On the minimum freedom of choice

On the Minimum Freedom of Choice:

Why a 100% inheritance tax redress is just in an extended stakeholder society

MA Philosophy Thesis University of Amsterdam

INTRODUCTION

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CHAPTER 1: JUSTIFICATION OF THE STAKE

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1.1. Justification of natural inheritance 5

1.2. Equality of clamshells 6

1.3. The auction for future generations 7

1.4. Infringement of property rights 8

1.5. Conclusion 10

CHAPTER 2: THE SYSTEM

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2.1. General considerations of taxation 12

2.2. The challenge for inheritance 13

2.3. The extended stake tax 15

2.4. Progressive income tax 18

2.5. Which tax serves what goal? 21

2.6. Conclusion 21

CHAPTER 3: EXPLORING EXTERNAL AND INTERNAL EQUALITY OF RESOURCES

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3.1. Fast and Slow 23

3.2. The insurance auction 24

3.3. Slavery of the talented 26

3.4. Conclusion 27

CHAPTER 4: THE SYSTEM IN PRACTICE

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4.1. What if? 29

4.2. Gift tax 31

4.3. Incentives and private yachts 32

4.4. Dollar-for-dollar charity 33

4.5. Other institutions in society 35

CHAPTER 5: CONCLUSION

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Introduction

Income inequality and wealth inequality are higher than they have ever been (Piketty, 2014). Over the last few decades we have experienced a shift from inequality to extreme inequality of wealth. We are currently experiencing increasing wealth and income inequality in the United States, Japan, Great Britain, France and Germany. The Netherlands, the country of interest of this essay, is no exception to this worrisome development (Broers, 2014). Due to interest on capital constantly and quite steeply exceeding the economic growth, those who have capital are able to accumulate more in a year than others gain in salary. Looking at the data in the Netherlands, due to this continuous accumulation of wealth, the top 10% wealthiest people own around 60% of the total national wealth (Van Bavel in WRR, 2014). Less abstract: in a group of 10 people, one person owns 1.5 times as much as all the other nine people combined. It is even more extreme when we look at the top-top consisting of the 2% wealthiest. This very small group of people has around one third of all national wealth. Compare this to the bottom 60% of the Netherlands who owns, collectively, only 1% of all our nation’s wealth (most have negative or zero wealth).

What creates tension is not that wealth is accumulated in one generation - this is something bound to happen in any capitalist society with free trade - but that it is passed on generation after generation. For example, the wealth inequality in the Netherlands is almost perfectly reflected in the inheritance inequality: the top 10% wealthy passed on 67% of all inherited wealth in 2005, 6,7 billion euros of the total 10 billion euros inherited (CBS Statline). After 2005, when tax regulation on inheritance in the Netherlands became even less progressive, these percentages remained but with a lower governmental income out of inheritance tax. So the children or grandchildren or family friends’ children received enormous amounts, compared to the other 90% who start out in life with relatively little.

Inequalities such as these wealth inequalities are sometimes addressed as effects of the otherwise just market mechanisms. I will argue that though the market is just, the unequal starting positions of people are unjust and should be equal in a just society. Wealth inequality infringes with freedom of choice, a fundamental principle this essay seeks to promote. This essay will show how all citizens of a state should have a minimal freedom of choice. The extreme wealth inequality we are experiencing now is not a simple market problem at all. It shows signs of a broken inheritance system, where the troubling effect lies not only in its economic effects such as a low economic growth

(OECD, 2014), but also more fundamentally in its effects on democracy. The most important factor, sine qua non wealth inequality could not have reached the heights of now is in fact the tax system, specifically the inheritance tax system. Generation after generation is able to accumulate wealth, giving their children better education, better social networks, better clothes, better accommodation or in short: better availability of choices. I and other authors will argue strongly against the status quo regarding inheritance of external resources. With these external resources, as argued by for example

Dworkin (1981), it is the case that me having this or that job excludes you from having that same job. So where some individuals have a great time in university living exactly the life they wanted, others struggle monthly to pay their tuition. The problem lies much deeper than some having more monetary funds whilst other do not. Part of the problem of unfreedom of choice, and thus its solution, lies in the construction of the state and its institutions, e.g. education, law and health insurance. I will propose a possible solution: an Extended Stakeholder Society.

In order to prove the injustice of the current system and to explore better options for a just society, I have a proposal similar to that of Thomas Paine (1797). My proposal is the following: At the age of 18, each citizen will receive the amount of 100.000 EUR1, provided by the state and funded out of partly a progressive income tax and partly a so called extended stake tax. The amount received by the state is called a (state-funded) stake, after Ackerman & Alstott (1999). The stake can be seen as an interest free loan, granted to everyone in a society. This stake serves different purposes for different authors. For this essay it serves the sole purpose of creating a minimum equality of choice, that is currently decided through inheritance of individuals, but should be provided by the state. It will be funded out of a Stake Fund, fully financed by the progressive income tax combined with the extended stake tax of 100%. What is now known as inheritance, I propose to treat as an extended stake.

The proposed tax system is bound to raise strong counter-reactions and objections. I will during the course of this essay explain why this is the only just tax system and try to treat most of the known objections correspondingly. My hope is that at the end we can reshape not only our society but also our way of thinking about equality - not because our current state of affairs has little equality of wealth, but because our redress system can, and should be just. We will see that in order to fund the stake we need a justification of the inheritance tax. Justification of taxes lies in part in the goal of governmental income that provides citizens the opportunities to flourish. Besides the stake being funded with these taxes, we also look at the stake being raised so future generations are better off as well as what social welfare the state can provide in order to make a real minimal freedom of choice possible. Part of more equality of the natural inheritance that Thomas Paine talks about in the next part will inevitably mean that earned pieces of some will end up in the pockets of others. Important to understand is how this infringes with property rights and how I in this analytical philosophical essay try to find a fitting balance and explore the tension between intergenerational freedom.

In the first chapter I will discuss the justification of equal distribution and contrast redistribution with property rights. The second chapter describes more in-depth the tax system I propose, and why it is a just redistribution of wealth. The third chapter explores whether only

redistribution of external resources is sufficient for a just society. The last chapter focuses on practical implications and counter-arguments for the proposed system.

I am well aware that both the age and the amount are to some extent arbitrary and up for discussion. Their specific number is however not important yet. For the sake of argument the age of 18 and the amount of 100.000 is for now what we will use, but is up for discussion.

