Written for smalltalkeconomics.com.
Do you think that’s absurd? Keep reading.
Tax systems of most developed countries are astonishingly complex. Depending on your country, factors such as your income, consumption, wealth, number of children, charitable contributions, mortgage payments, health insurance expenditures, or whether you donate blood may all influence your tax liability, i.e. the total amount of tax due each year. The ultimate aim of designing a tax system is fairness, although the concept is rather subjective. There are multiple plausible, yet very different views on what is fair. One view (very rare, luckily) is that a flat tax would be the most fair tax, as everybody would just pay the same amount. In practice, two main principles are used to argue which taxes are considered fair – the ability-to-pay principle and the benefits principle. While income tax or wealth tax are prominent examples of taxes we deem fair based on the ability-to-pay principle (you pay as much as your financial situation allows you to), consumption tax or highway tolls are typical taxes based on the idea of the benefits principle (you pay as much as you use a certain good or public service). The framework for optimal taxation which remains a centerpiece in modern public finance was laid out by James A. Mirrlees (of Mirrlees Review) and William Vickrey, for which they jointly received a Nobel Prize in 1996.
As argued by Nicholas Gregory Mankiw and Matthew Weinzierl (both from Harvard), based on this theory, a surprisingly suitable choice could be taxing people’s height, or more precisely, providing a tax credit to short people and imposing a tax surcharge for tall people. Before you discard the idea as nonsense and stop reading this article, think about the reasons not to tax height. In short, the optimal taxation theory as it stands today defines an ideal characteristic based on which to tax as:
- exogenous, meaning that the tax does not distort incentives as there is no way to change this characteristic,
- easily observable, meaning that it is easy to see what the value of this characteristic is for every person,
- positively correlated with ability, so that the ability-to-pay principle is satisfied.
Income, which is currently the most important characteristic of people for tax purposes in most countries, does not do too well in (1) because of deadweight loss and in (2) as documented by relatively high shares of the shadow economy throughout the world. Income does pretty well in (3); in fact, it is probably the best indicator of ability we have at this time.
But how about height? While the first two requirements are clearly met for height, the third one might raise questions. However, previous research (see, for example, here, here or here, and figure below) convincingly shows that taller people make more money – on average by between 1 and 2 percents per additional inch of height – and, assuming correlation between ability and income, a potential height tax would also be correlated with ability. Starting from here, the authors rigorously show in their article that the current theory suggests that we should indeed impose a height tax, and moreover, the optimal level of such tax is substantial. The fact that in practice, we do not impose such a tax and that most people think it absurd suggests that the current optimal taxation theory must in some way fail to capture our intuitive notions of distributive justice.
Reference: Mankiw, N. G., & Weinzierl, M. (2010). The optimal taxation of height: A case study of utilitarian income redistribution. American Economic Journal: Economic Policy, 2(1), 155-176. Available here, working paper version available here.