22 Jan 2019

Bob on Tom Woods Show Talking About Bob

Shameless Self-Promotion No Comments

What about it? Here ya go.

(Note that I have had 2 recent appearances; this isn’t a double post.)

22 Jan 2019

Bob on Tom Woods Show Talking IBC

Infinite Banking Concept 2 Comments

Here ya go.

22 Jan 2019

Why a Revenue-Neutral Tax Dividend Check Doesn’t Negate the Deadweight Loss of a Tax

Climate Change 37 Comments

I can see in the comments here, regarding my article about the economists writing a pro-carbon tax letter to the WSJ, that several of you aren’t seeing the big picture on the dividend stuff.

So in this post, let me give you a quick numerical example to show the standard way economists think about taxes, and how they distort behavior to cause “deadweight loss.”

Suppose there are two goods, X and Y. The consumer has a utility function:

u = ln(X) + ln(Y),

where ln(*) is the natural logarithm.

Further suppose that the price of X in the market is 1, while the price of Y is 2. Finally, suppose the consumer has a budget of 3000.

Without any taxes, the consumer optimizes by maximizing utility subject to the budget constraint. Typing this through WordPress I’m going to have trouble, but hopefully you can follow the argument, and I’m going to switch to lowercase variables now:

From the budget constraint we have

x + 2y = 3000

which means

y = (3000 – x) / 2.

Substitute that into the utility function and you have

u = ln(x) + ln[(3000-x)/2].

Take the derivative of u with respect to x and set to 0, in order to find the local maximum:

du/dx = 1/x + [2/(3000-x)]*(-1/2) = 0

Then use algebra to find

x* = 1500.

You can use a similar procedure to find y* = 750.

Notice that the consumer ends up spending the same portion of income (i.e. half) on either good. That’s not a coincidence; that’s what happens when you choose ln(*) for your utility function with the same coefficient on each term like this. (Someone who knows what he or she is talking about: Please confirm this for me. I want to make sure I’m not generalizing too much.)

OK, now suppose the government imposes a $1 tax on good X, so that the after-tax unit price on X is now 2, and the price on Y (from the market) is still 2.

Further, the government is going to make the tax revenue neutral. Specifically, the government will take the incoming tax receipts and give them back, lump sum, to the household.

THIS IS IMPORTANT: The household doesn’t optimize in the new situation thinking that its own tax payments are coming back. Rather, the household takes the dividend check from the government as a fixed dollar amount, which is the same regardless of the household’s behavior. However, in equilibrium it has to be true that what the house pays in taxes on good X, it gets back “dollar for dollar” in the dividend check from the government.

(If you want to make it more realistic, assume there are millions of identical households paying into one giant pot, and then the government sends the same lump-sum refund to every household. That way no individual household’s spending on X can affect its dividend check very much.)

OK so from the household’s perspective, its budget is now 3000 + R, where R is the total receipts from the new tax. (But remember, when doing the calculus, the household treats R as a constant, not as a variable.)

So the household’s new budget constraint is

2x + 2y = 3000 + R.

To optimize, the household allocates half of its total budget to good x, and the other half to good y, just as before.

So we can write that in the new equilibrium, after this tax has been placed on good X, that the optimal x* is

x* = (1500 + R/2) / 2,

i.e. half of the total budget divided by the new (after-tax) price of X.

We also know, however, that the total Receipts R will be equal to $1 times the number of units of X purchased. I.e. we know

R = x

Substituting and solving, we find

x* = 1000.

Knowing that total tax receipts are $1000, we now know that the total budget is 3000 + 1000 = 4000, which means the household allocates 2000 to good Y, meaning

y* = 1000.

So, in the new equilibrium, the household gets a $1000 dividend check from the government that bumps its total budget up to $4000, and then–facing equal (after-tax) prices on goods X and Y–the household spends $2000 on each good. Since each good (after tax) has a price of $2, that means buying 1000 units of each good. And yep, it checks out, that buying 1000 units of X causes the household to hand over $1,000 in tax receipts to the government.

So notice that the household hasn’t been “hurt financially” by the tax. The tax by construction was “revenue neutral.” The household got back in a dividend check “exactly what it paid in higher prices on the taxed good.” So according to the WSJ letter signers, you would think the household should be indifferent to the tax.

But nope, that’s wrong. If you substitute the two different outcomes into the utility function, you see that the household gets more utility from the first scenario.

Specifically,

ln(1500) + ln(750) > ln(1000) + ln(1000).

This is what economists have in mind when they talk about taxes having a distortionary effect. Economists don’t really “follow the dollars around”; the reason taxes (in general) are “bad for the economy” is that they alter behavior. In this example, the household is led to buy fewer units of X and more units of Y, in a way that makes the household worse off.

This is standard stuff. I wouldn’t get into this type of numerical example in a Principles class, but I would definitely do it in an Intermediate Micro class for undergrads.

Of course, the economists who signed the WSJ letter know all of the above. It’s also true that they think the negative externality of climate change is something to counterbalance against resource allocation in the pure market place. But my simple point is that they are being incredibly misleading by saying most households will “financially benefit” from a carbon-tax-and-dividend scheme.

