Tax laws are designed to make us all better off. But there is a famous saying in business: “If you can’t measure it, you can’t improve it.” Professor Marc Fleurbaey understands the profound challenges hidden within that simple statement. If policymakers can’t measure the potential impact of tax policies, how can they make better laws? Fleurbaey explores how we can evaluate how well off we are so that we can increase not just income and wealth, but also do better to quantify aspects of our society such as health and social relations. Fleurbaey explains how optimal tax theory, an imperfect tool policymakers use to write our tax laws, can be improved to address similar flaws in the ways we fail to measure what really matters. He also describes the lessons Rawls can teach us about creating tax laws that reflect society’s values more accurately than merely maximizing GDP. The conversation wraps up with a discussion of a surprising carbon tax proposal from conservative economists and politicians that aims to protect both the environment and vulnerable individuals. Fleurbaey tackles a pencil question about a New Jersey taxpayer named Zarin.
Marc Fleurbaey is the Research Director of the National Center for Scientific Research at the Paris School of Economics. He is the author of Fairness, Responsibility, and Welfare (2008), a co-author of Beyond GDP (with Didier Blanchet, 2013), A Theory of Fairness and Social Welfare (with François Maniquet, 2011), and the coeditor of several books, including Justice, Political Liberalism, and Utilitarianism: Themes from Harsanyi and Rawls (with Maurice Salles and John Weymark, 2008) and the Oxford Handbook of Well-Being and Public Policy (with Matthew Adler, 2016). His research on normative and public economics and theories of distributive justice has focused in particular on the analysis of equality of opportunity, risk, redistributive taxation, climate policy, and on seeking solutions to famous impossibilities of social choice theory.
Our student quote is read by Rita Halabi.
Resources
Speaker 1:
All of us should be willing to pay whatever taxes are necessary to enable efficient government to improve or expand any essential service.
Speaker 2:
You have a beautiful tax return, the nicest one I've ever seen.
Speaker 3:
Okay, folks, but remember your manners, no stampeding. Walk slow like you do when you come to pay your taxes.
Steven Dean:
Hi, I'm Steven Dean. This is the Tax Maven. Here, we are going to, in each episode, talk to our tax maven, who will be a person proving Archimedes' point that a single person with a lever long enough and a place to put it can change the world. The lever in this case is tax and the place to put it is here at NYU Law.
Speaker 5:
One, two, three.
Steven Dean:
I’m Steven Dean the Faculty Director of the Graduate Tax Program at NYU Law and today I’ll be speaking with Marc Fleurbaey. He is the Research Director of the National Center for Scientific Research at the Paris School of Economics. As a note to listeners, when we recorded the episode, he was at Princeton.
Steven Dean:
Policymakers want to do what is right for those they represent, but that can be challenging. Where do they start?
Marc Fleurbaey:
In democracy, equality and both go together. I'm an economist, but equality is not just about resources. It's also about power and status. And so we need to really think of all these dimensions. And when you look at the recent flow of events in the world, obviously we have serious problems with governance. And if we don't solve these problems, we will never solve the problems of inequality. But the difficulty is that, in fact, the problems we have with governance are linked to the problems we have with social fracture and inequalities. And so, all of these things hold together, and so it's a kind of Gordian knot and hard to cut it.
Steven Dean:
Well, how do you start to pick apart that Gordian knot?
Marc Fleurbaey:
Yeah, that's the big open question of our times. I think trying to improve institutions is key. And if I take inspiration from the work I've done with many colleagues from the world that I'm in, the International Panel on Social Progress, I mean, my colleagues came up with the idea that civil society is probably where we can put our hopes. So bottom up pressure from people acting in various organizations, NGOs, associations, also business people need to push because the political systems are not working very well.
Steven Dean:
And part of what your work and the work you referred to, as I understand it, is a push to broaden the way we measure how well off we are, right? So the standard measure for how well we're doing, how much progress we're making is GDP, gross domestic product. But my sense from your work is that you're not satisfied with that as a measure of progress or growth. How could we do it better?
Marc Fleurbaey:
Right. So I'm not very original in that way because many people are dissatisfied with GDP. GDP is too narrow, right? So not everything in our life is just earning money, but GDP also counts bad things as contributions to wealth, right? So if there is a catastrophe and we need to work more, that counts, that may increase GDP even though it's a bad thing that happened.
Marc Fleurbaey:
So GDP is not the right metric, and people have been sometimes a bit too radical. So if you want that I describe it a little bit where I stand in this debate, some people have said we should just completely go without any consideration of monetary metrics, measures, and go for something much more subjective, people's perceptions of their life and how satisfied they are with their lives.
Marc Fleurbaey:
So self-reported or subjective wellbeing measures have been very fashionable in some quarters lately. I'm a bit skeptical that we should go all the way to purely subjective measures for a very simple reason. When you ask people how satisfied they are with their lives, they will give you answers that depend on various frames of references that they have in mind that may be pretty heterogeneous across people, depending on the generation they come from, the social background they come from, and so on.
