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Fairness Test

Fairness Test

    As the so-called fiscal cliff gets nearer, you’ll hear lots of talk about whether current tax rates on the rich are fair. As I’ve said before, fairness is a concept invented so dumb people can participate in debates. Fairness isn’t a natural law of the universe. It’s a psychological problem.

    We sometimes get fairness confused with equality. Equality is usually good, and can often be measured with a satisfying precision. Fairness, on the other hand, is usually just a rationale for some sort of bias.

    If you think the rich should pay higher taxes, you probably compare today’s rates to years past when the tax rates on the rich were far higher, and you conveniently leave out the fact that few people actually paid those rates because of loopholes and deductions.

    If you think the rich already pay enough taxes, you focus on the percentage of total federal income taxes they pay and leave out any mention of taxes the poor pay, such as payroll and sales taxes.

    To demonstrate my point that fairness is about psychology and not the objective world, I’ll ask you two questions and I’d like you to give me the first answer that feels “fair” to you. Don’t read the other comments until you have your answer in your head.

    Here are the questions:

    A retired businessman is worth one billion dollars. Thanks to his expensive lifestyle and hobbies, his money supports a number of people, such as his chauffeur, personal assistant, etc. Please answer these two questions:

    1. How many jobs does a typical retired billionaire (with one billion in assets) support just to service his lifestyle? Give me your best guess.

    2. How many jobs should a retired billionaire (with one billion in assets) create for you to feel he has done enough for society such that his taxes should not go up? Is ten jobs enough? Twenty? 

    Make sure you have your answers before reading on.

    I thought of this question because I heard an estimate of how many families a particular billionaire supports. The estimate was a hundred. If you figure an average family is 2.5 people, one billionaire is supporting 250 humans.  He gets a lot in return, of course, but what struck me is how this number affects my feeling of fairness. When I hear that one person is supporting 250 non-relatives, plus a number of relatives too, it feels as if that billionaire is doing more than his “fair” share.  But as I’ve said, fairness isn’t a real thing. It’s just a psychological phenomenon that is easily manipulated.

    My personal view is that if most credible economists say higher taxes on the rich are necessary to save the economy, I’m all for it. I think every rich person would agree with that statement. The question that matters is whether taxing the rich will help or hurt the economy. Fairness should be eliminated from the discussion.

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