Saturday, January 10, 2009

Fair Fines and Flatulence Taxes for the Half-Glass Empty Class

"I guess it depends if you're a half-glass empty guy or a half-glass full guy."—George W. Bush
Ever get a parking ticket when you were a half-glass empty guy? Or maybe you were a full-glass full guy, in Bernie Madoff's old neighborhood, and you've had some million dollar months? A $100 equals a tenth of a grand a month, one ten-thousandth of a million. If you make $50,000 a year (a little above the median), that ticket is 0.024% of your monthly income. If you make $12 million per year, it's 0.0001%, approximately 240 times less than the median American's unhappiness over the same violation.

A flat tax would be more fair than a flat fine. At least with flat income taxes, we'd all be paying the same percentage of our income.

Dwindling tax revenues force governments to look for ways to balance their budgets. Draconian nose amputations are showing up in emergency rooms all over America. More are on their way. Regressive taxes are just worsening the pain on the lowest earners.

From parking tickets to OSHA fines, governments charge a flat price. If the idea of these fines is to discourage a certain behavior, why isn't the discouragement equal and just? We all know that many corporations find it easier, and cheaper, to simply pay the piddly, bothersome fine rather than correct the infraction. Why should Halliburton and Harry's Hardware pay exactly the same amount for the same safety infraction? To inflict the same pain, a fair pain, we should index the fine to the company's or individual's income.

In Finland, fines for motor vehicle violations were indexed to the state's latest income data, resulting in a record speeding ticket of $103,600 for Nokia director Anssi Vanjoki (who was doing 75 km/hr in a 50 zone on his Harley). I don't advocate making the rich pay more for everything (providing your tax return with every purchase would be a bit ridiculous). But I do think that every government official in America should think twice before increasing any regressive tax during a depression recession.

This goes for fines, fees, gas taxes, sin taxes, sales taxes, carbon taxes, and flatulence taxes (a proposed flat tax levied on each dairy cow). All of these taxes discourage some behavior: driving, smoking, drinking, speeding, parking wrong, providing an unsafe workplace, polluting, lying to the SEC, or greenhouse gases (like cow farts). One argument against these taxes is the rule of diminishing returns, that you are taxing away the bad behavior, leading to less and less revenue. I'm more concerned with making the unhappiness equal. While it's true that a rich person is paying more total alcohol tax than me (because he buys better booze), it is not the same pain to his income. The percentage tax on his bottle was exactly the same as mine. Same with sales tax. Sure, he buys a more expensive car, pays more total tax, but he pays a lower effective tax rate than me. Since most Americans agree with the progressive income tax, why are so many politicians raising the regressive taxes right now, taking an even larger percentage of income out of the hands of those who can least afford it?

Sales taxes are especially good at spreading unhappiness during a recession, as they increase the money paid by those who can least afford it, while also causing a decrease in spending, leading to further job losses, and even more pain for those below them. Meanwhile, those at the top keep trying to find new and better ways to squeeze more out of those at the bottom. The incentives to cheat, lie, and steal increase exponentially as profits dry up. Think the fight or flight reflex is strong when you're facing profound losses? Try having your electricity shut off, getting evicted, or watching a loved one die because you can't afford medical care.

When prosecutors tried to put Madoff in jail for sending packages of valuables to family members (a violation of his bail), his defense was that they weren't really that expensive, just some cuff links and $200 mittens. $200 mittens? The fact that $200 mittens even exist is proof to me that money can buy happiness.

While many of my friends, most of whom are decidedly middle class, argue with me on this point, it is obvious to astute philosophers and economists that money can indeed buy happiness. In this Justin Wolfers post at the Freakonomics blog, he talks about the assumption that money can't buy happiness.
Arguably the most important finding from the emerging economics of happiness has been the Easterlin Paradox.

What is this paradox? It is the juxtaposition of three observations:

1) Within a society, rich people tend to be much happier than poor people.
2) But, rich societies tend not to be happier than poor societies (or not by much).
3) As countries get richer, they do not get happier.

Easterlin offered an appealing resolution to his paradox, arguing that only relative income matters to happiness. Other explanations suggest a “hedonic treadmill,” in which we must keep consuming more just to stay at the same level of happiness.

This definition of the relation between money and happiness seemed to catch on, as it made the optimists (most of whom, as George Bush Freudianly noted, have a only a half-glass to begin with) happier.

The evidence points to the opposite. Not only do we need at least the bare necessities to keep us from despair, but the more money we have, the happier we are. Wolfers again:
There is no Easterlin Paradox.

The facts about income and happiness turn out to be much simpler than first realized:

1) Rich people are happier than poor people.
2) Richer countries are happier than poorer countries.
3) As countries get richer, they tend to get happier.

