Episode 103: Maxime Desmarais-Tremblay

Welcome and guest introduction

0:00Welcome to Smith & Mark's Walk into a Bar, a History of Economics podcast. I'm one of your hosts, Jennifer Jun, here today with my colleagues, Francois Alisson. Hi, Francois. Hello, Jennifer. How are you? Where are you right now? Your office looks very comfortable. At home in Lausanne, in sunny weather.

0:30For our audience members, Francois has a very impressive looking office chair that I'm extremely jealous of. So there's that. And I'm also joined here by Jinla Akhtere. Hi, Jinla. How are you? Hello. I'm also at home. As there are no classes right now, I'm trying to write a paper, complete a paper during the summer. It's very nice to see you all, guys. It's very nice to see you as well. I hope you're getting some rest as well. I'm very excited for our guest today.

1:03Maxime, Professor Maxime Desmarais Tremblay has the dubious honor of having listened to every single one of our episodes. So we are pleased to have him on the show. He is a junior professor of economics at the University of Lorraine and a book review editor at the European Journal for the History of the History of Economic Thought. Maxime, welcome to the show. We're glad to have you have you come by and visit us finally after after all these years of listening. Thank you. It's a great honor. I'm really happy to be here. Yeah, I've told you I'm a big fan of the show. So it puts a lot of pressure on me as this is my first time doing something like that.

1:39Oh, stop. I'm sure this will be perfectly, perfectly good. So Juna's actually got the first question for you. She's got a question for for for you, like a kind of general question. So I'm going to let her kick her kick us off.

Scientific method and history of science

1:53Okay, thank you. So we are really happy to have you finally in the show. Let's start with a general question.

2:02Yes. Could you say that economic methodology is your favorite subject? That's the general question. And if it's the case, actually, what drew you to it? And why and how did you decide to work on methodological questions in economics? Thank you. I'd say my interest in questions of scientific method goes back a long way. I remember in high school already, we had in the physics class, a chapter when I was about 16 years old on models of the atom.

2:38And from, you know, Thomson to Rutherford to Niels Bohr model of the atom, and that really piqued my interest. And I think I've had an interest in history and philosophy of science since then. And then in university, I took some classes in physics and history of science, where I had the chance to to read Thomas Kuhn's structure of scientific revolutions that was about 20 years ago at the University of Montreal.

3:08And I really loved that book, a fantastic book. And I think I'm I'm really glad that I had a chance to teach that book today to my econ students in in Nancy. And so after then studying some economics at the University of Montreal, I went for a master degree in economic methodology at the University of Paris, one Panthéon Sorbonne. And we call it epistemologie économique in French, which sometimes translates into historical epistemology.

3:42And the spirit of that degree there and of the group of people who teach and do research in Paris, one is really one of of openness to philosophical and sociological perspectives on the history of economic thought and the history of economics as a science. And this is well captured, I think, by Anikot, who was a head of that program for many years in the presidential address she gave at the joint HES-HES conference in Nice last May, which I think we'll be able to read in the European Journal of the History of Economic Thought in about a year time.

4:22So for me, methodological questions and history of ideas are interconnected. I often find that philosophy of science that is uninformed by actual historical case studies is often vacuous. And at the same time, some history of economic thought can be quite flat if it fails to raise questions about the foundation of economic knowledge, about the principles, the assumptions, the values underpinning economic knowledge or the structure of theories, models, how they're being used in different contexts for different purposes and so on.

4:59So what I'm trying to do often in my work is to connect the history of economic thought and methodology in the way that some colleagues who inspired me in doing so, like Harold Maas and Margaret Chabas, who I think you've had on the show before, and Mary Morgan as well. And thinking about that, so I shared a few papers with you that we're going to talk about today, I think two common points there is an interest I have in conceptions of human agency, and also an interest in how values are embedded in theory, in empirical measurement and in policy recommendations made by economists.

5:42So this is how I think I try to combine history of economic thought and economic methodology. Thanks, Maxime. Thanks, Maxime, for sharing these reflexive comments with us, and indeed we'll speak about the three papers that you sent us, and I'm very happy to have you on the show as a former colleague at the Centre Valois Pareto in Lausanne.

The birth of homo economicus

6:08The first paper we'll discuss about is the one that you wrote with Michael Ebay, and that was published in the Journal of Economic Thought in 2023, The Birth of Homo Economicus, the methodological debate on the economic agent from John Stuart Mill to Wilfredo Pareto. And so my first question to you would be on that paper, what is the common understanding of Homo Economicus today? Is it closer to John Stuart Mill's wealth-seeking individual, or to Maffeo Pantaleoni's evolutionary agent, as you tell in your paper, or even to Wilfredo Pareto's choice machine?

