IREF - Institute for Research in Economic and Fiscal issues
Fiscal competition and economic freedom
WP2013-01. Executive Summary
This working paper explores the notion of personal responsibility by considering people’s attitude towards redistribution. In particular, the authors run a controlled experiment by offering a representative group of people the possibility of choosing a proportional tax rate on their income. The tax revenues are then redistributed in equal amounts to each member of the population. The results of this experiment gives interesting insights on the way a redistribution system could be thought out.
The circumstances under which individuals choose their desired tax rate vary according to a set of different parameters: (1) the level of income, (2) the presence of good and bad luck affecting income levels, (3) the possibility of increasing one’s income through personal effort (work), (4) other people’s efforts to better their condition (so that they abstain from taking advantage of the subsidies), (5) social mobility, (6) the rate of time preference (the higher it is, the lower the importance one attributes to the future benefits generated by today’s working efforts).
The results can be summarized as follows.
> Self-interest alone cannot give a comprehensive explanation of the determinants of the demand for redistribution. In particular, individuals with an income up to about 160% of the average income of a society are favourable to substantial redistribution. Of course, this does not necessarily mean that people want to be taxed heavily. Rather, these results should be read as a lack of opposition to fair redistribution, which truly helps the poor through transparent transfers, rather than through the governmental production of goods and services.
> Individuals are sensitive to the role that luck and merit play. Thus, the greater the accidental nature of income, and the lower the opportunities to move up (and down) in society, the more individuals are ready to accept redistributive policies.
> Individuals reward effort: they prefer less redistribution, the higher the cost of effort and the higher the average effort demonstrated by the other members of the society to which they belong. In other words, in meritocratic societies individuals seem to be less favourable to redistribution.
What can we learn from this experiment? As mentioned earlier, the authors confirm that people are not self-interested creatures. Independent of the level of income, most people do welcome redistribution in favour of the poor, especially when poverty is due to causes beyond their control. Of course, the engine is altruism, a feeling that is strengthened when the givers trust the other members of the community and observe that the low-income earners are not merely passive recipients who try to free ride on the system.
This result, however, also raises a set of critical questions. Since people are indeed altruistic, why do we need government intervention to carry out the redistributive game? Wouldn’t people obtain the desirable level of redistribution spontaneously? And since the giver does care about how his resources are used (he appreciates the beneficiary’s efforts to help himself, i.e. his sense of responsibility), wouldn’t a privately-run redistributive system be more effective?
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