Robert Maynard
July 6, 2010
Fairness and pain
By Robert Maynard

On Thursday July 1st the True North Radio show had Vermont's U.S. Senate candidate Daniel Freilich on as its guest. Mr. Freilich is running in the Democratic Primary against the incumbent Pat Leahy as both a Democrat and an Independent. He expressed an interest in running in the general election as an Independent should he lose the primary. Mr. Freilich strikes me as a sincere and honest Progressive who believes strongly in holding political office as a form of service. In presenting his views on the True North show, he has afforded us an opportunity to honestly debate the relative merit of the notions of "fairness" as held by Progressives vs. those of us who believe in a limited role for government in realizing the public good.

In Mr. Freilich's view, taxation is not merely a means to raise the necessary revenue to run the legitimate functions of government; it is a means to establish "fairness." This is a common theme among Progressives. He went on the articulate another central tenant of "fairness" as Progressives see it. Establishing fairness means ensuring that the burden, or "pain" of sharing the load is evenly distributed. The fact that a lower tax burden will sometimes bring in more revenue by stimulating the economy is less relevant to them than the question of whether the lighter tax burden causes the rich to experience relatively less pain than that experienced by the poor.

From this point of view, the equal sharing of pain is more important than ensuring a "rising tide" that will "lift all boats." The problem here with the rising tide is that it does not lift all boats equally.

Those of us who believe in individual liberty see "fairness" a different way. Fairness does not require equal outcomes because people are not the same. Fairness requires equality under the law with no regard to one's race, sex or income level. Setting up political bureaucracies to forcibly confiscate the hard earned resources of one class of citizens to give to another is not only unjust, but it divides a community into warring interests. Furthermore, the assumption that a select few in the political class are to be anointed the arbitrators of what is fair is considered an act of hubris, which poses a grave threat to the ideal of liberty.

Finally, there is the assumption on the part of Mr. Freilich that the "rich" must have their earnings confiscated in a greater portion in order for them to share in the burden or "pain" of supporting society. This notion makes two assumptions, neither of which liberty supporters are likely to buy into. The first assumption is that having their taxes confiscated is the only burden the rich bare in support of society. Such a view neglects all the pain associated with the risks taken in order to be a successful entrepreneur. Such success not only requires risk taking, but a lot of hard work that non-entrepreneurs have a hard time understanding. The benefit to our society from such success is not only in jobs created for a nation's citizens and revenue generated to support the legitimate function of government, but the promotion of a culture which supports success. This is something the Russians are finally learning after nearly a century of experimenting with a command and control economy as a means to ensure "fairness."

As Pointed out by Daniel Foty in a recent Vermont Times article, Esther Dysonin was asked by the English edition of the Moscow Times to write a piece containing advice for Russian President Medvedev about what it will really take "to build economic growth, prosperity, and social contentment in the contemporary world."

Of course several points were listed, but the central theme was this "... what will be most important is the people and the culture they establish. Entrepreneurs need to be encouraged to take sensible risks,...".

The other problem with the Progressive view is that is looks at society as a static entity rather than as a dynamic one. Such a view sees "the rich" and "the poor" as specifically defined groups and seeks to level the playing field between them.

Countering this view is a special report just out in June by the Tax Foundation entitled "Income Mobility and the Persistence Of Millionaires, 1999 to 2007" http://www.taxfoundation.org/files/sr180.pdf . Here are some findings from their report:

"Concern over the rising gap between the rich and poor has been the primary rationale for President Obama's redistributive policies. But one important aspect of the American economy that should lessen concerns about snapshots of income inequality is the mobility of people up and down the economic ladder. If people move quickly up and down through the income spectrum, the position they occupy at any point in time may be less of a concern. Moreover, it is natural that people at different stages in their life cycle of earnings just entering the work force, just retired, or midlife during their peak earnings years would occupy different rungs of the economic ladder.

Research has documented that our economy exhibits considerable mobility. Roughly half of households move up from the bottom income quintile within ten years. Roughly 50 percent also move down from the top quintile within ten years.

This report generally confirms this same basic relationship using recent data covering the nine years from 1999 through 2007:

  • Nearly 60 percent of taxpayers move up from the bottom quintile within this nine-year period.

  • Nearly 40 percent of taxpayers move down from the top quintile within this nine-year period.

  • Nearly 60 percent of taxpayers are in a different quintile in 2007 than they were in 1999. "



The conclusion they draw from such findings:

"A major shortcoming of conventional distributional analysis has been that it compares snapshots of the population at different points in time but does not account for the fact that some, and perhaps many, households move up and down the income economic ladder over time."

In fact, as noted by Paul Krugman (1992):

"If income mobility were very high, the degree of inequality in any given year would be unimportant, because the distribution of lifetime income would be very even."

In short, the key to evening out people's income over a lifetime is to aim at high income mobility. Needless to say that the best way of doing this is to pursue free market policies which reward risk and innovation and to encourage a culture that values such things. In other words, encouraging people to maximize their individual talents, while creating inequalities in the short run, is a path better suited for relative long-term equality.

© Robert Maynard

 

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