6:55And perhaps the question behind that is, what common misconceptions about Homo Economicus were you hoping to challenge with your article? Okay, this is a great question, François. I guess the first one is easier and quicker for me to respond. I would say that modern microeconomics owes its understanding mostly to Edgeworth and to Pareto.

7:26And in micro, we see Homo Economicus as a choice machine. This is Pareto's expression. Individuals make choices based on their preferences, and the economist is generally agnostic about the content of those preferences. Certainly, the kind of conception that Maffeo Pantaleoni, a 19th century Italian economist, was defending, that is that Homo Economicus concurs to the preservation of the species and aims at reproductive acts. This is a conception we really no longer find today.

7:59This was a very crude kind of Spencerian view, and that was quickly, I think, dispersed in the 20th century. So today, the economic man or the Homo Economicus, the economic agent in economic theories, is much closer to the kind of purified version that we find from Villeferre de Pareto and also the mathematical utility maximizing machine of Edgeworth. And to answer your other question about the kind of motivation, so let me say a few words of context about the paper.

8:39This was a really exciting adventure with Michele B, who is now at the University of Salento. And we started working on this paper after I finished my PhD in Lausanne. And Michele was there as a postdoc at the Saint-Val-Has-Pareto.

8:59And I'm very pleased with the paper published in Open Access because it allowed it to circulate, I guess, widely. And now I see it being cited by scholars outside of history of economic thought. And I think that is interesting, you know, and unexpected that there are some people citing it in management or communication studies or bioeconomics, environmental law and so on.

9:25That speaks to them in a certain way. For us, in terms of motivation, writing that paper, I was struck by, while reading Mary Morgan's 2006 Journal of the History of Economic Thought paper on economic man as model man, which became a chapter in her 2012 book, The World and the Model, where she argues that Mill created the homo economicus. But if you read Mill, if you read John Stuart Mill, he doesn't use that expression of economic man or homo economicus.

10:01And so we were kind of asking ourselves, you know, who invented that expression if people say it's Mill, but he doesn't use that expression. So that was one kind of trigger for working on this subject. And more to your question about the motivation in terms of dissatisfaction, I would say, with the simplistic conception of human beings that comes out of behavioral economics. In 2016, I listened to Richard Taller's Nobel address where he argues that we should abandon the vision of homo economicus because it's not a realistic description of how human beings behave.

10:46And instead, humans, he says, are like Homer Simpson. And I think for me, this is doubly wrong in a way. One is, I don't think we're that dumb and impulsive creatures like Homer Simpson. Being a bit of a Kantian myself, I really don't buy this simplistic and purely empiricist vision of human behavior.

11:08I really believe in some form of human rationality. And I think secondly, and perhaps more importantly for our paper, is that Taller misreads what the homo economicus or the economic man is about when he says that it's not a realistic description. Because if he, in a way, read our paper, he would realize that this was not the intention of John Stuart Mill, who really proposed this conception of an abstract human being or an abstract version of an economic agent that is not supposed to be a realistic description.

11:46And it's the same with Vilfredo Pareto. They emphasize that this is for the purpose of building pure economics or for building a scientific economics. It's not meant to describe how actual human beings living in a society with complex forms of social interaction. For that, we need more than just the economic man.

Historical narrative of political economy

12:07That's great. One of the things that I wanted to press out a little bit further is this question of why conceptual genealogy of homo economicus. This was coming out in some of the stuff that you were just saying. And the reason why I'm asking is, it seems like the story that you're telling is kind of a corrective history. Right. It's supposed to, is it meant to correct a view of the history of economics as a series of dramatic revolutions, for example, or, or what?

12:35Well, I've already told you about kind of kind of the initial motivation. But then as we realized this historical analysis, we came to a conclusion that was not part of our initial expectation or motivations. But I think it does, in a way, challenge a standard narrative about the history of political economy in the 19th century and that narrative that insists on the marginless revolution in the 1870s as a kind of breaking point. So the standard story is that Carl Menger, William Jevons, Leon Valhass, they reason that the margin and that consumers demand good up to the point where the marginal utility is equal to its price.

13:22And the price is determined by the intersection of demand and supply and value is nothing but the market price. So these are standard elements of neoclassical marginalist economics that emerges in the 1870s. So that we're not challenging those results in a sense, but what we're challenging is that the idea that this would be the kind of the main narrative about the evolution from classical to neoclassical economics.

13:52So, and that depends on what you think of John Stuart Mill, basically, who's this central figure in the middle of the century. And so, on the one hand, you could argue that John Stuart Mill belongs to classical political economy because he abides to a cost of production theory of value, to the wage fund doctrine.

