Gary Saul Morson & Morton Schapiro: The Humanomics of Tax Reform

CentsThe Trump administration is now placing tax reform near the top of its legislative agenda. Perhaps they will garner the votes for tax reduction, but reform? Good luck.

It has been three decades since there has been meaningful tax reform in this country. In 1986, tax shelters were eliminated, the number of tax brackets went from 15 to 4, including a reduction of the highest marginal tax rate from 50% to 38.5% and the standard deduction was increased, simplifying tax preparation and resulting in zero tax liability for millions of low-income families. At the same time, a large-scale expansion of the alternative minimum tax affected substantial numbers of the more affluent.

President Reagan insisted that the overall effect be neutral with regard to tax revenues. That demand made it possible to set aside the issue of whether government should be larger or smaller and instead focus on inefficiencies or inequities in how taxes were assessed. Two powerful Democrats, Dick Gephardt in the House and Bill Bradley in the Senate, were co-sponsors.

Economists might evaluate the merits of this monumental piece of legislation in terms of the incentives and disincentives it created, its ultimate impact on labor force participation, capital investment and the like, but there is another metric to be evaluated – was it perceived to be fair? Accounts from that day imply that it was.

The notion of fairness is not generally in the wheelhouse of economics. But the humanities have much to say on that matter.

To begin with, literature teaches that fairness is one of those concepts that seem simple so long as one does not transcend one’s own habitual way of looking at things. As soon as one learns to see issues from other points of view, different conceptions of fairness become visible and simple questions become more complex. Great novels work by immersing the reader in one character’s perspective after another, so we learn to experience how different people – people as reasonable and decent as we ourselves are – might honestly come to see questions of fairness differently.

So, the first thing that literature would suggest is that, apart from the specific provisions of the 1986 tax reform, the fact that it was genuinely bipartisan was part of what made it fair. Bipartisanship meant the reform was not one side forcing its will on the other. Had the same reform been passed by one party, it would not have seemed so fair. Part of fairness is the perception of fairness, which suggests that the process, not just the result, was fair.

Fairness, of course, also pertains to the content of the reforms. What are the obligations of the rich to support needy families? Are there responsibilities of the poor to participate however they can in providing for their own transformation?

In Tolstoy’s novel Anna Karenina, two main characters, Levin and Stiva, go hunting with the young fop, Vasenka, and as they encounter hard-working peasants, they start discussing the justice of economic inequality. Only foolish Vasenka can discuss the question disinterestedly, because it is, believe it or not, entirely new to him: “`Yes, why is it we spend our time riding, drinking, shooting doing nothing, while they are forever at work?’ said Vasenka, obviously for the first time in his life reflecting on the question, and consequently considering it with perfect sincerity.” Can it really be that an educated person has reached adulthood with this question never having occurred to him at all?

And yet, isn’t that the position economists find themselves in when they ignore fairness? When they treat tax reform, or any other issue, entirely in economic terms? Levin recognizes that there is something unfair about his wealth, but also recognizes that there is no obvious solution: it would do the peasants no good if he were to just give away his property. Should he make things more equal by making everyone worse off? On the contrary, his ability to make farmland more productive benefits the peasants, too. So, what, he asks, should be done?

Levin also knows that inequality is not only economic. If one experiences oneself as a lesser person because of social status, as many of the peasants do, that is itself a form of inequality entirely apart from wealth. In our society, we refer to participants in government as “taxpayers.” Does that then mean that to exempt large numbers of people from any taxation entirely demeans them – not least of all, in their own eyes?  There may be no effective economic difference between a very small tax and none at all, but it may make a tremendous psychological difference. Isn’t the failure to take the psychological effect of tax rates seriously as disturbingly innocent as Vasenka’s question about inequality?

Combining a humanistic and an economic approach might not give us specific answers, but it does make questions of fairness, including symbolic effects, part of the question. And in a democracy, where popular acceptance of the rules as legitimate is crucial, that would be a step forward.

Gary Saul Morson is the Lawrence B. Dumas Professor of the Arts and Humanities and professor of Slavic languages and literatures at Northwestern University. His many books include Narrative and Freedom, “Anna Karenina” in Our Time, and The Words of Others: From Quotations to Culture. Morton Schapiro is the president of Northwestern University and a professor of economics. His many books include The Student Aid Game. Morson and Schapiro are also the editors of The Fabulous Future?: America and the World in 2040 and the authors of Cents and Sensibility: What Economics Can Learn from the Humanities.