10 Mar 2017

Free-Market Economists for Massive Tax Hikes

Health Legislation 17 Comments

You know how it’s impossible to buy an airplane ticket, unless your company pays for it? The reason is that businesses can deduct air travel as an expense.

You know how it’s impossible to go out to dinner, unless your company pays for it? The reason is that businesses can deduct meals as an expense.

You know how it’s impossible to afford printer paper and staplers unless your company pays for it? The reason is that–

“OK Bob, you’re making some kind of ‘analogy,’ we get it. What the hell’s your point?”

I’m glad you asked. Look at how Steve Landsburg and Scott Sumner are really mad at Paul Ryan–for refraining from imposing massive new taxes on health insurance. In my new Lara-Murphy.com blog post, I explain why I think their angst is misplaced.

Incidentally, to see just how mixed up Scott ended up getting on EconLog, look at this, when he responded to a critic (Glenn):

Glenn, You said:

“The bill eliminates most (all?) of the new taxes imposed on the sector by ACA. This should translate into lower costs.”

Which taxes are those? Removing the medical devices tax will increase health care costs.

No, taxing a supplier leads to higher prices.

It would be as if Scott were (correctly) arguing for taking away government support for colleges and universities, and then in the trenches ended up arguing, “In order to reduce education costs, the government should impose a tax on colleges for every student enrolled.”

Incidentally, David R. Henderson also had a (less cheeky) complaint against Scott’s post.

17 Responses to “Free-Market Economists for Massive Tax Hikes”

  1. RPLong says:

    Their arguments remind me of arguments for a Universal Basic Income, in the following way:

    UBI advocates start by pointing out that current government welfare schemes distort free market equilibria. Next, they point out that a direct cash transfer would result in less distortion. Finally, they conclude that a UBI is preferable to the status quo “on libertarian grounds.”

    But here’s my problem: I believe in markets because they appear to grant me maximal liberty at absolutely no cost to Pareto efficiency in all or most cases. So, markets are a good way to give me freedom, which is what I want.

    My problem with people like Sumner and advocates of UBIs and consumption taxes is that they seem to only value freedom insofar as it gives them Pareto efficiency. If they can argue that a free world is less Pareto-optimal, they will happily tax, regulate, and more in the name of achieving less dead-weight loss. Even if the DWL comes from prior government interference, as in the case of the medical device market.

    I just don’t get it. I’m a freedom first, economics second kind of guy. Perhaps they would call me an ideologue?

    • Darien says:

      I have a friend who holds very much the same view, and has even expressed it to me in more or less those terms — he believes in free markets because he believes they’re the best way to maximise social utility, but he would gladly jettison the whole concept of freedom if he thought some other approach would max out his utils better. And, yes, he delights in calling me an ideologue because I think his approach is putting the pony in back of the chariot.

    • Harold says:

      RP Long “I believe in markets because they appear to grant me maximal liberty at absolutely no cost to Pareto efficiency in all or most cases. So, markets are a good way to give me freedom, which is what I want.”

      There is a tension here. Do you believe in markets because they provide Pareto efficiency, or because it has minimal cost to freedom.?

      It is fine for you if you think both criteria are fulfilled, but that is presupposing the outcome. If it came to a choice which is the reason you like markets?

      You say you want freedom, so I guess you are happy to forego Pareto efficiency in favor of freedom if it came to the crunch. Pareto efficiency is, you believe, just a happy coincidence of your choice.

      So others who revere Pareto efficiency, because they are basically consequentialists rather than ideologues (I am not meaning this pejoratively), would prefer to sacrifice some freedom to achieve their aims of efficiency.

      So I guess they would call you an ideologue.

      Our host has indulged in similar arguments in the tax interaction effect. This is basically taking the world as it is now, with taxes etc, and seeing how a change will affect that. This is of course a reasonable approach, but seems to only be applied in certain circumstances where the outcome fits with certain conclusions.

      I may have missed some subtleties in the arguments here. I am putting this out there more as a hypothesis than a fully formed conclusion.