14:17But if you put John Stuart Mill in classical political economy, then marginalism is not a rupture because Mill already has something like a conception of the economic man, in a way, already in classical political economy. So, there's a continuity between classical political economy and neoclassical economics. On the other hand, if you decide that John Stuart Mill, because he proposes in 1836, this conception of the individual agent as the starting point of scientific economics,

14:52then you could put him in a way in the camp of neoclassical economics. But if you do that, if Mill is closer to neoclassical economics, then marginalism is not the point of rupture either, because Mill is not a marginalist, right? So, once we look at the history of 19th century political economy, rather than focusing only on the theory of value, if we look at the representation of the agent, then we kind of get a different narrative, a more complex picture of how things evolve in the 19th century.

15:25Thank you for this complexity that interests me very much.

History of concepts and words

15:33Reading your article, I was stuck by the fact that the concept of homo economicus and the label seems to have a distinct history. You just mentioned earlier that Mill formulated the idea without having the term. And in your paper, we learn that Janet, a guy called Janet, coins the term while criticizing the very idea. And Ponte Aleoni seems to be the first to bring the two together, the term and the concept.

16:08And so I would like to ask how important is this distinction between the history of a concept and the history of a word for understanding the genealogy of homo economicus? So, this is a question we really struggle while writing the paper. And I think generally speaking, I don't want to commit to an essentialist view, according to which concepts kind of float in the ether and pre-exist any kind of human speech act.

16:39In my work, I try to pay attention to the words used by economists, and most of the time, the words, the concepts, the expressions can be used as synonymous. But in this case, as you pointed out, Francois, it's more complicated because John Stuart Mill puts forward a methodological proposition to base political economy on an abstract conception of human beings. But he doesn't use that expression of economic man, right?

17:09Others use the expression of economic man to refer to Mill's proposal. So, this is very clear. We have this already by Francis Amasa Walker, the American economist in 1874. But by then, John Stuart Mill is already dead. And at about the same time, in the 1870s, Claudio Jeannet, or Jeannette, I don't know how to pronounce, a French Catholic economist who is very critical of the liberal and individualistic approach of English political economy.

17:44He probably is the first one to use that expression of homo economicus to decry that fiction that he says does not describe the reality of human social interaction. And especially, he has this conception of human determined by the fall, by sin. And so, Jeannette uses that expression of homo economicus to refer specifically to Mill's methodological text of 1836.

18:16So, he's talking about Mill, uses that expression, but in a negative way. And then, it will be neoclassical economists who then pick up on that, either economic man in English or homo economicus in French or in Italian, from the Latin, obviously, who use it as a positive tool or as a positive expression to build economic theory, right? This is what Pantaglioni does, this is what Pareto or Edgeworth do, they use the homo economicus or the economic man as a foundational block of economic analysis.

18:57So, that's a very quick summary which we show in the paper. And so, it's complicated in a way, whether we focus on the expression or John Stuart Mill's idea before the expression is used. Thank you very much, and congratulations on this paper.

John Rawls and economic literature

19:19I suggest now, Maxime, that we move to the second paper that you sent us, which is entitled Incentives and Taxation in Rawls Institutional Theory of Justice, that just appeared in the Journal of Institutional Economics. And as it is about John Rawls, I would like to start with an easy question, maybe. An easier question. We know that economists read and read John Rawls, but was Rawls a reader of economists?

19:55Yeah, thank you. So, most listeners might be familiar with John Rawls, the American philosopher who really was a very important figure of American political philosophy in the 20th century. And he was born in 1921, died in 2002, so his life and career overlapped with many of the key figures of 20th century economists with whom he interacted, for instance, Kenneth Arrow or James Buchanan.

20:27So, in his undergraduate thesis, Rawls was quite dismissive of self-interested conception of man. And after World War II, he came back to university, went to graduate school at Princeton, and when he finished his PhD in 1950, he enrolled into a seminar by William Baumol at Princeton, where he would read Contemporary Economists. So, he read, apparently, John Hicks' Value and Capital, Paul Samuelsson's Foundations, a bit of Valhaas' Elements of Pure Economics, but also the kind of new stuff that was coming out of Princeton, John von Neumann and Oscar Morgenstern's Theory of Game.

21:14I'm not sure what exactly he understood in that very abstract book in the early 50s, but he certainly got much from Frank Knight's Ethics of Competition. And then, in the 1950s, we know he read Luce and Raifa's Game and Decisions, which is a much more accessible book about game theory. He also read Kenneth Arrow's Social Choice, Individual Values. Then, in the 60s, he would engage with the emerging public choice literature.

