Occasionally we get economists who demand higher tax rates, fighting for justice and fairness (and truth and the American Way, a la Superman). They often also moonlight as political consultants, and assert that we need tax rates so high so as to tax billionaires out of existence. Or, we get business friendly economists, trying to save America from the evils of socialism, often raking in large consulting fees from various corporations, who tell us that the capital gains tax rate should be zero, corporations should face no taxes, and that cutting tax rates will unleash the economy and boost GDP—we will have so many jobs, we will all have to work two or three of them just to use them all up. How can both these breeds of economists supposedly be giving economics-based opinions?
Economics can tell us about the trade-offs in the tax system. Traditionally, we think of these trade-offs in the tax context in terms of efficiency versus equity. Higher tax rates or a more progressive tax system may lead to less economic growth, but also less inequality (depending on what we do with the revenue). Lower tax rates may lead to more growth, but may facilitate a more winner-take all society without funding for as large a social safety net as some may want. Economics can tell us about that trade-off, however, it cannot tell us how to make the trade-off. Economics is largely silent on how to trade off the pros and cons of high tax rates. As such, economists have no professional opinion on what tax system would produce “justice” (or truth, or the American way).
A person who is an economist may well have a view on what constitutes “justice” with regards to our tax system, but it is not a professional opinion solely as an economist. It is an opinion informed by an understanding of economics and the trade-offs, but also informed by the person’s political ideology, religion, cultural values, bedtime stories heard as a child, moral philosophy, etc. Economics alone cannot, and does not, define what justice is.
Consider an analogy: Your vet may well have an opinion on whether you should get your dog neutered, but veterinary science itself does not actually dictate whether you should emasculate Fido. Veterinary science dictates what to snip, and what potential problem the fixing fixes. However, your vet telling you whether you should get your dog fixed combines her knowledge as a vet of what happens to your dog’s ability to reproduce after you geld him, combined with her personal opinion on whether the world needs more puppies. Likewise, the economist who tells you that justice demands we need higher tax rates does so based on their knowledge of the trade-offs of a higher versus lower tax burden, but, also based on their own personal desire for a larger government that provides more services, fewer billionaires, more equality, etc.
That the ideologies of smart economists differ is why we can get different opinions as to whether tax rates should go up, or down.
Here is how Joel Slemrod and his coauthor Len Burman, put it:
“…what is appropriate tax policy also depends on noneconomic values, most importantly what priority to put on reducing economic inequality. For any given set of beliefs about how the economy works, people with more egalitarian values will favor more progressive tax systems. No economic arguments can resolve differences in values. For that we need ethicists, philosophers, theologians, and deep introspection, but not economists.” – Burman and Slemrod, Taxes in America. Page 139.
And, here is how this is taught in Econ 101, from two of the best-selling introductory microeconomics textbooks:
There are many questions related to taxes for which the correct answer is not answered by economics. As the renowned economist Gabriel Zucman well put it, “That’s not something for economists to decide.”
