Imagine a society with perfect economic equality. Then, one day, this egalitarian utopia is disturbed by an entrepreneur with an idea for a new product. Think of the entrepreneur as Steve Jobs as he develops the iPod, J. K. Rowling as she writes her Harry Potter books, or Steven Spielberg as he directs his blockbuster movies. The new product makes the entrepreneur much richer than everyone else. How should the entrepreneurial disturbance in this formerly egalitarian outcome alter public policy? Should public policy remain the same, because the situation was initially acceptable and the entrepreneur improved it for everyone? Or should government policymakers deplore the resulting inequality and use their powers to tax and transfer to spread the gains more equally? In my view, this thought experiment captures, in an extreme and stylized way, what has happened to US society over the past several decades. Since the 1970s, average incomes have grown, but the growth has not been uniform across the income distribution. The incomes at the top, especially in the top 1 percent, have grown much faster than average. These high earners have made significant economic contributions, but they have also reaped large gains. The question for public policy is what, if anything, to do about it.

The political philosophy one adopts naturally influences the kind of economic questions that are relevant for determining optimal policy. The utilitarian perspective leads to questions such as: How rapidly does marginal utility of consumption decline? What is the distribution of productivity? How much do taxes influence work effort? The just-deserts perspective focuses instead on other questions: Do the high incomes of the top 1 percent reflect extraordinary productivity, or some type of market failure? How are the benefits of public goods distributed across the income distribution? I have my own conjectures about the answers to these latter questions, and I have suggested them throughout this essay, but I am the first to admit that they are tentative. Fortunately, these are positive questions to which future economic research may provide more definitive answers.

To highlight the difference between these approaches, consider how each would address the issue of the top tax rate. In particular, why shouldn’t we raise the rate on high incomes to 75 percent, as France’s President Hollande has recently proposed, or to 91 percent, where it was through much of the 1950s in the United States? A utilitarian social planner would say that perhaps we should and would refrain from doing so only if the adverse incentive effects were too great. From the just-deserts perspective, such confiscatory tax rates are wrong, even ignoring any incentive effects. By this view, using the force of government to seize such a large share of the fruits of someone else’s labor is unjust, even if the taking is sanctioned by a majority of the citizenry.

In the final analysis, we should not be surprised when opinions about income redistribution vary. Economists can turn to empirical methods to estimate key parameters, but no amount of applied econometrics can bridge this philosophical divide. I hope my ruminations in this essay have convinced some readers to see the situation from a new angle. But at the very least, I trust that these thoughts offer a vivid reminder that fundamentally normative conclusions cannot rest on positive economics alone.

Vir: Gregory Mankiw, Journal of Economic Perspectives, 27 (3), Summer 2013: 21-34