Chapter 1: Justification of the stake

1.1. Justification of natural inheritance

Thomas Paine wrote in his groundbreaking work Agrarian Justice (1797) that every individual has the right to an equal amount of natural property. Natural property is to be seen as distinctively different from acquired property, which is property that persons have received through their own hands. It is natural property, all that God has laid out for people to acquire, that should be equally distributed. The earth is the common property of the human race and every person should be born to that property. Paine believed just like for example Locke (1689) that in the natural state there was plenty of natural resources and that poverty rose out of scarcity that was created within a state. This poverty arises because contrary to the natural state, persons in the man-made state are not equally born to property. Instead property in the state is created by the improvement of earth itself, ensuring ownership of individual property, or as Paine calls it: landed property. This landed property created poverty through exclusion in a way that did not exist before. Thus he proposes, as a right which was intended for every person who is born on this earth, that a National Fund is created which pays every person an amount of fifteen pounds sterling at age twenty-one, as well as ten pounds per year from there onwards. This system, later to be dubbed Stakeholder Society by Ackerman & Alstott (1999), is just according to Paine (1797) because it is a rightful compensation for the loss of natural inheritance that every person has a right to. The system of landed property has many advantages, but the loss of natural inheritance is something that must be compensated for.

Paine (1797) rightfully addresses that it is the system that is faulty, not the present land owners. Therefore it is important for this essay also that he proposes that every person gains the initial funding as well as the annual funding on top of property he/she has created him/herself or has

inherited. To finance the fund that provides the nation’s stakes, the best moment to do so would be at the moment of death of a person. According to Paine the bequeather gives nothing and the receiver pays nothing, for the natural resource which was never the receiver’s right, ceases to exist at the moment of the bequeather’s death. Paine proposes, based on meticulous calculations, that a tenth of the inheritance would be sufficient. Paine states that such an inheritance would (in his America of the day) provide for an equal part of natural inheritance for all, as well as leaving a sum for the ‘lame and blind’.2 Paine (1797) is very clear in the justification of his inheritance tax, for he states that “it ought not to be left to the choice of detached individuals whether they will do justice or not” (Agrarian Justice, p. 16).

Interestingly enough the extra sum for the lame and the blind will lead to one of the key discussions of later philosophers such as Van Parijs (1995) en Ackerman & Alstott (1999). We will review this discussion later on.

Modernised and with more knowledge of Paine’s system and its critiques, my claim is that an initial distribution of monetary funds, in this case 100.000 euros, is still fair. That this should be funded out of an income tax and an inheritance tax is, to a certain extent, just as fair. Every 18 year old gets to start his life financially in a similar way as his peers and has to pay back that same amount at the end of his life. In accordance with Paine (1797) this leaves all to inherit something to begin with. From that basis they can choose some actions over others but at least have a fair start with a set of options in life. Whether you choose to invest in education, a house, travelling the world or simply saving up for dire times is up to every individual, but as the system is now, there is no such minimal freedom of choice and with Paine I argue the same: the current state calls for justice of redress. In particular, redress of monetary wealth.

1.2. Equality of clamshells

To see why equality of monetary resources as an initial distribution is a fair way to get to the minimal freedom of choice, it is necessary to take a look at the work of Dworkin (1981). Dworkin lets us suppose there is an uninhabited island that has certain resources, say water and wine. Now if we put inhabitants on the island, trouble will arise when the resources have to be distributed. For who gets what and why? It seems fair to give every person an equal amount of water and an equal amount of wine. A different distribution than giving all the same is surely arbitrary. A complication arises from individual preferences. If there are people who heavily dislike the smell and taste of wine, it seems that even the same bundle of resources they receive does not reflect the same value that others who do like wine have.That is to say an equal distribution of all natural resources leaves no room for

individual preferences, or so-called individual utility.3 For everyone receives the same resources, but it is not worth the same to all. So distributing whatever is around in a society does not create an equal distribution per se. This is important, as Paine mostly talked about distribution of natural resources. It seems we need to find a standard in which this distribution is not only fair, but also preferred equally by all citizens involved.

One of Dworkin’s (1981) theories is that an initial distribution must have so-called envy-freedom. This means that if all get an equal amount of resources, none must prefer the bundle of resources of someone else over that of their own. In the case of only water and wine, individual preference plays no part. For every person that gets water and wine, there is no use in preferring a bundle of resources of someone else, because they also have the same amount of water and wine. So an equal distribution of goods is fair, because it is always envy-free. If people decide to trade their

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According to Varian (1974) these individual preferences do not matter as people will trade till they have what they want. I however know from an experiment in which I participated myself that this does not hold in practice. In the experiment students were handed cups and pens, and having to trade and define the worth there was an unequal balance between the items if they had to be given versus being received. As Chapman (1998) and many others have concluded there is trade reluctance once resources are distributed.

received goods, envy-freeness will remain, for what reason would there be to trade water for wine if the result is to prefer the bundle of someone else over your own?

To ensure the most efficient system of trade that would also lead to the best initial distribution, meaning a distribution that contains envy-freeness, Dworkin proposes a hypothetical auction. An auction has the same goal of fair distribution, but takes into account the individual preferences. In an initial auction each and every person receives something that is in itself not valuable, but is equally valued by all. In the example of Dworkin he says every person should receive an equal amount of clamshells, which will serve as the currency with which people bid during the auction. By this metric, anyone who dislikes wine is not obligated to bid on wine, but instead can bid on water. This is destined to efficiently ensure envy-freeness. So not only is it fair that every man or woman has the ability to equally auction on the same things with the same amount of clamshells, any other initial distribution would surely be arbitrary, thus rendering it unfair. We will look more closely to the auction of only external resources and its implications later but for now it suffices to say that an equal starting point regarding that currency with which people can bid on a shared market in life is fair, because every human being is entitled to equality of external resources by being a human with a right to natural resources. However, this auction only works for the initial distribution. It is therefore important to look more in-depth at what happens after the initial distribution.

1.3. The auction for future generations

Suppose the islands inhabitants mate and every couple gets exactly two children. For simplicity’s sake we will also suppose that the two children are twins and that every couple gets their children at exactly the same time. At some point in life these children will have the right to bid on the auction of natural resources with a certain amount of clamshells, just as their parents did. It is unfair to not give this second generation of islands inhabitants clamshells, simply because they arrived (were born) later than their predecessors. However, at this point the distribution becomes different. The parents have

acquired through the first auction the resources of the island they wanted. If we expand our earlier example where the island’s resources consist of more than just water and wine, we have a situation where the parents have been able to acquire land to work on, raw materials that have been turned into sellable goods and animals that are milked and slaughtered for consumption. The island has thus become closer to our modern society. Keeping in mind the first auction, it would seem logical to conclude that the children are allowed to bid on the total amount resources as well, even though the content of the resources might have changed. So instead of water and wine, now cows, land, beer, weapons as well as water and wine are available. If we assume the clamshells are the currency still used by the parents, how then can we for the new generation of children create a fair initial auction? It seems unlikely that there is envy-freedom amongst the people in the new generation if some parents have accumulated and passed on more natural resources. Fair in an initial distribution, as we have

seen, would be to give every child the same amount of clamshells so that they can bid, based on their individual preferences, on those goods they would like to acquire. But this is not how it works, either on the island or modern society. The children get what their parents bestow upon them, be it in the form of clamshells or acquired resources. Our initial distribution does not hold to be in the same way justifiable once a new generation comes along.