Moreover, each of these facts seems to suggest a roughly similar relationship between income and happiness.

Not only can money buy happiness, but more money can buy more happiness. Why? Because we are animals. We react to pain with unhappiness and the lack of pain with the lack of unhappiness. As we evolved into the kind of animals that can split atoms and create credit default swaps, we discovered that some of us could go beyond the lack of unhappiness, and actually get giddy when we had money pouring in.

We have even cut out the middle man. Now it seems, money doesn't even have to purchase anything. The money itself causes happiness, almost exactly like what cocaine does to our brains. In a guest post at the Freakonomics Blog, Andrew W. Lo, the Harris & Harris Group Professor at M.I.T. and director of its Laboratory for Financial Engineering, writes in Fear, Greed, and Crisis Management: A Neuroscientific Perspective:
The alleged fraud perpetrated by Bernard Madoff is a timely and powerful microcosm of the current economic crisis, and it underscores the origin of all financial bubbles and busts: fear and greed.

Using techniques such as magnetic resonance imaging, neuroscientists have documented the fact that monetary gain stimulates the same reward circuitry as cocaine — in both cases, dopamine is released into the nucleus accumbens. Similarly, the threat of financial loss activates the same fight-or-flight circuitry as physical attacks, releasing adrenaline and cortisol into the bloodstream, which results in elevated heart rate, blood pressure, and alertness.

These reactions are hardwired into human physiology, and while some of us are able to overcome our biology through education, experience, or genetic good luck, the vast majority of the human population is driven by these “animal spirits” that John Maynard Keynes identified over 70 years ago.

Lo goes onto to suggest that Obama host a “crisis summit”: which all the major stakeholders involved in this crisis, and their most knowledgeable subordinates, are invited to an undisclosed location for an intensive week-long conference.

During this meeting, detailed information about exposures to “toxic assets,” concentrations of risky counterparty relationships, and other systemic weaknesses will be provided on a confidential basis to regulators and policymakers, and various courses of action can be proposed and debated in real time.

At the end of this meeting, he suggests the government release the redacted minutes so we can all see just how much unhappiness these geniuses have wrought. While they're at it, perhaps they can discuss what kind of punishments could be doled out, who should be investigated for Ponzi schemes and other frauds, and how we should index their fines to their income from the last 5 years. It will be hard to get the worst offenders to fess up, of course, unless we offer them immunity. If we threatened to index the fines for such behavior to their income, they would lawyer up faster than they can offshore your job.

One thing we can certainly do for these happy people in the future is discourage them from creating unhappiness by choosing to pay a relatively cheap fine instead of following the law. While these higher fines will equalize pain as they move up the income brackets, the total amount of happiness in the world, to the delight of lower income utilitarians everywhere, would probably increase, as it almost always does when justice is served.

In a down-side up economic world where medical care, food, and energy costs are not counted in inflation calculations, where dental care is somehow separate from medical, and where work is taxed at a higher rate than capital gains, it would help to understand just how well the rich have been doing. The people at the top, or in George Bush's world, the full-glass full people (aka his "base”), have been doing quite well lately.

If you can stand window shopping, try gazing through the glass at the Cost of Living Extremely Well Index, or CLEWI, as measured by Forbes Magazine. In Peter Bernstein's book, All the Money in the World: How the Forbes 400 Make—and Spend—Their Fortunes, you can study this handy data visualization (PDF, without pictures of super cool expensive stuff), which shows that since 1982 the consumer price index (CPI) has doubled, while the CLEWI has nearly quadrupled. Before you decrease your happiness worrying about the ultra rich on the Forbes 400, keep in mind that their income has risen by a factor of 10 in the same time.

Back in the half-glass world, in 1982, the median household income was $36,811. In 2003, it was $43,318, for an increase of $6,507, or 17.6%. The full-glass people, defined in this particular case as the Forbes 400, saw their income rise by 1000%.

Income inequality has risen even more sharply during the Bush years, with the happiness getting spread all over the upper income brackets like Chinese lead from Dick Cheney's bird shot. As reported by David Cay Johnston in the New York times in March of 2007 (which also includes handy data visualizations):
Income inequality grew significantly in 2005, with the top 1 percent of Americans — those with incomes that year of more than $348,000 — receiving their largest share of national income since 1928...

The top 10 percent, roughly those earning more than $100,000, also reached a level of income share not seen since before the Depression. [...]

The new data also shows that the top 300,000 Americans collectively enjoyed almost as much income as the bottom 150 million Americans. Per person, the top group received 440 times as much as the average person in the bottom half earned, nearly doubling the gap from 1980.

