A central premise is that optimal tax theory (OTT), as founded by Mirrlees’ famous 1970s work, has made major strides in deploying social welfare functions (SWFs) to support conclusions about, not just optimal, but second-best tax systems. An example is the long-standard recommendation that the tax system use demogrants at the bottom with relatively flat rates, possibly even declining (in theory to zero) at the very top. Diamond and Saez have recently expanded the Overton window by arguing that OTT might instead support a tax rate as high as 70 percent top. A key move that they make in this regard is to argue that the marginal utility of a dollar for the very richest people should be valued at (effectively even if not quite literally) zero – whether as their own presumed subjective measure, or as a social assignment of value in the SWF. With a welfarist SWF, only people’s welfare counts to the bottom line evaluation of a set of outcomes, and it can only count positively, but differential weighting of people’s utilities is permissible unless one adopts a utilitarian approach, which requires valuing everyone’s utility equally.
The paper notes that utilitarianism (and other welfarism) have not won universal, unchallenged acclaim. Hence, if one considers the exercise of using SWFs intellectually (or otherwise) valuable, one should be in favor of modifying them, so that they can accommodate alternative viewpoints, such as those which value “fairness” defined in one way or another. The idea is that, say, libertarianism or resource egalitarianism (or systems resembling / parallel to them) ought to be expressible in SWF terms, permitting one as well to be, say, partly one or another or both.
The concept of “money market utility,” dating back (at least) to a 1974 paper by Paul Samuelson, plays an important role in the analysis, but explaining all that here would be rather complex and take a long post of probably less than general interest. The basic idea behind money-market utility is to surmount interpersonal utility comparison problems by employing complete specifications of people’s preferences, stated in dollar terms, in comparing states of affairs. E.g., rather than asking how my utility differs in inferior State 1 as compared to superior State B, we ask how many dollars I would have to be given, in State 1 as compared to State 2, in order to deem them equivalent. The concept’s usefulness is undermined by problems such as preference knowledge and preference revelation. But it may help if one considers its existence in principle (assuming that people have consistent and well-ordered preferences) to be important.
But the following two quick points may help to show very generally what the paper has in mind:
1) Technically speaking, most efforts to incorporate non-utilitarian (albeit generally not non-welfarist) values into the SWF have involved differential weighting of people’s utilities – for example, to give priority to the wellbeing of the worst-off, at the extreme through the quasi-Rawlsian maximin, in which the welfare of the worst-off individual completely outweighs that of everyone else. Under the maximin, reducing everyone else’s welfare by 20 trillion utiles (granting for argument’s sake the existence of such a thing) in order to raise that of the (still) worst-off individual by one utile would be scored as a social welfare gain. This might support the tax policy conclusion that everyone above the worst-off individual should be taxed at the revenue-maximizing rate, with the proceeds being used to raise the bottom as much as possible. But the paper argues that differential weighting of utilities generally doesn’t get one to the right place, so far as the various fairness theories it explores are concerned. Instead, one has to go the individual inputs (people’s utility as determined for purposes of the SWF) and modify them as needed.
2) To illustrate that point, consider what I just called the quasi-Rawlsian maximin. I called it quasi-Rawlsian because, as many have noted, it’s not really what Rawls supports even though he advocated absolute priority for the relevant concerns of the worst-off individual. The difference arose in his not being a welfarist. E.g., he spoke of primary goods rather than welfare generally. Suppose, therefore, that one modified the SWF so that the relevant “arguments” (i.e., people’s utilities) were based on a Rawlsian primary goods conception, rather than on the notion of utility. Or to put the same point differently, suppose that one defined “utility” for purposes of the Rawlsian SWF in terms of primary goods – on the view that it is simply a marker for what the social welfare evaluator cares about, rather than purporting to represent an objective fact about people’s welfare. I suspect that the SWF one thus computed still wouldn’t be precisely what Rawls, or various of his followers, might say they want to do, but it would certainly come closer to systematizing, OTT-style, the normative concerns that motivate them.
I’ll have a follow-up post to this in which I discuss a road not followed in our discussion yesterday, so that it doesn’t go to waste (as it may, I hope, be interesting & useful). It involves a little illustration I prepared, but then elected not to use in the discussion as it proved not to be sufficiently germane, that sketches out how some different philosophical positions discussed in the paper (utilitarianism, resource egalitarianism, an approach taken by John Roemer, and libertarianism) might apply to a particular stylized fact pattern.