Stop Arguing About Tax Fairness — You’re Not Convincing Anyone

What shapes a person’s view of tax policy? Sophisticated arguments about the relative efficiency of complex proposals? Not so much. How about views of government, including the way politicians spend money after they finish collecting it? Getting closer. How about fairness, including notions of distributional equity?

Bingo.

That’s one of the central conclusions in a paper released last month by Harvard economist Stefanie Stantcheva. Published by the National Bureau of Economic Research, the paper seeks to establish what people know and how they feel about two high-profile components of the federal tax system: individual income taxes and the estate tax. The broader goal is to lay bare the “mental models” that people use to make sense of tax policies, Stantcheva writes.

“Do people focus more on policies’ distributional implications or rather on their efficiency costs?” Stantcheva asks. “What fairness criteria do they employ? How do the answers to these questions differ by the socioeconomic and political characteristics of respondents?”

Using a combination of survey data and experimental techniques, Stantcheva identifies fascinating patterns in the way Americans evaluate tax policy. And at least one of her findings seems sure to frustrate tax experts, who have a penchant for trying to convince others about the best, most efficient, and fairest way to organize the nation’s revenue system: When it comes to shaping opinions about taxation, concepts of fairness are pivotal — and concepts of fairness are hard to change.

Why Bother?

Why bother to invest so much time in trying to understand how people think about taxes? Stantcheva offers a few good reasons. First, knowing how people make up their minds can shed light on how they sometimes come to change their minds. That’s useful, especially if people are misinformed to begin with. Moreover, a close look at mental models can “disentangle” perceptions (and misperceptions) of economic facts from value judgments and fairness concerns. Teasing apart those factors is important because while the public understanding of facts can be changed through the delivery of relevant information, opinions about fairness are less malleable, Stantcheva contends. “Fairness considerations may be more immutable and may need to (and perhaps even should) be taken as given and respected by policy makers,” she writes.

I’ll return to that quasi-abdication of moral responsibility in a bit. For the time being, however, I think Stantcheva is on to something important: Changing hearts and minds is hard, and doing it successfully requires more than simply providing new information to misinformed voters.

In her survey, Stantcheva uncovers some interesting patterns, including moments of both broad consensus and deep division. For instance, she finds that most people believe the rich are exquisitely sensitive to high taxes. “I find that respondents tend to think that high-income earners are more responsive to income taxes than middle class households and that the main channels of response are increased tax evasion, higher likelihood of moving to a different state, and being less entrepreneurial,” she writes.

Underneath that consensus, however, lurks a significant divide; participants in Stantcheva’s surveys were not of one mind on this subject — or most others, either. Views differed depending on partisan self-identification. “Republicans believe that taxes drive larger distortions in behavior, particularly with regard to reduced entrepreneurship and labor supply, whereas Democrats tend toward the opinion that income tax changes will not have as substantial of an effect,” she writes.

More specifically, Stantcheva found that Republicans believed the behavioral response to taxes to be 30 to 50 percent stronger than Democrats, both for high- and middle-income taxpayers (both Republicans and Democrats believe that middle-income taxpayers are generally less responsive to taxes than their wealthier compatriots).

This partisan division about the behavioral response to taxation should come as no surprise: It mirrors the division we see in elite political discourse every day. I think it’s fair to say that elite conservatives in politics and the media consistently overestimate the behavioral response to taxes, while liberals consistently underestimate it.

Like every modern political debate, the argument over the behavioral response to taxes features a lot of commentary from both ends of the spectrum and not much from the middle. Apparently, voters have internalized that polarization when it comes to their own assessments of tax policy.

‘Republicans believe that taxes drive larger distortions in behavior, particularly with regard to reduced entrepreneurship and labor supply, whereas Democrats tend toward the opinion that income tax changes will not have as substantial of an effect,’ Statncheva writes.

Stantcheva finds that partisan divisions are less evident around the estate tax because pretty much everyone seems to believe that rich people are highly sensitive to the tax. “People tend to believe that higher estate taxes drive increased tax evasion and moving across state lines, with less common perceived responses being saving less, being less entrepreneurial, and having one’s spouse stop working to decrease overall income,” she writes.

Partisan effects are very obvious, however, when people are asked about the effect of taxation on the economy as a whole, rather than on individual behavior. Asked about the effect of specific policies on the nation’s overall welfare, respondents hew close to party orthodoxy. “Issues such as whether income and estate tax cuts induce trickle-down effects that benefit everyone or whether they carry Laffer effects (i.e., increase tax revenues on balance) tend to vary a lot across distinct party lines,” Stantcheva reports.

Fairness Chasm

Stantcheva found the deepest partisan divides when asking about issues of fairness, including equity concerns surrounding the distribution of wealth and the transmission of wealth between generations. Views on fairness, moreover, were the most important factor in shaping opinions about particular tax policies. “It is mostly fairness considerations, rather than simply the perceived distributional impacts of taxes, that show the largest variation and that most strongly predict views on policies,” Stantcheva writes.

In her survey data, for instance, Stantcheva found that 70 percent of respondents endorsed money and wealth in the United States being more evenly distributed; almost half of all respondents said income inequality is a serious problem. Sounds like a consensus.

But the partisan divide was large. Ninety-two percent of Democrats indicated that wealth should be more evenly distributed while only 42 percent of Republicans agreed; 69 percent of Democrats considered inequality to be a serious or very serious problem while just 25 percent of Republicans described it in those terms.

Those divisions are discouraging but hardly surprising. I have no historical survey data available to support the assertion, but I’d be willing to bet that similar divisions would be evident going back for decades and probably a lot further back than that. Partisan divisions over distributional equity are foundational for the modern two-party system; they date at least to the end of the progressive era. (Reach back before the 1920s and the parties become a lot less internally coherent, thanks particularly to the rise of progressive Republicans in the waning years of the 19th century.)

Generally speaking, Stantcheva finds ideas about fairness to be stubborn things, resistant to change. And she voices a certain reluctance to even try. “Fairness concerns are arguably not for economists to influence and shape,” she writes. “But as the key determinants of policy support, they are definitely for economists to study.”

For what it’s worth, I think Stantcheva is selling economists short. Modern economists tend to be shy when asked to venture deep into fairness debates. Years ago, one of Washington’s most eminent tax economists explained the hesitance to me in characteristic terms; the discipline lacks a comparative advantage in fairness debates, having ceded the field to philosophers (and other deep thinkers) decades ago, he said.

That’s a good description of the discipline’s recent history, but a disappointing prospect for its future. It’s also a sad rejection of its more distant past, when economists took the lead in debating issues of fairness and equity in all their nonquantifiable mushiness. The modern income tax still bears the marks of those “ancient” economic debates.

Although I suppose that’s not necessarily a ringing endorsement.