21:47He read some Buchanan and Tullock. He read Musgrave's Theory of Public Finance. He would read British economist Nicholas Caldor's Expenditure Tax. And very important for later work, he also read James Mead, the British economist, his book on Efficiency, Equality, and the Ownership of Property. And this is where Rawls got the idea of a property-owning democracy from. So, in the Theory of Justice, which came out in his major work, came out in 1971, we see the influence of economic thinking in terms of the rational choice approach that he takes, the concept of the maximin, the idea that society is like a game with rules of the game.

22:35He was also, he says, inspired by the broad scope of political economy. At the time, in the English-speaking world, moral political philosophy was quite narrow, focused on small problems, and he wanted to build a kind of big social theory, just like Adam Smith or John Stuart Mill or Henry Sidgwick. And so, throughout his career, we see Rawls as a very avid reader. He writes very widely, and he cites generously, which is why we can know about all those works he read.

23:09He was a very modest man.

23:12And he, yeah, he borrowed much from economists. And so, economists were very interested in the Theory of Justice when it came out, because there was so much kind of economic reasoning in the Theory of Justice.

23:26And Rawls was very polite and very interested in engaging with economists after the publication of the Theory of Justice. But, as we know, the 1970s is also a time when economics become much more mathematical, and Rawls is honest that, you know, from the 1970s onward, the kind of mainstream work in economics was becoming too mathematical for him, and he couldn't really follow the maths, whether that is, you know, Atkinson, or Arrow, or Phelps, and so on. Thank you.

Taxation and the ability to pay

23:59Indeed, Rawls has created a very complex theory. And in your paper, you mentioned the Ability to Pay principle. My question is, how should we understand Rawls' rejection of the Ability to Pay principle? Thank you, Cinla. So, for those who are not familiar with the Theory of Taxation, The Ability to Pay is a principle of taxation, which says that taxes should be a portion to one's ability to contribute. So, in French, sometimes we say the faculty to contribute, or the ability to contribute, to contribute to the public good, or to the cost of public expenditures, or to contribute to, you know, collect money to redistribute to the poorest.

24:43So, ability here is understood generally in terms of financial ability, so either in terms of income or wealth.

24:53And we find that idea already in Adam Smith, but also in the Declaration of the Rights of Man and of the Citizen adopted by the French National Constituent Assembly in 1789. So, it's there in public finance throughout the 19th century, and in the 20th century, especially in the United States, it becomes really the dominant justification for the progressive income tax. So, both are kind of connected in the 20th century, U.S. tax debate, the progressive income tax, and taxing according to one's ability to contribute.

25:31And what's surprising here is that Rawls is often celebrated as an intellectual figurehead of the left or left liberal in the English-speaking world. So, but he was opposed to progressive income tax based on the ability principle.

25:52And so, how are we to make sense of that? That's one question I try to address in the paper. On the one hand, Rawls is a Cold War liberal with all the possible ambiguities that this represents, this position. He was, in the post-war period, quite wary of the increasing role of the state in individual affairs. And although he was clearly not a libertarian by any means, there is some kind of familiarity with Buchanan and Hayek's position in the 1950s.

26:29So, that's one part of the explanation, I think. The other part of the explanation is that Rawls, like John Stuart Mill, really favored of progressive inheritance tax. So, if you tax wealth, if you tax the transmission of wealth massively, there is less of a need of a progressive income tax as an instrument to reduce inequality, right? Especially at the time Rawls was living in the 50s, 70s, when he's thinking about the theory of justice, there is much less income inequality in the U.S. than there is now.

27:07And so, he didn't live in the age where a man like Elon Musk could amass a colossal fortune during one's lifetime, right? And so, again, if you cut the transmission of wealth, then maybe there's less of a need of a progressive income tax.

27:27And another part of the explanation, I think, is that Rawls favored the taxation of expenditure or consumption. And in theory, the difference between a tax on income and a tax on expenditure or total expenditure is just that you exempt savings. So, when you tax expenditure, you exempt savings. When you tax income, normally you include all income, including what you're going to save. So, the idea of a tax on expenditure goes back all the way to Thomas Hobbes, and it was defended in the 1950s by British economist Caldor.

28:07And Caldor's position was not very popular at the time, but somehow Rawls picked up on this. And one way to make sense of this is that Rawls really saw society as a cooperative venture. So, he wanted to encourage workers to collaborate to create a social surplus through the division of labor. So, the idea here is that if you tax consumption, you tax what you take out of the common stock. That's Hobbes' expression.

28:39So, you want to encourage people to put in, in a way, the common stock or the common good, rather than encourage them to take out of it. So, you tax consumption, what they take out, rather than tax work or labor, what they put in. So, it's quite a crude idea. That's not very Keynesian, obviously.

28:59But that's part of the explanation for why Rawls is more sympathetic to a tax on, a proportional tax on consumption, rather than a progressive tax on income. That was the dominant view among public finance liberals in the U.S. at the time. But to be fair, you know, what I reconstruct in the paper is Rawls' writings on taxation throughout his text.