There is a way to ensure that the next generation has a fair share and equal freedom of choice. The easiest would be to slaughter all inhabitants of the first generation at the same time putting all their resources on one big pile. Then, seeing as all children were born at the same time making the only fair distribution an equal one, all new citizens would get the same amount of clamshells, and auction on the new set of resources. Though this example is fairly grim, and the real proposal does not include slaughter in any way, it becomes clear that if the initial distribution Dworkin talks about is in fact just, it must be ensured that every new generation also acquires this most basic right. It is for that reason that I argue every 18 year old must receive a stake with which he or she can bid on the market (participate in life). The market’s content might change, but it is the equal choices that are available to each 18 year old that are necessary. It is important to note that when starting positions are equal, every other property of capital acquired during one’s lifetime after those equal starting positions is not unjust. That is why prima facie, the idea of taking the lives and property of the first generation feels unjust, not to say very cruel. As they worked for it their whole life, (forcefully) taking it away for the sake of equal starting points seems conflicting, to say the least. In a civilized society, everyone has the right to hold his own property, at least during their life (and also including his life), as we will see next.

1.4. Infringement of property rights

If everyone within a society is given equal resources at the start of their life, this must in a way always come at the cost of those who have earned the bulk of the resources throughout their life. As we saw in the previous example, to ensure equal starting points it is necessary to take everything needed for equal distribution. This can be within a generation, but also between generations. In order to understand what we can and cannot take from people who used their clamshells to acquire certain goods, we must understand the theory of property rights. On Dworkin’s island, every person is allowed to use their water and wine to make whatever they like, and that creation is rightfully theirs, but why? Locke (1689), like Paine, also argued that nature belonged to all. To decide whether or not a man was allowed to rightfully take another man’s food, he argued that when a man mixes his labour with nature’s good, this labour makes the good rightfully his. If you climb a tree to pick an apple, that apple belongs to you and I cannot rightfully take it from you. The act of labour you have mixed with nature grants you the individual the right to do what you want with whatever natural object (which has not already been appropriated by some other man).

This first theory of property rights has many objections, the most important having to do with Locke’s (1689) assumption of plenty. This simple theory of property rights assumes that there are enough apples to pick. When there is scarcity, the theory of mixing ones labour with some natural good does not hold. Imagine a vast and great dessert. In the desert there is one source of water. In this desert there are multiple people roaming around, thirstily searching for water. One man randomly (or by being gifted with great geographic talent) comes across the only well in the desert and puts a wall around it.4 He then charges everyone who wants to drink from the well for an absurd price. This seems arbitrary at best and unjust at worst.

A more well-defined theory of property rights is written by Nozick (1974). As a libertarian Nozick believes that the state should intervene in an absolute minimal way. All other intervention besides the minimal violates people’s rights. A firm believer of a just market Nozick claims that every situation that unfolds out of just beginnings and just transfers is in itself just. Therefore just property has a distinctive historical aspect, for every property is just insofar the historical events that lead to the property were just. In principle, Nozick holds that if past events or transactions lead to different distributions of resources amongst persons this can in fact be just. It can be said that people within a community (but also cross-border) trade if and only if they deem the received good/service worth the given ones. Therefore all that someone has bought or traded makes him/her rightfully entitled to that resource. According to Nozick the justice is also the case with inherited resources, for when passed on to the receiver this so-called entitlement theory makes the new ownership just as well as its

transaction. Nozick would call it unjust if a government taxes inheritance as it earned by trade and work in a way that is just. It is in part unjust because if the parents intend with whole their hearts to pass on their rightfully earned resources to their children, an inheritance tax would effectively be called a tax on love (Van Donselaar, 2003). We will come back to the discussion on inheritance tax in Chapter 2. Because entitlement theory holds that all just transactions lead to just holdings, every redistribution that infringes on these rights is unjust. Taxes infringe on the freedom to choose what to do with what one has rightfully acquired. Taxing the income of a working man is the same as forcing him to work for others, as the argument goes.

There is some agreement to be found in Nozick’s entitlement theory. Every transaction made on the free market is in principle just and those who trade or work should have the sole ownership of whatever they receive. But an important clause is that the starting points of those who work and trade should be fair. If I start with 10 cows and you start with nothing, of course I will receive more milk than you do, even given that market transactions are fair. We all come back to the initial distribution, where you and I should equally be able to bid on a cow, in order to make milk. Without the equal starting point, anything anyone acquires is unrightfully received, because the way things started were not fair be begin with. It is exactly because we are able to acquire individual property throughout our

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lives that we need to make the starting point just for all generations (Paine, 1797). Also, regarding the ‘new ownership’ Nozick talks about as part of property rights when it comes to justice of inheritance, I see as fundamentally different from property throughout life. There is direct tension between the ownership of those that earned and deserved property vis-à-vis the new ownership that is only earned through birth right, but not necessarily deserved. This analytical problem, that of ownership and freedom of one generation that stands in direct relation with the freedom of the other (or differences therein) is the main problem of this essay. For this analytical problem I will propose an analytical solution in the next chapter.

1.5. Conclusion

In this chapter we have carefully considered the subject of inequality of material resources. The current state of affairs in the Netherlands (but of course not only the Netherlands) is that of extreme wealth inequality as has never been seen before. This undermines our democracy as well as the freedom of choice current and future generations have. The goal of this chapter was to show why it unjust to have such inequality and in turn propose an alternative to the current system.

First, all on earth have equal rights to natural property. This is argued by Paine, and has to do with the equal worth of a person and his right to the natural resources of earth. However, communities are no longer as simple as before modern day. We now have state property, which consists of more than just trees from which we can take food. In order to provide for the rights that all men (and of course women) should have, we have to take a look at a system that compensates for the loss of our natural inheritance. The compensation may very well come from a Stake Fund, or as later authors would call this: a stake. The system proposed in this chapter is a stake of €100.000 euro’s that is to be repaid at the moment of death, together with treatment of inheritance as an extended stake. The importance of this will be stressed in the next chapter.

The stake is just according to Dworkin’s theory of external resources. Dworkin proposes that for any distribution of external resources, only an initial equal distribution would be fair. Only an equal distribution would be fair, because any other distribution would be arbitrary.

