Sebastian, it’s neither a feature nor a bug for me, as I’m not taking a position just trying to sort out the implications of what was said. I don’t see that what you’ve said follows though, because in the example the wealth was created in a corporation originally, it wasn’t anyones to put in initially. Turning it into salary might not make any sense under some conditions, granted, but we could play around with the parameters. I just didn’t see initially why giving the 20 million to someone who turns around and purchases a plane to least is different (except for that someone) than the corporation doing it directly, from the point of view of making this stuff available. In other words, I saw dsquareds points about the value of having this sort of lease available, but not why it was important to encourage individuals to exercise it.

Take someone who has been naturally gifted with ability. Such a person might choose to be a doctor, a business leader, a philosopher. Let us say that there is a shortage of doctors in this society, such that the most socially useful purpose that the individual could direct her efforts towards is medicine. How are we to get her, and others like her, to be doctors? Certainly this choice of career path must be within the personal prerogative—if she wants to be a philosopher because she thinks this is a valuable life, this can’t be mere self-absorption just because society needs doctors more than philosophers. If we reject coercion as a mechanism, as we should, we are left with incentives. So, a current doctor, offering a justification of the higher pay rates of doctors to one who occupies the least well off social position has a much different argument to give than the one Cohen attributes to him. He can justify this inequality on the grounds that it is necessary to encourage sufficient others to undergo the long training and education necessary to become a doctor, rather than to pursue some other career path as is their prerogative.

This is exactly the sort of justification Rawls has in mind. He says, “The function of unequal distributive shares is to cover the costs of training and education, to attract individuals to places and associations where they are most needed from a social point of view, and so on” (277 revised, and very similar things on pages 87, 136, 269, 274). He also means the difference principle to apply to unequal distributions of authority, not only of wealth and income, so that we might give special authority to a group of legislators to make laws that other citizens don’t have (as every modern large democracy does), if such a system benefits the least well off. This also justifies allowing differences of authority within firms, so that some may have greater managerial authority than others, if allowing such inequalities benefits the least well off. It might, due to an increase in productive efficiencies, but this does nothing to justify the current massive levels of imbalance of power in, for example, many US firms.

I’m not aware of Rawls ever arguing that (as Cohen held in the previous chapter) incentives are needed to make the already well-off work harder. This same line of thought I believe works against Cohen’s claim in this chapter that if we can move from an equal distribution of primary goods, at D1, to an unequal distribution, at D2, where the least off do better, then we can also move to D3, where the better off give back part of their earnings to the least well off, once again creating a condition of equality, but one in which everyone is better off than the least well of were in at D2. We cannot, because of what I think is a morally unobjectionable need for incentives to induce those with natural talent to pursue career paths that would be optimally socially beneficial rather than other perfectly acceptable career paths (as would be their personal prerogative), and the related reasons.

But people don’t have to put into a corporation intitially if the tax burden is going to hammer them too hard. Now for you, perhaps that is a feature rather than a bug.

I learned something in your exchange above. It helps me to put my finger on the quarrel I do have with Rawls’ thought experiment. The quarrel is that it’s static and therefore too close to the original contractarian views, therefore open to challenges of ‘legalism’ and therefore also unable to deal with the evolving issues posed in a dynamic world.

One way to deal with this would be to put an obligation of individual moral conduct on each & everyone of us. If I understand correctly that’s what Chris is argueing, on behalf of Cohen – or so it seems. This can’t be the right solution for the reason Jon gives on behalf of Rawls quoted below.

Jon: For Rawls, however, any evaluation that we make of individual conduct must recognize the fact that there is a diversity of reasonable though incompatible values that people may permissibly pursue. That is, they cannot be expected fully to justify their goals and values to one another. Still, they do have to meet some threshold, and legality is surely part of it.

Such obligations are part of comprehensive doctrines and comprehensive doctrines are the 1st thing to get rid of if we are to satisfy the basic principle of a liberal society. We can’t expect the Christian and the atheist to subscribe to the same full justification for moral action (but we can expect them to have different full justifications for actions in an overlapping consensus).

So we have to find another way. I think (but have never been able to think it through) that this idea of overlapping consensus is more powerful as it can be something dynamic, evolving over time (allowing maybe the right place for the inescapable Darwinian element as well). Even then the issue remains that the principles, including the difference principle, are not as such part of what can be allowed to evolve (although the exact legal translation of the difference principle is something that would be allowed to evolve). But that’s something that maybe can be saved w/o static original positions as it can be seen as a precondition (environmental context) of what the boundaries for permissible evolution are.

Muddy waters (at least for me).

dsquared-49,

I am pretty sure that Cohen would say that a plain vanilla tax-driven leasing transaction is unjust, Rawls as just

Just can’t let go of that ouija board now, can you? ;-)

Not really; as long as you’re paying tax at the corporate level, you’ve got an incentive to avoid that tax; either you avoid the tax altogether or you reduce the extent to which you’re double-taxed. Also the same Rawls/Cohen issue arises – people aren’t going to put their savings into a corporate vehicle if the tax treatment is so onerous and that will have effects on the equilibrium rates of investment and therefore growth. Actually, the more I think about it, the more it makes sense to think of the incentives/compensation debate in Chapter 1 in terms of savings rather than labour income.

Personally, I think leasing’s a good thing, but I think I’d have a hard time defending it as just to someone who thought it was burden-shirking. And the problem here is exactly the one that Chris and John have been discussing; someone, somewhere is basically going to refuse to put up his savings for investment in physical capital assets unless he’s given a tax break for doing so.