      • RPLong says:

        Harold – nope, I think you’ve got it. It sounds like we’re saying more or less the same thing. If push came to shove, I’d rather have freedom than Pareto efficiency, and I have evidence suggesting that most other people feel the same way: Monopolistic Competition.

        The textbook treatment of monopolistic competition is that we lose some efficiency, but gain more choices – products that are only-ever-so-slightly differentiated from each other, like a Big Mac and a King Supreme or whatever. To gain more efficiency, we’d give up some freedom of choice to achieve perfect hamburger competition. But none of us want that, because we like having the ability to choose.

        This is pretty strong evidence of revealed preference for freedom over efficiency. I don’t know for a fact that all or most people prefer freedom, but like I say: I have evidence.

        • Harold says:

          Possibly, I have some questions. MC requires low barriers to entry and many producers and I am not sure that the leading fast food brands really fit that description. Brand creation is a very expensive business and does not represent low barrier to entry, so that weakens the argument. But anyone can sell burgers with little set up costs, so I am not quite sure.

          Also, is the fact that we have ended up with a system of something like MC a definitive argument that we prefer MC to perfect hamburger competition? Many stable equilibria are not the best possible, but represent a local maximum. Maybe we are always doomed to end up on a subsidiary peak and never attain the true peak.

          • RPLong says:

            Harold, interesting questions, but we’re now too far afield to address the main issues behind this post and what I was really getting at.

            • Harold says:

              Yes, something of a digression. Some other time perhaps.

  2. Craw says:

    Isn’t this the “selective tax” debate we have had before?
    Imagine there is a $100 tax on staples. Home Depot prices staples at 39 cents a box (their cost is 38 cents). Not many people buy staples, only some folks with a special need, such as anyone near Neil De Grasse Tyson’s lips.
    Then the tax is removed for blue eyed people.
    My guess is the price of staples will go up.

    • Harold says:

      Craw. I missed the debate previously. My question is why would Home Depot only charge 39c if the customer is going to pay $100.39? The customer has such a need for staples they are unlikely to be deterred if they had to pay say $110, let alone $100.50. I can only assume it is because competition is so fierce that Home Depot cannot charge any more than the absolute minimum it is worth them doing it for. That is, their margin is the same regardless of the tax.

      If we now give blue eyed people the tax break I don’t see that anything has changed for Home Depot. They can still only charge the minimum margin or they will be undercut.

      As I said I missed the earlier discussion. I have not considered the effects down the supply chain, but I don’t see how increasing the volume could raise the costs there either.

      • Craw says:

        Harold, never has the only thing you missed been the previous debate. But I was unclear. there’s a decent chance Sumner means total spending. In my example 6 people buy staples a year. After the tax cut millions do. “Stapling costs” are up. Especially in a market with insurance and deductibles I won’t say that won’t also lead to more wasteful spending.

        And a selective tax cut can shift the demand curve. In my stapler example there is an artificial cut off in the market. Removing those things can have effects contrary to what one might expect. Like when, with monopsony, hiking the minimum wage can increase employment in some cases.

        I,m not defending Sumner. I am just saying he might be talking about special cases rather than denying demand curves usually slope down, as Bob seems to read him saying.

        • Tel says:

          With something like staples, there’s a massive economy of scale so with only 6 sales per year the per-unit cost of a staple would be huge and no it wouldn’t be stocked in Home Depot, because they have not the slightest interest in rare speciality items. Staples would only be available from some obscure Internet shop by mail order. Also, all the people who were thinking about staples would buy paper clips or something as a substitute.

          That said, health insurance probably has very a different profile in terms of economies of scale, and we aren’t talking about a tax that destroys the entire market, we are talking about a smaller tax which distorts the market.

          A better example would be if Home Depot said, “Staples cost $1 a box unless you also buy a coffee at the same time, and then we drop the price to 50c a box”. This kind of bundling happens all the time in retail, and they do it for a reason — because they think it can encourage a few people to spend a little extra. In the case of health insurance it’s government imposing the distortion but the economic effect doesn’t change (your opinion on legitimacy and incentives might change).