In the initial distribution, envy-freeness is a necessary condition. No person may, after distribution, prefer the bundle of resources that some other person has. Of course, when trading in an auction, which Dworkin holds to be most efficient, envy cannot take place. For trade implies the choice to trade, and why trade if that leads to a preference of the other bundle? Therefore, an auction with an equally valued currency is fair and that is why this essay focuses on the distribution of monetary wealth.

An important subject that arises from this initial distribution is the distribution after the initial distribution. The next generation of kin will receive external resources only in accord with what their parents have saved up for them. If true equality within generations must be pursued, the claim would

be that all wealth be taken from the parents at moment of death, so this can lead to a new initial distribution in the next generation. But this would infringe on property rights and the freedom of the first generation. So we come at an interesting tension, which will be the focus of our next chapters. In principle, we cannot compensate for individual ambitions, including the will to leave an inheritance behind. But, if we do not accept that a distribution within generations must to a certain extent be just and envy-free, then it seems that we are forced to interfere directly in the ambitions of individuals: that of leaving something behind. Concluding, we can say that the personal freedom of one generation, even given its equal initial distribution, inevitably will lead to unequal freedom for the next generation(s), as can be seen in today’s wealth distribution.

Chapter 2: The system

To provide an analytical solution for the analytical problem we discussed in the previous chapter, I focus on a tax system together with a stakeholder society, called the Extended Stakeholder Society. The most crucial point in the extended stakeholder society compared to the stakeholder society is the treatment of inheritance as an extended stake and the corresponding extended stake tax. Taxation therefore plays a big part of the analytical solution and without justification of said tax, the system cannot hold. The stake of €100.000 for each 18-year old will naturally have to be. The just means of financing the stake is via taxation. The tax system I propose has two components: an inheritance tax on the stake plus any additional inherited stake and a progressive income tax. This chapter will carefully explain why the combination of this taxation is not only best, but also the most just form in any society, especially a stakeholder society. Important in this entire chapter is the friction between ambition freedom of the first generation in relation to the equal (external) circumstances of the second generation. Leading in this debate will be the book of Murphy & Nagel, the Myth of Ownership. We will consider thoroughly why the stakeholder society is the most just form of a society, given its tax system. An important idea is that justice in taxation cannot be judged without discussing the allocation of said taxes. We will therefore discuss which tax goes where. Also important to keep in mind is that the primary subject of this essay is redress of external resources for minimum freedom of choice. But we will see that the freedom of one generation will obstruct the freedom of the other.

2.1. General considerations of taxation

Taxation is a highly moral subject, though no attention is usually paid to it in tax law or tax economics classes5. The set of rules that govern wealth tax, inheritance tax, VAT, tax deduction, progressivity of a tax system or tax exemption are all based on ethical considerations of for example welfare state versus free-market state. Though we generally know the tax rules as written law, the morality of the content cannot go untouched. Every assumption in tax law should be revisable and open to discussion. If the fundament of our criminal law for example would be the superiority of men over women, it would with our modern morality have to be revised. Similarly, the subject of tax, for example income tax versus consumption tax, should also be open to revision if in light of our current ethics the past choice is not deemed fit. In particular inheritance tax is a highly controversial subject, and I suspect this is especially so because the status quo of inheritance ethics has remained relatively the same over centuries. In order to analyse the proposed tax system we need to understand three important aspects of taxation.

First is the tax base. The tax base is the subject of taxation. An example of a tax base would be the income of every citizen. Specifically for a theory of justice, the tax base must be justified

compared to other tax bases - why tax the amount of earned euros and not the amount of spent euros? In this chapter, two tax bases will be defended compared to others: (1) the original stake plus any inheritance that contributed to the stake and (2) the income of any citizen. The income of any citizen will be measured as the actual income, instead of the endowment (the ability to earn a certain income). We take actual income over endowment based on our discussion of the slavery of the talented in the third Chapter. The income tax base is taxed at the moment of earning, mostly for practical reasons. The other, and more important tax base is the tax on the original stake plus any other inheritance. This thus consists of the €100.000 stake provided by the government plus any inherited wealth. That total sum which eventually makes up the inheritance tax base we will call the extended stake. Important to note is that contrary to the income tax base, the extended stake is taxed at the moment of death, one generation after you have passed on your wealth. Any inherited wealth is therefore untouched at moment of receiving and is unburdened throughout life, but that same amount will be taxed at moment of passing of said receiver. We will see the technicalities later on.

The second ethical consideration of taxation is the tax rate. The tax rate consists of two aspects: the tax percentage and the tax system’s layers. The tax layers come in either flat tax rates, progressive tax rates or degressive tax rates. A flat tax rate is simply a percentage of any tax base and is the same percentage for any amount taxed. Quite different is a progressive tax rate where the higher the amount, the higher the percentage of taxation (and of course degressive rates do exactly the opposite of progressive rates). Progressivity comes in many forms and will have to be justified differently than a flat tax rate. For our first tax base, the extended stake, I argue for a flat tax rate of 100%. Though this tax percentage might seem extreme, it is in fact extremely just and balances between equality libertarianism and the modern theory of property rights. For income tax, I argue for a progressive system, the reasons of which to be explained.

The last ethical point of taxation to consider is one that is sometimes forgotten in theories of taxation. As Murphy and Nagel (2004) argue extensively, it is impossible to view the justice of tax without looking at the corresponding expenditure. In other words, no form of taxation, regardless of its tax base or tax rate, can be justified if its goal, i.e. what it finances or does for the society, is not justifiable. Even the most efficient tax system is unjustified if the government spends it on buying champagne for their richest friends.6 For that reason we take a look at the justification of government spending in the fourth paragraph and also the last chapter.

2.2. The challenge for inheritance

One of the most controversial taxes in the history of taxes is undoubtedly the inheritance tax, often called the ‘death tax’ (Murphy & Nagel, 2004). At the same time, the most important idea for redress in this essay is the so-called extended stake tax, which is effectively an inheritance tax. The extended

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stake tax is a 100% flat tax on the received stake plus any received inheritance during life, to be paid at the moment of passing. To understand why this is the most fair way, first we must understand the objections towards inheritance tax, before we explore its justice.

There are several objections to inheritance tax, none of which in my opinion hold. One of the objections is that it is absurd to tax wealth twice, when for instance it has already been taxed by an income tax or a wealth tax. The idea that personal income would be taxed twice has for a long time been a subject of objection (Maguire, 1923). In my opinion the fact that any amount of money is taxed multiple times throughout its usage does not make it in itself ‘absurd’. Just as a 10 euro bill serves multiple purposes and comes into circulation of the market multiple times, just as fair is it to tax that bill multiple times. Money earned is also different from money spent or money given, and should be treated differently every time. Besides the fact that it is impossible to not tax multiple times - every euro has been used at least once since created so should we track it so we can never tax it again? - the objection that one has already once paid tax for one’s income and because of that should be exempted from paying tax when influencing the market a second time is a rather weak one.