Well let’s bring this down to a brass tacks example – I am pretty sure that Cohen would say that a plain vanilla tax-driven leasing transaction is unjust, Rawls as just.

The nature of this transaction is such –
1: the tax code recognises tax depreciation at a rate of 20% per year (pretty standard and likely to be a part of any fair tax code, otherwise industries that use capital assets are heavily disadvantaged).

2: Easyjet has profits of $0 (because it’s a startup) and wants to buy an A300 for $100m. The A300 is to be paid for in 5 annual installments of $20m, to keep the numbers really clear.

3: I have a personal income (from managing my hedge fund or something) of $20m.

4: Assume the rates of both corporation and individual income tax are a flat 25%.

5: British Airways has profits of $1bn and also wants to buy an A300.

Now, if leasing isn’t allowed, the effective cost of the aeroplane to British Airways will be $100m minus the tax saving = $16m per year (BA pays $20m to Airbus, but its tax bill is reduced by 25% multiplied by the tax depreciation). Easyjet would have to pay $20m.

But we can do a bit better than that. If I buy the jet, I can reduce my tax bill by $4m per year. If I lease the plane to Easyjet for $17.5m per year, I come out well ahead of the game.

There’ s a decent public policy rationale for allowing a leasing transaction like this – it stops the playing field from being tilted away from stratups like Easyjet without having to design all sorts of ad hoc fixes and such like into the tax system. Not only am I not breaking the law by engaging in this lease, I’m helping the tax system work as intended – the intention was always to allow a deduction for the purchase of capital assets, and there was no real intent to stop this deduction being used by companies that happened to be unprofitable in the current tax year. I don’t think anyone, even the HMRC and IRS would refer to a plain vanilla lease like this as a “loophole”; it’s a perfectly legitimate piece of tax planning.

But what would Cohen say about someone like me who’s a bigshot hedge fund manager who makes a point of going round doing lease after lease in order to reduce his total income tax liability to zero? Isn’t there another intuition (maybe right, maybe wrong, but defensible) that if I act too aggressively in carrying out certain kinds of transaction which can all individually be justified on clear justice’n’fairness grounds, but which have the cumulative effect of helping me personally at the expense of everyone else, then I’m not really playing within the spirit of the laws? But is any liberal at all, Rawlsian or otherwise, really going to say that I’ve got the right to carry out legal transactions, as long as I don’t exercise that right too successfully, with the taxman allowed to say ex post what counts as too successful?

(If this example hasn’t pushed it far enough and you still think I’m not being unfair as a leasing mogul, consider the case of a guy who does nothing other than grub around the world looking for companies in the position of Easyjet, in order to bundle up their capital investment programmes and sell them to rich men who are looking for a tax loss. Are we still going to say that he shouldn’t attract any opprobrium in polite society? But what’s he doing wrong? Certainly nothing that we’d want to change the institutions of society to prevent; after all, he’s helping a lot of startup companies get cheaper finance)

Cohen holds that the principles for evaluating institutions must be the same as those for evaluating individual conduct (if the difference principle applies to the one, it should also apply to the other). Rawls disagrees. But this is not to say that we can’t evaluate individual conduct at all or that the only standard is legality. For Rawls, however, any evaluation that we make of individual conduct must recognize the fact that there is a diversity of reasonable though incompatible values that people may permissibly pursue. That is, they cannot be expected fully to justify their goals and values to one another. Still, they do have to meet some threshold, and legality is surely part of it. But I don’t see why it is thought that Rawls holds that it is the only standard. (Admittedly, he doesn’t pursue “rightness as fairness” and spell out the standard for individual conduct in any detail. But then again, neither does Cohen beyond saying that the principles must be the same for institutions and individual conduct.)

So, as Daniel says, a just tax code will create various incentives, and I can’t imagine what would be unjust about a company simply hiring someone to figure out how to respond to those incentives. On the other hand, if they are exploiting some loophole in the tax code, even if legal, why shouldn’t Rawls say that doing so is unjust? Obviously, in concrete cases, there may be disagreement about whether some action is exploiting a loophole or just responding to an incentive. I don’t know whether Enron’s shifting its liabilities off-balance sheet was objectionable in this way, but it sure sounds sneaky – the kind of thing that very well might not be able to be publicly justified in the way I’m imagining, even if legal.

One more (somewhat pedantic) point to add to Matt’s example (#45). The parties in the original position are supposed to choose the principles to be used in evaluating social institutions. They don’t choose institutions directly. So as new financial instruments are invented and economic circumstances change, the same principles chosen by the parties (including the difference principle) may require different institutions, laws, regulations, etc. These kinds of transitions will expose loopholes that may not have existed or been noticed before.

I checked: the Law of Peoples doesn’t address it (at least not if the Index & my notes are enough to go by.

This being said maybe it’s not in the cursory reading but in the example itself that we have to find the detail-devil. The financial industry in tax paradises obviously isn’t a result of natural circumstance; it is the result of lack of regulation in US, Europe and elsewhere such that the wealthy can get away with things inaccessible to the many. If so it is the duty in the latter countries to avoid these sneaky ways. Sure, that would be bad for The Cayman Islands but, as you say, e.g. the US have no obligation to support their economies (unless they become so poor of the collapse of the financial industry that they need the help to be able to sort their stuff out).

If it turns out? That seems about as uncontroversial position as one might take on human nature.