Greg Mankiw and Matthew Weinzierl have a paper on the "Optimal Taxation of Height: A Case Study of Utilitarian Income Redistribution" (July 2007). As noted in their introduction, the paper may be just a "quirky contribution aimed to clarify the literature on optimal income taxation" or a "challenge to that literature." It raises questions about Vickrey and Mirrlees' Noble-prize-winning public finance work on optimal taxation.
The authors note that under Edgeworth's initial insight, the ultimate objective of a utilitarian social planner with full information would be full egalitarianism--equalization of marginal utility even in after tax incomes. He who could produce more would be taxed more, he who produced less would be subsidized. Vickrey (1945) and Mirrlees (1971) developed the notion of optimal income taxation: productivity cannot be observed, whereas income can, though the use of income to achieve redistribution requires somewhat less strong redistribution else it might blunt any incentives to be productive.
Akerlof (1978) and others added the observation that various items may correlate with productivity, or with the ability to identify the people who society thinks it should be supporting through redistribution--health expenditures, mortgage loan payments, number of children. These "tags" can be used to target the redistribution within the system, even though it is not completely redistributive.
Mankiw and Weinzierl note that under this optimal tax theory, any variable closely correlated with income may provide a useful "tag." Height is strongly correlated with income: a person who is 72" tall earns about $5525 more annually than a person who is 65" tall; 1" more in height for an adult white male correlates with a 1.8% increase in earnings. Various explanations have been provided. Persico, Postlewaite & Silverman (2005) suggest that adolescent height is related to the development of self-esteem, which is rewarded in the labor market, whereas Case and Paxsopn suggest that height correlates with cognitive ability, which is rewarded. Whatever the relationship, the correlation of height and income is strong.
Yet our instincts tend to shy away from taxing taller people at higher rates than shorter people. It seems to poorly match our fairness intuitions, yet it follows inexorably, according to the authors, from the dominant approach to optimal income taxation. So perhaps the dominant approach to optimal income taxation is lacking as an appropriate theory of taxation. The authors suggest three problems: (i) political constraints (picking this demographic factor could lead to taxation based on gender, color, attractiveness), but we consider marital status, parenthood, and income already; (ii) costs of stigmatization might mean that a subsidy to short people could stigmatize them (but we have many subsidies in the system that do not seem to stigmatize); and (iii) the basic notion of utilitarianism may simply be the wrong philosophical framework for thiking about taxation, as compared to an individual rights-based approach (libertarianism) or a horizontal-equity based approach. In spite of economic analyses that disparage horizontal equity, it still seems to stand as a "worthy goal" (Auerbach 1999) of the tax system.
This was an interesting, brief, and thought-provoking article worth the read. I'll plan to report on more articles each Thursday as a new segment of this blog.