Here's an earlier version of an NBER working paper written by Greg Mankiw and Matthew Weinzierl. The abstract:
Should the income tax system include a tax credit for short taxpayers and a tax surcharge for tall ones? This paper shows that the standard Utilitarian framework for tax policy analysis answers this question in the affirmative. Moreover, based on the empirical distribution of height and wages, the optimal heighttax is substantial: a tall person earning $50,000 should pay about $4,500 more in taxes than a short person earning the same income. This result has two possible interpretations. One interpretation is that individual attributes correlated with wages, such as height, should be considered more widely for determining tax liabilities. Alternatively, if policies such as a tax on height are rejected, then the standard Utilitarian framework must in some way fail to capture our intuitive notions of distributive justice.
Tall people would undoubtebly object to such a possible. But if height is positively related to utility in other ways, then they can at least be comforted knowing that their absolute utility is higher even if marginal utility is equalized. Assuming persons are completely identical in all other ways of course.
Friday, May 29, 2009
Wednesday, May 27, 2009
Morally Hazardous Politics
Employment Insurance hasbeen at the forefront of our country's political discourse recently. The Tories are instituting training programs for "long-tenured workers" but have opted against major changes. The opposition parties want a more dramatic overhaul of eligibility requirements. You can read about the details here, here, here and here.
So who is in the right? Should the government make it easier to qualify for EI benefits, as the Liberals and New Democrats want? Or are current eligibility rules sufficient, as the Conservatives claim?
I'm inclined to side with the government on this one. Remember that EI is an insurance program. It is not a social program in the same way that medicare or public education are. The latter programs are available to all regardless of personal circumstances. EI is designed for workers, and its benefits are limited to specific situations.
Like any insurance policy, EI comes with a premium. This is paid by workers and their employers each pay period. Earnings are insured up to a maximum level ($42,300 in 2009) and a rate is applied (1.73% in 2009) until the maximum annual contribution is reached.
Most undergrad economics students will encounter the concept of moral hazard sometime in their studies. Simply put, moral hazard is the adverse impact that insurance can have on the insuree's behaviour. If I can be protected from a the consequences of a risky activity, then my disincentive to engage in that risky activity is lowered. For example, suppose that there are two home security systems to choose from. Suppose also that the more expensive one is the optimal choice. But if I have homeowner's insurance, I might be inclined to purchase the cheaper one.
Insurance companies deal with this type of situation all the time. In the above scenario, the company might charge me a different premium based on the type of security I have at my house. If the premium is set correctly, I will purchase the optimal system.
Of course, there are costs to this type of supervision. The insurance company must weigh the cost of monitoring my behaviour against the potential savings. In the context of EI, the cost of applying different premiums based on measured risk would be obscene. For this reason, there is only one rate.
So how does the government address the conflict of moral hazard? One way it does this is by only paying benefits to workers who are laid off. Otherwise there would be a perverse incentive to get yourself fired. It also addresses moral hazard by adjusting benefits based on observed unemployment rates. If the unemployment rate in my region is low, the likelihood of finding another job is high. So instead of letting me milk off the government teat for an extended period of time, the EI system encourages me to get back into the workforce as soon as possible. On the other hand, if I live in a high unemployment region, it is more difficult to find a new job and the government will be compassionate toward me.
Is this fair? Frankly, no. Everyone pays the same premium, but not everyone is eligible for the same benefits. This aspect of EI is part of the social safety net. It's not "fair" that the rich contribute proportionally more to our collective health care costs either. But I don't hear a lot of complaints from the masses on that one.
My point, I guess, is that there is nothing fundamentally wrong with the way EI is currently set up. Eligibility should be based on the respective probability of finding a new job so equalizing qualification standards across the country would be the wrong policy. I cannot speak to whether the requirements are optimally set or not. That's a job for government economists. But the principle is sound. One change I'd like to see considerd is factoring in expected near-term changes in regional unemployment rates. Then the system could better anticipate the needs of an economic downturn.
Another point: EI is an "automatic stabilizer". These policies help cushion the economy from shocks, both positive and negative. Automatic stabilizers should be designed ex ante so as to adjust correctly to various situations. EI, therefore, should not be tinkered with when times are extreme. If there is a serious problem with it, the fault lies with the original policymakers (the Liberal Party) and not the current government.
On a final note, some commentators (example here) have supreme confidence in the work ethic of mankind and therefore dismiss arguments based on moral hazard. This is foolish. Man is obsessed first with his own survival. When this is assured, his concern turns to how he can reap maximum benefits without exercising more than the minimum effort. In short, when self-preservation is not in question, man is a lazy animal. Don't not be deceived: moral hazard is at play everywhere.
