In his recent blog-post The pillars of tax wisdom, Tim Harford (author of The Undercover Economist) discusses “James Mirrlees — now a Nobel laureate — who tried to figure out what could be said about optimal income taxation. One of his conclusions, surprising to him as much as anyone else, was that an optimal income tax might impose flat or even falling marginal tax rates.”
I had to sit and think about that for a moment. But then it hit me: this regime that Mirrlees proposes is optimal or not precisely depending on what you’re trying to optimise for. The approach he described optimises for the gross amount of tax income; but we may care about many other things as much, or more. (We can easily prove this to ourselves by imagining a tax system identical to the one we have now, but where the lowest 10% of earners are compelled to pay 100% of their income as tax. That would be more “efficient” in Mirrlees’ sense, in that it would bring in more revenue, but it would not be more desirable.)
So the question of what tax system to adopt depends on what we want to optimise for. (This is similar to other points I’ve made on this blog and others: optimising the economy to maximise GDP doesn’t give us what we want; and we need to measure the thing we’re interested in in academia, otherwise we invite gaming of whatever productivity/quality proxies we use.)
And the question of what we want to optimise for is a much deeper one than that of how to optimise for it. We may want to maximise the transfer of wealth from rich to poor; or the extent to which revenue is from tax on wealth rather than income; or any one of a hundred different things. (More likely, of course, some combination of multiple criteria.) Everything depends on our philosophy.
Or as a much better writer explained it:
Suppose that a great commotion arises in the street about something, let us say a lamp-post, which many influential persons desire to pull down. A grey-clad monk, who is the spirit of the Middle Ages, is approached upon the matter, and begins to say, in the arid manner of the Schoolmen, “Let us first of all consider, my brethren, the value of Light. If Light be in itself good–” At this point he is somewhat excusably knocked down. All the people make a rush for the lamp-post, the lamp-post is down in ten minutes, and they go about congratulating each other on their unmediaeval practicality. But as things go on they do not work out so easily. Some people have pulled the lamp-post down because they wanted the electric light; some because they wanted old iron; some because they wanted darkness, because their deeds were evil. Some thought it not enough of a lamp-post, some too much; some acted because they wanted to smash municipal machinery; some because they wanted to smash something. And there is war in the night, no man knowing whom he strikes. So, gradually and inevitably, to-day, to-morrow, or the next day, there comes back the conviction that the monk was right after all, and that all depends on what is the philosophy of Light. Only what we might have discussed under the gas-lamp, we now must discuss in the dark.
— G. K. Chesterton, Heretics (1905), Chapter 1.
The reason that all of this makes me jealous of my eldest son, Daniel, is that this morning he got his invitation to interview at Oxford, where all being well he’ll be off next year to study PPE (Philosophy, Politics and Economics). Even if all does not go well, he’ll study PPE somewhere. And I’ve realised that that’s what I’d want to do myself, if only I had the time.
Economics is fascinating; but you can only make policy based on it if you also have a philosophy. If you like, economics is like a car, and philosophy is like a map. A map won’t get you anywhere without a car, but a car alone doesn’t give you an idea of where to go. And then of course there is politics, which gives you the practical tools to actually put things into effect. It’s a very absorbing trio of subjects, deeply intertwingled, and Dan’s going to have the time of his life getting to grips with them.