29:31But he never wrote a systematic book on taxation or even a whole book chapter or paper on taxation. So, sometimes it feels as if he hasn't, you know, given enough thought about a systematic way to address tax issues, which is a pity because he's really concerned about institutions. And I think that, you know, tax rules are really important economic institutions. I want to get into the weeds a little bit further about Rawls' views of taxation, so far as he did have them.

Incentives and fair taxation

30:03In his writings, as you noted, he was really conscious of the importance of how tax policy could interact with the incentives of those who were taxed. And so, I was wondering if you could tell us a little bit about how do incentives or their absence play a role in fair taxation? Thank you. So, let me start by the kind of standard way of framing the relation between incentives and fairness in contemporary normative economics.

30:33So, economists generally make this distinction between efficiency and equity, right? And this is a clear post-1970s, something that, you know, was taking shape after Rawls' theory of justice was published, but that he reacted to. So, incentives are there to increase efficiency, but there's a trade-off between efficiency and equity, and this is captured by a social welfare function. So, if you want to redistribute more money to the poor, you need to tax the rich more, but unless you have a way to tax them that does not impact their behavior, what economists call a lump sum tax, then taxing them will change their behavior and will have an efficiency loss.

31:19So, if you tax only their labor, if you tax labor income, then optimal tax theory tells you that a tax on labor income has a disincentive effect on labor, because it would encourage people to work less, that is the so-called substitution effect. So, the theory tells you that there's an efficiency cost to redistribution. So, that's the trade-off. Now, Rawls' theory of justice has, at its core, two principles of justice.

31:53The second one says that we should maximize the position of the worst-off member of society, or the worst-off representative member of society. And so, for Rawls, this is a question of justice. It's not mainly a question of efficiency. But one way to interpret this principle is that inequalities are tolerable up to the point where they're no longer to the advantage of the poorest member of society. So, that reasoning assumes that some level of inequality is socially advantageous.

32:29And that's the incentive argument for Rawls, right? So, if you, for instance, take doctors, we want to encourage talented individuals to take up those positions which demand large personal sacrifice. And it's to the benefit of everyone that some people study for very long, have stressful lives, so that we can have good doctors and good health care. But that means that we have to accept some level of inequality, that some jobs pay more than others.

33:02And that's to the advantage of everyone in society, including the poorest members. And you can make a similar argument for an entrepreneur. You can say that we're going to leave some of them with a bigger share of the social surplus in order to encourage talented individuals to take up those risks. And the level will be that there will be some level of inequality in society. And so, there's an incentive here that benefits the worst soft member, but only up to a certain point, right?

33:34Rawls' second principle says that, you know, if inequalities are not to the advantage, then the priority of the first principle is that we want to give people equal chances in life and we want to give them equal liberty. And perhaps too large inequalities will damage that equality between individuals and society. And so, perhaps today, you know, we live in a society where doctors can earn in the U.S. maybe half a million a year.

34:08But that might not be, if we follow Rawls, we might not need to give them that high salaries or income in order to incentivize them to practice medicine, right? So, society perhaps should not leave them with so much, we could tax them more in order to redistribute to the worst soft member. And that would be to advantage, right, of everyone, including the worst soft members. So, yes, some level of inequality, but only to a certain extent.

34:40Thank you.

Ideal and non-ideal theory

34:41One of the interesting notions that I came across in your paper is non-ideal theory. Could you please describe the notion of non-ideal theory and then tell us why do Rawls' sensitive text proposals belong to non-ideal theory? Thank you. So, the distinction between ideal and non-ideal theory is one that Rawls introduces in the theory of justice that then gets picked up in political philosophy. So, ideal theory should be there to guide systems in which individuals respect the rules of the game.

35:18And non-ideal theory is a theory of systems where individuals cheat or where individuals don't respect the rules, where institutions are unjust, or where policy instruments are restricted and you don't have all the means available to conduct policy. So, a theory for our unjust world is a non-ideal theory. The question of a transition to a more sustainable economy, for instance, is a question also of non-ideal theory.

35:51But Rawls claims that his theory of justice is an ideal theory, that it's meant for a society in which individuals, in theory, respect the rules of the game. It's a thought experiment in which abstract individuals give themselves principles of justice and respect them. And then we ask what kind of institutions should follow from that framework. The problem of taxation is that sometimes Rawls says that tax institutions belong to an ideal system.

36:28And sometimes he says, well, those are practical questions that should be dealt with in non-ideal theory.

36:35So, in this paper, I do two things. First, I make a historical reconstruction of what Rawls wrote on taxation. And then I make a critical point where I argue that Rawls' comments on taxation really definitely belong to non-ideal theory.

