Whose money is it, anyway?

Over on Facebook, my colleague Jason Antrosio got into a polite spat with another reader over the issue of expropriation. The impetus was this article about George Soros, who sees dangers posed by social-media companies and is calling for their regulation.

The very first comment asked, “Expropriated? Who is going to reimburse the owners?”

Which was an interesting take, because the article itself says nothing about expropriation. It talks about regulating Facebook, Google, etc. as public utilities (the way we regulate the companies that bring electricity to our houses), but the first respondent thought that was expropriation and responded accordingly.

(Edit Feb 5th: In writing the paragraph above I had missed the fact that when Jason shared the Soros article to the "Anthropology Report" Facebook page, he had added his own comment that the companies should be either broken up/regulated, or expropriated. See his comment below.)

Jason suggested the owners of social-media companies would still be just fine under Soros’s proposal.

The first commenter responded, “Just because you have a lot of money, that doesn’t mean others have the right to take away what belongs to you. It’s yours, you worked for it.”

Jason admitted some role for compensation, but thought it could be limited to, say, some generous multiple of a society’s median wealth. 10 times, 50 times, maybe even 100 times. But that it was reasonable for there to be a limit on the extent of compensation.

The logic behind Jason’s proposal is essentially the logic behind strongly progressive taxation.

The cohesion and durability of any social organization depends in part on the set of ideas floating around in the minds of the people in that organization. In the U.S., anti-tax radicals have heavily colonized our minds with snappy soundbites that have a certain visceral appeal:

• It’s my money, I earned it!
• Don’t penalize success!
• Taxation is theft!

The argument in favor of progressive taxation doesn’t fit into such handy slogans. That makes it all the more important to periodically remind ourselves of the logic behind the policy.

And so here’s one of what should be many periodic recitations.

There are two basic arguments against progressive taxation, both linked to the idea that high earnings—including exceptionally high earnings, hundreds of times beyond the average—are the result of hard work that makes society better off.

From that premise we get the practical argument that exceptionally high earnings are a (necessary) incentive for people to do more of that hard, productive work and thereby make society even better off.

And we get the moral argument that the high earners have, as the term suggests, earned those high incomes, and so society has no claim on it.

There are weaknesses in the premise that invalidate both arguments.

First, the work that receives those high earnings is not always making society better off. For a time, it was very rewarding for individuals to sell sub-prime mortgages and then to repackage those weak financial instruments as safe bonds with attractive interest rates. That is, it was rewarding for the individuals involved in the business, but for the economy as a whole it was tantamount to littering the place with land mines. In 2008-09, many of them blew up. Many of the people who laid them walked away far richer than before.

People are also very well compensated for designing ad campaigns that encourage smoking, or the consumption unhealthy diets. I am by no means advocating criminalizing such activities, nor singling them out for special tax treatment. My point is simply that it’s possible to be very well paid doing legal work that makes society worse off, not better.

And the link between how well or hard one works and one’s earnings is also suspect. If we take as an example a car company, management and labor are both necessary: no cars will get made without workers on the assembly lines (at least for now …) and arguably workers would get a lot less done if there weren’t managers organizing the production process. So there’s a certain amount of revenue from selling the cars, to which both labor and management contributed.

Neoclassical economics says that everyone—from the clean-up crew to the CEO—is paid their marginal product, the difference that their work made to the company’s output.

The problem with that statement is that there’s no way to objectively assess someone’s marginal product, and so there’s no way to assess whether the intro-econ explanation of wage differences is grounded in reality.

But take a look at what's happened to wages of different income strata between 1933 and today (the data behind this next section are here).

Note that top-0.01% wages stagnated from 1933 to 1985, and since then have risen by a factor of 7. In contrast, lower 90% wages multiplied by a factor of 5 from 1933 to 1973, and since then have stagnated.

These are simple facts, lying there in the data for anyone who's interested to see. I have never seen a convincing explanation of them rooted in technological change—i.e., something consistent with the intro-econ theory of marginal product—as if some technology switch were thrown in the first half of the 1980’s, where we had one pattern before and a different pattern after.

On the other hand, 1973 was the beginning of the high oil prices that lasted for 13 years, and the early 1980’s were the major tax-code rewrite and an intensification of anti-union activities. So there’s a possible “switch” to turn off wage gains for the 90% with the oil crisis, then a change in the tax code to enable top-0.01% incomes to rise like mad after oil prices came down in the mid-1980’s, with the long-run effects of de-unionization providing an additional ongoing force to keep most people’s wages from rising.

This suggests that there is a lot more to earnings than marginal product—more to earnings than what we have, in some sense, earned.

We can’t arbitrarily decree what different occupations or individuals should earn—we don’t have nearly enough information or supplies of disinterested judgment to make that work.

But we have more than enough information to give up our notion that any given scale of compensation is simply the natural order and therefore shouldn’t be altered.

There are many potential factors behind the differences in our incomes: our choices, our intelligence, our hard work, our parentage, the neighborhood we grew up in, who our parents were, and just plain dumb luck.

If income differences were all based on "merit"—intelligence, hard work, personal choices—there would be no moral case for progressive taxation. We might even be justified in calling for a head tax: collect the same number of dollars from everyone, regardless of his/her income.

At the other end of the scale, if differences were all based on luck, the most moral  tax system would be one which left everyone with the same amount of after-tax dollars as everyone else. If the only reason for me having higher income than you is that I was lucky, then what moral claim do I have to end up wealthier than you?

In the real world, our income differences flow from a tangled mix of both merit and luck. And some people get paid very high salaries for doing things of great service to the broader community—a brilliant doctor or inventor, an entertainer who brings joy to many people—while other people get paid very high salaries while doing damage to the broader community.

The rational response to this set of facts is strongly progressive taxation.

There's still a strong incentive to work, because if you want to raise your after-tax income, you still have to raise your total income.

But there's also a crude recognition that not all "earned" income is actually earned, and that not all well-paid work is stuff we want to encourage.