In Armchair Economist: Economics & Everyday Life
economist Steven E. Landsburg posed the following:
"Suppose that Jack and Jill draw equal amounts of water from a community well. Jack's income is $10,000, of which he is taxed 10%, or $1,000, to support the well. Jill's income is $100,000, of which she is taxed 5%, or $5,000, to support the well. In which direction is the policy unfair?"
Jack and Jill are getting exactly the same amount of water but the government has decreed that Jill pay five times as much for it. Doesn't seem fair. But Jack must pay a larger percentage of a much more modest budget to get the water; the tax is more of a hardship for Jack than Jill. Maybe Jill should be paying more.
Carpe Diem says an honest person will admit that this question has no indisputably right answer. Prof. Landsburg himself asked "If I can't tell what's fair in a world of two people and one well, how can I tell what's fair in a country with 250 million people and tens of thousands of government services?"
Let's assume we agree that this taxing scheme is fair. Consider a simple twist:
The well produces 2,000 gallons. The government taxes Jack $100 for each 100 gallons he draws from the well. Jack would be willing to pay $200 for the first 100 gallons, $190 for the next 100, and so forth, so that he would be willing to pay $100 for the tenth barrel of 100 gallons. Because Jack will keep buying water until the marginal price equals the marginal value to him, he will spend a total of $1,000 for 1,000 gallons.
The government taxes rich Jill $500 for each 100 gallons she draws from the well. Jill values the first 100 gallons at $590, the second 100 gallons at $580, the third 100 gallons at $570 and so forth; she is willing to pay $500 for the 9th barrel of 100 gallons and only $490 for the 10th barrel. Jill keeps buying water until marginal price equals the marginal value to her so she spends $4,500 for 900 gallons; she's not willing to buy the last 100 gallons.
100 gallons remain in the well. Jack could buy that last 100 gallons for $100, but he doesn't value them that much. Jill is willing to spend $490 for that 100 gallons, but that is not the tax we agreed was "fair" for Jill.
Is this tax scheme still fair if it wastes 100 gallons of water?
Economics can't answer this. All it can do is identify the dead-weight loss from the tax policy (here the 100 gallons of water left in the well).
I imagine 80% of political arguments are isomorphic to one of these two examples. Which is why I try to stay out of political arguments.
