Two Quick Notes on Tax Theory
[UPDATE: I think I misunderstood what the objective was in David R. Henderson’s post, so you can safely disregard my Note #1 I think. See the first comment by Alex Tabarrok.]
NOTE #1: David R. Henderson repeated an interesting argument against progressive taxation that I had never heard, but I think it’s wrong. David stipulates for the sake of argument that we can make interpersonal utility comparisons, and he even stipulates that there is diminishing marginal utility in money. I.e. David is stipulating (again, just for the sake of argument) that we can say $1 to Bill Gates means less than $1 to Bill Pullman. Even so, David claims these assumptions aren’t enough, to conclude that progressive income taxation increases “social utility” or some such criterion. Here’s David making the argument, and then he quotes Pigou saying it too:
[These assumptions are] consistent with a lower marginal tax rate on the high-income person because even a lower marginal tax rate above some income level will take more money from the high-income person than from the low-income person….[But y]ou need a much stronger assumption, specifically, a very steep decline in the marginal utility of income, to get Johnston’s conclusion [that a progressive income tax imposes “equal sacrifice” among taxpayers].
Here’s how Arthur Pigou put the issue in his 1951 book, A Study in Public Finance:
All that the law of diminishing utility asserts is that the last ₤1 of a ₤1000 income carries less satisfaction than the last ₤1 of a ₤100 income does. From this datum it cannot be inferred that, in order to secure equal sacrifice . . . taxation must be progressive. In order to prove that the principle of equal sacrifice necessarily involves progression we should need to know that the last ₤10 of a ₤1000 income carries less satisfaction than the last ₤1 of a ₤100 income; and this the law of diminishing utility does not assert.
OK I have to confess that I was flummoxed by this for a few minutes, because it seemed Pigou and Johnston were both right. Fortunately, I figured out (I think) what was going on, before my head exploded.
If “progressive income taxation” means that Bill Gates has his entire income taxed at a higher rate than Bill Pullman does, then Pigou is right: We have no reason to suppose we are distributing the utility-pain of taxation equally. (Again, pretend that this language even makes sense, just for this once.)
But that’s not what most people mean by the term. No, a modern “progressive income tax” has various brackets, in which the higher rates apply. So if the last $1 of a $1 million income carries less utility than the last $1 of a $10,000 income, then (giving the progressive all his other assumptions) it makes sense to impose a higher tax rate on income above $1 million, as opposed to that portion of income in the $10,000 – $y,000 bracket.
NOTE #2: Like a stopped clock, Gene Callahan occasionally throws some criticisms against modern libertarian economists that stick to the wall. (Am I mixing metaphors? Perhaps, but I note that most stopped clocks are in fact stuck to the wall.) Here and here he is wondering why we emphasize the distinction between the legal and economic incidence of taxes if and only if it helps our case for lower tax rates. In other words, Callahan is accusing us of doing a Krugman Kontradiction, although in this case it would be a Murphy Muddle.
The worst part is, off the top of my head it’s not obvious how to respond to Gene, and for sure I don’t think any of his commenters have provided an adequate solution. I’m having trouble because when I taught the tax incidence stuff to undergrads, we always used a fixed dollar amount of a tax to make drawing those cute lines (and filling in the deadweight loss triangles with colored chalk!) easier. In contrast, with supply-side griping about income tax rates, we always do it in terms of percentages, so I’m not sure if that has anything to do with Gene’s challenge. Anyway, I recommend bribing Gene’s ISP to disconnect his blog.
MMT Bask
OK I have decided that this MMT (Modern Monetary Theory) doctrine/worldview needs a thorough refuting, much more than my good friend’s quick thoughts. I have seen our frequent guest “AP Lerner” make numerous claims in the comments of this blog that seem almost self-evidently false to me.
However, I can’t very well write a Mises.org article quoting some guy from the comments of my blog. So, MMT supporters, please point me to canonical expositions, so that you can’t accuse me of attacking a strawman or a weak exposition of it.
Unfortunately, my time is scarce. I can’t devote a weekend to this. So please just send me things that are (a) authoritative but (b) succinct.
In particular, I think it is crazy when people say that if the federal government runs a budget surplus, then by simple accounting the private sector can’t save. So if you can point me to a big gun who says that and gives the logic behind it, I would appreciate it.
