April 24, 2007
Academic Parlor Games
Posted by Victor Fleischer

In a recent post picked up by the New York Times, Frank Pasquale dissed Greg Mankiw's new paper on "The Optimal Taxation of Height" as an academic parlor game

Pasquale's drive-by analysis of the paper misses the point.  If we find the idea of taxing height absurd, then it puts a heavy burden on those who advocate optimal income tax analysis to defend the approach.  Optimal income tax theory suggests that we should have declining marginal tax rates.  So by attacking Mankiw's "parlor game," Pasquale, ironically, is defending declining marginal rates.  I doubt that's what Pasquale intended. 

These battles over ideal theory do have real world political relevance.  A seminar student pointed me to some state legislative proposals that would provide tax subsidies to young people as an attempt to combat brain-drain.   Should we dismiss age-based taxation as a parlor game?  In a recent paper, I use the endowment tax literature to analyze the taxation of high-ability fund managers, an issue that Congress is looking at now.  (I'm not endorsing endowment taxation; rather, our broadly-shared reluctance to taxing endowment helps explain an important element of partnership tax.)  There's a serious paper out there on gender-based taxation.  Not to mention, in the actual tax Code, various tax credits and deductions based on marital status, the number of children you have, medical conditions, and other personal attributes.  Are these all parlor games?

It's often necessary to think about ideal tax approaches in order to understand how we define the tax base and the trade-offs involved in making actual tax policy.  It's just not helpful to vaguely argue that we should tax the rich more without explaining why (and to what extent) we should tax the rich, and how we should measure wealth, income, or ability to pay in the first place. 

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Comments (6)

1. Posted by Jake on April 24, 2007 @ 19:18 | Permalink

Hip, hip, hooray for Vic. Well stated.


2. Posted by Billly Budd on April 24, 2007 @ 20:05 | Permalink

I agree with your last comment. This may be a particularly unoriginal and self-serving comment, but I think it's hard to justify equating higher salaries with more wealth for the purposes of higher taxes. If I make $190K two years from now, I'll have to pay the same amount of money as a guy with $40M in assets who's working part time at his old i-bank even though I've got $0 in assets and a ton of law school debt.


3. Posted by M. Hodak on April 24, 2007 @ 20:06 | Permalink

People don't appreciate that our tax code is riddled with discrimination. It discriminates against renters vs. homeowners, against non-union workers vs. union workers, against those who distribute food vs. those who grow it, against those who donate their time vs. those who donate cash...as well as those who invested the most in their human capital to become the most productive members of our society.

Everyone who gets a tax break for any purpose is being discriminated in favor of those who don't get it. What's wrong with being a renter?


4. Posted by Frank on April 24, 2007 @ 21:16 | Permalink

Well, I agree with you that Mankiw and I may ultimately be on the same side of the issue when it comes to questioning the utility of the ideal theory. However, he attempts to do so by simultaneously a) playing its game and b) deriding the results of playing it. I tend to doubt one has to do a) in order to convincingly do b); see, e.g., comment to

http://www.concurringopinions.com/archives/2006/04/modeling_to_the_1.html

In any event, my main purpose was to point out that the parable-like quality of Mankiw's argument derived from some common misperceptions--or false heuristics--about the comparative distributive patterns of height and wealth.

Consider this quote from a recent review of Taleb's book The Black Swan:

"If 100 random people gather in a room and the world's tallest man walks in, the average height doesn't change much. But if Bill Gates walks in, the average net worth rises dramatically. Height follows the bell curve in its distribution. Wealth does not: It follows an asymmetric, L-shaped pattern known as a 'power law,' where most values are below average and a few far above."

from
http://online.wsj.com/article/SB117736979316179649-search.html?KEYWORDS=black+swan&COLLECTION=wsjie/6month

In other words, the ridiculousness of the idea of taxing height stems from the relatively trivial degree to which it contributes to extant inequalities, and how closely "packed" heights are (as opposed to wealth). It does not stem from the broader notion that Mankiw implies it does; namely, that "conventional models of distributive justice [do not] adequately capture of our intuitions about what is fair and what is not." (from his response to my post).


5. Posted by Christine on April 25, 2007 @ 7:06 | Permalink

I have been working on a paper about why we hate windfalls. The tax code is full of provisions taxing so-called windfalls. Beauty pageant awards are taxed, but the Nobel prize isn't. Beauty is a windfall, but for some reason we believe that genius and brilliance are things we work very hard toward or at least work very hard to capitalize upon. Taxfalls are nice to tax because the taxation doesn't skew preferences. People can't avoid good fortune. Height is an obvious windfall; taxing height probably wouldn't skew preferences. I can't see myself choosing not to marry Paul, who is from a much taller family than I am, just because it might throw my kids into a higher tax bracket!


6. Posted by Christine on April 25, 2007 @ 8:43 | Permalink

Sarah Lawsky tells me that Nobel prizes are now taxed, so I will research more and update.

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