Therefore, if gender and parents' income alone account for 43% of what we have, it is not a stretch to conclude that overall, more than half of what we have, we have as the composite result of chance factors at play in the Six Lotteries.
Figure 14 shows the result when we combine the distributions for gender and parents' income. [18] The “poor girls” distribution shows the earnings of women whose parents' income was below the median, and the “rich boys” distribution shows men whose parents' income were above the median. The distributions for “rich girls” and “poor boys” are very nearly the same, so they have been combined into a single distribution with twice as many people in it. A “poor girl” taken at random has 18% chance of earning more than the population median. A “rich boy” has a 75% chance of earning more than the population median. A “poor girl” has an 8% chance of earning more than a “rich boy.”
Figure 14
I don't know about you, but I am an individual, not a statistic. I am with Paul Ryan, Rand Paul, Ayn Rand and Jimmy Cliff. I can get it if I really want, regardless of what your studies say.
Of course each of us is an individual. And as individuals we face possibilities. But as members of a population, and when the subject is earnings over a lifetime, we face probabilities. When I ask you to stipulate that we have half of what we have by accident, as I will do in How Government Should Take What it Needs for Charity, I am talking about the lifetime earnings of the population of all Americans. Individuals' earnings vary widely, and many people find their way into the “tails” of these distributions. Notwithstanding this, the tickets we draw in the Six Lotteries do indeed “explain” or “predict” more than half of where we end up.
How Government Should Take What it Needs for Charity
The “Six Lotteries” and “Why We Have What We Have” should have convinced you that at least half of what we have we have (or lack) is accidental. I hope you will also agree that we can't take credit for the portion we have by accident, nor be blamed for the part we lack. To me, these conclusions have important implications for fair tax policy in a society that decides to fund a social safety net.
The question here is not whether it is legitimate for government to engage in such “charitable” activities as Social Security, Medicare, Medicaid, food stamps, early childhood education, subsidized college loans, disability and unemployment insurance, public housing or public television. [19] The question is this: if a society decides to provide these things to its members, what is a fair way to pay for them?
Let's go back to the parallel universe of Figure 1, where what we have depends only on the month in which we were born. The line in Figure 15 shows Americans' Adjusted Gross Income as reported to the IRS in 2009. [20] In our parallel universe, the bottom 25% were born in October, November or December and the top 25% were bon in January, February or March.
Figure 15
Of course, we might find ourselves in the next parallel universe over, in which earnings depend only on our IQ (Charles Murray's universe); or in the universe parallel to that one, in which earnings depend only on parents' income. Depending on which universe you prefer, you can label the quartiles of figure 15 by calendar month, as I have done; you could label them “very dull,” “dull,” “bright” “very bright,” as would Charles Murray; or you could label them “very poor parents,” “poor parents,” “rich parents,” “very rich parents.”
Now if, in any of these universes, society wants to provide a social safety net, what is an equitable to pay for it? Is it a flat tax at the same rate on all earnings? Or is it a tax that takes first from those who have the most-a “top-down” tax, as shown in Figure 16?
To me it depends on whether people deserve what they have. If they don't, then those who have the most have no cause to complain if a top-down tax takes what it needs from them first, before taxing those who have less. I don’t see any grounds on which those born in January, February and March could object that a “top-down” tax is unfair, and that part of their tax burden should be shifted to people born in earlier months of the year.
Figure 16
So do people deserve to have what they have in these parallel universes?
There should be no disagreement in the case of the calendar month universe: no-one deserves the month of her birth, so no-one deserves what she has as a consequence of that accident.
What about Charles Murray's universe? Some might argue that, since the market rewards intelligence, people deserve what their intelligence is worth in the marketplace. But why do we deserve our intelligence? Remember that in Murray's universe, we can't grow our IQ at the gym. It's is a number printed on a ticket we draw at birth. If we don't deserve our IQ, there's no way we deserve what it's worth in the marketplace.
The same arguments apply to the market value of innate talent. Of course, how well we perform depends not only on whatever talent we were born with, but also on how hard we work to make the most of it. We can take credit for the “value added” by hard work, but we can take no credit for the market value of what we were born with.
Finally, there is the universe in which the quartiles of Figure 15 are labeled “very poor parents,” “poor parents,” “rich parents,” “very rich parents.” None of us deserves his parents, or his parents' income, and so none of us deserves what he has as a result. As we saw in “Why We Have What We Have,” the underlying factors that explain the correlation between parents' income and that of their children are complex. But in a parallel universe where there is a perfect correlation, it doesn't matter what these are. Children who end up in the fourth quartile can take no credit for anything they have.
Let's now leap back from these parallel universes--in which 100% of what we have results from things for which we can take no credit--to the universe we actually live in. Here, as we have stipulated, gender, parents' income, and other accidents account for at least half of what we have (or lack), while intentional factors” account for the other half. The situation in our universe is illustrated in Figure 17.