        • Harold says:

          I did not say the last debate was the onlything I missed 🙂

          • craw says:

            The more I read it the more it sounds like Sumner means health care spending in toto. “But sire, if you stop whipping readers more books will be sold.” A lot of people just assume rising healthcare spending is a bad thing.

  3. Silas Barta says:

    Hm … not sure that (the student tax) is the best example to make the point, since there are more complicated dynamics for education that *do* cause price to move in the direction of the government subsidy, and many of those same dynamics apply to health care. And indeed, at least one libertarian economist (Bryan Caplan) has suggested that taxing education would cut prices, because it could break the “signaling arms race” and reduce demand.

    That dynamic is something like, “buyer is separated from payer, payer overpays, billed amount goes up, and providers now compete on throwing bells-n-whistles into the product that no one would actually want if they had to bear the cost[1]”. Both health care and education arguably suffer from this effect.

    It’s not so much that the price “goes up”, but that the equilibrium “quantity” goes up, which *appears* as a higher price compared to the bundle that a cost-bearing buyer would want.

    To the extent that medical devices fall into that category, the tax would “correctly” reduce the overspend. But medical devices are not inherently in this category, so the correlation is weak — like when people want higher gas taxes to cut traffic (cough, Mankiw).

    [1] at least in the sense of “they would prefer the cash value in lieu of that bell/whistle”

    • Bob Murphy says:

      Silas, it sounds like you just wrote, “It would make prices go up in education. Well technically not a price going up, but…”

      Right? If it helps, I am talking about prices not literally going down when the government adds a tax on suppliers. If you agree that the actual prices would go up, but want to say this somehow means “lower costs,” I’m fine with that.

      In fact, Scott might mean something like, “Counting the government revenue” even though I think it’s still technically a false statement.

      • Silas Barta says:

        >Right? If it helps, I am talking about prices not literally going down when the government adds a tax on suppliers. If you agree that the actual prices would go up, but want to say this somehow means “lower costs,” I’m fine with that.

        I think the actual (unit) prices might be unchanged, but yeah.

        To elaborate, a good comparison of my model would be to airline price floors, which causes airlines to compete on quality. In that case, you could impute out the effective price of everything the ticket is buying and say “yep, the implicit price of the flight itself is unchanged, the implicit price of the better-looking employees is unchanged, the implicit price of the airline food is unchanged, etc” and yet there’s still a utility loss from people having to buy more with the airline ticket than they really want. In that sense, it’s a price increase.

        Likewise, a subsidy for health care or education might cause people to pay more even though you can go through and say, “yup, that’s the normal price for a medical device, rock climbing wall, state of the art stadium, private hospital room…”.

        Do you see how that could rightly be described as “education/health care costs as borne by consumers went up, but (unit) prices went down”?

    • Tel says:

      That dynamic is something like, “buyer is separated from payer, payer overpays, billed amount goes up, and providers now compete on throwing bells-n-whistles into the product that no one would actually want if they had to bear the cost[1]”. Both health care and education arguably suffer from this effect.

      What would normally happen is that prices temporarily spike up, and then a lot more suppliers jump into that market and compete fiercely for the free money (bringing prices back down again). However, in both education and healthcare the government has also introduced all sorts of barriers to entry in terms of licensing and approval processes to obstruct market forces.

      And yeah, we may also argue that students are buying the wrong things (better gym, bigger dorm rooms) but from a market perspective it doesn’t matter a whole lot what they want, if suppliers have free hand to supply it then they will. Same deal for healthcare.

      It’s not so much that the price “goes up”, but that the equilibrium “quantity” goes up, which *appears* as a higher price compared to the bundle that a cost-bearing buyer would want.

      Well two things are happening: demand has been artificially increased (because of buyer / payer separation) but also supply side has been prevented from adapting to that (because of regulatory barriers to entry). With those two things put together you are guaranteed to get artificial shortage and prices go right up.

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