- 19 Aug 2009
- Working Paper Summaries
The Optimal Taxation of Height: A Case Study of Utilitarian Income Redistribution
Overview — A tax on height follows inexorably from a well-established empirical regularity and the standard approach to the optimal design of tax policy. Many readers of this paper, however, will not so quickly embrace the idea of levying higher taxes on tall taxpayers. Indeed, when first hearing the proposal, most people either recoil from it or are amused by it. That reaction is precisely what makes tax policy so intriguing, according to N. Gregory Mankiw of Harvard University and Matthew Weinzierl of HBS. This paper addresses a classic problem: the optimal redistribution of income. A Utilitarian social planner would like to transfer resources from high-ability individuals to low-ability individuals, but is constrained by the fact that he cannot directly observe ability. Taxing height helps the planner achieve redistribution efficiently because height, the data show, is an indicator of income-earning ability. Although readers might take this paper in one of two ways—some seeing it as a small, quirky contribution aimed to clarify the literature on optimal income taxation, others as a broader effort to challenge the entire literature—the authors' results raise a fundamental question about the framework for optimal taxation for which William Vickrey and James Mirrlees won the 1996 Nobel Prize in Economics and which remains a centerpiece of modern public finance. Key concepts include:
- We must either advocate a tax on height or reject, or at least significantly amend, the conventional Utilitarian approach to optimal taxation. Such choices cannot be avoided.
- Calculations show that a Utilitarian social planner should levy a sizable tax on height. A tall person making $50,000 should pay about $4,500 more in taxes than a short person making the same income.
- Height is, of course, only one of many possible personal characteristics that are correlated with a person's opportunities to produce income. In this paper, the authors have avoided these other variables, such as race and gender, because they are intertwined with a long history of discrimination. Any discussion of using these variables in tax policy would raise various political and philosophical issues that go beyond the scope of this paper.
- Some might fear that a height tax would potentially become a "gateway" tax for the government, making taxes based on demographic characteristics more natural and dangerously expanding the scope for government information collection and policy personalization.
- Yet modern tax systems already condition on much personal information, such as number of children, marital status, and personal disabilities. A height tax is qualitatively similar, so it is difficult to see why it would trigger a sudden descent down a slippery slope.
Should the income tax include a credit for short taxpayers and a surcharge for tall ones? The standard Utilitarian framework for tax analysis answers this question in the affirmative. Moreover, a plausible parameterization using data on height and wages implies a substantial height tax: a tall person earning $50,000 should pay $4,500 more in tax than a short person. One interpretation is that personal attributes correlated with wages should be considered more widely for determining taxes. Alternatively, if policies such as a height tax are rejected, then the standard Utilitarian framework must fail to capture intuitive notions of distributive justice. 27 pages.