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.

  • Miko

    Reminds me of the Ultimatum Game: A researcher brings in two volunteers and explains that he’s (maybe) going to split 100$ between them: volunteer A chooses how the money will be split, and then volunteer B gets to choose to either accept the split (in which case both get what A stipulated) or reject the split (in which case both get nothing). (Of course, volunteer A may be an actor if the researcher is looking for certain results.) In practice, offers worse that 75$-25$ typically get rejected, meaning that volunteer B is willing to sacrifice 25$ for the purpose of making volunteer A sacrifice 75$.

    It’s irrational (in a non-iterated game), of course, but it’s also easy to see where people can get the idea that such actions are in their interests.

  • Akston

    I think it may be dependent on if you think your neighbor’s actions and results are connected to your own. You assert (and so do I) that this is not a zero-sum game, but there are many out there that perceive this otherwise.

    The quote I first read at this site describes that perception pretty well:

    Capitalism and communism stand at opposite poles. Their essential difference is this: The communist, seeing the rich man and his fine home, says: ‘No man should have so much.’ The capitalist, seeing the same thing, says: ‘All men should have as much.’

    – Phelps Adams

    When you perceive that your neighbor’s success has taken money from a fixed pot you could have had, it’s natural to resent that success.

    I thought this was profoundly demonstrated during an episode of the program Nova called Ape Genius. In chapter 3, they show segments from an experiment in Leipzig Germany. A chimpanzee is given the opportunity to remove the success of a neighbor who actively gains at the former’s expense. They contrast the reaction to instances where the original chimpanzee does not see his neighbor’s success as intended theft by the recipient. You can view that 10 minute segment in high resolution Windows Media here. They also offer lower resolution and Quicktime at the first link I included for the overall show. I highly recommend the entire program. There are many interesting questions raised.

    However, if I use this experiment as an analogy to free markets, it breaks down in the important aspect that there is only one pot of food and the original chimpanzee is deprived of the ability to find, trade for, or produce his own. But the results are still fascinating. Just like humans, chimps resent success when it’s presented as theft.

    I think the division between Ezra Klein’s perspective and a libertarian one is the assumption that others’ success is somehow my loss.

    As to the thrust of your last paragraph, I think there is definitely the danger (and probably the reality) that the tendency for people to believe as Mr. Klein describes is quite useful to some in government who actively encourage it. I see the victims of this fraud less as useful idiots, and more as people who have been misled into thinking there is just one pot of food. It’s an easy error to make.

  • Sean Shepard

    Take all the wealth from all the people and spread it equally amongst the population. Within a generation it will be unequal again with many of the same folks “at the top”.

    Poverty is a function of how you think and how you spend your time. We must always consider what comes first or what sustains a situation [in most cases], someone’s flawed thought process, flawed work ethic, poor decisions OR something else?

    Eradicating economic inequality is just another way of suggesting that we are going to strip the benefits associated with education, hard work, good decision making and risk taking in order to reward failure to become educated, failure to work hard or failure to make good decisions. You get more of what you subsidize, less of what you tax.

    Sean Shepard
    The Liberty File

  • Jeff Molby

    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?

    Depends on what services the govt is providing. If it’s soaking them enough to provide $15k in services to you for the low, low price of $10k, well that’s rational on a superficial basis.