4 The U.S. Fiscal System as an Opportunity- Equalizing Device Marianne Page and John E. Roemer In democracies, at least, it is an axiom that taxation should be fair. What constitutes fairness depends on one's theory of fair- ness or justice. Most Americans subscribe to some version of an equal-opportunity theory of justice. Recently Roemer (1998) pro- posed a general conception of what equalizing opportunities re- quires. In this chapter we apply that conception to the issue of income taxation in the United States. In this first section we re- view this approach to equalization of opportunities and indicate how the tax-and-transfer system of a country can be viewed as an instrument for equalizing opportunities for income. If fair- ness requires equality of opportunity,' then a fair tax-and-trans- fer system is one that equalizes opportunities for some objective, which arguably should be income. (An alternative but far more controversial objective would be welfare-more controversial since equalizing opportunities for welfare would require, ac- cording to our theory, an interpersonally comparable and mea- surable index of individual welfare.) The popular idiom formalized by this theory is leveling the playing field: equal opportunity with respect to acquiring in- come will have been achieved when the playing field has been leveled. What troughs in the playing field should be leveled in its initial state? They are, we propose, the disadvantages that individuals face by virtue of circumstances beyond their control that hinder their capacity to achieve the objective in question-in our case income. Thus the first step in conceptualizing equality of opportunity is to specify the circumstances beyond the con- 134 PAGE AND ROEMER trol of individuals that are relevant for the problem at hand. We next partition the population into a set of types, where a type consists of all individuals with the same circumstances. Besides circumstances what influences the value of the ob- jective (in our case income) that the individual eventually ac- quires? His own effort and the policy that may be applied to intervene in the achievement of the objective, such as tax policy. Effort should be conceived of as those actions and behaviors of the individual that society wishes to hold him accountable for- basically everything but circumstances and perhaps luck. To be explicit, we view the outcome for the individual as a function of circumstances, effort, policy intervention, and luck. The philosophy of equal opportunity is this: the achieve- ment of the objective by an individual should be sensitive to his effort, not to his circumstances. That is, the equal-opportunity planner intervenes with policy so that the value of the objective achieved by individuals will reflect their effort but will be inde- pendent of their type or circumstances. In brief the playing field is leveled by using policy to compensate those with disadvanta- geous circumstances. The language of the theory thus consists of five words: ob- jective, circumstance, type, effort, and policy. There are many ways of computing equal-opportunity policy: given the objective of opportunities that are to be equalized, many decisions must be made concerning what constitutes the relevant circumstances, effort, and set of policies. For instance, one might advocate using educational investment as the appropriate policy to equalize op- 2 portunities for income, rather than the nation's fiscal system. One can study the choice of instrument using economic analysis: what is the cost of achieving a given degree of opportunity equalization with respect to different choices of the policy in- strument? We do not address that problem here. We ask to what extent the actual fiscal system in the United States equalizes op- portunities for income among citizens. To summarize in another way, equality of opportunity dis- tinguishes between two sets of factors that influence a person's achievement of an objective: circumstances and effort. Such equality seeks to hold the person responsible for the conse- quences of effort, not for the consequences of one's circum- 135 FISCAL SYSTEM AND OPPORTUNITY stances. It is thus to be distinguished from the more radical equality-of-outcome view, which would use policy to equalize so far as possible the degree of the objective achieved by all. That view implicitly holds individuals responsible for nothing about their behavior. The modern conception of equality of opportunity grew out of a lively debate among political philosophers initiated in the early 1970s by John Rawls's Theory of Justice. Rawls's theory discussed the distinction between what we have called circum- "maximin stances and effort, but his proposal of primary goods" inadequately captured the idea that individuals should be held responsible for their effort but not for their circumstances. Other important contributions to the debate were Sen 1980, Dworkin 1981a and b, Scanlon 1988, Arneson 1989, and Cohen 1989. A summary of this intellectual history can be found in Roemer 1996, chapters 5, 7, and 8. We proceed to formalize quickly the proposal outlined above. (An elaborate presentation can be found in Roemer 1998.) Let ( be the set of feasible policies, with generic element 0. Let the types of individual be denoted 1,2,. .. ,T, with generic index t. Let u'(e, 0) be the value of the objective achieved on average by individuals of type t who exert effort e under policy 0. Assume for the moment that effort is a one-dimensional variable, an as- sumption we later drop. Under a given policy 0, a distribution of effort among the individuals in each type will be forthcoming. Denote the distri- bution functions (CDFs) of those probability distributions as Et(e; 0). Our aim is to use policy to equalize so far as is possible the average value of the objective achieved across types for a given degree of effort. But we do not wish to equalize the objec- tive value for individuals who expended different degrees of ef- fort. If we could do what has just been proposed, we would have implemented the equal-opportunity view: that the degrees of the objective achieved by individuals are sensitive to their effort, but not to their circumstances (type). But there is a conceptual problem. How can we compare the degrees of effort expended by individuals in different types? The distributions of effort at a policy 0 will in general be very different across the types. And the distribution of effort in a type 136 PAGE AND ROEMER is a characteristic of the type, not of any individual. Because we wish not to hold persons responsible for their type, we should therefore not hold them responsible for being in a type with a "bad" distribution of effort. Consequently we should not use the raw effort e that an individual expends as the appropriate measure of his effort for inter-type comparisons, for it is pol- luted by characteristics of the type-distribution of effort. We must rather find a measure of effort from which we have purged the characteristics of the effort distribution of the type. The obvi- ous choice is to measure a person's effort by the centile (more generally quantile) of the effort distribution of his type at which he sits. This gives us an inter-type comparable measure of effort in which the degree of a person's effort is assessed by comparing him only to others with his circumstances. For example, those at the medians of their effort distributions in different types will be declared to have expended the same degree of effort (as op- posed to the same level of effort). Given the functions ut and the distributions Et, we can com- pute the indirect objective functions, denoted v'( i; 0), which give the averagevalue of the objective among members of type t, who are lo- cated at the wrth quantile of their effort distribution, when the policy is 0. We assert that all individuals regardless of type who have the same index 7r have expended the same degree of effort, although their levels of raw effort are generally different. Let us now fix the effort quantile 7T at some number in the interval [0,1]. If we consider only this slice of the population-all those at degree of effort 7w in the various types-then our equal- opportunity goal would be to choose (pin @D to Max Min t (; ). (4-1) At the solution to 4-1, the average achievement of the objective across types at the given degree of effort, Tr, is as equal as possi- ble in the sense that maximin is the appropriate substitute for equalize when equality leads to Pareto suboptimal allocations. (In economics we always substitute maximize the minimum value for equalize all values to avoid equalizing at a low level.) Let us call the solution to program 4-1, p,,. If the policies { ,) were identical for all 7r in [0,11, then that well-defined policy would unequivocally be the equal-opportunity policy. Unfor- 137 FISCAL SYSTEM AND OPPORTUNITY tunately this will rarely happen. We will in general have a continuum of policies, one for each 7r. Thus we must take some second-best approach. The approach proposed in Roemer 1998 is to create an ag- gregate objective function that gives the objective function of t each 7r slice-namely, the function Min v (77;0)-its per capita weight in the aggregate. That is, we give the objective function of each effort centile of the population a weight of 1 percent in the social objective. Thus our equality-of-opportunity objective becomes Max fMinuvt(rO)dr. (4-2) 0' 0 t We call the solution to program 4-2 OEOp Program 4-2 has two parents: Rawls's maximin and utili- tarianism.