Friday, 31 March 2017

On Two Types Of Fairness

Do you think women should always be paid the same as men for doing the same job, or can you think of any conditions under which one or the other should be paid more? Your answer to this question is based on how you perceive fairness? Let's explore this further.

There are usually two kinds of perception of fairness, which we'll call Fairness A and Fairness BFairness A says if workers are treated equally while at the same time benefiting from their endeavours then we should support a flat tax rate for all (say 25%). That means that Tom who earns £100,000 per year and Dick who earns £30,000 per year each pays the same rate of tax, but Tom pays more due to having higher earnings.

Fairness B says that it's fair to treat people unequally to try to bring about a fairer equalisation overall. That means that Tom who earns £100,000 a year and in absolute terms already pays more tax than Dick on £30,000 per year also pays a higher rate of tax than Dick, because it is seen as a good thing that high earners, although not often willing to help out voluntarily, do instead have the compassion to accept or embrace the kind of taxation that redistributes the top-end money to those with less.

Isn’t our tax system like that?

Yes, currently it is. Fairness A is often referred to as flat taxation and Fairness B is often referred to as progressive taxation. Those on the left tend to prefer progressive tax - but it is hard to be consistently progressive because people's ideas of fairness are inconsistent. That is to say, people are clumsy, and they tend to cherry pick between Fairness A and Fairness B while believing they are sticking firmly to either A or B. If you asked them whether women should always be paid the same as men for doing the same job, they'd probably say yes. But then that can go against their progressive ethos, because there are conditions under which unequal pay for men and women could be progressive (and, in fact, this once was the case).

For example, a married man with a non-working wife and children would find it harder to live than a single, childless woman doing the same job. In fact, it used to be thought to be justified to pay a man more than a woman on those grounds. Given that once upon a time most men were working breadwinners and most women were stay-at-home-housewives, it was thought to make sense to pay men more, as that extra money also benefitted the wife and children. Whether you think that's good depends on how you view the situation of a single, childless woman getting paid the same as a married man with a non-working wife and children. Most people now are proponents of the “equal pay for equal work” maxim, whereas one hundred years ago those people would have been in the minority.

The question, then, for proponents of Fairness B is why they'd support richer people paying a greater rate of tax but not support the same method of equalisation when it comes to single women being better off than their male colleague who's married with three children?

One good response might be that although we’ve been selectively a la carte over the years, we’ve done so for good reason, because it’s important to adapt to changing landscapes. Now that more women are working women, the ‘equal pay for equal work’ maxim makes the previous male-dominated sensibility seem rather outmoded. 

Another good response is that tax policies are largely based on buying votes. Creating a tax system that hits the minority hardest and benefits the majority at their cost is seen as a good way to buy votes, which is what governments base their tax systems on. Here's a simple illustration. Imagine you are governor of an island with a population of 150, and you want to obtain votes for re-election in a democracy. Out of the population, 100 of those 150 earn £25,000 per year and the other 50 earn £100,000 per year. Your rival governor candidate wants everyone to be free to spend their own money, and you want all the money to be pooled into a state pot and shared out evenly among the 150 people.

Under your opponent's system two thirds get to spend £25,000 and one third gets to spend £100,000. Under your rule those £25,000 earners who make up the two thirds get to have a share of the £100,000 earned by the minority group. Under your system everyone in the two thirds group is £25,000 better off and everyone in the one third group is £50,000 worse off (for those still counting, each of the population has £50,000 to spend). My prediction is that on Election Day your opponent will obtain one third of the votes and you'll obtain two thirds.

Before universal suffrage, the primary voters were men who earned money, so it was best for the government to adopt a flat rate tax policy. When universal suffrage came in, things changed, because now there were a lot more votes to buy, so it made sense to appeal to the majority (the low and medium earners) against the minority (the high earners) . A political party that promised to tax the wealthiest people at a higher rate and distribute it to the poorer people would gain plenty of support, so their policies were tactical. 

This is what we find in the modern age in the UK. In the UK the median income is lower than the average income, meaning most people earn less than the UK’s average wage. This presents a tactical no-brainer for political parties; endorse progressive taxation because then if you tax the wealthiest more than the poorest you bestow gifts on the majority of the people – which, for most people, basically amounts to voting for your own gifts.

This all sounds nice; surely voting for things that you like is a positive thing, and surely a nation in which the majority benefits from the government’s beneficence is a good thing too, right?

It depends how you look at it. If you like efficiency then no, it’s not great, because it is a recipe for profligacy. The reason being; if you buy something that’s worth less than it costs, you’ll find lots of wasteful spending. And if you spend other people’s money you’ll spend it less wisely than if you spend your own. Free markets are efficient because the product or service price from a supplier won’t usually be less than its production costs, and it won’t usually be more than the consumer is willing to pay for it.

In progressive tax systems things change. Most people reading this Blog will contribute far less than what would be their average share of a government’s spending policy, which means their incentive to see prudence and efficiency is diminished. Consider this illustration: Imagine you and I are at a large banquet with 98 other people, where the richest few are going to pick up the vast majority of the bill, and what’s left will be split between the rest of us. If everyone decides to have an extra bottle of wine per person and a supplementary box of chocolates, the proportion of the wine and chocolates costs with regards the overall bill will be less for you and I than the value of the wine and chocolates.

So even if we’d ordinarily not be willing to pay for the extra wine and chocolates, we won’t mind having it because the cost for us will be significantly less. What’s worse, there are bound to be lots of stuffed diners who didn’t really want the wine and chocolates who would not care too much because the majority of the expense is being taken care of by the richest few. This is what’s happening in real life with our politics.