Readings for the Vanderbilt Debate on Gold vs Fiat Money
Last night I had the debate (more of a conversation really) with Vanderbilt econ professor Mario Crucini. I promised the crowd that I would put some readings here on my blog to back up a few of the claims I was making…
==> Here is a “big picture” article summarizing my views on the gold standard, and why it is far preferable to a government fiat system.
==> Regarding the claims by Eichengreen et al. that countries leaving the gold standard did better in the 1930s (and hence the gold standard apparently exacerbated the Great Depression), here is my response.
==> To see why I don’t think deflation is a good explanation for the severity of the Great Depression, read this article comparing it to the 1920-1921 Depression. (However here is a Keynesian rebuttal.)
==> More generally, to see my views on the Great Depression and the connection to gold, check out my book (which you would have to buy, alas).
For Those Who Are Bored
…and want to vie for a link from the Big Three clueless econ PhDs (Landsburg, Tabarrok, and Murphy). Apropos this controversy, take Krugman and DeLong‘s arguments and apply them to Krugman’s discussion in his textbook about tax incidence. (E.g. if the government puts a sales tax on selling gasoline, do the retailers or motorists actually shoulder the burden of the tax?) Make sure you guffaw and work in some “Ummms” to increase your odds of winning the contest.
Landsburg 1, Krugman 0
[UPDATE below.]
I have made my bones attacking Steve Landsburg’s arguments in the past (here, here, and here). So the present post isn’t simply, “I like free market guys and hate Paul Krugman.”
I am supposed to be preparing for a debate that will occur in a few hours so I need to keep this brief. Go read Landsburg’s post on a journalist’s silly recommendations for tax policy. The stipulated facts (which I haven’t verified) are that some rich guy is sitting on $84 million and he literally doesn’t spend any of it; he just drives around his fleet of cars. (I guess he must buy gasoline once in a while.) So the journalist wants the government to tax that guy.
Landsburg says that we don’t even need to worry about whether it is fair or unfair to go ahead and tax the guy out of his fortune, because it’s impossible:
Here’s why it’s impossible: For the government to consume more goods and services, somebody else must consume fewer. But [the rich heir], by [the journalist’s] account, consumes almost no goods or services whatsoever. He just pushes cars around all day. His consumption can’t go much lower.
Ah, says [the journalist] — but there’s still that $84 million in the bank. Surely we can tax that, no? That, right there, is the heart of [her] confusion. She thinks that green pieces of paper, or a series of zeroes and ones in a bank computer, can somehow help supply the government’s demand for actual goods and services. It can’t.
OK we all see what Landsburg is driving at, I hope. It’s true, if you want to do the Bizarro World of the Liquidity Trap where the laws of economics become inverted, then Landsburg’s argument falls apart. (That’s not surprising, since Landsburg is basing his arguments on the laws of economics.)
Now enter Paul Krugman:
Brad DeLong and Noah Smith have some fun with a bizarre post by Steve Landsburg — even more bizarrely endorsed by Alex Tabarrok — in which Landsburg asserts that you can’t tax a man if you can’t persuade him to reduce his consumption.
There are multiple things wrong with this claim, but the most fundamental, I think, is that it represents a remarkable misunderstanding of the reasons why we have taxes in the first place. They don’t primarily exist as a way to induce lower private consumption, although they may sometimes have that effect; they are there to ensure government solvency.
Consider first the taxes raised by, say, the state of New Jersey. Chris Christie doesn’t tax me because he wants to reduce my consumption; he taxes me because NJ needs money to pay its bills. It’s true that in the short run, if we ignore the legal restrictions on state borrowing, he can spend more than the state takes in in taxes; but over the longer run the state must, one way or another, collect enough revenue to pay for its spending.
Does the same thing hold true for the federal government? Well, the feds have the Fed, which can print money. But there are constraints on that, too — they’re not as sharp as the constraints on governments that can’t print money, but too much reliance on the printing press leads to unacceptable inflation. (Cue the MMT people — but after repeated discussions, I still don’t get how they sidestep the issue of limits on seignorage.)
So taxes are, first and foremost, about paying for what the government buys (duh). It’s true that they can also affect aggregate demand, and that may be something you want to do. But that really is a secondary issue.
Congratulations, Dr. Krugman: You are doing EXACTLY what the MMT people do. They say the government can’t ever go insolvent because it can print money. You (quite correctly) point out that green pieces of paper aren’t really the issue, and that without real resources to facilitate things, the printing press would just lead to rising prices.