An objection taken more seriously in this essay is the claim that every citizen has the right to spend one’s accumulated wealth as he wants (Nozick, 1974). It is a fundamental right to plan your life and make corresponding free choices what to do with your property throughout life. If I want to spend my entire life working from 06:00 till 23:00, only sleeping from 00:00 till 05:00 so I can finance a museum in honour of the great Immanuel Kant I should be able to so, or at least the government should not prevent me from making that choice by saying that all that earned wealth will be taxed at death. In principle, I agree with this idea of property rights and the freedom to live one’s life as one sees fit. This essay is based on exactly that ideal, the ideal to live one’s life exactly as one wishes. We should however consider very carefully what the freedom of the one means for the unfreedom of the other. Because it is certainly true that the main tension of this essay lies in the freedom of the first generation and its relation to the unfreedom of the second, or vice versa. When considering inheritance a sharp distinction must be made between the giver and the receiver (Murphy & Nagel, 2004).

Consider the following example.

In a modern Western stakeholders society where the market functions well and the democratic state is well established with a fairly steep progressive income tax, two families live next to each other. Rich and Rory (R1) are both lawyers who have used their stake to pay for a prestigious law school and work hard every day to build their capital. Peter and Pauline (P1) used their stake to travel the world, having spent most of it during their twenties, living from day to day working on a farm just outside the city. Both couples are equally happy but surely have different goals in life. Where Paul and Pauline want to enjoy life to its fullest, Rich and Rory want to leave an empire behind for their

children to reign over. Both couples in fact get pregnant of twins and at the end of their life Rich & Rory have a net wealth of 10 million euros, consisting of an international law firm worth 8 million and a 2 million euro bank account. On the contrary, Paul and Pauline have steadily lived a pleasant life and

both retained the original stake of 100.000 euro each, but no more than that. From the perspective of the parents it seems perfectly just to pass on any earned wealth, especially because both couples chose to live their lives differently, but exactly as they wanted. It would be outrageous to fully tax the 10 million euros of hard work given that the goal of R1 was to pass this on to their children. So in principle, no tax should be imposed on any extra wealth, besides the payback of the original stake that all four have to pay because it made possible their minimal equality of choice, as discussed in Chapter 1. Now look at the tension that is created for the second generation.

From the perspective of the children the answer to the question what is fair is quite different. In particular the external circumstances are quite different. Say Richard and Robin (R2) are the twins who both get half of the 10 million in net wealth.7 Their options in life are very different from Phil and Pam (P2), who get nothing but their state-funded stake of 100.000 euro. R2 gets to invest in high-earning stocks, housing and new businesses, both national and international. Those purely material choices are not open to the latter two. Of course from the perspective of children receiving a stake or inheritance, neither Richard and Robin nor Phil and Pam have a right to the 10 million, other than birth right. That is to say they did nothing in the way that R1 and P1 did that made the wealth of the first generation rightfully theirs. Birth right is just as random as race or sex and it would be crude to assume rightfulness of ownership based on a lottery, exactly what Dworkin (1981) says about the new inhabitants of the island. The randomness of being born in a wealthy family or poor family is brute luck, rather then option luck (luck by bad faith versus luck by own risk taking).8 So neither of the two sets of children has a direct right to what others have earned, but nonetheless two out of four people receive 5 million on top of their now fairly insignificant state-funded stake.

2.3. The extended stake tax

In the discussion of property rights and the previous discussion it is clear that in the above example, those who inherit wealth and their equality of opportunity is not seen as a strong enough justification for the freedom of choice that the parents should enjoy. For the state to interfere with the way people want to live life needs a very strong justification. For that reason I propose the tax system that treats inherited wealth as an additional stake. In this system, inheritance is seen as something that is rightfully earned and deserved by the people that put in the labour, and at the moment of passing it stays untouched. However, from the point of view of the receiving party, it is treated as an extended stake, i.e. external resources that are received in order to create choices in life, but are not owned or deserved by the receiver. The tension between the first and second generation is different if the second

7

An important objection which is discussed later is what to do with productive business, which have a very different impact on society then holding money in a bank account. Therefore, treatment and taxation should also be different.

8

Though this essay is only aimed at a closed-off society, in principle the same ideas apply across borders, as being born in a corrupt, undemocratic and extremly poor country is also brute bad luck.

generation does receive the right to exploit their inheritance otherwise known as extended stake to enrich their life, but do not receive full ownership. That means they themselves cannot pass on the received amount at the moment of their passing (or spend it all). This will inevitably create a society where incentives become different. That this can be challenging, we will see in the last Chapter. However, it can also be beneficial productivity-wise, as every generation, if they want their children to lead a better life than others, will have to work for it, regardless of what they receive from family wealth. For most people in the middle and lower class, this is of course already the case. However, it is not a bad thing that for every citizen in the same society, the nature of inheritance becomes one that is rightfully earned, but not passed on for an infinite amount of generations. It is this analytical solution that stands at the core of this essay, to deal with the tension that is created within generations when it comes to equality of choice. This system creates a different intergenerational dynamic, that is easiest explained by continuing our example.

Say that given the property rights of R1, generation R2 cannot be prevented from receiving what their parents intended to do with their accumulated capital. So R2 starts out with a received capital of 5.1 million euro (they of course also receive their state-funded stake) and P2, who receive only the state-funded stake, start their young-adult life with a mere 100.000 euro. P2, who have been taught the same carpe diem mentality as their parents, choose to spend their lives surfing the beaches of Bali and giving diving lessons in order to provide for their basic needs. R2 however, being brought up with much discipline, go to the same law school as their parents and expand their family firm even further, resulting in having a net worth of 15 million euro each at the moment of their death. The way the expanded tax system works is now as follows. For P2, the system requires them to pay back their original stake of €100.000 just as R1 and P1 had to. R2 however, have each received not only that stake of €100.000, but also an additional stake of 5 million euros. My proposal works as follows. Given that Richard and Robin find the law firm to be boring and would rather have their children become something else, they liquidate the firm and pass on 15 million euros in cash to their kin, but not after the so-called extended stake tax has been paid. Thus, they pay 100% over 5.1 million of the extended stake tax and are allowed to give the remaining 9.9 million to whomever they like (probably R3 or R4).9 It is this additional amount they have worked for and have a right to pass on, given what they in life have received without having earned it. The original stake as well as the extended stake were undeserved and thus are not included in their property rights. For all further generations the same rule applies: whatever one has accumulated in one’s life may be passed on, but whatever has been received out of inheritance cannot be passed on a second time. In other words: property rights have priority during your life and at the moment of death, but not after that. The priority expires because the ambition cannot lead to inequality of circumstances within generations, even if this means interfering

9

In comon practice this is similar to the usufruct system, where I get to exploit land of for example the

government for my own betterment, whilst the property and ownership itself stay with the government the whole time.

between generations and creating a tension between freedom of all future generations, at the slight expense of not having unlimited freedom for the first generation.