Marc Fleurbaey:
And so, very hard to compare that across people, including across cultures, across social groups, and therefore, we probably need to remain firmly on the ground in terms of people's achievements, but somehow enriching the measure of achievement. So beyond income and wealth, we need to introduce additional dimensions like health and potentially also things like social prestige, social status, social inclusion.
Marc Fleurbaey:
We are pretty bad, I must confess, in economics at measuring the quality of social relations and this sort of thing, but that seems to be important. And in fact, I was negative about subjective wellbeing, but these studies tell us that these social relations and social status dimensions matter to people, and that's very interesting information.
Steven Dean:
Creating a measure of wellbeing that captures what matters offers us a place to start, but how do we go about increasing wellbeing?
Marc Fleurbaey:
Gross national happiness is this famous a competitor to GDP, but as I said, it's not clear that you can compare it. And when you just compute the average happiness or average satisfaction across the population, you disregard inequalities, right? So just taking the averages, disregarding especially the fate of the worst off. And so, it's not clear that we can really trust these measures to compute inequalities, and so that's why it's important to keep track of things which are still in the domain of the economy and are in the domain of power and structures and social relations.
Steven Dean:
And there's a different perspective on the same debate that you referred to in your work, that it's not rejecting objective measures of wellbeing, but perhaps suggesting that we shouldn't measure achievements or consumption, but opportunity or freedom. That's a different sort of criticism of the GDP kind of measurement approach.
Marc Fleurbaey:
That's right. And to be frank, I've studied, I've spent decades studying this idea that we should look at people's opportunities. And I ended up being associated with this wave of thinking in terms of opportunities, but my main motivation to study that was that I was afraid that this new wave was a bit frightening because it could be harsh on the people who are disadvantaged. Somehow the threat I was seeing there was a sort of double penalty. So the people who are suffering certain hidden disadvantages would be suffering these disadvantages, and at the top of it, they would be accused of being responsible for these disadvantages. And so that's this kind of mistake, right? The false positives or false negatives. The undeserving poor are the people I had in mind when I started...
Steven Dean:
And why would, just to unpack that a little bit, why would the undeserving poor be doubly penalized under that perspective?
Marc Fleurbaey:
Right. So I'm very skeptical about the fact that people can be really willing, genuinely destroying their opportunities. I think everybody is good-willed and would like to succeed in life, but some people face very difficult circumstances.
Marc Fleurbaey:
The problem is that we never, and when I say we, I mean the statisticians, the governments, we never really observe what happens to people. So we know for instance that the way you are treated in the very first days or weeks of your life matter a lot, matters a lot for your future, but we never observe exactly how people are treated when they are very small infants. And so, it's very easy to accuse people who look like failures, that they are somehow responsible for that, and there is such a long history of mistreatment of the poor because they were considered to be guilty for all their plight. So [inaudible 00:08:13] would be very wary about going that route.
Steven Dean:
Creating tax policies would be hard enough with perfect information and if there were only one kind of tax to worry about. Unfortunately, the information available to policymakers about taxpayers tends to be quite modest and they have a whole array of taxes to grapple with.
Marc Fleurbaey:
Yeah, so the father of optimal tax theory is James Mirrlees, a Nobel Prize who had the brilliant idea of incorporating incentive issues in the analysis of the optimal taxes. So before him, people were thinking in terms of horizontal equity, vertical equity, but they really struggled to put together all the relevant considerations. And Mirrlees said, "Okay, let's imagine we have a social objective. The government wants to optimize things for society, but is facing the problem that we can't observe people's characteristics at the personal level. So we don't know who is talented, who is less talented. The only thing that we can really observe through the tax system is people's earnings, right? And so we don't really know if they earn a lot through a lot of effort or just through a high wage rate on the market. And so if our only tool is earnings, we have to make due with the fact that our information is poor."
Marc Fleurbaey:
And so Mirrlees found the way to really do this analysis and to design the best kind of tax schedule that we can do under these constrained informational settings.
Steven Dean:
So that does sound very helpful. And the way I understand, so you're responding to criticisms of optimal tax I think in very productive ways, and the way that I understand the criticisms you're responding to is that they're very similar to the sorts of criticisms, maybe different in ways, the criticisms leveled at GDP; obviously very different, but the same sort of resistance to the idea that you can quantify something this important. I know that's a gross oversimplification of the criticisms, but for folks who are trying to grapple with the idea of what optimal tax theory is, maybe at least they've understood GDP and what the criticisms of GDP are. Is that a-
Marc Fleurbaey:
Yes. Yes, yes.
Steven Dean:
I don't know, what are the... Yeah.
