Consulting by RPM || Free Advice Blog

Three Myths About Tax Reform

My latest FEE article. An excerpt:

The “correct” amount of saving, in terms of economic theory, is that which people choose in a free market. People have underlying preferences for present versus future consumption, and they engage in mutually advantageous trades — guided by interest rates — to rearrange the timing of their income and consumption.

It is true, as many critics complain, that the income tax imposes a “double tax” on labor income if it is saved and invested. However, the real problem here (from the point of view of resource allocation) is that a tax on dividend and interest income imposes an artificial penalty on future consumption versus present consumption. This is the sense in which a flat income tax of 10 percent will cause more economic inefficiency than a flat consumption tax of 10 percent, and it is the basis of many proposals to reform the tax code.

Yet, the problem here isn’t the government’s failure to reward (or encourage) saving; the problem is that the income tax artificially punishes deferred consumption relative to immediate consumption.

More on Bad Arguments

My manager, agent, family, and closest friends have all told me to walk away, but I’m going to the barricades on this one…

If Charles Krauthammer had argued, “The government should cut taxes because 2+2=4,” that would be a terrible argument. This is the case even though the premise is true, and even though I agree with the conclusion. To be sure, I probably wouldn’t devote a column to exposing the non sequitur, but I would agree–if somebody asked me–that the above is a terrible argument.

If Charles Krauthammer had argued, “The government should hike the gas tax $1 per gallon and use the proceeds to give Social Security rebates, because 2+2=4,” that would also be a terrible argument. This is the case even though the premise is true. If I point out that it’s a terrible argument, I haven’t proven that the government should NOT implement Krauthammer’s policy; but I’ve certainly shown that his argument gives us no reason to support it.

If Charles Krauthammer had argued, “The government should hike the gas tax $1 per gallon and use the proceeds to give Social Security rebates, because the rebate leaves the average motorist unharmed and it encourages job creation,” that is a really terrible argument. Now, not only is Krauthammer trying to reach a conclusion with a non sequitur (by looking at benefits and ignoring costs), but he’s relying on a premise that is FALSE. Specifically, it’s not true that the average motorist is unharmed by a gas tax hike, so long as he gets the same dollar amount refunded lump sum.

Do you doubt my last sentence? Imagine the government hiked the gas tax $1000 per gallon, and refunded all receipts to Social Security payers. The tax goes in, everyone stops driving, and gas sales fall to 0. So no refund. Zero taxes paid to the Treasury, zero Social Security rebate. According to Krauthammer, the average motorist isn’t harmed.

And now we should expect all sorts of job creation in an America where people ride bikes to work.

An Interesting Household Saving Strategy?

I once encountered a suggestion (from a magazine, I think) that offered the following strategy to encourage household saving: Whenever buying something, only use $5 bills or higher. Then every night, empty your wallet/purse of any singles into a jar. By the end of a month, you will be shocked at how much you have saved.

Now when evaluating this proposal, the first thing I did was exaggerate it. I thought, “Why stop at a $5 bill? Why not always break $100 for every purchase?” Clearly that wouldn’t be a source of new savings–you would have to keep draining your saving account to replenish your stack of $100 bills.

So for those of you who were arguing with me in this thread, my question is: Do you agree the strategy is a good “first move” in this context? Again, it doesn’t prove that the technique with $5 bills is wrong, but it very quickly isolates the tradeoffs involved. And in particular, if you were arguing with someone who saw no downside in the $5 approach, surely the $100 example would be quite useful, right?

Translate Piketty?

Do we have any fluent French speakers who can translate these two paragraphs, taken from an August 2014 Piketty column (HT2 Magness)?

La croissance perpétuelle de la population, le dynamisme de ses universités et de ses innovations ont pour l’instant préservé le pays de cette dérive. Mais cela ne suffit plus. Une première fois déjà, vers 1900-1920, la montée des inégalités avait suscité un vaste débat national – c’était l’époque du Gilded Age, de Rock-feller et de Gatsby le Magnifique. C’est ainsi que le pays s’est retrouvé à inventer dans l’entre-deux-guerres une fiscalité lourdement progressive sur les plus hauts revenus et les patrimoines hérités les plus importants, avec des taux marginaux supérieurs atteignant ou dépassant les 70%-80% pendant un demi-siècle.

