Thursday, February 4, 2010

Mankiw and Weinzierl on the Taxation of Height

According to Mankiw and Weinzierl, under a purely utilitarian perspective tall people should pay more taxes than short people:
Should the income tax include a credit for short taxpayers and a surcharge for tall ones? The standard utilitarian framework for tax analysis answers this question in the affirmative. ... A tall person earning $50,000 should pay $4,500 more in tax than a short person.
The most interesting point they make however is this one:
If policies such as a height tax are rejected, then the standard utilitarian framework must fail to capture intuitive notions of distributive justice.
In other words: why is it that most people agree that wealth should be taxed but beauty, charm, strength, height and health should not?

9 comments:

scary-hairy said...

Rather simple - you can't make short people taller by taxing tall people. You can make poor people less poor by taxing rich people.

Pedro H. Albuquerque said...

Scary-hairy, thanks for posting, but you're missing the point: you may not make short people taller, but you can compensate them financially, so my question stands.

Joseph said...

These sorts of questions are particularly interesting to me and why I like economics in general. I don't really have an answer, I just thought I'd comment that economist Robin Hanson ( http://www.overcomingbias.com ) often poses these very same questions and the comments that follow can get very lively indeed (especially when he is talking about racially or sexually sensitive issues). Thanks for the link!

Pedro H. Albuquerque said...

Overcoming Bias is a pretty nice blog indeed. Thanks for your comments Joseph!

Joseph said...

I think I have some semblance of an answer. In some way, the advantages of being tall are already taxed and distributed to short people via a progressive income tax. Presumably, tall people make more than short people solely based on their height so theoretically they make more money than short people on average.

I think its useful to draw a comparison to smart vs stupid people (not implying that short people are stupid, as I myself am pretty short). Smart people probably pay more income tax than stupid people and some of the benefit of intelligence is captured already by a progressive income tax.

There might be some untaxed or overtaxed benefit to height that the income tax doesn't capture -- but it would probably be very hard to not only enforce such a height-based tax scheme. In the end, government agents will have to come over to your house and measure you in order to determine your tax contribution, and the costs of that to the country probably well exceed the benefits gained by short people.

The height-based tax scheme also relies on specific social conditions at the time of the study. The benefit that tall people get from being tall can very well change based on people's personal preferences -- and we all know how stable THOSE are.

Pedro H. Albuquerque said...

Hi Joseph, the problem is even more interesting however under a Public Finance perspective. Taxing height is efficient because you cannot voluntarily change or hide the incidence base. For example, taxing income is inneficient because it acts as a disincentive to work (it's the same as a punishment on an economic "good").

Height serves well as a tax incidence base because it's perfectly inelastic to the tax rate. You can't hide your height too, so unlike most other taxes you won't subsidize the underground economy.

For example, bigger and stronger people have more "muscle-hours" that can be profitably employed in home improvement. This "extra wealth and income" gets a free pass under our tax code.

Joseph said...

Pedro,

Wouldn't taxing height eventually cause the population to get shorter, though? The higher taxes tall people pay would make them less inclined to have children than short people, and thus more short people would pass their "short genes" on.

Pedro H. Albuquerque said...

Interesting point Joseph, such an unintended consequence shouldn't be discarded for sure. Could the same argument apply to people with marketable skills (able to earn more) under a system based mostly on income? I mean, would income taxes lead to a population less able to generate income in the long run?

I'd say that there's something about "clan justice" that explains why people abhor policies based on physical inequality. Would parents expect kids that are taller or stronger to work harder, not because they can do it, but so others are compensated for their lesser innate gifts? I find the latter hard to imagine.

Joseph said...

Pedro,

I think in order for there to be some sort of evolutionary selection in your example of income, the taxes would have to be so high that the amount of income earned after high taxes is less than the lower income workers. This really only happens in blatantly socialist countries. I believe some sort of tax scheme like that was implemented in the USSR for awhile, where not only were the wages controlled, but if they were deemed "too high," they were taxed down to more "appropriate" levels. Pretty ridiculous considering it was the government itself that was controlling the original "high" wage in the first place!!