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Luck and Taxation

From the Becker-Posner blog by Gary Becker:

I do not believe that differences in value judgments are the main source of the disagreement among economists over how much to tax individual with different levels of wealth and income. These value judgments include beliefs about how much of high incomes are due to good luck, whether high-income individuals “deserve” their incomes, or whether there is “free will”. Such considerations, however, may be more important among the general public since, for example, they may not want to tax heavily a Steve Jobs or Brad Pitt because they admire these (and some other) successful individuals and their accomplishments.

For economists, differences in views on what the tax structure should be and on other policies mainly come down to different beliefs about how taxes and other policies affect behavior. For example, economists who support much greater taxes on higher income individuals believe that higher taxes will not much affect how hard these individuals work, their propensity to start businesses, or other kinds of behavior. On the other hand, other economists, including me, believe that high marginal tax rates not only discourage effort and other choices by those being taxed, but also affect the form in which they take their incomes. These adjustments include increases in non-taxable perquisites, such as greater use of a company’s plane, hiring expensive accountants and lawyers to search for loopholes in the tax code, converting income into capital gains when these gains are taxed at lower rates, and investing abroad if the income earned there is taxed at lower rates.

Unfortunately, the empirical evidence accumulated so far does not conclusively support either approach. That is, it is unclear how large is the effect of higher income taxes on the behavior of richer individuals. The relevant evidence is growing, but so far different perceptions of these effects prevent the resolution of the sharp differences in opinions among even a-political economists on the damage done by high marginal income tax rates.

The important point for our discussion is that beliefs about the importance of good or bad luck in determining high or low incomes is not usually the decisive source of differences in attitudes about tax rates and other public policies. For example, one may correctly believe that luck has a major role in determining the genes, education, and other opportunities of highly successful individuals, and yet believe as well that high tax rates on their income and wealth would induce major changes in their behavior. Conversely, one can believe that luck is unimportant in determining success, and at the same time believe that high tax rates on rich individuals would little affect their behavior. And, of course, various other combinations are possible about the relation between the role of luck in achievement and induced responses to taxes and other policies.

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