Roemer paper on Kantian cooperation, part 2: tax policy implications

As the previous post noted, John Roemer has a paper and book asserting that we should think about real world prisoner's dilemmas in light of the possibility that people do not always act like selfish Nashian optimizers, but may instead base their decisions on the Kantian question of what decision would be best if adopted by everyone who is facing a given choice. Hence the classic prisoner in the dilemma may hold out rather than confess and implicate his colleagues, and an individual may choose (say) to recycle on the view that it's better for everyone than no one to do so.

From this starting point, Roemer constructs a model in which universal Kantianism would lead to Pareto-superior outcomes that were better for everyone than the set of such outcomes that would result from selfish Nashian optimization. So neoclassical economics (with selfish optimizers but perfect markets) is not the only route to maximizing efficiency. And, in his model, efficiency and equity aims no longer need be in conflict. For example, in his tax instantiation, there will be no deadweight loss whether the labor income tax rate is 0 percent, 100 percent, or anywhere in between, because will ignore the tax rate in deciding how much labor (yielding such income) to supply.

How does he get there? Let's start with a hypothetical society in which (a la Mirrlees) the government simply levies a labor income tax to fund a demogrant. Suppose initially that everyone has the same (1) "ability" or wage rate, (2) preferences, and indeed (3) labor income. Only, one of these individuals is now considering increasing her labor supply, thus increasing as well her income and her tax liability.

If she's a selfish Nashian optimizer, she'll evaluate the choice in light of the fact that she'll only get to keep the after-tax income. While it will also increase the revenues that are used to fund the demogrant, her share of that, in a large society, is trivial.

But now suppose she's a Kantian. She'll ask herself: How I would be affected if EVERYONE increased labor supply, and thus income, by this amount. The answer, given the society's assumed homogeneity, is that the tax and demogrant would be exactly equal. E.g., suppose that, in a 10-person society with a 100% tax rate, she earns an extra $100, but the other 9 members do so as well. She'll keep zero of the extra earnings after-tax but pre-grant, but her grant will go up by $100 (i.e., one-tenth of the newly generated $1,000).

So she bases her labor supply choice on pre-tax income, reflecting that with the demogrant (at any consistently applied tax rate, but everyone's doing the same thing) the tax and demogrant will be a wash. By contrast, the selfish Nashian optimizer would ask: What if only I increase my income by $100? In this 10-person set-up, I get to keep only $10 from the increased demogrant.

Again, the Kantian's motivation is not that maybe other people will in fact work more, too, if she does. Rather, it is that the moral, cooperative way to think about the question is to ask: What would be best if everyone made the same choice as I do?

Now let's add heterogeneity to the picture. At first, just in wage rate. Suppose she can earn $100 an hour, while all other members of the society, being less "able," can earn only $5 an hour. In John's model this makes no difference, because what she asks herself is: What if everyone worked long enough to earn $100 more? Then I would still break even from the tax plus demogrant, and so pre-tax income is the right metric.

What if we add in heterogeneous tastes? Then two individuals who are both Kantians may make different marginal choices. One deems the disutility of working more to be adequately offset by getting to consume more, as determined based on pretax income. The other likes leisure more and market consumption less, so she decides not to work more. We end up getting a transfer, at the margin, from the first of these individuals to the second. This result, while not rebutting the claim of Pareto superiority from the system, strikes me as a bit perverse, in the sense that we are transferring $$ from one who subjectively values them more at the margin compatred to leisure, to someone who subjectively values them less in this sense. But John isn't claiming that the system yields overall welfare maximization or otherwise defined optimality, and he regards its effectively decentralizing decision-making from any central planning function to all of the individual workers as a virtue.

What if we now change the model so that the government is funding goods and services with its tax revenues, rather than demogrants? This doesn't change things fundamentally, although it's true that Kantians' possibly varying beliefs regarding the benefit derived from government spending might result in differentiating their choices. But it does seem that here "pretax income" becomes a less precise statement of what the Kantian will be evaluating when making a marginal labor supply choice.

This brings us to the question from my post earlier today of exactly what sorts of questions the categorical imperative might be thought to demand that we ask. Again, "cooperate vs. defect" is easy; "how cooperate" less so. But an eminent NYU philosopher once told me that he personally decided on whether, say, to accept a consulting engagement, for which he was being offered $X, based on the pretax amount, not the after-tax amount. This appeared to reflect a Kantian feeling that it was morally wrong to look only at the after-tax amount, given that the tax payment wasn't being lost - it was merely being transferred from his individual pocket to the collective one.

That strikes me as a more salient and intuitive way to think about Kantian labor supply behavior than doing so in terms of "efficiency units in labor supply," in the manner of the Roemer paper. But why might we expect anyone to think about pretax versus after-tax income even in that way? Are people Kantian enough to do that, even assuming that it captures how they would be Kantian?

The paper notes evidence that tax compliance is higher than it "ought" to be given people's actual economic incentives (at low audit levels) and risk preferences as otherwise discerned. And the tax compliance literature extensively shows that "tax morale" - reflecting, for example, perceptions regarding others' compliance behavior, the tax system's "fairness," the overall political system's fairness, and so forth - can have a major impact on compliance behavior, even holding constant the actual "audit lottery" odds (given penalties as well as audit levels).

So the extent to which people act as Kantians by focusing on pretax income, when they make labor supply choices, might likewise reflect considerations analogous to morale in compliance. But I'm not certain that they do, since for me there's a lot of context-specific sociology to the question of how people who have non-zero Kantian inclinations will interpret the demands of a taste for cooperation in practice. There's no reason to think that they (or I) do so in a universal and logically consistent fashion.

But if a degree of Kantianism here is plausible, then one might be able to reduce labor supply elasticity by addressing morale-type considerations about social solidarity, faith and trust in government, and others' willingness to overlook tax planning considerations and focus on pretax income.

One last set of questions potentially raised by the paper goes to fleshing out how a Kantian might think about all the various choices that we face in making tax planning decisions. "Work more and thereby earn more" is only one possible choice. One could also try to apply the reasoning, say, to lawful tax avoidance (ranging from the clearly "intended" to the arguably "unintended" even if efficacious). But for now I will leave them to the reader to ponder, if he or she likes.