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Luck and Taxes

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01/17/2020

“Luck egalitarianism” is a philosophical fad, and in the past I have had some characteristically unkind things to say about it. I’d like today to discuss a new argument that concerns luck and government.

The economist Robert H. Frank says in Under the Influence,

Because successful people often fail to appreciate the importance of seemingly minor random events in life, they tend to develop an exaggerated sense of entitlement to the enormous material rewards they command in the marketplace. To be sure, most successful people work hard and are highly talented. But at critical junctures, they must also have been lucky. There are plenty of others, after all, who were equally talented and hardworking, yet didn’t earn nearly as much. The problem is that when people think their success was entirely their own doing, they often become more reluctant to support taxes necessary for the investments that would create similar opportunities for the next generation.

The argument is difficult to follow. The successful person is supposed to be thinking in this way: “My success came about because of my hard work and talent. I am then reluctant to support taxes on my high income and wealth.” Frank’s objection to this is that the first premise is false: the successful person did not earn his wealth only through his hard work and talent. We know this because others, equally talented and hardworking, did not earn as much money.

In many cases, at any rate, Frank’s argument against the first premise fails. Successful entrepreneurs, for example, are more talented than their rivals in satisfying the demands of their customers. Their ability enables them to achieve success. As Mises says,

Economics, however, always did and still does use the term ‘entrepreneur’ in a sense other than that attached to it in the imaginary construction of functional distribution. It also calls entrepreneurs those who are especially eager to profit from adjusting production to the expected changes in conditions, those who have more initiative, more venturesomeness, and a quicker eye than the crowd, the pushing and promoting pioneers of economic improvement. (Human Action, chapter 14.) 

If Mises is correct, then, it is false that successful entrepreneurs are no more talented than others. What Frank has overlooked is that the ability to anticipate the demands of consumers is itself a talent. We can see many other cases in which Frank’s claim is false. Are there golfers as talented and hardworking as Tiger Woods, or basketball players as LeBron James, but who earn much less than they do? It hardly seems likely.

Frank’s argument should not be confused with another one that other luck egalitarians give and which he has elsewhere endorsed. That argument is that someone’s superior talent, or the ability to work hard, is itself the result of luck. The talented person has won the genetic or environmental lottery. That claim, and its relevance as a justification for redistribution, has generated much controversy. But it differs from the question now under consideration, and Frank’s present claim is in many cases without basis.

There is a phenomenon that gives superficial plausibility to Frank’s argument, but a closer look will show that it is irrelevant. In instances where someone’s superior talent has brought him financial success, can’t we easily imagine circumstances that would have derailed his success? Suppose that Tiger Woods had developed back problems very early in his career that prevented him from playing in tournaments. Wasn’t he lucky that this didn’t happen? That may well be so, but once more, it is irrelevant to Frank’s claim, which is that there are people equally talented to the successful who fail to achieve success, making the good results of the latter group at least in part a matter of luck.

So much for the first premise. We must now ask, is Frank in his argument making a descriptive or a normative claim? That is, is he arguing that successful people are in fact reluctant to pay taxes because they think that their success stems from their superior talents and ability to work hard? Or is he arguing, rather, that they think this understanding of their success justifies their reluctance? It is the latter construal that is of interest to us here.

If Frank is making a normative claim, then he might try to counter my argument against him by using the concession I have made in regard to luck. “You admit,” he might say, “that accidents could have prevented those who succeed from doing well. Isn’t their success, then, the result in part of luck and their reluctance to pay high taxes without justification?”

This imagined rejoinder exposes another difficulty in Frank’s argument. He is saying that the successful person bases his reluctance to pay high taxes on the fact that his success comes about exclusively because of his superior talent or ability to work hard. The rejoinder questions the exclusivity. Against this, we may ask: why should it be demanded that the successful person justify his reluctance to pay high taxes by the alleged fact that only his superior abilities brought about his success? Why isn’t it sufficient that these abilities had a great deal to do with his success? The fact his abilities did not guarantee success is very plausibly true, but to require that they do so demands too much.

Frank is not yet dispatched. He might say, “Even if there are cases where someone succeeds by talents superior to those of his rivals, aren’t there others in which successful people simply ‘luck out’? Granted that it would in practice be hard to separate out these cases from the rest, don’t we at least in theory have an example in which a successful person would be without grounds for his reluctance to pay high taxes?”

Once more the hypothetical rejoinder leads to a further problem with Frank’s argument. He is supposing that if someone’s success were entirely the result of luck, he would lack a reason for his reluctance to pay high taxes. Is that so? Suppose that someone wins a lottery, where the odds against winning are many millions to one. Aside from the fact that he bought a ticket, his success is entirely the result of luck, and we can eliminate the little bit that isn’t by supposing that a stranger hands him the lottery ticket. Now suppose that the state taxes away most of his winnings. Wouldn’t he have good grounds to feel aggrieved?

There is yet another problem with Frank’s argument. Why is it supposed that investment by the state is needed for people in the next generation to have a chance to succeed? Why isn’t investment by people in the free market sufficient and in reality much better? Also, what happens if the state uses tax revenue for other purposes than investment? Is the reluctance of the successful to pay taxes then all right?

Readers will probably have long since thought of an additional answer to Frank. Doesn’t taxation violate the rights of the successful, whatever their talents, ability to work hard, and their luck or the lack thereof may be? That is indeed so, but I have here tried to look at Frank’s argument on its own terms. I hope that it is not going overboard to say that it is not altogether compelling.

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Contact David Gordon

David Gordon is Senior Fellow at the Mises Institute, and editor of The Mises Review.

Note: The views expressed on Mises.org are not necessarily those of the Mises Institute.
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