Schematically the example leads to the following table: R1 stake €100.000 P1 stake €100.000 > R2 stake + extended stake €10.100.000 P2 stake + extended stake €100.000 > R3 stake + extended stake €5.100.000 P3 stake + extended stake €100.500 R1 surplus €10.000.000 P1 surplus €0 R2 surplus €5.000.000 P2 surplus €500 R3 surplus €0 P3 surplus €250.000 R1 extended stake tax = 100% over €100.000 P1 extended stake tax = 100% over €100.000 R2 extended stake tax = 100% over €10.100.000 P2 extended stake tax = 100% over €100.000 R3 extended stake tax = 100% over €5.100.000 P3 extended stake tax = 100% over €100.500

As you can see, the extended stake tax applies on both the state-funded stake of 100.000, which is standard, as well as on any inherited stake, which is part of the so-called extension (or expansion) of the stake. This analytical solution will be opposed for several reasons, most quite similar to the opposition of inheritance tax in general. But the most intuitive objection will likely come from the fact that large sums of money will not be able to be passed on for more than one generation and this is an infringement of property rights and the choice of what to do with your earned wealth. Two replies are possible. The first is that if any parent wishes to save money not only for his children but for his grandchildren or any other group, he is still free to do so.10 If at the moment of death R2 decides to give their whole net worth to their grandchildren, or maybe split it between their children and grandchildren, they are still free to do so and the same rules will apply. They can even write a clause that states that a certain amount of money will be saved up until their grand-children or grand-grand-children turn 18. The part that R3 would then inherit is part of their extended stake, and will be taxed at the moment of their death. They have the freedom to use it as they wish, but eventually it will not in its totality be passed on to R4 (or R5).

Another reply to the objection that this form of inheritance taxation is unjust for future generations is that it is just exactly because of future generations. Recall the point that tax is only as just as the means it provides. Depending on what this extended stake tax is used for, it is perfectly just to tax any additional stake, even if that means the “loss” of wealth accumulation over generations. The object of expenditure is not only the stake that provides minimum freedom of choice for all, but also the minimal provisions of the state, to be discussed in the last paragraph of this chapter. A proper education system, healthcare and law enforcement, depending on the public opinion, are all examples of what the extended stake tax would fund out of the surplus. Also the growth of the stake can be

financed, so all future generations start with a better position in life than their predecessors. The sort of future that is possible through the extended stake tax, in conjunction with the progressive income tax, has in essence much more to offer future generations than any other society. The status quo of inheritance, its rightfulness and its goals are skewed in the modern state. It is the concept of a

stakeholder society with an extended stake tax that proves to be fair, because it finds the right balance between freedom of one generation or individual, at the limit of the freedom of next generation or individual.

2.4. Progressive income tax

Though in principle the extended stake tax will cover the stakes of all future generations, as well as a growing stake, it is still necessary to look at another form of taxation. There are two reasons for that. One is the discussion around handicaps and internal resources and the effect they have on exploitation of external resources. The other reason is that incentives will change, making it necessary to tax another tax base in order to ensure the state-funded tax, and thus the minimum freedom. So having an income tax serves redress, partly it also functions as a practical means to an end. Income tax is the taxation of a certain amount of a total income. Usually this is measured during the year and paid in the year after. The discussion of the progressive income tax I have in mind has two controversies: why tax money I as a citizen have worked for? and why tax a higher earning citizen relatively more than the lower earning citizen?

In order to get a strong sense of why taxing the income a citizen has worked for is just, the next chapter will look at certain examples regarding the brothers Fast and Slow. For a sufficient understanding at this point in the essay, it is enough to explain that these brothers are from the same kin, yet in talents are complete opposites. One is athletically fit and incredibly smart, the other handicapped and insecure. As we will see in the next chapter, it is surely unjust to tax Fast for the money he could earn instead of what he actually earns. It is unjust because it would force him to optimize his talents as seems valuable by society, in order to pay his taxes and live a normal life. Talents are not objective, but subjective to a person and by taxing potential earnings we would force others to do what the general public deems worthy (being pretty, a good guitar player, being funny) instead of what persons themselves deem to be a useful talent. It is clear that the internal capacity to earn money cannot be shared across people, and it is up to their freedom to do with the internal capacities whatever they want. The state should not distribute internal talents by taxing the potential, for then the state forces its citizens to take the highest earning job, regardless of what the person wants for himself. This would be a grand infringement on one’s property rights over one’s own capacities, as well as the freedom to choose in general. In other words, as Dworkin (1981) tried to show, we cannot find a general standard of internal worth. Differences between people are too subjective (who is the prettiest girl on the planet say you?) and thus there is no currency to be found. But we can to a degree

measure what people are externally worth, or at least what they create. Worth is in this sense

expressed in monetary terms and not for example in how much happiness someone brings about in the world. But, does the fact that it is unfair to tax endowment, make taxing actual income in a progressive manner just?

In principle it would seem that exactly because it unjust to tax potential, it is just to tax actual earning if talented people choose to use their talents out of their own choice. Internal capacities cannot be taxed as potential but given that some have the luck to earn money for certain skills that are worth more than others it is fair to compensate for these internal inequalities, if they turn out to be defining in the different lives people can lead. Of course as Murphy & Nagel (2004) note, a tax on actual income will result in the so-called income effect, where people take higher earning jobs to gain the income they need, after tax payment. However, given the choice some have over others given their talents, such as being able to read extensive law cases for hours and hours, it is necessary in order to avoid slavery of the talented to let potential successful super-lawyers be unsuccessful writers if they so choose. But given that those with only potential to become an unsuccessful writer cannot choose to be a super-lawyer it is fair to tax the lawyer for what he earns and also the writer for what he actually earns. Taxing actual income gives persons the freedom to earn as they wish, as well as compensating for the output of arbitrary and therefore undeserved talents amongst people. The first justification of a progressive income tax is thus the following: because people have undeserved internal talents that lead to higher actual earnings and others do not, we should tax the income made, and in a progressive manner to compensate for extreme talents. We do not limit choices, but instead improve the freedom of choice, given that the tax is used for a stakeholder society as proposed.

