08 Sep 2009  Research & Ideas

The Height Tax, and Other New Ways to Think about Taxation

The notion of levying higher taxes on tall people—an idea offered largely tongue in cheek—presents an ideal way to highlight the shortcomings of current tax policy and how to make it better. Harvard Business School professor Matthew C. Weinzierl looks at modern trends in taxation. Key concepts include:

  • Studies show that each inch of height is associated with about a 2 percent higher wage among white males in the United States.
  • If we as a society are uncomfortable taxing height, maybe we should reconsider our comfort level for taxing ability (as currently happens with the progressive income tax).
  • For Weinzierl, the key to explaining the apparent disconnect between theory and intuition starts with the particular goal for tax policy assumed in the standard framework. That goal is to minimize the total sacrifice borne by those who pay taxes.
  • Behind the scenes, important trends are evolving in tax policy. Value-added taxes, for example, are generally seen as efficient by tax economists, but such taxes can bear heavily on the poor if not balanced with other changes to the system.

 

Should tall people pay higher taxes than the rest of us? It is an idea that is bound to raise eyebrows, if not a smile. Yet the underlying notion is not entirely silly, grounded as it is in serious questions about why we tax the way we do and how to make paying taxes if not enjoyable then at least less burdensome for all citizens.

"While the idea of a height tax follows directly from the standard economic framework for tax analysis, most people find the idea crazy," allows HBS professor Matthew C. Weinzierl, an economist who studies optimal taxation in theory and practice. With Harvard economist N. Gregory Mankiw, Weinzierl coauthored the HBS working paper "The Optimal Taxation of Height: A Case Study of Utilitarian Income Redistribution" [PDF].

The main framework economists use to think through tax policy supposes that when a government needs to raise tax revenue, it wants to spread the burden of taxes among its citizens in the least painful way, Weinzierl says. In other words, the government wants those for whom it is relatively easy to earn money to pay more in taxes than those for whom it is difficult.

"Most people view taxes as a burden rather than as a rich topic of study and an immensely powerful policy tool."

"The problem is this: The government can't tell whether it is easy or hard for a given person to earn income, because it can't measure 'ability.' What the government can measure is income, so it tends to tax income. But when the government taxes incomes, it discourages people from working as hard as they otherwise would have worked. This is what generates the classic tradeoff in tax policy: The more equally you try to slice the economic pie, the smaller it gets.

"The holy grail of tax policy, according to this framework, is a fixed and observable measure of ability," Weinzierl continues. "That is where height comes in. It turns out that each inch of height is associated with about a 2 percent higher wage among white males in the United States. Wage is one measure of ability, since it measures how much someone can earn in an hour of work. Therefore, if height is taxed, you are taxing ability directly, so you can cut the economic pie more equally without it shrinking."

Both topping six feet, Weinzierl and Mankiw would be subject to their own higher taxes (as would President Obama).

Weinzierl explained the research in an e-mail interview with HBS Working Knowledge.

Martha Lagace: Are you and Professor Mankiw really serious? Could you give us a brief background for your idea of taxing according to personal characteristics such as height?

Matt Weinzierl: We wrote our paper to ask why there is such a disconnect between theory and intuition. After all, the implication of our paper is that if we are uncomfortable taxing height as a society, we ought to think twice about whether we're comfortable taxing ability (as we currently do with our progressive income tax).

I won't speak for Greg, but for me the key to explaining the disconnect between theory and intuition starts with the particular goal for tax policy assumed in the standard framework. As I said earlier, that goal is to minimize the total sacrifice borne by those who pay taxes. My sense is that we, as taxpayers, have additional goals for our tax system. For example, we might want to split the costs of government equally among all taxpayers, letting each of us keep whatever income we earn above our fair share. Or, we might want our tax system to reinforce social and political values, such as equal treatment of minority groups. Prioritizing such goals would work against having taxes based on personal characteristics.

Now, if the gain in terms of reduced total sacrifice were large enough from taxing height, we might do it despite the cost in terms of other goals. For instance, if we lived in an economy where the only job was picking fruit from tall trees, height taxation would seem natural. But in our economy the gain from taxing height is too small relative to its costs.

Q: What are some problems with the current tax policy that most concern you? Does the current policy reflect what you consider to be the best, most fair strategies in public finance?

A: Tax economists generally point to a few things about current taxes that seem unwise.

Probably foremost among them is the taxation of capital income, such as dividends and capital gains. There is a long tradition in optimal tax analysis suggesting that the goals of society can be better met without these taxes, and though research continues to consider reasons why it may be justified, capital income taxation is generally viewed as inefficient.