Figure 17
The upper area above the median (“fortune”) represents the fruits of drawing better lottery tickets than the average American, while the lower area (“ant”) represents area represents the fruits of working harder than the average American. The upper area below the median (“misfortune”) represents the blight of drawing worse than average tickets, while the lower area (“grasshopper”) represents the blight of being lazier than average.
So what is the fair way to fund the social safety net? It is to take as much of the “fortune” area in Figure 17 as is needed. We would do this with a “Fortune Tax” of 50% on all income above the median income, or whatever level above the median satisfies the funding requirement. For example, if a tax that “cuts in” at the 65th percentile ($25,500) satisfies the funding requirement, then the Fortune Tax would be zero for everyone earning less than $25,500. For someone earning $35,000, the tax would be 0.5 x ($35,000-$25,500) = $4,750, which is an average tax rate of 13.6%.
Are you saying it's fair that I should pay the same tax as someone who drew better tickets than me in your lotteries, didn't work as hard as me, and earned the same as me?
No. That is not fair, but I see no practical way to devise a tax that would be any fairer, primarily because there's no way to say, for a given individual, what part of what she has is a consequence of the lotteries, and what part is a consequence of how hard she worked. Notice also that the Fortune Tax is no less fair in this respect than the current income tax regime, since both extract the same tax from everyone who earns the same amount (ignoring, of course, the differences arising from the rules for credits and deductions).
However, while the Fortune Tax is no fairer than the current regime as between individuals, I am arguing that it is indeed fairer as between groups--specifically, the group of all people above the "cut-in" percentile, and the group of all below that percentile. We found in "Why We Have Wha
t We Have" that the upper group draws better lottery tickets on average than the lower group. And we found that at least half the earnings of the upper group in excess of the earnings at the cut-in percentile are attributable to their better tickets (the "fortune" area in Figure 17). Under the current rules, the upper group keeps a substantial portion of their accidental earnings, while the lower group gives up a substantial portion of their earnings. This is despite the fact that everyone in the lower group earns less than the lowest earner in the upper group, and despite the fact that half of the lower group’s earnings shortfall relative to the lowest earner in the upper group ("misfortune" in Figure 17) is attributable to the worse tickets drawn by the lower group.
On this basis, therefore I find the Fortune Tax to be fairer than current rules for income taxation.
I would combine the Fortune Tax to fund the safety neet with a “user tax”—paid at the same rate by all-- to fund the “non-charitable” functions of government: national defense, the judiciary, infrastructure, R&D, education, regulation of commerce, debt service. That’s because everyone benefits from these government services more or less in proportion to their consumption or income. (This “user tax” could be levied either on consumption or on income.)
When combined with a 10% “user tax” on all income, the Fortune Tax would result in a sharply progressive schedule of effective rates, as shown in Figure 18. [21] This figure shows the average (not marginal) tax rates when the 50% rate is applied to all income above the 65th percentile. This figure also shows average rates under current tax law, and the 1969 rates. The 1969 rates are fairly representative of the rates that were in effect throughout America's “Age of Affluence” that began in 1953, and ended in 1973 when an OPEC oil embargo quadrupled permanently the world oil price, and triggered America's first “Energy Crisis.”
Figure 18
The total amount of tax revenue that would have been raised in 2009 under each of the three Figure 18 rate schedules is: [22]
ο Current rates: $1.6 trillion
ο Fortune Tax rates: $2.1 trillion
ο Age of Affluence rates: $2.3 trillion
If the objective is to raise revenue, then the Good Luck rates are a clear winner--$540 billion per year more than current rates. But if that's not enough to satisfy the requirements for social safety-net funding, we can lower the percentile above which the Good Luck Tax applies. If we brought it all the way down to the median income level, the Good Luck tax would raise $2.5 trillion per year.
Wouldn't the Fortune Tax rates kill jobs?
Not according to Figure 18. The top marginal rate during the Age of Affluence was never lower than 70%, and was at times as high as 91%. Real median family income rose at an annual rate of 2.8% during that period. By contrast, during the twenty years from 1991 to 2011, when the top rate was never higher than 39.6%, real median family income rose at an annual average rate of 0.3%.
The Great Chain of Earning
In the middle ages, court intellectuals developed the doctrine of “the Great Chain of Being.” This held that all living things have an ordained place in a hierarchy. God sat at the top, and the king sat immediately below God. Below the king came the nobility, then the clergy, the landed gentry, merchants, and so on. At the bottom of the Chain were the peasants and serfs. Since everyone's place in the Chain was ordained by God, an attempt to improve one's position without the consent of one's superiors--for example, to depose the king--was both blasphemous and unnatural.
This doctrine served the king's interests well. In fact, it served the interests of all but serfs and peasants. Although the doctrine prevented you from aspiring to rise to a higher station than the one to which you were born, it also prevented anyone below you from aspiring to rise to (or above) your level.
