Think of something good that happened to you. Now, think of a factor that was not under your control that contributed to that good experience. Perhaps you thought of how you got your current job—and remembered that you found out the job was available when an acquaintance mentioned it to you in passing. Or perhaps you thought of something as simple as scoring that comfortable, attractive shirt at the local department store—and remembered it was the last one in your size; if you’d gone shopping just a few hours later, it may have been taken by the time you got there. What do these memories have in common? They illustrate the hidden hand of luck in our successes.
“We notice luck’s influence when it hits us over the head,” says Robert H. Frank, Economics/Graduate School of Management. “When someone wins the lottery, we notice it. Or conversely when someone gets killed in an accident, we call that bad luck. But luck typically plays out in much more subtle ways, and if it plays out in a successful outcome for us, we tend not to notice it at all.”
Luck is Random
Frank has just finished his latest book, titled Success and Luck: Good Fortune and the Myth of Meritocracy (Princeton University Press). In the book, Frank scrutinizes the tendency of very successful people to think of themselves as having reached their success entirely on their own. He also looks at the economic fallout of that belief.
“It’s a natural cognitive process, if you’ve been successful, to think you’ve done it on your own,” says Frank. When these highly successful people think back on why they are successful, they naturally remember the hard work and expertise they engaged in every day on the way to the top, and they don’t remember the little bits of luck that pushed them along the way.
“There are many people who are smart and work hard and don’t succeed on a big scale, because luck is random,” says Frank, “and this is what people don’t see. Those people are invisible to them. Every career has a thousand steps, and most of them are small and depend on the steps that came before. If one of those steps were just a little different, then the direction of the overall path would be different and where it ends up could be very different. And some of these changes are just pure chance events.”
Success—All by Myself—and Taxes
Frank is interested in this phenomenon because very successful people are in the highest socio-economic sphere, and their beliefs about their own success can have huge political and economic consequences. “When people think they did it all themselves, that seems to kindle a fierce determination to hang on to every nickel that comes their way,” Frank explains. “That often translates into the belief that taxation is theft. That’s not a sensible view for anyone to hold if they really think about it. If you didn’t have taxes, there wouldn’t be a government.”
“There are many people who are smart and work hard and don’t succeed on a big scale, because luck is random,” says Frank, “and this is what people don’t see. …Every career has a thousand steps, and most of them are small and depend on the steps that came before.”
Without government there would be no army to defend the country, no roads or infrastructures to get goods to market, and no public schooling to train workers, among other things. These are all necessary for the individual success of entrepreneurs, Frank says, so giving these same entrepreneurs tax cuts hurts the public sector, and that isn’t good for anyone.
The rich don’t realize that everyone in their tax bracket would equally share the effect of higher taxes, resulting in zero impact for them, according to Frank. Those in the highest income bracket have long since purchased everything they need. What are left are the things they want—things that are scarce, such as a sweeping lake view or an elite sports car.
“These are the things you have to outbid others for,” he says. “There’s not enough of them to go around. If everyone in the upper income bracket had their taxes raised, then they may have less money and the highest bidder may not be able to bid as high as before, but neither can anyone else. It’s relative purchasing power that determines who wins those bidding wars.”
When the Rich Think about Taxes
In his book, Frank explores why the rich don’t grasp this fundamental economic reality. “Most of the people I talk to about this say, ‘I never thought of it like that. I thought higher taxes would hurt,’” he says. One reason for this misunderstanding is because taxes in the United States have not really gone up in decades. Although there has been some fluctuation in tax rates from administration to administration, the overall effect has been almost static. That means people don’t have experience to draw on when evaluating the effect of a tax hike.
“When you don’t have examples of higher taxes to help you assess the impact, what you do instead is think of all the other times you had less money,” Frank says. “So you think about when you lost a job, got a divorce, had a serious illness—all the things that people do experience with some frequency. In those cases, your income was lowered, and it hurt because you had less money while everyone else still had the same amount they always had. Your relative purchasing power went down. It’s not a true comparison. If taxes went up, the rich would still be able to get just as much of what they want as they could before.”
A Progressive Consumption Tax
Frank has long advocated for a progressive consumption tax tied to how much an individual spends in a year. Taxpayers would report how much they made in a year, minus how much they saved. The difference is how much they spent. That, minus a standard deduction, would be the taxpayer’s tax base—their taxable consumption. “The more you spend, the more you pay in tax on the next dollar,” Frank explains. That sort of a tax would help curb runaway competitive spending, which results when wealthy people are compelled to spend more than others in their income bracket in order to feel that what they have is special.
Frank is hoping that his book will ignite conversations among the more well-off. “I hope successful people will talk to other successful people about this,” he says. “I think we can have a much better society if I, and others like me, paid more in taxes, and we had a better public sphere than we do. When people talk about things, minds change quickly. It’s important to have hope that things can change. If you don’t have hope, you quit trying.”