09 June 2011

"Who said taxes are fair?"

The Economist: Free Exchange | A.S. | Who said taxes are fair?

Perhaps fairness also requires that the tax code account for the higher cost of living in some areas. The income cut-off for tax increases floated by President Obama is $250,000. That sum buys you a lot more in Fargo than it does in Manhattan. Most high earners live in expensive areas. They command such high salaries, in part, to offset their high cost of living. So if by fairness we mean targeting a certain benefit from consumption, it seems federal taxes need to account for geographic disparities. University of Michigan economist David Albouy found that workers in high-cost cities pay up to 27% more in federal taxes than workers with similar skills in low tax cities. Is that fair?

Unless the government has taken the view that living in Texas is a normal good and California is a luxury good. Perhaps income taxes are actually consumption taxes in disguise.
(1) I like that AS acknowledges "fairness" is a slippery-to-meaningless concept when it comes to taxation. The above quote is the end of his(?) post; the beginning 80% is unobjectionable and handles this issue well.

(2a) I think it borders on futile to discuss the fairness of various taxes, since "fair" has so little meaning. Until we can agree on "The Parable of the Well Tax" or "The Parable of the Bar Tab" how can we possibly grapple with the fairness of the entire US tax code?

(2b) Disregard (2a) -- I obviously can not resist blogging some commentary about this, even though I think it is futile.

(3a) Income taxes are certainly not "consumption taxes in disguise." If they are it is only on this one narrow dimension of urban cost of living.  For them to really be "consumption taxes in disguise" you would have to assume all spending is practically mandatory, and people will spend whatever they earn, which ignores away pesky little things like savings.

(3b) You could say that living in California very much is a luxury.
Luxury (n):
1. Something inessential but conducive to pleasure and comfort.
2. Something expensive or hard to obtain.
3. Sumptuous living or surroundings: lives in luxury.
Living in California is inessential, it is conducive to pleasure and comfort, and it is expensive and hard to obtain (relatively).  We would have to unpack the definition of "sumptuous" to address the third definition, which will lead us down a long chain, but "suggesting great expense" seems to be the operable phrase in that definition, and I think it fair to say that applies for the purpose of this discussion.

(4) Is it "unfair" for someone in Manhattan to pay more in Federal taxes than someone with the same skills in Fargo? Why would it be? Living in Manhattan is not a natural right, or state of nature, or existential requirement. It is a conscious choice. It will entail certain consequences including paying higher prices for goods and services (mostly), and also (typically) commanding a higher price for your own services.

Let's say Albouy is right about Manhattanites paying more in Federal taxes than Fargoans. (And I have no reason beyond the typical background levels of skepticism to suppose he isn't.) It seems almost certain that Manhattanites also earn more and spend (i.e. consume) more than Fargoans as well.

Our tax system takes a bite out of transactions going both ways: both you paying others and others paying you. If you decide to live in an area which will have you doing more of both why would you expect your tax burden wouldn't be higher?

I don't see any reason to structure the tax code to insulate people from the costs of the decision to live in more expensive areas. In fact I think this aspect of our tax code is a feature, not a bug.*

(* You may disagree with me if you have different opinions about the net externalities of denser living and think that we should actually be encouraging people to live in denser areas.  Fine. But if that's the goal then let's set up a system to encourage density specifically, rather than tinkering with the inefficient levers of the income tax code and using mean cost-of-living as a proxy.)

(5) Why are we limiting this discussion to Texas vs California or Big Coastal City vs. Small Interior City?  I could live fifteen miles away from where I do and pay one third less in rent.  Does this entitle me to receiving a subsidy from the people who live further out?  I made the decision to spend more money so that I could consume the set of goods encapsulated in "living close to things in Silver Spring" rather than consuming "living close to things in Greenbelt."  Why should someone in Greenbelt, or Salisbury, for that matter, be required to help me do that?

4 comments:

  1. Point 5 actually seems the strongest to me. Really, there's no "the" cost of living, there are only averages. Averages tell an important story, but still, anyone working in e.g. Manhattan could find a cheap place to live somewhere within some sort of endurable commuting distance. It may be small and not to their liking, but they could. Similar story for food purchases, auto (or not), etc.

    To unravel all these tradeoffs people make and things they consume and come up with "the" cost of living for which people working in locale A should be compensated more than in B will inevitably mean favoring a certain specific sort of lifestyle and set of choices. Usually, the lifestyle/choices that belong to the person who thinks their taxes should be weighted lower in this way.

    So this is a rarity, the one argument for lowering (some) taxes I am happy to say holds no water.

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  2. That's a very good point as well. I wish I had thought to say that as #6.

    This is, by the way, the second time this week I've defended higher taxes on the internet. It feels weird.

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  3. You missed the point of Albouy's article. People are subsidized to live in nice areas, like Honolulu, and taxed for living in productive areas, like Chicago.

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  4. I didn't miss the point of Albouy's article. I didn't read Albouy's article. I was only reacting to the Free Exchange post that cited it.

    I'm sympathetic to arguments made by people like Ryan Avent that we should be encouraging people to live in more productive -- and thus often more expensive -- places. But:

    (a) that's about efficiency and growth and has nothing to do with fairness;

    (b) averaging out THE cost of living over an entire metropolitan area and sample of lifestyle choices is beyond imprecise, and;

    (c) if we want to subsidize/don't punish people for living in productive areas let's do that explicitly instead of meddling with some indirect and messy proxies in the form of income tax parameters.

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