The Ultimatum Games

Obama’s second favorite word after one of many permutations of the first person pronoun is ‘fair.’ He constantly uses the word when droning on about taxation and the need for deficit reduction.

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Note that Obama never talks about cutting spending as a means for deficit reduction.

When discussing taxation and increasing tax receipts (I refuse to use the liberal euphemism of ‘revenue’, since it implies the Government somehow earned the money) it is important to remember the Laffer Curve. Furthermore, as my favorite economics writer points out when discussing the Laffer Curve it is also important to remember it’s what the tax-ee think’s is a fair rate to tax them, not what the tax-er thinks is a fair rate for them.

And there’s a lot of very interesting economics been done on what people do think is fair: take the ultimatum game for example. Two people, $100. One of them gets to decide how the two will split it. The other one can accept the split or reject it: on rejection neither of them get anything.

The logical policy is to accept any split at all from 1:99 on up. Hey, at least you’ll get a whole dollar! But as it turns out people just don’t react that way. As soon as the split starts getting worse than $40:$60 the rejection rate goes way up. The conclusion is that we’re so tied up, we weird humans, about fairness that we will even punish ourselves in order to punish someone else we think is acting unfairly. There have also been experiments with both monkeys and apes (although with lovely pieces of fruit rather than useless pieces of paper) that lead to the same conclusion. All of us higher primates seem to be wired pretty much the same way: you try and rip me off and I’ll take you down with me fella.

I’ve not seen this point explicitly made anywhere: although I assume that’s to do with my lack of reading more than anything else. But if that sense of fairness is hard wired, then obviously it’s also going to apply to those we’re trying to tax. Which will mean that that peak of the Laffer Curve, that rate at which people bunk off, leave the country, reduce their work loads, lie or cheat the taxman, isn’t determined by what we think is a fair rate to tax them. It’s a result of what they think is a fair rate to tax them. Which, of course, could be a very different rate indeed from what we think is a fair rate.

In a sane world where people are interested in optimizing tax receipts this concept makes perfect sense. However, to Obama and his devoted 47%, their idea of fairness is much different.

Obama isn’t interested in deficit reduction or anything of the sort. He (and his supporters) are only interested in class warfare. In a strange way, they are attempting to turn the ultimatum game on its head and use the tax code to punish the successful.

Unfortunately, Obama’s followers don’t realize how this game is going to end.