Prof. Emmanuel Saez, the University of California, Berkeley, economist who analyzed the Internal Revenue Service data with Prof. Thomas Piketty of the Paris School of Economics, said such growing disparities were significant in terms of social and political stability.

Le duh! Meanwhile, we half-glassers panic over the mere sight of flashing lights behind us, in dread of a ticket that would mean skipping that trip to the dentist, or not getting that prescription next month, while the guy in the Mercedes (who blew our doors off) might get a ticket for an amount he probably has laying around on his teak dresser.

Social and political stability depend on an innate sense of fairness which has evolved for millions of years. Researchers at the Yerkes National Primate Research Center of Emory University have shown that "nonhuman primates respond negatively to unequal reward distribution." ScienceDaily (Sep. 19, 2003):
These new findings, coupled with previous scientific data that demonstrate a direct link between nonhuman primate behavior and that of humans, support a new school of thought that economic decision-making is based as much on an emotional sense of fairness as on rational considerations. [...]

In this study, researchers made food-related exchanges with brown capuchin monkeys. The subjects refused previously acceptable rewards (cucumbers) if they witnessed their partners receiving higher-value rewards (grapes) for equal or less work.

No primate wants to see another be rewarded grapes for the same work for which he got cucumbers. While the primate research didn't study regressive punishment per se, I would wager that no primate likes paying grapes for the same infraction for which another pays cucumbers. Some conservatives, though, including some who measure their happiness by the price of their mittens, will likely rail that I am preaching class warfare and socialism: a brainless, straw-stuffed distraction of an argument. To keep that argument from going up in flames, those conservatives would have to argue that there is no innate sense of fairness because we didn't evolve. In that case, we can end with a Lisa Simpson quote: “Mom. They are teaching us Creationism in school. We had a test today, and every answer was ‘God did it’.”

For the sake of arguing with even those conservatives a bit further, let's assume God gave us our sense of fairness. Jesus H. Christ himself had something to say about justice, and paying your fair share. Buddha was all over the subject. Does it matter where our sense of justice came from? We experience unhappiness when we discover unfairness. It is why we evolved from improved upon Hammurabi's code, the Magna Carta, and our constitution. Social and political stability are built on a cornerstone of fairness. Undermining this cornerstone has cracked the whole structure. We need to patch those cracks before they lead to collapse.

Patching those cracks will be similar to recovering from a crack addiction. We must undergo a financial abuse recovery program. We must make investments that will pay off later, like in green infrastructure, and education. We must correct imbalances that have led to capitalism driven by marketing to create needs, rather than ingenuity to fill needs. This transformation will be expensive, and someone will have to pay. Should we unfairly burden the least able of our children and grandchildren?

As we kick the financial equivalent of addiction, we'll have our group therapy. We'll attend conferences, hold summits, and sit in on seminars. For the sake of a more fair system on which to base our recovery, we should explore the idea of making taxes, fines, and fees more progressive, not more regressive. Indexing fines to income is an especially a good way to increase taxes on only the rich who most deserve it, something with which most primates would agree.

Teddy Roosevelt, the Republican who instigated progressive income taxation, wrote in his autobiography, almost 100 years ago:
Because of things I have done on behalf of justice to the workingman, I have often been called a Socialist. Usually I have not taken the trouble even to notice the epithet. Moreover, I know that many American Socialists are high-minded and honorable citizens, who in reality are merely radical social reformers. They are opposed to the brutalities and industrial injustices which we see everywhere about us.

...many of the men who call themselves Socialists to-day are in reality merely radical social reformers, with whom on many points good citizens can and ought to work in hearty general agreement, and whom in many practical matters of government good citizens well afford to follow.

Perhaps we should read more from the progressive Republicans of our history, of which there were many. Our future happiness, or at least our lack of deep despair, may depend on it.

1 comment:

Mort said...

The incredible disparity between the wealthy and the rest of us began when Regan revised the income tax code and did away with the 90% bracket. The real problem is that people don’t know when they have won the game so they just keep trying to get more. With a 90% tax bracket the motivation for making more and more was largely diminished. What’s the point if the government is going to take most of it? Frankly I’m for a 100% tax bracket. If you make more income in a year than (pick a number) say $500,000, you would have to give all of it in taxes or to not-for-profits.

On happiness you write, “The money itself causes happiness, almost exactly like what cocaine does to our brains.” And quote Lo “…monetary gain stimulates the same reward circuitry as cocaine. I have no experience with cocaine but I think I get the idea. As you know I have written quite a bit on happiness ( The happiness of which I write is quite a different beast than the “happiness” caused by money.