Another important argument that has been made in favour of income taxation is that the state made the income you earn possible to at least a minimal degree by providing law enforcement and conditions for a fair open market. If we keep the war of all against of all that Hobbes (1651) had in mind, we are better off in a government than in the natural state. To make the point of state provision more clear, Murphy and Nagel (2004) argue we have to justify tax burdens together with government expenditure. It is in fact just of the government to tax its citizens if these tax burdens pay for the services needed to provide everyone’s basic rights that can only be provided by the state. We are supposed to pay income tax not necessarily because we are part of the state, but because we are part of the market in which we earn that income, which is made possible by the state. So it is at least to a minimal degree fair to tax income so everybody contributes to a common good. More difficult to explain is what amount everyone should pay. To the specific justification of progressivity I turn next.

Progressivity within the tax system is sometimes a contested subject. Adversaries say that with a flat tax of for example 30% is already the case that those with more income pay a higher amount (30% of 1 million is more than 30% of 10 cents). The reason progressivity is necessary and just in a stakeholder society has to do with the principle of diminishing marginal utility. We can show the principle of diminishing marginal utility in the following curve:

The man who owns 10 euro but pays 4 euro in tax loses more than the man who owns 10 million and loses 4 million. For the first can no longer pay bread for his family, the second no longer his second house (for his second family). The reason the marginal utility principle calls for progressivity in a tax system is that we are with taxation interested in equal sacrifice, or better, given the talents that some have that give them this or that earning capacity: proportionate sacrifice. A flat tax would give all on the bottom of the wealth pyramid and thus the bottom of the utility curve a disproportionate loss in their utility. The amount they lose weighs more in their life than the amount the top earning percentage loses.

Besides that, the way governments are regulated serves all citizens in principle, but some more than others. Rules and governance that ensure protection of citizens have a stronger net effect on those that own more. For the above curve only looks at marginal growth and not so much absolute total utility. Someone who owns a million dollar house and a Ferrari might feel the loss of 1 euro in a very different than the bum on the street, but if enforcement of law is not in place, having both the house and Ferrari forcefully taken surely has a bigger impact than your last bottle of beer (I would assume). As the rich have more to lose and thus more to gain by having a good government regulating markets and enforcing law, progressivity does not seem unjust. In fact a progressive income tax seems necessary. What purpose both taxes serve is however another important subject.

2.5. Which tax serves what goal?

As a last paragraph I explain what happens to all that is taxed. As wealth and income both have a tendency to accumulate the total amount taxed will be considerably high. First and foremost the priority lies with the National Stake Fund, which serves to give every new 18 year old their stake to start with. This will be financed directly by the extended stake tax. Every euro goes to this goal, without exception. As the amount of citizens tends to grow, so will the amount needed in the National Stake Fund grow. The extended stake tax will not only provide for the growing amount of citizens, due to its very nature (capturing added value of the collective), it is also possible to make the stake grow. As our economy grows, so will the well-being and range of options of future generations grow as the National Stake Fund increases. The general hope for every generation has been to ensure future generations are better off than themselves. In this system, any surplus arising out of the extended stake tax will inevitably raise the well-being of future generations, in a way that would even please the likes of Rawls (1981).

Simultaneously the progressive income tax will cover something else entirely, which is the minimal institutions that should be in place. As I go into more detail at the end of this essay regarding the necessary institutions, it is important to make the distinction between what the extended stake tax funds and what the progressive income tax funds. In principle the latter serves the function that all taxes nowadays serve: to provide the government income to manage the country. With the progressive income tax this is no different, except that the institutions all have the goal of making a minimal freedom of choice possible. For the proposed system in particular education is important, especially regarding what to do with your stake.

Another option for the progressive income tax is to provide those that are born with so-called lesser internal resources with an extra stake. This is the main discussion of the next chapter. The extra stake that the state would then give to what Paine (1797) calls the lame and the blind, and Dworkin (1981) calls the handicapped, would be based on the idea of solidarity. Especially the progressive income tax could serve this goal, because those with certain valuable talents such as smart minds or super-athletic build would be providing for the mentally handicapped and physically impaired. It is an attractive opportunity, that is not the main subject of this essay but something that is to be considered nonetheless.

2.6. Conclusion

This chapter illustrates the way the tax system should be in a just society. Tax is a highly moral subject, and the two ways of taxation deemed most just are the the extended stake tax and progressive income tax. The extended stake tax is flat tax of 100% over the stake that each individual receives from the state, plus any additional stake received from inheritance throughout life. Progressive income tax is the tax over the income that each individual generates, with a higher tax rate when the amount of

income is higher. This chapter provides the analytical solution of the main tension in the essay, namely the tension between freedom of one generation at the expense of unequal freedom in the next.

The infringement of property rights of the first generation in relation to equality in the next is the main analytical problem in this essay. We have seen that in principle, all should be free to choose the life they want. An important part of what people want is the freedom to leave their savings to their kin, in the hope for a better life than they had. But the accumulation of capital in that way leads from the perspective of the next generation to unfair circumstances. And exactly that is what makes this friction so evident. Intergenerational justice is always in between two fires: that of the old generation and that of the new. In this case the ambitions of the old in comparison to the circumstances of the new. The extended stake tax finds a balance between the two. By allowing the inheritance to pass freely from one generation to the next, but by treating it as an extended stake which has to be paid back at the end of the receivers’ life, it allows the freedom to better one’s life by the ambitions of the parents, while maintaining that ideal of a natural inheritance that all men have a right to, as claimed by Paine (1797). The status quo has always been that inheritance is just and that any government

interference is unjust, but exactly that idea I want to change. My hope is that the extended stake shows why that change is just. At the moment of passing, all you have received which you have not yourself worked for, is given back to build on a stronger and shared society. The proceeds from the extended stake tax therefore go directly to the National Stake Fund, which due the nature of the tax is bound to grow, creating more options and well-being for all future generations.

Additionally, the system also includes a progressive income tax. Instead of taxing talent so that people with handicaps are compensated for, we tax the proceeds of talents, thereby compensating the loss of proceeds that befall on those with less internal and thus external resources. Income tax is just, exactly because it taxes that what one actually makes, given his circumstances, without hindering his ambitions to lead a certain life. The part progressivity plays is also a crucial one. We are aiming not to take money for the sake of money, but for the role money plays within our range of options. According to the marginal utility principle, those with less financial wealth lose more in utility of life when paying a fixed amount of their total income, compared to those with a lot of income. Therefore, to make sure the tax the actual income in a way that leads to proportionate sacrifice, we mandate a progressive income tax, and this way of taxation is just in a stakeholder society. The proceeds of the progressive income tax finance the basic institutions of society, and possibly serve as solidarity towards those with handicaps. Why compensating those whose internal capacities are not sufficient leads to a valid progressive income taxation and under what conditions is the main subject of the next chapter.

