In a comment on one of my recent posts, co-blogger Scott Sumner quotes my statement:
But implicit in his discussion is the idea that equity is synonymous with income equality or, at least, reduced income inequality. That’s not my view. My view is that people are treated equitably when other people don’t take their stuff.
Scott then writes:
That’s fine as a definition, but in that case I’d just use a different term. Even if I accepted your definition of “equity”, it would not change my views on Romney’s proposal at all. I’d just replace “equity” with “income equality” in my post, and otherwise keep the argument the same.
If he had stopped there, we wouldn’t have had a disagreement, except that we have very different views on the desirability of Romney’s proposal.
But then Scott writes:
I think my use of equity is consistent with how it’s used in economics textbooks when they discuss the equity/efficiency trade-off.
That’s a bridge too far.
It is consistent with how it’s used in some, possibly many, economics textbooks. I found words to that effect, for example, in Jack Hirshleifer’s microeconomics text. But some, maybe many, economics textbooks give a few versions of “equity.”
Here are two examples, and I didn’t have to look hard in my remaining few economics textbooks to find them.
In the 9th edition of their textbook Economics: Principles and Policy (2003), William J. Baumol and Alan S. Blinder consider various versions of equity. The two most directly related to this discussion are the concept of “vertical equity” and the benefits principle.
The version of the vertical equity principle they discuss is the “ability-to-pay principle,” which says that “those most able to pay should pay the highest taxes.” But they then give examples of a progressive, a proportional, and a regressive income tax system, in all of which those most able to pay do pay the highest taxes. So that’s not guidance that leads you to income equality or even to reducing income inequality.
The other equity principle they discuss is the “benefits principle,” which says that “those who reap the benefits from government services should pay the taxes.” They note that this principle of fair taxation “often violates commonly accepted notions of vertical equity.”
You can see why. Bill Gates gains a lot from national defense, but does he gain much from U.S. foreign policy, which tends to be focused on national offense? Or even more obviously, does he gain from the existence of the SNAP (food stamp) program?
In the 5th edition of N. Gregory Mankiw’s Principles of Economics (2009), there’s a similar discussion. Indeed, Mankiw uses examples of progressive, proportional, and regressive tax systems, all of which cause those with higher incomes to pay more taxes.
Mankiw also discusses the benefits principle and even argues that it could be used to justify taxing higher-income people more for anti-poverty programs, on the grounds that reducing poverty is a public good. Whether or not you think this is a stretch, the point is that we still don’t get to the conclusion that high-income people should pay a larger percent of their income.
And notice that neither of the two textbooks equates equity with income equality.
READER COMMENTS
nobody.really
Feb 10 2021 at 9:06am
First Henderson infers that Sumner’s concern for equality expresses a concern for “income inequality.” Then Henderson argues that progressive taxation does not promote income equality, or even reduce income inequality.
Perhaps Sumner could clarify whether his concern for equality actually refers to a concern for “income inequality”–or perhaps a concern for “net income inequality”? In my (admittedly limited) experience, people who express concern for growing income inequality often favor progressive taxation and government transfers/social safety net programs. These programs are designed to reduce net income inequality–that is, inequality after accounting for the effects of taxation and transfers.
In short, I wonder if Henderson has misapprehended how Sumner uses the word “equality.”
Thomas Hutcheson
Feb 10 2021 at 9:50am
I think benefit principle taxation is largely consistent with consumption equality (or even after-tax income equality) taxation. Bill Gates or Jeff Bezos benefits enormously, vastly more from the Democratic Capitalist system we have and that taxation supports than a low wage worker.
David R. Henderson
Feb 10 2021 at 11:03am
You write:
I didn’t argue that at all. If you care about what I’m arguing, read my post more carefully.
nobody.really
Feb 12 2021 at 2:53pm
I apologize for mischaracterizing Henderson’s position; apparently I have misunderstood it. Alas, even with the benefit of Henderson’s additional comment, and the comments of others, I’m not following this.
Alan Goldhammer
Feb 10 2021 at 12:02pm
This post is an example of Sayre’s Law in action.
Juan Manuel Perez Porrua Perez
Feb 11 2021 at 12:44am
“Equity” is a term that I believe comes ultimately from Roman law, where it means basically fairness, e.g. Ralws’ Justice as Fairness. Like other legal terms like reasonableness, or another term in Roman law, fides or bona fides it’s intentionally vague, a standard that’s supposed to be applied case by case. “Equity” also has a history in English law, as a body of law that was developed in the Court of Chancery and that began as discretionary measures by the Lord Chancellor by people dissatisfied with the outcomes of the way the formulaic medieval common law was applied.
Clearly equity is much less clear than equality, which after all is a term that applies to numbers. That being said, I’ve always gotten the sense that equality is much stronger than equity.
Steven Hankin
Feb 12 2021 at 9:03pm
Could someone explain to me this idea of “vertical equity” : that it is somehow considered equitable for those most able to pay, to pay the most taxes, without regard to the benefit he stands to receive.
If a rich person goes to a grocery store should he required to pay more for a product than a person who is less able to pay. Furthermore, if taxes are paid by the rich person solely for the benefit of others, ie, that such rich person feels he has received no benefit from the taxes he pays, then how is that equitable.
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