Having trouble figuring out what the writer is trying to convey here...
April 15, 2008 11:05 PM Subscribe
Can someone help me figure out this snippet from an article on our sense of fairness and taxes?
The article says: "In the 1970s, the Nobel Prize-winning economist Thomas Schelling used to put some questions to his students at Harvard when he wanted to show how people's ethical preferences on public policy can be turned around. Suppose, he said, that you were designing a tax code and wanted to provide a credit -- a rebate, in effect -- for couples with children. (I'm simplifying a bit.) In a progressive tax system such as ours, we try to ease the burden on the less well off, so it might make sense to adjust the child credit accordingly. Would it be fair, do you think, to give poor parents a bigger credit than rich parents? Schelling's students were inclined to think so. If the credit was going to vary with income, it seemed fair to award struggling families the bigger tax break. It would certainly be unfair, they agreed, for richer families to get a bigger one.
Then Schelling asked his students to think about things in a different way. Instead of giving families with children a credit, you'd impose a surcharge on couples with no children. Now then: Would it be fair to make the childless rich pay a bigger surcharge than the childless poor? Schelling's students thought so.
But -- hang on a sec -- a bonus for those who have a child amounts to a penalty for those who don't have one. (Saying that those with children should be taxed less than the childless is another way of saying that the childless should be taxed more than those with children.) So when poor parents receive a smaller credit than rich ones, that is, in effect, the same as the childless poor paying a smaller surcharge than the childless rich. To many, the first deal sounds unfair and the second sounds fair -- but they're the very same tax scheme."
How? I mean, how are they part of the same tax scheme? One penalizes the poor parents over the rich ones and the other does the very opposite for childless couples. I'm unable to see the link here between the two examples? Could someone explain this?
Thanks!
The article says: "In the 1970s, the Nobel Prize-winning economist Thomas Schelling used to put some questions to his students at Harvard when he wanted to show how people's ethical preferences on public policy can be turned around. Suppose, he said, that you were designing a tax code and wanted to provide a credit -- a rebate, in effect -- for couples with children. (I'm simplifying a bit.) In a progressive tax system such as ours, we try to ease the burden on the less well off, so it might make sense to adjust the child credit accordingly. Would it be fair, do you think, to give poor parents a bigger credit than rich parents? Schelling's students were inclined to think so. If the credit was going to vary with income, it seemed fair to award struggling families the bigger tax break. It would certainly be unfair, they agreed, for richer families to get a bigger one.
Then Schelling asked his students to think about things in a different way. Instead of giving families with children a credit, you'd impose a surcharge on couples with no children. Now then: Would it be fair to make the childless rich pay a bigger surcharge than the childless poor? Schelling's students thought so.
But -- hang on a sec -- a bonus for those who have a child amounts to a penalty for those who don't have one. (Saying that those with children should be taxed less than the childless is another way of saying that the childless should be taxed more than those with children.) So when poor parents receive a smaller credit than rich ones, that is, in effect, the same as the childless poor paying a smaller surcharge than the childless rich. To many, the first deal sounds unfair and the second sounds fair -- but they're the very same tax scheme."
How? I mean, how are they part of the same tax scheme? One penalizes the poor parents over the rich ones and the other does the very opposite for childless couples. I'm unable to see the link here between the two examples? Could someone explain this?
Thanks!
In this tax scheme, rich families without children pay 2x amount of surcharge. Poor families without children only pay x amount of surcharge. If the rich family decided to have kids, the surcharge of 2x would be nullified, and they would be 2x better off. If the poor family decided to have kids, they would only be x better off.
Yet if the situation involved a credit system, we would expect the poor family to receive a rebate of 2x and the rich family to receive a rebate of only x. If the poor family had decided not to have kids, they would've been 2x worse off, while the rich family would've only been x worse off.
In both sides of the same case, the first scenario appeals to us, but in terms of pure progressivity it doesn't necessarily render the poorer family better off. Hence the snipe about your sense of justice with respect to tax.
posted by Phire at 12:30 AM on April 16, 2008
Yet if the situation involved a credit system, we would expect the poor family to receive a rebate of 2x and the rich family to receive a rebate of only x. If the poor family had decided not to have kids, they would've been 2x worse off, while the rich family would've only been x worse off.
In both sides of the same case, the first scenario appeals to us, but in terms of pure progressivity it doesn't necessarily render the poorer family better off. Hence the snipe about your sense of justice with respect to tax.
posted by Phire at 12:30 AM on April 16, 2008
So when poor parents receive a smaller credit than rich ones, that is, in effect, the same as the childless poor paying a smaller surcharge than the childless rich.
In both cases, the change in relative income as between the four different groups caused by the policy is the same.
If either 1) the poor people with children receive a large credit, or 2) the poor people without children are subject to a large surcharge, the childless poor will be the big losers, in terms of relative income, with respect to the other groups.
If this makes sense, but doesn't seem to quite add up, I think the key insight is that the child credit/surcharge will either be paid out of general tax revenue or be paid into general tax revenue. If we assume a constant budget (as we should, if we're trying to evaluate the isolated effect if this one policy), either policy quoted above should amount to the same.
posted by Mr. President Dr. Steve Elvis America at 3:06 AM on April 16, 2008
In both cases, the change in relative income as between the four different groups caused by the policy is the same.
If either 1) the poor people with children receive a large credit, or 2) the poor people without children are subject to a large surcharge, the childless poor will be the big losers, in terms of relative income, with respect to the other groups.