Va-t-on assister dans les années et décennies à venir à une réaction similaire de la démocratie américaine ? La décision de la Cour suprême montre que la bataille politique promet d’être rude – mais elle peut être gagnée. Les juges constitutionnels américains avaient déjà tenté de bloquer l’impôt sur le revenu au XIX^e siècle et le salaire minimum dans les années 30. Ils semblent bien partis pour jouer le même rôle réactionnaire, à l’image d’ailleurs du Conseil constitutionnel français, de plus en plus prompt à donner force de loi à ses opinions fiscales conservatrices, en toute bonne conscience.

Scientists and Theism

I was talking to someone about the topic of scientists believing in God, and I went to look up the stats. I was fairly surprised by what I found. This was one of the top hits I got, an article in the LA Times talking about a Pew survey done in 2009. Some interesting excerpts, with bold from me:

The scientific community is, however, much less religious than the general public. In Pew surveys, 95% of American adults say they believe in some form of deity or higher power.

A Dreamy Argument

It’s the age-old debate: Do people wear clothes for functionality (such as staying warm or protecting feet), or do they wear clothes for style?

A lot of people think the answer is “both,” but those people are no fun. I like to make it sound like I really believe it is nothing but style, except if you challenge me with obvious counterarguments then I’ll say, “Well duh, obviously I wasn’t denying that.”

Anyway, if the critics are right and we really wear clothes because they serve an actual pragmatic function, then why is it common for people to dream about being naked and horribly embarrassed in front of a crowd? Nobody ever has a nightmare about being naked in the tundra, all alone, and then freezing to death.

This post inspired by Bryan Caplan.

Potpourri

==> My co-authors at the Fraser Institute and I have a new book out that explains economic principles to the layperson. The ideas are universal but the book is aimed at a Canadian audience.

==> When Tyler Cowen goes head-to-head against Scott Sumner, I side with Cowen.

==> Phil Magness has some fun with the rules of empiricism, Piketty-style. (Note: I have not independently checked Phil’s work here, but from what I can tell he has done what he claims to have done.)

Murphy vs. Krauthammer on Gas Tax

My latest at IER. For you folks, here’s the part I want to highlight:

First, let’s use a trick from the minimum wage debate, which I’m sure Krauthammer and other Fox contributors will appreciate. When a progressive says how great boosting the minimum wage to (say) $10/hour would be, the easiest way to show the weakness in the argument is to ask, “Okay, then why not boost the minimum wage to $100 per hour?!” It’s not that this is the end of the story, period, but the rhetorical question shows that the typical progressive hasn’t even considered the downsides of the proposal, and thus is caught flat-footed when challenged in this way.

We can use the same rhetorical device against Krauthammer. In his article, he doesn’t list a single downside of raising the gas tax. It is safe to assume that he pulled that $1 per gallon figure out of thin air—it’s not the result of a careful weighing of pros and cons. So the wise reader can go back and plug a $10 per gallon tax on gasoline into Krauthammer’s piece, and see if it still makes sense.

Here’s a hint: It won’t.

Now there was some pushback last year from the free-market camp, along the lines of, “Hey guys, we really need to stop doing the extreme ‘why not make it $100 an hour?!’ argument in the minimum wage debate.”

I strongly disagree. If someone makes an argument for X, but that same argument would prove 10X is much better, then it must be a bad argument if in fact we can all agree 10X would be terrible. We haven’t of course proven that X is bad, but we’ve definitely established that the original argument for X is bad.

Robert Nozick apparently was converted away from typical interventionist notions with just such an argument. (I say “apparently” because I’ve heard people repeat this; I never read him saying this in his own words, I don’t think.) When critics said, “If you support a modest hike in the minimum wage, why not a massive one?” the people Nozick used to regard as heroes didn’t have a good response. That’s when he realized he should stop taking cues from them on economic policy, and began reading others.

So anyway, it’s the same thing with Krauthammer’s call for a $1 per gallon hike in the gas tax. He didn’t arrive at that figure as the optimal stopping point; he just picked it out of the air, and then listed some benefits from it, without any discussion of the costs (let alone demonstrating that the benefits outweighed the costs). That is a terrible argument for an economic policy.