36:55And essentially, very quickly, my argument is that Rawls rejected progressive labor income taxation, as I said already, because he was concerned with preserving incentives to work. He believed that if you tax income progressively, the talented might not work as hard. And my point is that this argument, this reasoning is based on an empirical assumption, an elasticity of labor supply, which is quite arbitrary from the point of view of ideal theory.

37:28So, if you build an ideal theory in which people treat each other as equals, as Rawls assumes, in which they express the values of fraternity and solidarity, then those individuals are not going to shirk if you tax them more. Right. That would happen in the real world, in the non-ideal world, in which individuals have not internalized the principles of justice.

38:02But in the ideal world of Rawls' theory, people should not have that labor supply response, I think. And so, his comments on taxation that follow from that premise do not kind of belong to ideal theory. We got some more questions about taxes and taxation in a third paper that you shared with us that you co-wrote with Marian Johnson, if I remember correctly. It's forthcoming, so it's very, very recent.

38:35It's going to come out in the history of political economy.

Measuring the post-war tax burden

38:38It's called Distributing the Tax Burden in Post-War America, with the subtitle Empirical Estimates and Normative Principles. And this is an interesting paper that brings together questions that I'm interested in, philosophy of measurement, together with political economy, political philosophy. But to set up a little bit of historical context, I just wanted to start off with the question. Why was the question of the tax burden so salient in the period of investigation of this paper, which is during the post-war period? What was going on during the time? Thank you.

39:09So, yes, I'm really looking forward to see that paper coming out in history of political economy. I think it will be in the February issue of next year, and it should come out online, I guess, by the end of the year.

39:24And Marian Johnson and I, she's based at the University of Wisconsin, Oshkosh. We've been working on two kind of sister papers on the same project, and this one is coming out soon. And there's already another one that came out in international tax and public finance. So, to answer your question, Jen, the demands of the Second World War, that is, massive mobilization of men, women, material resources, led to an unprecedented level of public expenditures in most countries during the Second World War.

40:01And some of it was paid by public borrowing in the form of war bonds, for instance, but also by very large tax increases. So, in the United States, before the war, the income tax was a tax paid mostly only by the rich, really. Only 6% of households pay income tax. It was a modest tax. The rate was not very high, but it was explicitly redistributive and meant as a small check on the concentration of income and wealth.

40:33But by the end of the war, the income tax had become a completely different beast. It was a mass tax, sorry, that was paid by the majority of American households. So, we have a completely new tax regime, and thus the question arose, who bears the burden of the tax? And the question is difficult because economists know, at least since Adam Smith, that the agent that is charged with a tax is not always the agent who will bear the burden of the tax because of the possibility of shifting the burden to other agents.

41:11So, for instance, if you tax soda, even if the tax is charged to the producer of the soft drink, the tax we know, economists know, will likely be paid mostly by the consumers. And that is because generally the demand for sweetened beverage is more inelastic than the supply. And so, there's a possibility of shifting. So, for every tax, economists conduct incidence analysis to try to assess who bears the burden of the tax.

41:45And the question that interests Richard Musgrave, in particular, who was a 20th century American public finance economist after the Second World War, when we have this new tax regime, is who bears the burden of the tax? And he wanted to assess the overall distribution of the tax burden by income group, right? So, what we mean by overall or total tax burden is when you take into account all the taxes, right?

42:18The excise, the federal personal income tax, the corporate income tax, payroll taxes, local property taxes, and so on, right? So, each of those taxes have a different kind of incidence. And he was interested to know, you know, who ends up paying the burden of those taxes. He doesn't have micro-level data, but he has enough information in order to attribute the burden by income groups. And the burden is calculated in terms of effective tax rate for each income group.

42:50That is, you divide the tax paid by the amount of income, and you get the tax, effective tax rate. So, why does it matter? It matters because, well, after the Second World War, we have demobilization, and so we can eventually afford a tax cut. And when a tax cut comes in, the question is, who should get relieved first, right? And in order to answer that question, that politicians who need to decide who will get a tax cut, Musgrave argues they need to have an accurate picture of the state of things as they stand.

43:30Who is actually paying the effective tax burden before you know who should be relieved? And then, you know, soon, the U.S. enters the Korean War in 1950, and then taxes have to be increased again to fund this new war. And then the kind of reverse question comes up, you know, we need to increase taxes, who should bear more taxes? And then, again, the question, well, who's actually paying the taxes right now before we talk about increasing taxes?

44:04That's really relevant information.

44:08Speaking of Musgrave, this was something that you alluded to in your answer just now, was that Musgrave was really interested in this question of measurement, like how much is a tax burden? And there was some, for lack of a better word off the top of my head, there was some measurement beef between Musgrave and some other people who were trying to estimate this tax burden. So how would you characterize the disagreement between Musgrave's estimates of the tax burden and those who had, you know, in quote, business interests?

