Bernanke the Rawlsian

from Paul Krugman's blog

June 3, 2013

Ben Bernanke Endorses A 73 Percent Tax Rate

OK, he didn't actually say that in so many words. But if you follow
through on the logic of his excellent speech at Princeton yesterday,
that's where you end up.

Actually, there were several things Bernanke said that were politically
controversial. When he declared that

physical beauty is evolution's way of assuring us that the other person
doesn't have too many intestinal parasites

he was endorsing the theory of evolution — which puts him at odds with a
large majority of Republicans, 58 percent of whom believe that man was
created in his present form within the last 10,000 years.

But the big thing in Bernanke's remarks was his discussion of the
obligations of the successful, even within a supposedly meritocratic
society:

We have been taught that meritocratic institutions and societies are fair.
Putting aside the reality that no system, including our own, is really
entirely meritocratic, meritocracies may be fairer and more efficient than
some alternatives. But fair in an absolute sense? Think about it. A
meritocracy is a system in which the people who are the luckiest in their
health and genetic endowment; luckiest in terms of family support,
encouragement, and, probably, income; luckiest in their educational and
career opportunities; and luckiest in so many other ways difficult to
enumerate–these are the folks who reap the largest rewards. The only way
for even a putative meritocracy to hope to pass ethical muster, to be
considered fair, is if those who are the luckiest in all of those respects
also have the greatest responsibility to work hard, to contribute to the
betterment of the world, and to share their luck with others.

OK, this is, whether BB realizes it or not (he probably does) basically a
Rawlsian view of the world, in which you think of life as a kind of
lottery in which you draw a ticket that includes things like your genetic
endowment as well as the wealth of your parents. And what you're supposed
to do, ethically, is support the economic and social system you would
choose if you had to enter that lottery not knowing what ticket you were
going to draw — if you were making political choices behind the "veil of
ignorance".

As soon as you portray the choice that way, you've introduced a strong
presumption in favor of redistribution. After all, if you should happen to
end up as a member of the top 1 percent, an extra dollar at the margin
won't mean a lot to you; but if you should happen to end up as a member
of, say, the bottom quintile, an extra dollar could make a lot of
difference. So you should, other things equal, favor a system of
progressive taxation and generous aid to the poor and unlucky.

So why not favor complete leveling, America as Cuba? Because for many
reasons, both economic and political, we favor a market economy in which
people make decentralized decisions about working, saving, and so on. And
this means that incentive effects become important; you can't levy 100
percent taxation on the rich, or completely insulate the poor from any
consequences of low income, without destroying the incentives you need to
make the economy work.

The question then becomes one of numbers. In particular, how high should
we set the top tax rate? From a Rawlsian perspective, the key thing about
very high incomes is that making them a bit higher or lower basically
doesn't matter — if you are lucky enough to find yourself in the top 0.1
percent (say), the marginal value of a dollar to your welfare is trivial
compared with the value of that dollar to almost anyone else. So the top
tax rate should be set solely with regard to the amount of money it raises
for other purposes; essentially, you should soak the rich up to the point
where any further rise in the tax rate would actually reduce revenue.

And we have a pretty good idea, based on careful statistical studies, of
where that optimal top rate lies; 73 percent, say Diamond and Saez, maybe
80 percent, say Romer and Romer.

Does this sound wildly radical to you? Well, it's just where the logic and
evidence take you once you adopt a more or less Rawlsian view of social
justice — which is exactly what Ben Bernanke did at Princeton.

Some people have suggested that BB's speech had a touch of radicalism to
it. Little did they know!