Today, while listening to a podcast about Keynes and Hayek and their philosophical differences, some thoughts surfaced regarding the many conversations I've had in discussions (classroom, among friends, online with strangers) regarding justice, fairness, and equity in taxation.
Is our system of taxation fair? Should the wealthy, say a married couple making 380k or greater, be taxed more because they can afford it, because they should want to help the poor, because they won the lottery, genetic or otherwise? In short, questions usually center around how can we make society more fair, more equitable.
To answer, I like to think of the opening chapter in Greg Mankiw's undergraduate Econ textbooks. He outlines 10 principles that the vast majority of economists agree with. The relevant one here is that society faces a tradeoff between efficiency and equity. An efficient economy rewards the best users of wealth (those capable of earning the greatest return on that wealth) by funneling capital to them. This results in quite a bit of inequality. A society focused on equality divides up wealth equally among its citizens, and any return earned that is greater than average is redistributed to equalize the citizens yet again.
Does the equal society sound good? There's a catch. The totally equal society provides no incentive for anyone to put forth effort into earning a return on capital. In other words, if you know that any profit you make will be taken if you earn an above average rate of return on your capital, then your incentive to earn that rate is reduced, or gone completely (no incentive to innovate, to cut costs, increase efficiency, etc).
In a society completely focused on equal distribution and redistribution of capital, there is no incentive to create more capital. The overall wealth of that society will stagnate, and over time, fall. Politicians in both parties should be up front and admit that neither wants a totally efficient or totally equal society. The ramifications of either would be unbearable.
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