In the middle of the 17th century, deconstructionists, in what was to be the first ray of the Enlightenment, realized, “OMG, the Chain was not invented by God, but by the men whose interests it serves!”
These days, many are true believers in what might be called the Great Chain of Earning. This doctrine--developed by high-earners to justify the positions they have attained (or hope to attain) in the wealth pyramid--holds that an individual's quantum of hard work and talent establishes his right and proper position in the pyramid. Believers claim that this doctrine follows from a proper understanding of market economics in a meritocratic society. And they believe that government intervention to fiddle with positions in the pyramid -- for example, progressive taxation to fund social safety net spending -- is both blasphemous and unnatural.
However, while it is true that we have evolved from monarchy and aristocracy to democracy and meritocracy, it is hardly the case that the birth accident no longer matters. In the middle ages, people were chained to their places by gender and family: if your father was a baron, you would be a baron if you were a boy, but not if you were a girl. If your mother was a seamstress, you would be unlikely to fall to kitchen maid, or to rise to shop girl.
A “transition matrix” for medieval society would have looked very much like Table 3. The research summarized in Why We Have What We Have suggests that today, we have barely half-emerged from the medieval system, since gender and parents' income still “explain” half of children's income. Our transition matrix now looks like Table 1, which is more or less half way between the medieval matrix of Table 3, and the fully mobile matrix of Table 2.
The “transmission vectors” linking the status of parents to the status of their children have also changed. When I entered Yale in 1964, the majority of the freshman class was drawn from a few private schools, and legacy candidates for admission were almost never rejected. By the time I graduated, Kingman Brewster and his admissions director Inslee Clark had reformed the admissions policy so that aptitude and achievement were vastly more important than the school from which you were applying or who you parents were. (I am full of admiration for Brewster and Clark's courage in carrying out this transformation. Hell hath no vitriol like the vitriol of an “Old Blue” when you tell him something at Yale is going to change.)
Notice, however, that a system enshrining aptitude and achievement doesn't make it irrelevant who your parents are. To the extent that genes determine intelligence and talent, we have our parents to thank or blame. We can mostly thank or blame our parents for the quanta of self-esteem and self-discipline with which we enter adult life (unless you believe that the child of alcoholics is every bit as capable of learning self-discipline as the child of professional musicians). Finally, we must thank or blame parents for how much or how little they sacrificed in order to give us the best chances in life.
So, yes, we live an age of meritocracy. But it turns out that at least half of our merit is the result of birth accidents. And the corollary is this: since we don't deserve half of our merit, we don't deserve whatever it is worth in the marketplace.
How can you say that I don't deserve what I am worth in the marketplace? Market economic theory holds that the market rewards people in proportion to the value added by their labor. And if my labor adds more value than yours because I am more clever, more talented, or work harder than you, why do I not deserve to have more than you?
Think of it this way. Do you deserve to be cleverer or more talented than me, or to be born to better parents? I don't think so. I am not envious or resentful; I just don't believe that any of us deserves anything that comes our way entirely by accident. Hard work, of course, is another matter.
If I had been born to any other parents, or with any other genes, I wouldn't be me, I would be someone else. Are you saying I am lucky not to be someone I am not?
Yes, and you cannot gainsay my assertion by invoking the “anthropic principle.” I make my assertion in the context of a discussion about fair taxation, where the question is, “Why me rather than the other guy?” My answer is, “because you're luckier than the other guy.” This is not at all the same thing as saying that you might have been the other guy.
/> There are only two people who can fairly claim that what we have came our way mainly from hard work. These are our parents, and the hard work is theirs, not ours. They may not have worked too hard to furnish us with genes, but they deserve the credit or the blame for much of the rest of what we have become by the time we leave the nest.
The corollary is that parents may fairly complain that a Fortune Tax applied to their children is unfair, because it is to some extent a tax on wealth created by the parents' hard work. The Fortune tax is, in this respect, akin to the estate and gift tax. But the Fortune Tax is arguably more benign than estate or gift taxation, because it does not apply until after children reaped the benefit of their parents' largesse to reach whatever station it allows them to achieve. Only then does the state reach in to extract a portion of the “value added” by their parents' hard work.
In fact, the Fortune Tax points the way to a useful reform of trust, estate and gift taxation. But that is a subject for another time.
It comes down to this: the word “fortune” means both “wealth” and “luck.” The same was true for the Latin word fortuna which, to the Romans, meant “luck,” “fate,” “chance,” “prosperity,” “goods,” “possessions,” or “property.” The understanding that wealth and luck are two sides of the same coin is ancient. Our forebears understood what Glenn Beck apparently does not: people are unlikely to have (or lack) one without having (or lacking) the other. The apostles of the Great Chain of Earning may deny that the link between the two is very strong, but in this they are wrong.
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Notes