So who is in the right? Should the government make it easier to qualify for EI benefits, as the Liberals and New Democrats want? Or are current eligibility rules sufficient, as the Conservatives claim?
I'm inclined to side with the government on this one. Remember that EI is an insurance program. It is not a social program in the same way that medicare or public education are. The latter programs are available to all regardless of personal circumstances. EI is designed for workers, and its benefits are limited to specific situations.
Like any insurance policy, EI comes with a premium. This is paid by workers and their employers each pay period. Earnings are insured up to a maximum level ($42,300 in 2009) and a rate is applied (1.73% in 2009) until the maximum annual contribution is reached.
Most undergrad economics students will encounter the concept of moral hazard sometime in their studies. Simply put, moral hazard is the adverse impact that insurance can have on the insuree's behaviour. If I can be protected from a the consequences of a risky activity, then my disincentive to engage in that risky activity is lowered. For example, suppose that there are two home security systems to choose from. Suppose also that the more expensive one is the optimal choice. But if I have homeowner's insurance, I might be inclined to purchase the cheaper one.
Insurance companies deal with this type of situation all the time. In the above scenario, the company might charge me a different premium based on the type of security I have at my house. If the premium is set correctly, I will purchase the optimal system.
Of course, there are costs to this type of supervision. The insurance company must weigh the cost of monitoring my behaviour against the potential savings. In the context of EI, the cost of applying different premiums based on measured risk would be obscene. For this reason, there is only one rate.
So how does the government address the conflict of moral hazard? One way it does this is by only paying benefits to workers who are laid off. Otherwise there would be a perverse incentive to get yourself fired. It also addresses moral hazard by adjusting benefits based on observed unemployment rates. If the unemployment rate in my region is low, the likelihood of finding another job is high. So instead of letting me milk off the government teat for an extended period of time, the EI system encourages me to get back into the workforce as soon as possible. On the other hand, if I live in a high unemployment region, it is more difficult to find a new job and the government will be compassionate toward me.
Is this fair? Frankly, no. Everyone pays the same premium, but not everyone is eligible for the same benefits. This aspect of EI is part of the social safety net. It's not "fair" that the rich contribute proportionally more to our collective health care costs either. But I don't hear a lot of complaints from the masses on that one.
My point, I guess, is that there is nothing fundamentally wrong with the way EI is currently set up. Eligibility should be based on the respective probability of finding a new job so equalizing qualification standards across the country would be the wrong policy. I cannot speak to whether the requirements are optimally set or not. That's a job for government economists. But the principle is sound. One change I'd like to see considerd is factoring in expected near-term changes in regional unemployment rates. Then the system could better anticipate the needs of an economic downturn.
Another point: EI is an "automatic stabilizer". These policies help cushion the economy from shocks, both positive and negative. Automatic stabilizers should be designed ex ante so as to adjust correctly to various situations. EI, therefore, should not be tinkered with when times are extreme. If there is a serious problem with it, the fault lies with the original policymakers (the Liberal Party) and not the current government.
On a final note, some commentators (example here) have supreme confidence in the work ethic of mankind and therefore dismiss arguments based on moral hazard. This is foolish. Man is obsessed first with his own survival. When this is assured, his concern turns to how he can reap maximum benefits without exercising more than the minimum effort. In short, when self-preservation is not in question, man is a lazy animal. Don't not be deceived: moral hazard is at play everywhere.
Friday, May 15, 2009
Assorted links
Seal hunt: Maybe I'm amazed by the way you hate our seal whacking.
Suds Still Strong: It's nice to know that some industries are doing alright.
Gladwell-Simmons II: Ultimate rematch: The concept of inliers is fun and speak to the truth about the importance of timing is in the world of sports. I sometimes wonder if Roger Bannister would have broken 4 minutes if he didn't have such a great rival in John Landy.
Tintin Gay Rumours: Can't say I ever picked up on this while reading Tintin as a kid, but then again the racist overtones of some of the stories also eluded me.
Suds Still Strong: It's nice to know that some industries are doing alright.
Gladwell-Simmons II: Ultimate rematch: The concept of inliers is fun and speak to the truth about the importance of timing is in the world of sports. I sometimes wonder if Roger Bannister would have broken 4 minutes if he didn't have such a great rival in John Landy.
Tintin Gay Rumours: Can't say I ever picked up on this while reading Tintin as a kid, but then again the racist overtones of some of the stories also eluded me.
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