From Kwame Anthony Appiah's fascinating longer article on fairness in politics, via Greg Mankiw:
In the 1970s, the Nobel Prize-winning economist Thomas Schelling used to put some questions to his students at Harvard when he wanted to show how people's ethical preferences on public policy can be turned around. Suppose, he said, that you were designing a tax code and wanted to provide a credit -- a rebate, in effect -- for couples with children. (I'm simplifying a bit.) In a progressive tax system such as ours, we try to ease the burden on the less well off, so it might make sense to adjust the child credit accordingly. Would it be fair, do you think, to give poor parents a bigger credit than rich parents? Schelling's students were inclined to think so. If the credit was going to vary with income, it seemed fair to award struggling families the bigger tax break. It would certainly be unfair, they agreed, for richer families to get a bigger one.
Then Schelling asked his students to think about things in a different way. Instead of giving families with children a credit, you'd impose a surcharge on couples with no children. Now then: Would it be fair to make the childless rich pay a bigger surcharge than the childless poor? Schelling's students thought so.
But -- hang on a sec -- a bonus for those who have a child amounts to a penalty for those who don't have one. (Saying that those with children should be taxed less than the childless is another way of saying that the childless should be taxed more than those with children.) So when poor parents receive a smaller credit than rich ones, that is, in effect, the same as the childless poor paying a smaller surcharge than the childless rich. To many, the first deal sounds unfair and the second sounds fair -- but they're the very same tax scheme.
That's a little disturbing, isn't it?
Why do people respond this way? There's no real paradox. The above questions seem to have elicited from the subjects a confusion of aims, in combination with a strong conceptually unpolished [IF rich THEN confiscate money] reflex.
Assume (very) hypothetically that a bonus or penalty should be applied. If it is as an incentive it should apply to rich and the poor equally, unless there is some reason to incentivise one economic class over the other (e.g. better for rich to procreate to help redistribute wealth, so a greater bonus to them) or unless you think the poor will respond to smaller incentives because it's a larger proportion of their income (in which case give bigger bonus or penalty to rich). That redistribution of wealth is a great idea is no reason for it to be tangled up with this sort of incentive scheme. If a bonus is to be given for the purpose of redistributing wealth to where it is needed (rather than as an incentive, though realising it might be one too), it should go to the poorer presumably.
Confusion about the purpose of intervening leads to an overlooked problem with the conclusion that people are being inconsistent. If a greater penalty is applied to the rich, this is not the same as giving the rich with babies a larger bonus. They have a larger bonus relative to what they would otherwise have, but what they would otherwise have has been reduced more than it has for the poor baby owners. Thus it is not better than what the poor procreaters receive. It is a greater incentive, but irrelevant to wealth distribution between the filthily rich and poor. Similarly, giving a big bonus to poor babyholders is not the same as penalising the other poor, except in terms of incentives.
The above problem is problematic because where a bonus is paid people either assume it is for wealth redistribution or that wealth redistribution should be included in the incentive by habit. Where there is a penalty, it is assumed it as a disincentive. If it were to be for wealth redistribution, penalising the rich should not be considered as benefiting other rich (relative penalisations within a class are only relevant to incentives).
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