44:41This is a little bit of a loaded question, but was it a purely technical disagreement or was something else at stake? And if there was a consensus, how did such a consensus emerge in spite of those disagreements? Yeah, that's a great question. And it took us quite some time, Marianne and I, to try to build that argument in the paper, because if you read Musgrave's papers and the attacks that he faced and the response, they're all very technical and they're not never framed in political terms.

45:13But through correspondence, unpublished correspondence and kind of more historical work that we read, we are able to argue that the question is really political, right? It's also a scientific empirical question, but we know that this information can be used and has been used for political purposes. So to give you a bit of context, after the New Deal, some big industrialist manufacturers in the U.S., they already lobbied to repeal some provisions of the New Deal and they want to cut back the role of the federal government in the economy.

45:56And they argued that free enterprise and small government is really part of the American way of life. And so after the war, there is a kind of we talk about the post-war consensus that the tax regime, progressive income tax and progressive corporate income tax was part of the kind of political economy of the post-war regime. But there are still some segments of this business interest, the more radical reactionary segments who criticize the high tax regime.

46:27They want to cut corporate income tax, they want to cut the top rates on personal income tax because they say that, you know, these top executives are burdened too much by those taxes. And in order to unleash their entrepreneurial spirit, in order not to weaken their incentives to work, we need to leave them with a larger savings. And also because those savings will contribute to capital accumulation. Again, these are antique and Asian vision of the economy.

46:59And when we read congressional hearings, we see those representative of manufacturing lobby testifying to those committees of the Congress saying that this is the way tax reform should go. So, for instance, the National Association of Manufacturers is one very powerful lobby at the time. General Motors is a big member of this association. As we know, GM will become, you know, the biggest company in the world at the time in the early 50s.

47:30And they can hire smart economists, just like big corporations can today. And so one of them, Rufus Tucker, who's completely unknown today, but, you know, he's a public finance guy. He has a PhD in economics from Harvard. And already in the interwar period, he was attacking distributional studies, arguing that the American tax system was already progressive. Right. And so that matters because, again, when a tax reform comes up on the agenda, if you show that the tax is already very progressive, then maybe you don't want to increase taxes on the rich more.

48:09Right. So he's in this technical statistical fight. You know, he's a respected guy. He was vice president of the, I think, American Statistical Society. And so when Musgrave comes up with his paper that he wrote with graduate students at the University of Michigan, it's published in the National Tax Journal in 1951. Tucker really attacks Musgrave on methodological assumptions made by Musgrave about the income basis and about the incidence of various taxes.

48:41So, as I said, this is a highly technical debate that spills over various conference sessions and papers and involves also other public finance experts like Joseph Peschman and Gerhard Kolm. But what seems to be clear to everyone in that debate is that it's the political implications of the finding. Right. When Tucker argues that Musgrave should not attribute undistributed profits as income to the richest households, it's because doing so would increase the denominator of the tax paid by the rich.

49:19Right. So if you in your accounting process, if you attribute undistributed profits to the richest income group, then you enlarge the denominator. And then it means that the effective tax rate paying by those people in that income group is smaller. Right. And so Tucker says Musgrave is wrong in attributing those undistributed profits, for instance. And if you don't attribute them, then it shows that the rich are paying more taxes. Right. So that's that's one example. But there's many points on which to debate.

49:56And and so, you know, Tucker argues that the distribution of tax burden is more progressive than what Musgrave makes it look like with his calculation. But the bottom line, I think, is that Musgrave was a kind of centrist who left liberal and and his position was probably the dominant one among academic economists at the time. And although he was also very respected by the profession, he was quite transparent and quite thorough about his methodological assumptions.

50:32So the procedure that he devised for calculating the tax burden eventually, I think, convinces public finance colleagues. We see this in exchange in the early 50s. It becomes a standard process that is then used in Canada by some graduate student of Musgrave, but also in Colombia on other tax fiscal mission. And so it's also at the time Musgrave uses those results in congressional hearings when he's asked to testify and congressmen eventually kind of buy into this idea that the tax burden is distributed roughly proportionally to income.

51:17Thank you. Thank you. Thank you. Thank you. Well, who pays the taxes? That's the question. Measuring the fairness of a tax system, it seems that creating a democratic society is really important. Could you walk us through the links you draw in your paper between these two dimensions? Yeah, that's a great question. That's really something I've been thinking about a lot lately. Well, so as I was just saying, the main finding of Musgrave's study eventually became what we call a stylized fact.

51:55This is an expression we borrow from economic sociologist Daniel Hirschman.

