Taxation and Harm to the One Percent

I've recently been reading Mankiw's paper "Defending the One Percent". Mankiw writes:

An alternative to the social insurance view of the income distribution is what, in Mankiw (2010), I called a “just deserts” perspective. According to this view, people should receive compensation congruent with their contributions. If the economy were described by a classical competitive equilibrium without any externalities or public goods, then every individual would earn the value of his or her own marginal product, and there would be no need for government to alter the resulting income distribution. The role of government arises as the economy departs from this classical benchmark. Pigovian taxes and subsidies are necessary to correct externalities and progressive income taxes can be justified to finance public goods based on the benefits principle. Transfer payments to the poor have a role as well, because fighting poverty can be viewed as a public good.

I take it that this view reflects a fairly common approach to the ethics economic inequality. The thought is that we shouldn't overly tax the wealthy because they deserve the fruits of their labor. To the extent that it is acceptable to tax the wealthy, it is only justifiable in terms of its effect on the common good and on helping the least well off.

The underlying assumption is that taxation of the wealthy is detrimental to them: that it is bad for the wealthy to be taxed. While I would agree that taxation is typically detrimental to the person being taxed, and it is not obvious that this is the case for the very wealthy.

 It is conceivable that taxing the wealthy has virtually no effect on their well-being. It might make sense to say that, up to the first million dollars of yearly income, wealth adds something significant to the quality of our lives. We can afford to live safely and securely. We can afford practically any hobby that people engage in. But beyond that level of income, it is hard to imagine that additional income adds much. The average quality of life, measured in terms of whatever makes a life go best, among people that are very wealthy must not be that much higher than moderately well off. If this is the case, then the increases that come with additional income must become vanishingly small.

If this is the case, then why do people continue to pursue greater amounts of wealth? There might be several reasons -- first, it might be comparative levels of wealth make a difference. If I can make more money this year than I did last year, that might make me happier. Or if I can make more money than my neighbor, I might feel more satisfaction with my accomplishments. This need not have anything to do with how much I actually make, once I can take care of all of my major concerns.

Second, there might be something valuable and motivating about simply achieving what counts as material success in one's culture or subculture. Making a lot of money might be a good thing simply because it involves achieving one's potential given the limits imposed by the system. This may change as one changes subcultures. If one starts off in poverty, a middle class income might count as a success. If one starts off in substantial wealth, success might come from being very wealthy. Taxation could change what we count as success, and so a tax might lower someone's income without making them any worse off (so long as it doesn't change the level of success we attribute to that income.)

So it is possible that taxation might not harm the wealthy much at all. If quality of life isn't much affected by income level, and if it is more significantly influenced by relative income, then taxing everyone might not take anyone (much) worse off.

There is, however, a stronger point that may be made. It is not obvious that taxation is not in the interests of the wealthy. It is deeply plausible that limitations are an important part of a good life. If we could get whatever we wanted with the snap of a finger, our life might not be as good as if we had to work to get what we wanted, and were sometimes disappointed. The ability to buy whatever we want might actually make our life worse.

It might be thought that taxation must not be in the interest of the wealthy, because they are not rushing to donate money to the government on their own initiative. This can be explained by the difference between internally imposed constraints and externally imposed constraints. It might be that internally imposed constraints are less good for us than externally imposed constraints. If we decide that it is better to live a life with limitations, then we might seek to impose limitations on ourselves. However, limiting ourselves not be satisfying. It removes something of the genuineness of what successes we have.

For example, it is not very enjoyable to play chess when you are vastly better than your opponent. You could voluntarily make bad moves to make the game fairer, and to make it less likely that you would win, but there is no guarantee that it would make it any more enjoyable. What is enjoyable about chess is being challenged, and rising to that challenge. Self-imposed limits are not as satisfying to us as externally imposed limits. Since donating money to the government might be a self-imposed limit, it is not necessarily a suitable rectification in having life go too easy.

So it might turn out to be in the interest of the wealthy to be taxed. It may be that the limits that a government would impose upon wealthy individuals benefit them in ways that couldn't be done entirely with their consent. These sorts of considerations seem to be very important in the justification of taxation in current society.