up toward the end, we might suppose to please the AIER, as the essay is in their realm:

The problem is that many people on the left want to define wealth—and also poverty—as a relative, rather than absolute, concept. If poverty is an absolute concept, as it is sensibly defined in development economics, then poverty is something that can be defined clearly, and can be eradicated. But if poverty is a relative concept, it is a problem forever: the poorest 20 percent will always be in the lowest quintile of the income distribution. …The 10 Years After song is a deep insight into the mindset of envy that motivates many on the left. The problem is not poverty, the problem is inequality. So the problem is not to make the poor prosperous, but rather to take money away from the wealthy…This is not a conjecture, but is something one can directly infer from the rhetoric of progressive politicians. As I already noted, AOC didn’t wear a designer gown that said, “Feed the Poor!” She doesn’t really care about poverty; her goal is to end wealth.

Wow. Doubtful that anyone on the Left, including AOC, want to end wealth. The issue of Wealth for Whom is actually the empirical question, a MetaEcon would point out, and, the conjecture that somehow the Left, AOC included, want to eliminate wealth in the relative sense would not likely stand-up to consideration on a foundation of facts & ethics. Also, it is doubtful the Left is all about relative income only. Rather, it is about Optimal Inequality, a reasoned opportunity to have income and wealth with a tempered taking and keeping of same without regard to ethics. Ooops, did I say ethics?

And, please don’t say, well “if it is legal, it is just fine to take and keep,” as Friedman famously claimed. Not really, in that the most self-interest driven people go change the law to make it legal to take and keep, as Pistor (2019) has documented. And, even Munger has pointed to the reality (in Munger and Villarreal-Diaz 2019) that an unfettered economic system just naturally goes to a Cronyism, fueled by hiring lobbyists and tax lawyers to take and keep wealth rather than engineers and technical people to make new wealth.

And, as the Cronyism builds, and the inherent resentment going along with it rises-up, predictably the authoritarian shows-up promising to fix everything (2016 election, anyone?). The system then collapses into Authoritarianism & Religionism (the Fundamentalism arrives, joining with the Cronyism, ironically often joined by the people who are part of Libertarianism: Figure that one out) & Oligarchism: Just look around now in the 2020s. In contrast, a system not operating as Cronyism (and away from the deadly triad of Authoritarianism & Religionism & Oligarchism) needs to be about being a jointly Humane Capitalism & Inclusive Community: Government, again pointing to a kind of Optimal Inequality.

Taxation Needs to Be Viewed from the frame of Humanomics

The notion of Humanomics, too, comes into play “… an economics with the humans and their ethics left in” (McCloskey and Carden 2020, p. 176; also see Smith (Vernon, not Adam) and Wilson 2019). For an overview of the meaning of Humanomics, see Lynne (2020), in that Metaeconomics is a Humanomics not only about Humans with their ethics left in, but a Humanomics with a theory represented in DIT. The contrast is SIT used in mainstream (Micro)economics, which is an economics representing the Econ, a person from whom ethics have been taken out. And, even worse, in Libertarian (and, it seems, AIER) framing, an Econ is even opposed to ethical reflection. It is easy to see how a conversation about Taxation as Social Justice using said kind of economics, well, it is contorted and distorted. Munger generally says TAITC: A MetaEcon agrees. And, well, one cannot get to that claim using SIT, but one can using DIT.

Munger Wraps with an Unfounded Claim of Envy Driving Taxation Concerns

Taxation has been taken outside the realm of public financing of government expenditures, and moved into the domain of social justice, governed not by real fairness, but by simple envy.

Well, an empirical question we might suppose, but it is not likely as much envy as it is resentment for the arrogance reflected in the extremes of wealth. The recent return to building labor unions, as represented in the ongoing strike by the UAW, and the recent writers guild strike, are cases in point. Labor has had enough. Union efforts are driven by resentment, with the strike against arrogance such as represented in the extreme compensation for CEOs is real. Resentment eventually takes down all systems, some well documented cases being in sports performance and effective factory lines, as mentioned earlier.

Go Back to Adam Smith, Please

Munger and the AIER both need to go back to Adam Smith and seriously consider what Smith saw for the drivers in the Wealth of Nations, and see that taxation is part of the realm of the Moral Sentiments. So, yes, Taxation as Social Justice is partly correct, as it fits within the realm of the Moral Sentiments, albeit Taxation is mainly about achieving economic efficiency which is impossible without both price P & tax T working in consort. So, tax T is essential to finding good balance in a joint Market & Community:Government on the way to the true Wealth of Nations, requiring attention to the joint private & public good. And, again, after Munger in another realm, TAITC with tax T a legitimate part of that TC.

References

Khachaturyan, Marianna and Lynne, Gary D. "Review of McCloskey, D. N. The Bourgeois Virtues: Ethics for an Age of Commerce. Chicago, Il: The University of Chicago Press, 2006, 616 pp." Journal of Socio-Economics 39 (October 2010): 610-12.

Lakey, George. Viking Economics: How the Scandinavians Got It Right - and How We Can, Too. Brooklyn, New York: Melville House Publishing, 2016.

Liu, Glory M. “Adam Smith's America: How a Scottish Philosopher Became an Icon of American Capitalism.” Princeton, NJ: Princeton University Press, 2022.

Lynne, Gary D. Metaeconomics: Tempering Excessive Greed. Palgrave Advances in Behavioral Economics. Edited by John Tomer. New York: Palgrave Macmillan, 2020.

Lynne, Gary D and Czap, Natalia V. "Towards a Dual Interest Theory in Metaeconomics." Journal of Interdisciplinary Economics, no. July (2023): 1-19.

Lynne, Gary D. “Review of Liu, Glory M. 2022. Adam Smith's America: How a Scottish Philosopher Became an Icon of American Capitalism.” Journal of Behavioral Economics for Policy (in press).

McCloskey, D. N. The Bourgeois Virtues: Ethics for an Age of Commerce. Chicago, Il: The University of Chicago Press, 2006.

McCloskey, Deidre Nansen and Carden, Art. Leave Me Alone and I'll Make You Rich: How the Bourgeois Deal Enriched the World. Chicago: The University of Chicago Press, 2020.

Munger, Michael C. and Villarreal-Diaz, Mario. "The Road to Crony Capitalism." Independent Review: A Journal of Political Economy 23, 3 (2019): 331-44.

Pistor, Katharina. The Code of Capital: How the Law Creates Wealth and Inequality Princeton, NJ: Princeton University Press, 2019.

Smith, Vernon L. and Wilson, Bart J. Humanomics: Moral Sentiments and the Wealth of Nations for the Twenty-First Century. New York: Cambridge University Press, 2019.