Marc Fleurbaey:
Yeah, I think you are on to something. Because indeed, one problem with the GDP is that it just adds up the income of people without looking at inequalities very carefully. And similarly, the tradition in optimal tax, and Mirrlees was a staunch utilitarian, so he believed in maximizing the sum of utilities, that comes from Bentham. And so people have been worried that the utilitarian philosophy is actually very special and not necessarily the one that's the most prominent in various countries right? So if you look at the US for instance, you have some libertarian ideas, or some meritocratic ideas that we were just talking about that are pretty prominent in the public debate. And utilitarianism is not very well attuned to these public views.
Marc Fleurbaey:
And so, the job of the economist is to try to translate public views into rational policies. And so the utilitarian approach may not be exactly doing the whole job, and especially one aspect of utilitarianism, which is like GDP, it's just the sum of utilities. So it may not be sensitive to people's inequality, to the inequalities between people in a very fine-grained way. And so the effort that has been done in recent years by several authors is to incorporate additional fairness considerations that keep track of views that are more widespread in the public.
Steven Dean:
So I'm just going to read from one of your recent pieces, and it's out of context, but I'm going to have you help me put it in context and explain it a bit. "So independently of how low the utility of this agent is, a small utility gain for many well-off individuals may outweigh large utility loss for the miserable one," right? So this is that issue, right? That the way utilitarianism works, it's a mathematical formula. And if you can make many already well-off people a tiny bit more well-off by increasing the misery by quite a bit of somebody who's already quite miserable, a utilitarian framework would say that's great.
Marc Fleurbaey:
Absolutely, right? Because you just look at the sum, so you don't care about how utility is distributed. So a tiny bit of additional utility for many people, even if they are the best off, may justify imposing substantial pain on one victim.
Steven Dean:
So this makes it hard for me to get excited about optimal tax theory. But a lot of the work you're doing is I think, if not trying to reclaim, at least update or improve optimal tax theory so that it doesn't make those sort of heartless calculations.
Marc Fleurbaey:
Right.
Steven Dean:
How do we do that? How are you doing that?
Marc Fleurbaey:
So there is a kind of apparently radical way of doing that, which is to put absolute priority on the worst off, on the very worst off. John Rawls is famous, the philosopher, for advocating this kind of absolute priority for the worst off. And it turns out that when you study fairness in economics, you can find many arguments, and I won't develop that here, but many theoretical arguments that push toward a strong priority for the worst off.
Marc Fleurbaey:
Now, if you do that in a taxation context, you might think, "Oh, but that will be too radical. We'll tax income at 100%." Not at all, in fact, because you have incentive constraints, right? You don't want to discourage work and you don't want to encourage tax evasion, so you need to take account of the incentives. And so that prevents you from taxing to 100%, but it still makes sense to look at what happens at the bottom of the distribution and what you can do for the very worst off people. And I say people because it's a group. It's not just one individual, it's a group of people who are, let's say, the most disadvantaged in terms of market productivity, the wages they can earn on the market. So what can we do for them is an interesting question, and that avoids the problem with utilitarianism you were describing, where we would be willing to sacrifice them for the sake of well-off people...
Steven Dean:
In face, required to sacrifice them.
Marc Fleurbaey:
Yeah. Yeah.
Steven Dean:
If you take it seriously. So now, this is just a question that I have often, and I'm hoping you can help me grapple with this a bit. If one is an adherent of optimal tax theory, perhaps as modified with the friendly amendments that you're proposing, and they are friendly, I think, amendments, would you be happy or sad to know that somebody in the legislature read your article immediately before they went to reform a tax law or create a tax law? Do you think they are likely in practice to be led in a good direction by optimal tax theory, or is it really something that is really a theoretical debate that somebody, an actual politician, is likely to misconstrue or use for purposes that are not great?
Marc Fleurbaey:
Right. So I think to some extent, yeah, that provides some reasonable guide for, I would say, basic orders of magnitude, right, of taxes. So when you discuss whether the top tax rate should be 40% or should be less or more, this approach can give some ideas. But when we look at the whole tax system, the problem is the interdependence between the various taxes. So each of the little models we study for tractability purposes is just looking at one part of the picture. And so if you want to take account of, yeah, taxes on capital interact with taxes on earnings, and taxes and subsidies on the environment also should take account of the distortions we have with labor taxes and payroll taxes and all that. And in the US, it's even more complex because you have the federal tax and you have the state tax and so on.
Marc Fleurbaey:
So the difficulty is really to take account of all of that, and none of the models we have is really getting at that in a very complete way. So some caution is needed, right? So it gives ideas about the relevant considerations, what we are doing so far, but if you really want to go for numerical proposals, you have to build a very applied model.