Tax burden and democratic transparency

52:00And so through repetition of the data of the process, replication, eventually we see in those congressional hearings over the years, especially progressive representatives and senators kind of accept this idea that the tax burden is mostly proportional. And by that we mean that except the poorest and the richest most U.S. taxpayer, the overall tax burden does not increase that much with income.

52:33And that is because although federal taxes, the federal income tax, corporate and personal income tax are very progressive, we have local and state taxes that are very regressive and excise that are very regressive. So the overall burden is proportional because some taxes are progressive and others are regressive. So to give you an idea, in 1948, so Musgraves builds different scenario and, you know, according to one scenario, the taxes, the effective tax burden on the middle incomes is about 25% of their income.

53:12So that's the effective tax burden. That's the effective tax burden. And by the way, it's not too dissimilar from the current effective tax burden of the middle classes in the United States today. How does that relate to democracy? Musgraves makes two very clear value judgments about tax policy in a democracy. First, the level of progressivity of the tax structure should correspond to social preferences about the level of inequality. He thinks it's not up to him to decide how progressive the tax system should be.

53:46But he argues that there was a social consensus at the time that the tax system should be progressive. And I think that's quite convincing. People already who looked at the data realized that although statutory rates were very high, right, that the top marginal rate of federal income tax was 94% after the war. But not many people paid that 94%. And what Musgrave study adds to this is really to show, as I said, that the overall distribution is not progressive overall.

54:22It's mostly proportional. And so this is information for politicians to use to factor in in their decision about tax reform. It's not for Musgrave or the economists to decide, but he's there to provide kind of this expertise that is being used for, hopefully, politicians to make the right decision. The second value judgment that Musgrave makes explicit is that the tax system should be transparent, right? The two go together is that the tax system should reflect the social values of the population as captured by their elected representative.

55:00And the tax system should be transparent. That is, in a democracy, he thinks people have the right to know how political decisions affect them. And so he's aware that his study is based on some informed guesses. Notably, the incidence of the corporate income tax is really difficult to assess. That's something that Marian and I discuss in our sister paper that came out in International Tax and Public Finance.

55:30But Musgrave devises a rigorous process, and he says the result is better than the uninformed opinion of the man on the street. So for Musgrave, the role of economic experts in a democracy is to rationalize the value judgments of the population or of the elected representatives, and to provide policy that is consistent with this rationalization, with those values, and the empirical knowledge that they can gather about the economy.

56:01And I think those issues are still with us today, right? This conception of the role of the economist in a democracy, I think, is still relevant. And some of those issues about technical debates about the measurement of the distribution of tax burden are still also with us. Again, in the other paper, Marian and I discuss the echo of those debates from the 1950s in the 2020, between Thomas Piketty, Emmanuel Saez and Gabriel Zuckman on the one hand, and Gerald Auten and David Splinter on the other hand,

56:39who really have technical debates about the evolution of economic inequality in the United States that really echo already this debate from the 1950s, we think. Excellent. Thank you, Maxime.

Constructing fiscal statistics

56:53And this leads us to our last question for today. In general, drawing on your experience with this article, would you say that fiscal statistics describe reality or contribute to building reality? Thanks, Francois. Well, my answer to this question is quite short. I'm a constructivist, so I think statistics construct the social world.

57:23If you think of statistics like the unemployment rate, for instance, they really construct the identity. You can't think of someone thinking of themselves as an unemployed person if you don't kind of create a statistic of unemployment, right? And to a certain degree, it's the same with other statistics. The effective tax burden is not a creature that roams the street that you can see on a night out. The proportionality of the tax burden is a constructed, becomes a stylized fact.

57:54And so the curve that represents a distribution of the fiscal burden is a statistical artifact. It makes us see part of the social world, which we cannot observe with our eyes, but it's a constructed social world. Yeah. That's a notable quote from today. The tax, the effective tax burden is not something that's just wandering out outside in the middle of the night. Great.

58:24Well, thank you so much for stopping by, Maxime. We've been really looking forward to having you on the show. And we're finally glad that you're here as a guest in addition to being a listener. And thanks for listening to all those episodes. And thanks for making taxation so interesting. Thank you. Thank you very much for the invitation. It was a pleasure. And I look forward to future episodes. Fantastic. Fantastic. And I've got one more, one more last word for our listeners out there. We would love, we at here at Smith and Marks, walking to a bar, would love to hear from you.

58:56We would love to hear about what you have found interesting or what you would find interesting. People you'd like to hear from topics you'd like us to talk about. And if you'd like to get a hold of us, please email us at smithandmarks1 at gmail.com. So that's smithandmarks, all lowercase, the number one, at gmail.com. And we look really forward to hearing from you. Join us again next month for another episode of Smith and Marks Walk into a Bar, a History

59:26of Economics podcast.