One concern probably less familiar to nonspecialists is that our tax system fails to use information on individuals over time. For half a century, tax analysts have noted that taxes averaged over a span of years (or even a lifetime), or taxes that depend on income histories and age, would be substantially more efficient and equitable. People are already so concerned about the complexity of taxes that these reforms seem unlikely, but we are missing a large opportunity by avoiding them.

In general, I hesitate to pass judgment on our tax system as a whole. My intuition is that tax theorists have as much or more to learn from existing policies than do policymakers from tax theorists. For instance, the mortgage interest deduction is widely disliked by tax analysts, but it has survived as a policy. Does this suggest that the policy process is broken or that tax analysts are missing something? My intuition often leans toward the latter, and not just on this issue.

Q: How fast or slowly does tax policy adapt to the times?

A: Policy is not particularly flexible, though major reforms do happen. For instance, they have occurred every few decades in the United States since the mid-20th century. Many commentators and tax experts think that we are due for another large reform, though President Obama's push on health insurance may delay its arrival.

Q: How is your idea of a height tax greeted among economists and policymakers? How do you address potential criticisms as mentioned in your paper, such as fears about a slippery slope leading to taxes according to race, gender, and so on?

A: We have received a wide range of responses. We were featured in the New York Times Magazine's annual "Year of Ideas" issue and in The Economist. These discussions, as well as most of the reaction we've received from fellow economists, have been encouraging in that it is clear we've pushed people to think hard about taxes in a new way. No policymaker has called to ask for the details of the optimal height tax, though!

We hope that businesspeople and the public will think more deeply about taxes once they hear about our idea. Most people view taxes as a burden rather than as a rich topic of study and an immensely powerful policy tool. If more voters were to understand the importance of our tax system and the logic behind how it is structured, perhaps we would end up with a system that engendered more agreement and satisfaction.

Fears that height taxes would evolve into taxes on a wide range of characteristics have to contend with the fact that we already make taxes and transfers depend on some characteristics, such as the number of children and physical disabilities. Why would height open the door to abuses if these have not? More fundamentally, though, we need to ask why taxes on these other variables would be deemed inappropriate, because the same theory of taxation implies that we ought to tax them as well.

Q: To what extent are you thinking about and researching tax policy for businesses?

A: I am currently writing an HBS case on tax competition among U.S. states, which will include a rich discussion of corporate taxation. Like tax competition, many fundamental issues in taxation are relevant for individuals and businesses, so much of my work ought to be useful to both.

Q: What are the most important trends in public finance that businesspeople and managers should keep in mind?

A: A few trends stand out in policymaking.

First, income tax schedules have "flattened out" in most developed countries, so that marginal tax rates don't rise nearly as much at high incomes as they did 30 years ago. This has important implications for the geographical location of talent and innovative activity.

Second, tax rates on capital income (such as corporate profits, dividends, and capital gains) have fallen while loopholes and deductions have generally been tightened, so that the overall tax burden on capital income has not necessarily fallen. Businesspeople naturally pay attention to both the statutory rates of tax on corporate income and the specifics of the definition of corporate income when thinking about taxes. But they may also find it valuable to think about why these trends coexist and whether falling rates signal a trend toward lower taxation of capital income.

Third, value-added taxes, or general sales taxes, are increasingly important policies, having filled in for lower personal income tax revenue in many developed countries over the past few decades. These taxes are generally seen as efficient by tax economists, but they can bear heavily on the poor if not balanced with other changes to the system. Will the trend toward these taxes continue, or will dissatisfaction with income inequality force a reversal?

On the research side, let me note three developments:

First, powerful mathematical and numerical methods are allowing public finance researchers to include dynamic elements in their models that have substantially broadened the range of policies under consideration. These are very new, so their influence on policy is still relatively small, but I expect that they will have impact over the longer term.

Second, greater awareness of human psychology is leading to research in what is called behavioral public finance, such as how salient different types of taxes are to people.

Third, after decades of viewing individuals as similar along all but one dimension (ability), public finance theorists have started to incorporate differences along many dimensions into their models, yielding striking insights of both descriptive and prescriptive importance.

Q: What are you working on next?

A: I have several research projects ongoing. I've already mentioned my new case on tax competition, about which I'm very excited. Among my other projects, two studies are related to how we ought to tax people when they differ in multiple ways. One shows that taxes ought to be less progressive when preferences for leisure time vary widely in society, and I find that international data is consistent with the predictions of the model.

Another (with Aleh Tsyvinski of Yale and Mikhail Golosov of MIT) looks at optimal commodity taxation when individuals' abilities are related to their preferences over different goods. It turns out that the best taxes may offer relatively lower taxes on the rich for those goods that they especially prefer: The mortgage interest deduction in the United States may offer an example of this result.

About the author

Martha Lagace is the senior editor of HBS Working Knowledge.