Marc Fleurbaey:
In Europe, there is such a kind of model, but it's still imperfect because it doesn't take into account... So it really builds all the tax system for the various European countries in a quite fine-grained way, but doesn't take into account the incentives very well. So if you want to test the reform, it gives you what the impact of the reform will be taking account of all the bits and pieces on various categories of the population. It doesn't tell you how the people will react to the new tax system.
Marc Fleurbaey:
I don't think there is anything like that for the US unfortunately, even though the CBO is sometimes doing simulations which would like that. But yeah, so in one word, yeah, one should be careful.
Steven Dean:
Imagine, again, our well-meaning policymaker. She wants to help preserve the environment. Would optimal tax theory help her create a tax to accomplish that?
Marc Fleurbaey:
If we want to introduce an ambitious carbon tax, how does that impact on the distribution of income and wealth in society? And if that hurts, for instance, if that raises the price of energy for the poor people, that may trigger revolts, right? So I'm from France, and the yellow vest movement was triggered by a carbon tax on fuel. And so we have to be careful with that. And yes, there is very interesting literature that studies how we can introduce a carbon tax and recycle the revenue from the carbon tax in order to avoid inequalities and protests as well.
Marc Fleurbaey:
There is actually a proposal in the US that is going in that direction. Interestingly, it's a proposal that comes from conservative politicians and economists, and it takes the level of carbon tax from the expert reports on what would be desirable, and it suggests redistributing the proceeds as a lump sum to every American household in such a way that essentially three fifths of the population in the bottom brackets of the population would actually benefit from the change because the lump sum would more than compensate for the rise in their expenses due to the tax.
Steven Dean:
And so this is, I think, a very interesting way where the optimal tax theory is doing the opposite of heartless.
Marc Fleurbaey:
Exactly.
Steven Dean:
It is really trying to create a system that is very thoughtful about future generations and also about those who are less advantaged today. Well, very, very interesting. Thank you very much. So I learned a lot from you today, and now I'm going to ask you a question. And the question is silly, as most of mine are. And the good news is if you get it right, you get this beautiful NYU Law Graduate Tax Program pencil. So the stakes are very high.
Steven Dean:
You're at Princeton in New Jersey, and I'm going to ask you a question about a taxpayer from New Jersey, who, at least among tax professors and students of federal income tax, is quite famous. So this New Jersey resident named Zarin once received a tax bill for just under $3 million for one of three reasons. I'll give you three choices. A). He gambled heavily and lost in Atlantic City. B). He won the New Jersey state lottery. And C). He had invested in a controversial tax shelter.
Marc Fleurbaey:
I would prefer the last option, but unfortunately it's unlikely to be the case, right? Yeah, so could it be... I don't know whether it's one or two.
Steven Dean:
So I will just say that Atlantic City is pretty cool.
Marc Fleurbaey:
Okay. So that was the first one, yeah?
Steven Dean:
So it was in fact he gambled heavily and lost in Atlantic City. So here is your pencil.
Marc Fleurbaey:
Oh, thanks.
Steven Dean:
Absolutely. And so I learned this by reading an article from one of our colleagues here at NYU, although I think it was before he was at NYU. He was at the University of Chicago back then, Dan Shaviro, who wrote an article, "The Man Who Lost Too Much: Zarin v. the Commissioner and the Measurement of Taxable Consumption." So the story is that he had the unfortunate coincidence of being a compulsive gambler and living in Atlantic City. He lost a whole lot of money in the casinos and the casinos couldn't collect because he was a compulsive gambler and had gambled far beyond his means. And the way the income tax works, if you have a debt and the lender forgives it, you have income then. So the question was whether he had income when the casinos forgave the millions of dollars of gambling debts that he had.
Steven Dean:
So thank you so much for being with us today. Thanks for answering my silly question.
Marc Fleurbaey:
Thank you, Steven.
Steven Dean:
I really learned a lot. Thank you so much.
Marc Fleurbaey:
Thank you.
Steven Dean:
Thank you for listening to the Tax Maven. And I also want to give a very special thank you to those that help make the podcast possible, Patrick Kelly, Joe Rivera, Greg Addison, Rebekah Carmichael, Jill Rachlin, and Anthony Pietrangelo. And thank you, Rachel Burns.
Steven Dean:
The NYU Law Graduate Tax Program has been the premier place to learn about tax law for the past 75 years. So please visit us on the web, visit our Graduate Tax Program website to see the different programs we offer, both in-person and online, both for lawyers and non-lawyers. Take a look at what we offer, and I hope you consider joining us.
Steven Dean:
And now, we like to end each of our episodes with a quote about taxes read by one of our students. Today's tax quote comes from Rita Halabi from Virginia Beach, Virginia.
Rita Halabi:
In tax, as in comedy, timing matters.
Steven Dean:
Please email us at info@taxmavenpodcast.com if you have any questions or comments or suggestions. And if you are a student and want to email us a recording of your favorite tax quote, please email it there as well. Thanks for tuning in.