Economic theory has long been aware of notions of empathy, vide Adam Smith (1759, 1984) on moral sentiments.
Some tax theorists suggest that the social subsistence level should be exempt from taxation. Hofstra (1975) recalls the Cohen Stuart 1889 analogy, that a bridge must hold its own weight before it can be used.
In his 1980 presidential address to the American Economic Association, Solow (1980) discussed his reading of Pigou’ work, and writes:
“The last comment of Pigou’s that I want to cite is especially intriguing because it is so unlike the sort of thing that his present day successors keep saying. Already in the 1933 Theory of unemployment he wrote: “... public opinion in a modern civilized State builds up for itself a rough estimate of what constitutes a reasonable living wage. This is derived half-consciously from a knowlegde of the actual standards enjoyed by more or less ‘average’ workers ... Public opinion then enforces its view, failing success through social pressure, by the machinery of .. legislation” (p.255). A similar remark appears in Lapses [Pigou 1944 Lapses from Full Employment]. Such feelings about equity and fairness are obviously relevant to the setting of statutory minimum wages, and Pigou uses them that way.” (p5)
Solow in the next sentences also emphasises the power of social pressure, and shows himself aware that the minimum wage need not be a special application since social pressure is abundant:
“... it is even more surprising ... that employers so rarely try to elicit wage cutting on the part of their laid-off employees, even in a buyer’s market for labor. Several forces can be at work, but I think Occam’s razor and common observation both suggest that a code of good behavior enforced by social pressure is one of them.”
Types of indexation
We already have encountered these indexes of subsistence:
· The graphs in Book III are based on indexation on the net average wage Net[W] = W - T[W]. This presentation has been chosen since its approach is more conservative.
· Another indexation is on W itself, which thus considers taxes a part of well-being. Property (13.3e) however shows this equivalent to the first, for the Bentham tax, provided that exemption is properly indexed too.