If this makes sense, but doesn't seem to quite add up, I think the key insight is that the child credit/surcharge will either be paid out of general tax revenue or be paid into general tax revenue. If we assume a constant budget (as we should, if we're trying to evaluate the isolated effect if this one policy), either policy quoted above should amount to the same.
posted by Mr. President Dr. Steve Elvis America at 3:06 AM on April 16, 2008
Your confusion seems to be in thinking, "One penalizes the poor parents over the rich ones and the other does the very opposite for childless couples." No, neither penalizes the poor over the rich. Both schemes penalize the rich over the poor, i.e. a rich person under either scheme is going to have to pay more taxes than a poor person. The article says that the schemes are basically like this (omitting the points about whether they have children):
Scheme #1:
Rich person gets small reduction in their taxes.
Poor person gets big reduction in their taxes.
Scheme #2
Rich person gets big increase in their taxes.
Poor person gets small increase in their taxes.
If you knew your taxes were going to be lowered, you'd rather have them lowered a big amount than a small amount. If you knew your taxes were going to be raised, you'd rather have them raised a small amount than a big amount. In each scheme, the poor person gets what you'd rather have. So both of them are equally weighted toward the poor. Thus, it's simply not the case that scheme #1 "penalizes the poor parents over the rich ones."
posted by Jaltcoh at 5:05 AM on April 16, 2008
Scheme #1:
Rich person gets small reduction in their taxes.
Poor person gets big reduction in their taxes.
Scheme #2
Rich person gets big increase in their taxes.
Poor person gets small increase in their taxes.
If you knew your taxes were going to be lowered, you'd rather have them lowered a big amount than a small amount. If you knew your taxes were going to be raised, you'd rather have them raised a small amount than a big amount. In each scheme, the poor person gets what you'd rather have. So both of them are equally weighted toward the poor. Thus, it's simply not the case that scheme #1 "penalizes the poor parents over the rich ones."
posted by Jaltcoh at 5:05 AM on April 16, 2008
They are trying to convey a frame of reference problem. One way to reduce the issue he's trying to convey is to reduce it to a smaller scale.
For example, suppose you and some friends decide to rent a four bedroom cabin. One single person, one childless couple, one family of four and one family of six. (Assume that the kids are camping out back). There are four "families", so you'd split it four ways, right? But the single person will complain that they are paying a disproportionately high share of the rent- they are paying the most per-person. But the families will say hey, there are four bedrooms and each "family" gets one, why should the single person pay less per bedroom than they are? Each position is right, from their frame of reference.
Same thing with the tax scenario- the government has bills to pay, some fixed amount. How do you fairly determine which share of those bills each citizen is responsible for?
The professor's scenario also illustrates the problem of using taxes for more than just paying the bills- we use it to redistribute income ("ease the burden") and to encourage saving, home buying, charitable giving and so on.
posted by gjc at 7:54 AM on April 16, 2008
For example, suppose you and some friends decide to rent a four bedroom cabin. One single person, one childless couple, one family of four and one family of six. (Assume that the kids are camping out back). There are four "families", so you'd split it four ways, right? But the single person will complain that they are paying a disproportionately high share of the rent- they are paying the most per-person. But the families will say hey, there are four bedrooms and each "family" gets one, why should the single person pay less per bedroom than they are? Each position is right, from their frame of reference.
Same thing with the tax scenario- the government has bills to pay, some fixed amount. How do you fairly determine which share of those bills each citizen is responsible for?
The professor's scenario also illustrates the problem of using taxes for more than just paying the bills- we use it to redistribute income ("ease the burden") and to encourage saving, home buying, charitable giving and so on.
posted by gjc at 7:54 AM on April 16, 2008
Economists think of gains and loses as equivalent, and they think you should too. Here's a decently good wikipedia article about the subject.
posted by paultopia at 10:12 AM on April 16, 2008
posted by paultopia at 10:12 AM on April 16, 2008
I have also heard this discussed by economists as "framing effects" how you frame the question shapes the perceptions. So you can offer two economically identical scenarios, where each party pays the same dollars in taxes, but one version is framed as a penalty on party A and the second is framed as a subsidy for party B.
posted by shothotbot at 11:32 AM on April 16, 2008
posted by shothotbot at 11:32 AM on April 16, 2008
Your scenario changed halfway through. In the first paragraph, the poor families get a larger credit:
Would it be fair, do you think, to give poor parents a bigger credit than rich parents? Schelling's students were inclined to think so.
But in the third paragraph, where the two plans are compared, the poor families get a smaller credit:
So when poor parents receive a smaller credit than rich ones...
posted by Hermes32 at 11:42 AM on April 16, 2008
Would it be fair, do you think, to give poor parents a bigger credit than rich parents? Schelling's students were inclined to think so.
But in the third paragraph, where the two plans are compared, the poor families get a smaller credit:
So when poor parents receive a smaller credit than rich ones...
posted by Hermes32 at 11:42 AM on April 16, 2008
Hmmm, just after I posted I realized that I'd totally missed the point. The question has been answered pretty well already, so I'll just slink away quietly...
posted by Hermes32 at 11:57 AM on April 16, 2008
posted by Hermes32 at 11:57 AM on April 16, 2008
This thread is closed to new comments.
Divide the populace into 4 groups: poor with children (P+C), rich with children (R+C), poor without kids (P-C), rich without kids (R-C).
If one doesn't care about kids, the tax on P+C and P-C is equal. So is the tax on R+C and R-C. Now we bring kids into the picture.
In the first scenario, one is saying that the credit for R+C should be less than the credit for P+C. Say R+C get $100, P+C get $200.
In relative terms, this is the same as P-C paying $200, R-C paying $100 (comparing with their peer groups only).
But that contradicts what seems fair in the second scenario.
posted by shazzam at 11:30 PM on April 15, 2008