Taxes Are A Positional Good
Ezra Klein, suggesting he’d rather be poorer and more equal than richer and more unequal:
Robert Frank explains this well in his book Falling Behind: How Rising Inequality Harms the Middle Class, but a nice way to think about it is through housing: Would you rather live in a land where you had a 4,000-square-foot house and everyone else had a 6,000-square-foot house, or one in which you had a 3,000-square-foot house and everyone else had a 2,000-square-foot house? Given this choice, studies show that most respondents pick the latter. They’d rather have less home in absolute terms if it means more home in relative terms. That makes housing a positional good.
Being concerned with one’s relative position rather than one’s absolute position is not irrational or merely motivated by envy.
Well, first things first — I’d definitely call it irrational and motivated by envy. It may be common, but that doesn’t make it rational. Rationally, increasing absolute wealth is a good thing, while irrationally, other people’s absolute wealth increasing faster than yours is a bad thing. This is another area where it is not a zero-sum game, so there is no rational reason to feel bad about other people improving faster than you do.
But that’s not where I’m going with this. This is about taxes, and something that Friedrich Hayek said a long time ago:
It would probably be true, on the other hand, to say that the illusion that by means of progressive taxation the burden can be shifted substantially onto the shoulders of the wealthy has been the chief reason why taxation has increased as fast as it has done and that, under the influence of this illusion, the masses have come to accept a much heavier load than they would have done otherwise. The only major result of the policy has been the severe limitation of the incomes that could be earned by the most successful and thereby gratification of the envy of the less-well-off.
He’s saying that the middle class is willing to accept higher tax burdens, as long as those above them are getting absolutely soaked. Is that irrational?
Well, let’s say I work for a living and make the median household income of $50,000/year. I work hard, and every paycheck I see money taken out of my paycheck for taxes — for the sake of argument, $10,000/year. My neighbor, on the other hand, is working very hard at a higher-paying job, making $100,000/year, but is paying the same flat tax rate of 20%, thus $20,000/year.
If Ezra Klein is right about the rationality of positional goods, it makes perfect sense for me to be happy if my taxes are raised to $20,000/year (40%), as long as my neighbor’s taxes are raised to $50,000/year (50%). In what bizarro world should it be rational that I be happier to give up $10,000/year more to the government if I simply think that those making more that me are getting soaked even worse?
I often behave and argue as if government is incompetent. They’re not — they’re just working in their own interest rather than ours. I’m sure that politicians are well aware of the fact that increasing marginal tax rates on the rich will make it easier for the middle and lower classes to expect tax increases as well. They can then hide the high rates on their rich donors through loopholes, while soaking the middle class, where the money is. Politicians are very useful at using psychology: very useful at using it against us.
