Economics and Redistributive Justice

8/14/2019 Economics and Redistributive Justice

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Economics and

Redistributive JusticeMichael Kratsios

Lecture 2

03.15.10


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Officer Hours & Lecture

Wednesdays, 7:30-8:30pm226 Weilum Building

Available almost any other time as well

Todays discussion is derived from Mankiws Spreadingthe Wealth Around

Available at:
http://www.economics.harvard.edu/faculty/mankiw/files/Spreading%20the%20Wealth%20Around.pdfhttp://www.economics.harvard.edu/faculty/mankiw/files/Spreading%20the%20Wealth%20Around.pdfhttp://www.economics.harvard.edu/faculty/mankiw/files/Spreading%20the%20Wealth%20Around.pdfhttp://www.economics.harvard.edu/faculty/mankiw/files/Spreading%20the%20Wealth%20Around.pdfhttp://www.economics.harvard.edu/faculty/mankiw/files/Spreading%20the%20Wealth%20Around.pdfhttp://www.economics.harvard.edu/faculty/mankiw/files/Spreading%20the%20Wealth%20Around.pdf


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Barack Obama

It's not that I want topunish your success. Ijust want to make sure

that everybody who isbehind you, thatthey've got a chance atsuccess, too. I think

when you spread thewealth around, itsgood for everybody.


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Growth in Real Mean Family Income byIncome Quintile

Source: Goldin and Katz (2007)


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Share of Income going to the top 1%

Source: Piketty and Saez


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Share of Income going to the top 0.01%

Source: Piketty and Saez


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Why?

Goldin and Katz:The Race Between

Education and

Technology


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Federal Taxes as a Percentage of Income

Source: Congressional Budget Office, 2004 data

Average Pre-TaxIncome

Effective FederalTax Rate

1st Quintile $15,400 4.5%

2nd Quintile 36,300 10.0

3rd Quintile 56,200 13.9

4th Quintile 81,700 17.2

5th Quintile 207,200 25.1

Top 1% 1,259,700 31.1


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Role of Economists

We economists can try to estimate the cost ofredistributionthat is, the negative impact on efficiency

that comes with attempts to achieve more equality. Butin the end, picking the best point on the tradeoffbetween efficiency and equality comes from policypreferences about which we, as economists, must be

agnostic...The academic literature on optimal taxation,however, takes a different track.

~Mankiw (2010)


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Activity: Utilitarianism

Each table is one group

Read the following

scenario

In your groups discusshow you would respond

I will select a few groups topresent their conclusion tothe class


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Scenario

Facts:There is a nuclear bomb hidden in a major US city.

It will explode in 2 hours.

You have a man in custody who planted the bomb and

knows the bombs exact location.Only if you torture the man will he reveal the location of the

bomb, and you will be able to defuse it, thus saving millions

or lives. No other interrogation technique will work.

There is not enough time or information to find the bombwithout the mans information.

Do you torture the man?


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Follow upWhat does an act utilitarian believe?

What would an act utilitarian do?

What does this have to do with wealth redistribution?

How would a utilitarian redistribute wealth?

Do you see a parallel with individual decision making?

Individuals maximize their own utility

Society should chose a tax-and-transfer policy tomaximize the of utility over all individuals

What role does marginal utility play?


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How does a utilitarian economist

calculate the optimal tax rate?How quickly doesmarginal utility fall as

income rises?How much do peoplerespond to thedisincentive effects of

redistributive tax policy?

Laffer Curve


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Objections to Utilitarianism

A Presidential candidate proposes a one-third tax on the averageAmericans income with tax proceeds being transferred to poornations around the world.

Very few would support thisDoesnt the US already impose a one-third tax on its richestcitizens because they have lower marginal utility?

The average American is vastly richer than the average citizen of

the world and should, therefore, have lower marginal utility.Can you think of another objection to utilitarianism?Hint: What is the utilitarian calculation?


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ConclusionUtilitarianism leads to policy conclusions about which many peopleare uncomfortable (torturing people, redistributing money abroad).

Mankiws solution: People should get what they deserve

People are rarely outraged when high incomes go to those who

earned them (JK Rowling, Lebron James)Allows for Pigovian taxes, progressive tax rates, and transfers tothe poor

A Utilitarian asks how quickly marginal utility falls as income risesand how much people respond to the disincentive effects of

redistributive tax policy.

A Just Deserts Theorist begins by asking whether peoplescompensation reflects the contributions they make to society andhow much they benefit from government actions.


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QuestionsUtilitarianism, Ethics, Wealth Redistribution,anything...

Documents

Economics and Redistributive Justice