Sunday, July 28, 2013

Ad Hoc Propiter Hoc

There is a recent paper lauded by the left which in essence states:

"People who have money have offspring who succeed financially disproportionately to those whose parents are not that well off and thus to equalize the outcomes we should tax those who have succeeded so as to enable the offspring of those who have not to get an equal chance."

The paper's conclusion is:

In this paper, we explore the possibility that equalizing individuals’ economic outcomes may help to equalize their children’s opportunities: that is, when poor parents have more disposable income, their children’s performance improves and they have greater opportunity to succeed. 

We study the effect that this intergenerational connection has on optimal tax policy, which will take advantage of this relationship to shape the ability distribution over time. But exactly how it will do so depends on complex interactions between natural ability and the returns to investment in human capital. Ours is the …first paper we know of to model this complexity and derive policy implications.

We characterize conditions describing optimal tax policy when children’s abilities depend on both inherited characteristics and parental (…nancial) resources. On the intratemporal margin, we highlight competing effects of this endogeneity. If parental resources have greater marginal effects on the children of low-skilled parents, then optimal distortions may be smaller at low incomes because of their positive effects on overall tax revenues and the incentives of high-skilled parents. 

On the other hand, larger distortions at low incomes have a bene…fit in encouraging preceding generations to invest in their children’s ability pushes in the other direction. In the end, the implications for optimal marginal distortions are ambiguous. On the intertemporal margin, we show that optimality requires a more sophisticated understanding of the cost of raising social welfare  through transfers across generations, in particular including the effects of one generation’s resources on future generations’tax payments and utilities....

Of course, future research may be able to improve our understanding of the tax policy studied in this paper. For example, when a panel dataset of suffcient duration allows us to link data on parents’and children’s wages, this will allow estimates of the intergenerational effect of parental income on parent-child wage transitions. Incorporating other dimensions of parental influence is another natural next step. 

We have shown (in the Appendix) that parental leisure versus work time does not seem to exert an important infl‡uence in this case, but one might study how the composition of parents’available resources (i.e., as disposable income or in-kind, such as education) affects the results. Such analyses may have implications for a broader class of policies that, like the taxes in this paper, could be used to affect –rather than merely respond to–the dynamics of the ability distribution.

Somehow they have left out the genetic facts that dumb parents often give rise to dumb offspring, and that drug addicted parents no matter what the gene pool is will not provide an equal opportunity tor the offspring, and that single parent offspring are disadvantaged by the loss of income, and the list goes on. As one who deals in genetics, that is often the dominant factor and success is all to often delimited by that factor. But the authors seem ignorant of that issue.

One can state a counter example for every such success. Take the Koch brothers, MIT grads but with a father who set them up. Then take O'Malley, no rich father, a Manhattan College grad, and just as successful. Was parental income redistribution the determinant? Hardly, it was competence and drive. I can think of dozens of my MIT MITES minority students, all successful, despite in many cases low income parentage. Then again one can think of the generation who made it, the generation who spent it, and the generation who lost it. Genes go just so far.

But taxing those who achieve to redistribute it to those who do not is not the answer.

The answer is simple. Scholarships based solely upon academic performance.  The old NY State Regents Scholarships. You take a test and your grade determines whether you get it or not. No issues regarding your volunteer work, class projects, advanced placement exams. Just one test, anyone can try it, if you are in the top, say 10%, you get a free ride to college. And the college must accept you. That is the answer. Hang out the gold ring, make it fair, simple, and independent of anything else. Even rich kids can apply.