I’m pretty sure than most people don’t think it’s fair to tax people at higher rates, just based on eye color. What about taxing people who are more patient? I think most people do favor policies that tax patient people at higher rates, although they they usually don’t know that the policies they favor would have that effect. Ray Fisman has a very puzzling article discussing the pros and cons of eliminating the “tax shelter” for 401k accounts.
It turns out that savings incentives had scarcely any impact on the rate at which Danes accumulated nest eggs, while the nudges were very effective in making people save. These findings suggest that 401(k) plans and their brethren—which cost the U.S. government as much as $100 billion a year in lost revenue—don’t do much to further their stated objective of boosting retirement savings. Even if $100 billion wouldn’t go all that far toward solving America’s debt problems, it suggests that smart approaches to eliminating or improving government programs could quickly add up to fiscal solvency—and might help the two sides find common ground.
The reason we have tax shelters like the 401(k) is to change the relative cost of spending money today versus saving for tomorrow. Exempting retirement investments from taxation increases the saver’s return on his investment, so a rational cost-benefit calculation should lead most people to put something away for the future.
It seems to me that we should defer taxes on money saved because it is the fair thing to do. Or if you want to be a utilitarian about it, because consumption is more closely correlated with utility than income. People putting money into 401ks don’t get any sort of tax break–they must pay taxes on 100% of the funds (principal and interest) when the money is withdrawn. The taxes are simply deferred. If all saving were treated like 401k accounts then the government would be adopting a neutral position between current and future consumption, as it should. I see no reason why either blue-eyed people or patient people should pay a higher tax rate on their lifetime consumption, as compared to a brown-eyed person, or an impatient person who consumes the same resources at an earlier stage of life.
Fisman points to a Danish study that shows the effects of saving incentives are very small, at least in the short run. However I would caution readers that short run elasticities are almost always much lower than long run elasticities. On the other hand, unlike many libertarians I’m not opposed to policies “nudging” people to save more, as our economy is absolutely riddled with all sorts of disincentives to save.
I suppose there is one utilitarian argument for taxing savers at a higher rate—they might derive less utility from an extra dollar of lifetime wealth than less patient people. Of course (as Mankiw once showed) the same argument might apply to height, and all sorts of other innate characteristics. It could also be applied to ethnicity. Given our society’s moral revulsion against “discrimination,” I don’t know if there’d be much support for policies that might imply (even indirectly) that certain ethnic groups should face higher tax rates than other ethnic groups. What do you think? Are there any innate characteristics that we ought to tax at higher rates, for a given level of resources?
Update: Josh Hendrickson just sent me an email that is far better than this post, and much shorter:
People with patience and blue eyes are taxed higher, its called Scandinavia.
(Note his last name.)
Update: Here’s Evan Soltas:
Allowing the 2001 and 2003 tax cuts to expire would be, in large part, a win for Democrats. The party’s platform calls for reverting to the top two income-tax brackets under Clinton — 36 percent and 39.6 percent — while preserving the rate reductions for the lower brackets. Limits to personal exemptions and itemized deductions are another part of the Democratic plan, coming in at $200,000 in income for individuals and $250,000 for married couples. The top capital-gains tax rate would rise to 23.8 percent, due to an additional 3.8 percent levy in the Affordable Care Act.
The sentence about capital gains is correct. The second sentence is correct but slightly misleading, and should read:
Obama is proposing that we raise the top two income-tax brackets to higher levels than under Clinton — 39.8% percent and 43.4% percent, due to an additional 3.8 percent levy in the Affordable Care Act — while preserving the rate reductions for the lower brackets.
This NYT assertion is completely inaccurate:
Even if Republicans were to agree to Mr. Obama’s core demand — that the top marginal income rates return to the Clinton-era levels of 36 percent and 39.6 percent after Dec. 31, rather than stay at the Bush-era rates of 33 percent and 35 percent — the additional revenue would be only about a quarter of the $1.6 trillion that Mr. Obama wants to collect over 10 years.
He’s proposing even higher top rates.