Economics Does Not Define “Fair”
Six Nobel Prize-winning economists recently endorsed California’s Proposition 40, which would impose a one-time 5% tax on billionaire wealth. Daron Acemoglu, one of the economists, followed up with a post explaining his support.
There are plenty of economic questions embedded in this proposed tax law change. How much revenue would the tax raise? How much avoidance would it induce? Would billionaires leave California? Would it discourage entrepreneurship or investment? These are questions on which economists have genuine expertise, and which their science has the tools to try to answer (even if different methods and assumptions will produce wildly different answers—answers to the first question range from $100 billion to negative $20 billion).
But supporters of the proposal, like Professor Acemoglu, often call on fairness to support this proposed tax instrument. Billionaires should pay their “fair share.” The Nobel laureates’ letter says that California’s public investments are “key engines of economic growth to which it is only fair to ask the ultra-wealthy to contribute.” Professor Acemoglu mentions “These distortions have allowed a small number of people to amass vast fortunes without paying their fair share of taxes.”
But, there is a problem with the economists couching arguments in terms of fairness. Economics has no definition of “fair.” Economics is exceptionally useful for explaining trade-offs, and at optimizing. Give an economist an objective function, and she can tell you the parameters that maximize it. Economics can estimate how a tax changes behavior. It has tools which can attempt to tell us who ultimately bears the burden of a tax. But economics cannot tell us how much one person deserves relative to another, or how much of a billionaires property society is morally entitled to take. That is simply not economics, and an economist basing arguments on these matters has no more authority to speak on them than anyone else.
Those are value judgments, and the values of a Nobel prize winning economist are not more noble than those of some lesser mortal.
Reasonable people can look at precisely the same economic facts and reach opposite conclusion because of different values. One person may believe that because a billionaire can surrender 5% of his wealth with little effect on his standard of living, taking that wealth is fair. Another may believe that because the billionaire acquired his property legally, taking 5% of it merely because he has a great deal is unfair. A third may care primarily about maximizing government revenue. A fourth may care about reducing inequality even if doing so reduces revenue. None of these positions follows mechanically from economic theory.
This is a standard point in the discipline. Economists Leonard Burman and Joel Slemrod write “No economic arguments can resolve differences in values. For that we need ethicists, philosophers, theologians, and deep introspection, but not economists.”
Introductory economics textbooks say much the same thing. Here is what the top two have to say: Paul Krugman and Robin Wells write that “Economic analysis cannot say how much weight a tax system should give to equity and how much to efficiency. That choice is a value judgement, one we make through the political process.” Greg Mankiw similarly notes that economists alone cannot determine the proper balance between efficiency and equity because the question also involves political philosophy.
The six economists who signed the California letter are extraordinarily accomplished scholars, by many measures, some of the best economists on earth. But, that does not make them experts in fairness. We should demand rigorous economic analysis from economists. We shouldn’t outsource our moral philosophy to them. Gabriel Zucman, one of the designers of this tax, said it well when he noted that some questions about wealth are “not something for economists to decide.”
