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Friday, April 15, 2016

Luck Doesn’t Justify Higher Taxes

Being Lucky (or Unlucky) Doesn't Justify Discriminatory Treatment


Cornell University economics professor Robert Frank has an article in the Atlantic on luck. In “Why Luck Matters More Than You Might Think,” he claims that successful people underestimate the role of luck in their lives. I’m quite willing to believe that, although he does not give any supporting data.

Instead, he argues for higher marginal tax rates.

Frank writes:

According to the Pew Research Center, people in higher income brackets are much more likely than those with lower incomes to say that individuals get rich primarily because they work hard. Other surveys bear this out: Wealthy people overwhelmingly attribute their own success to hard work rather than to factors like luck or being in the right place at the right time.

That’s troubling , because a growing body of evidence suggests that seeing ourselves as self-made — rather than as talented, hardworking, and lucky leads us to be less generous and public-spirited. It may even make the lucky less likely to support the conditions (such as high-quality public infrastructure and education) that made their own success possible.

Let’s say that Frank is right that high-income people overstate the role of their own hard work in their success. How does he know that low-income people, who put a bigger weight on luck, are thinking correctly? Moreover, imagine that you were asked to give advice to a 20-year-old from a poor family who wanted to be financially successful. Would you tell him that luck is a huge factor? Even if it’s true, it’s demotivating. Who is likely to do better: the poor 20-year-old who thinks that luck is more important than hard work or the poor 20-year-old who thinks the opposite?

In a “you didn’t build that” spirit, Frank advocates higher marginal tax rates so that the government can spend on more on infrastructure and schooling. Past such expenditures, he argues, were a large factor in the success of the successful. He doesn’t give any data or even any links backing this up. He simply asserts it.

Frank writes:

A recent study by the political scientists Benjamin Page, Larry Bartels, and Jason Seawright found that the top 1 percent of U.S. wealth-holders are “extremely active politically” and are much more likely than the rest of the American public to resist taxation, regulation, and government spending. Given that the wealthiest Americans believe their prosperity is due, above all else, to their own talent and hard work, is this any wonder? Surely it’s a short hop from overlooking luck’s role in success to feeling entitled to keep the lion’s share of your income and to being reluctant to sustain the public investments that let you succeed in the first place.

I must say, partly because I’m a libertarian and partly because high taxes, heavy regulation, and high government spending are keeping economic growth anemic, thus making it harder for almost everyone in the United States, I found this paragraph the most heartening of all.

My impression, though, and I may be wrong, is that there is one policy that the top 1 percent tend to favor more than the bottom 99 percent, a policy that would do more than any other policy to help really poor people: they tend to favor immigration.

Robert Frank almost gets there. He writes:

The one dimension of personal luck that transcends all others is to have been born in a highly developed country. I often think of Birkhaman Rai, the Bhutanese man who was my cook when I was a Peace Corps volunteer in Nepal. He was perhaps the most resourceful person I’ve ever met. Though he was never taught to read, he could perform virtually any task in his environment to a high standard, from thatching a roof to repairing a clock to driving a tough bargain without alienating people.
Even so, the meager salary I was able to pay him was almost certainly the high point of his life’s earnings trajectory. If he’d grown up in a rich country, he would have been far more prosperous, perhaps even spectacularly successful.

So wouldn’t it be nice if instead of using Birkhaman Rai as a prop to illustrate Frank’s case for bigger government, Frank instead advocated letting more people like Birkhaman Rai into the United States?

Unfortunately, Frank fails to connect the dots. In the very next paragraph, he writes:

Being born in a favorable environment is an enormous stroke of luck. But maintaining such an environment requires high levels of public investment in everything from infrastructure to education something Americans have lately been unwilling to support. Many factors have contributed to this reticence, but one in particular stands out: budget deficits resulting from a long-term decline in the United States’ top marginal tax rate.

Frank is right that those of us born in the United States were incredibly lucky just to be born here. I was born in Canada, which made me roughly 80% as lucky. But then if we want to help poor people, let’s let them in. Ask the Birkhaman Rai’s of the world: Would you like the U.S. government to let an extra 5 million people a year into the United States or would you like more government spending on freeways and government schools?

Hat tip: Mark Thoma. Russ Roberts interviews Robert Frank on success and luck here.

Cross-posted from Econlog.


  • David Henderson is a research fellow with the Hoover Institution and an economics professor at the Graduate School of Business and Public Policy, Naval Postgraduate School, Monterey, California. He is editor of The Concise Encyclopedia of Economics (Liberty Fund) and blogs at econlib.org.