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January 28, 2005

No. You Don't "Deserve" Your Pretax Income. Stop

The keen-witted Elizabeth Anderson drops the Hayek Bomb on those who believe that they "deserve" their income:

Left2Right: How Not to Complain About Taxes (III): "I deserve my pretax income": Today's post is a tribute to F. A. Hayek.... The question at stake is whether there are sound arguments for the proposition that individuals have such a strong claim to their property that the state cannot justly tax them for the purpose of funding social insurance.... The claim "I deserve my income," as applied to an individual's pretax income in free market economies, has considerable intuitive force.... But... Hayek explained why free market prices cannot, and should not, track claims of individual moral desert....
Hayek's deepest economic insight was that the basic function of free market prices is informational.... They reflect the sum total of the inherently dispersed information about the supply and demand of millions of distinct individuals for each product. Free market prices give us our only access to this information.... This is why centralized economic planning is doomed to failure.... It's a short step from this core insight about prices to their failure to track any coherent notion of moral desert. Claims of desert are essentially backward-looking.... Free market prices are essentially forward-looking. Current prices send signals to producers as to where the demand is now.... [C]apitalism is constantly pulling the rug out from underneath even the most thoughtful, foresightful, and prudent production plans of individual agents... individuals cannot count on their virtue being rewarded in the free market. For the function of the market isn't to reward people for past good behavior. It's to direct them toward producing for current demand, regardless of what they did in the past....
If free market prices don't give people what they morally deserve, should we try to regulate factor prices so that they do track producers' moral deserts? Hayek offered two compelling arguments against this proposal. First, if you fix prices on a backward-looking standard, they will no longer be able to perform their informational function.... This creates enormous waste.... Hayek focused on... any attempt to regulate people's rewards according to judgments of how much they morally deserve would destroy liberty. It would involve the state in making detailed, intrusive judgments of how well people used their liberty, and penalize them for not exercising their liberty in the way the state thinks best. This is no way to run a free society....
Several implications follow.... (a) The claim "I deserve my pretax income" is not generally true.... (b) The claim that people rocked by the vicissitudes of the market... are getting what they deserve is also not generally true.... It is in principle impossible for even the most prudent to forsee all the market turns that could undo them. (If it were possible, then efficient socialist planning would be possible, too. But it isn't.)... (d) The volatility of capitalist markets creates a profound and urgent need for insurance, over and above the insurance needs people would have under more stable (but stagnant) economic systems. This need is increased also by the fact that capitalism inspires a love of personal independence.... This fact does not yet clinch the case for social insurance... maybe private insurance would do a better job meeting people's needs for insurance in the event of unemployment, disability, loss of a household earner, sickness, and old age.... [But] no argument that people have a moral claim to their pretax incomes, sufficient to preclude taxing it for insurance purposes, has survived critical scrutiny. Certainly, "I deserve it" doesn't.

Truly an intellectual weapon of awesome destructive power...

Posted by DeLong at January 28, 2005 11:03 AM