Behavioural economics: oh yes the French do move because of taxes!
by Tim Worstall | 1st, February 2013
ONE of the great current tropes is that the rich must pay more in taxes because that is fair. One of the current answers is that try taxing too much and the rich will leave. Which gets called unfair again.
The thing is, the rich really will move if they are taxed too much:
The richest man in France has officially transferred his multi-billion pound fortune out of his homeland to Belgium.
Bernard Arnault, head of luxury goods group LVMH, insists he has moved his assets for ‘family inheritance reasons’.
But others are convinced that the 63-year-old has joined other tycoons and celebrities in wanting to avoid taxes – including a 75 per cent top rate on income – introduced by Socialist President Francois Hollande.
Mr Arnault applied for a Belgian passport soon after the Socialists won elections last year.
Now maybe this is unfair and maybe it’s not. The thing is, who is it doing the deciding on whether it is unfair or not.
At which point we can turn to one of the new bits of economics, behavioural economics. This is based on the novel idea of actually doing experiments rather than basing it all on the musings of middle aged white men in ivory towers. One of the great experiments is the “ultimatum game”. In this, you’ve two players. One is given $100 and told to divide it betweren him/her and the other player. Any proportion they like, $1 to $99 or $50/$50, whatever.
The trick is that the other player has to accept that division. If they don’t then the professor takes the $100 back. If they do then each player gets whatever the division is.
And what we find is that humans have a very strong idea bout what “fair” is. Logically, the second player should accept whatever the division is. At least they’ll get $1 even if the first is being a right greedy bastard. But they don’t: experimentally we find that once the division gets worse than 60/40 then the second player starts to reject it. They will give up $35 in order to make sure that the greedy bastard doesn’t get $65.
And that’s the ultimatum game. Which is usually taken to mean that we all have this strong sense of fairness and so you’d better cough up you rich bastards.
But that’s not the only lesson of the game. Play it again with government as the first player, some rich bloke as the second. At what point does the rich bloke think “this is unfair” and bugger off? Or refuse to play the game, or insist on “punishing” the first player for being so unfair?
And that’s what the problem with using “fairness” to determine tax rates is. It depends upon who is doing the determining of what is fair. You and I might think that Arnault, with his €5 billion euros already, should be happy to pay 75% on this year’s additional income. But as these experiments in behavioural economics show us, what really matters is what Arnault thinks it is fair. Otherwise he will, or at least might, do something that will damage his own interests (a good description of living in Belgium) in order to punish that French taxman that he thinks is being unfair.
Since these experiments were first done on US college students they’ve been repeated all over the place. Always with very similar results. They’ve even been extended to apes and monkeys: there really is no reason at all that they wouldn’t apply to Frenchmen as well.
Tim Worstall
Posted: 1st, February 2013 | In: Money Comment (1)
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