Chapter 3: Exploring external and internal equality of resources

The most important reason we are having the discussion of equality of internal resources is because in most theories of justice, external resources are the main subject of discussion. However, the innate talents (or handicaps) a person has, greatly influence the way those resources can be used, a point that Sen (1990) stresses very clearly. There is a contradictory point in giving the lame and the blind more external resources, as Paine (1797) argues. For if you give a blind man and a person who can see a large piece of land, surely the second will be able to make more use out of it and giving the blind more land does not make it easier to see. How we are able to make use out of external resources seems like an important aspect of what constitutes justice. The point is that fair distribution of external resources does not lead prima facie to just conditions per se, and this essay seeks to find out how to deal with the inequality of internal resources, and whether or not we should compensate for them.

3.1. Fast and Slow

In the previous chapter we saw that an equal starting point in life is fair, and we try to give people at least a minimum freedom of choice by letting the state provide a stake, funded out of a specific tax system. I have argued so far that in order for society to create the minimum freedom of choice, every person should receive the amount of 100.000 euros at the age of 18. This gives any group of people with equal talents and capacities an equal choice in life. However, what happens when we take

unequal talents and capacities into account? That is, is equality of external resources sufficient for

freedom of choice?

Imagine that under the previously proposed system two people called Fast and Slow receive 100.000 euros at the age of 18. Fast is an athletic, tall figure and has an unexplainable drive to be the founder of the world’s first full electric and top performing Formula 1 car.12 Slow on the contrary was born with a bad leg disability, is mentally very insecure because of this and his mental state prevents him from outperforming any of his classmates. In my proposed system, at the age of 18, Fast and Slow receive their stake. Now, if Slow would want to start the business that Fast wants, i.e. would want to choose the life Fast can easily lead, he would have to spend a considerable amount of money for machine legs so he can test drive the Formula 1 cars. He, if he wants the skills Fast has, would also have to backpack the globe to get over his insecurities and take much personal coaching and

meditation training to gain the ambition and motivation Fast has. It is quite possible that at the end of his long journey, Slow will have spent half of his stake, after which he will finally have the same

capacities

11

Major parts of this chapter are derived from a previous essy: Equality of Internal Resources and Slavery of the Talented, Hwan (2018).

12

Fast and Slow are male for current Formula 1 racers’ respresentation’s sake, but could have just as well been female.

be the first because Fast has already started making a second model, the first being a worldwide success.) Intuitively, even given their equal monetary stake, something seems off in this example. In fact, it seems that Slow cannot as easily lead the life Fast can. The question arises whether or not Slow should be compensated for his handicap, and whether or not this should be at the expense of the very talented and lucky Fast. This chapter will be aimed at explaining both aspects of compensating for internal resources, to ensure redress of external resources is sufficient for a theory of minimal equality of choice.

3.2. The insurance auction

Recall that in Chapter 1 we assessed using the work of Dworkin (1981) that a fair way to create freedom of choice is to give every member of the community an equal amount of clamshells, in order to bid for certain goods at an auction. An initial distribution based on timing, looks or other qualities would be completely arbitrary, leaving only an equal distribution to be fair, or at least non-arbitrary. Of course we only discussed the fairness of the auction when there is a certain amount of material goods on the island that have to be distributed. This auction of external resources has presupposed an equality of internal resources, such as handicaps, talents or even ambition.

If we take a look at handicaps, Dworkin (1981) explores what we should and should not compensate for. An important distinction is the role of luck. He distinguishes so-called brute (bad) luck, where you have no choice in an event or condition that has taken place due to mother nature or Lady Fortuna. Being struck by thunder is different from the second form of luck, called option luck. In this case you take a risk, of which you know there is chance involved. For example betting your life savings at the roulette table. Dworkin uses these forms of luck to decide what we should compensate people for, besides a distribution of external resources. He decides this by adding a so called insurance to our earlier mentioned hypothetical auction. By insuring at the expense of clamshells against certain handicaps, say having bad legs, participants can create their own option luck (you make your own choice regarding the amount of risk you want to take and thus the effect luck can have on you) by purchasing assurance against such an event happening. If, given that everybody has the same chances of having such a handicap, certain members are born without legs, these members are compensated for their handicap with the premium of the insurance paid by others. As Dworkin notes, what we call a handicap is fully dependent on what sort of life a person wants, but this can of course never be taken into account before the handicap takes place.

In order for this extended auction to work there must be some standard to which people can measure whether or not they are handicapped. However, we have trouble defining a ‘normal’ person and correspondingly what counts as a handicap. Do people get compensated for being ugly? Then what is the standard for being normal, i.e. does a person get compensated for thinking he is ugly or for everybody else thinking him ugly? Dworkin (1981) says that we cannot compensate for subjective

internal resources. We do no have the same opinions regarding certain qualities and thus it is impossible to formulate all standards for which people can insure. It seems at least very difficult to compensate for every mental and physical deviation. However, Dworkin seems adamant, as does Paine (1797) claim, that any person with a serious handicap that all would agree on should in fact be compensated for. Dworkin (1981) claims that there are certain handicaps which can be called true handicaps, about which there would be general consensus. Some handicaps can very clearly hinder us in life, but which to compensate for is complicated.

In order to avoid or at least be careful with any slippery slope, Dworkin (1981) proposes that we look at the insurance auction in a different way. The complication of handicaps leads Dworkin to conclude that the most efficient way to distinguish between them is by making earning capacity in life the focus point. The reason is that, given different influences of physical or mental features, one could at least assume that people would insure against (extreme) poverty. So Dworkin asks us to look not so much at the talents or handicaps of people, but the proceeds of said talents or handicaps. For those proceeds that severe handicaps imply, citizens would insure against. The premium they would pay then depends on who else would also insure against extreme poverty. With such a thing as good looks or a specific length there is no saying as to who would insure. But we can agree that people would insure to not be extremely poor. What you get under the hypothetical auction is the following figure change:

Figure 3. Total distribution of earning capacity

Here the top of the original auction society pays the premium that compensates the bottom of society. But, if we were to compensate for earning capacity, would any monetary amount make a person without legs or with a severe mental handicap equal to a normal person? According to Dworkin (1981) that is not the case, for physical and mental health are not ordinary resources that can be freely

transferred and thus are not the immediate object of creating equality of opportunity. As Van Donselaar (2003) notes, it is not the case that because Fast has certain internal resources, Slow does not have them. In the case of external resources this is of course the case, for me owning land excludes you (or others) from having that land. As Dworkin (1981) argues, while the physical and mental state

Before Hypothetical Insurance Auction

After Hypothetical Insurrance Auction