Equity trumps Equality in arguments about taxation

August 31st, 2011 by Ravi Iyer

It is more effective to advocate for progressive taxation using arguments about equity or deservingness rather than arguments about how unequal American society has become.

I have written about this before, using different data, but with renewed attention being paid to rising inequality, leading liberals to continue to push for rising taxes for the rich, I feel like it bears repeating, this time with different data.    While most Americans might prefer a more equal distribution of wealth, when positing such a distribution without considering who worked harder or contributed more, I doubt any study could show that any large group of people actually care about sharing some good equally more than adhering to the principle of deservingness.  People care more that people get what they deserve than if everything is shared equally.  Indeed if anybody knows of such a study, showing the oppositve, please share it with me.

Below is a graph of questions asking “how wrong” certain violations of fairness principles are.  For example, a violation of procedural justice concerns situations like a trial being decided with misleading information or a law being made without the input of affected parties (alpha = .77).  A violation of “lack of punishment” would concern a person going unpunished for a crime (alpha = .78).  A violation of equity/deservingness concerns a person contributing to society and not being rewarded or a bonus being awarded without considering the relative contributions of employees (alpha = .76).  A violation of equality concerns some employees being paid a lot while others are paid very little or a child inheriting a lot of money while another inherits nothing (alpha = .89).

To me, the interesting thing is not that liberals care more about equality than conservatives,or that liberals care less about punishing wrongdoers.  Both facts make sense but are almost self-evident if one pays attention to politics and current events.  Rather, the most interesting thing about this data (and any other data where I’ve pitted equality/deservingness against equality), is that everyone, including liberals, believes that equity/deservingness is a more important principle than equality.

Equity vs. Equality

There are certainly caveats to this data, in that it’s a limited sample and the conclusions are somewhat reliant on the questions I choose to ask.  However, this is but one of many datasets we have collected which tell the same story…that equity concerns trump equality concerns.  Moreover, I think this idea is quite “post-dictable” meaning that most people who really think about it, realize that they themselves, no matter how liberal they are, care more about equity/deservingness than they care about making things more equal.  This article from the Atlantic blog sums it up nicely:

I think very few (completely misguided) people resent “wealth” per se.  I don’t remember anyone ever begrudging Bill Gates’ wealth, either.  When people resent wealth, more often than not the resentment is directed at how the wealth is accrued rather than at who has accrued it.  In certain instances, the how and the who become one and the resentment oozes toward the individual.  I’m thinking of the Paris Hilton’s of the world in this instance.  Here’s somebody who has done nothing of substance whatsoever; her wealth was accrued by virtue of genetic lottery.  But those instances where people resent a particular person for their wealth are, I think, rather rare.

So how can liberals argue for progressive taxation as a matter of equity rather than equality?  One problem for liberals is that research on system justification suggests that conservatives are more likely to believe that wealthy investors are more like Bill Gates than Paris Hilton.  I don’t have data on this (though I hope to collect it), but one example that worked for me recently is to frame progressive taxation policies in terms of rewarding work, as opposed to investment.  Conservatives value hard work and I might even go as far as to say, anecdotally, that the conservatives I know work harder than the liberals I know (see this book which is tangentially related).  Yet, we live in a country where someone who works hard for a living pays taxes at a higher rate (the income tax rate) compared to someone who happens to buy the right stock or the right real estate property at the right time, and sells it later for a gain (taxed at the capital gains rate).  Or someone who inherits millions, and lives off their investments, a la Paris Hilton.  Hard work is penalized relative to profiting by owning things.  Is that fair?

- Ravi Iyer

Posted in equality, equity, fairness, justice and fairness, news commentary, political psychology, procedural justice, progressive taxation, yourmorals.org7 Comments »

7 Responses to “Equity trumps Equality in arguments about taxation”

  1. lillet says:

    “rewarding work, as opposed to investment.”

    Spoken like someone truly ignorant about what it’s like to work in finance. HF managers are indeed more like Bill Gates than Paris Hilton, in the sense that generally they are smart and innovative people who have worked brutal hours to get where they are. Grad students, however…suffice to say that my silver spoon layabout friends are likelier to be in this field than working at HFs.

  2. Ravi Iyer says:

    That’s a very good point. Investment bankers do indeed work quite hard, more in line with Bill Gates. It’s the output of that work that some people question the value of, but I don’t really have a strong opinion about it. What I do have a stronger opinion about is that that we should tax investment at (at least) the same rate that we tax work…and that that is a very easy equity/deservingness based argument to make, especially compared to an inequality based argument for the same policy.

    [edit: btw, I thought about this more and changed "hedge fund managers" to "wealthy investors" as you were right about me picking the wrong group. Investment bankers, for better or worse, work really hard. ]

  3. lillet says:

    From a moral standpoint, taxing income and capital gains at identical rates is moderately compelling, and I agree that equity/desert is a more powerful argument in general than egalitarianism. The one counterpoint I’d raise is that capital gains taxes are traditionally lower than income taxes because capital investment spurs entrepreneurial activity and productivity growth — as a capital investor, you’re doing something especially valuable for the economy, so you deserve to reap a greater percentage of your reward. Whether this rationale should apply to carried interest earned by investment managers is a thorny question. Some funds (typically PE funds rather than hedge funds) really do underwrite productive growth, and the ROI they earn — along with the risk they assume — seems intuitively more conducive to a capital gains treatment than an income treatment. Maybe the solution is to treat long-term carry differently from short-term carry, since the funds that are most substantively involved with their portfolios tend to invest on a longer time horizon.

    /end econ tangent on psych blog

  4. Ravi Iyer says:

    That all sounds very reasonable. When investment truly does provide a public good, it does make sense to tax it less. And your solution (which you know more about than I) to disentangle when investment really does provide a public good sounds like a great idea too. I think most people would support such policies. Thanks for the thoughtful reply.

  5. By people you mean contemporary Americans / Westerners, right? Anthropologists discuss traditional societies that have prioritized equality in food distribution: individuals hunt in small groups; when a big kill occurs, meat is distributed back to everyone in the village regardless of whether they contributed.

    The existence of diversity regarding fairness in the human cultural record means humans aren’t stuck forever with preferring deservingness, even if that state is a local minimum right now.

  6. Ravi Iyer says:

    Catherine, that’s a good point. Yes, there may be groups where equality trumps deservingness. My intuition is that that is the exception, but that’s only my intuition. Thanks for your comment.

  7. Chaz Novit says:

    In address to lillet’s defensive comment about his background in “finance”.

    From a Hayekian economic POV, all hard work is not equal in its contribution to gross society wealth*. Physical production is the primary measure of wealth. The service sector, although important, is merely reshuffling of resources, nothing new is produced, and beyond a certain point becomes inefficient churning without enhancing distribution availability or resources.
    Finance too is very important is re-allocating pools of investment money (and other related benefits of the financial sector. But sadly, the over-churning present in modern wall street hyper-speculation is not productive beyond a certain point, and is toxic to prosperity. BUT..I do not blame wall street for that..it is mostly due to distortion of the free market banking and finance sector by federal regulations.

    A good illustration of that is low bank reserve ratio capital requirements condoned by the Federal Reserve and Washington–that lead to the 1919 banking collapse (in part), and over-speculation in contractionary markets. Likewise, FRB incentivized bank “low interest rates” harm savings, and synthetically stimulate stock market gambling by a naive public. cfiat money, which corrupts the banking system.

    *(Societal wealth as M Rothbard defined it, is not fallacious GDP, which erroneously includes squandering and mis-allocation of spending by government, but is the actual private productivity per person, PPP)

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