To repeat: In the example above, the household was held “harmless financially” if that’s the way you want to think about it. But that hardly means the tax had no impact. Now if I told you that good X was actually “electricity from a coal-fired power plant,” while good Y was “transportation in a solar-powered train,” then you could say that the tax was a good move ALL THINGS CONSIDERED. But it would be wrong to claim that the environmental benefits were good and that the dividend check compensated the household for the higher price on coal-provided electricity. No, the higher price on good X leads to a definite loss of utility in terms of the direct services provided by X and Y, which maybe are justified by the gain in environmental quality (not modeled here). But the dividend check doesn’t render the tax costless.

This is the stuff Tyler Cowen surely had in mind when he wrote (italics in original):

[The lump-sum dividend rebate] tries to make a carbon tax a free lunch, which it is not, no matter how great the longer-term gains.  I don’t believe in economists tricking people, even though I will admit tricking people can be useful.  The tricking is somebody else’s job!

18 Jan 2019

Murphy Twin Spin on Energy Topics

Energy 29 Comments

==> My Part 2 of my critique of the “Green New Deal.”

==> My response to the 45 economists who wrote an open letter to the Wall Street Journal calling for a carbon tax. My favorite part:

Before leaving this section, let me try one last attempt to get the reader to see the sleight-of-hand that these economists are pulling here. Suppose that President Trump had his protectionist economic adviser, Peter Navarro (who has a PhD in economics from Harvard, by the way), announce a new tariff of 100% on all Chinese imports, but that the proceeds from this new tax would be sent lump-sum to every American citizen. Would the economists who signed the WSJ letter then agree that “most American families” would benefit financially from the tariff? I mean after all, rich people tend to spend more dollars (in absolute terms) on imported goods than poor people do, so the statement would be correct. And yet, of course none of the WSJ letter signers would endorse such a plan. They would (rightly) warn Americans that such a large tariff would disrupt production decisions and lower just about everybody’s standard of living. The fact that these economists are adopting a completely novel talking point to sell a carbon tax should make Americans quite suspicious.

Incidentally, although Tyler Cowen supports a carbon tax, he also doesn’t like the dividend refund stuff: “I don’t believe in economists tricking people, even though I will admit tricking people can be useful.”

17 Jan 2019

BMS ep. 12: Gene Epstein on Commies, Krugman, and Crushing Debaters

Bob Murphy Show 5 Comments

The latest episode is long but we cover a lot of interesting stuff.

13 Jan 2019

Would Jesus Be Annoyed With Libertarian Memes?

Religious 23 Comments

Of course He would be–He’s fully human after all…

But specifically, what about the “TAXATION IS THEFT!” line of argument? Gene Callahan blogs that this isn’t scriptural, since we read in Luke 3:

10 And the crowds asked him [John the Baptist], “What then shall we do?” 11 And he answered them, “Whoever has two tunics[b] is to share with him who has none, and whoever has food is to do likewise.” 12 Tax collectors also came to be baptized and said to him, “Teacher, what shall we do?” 13 And he said to them, “Collect no more than you are authorized to do.” 14 Soldiers also asked him, “And we, what shall we do?” And he said to them, “Do not extort money from anyone by threats or by false accusation, and be content with your wages.”

On this blog, someone in the comments answered Keshav (I think?) who had brought Gene’s point up, by saying that this type of thing is typical in the Bible, where God (or people speaking on His behalf) are just trying to limit sin. For example, Moses gave the Israelites the lawful way to divorce, and Jesus famously said that this was because “of the hardness of your hearts.” It certainly wasn’t that God was a fan of divorce.

But even more to the point, Paul gave instruction to the masters of bondservants/slaves that fell short of, “Free them immediately.” Here’s an example (Ephesians 6: 5-9):

Slaves, obey your earthly masters with respect and fear, and with sincerity of heart, just as you would obey Christ. Obey them not only to win their favor when their eye is on you, but as slaves of Christ, doing the will of God from your heart.Serve wholeheartedly, as if you were serving the Lord, not people, because you know that the Lord will reward each one for whatever good they do, whether they are slave or free.

And masters, treat your slaves in the same way. Do not threaten them, since you know that he who is both their Master and yours is in heaven, and there is no favoritism with him.

So I don’t think it is fair to say that the New Testament condones chattel slavery. In context, I think what is happening in the above is that Paul is trying to promote justice within the confines of his understanding of the economic/legal framework.

Likewise, I think John the Baptist was moved by the Spirit to sense the presence of the Messiah–even in the womb–but I don’t think he had a vision of a private property society and rejected it. John the Baptist knew that theft was sinful, but his understanding of property rights differed from the modern Rothbardian’s. I realize that that is the very thing under discussion, but pointing that out doesn’t prove that taxation is NOT theft.

10 Jan 2019

Problem & Solution

Contra Krugman No Comments

09 Jan 2019

Bob Murphy Show ep. 11: The Economics of Immigration and a Border Wall

Bob Murphy Show, Immigration 22 Comments

Ooooh I’m topical in this one. Immigration is so hot right now.