This of course is exactly what Landsburg is saying. Suppose there were thousands of people like the heir, who had a trillion dollars in paper currency sitting in their basements where it had been “idle” for years. Now the government has a huge budget deficit, and has two choices: It can either run the printing press and create $1 trillion in new currency, or it can seize the $1 trillion that (by hypothesis) would have stayed in the hoards for at least the next 50 years.
Apparently Krugman thinks the first option would cause price inflation and would just be a trick in terms of maintaining solvency, whereas the second option would be perfectly fine.
And you have to love this concluding paragraph from Krugman:
Discussions like this really disturb me; they indicate that there are a lot of people with Ph.D.s in economics who can throw around a lot of jargon, but when push comes to shove, have no coherent picture whatsoever of how the pieces fit together.
Exactly, I hear you brother! And I for one am really annoyed at all these economists running around, trying to write pop books and appear on TV, acting as if this is all a big show. Can’t we just have economists who write journal articles and stop making wiseacre remarks about everything? Why, I even hear that there’s some guy calling himself a “standup economist.” Man that kind of showboating annoys me.
UPDATE: I want to clarify that I’m not even endorsing Landsburg’s argument in the grand scheme. In particular, it worries me that he is committing the same mistake as people who say Bernanke’s money-creation will only affect the economy “once it leaks out into the system.”
So in my example, you could argue that the trillion dollars in currency sitting in people’s basements was exactly the equilibrium amount of purchasing power they wanted to hold, and so when the government seizes it, they will bust their buns creating another trillion dollars’ worth of output, in order to replenish their hoards. Hence, the government really just seized their output.
But that’s not the kind of argument Krugman was giving. Instead, he was focusing on solvency, on the fact that the government needs to come up with green pieces of paper to pay its bills. And that is exactly the position of the MMTers, and why they think taxes are superfluous for the purposes of solvency.
Final note: I haven’t read DeLong or the others yet. If they are making the subtle point about cash balances serving a purpose too, and being able to influence production behavior, then I may side with them over Landsburg. My narrow point in this post is that Krugman totally fell on his face when trying to show how dumb Landsburg is, and then he doubled down with the hilarious line about PhDs not seeing how it all fits together.
Conspiracy Theory or Fact?
OK so somebody sent me this Yglesias post on the reasons the Union fought the War Between the States. (I’m very sensitive to all Americans.) Go ahead and skim it if you haven’t already seen it.
So then I was about the 13th comment and I wrote:
“Be careful Yglesias, a partisan might take your perfectly reasonable post and label you pro-Confederate.”
I am almost positive the post was “live,” meaning I could see it in line with the previous posts. I.e. it didn’t look like I was seeing it merely because I had written it.
Furthermore, to this day when I go to the thread, the Disqus log-in box at the bottom tells me I have 1 comment, and 1 like. So presumably at least one other person saw it.
Yet, my comment no longer seems to be on the thread. Right? You guys can’t see it?
I don’t want to judge something like this before all the facts are in, but it looks like Yglesias pulled a DeLong. Any alternate hypotheses?
Praxeology Through Price Theory
To register, go here.
For the full infomercial, go here.
Exhibition Match: Murphy vs. Crucini on Gold vs. Fiat Money
I should clarify that Mario Crucini, a professor at Vanderbilt, is not a Keynesian. However, this Thursday at 5pm we will be debating the merits of a gold standard versus fiat money. The event is open to the public but it will not be recorded. You still have time to buy your plane tickets.
DETAILS:
=======
Matt Collins (a local liberty activist) was kind enough to summarize all the info and even make a Facebook deal about it:
This coming Thursday night, April 21st, at 5PM, free-market Austrian School economist and author Dr. Robert Murphy and Vanderbilt Professor of Economics Mario Crucini will be debating “Paper Money vs. Gold & Silver.” This event is open public with free admission and will be held at the Vanderbilt Commons Center Room 235/237. The debate will last about an hour and there will also be a catered gourmet reception after the debate. If you plan to attend, please RSVP on Facebook. Parking information can be found here: http://www.vanderbilt.edu/traffic_parking/visitor-parking.php
Here is the official Facebook Invite: www.facebook.com/event.php?eid=203346393032419
Recent Comments