Discouraging Effort and Success

Why do we tax labor? We know that any tax on an activity discourages people from engaging in that activity by reducing the rewards for doing it. So why do we tax hard work, production, and wise investment? Do we really want less of those things?

We need to fund our government (some claim), so we need to tax something. Why not tax behaviors that we want less of? Wouldn't that be killing two birds with one stone?

What would happen if we ditched all income taxes (including capital gains, and corporate income taxes) in favor of taxation levied exclusively against consumption? How would our society change?

I imagine a system wherein my income is not monitored by the government, but the total amount of my consumptive spending is instead. It's easy enough to do - just give up cash and require banks to report the amount of spending. As long as my consumptive spending total for the tax period stays below a legally established minimum, I pay no tax. But when my total rises above that level, I begin to pay tax out of each additional dollar spent. So if I don't spend much beyond the limit, the taxation I experience will be very low.

There are many advantages to such a system. For one, we'd stop punishing smart and hardworking people for being so productive. Every dollar they earn would be theirs to keep. This would include dollars earned for good investments (capital gains). Similarly, we'd stop punishing businesses for competence in producing and selling products and services to people who need them. When a highly successful business has to pay a large amount of income tax while its less successful competitor pays no tax (due to writing off business losses) the playing field is being unfairly tipped to reward poor performance! Not only that, but why tax production at all when production is what gives us the things we need and desire?

Also very important is the fact that taxing consumption, instead of labor, production, and investment, allows individuals to adjust their tax liability to fit their circumstances and desires. If I don't want to pay so much in taxes this year, I can reduce my consumption and pay less. And, I bear no penalty for working extra hard to earn additional money to fund my future, or my children's future.

Under this kind of system saving would be strongly incentivized. For those who wished to avoid taxation, saving and wise investment would be the safest harbor for their money. Everyone would be faced with compelling reasons to defer spending to a later date. Government subsidized retirement could become unnecessary for average Americans.

It's possible to take this idea to a more extreme level and suggest that leisure (time spent not producing or learning) could be taxed when it exceeded a certain minimum amount. This could spur the indolent and chronically unemployed (whether poor or wealthy) to return to productivity, lending their efforts to the improvement of society.

Undoubtedly there are many weaknesses in such a plan, and opportunities for clever gaming of the system. But that is no different from our current system for taxation.

Are there structural problems with this proposition?

Quote of the Day - Me

'Human Dignity' seems like weak wording for the issue of who gets to summer in Provence and who gets to die of dysentery before reaching adulthood.


Look for me in the comments at http://factsandotherstubbornthings.blogspot.com/2010/07/on-inequality.html

Quote of the Day - Popper

"Institutions are like fortresses. They must be well designed and manned."

Overly Simplistic

So, how would it change the nature of American government if every law came with a sunset clause, by default? In order to persist beyond, say, three years, they'd have to be re-adopted. I believe that the primary change would be to make governance more experimental and more fluid. Good thing? I don't know. I think most people are annoyed by the very slow pace of positive change in this country, but probably most are happy that the pace of negative change isn't any more rapid.

Would there be other significant unintended consequences? E.g. Regime uncertainty? Could those consequences be mitigated in some way?

Well-Off

Many economists build a case against policies that are aimed at reducing inequality in income and wealth. Their argument rests on two premises:

1. Societies should seek to be maximally productive, because this is the best way to provide for the needs of the members of the society, and
2. There is a trade-off between equality and efficiency - policies that promote equality tend to reduce productivity.

I'm not convinced. 

The first premise invokes Coase: well-defined property rights ensure that any redistribution (of wealth, property, or rights) that will increase societal welfare will happen through the mechanism of the market without the need for the intervention of the government - provided that transaction costs are negligible. 

Transaction costs are rarely negligible, but even if we set that aside there is still a problem. Arnold Kling gives an example that illustrates the problem with Coase. Prof. Kling considers the case of a biker who needs to use a bike path that crosses private land. Here's my retelling: The biker is willing to pay a heavy toll (a large percentage of his total wealth) in order to be allowed to use the path, because he wants to reach the hospital where his father is dying to see his father one last time. If he doesn't use the path then he has to take a much longer route and will not reach the hospital in time. The landowner wants to exclude the biker from using the path because the landowner doesn't like to have strangers on his land. Let's assume essentially zero transaction costs - the biker carries a transponder that automatically computes and pays his toll (with his agreement), according to the rate the landowner has set. The landowner sets the toll at a level that compensates him for the unpleasantness he experiences at having strangers cross his land. 

The problem is that the biker is very poor, and the landowner is very wealthy, and as a result, the price the landowner sets is much higher than what the biker can pay, even though the biker places a very high value on using the path. Under Coase, as long as the biker gets more value out of using the path than the landowner loses when the biker uses the path, then they should be able to agree on a price that compensates the landowner. Why doesn't that work in this case? Clearly, the biker places a very high intrinsic value on using the path - equal to a large percentage of his total wealth!

It doesn't work because the landowner and the biker value money, dollars, differently. Essentially the biker and the landowner are not using a common unit of exchange. You could say that the landowner sets the price in apples, but that the biker is paying in oranges. Or to highlight the difference in value, the landowner is setting the price in coal, but the biker must in diamonds. 

There is a further, even more radical implication to all of this, and that is that when there are differences in wealth among the members of a society, transfers from the wealthy to the poor INCREASE net societal welfare. This is because when a dollar is taken from a wealthy man and given to a poor man, the loss of intrinsic value experienced by the rich man is less than the gain in intrinsic value experienced by the poor man. Prices don't clear the market because prices are not established in units of intrinsic value.

As far as premise number two, I haven't seen any good measures of the magnitude of that trade-off. Is it significant? Is it significant at some degrees of intervention, but not significant at others? If you know where i can see data that describe this relationship I would be very interested.

PostScript: None of this addresses the libertarian arguments against policies that are aimed at reducing inequality. Nor does it address the question of whether governments are needed to effect redistribution (when it is desirable), or whether non-coercive institutions and norms could be a more optimal solution than government.

The Point Of This Blog

"Without new technologies, an economy might grow slowly. But without decent rules, an economy cannot even make use of the technologies that already exist."


-Sebastian Mallaby

Of mind control, paranoia, and secret government...

...I can't even finish the title. Are you still reading this, or have I already driven you away?

Beginning in the 1950s, something strange began in the US. It involved experimentation with powerful chemical compounds that had the ability to alter behavior and brain function. Documentation shows it lasted through the 1960s and may continue to this day.

No, it's not the hippie era, but that's a good guess. I'm referring to MK-ULTRA, the covert CIA program that studied how people responded to LSD and other drugs, presumably to determine how the agency could make use of the chemicals in other secret CIA settings.

The implications are far-reaching, the fodder of conspiracy theorists and mind control authorities (nearly all of whom seem to have their own blog, book, and following).

It's a lot to weed through, but here's what is certain:

• There really was a project named MK-ULTRA, and they really did do experimentation with dangerous drugs on unconsenting subjects.

To be honest, I was prepared to debunk the whole thing as ridiculous conjecture, but it isn't possible. Most of the documentation was destroyed in the 70s, but some it remains, and what it says doesn't bode well for the non-paranoid.

At least some of the research was applied to "unwitting subjects in normal life settings. It was noted earlier that the capabilities of MKULTRA substances to produce disabling or discrediting effects or to increase the effectiveness of interrogation of hostile subjects cannot be established solely through testing on volunteer populations." They freely admit that, regarding this controversial aspect, "No effective cover story appears to be available."

They weren't unaware of what might happen, but in paired sentences say that "possible sickness and attendant economic loss are inherent contingent effects of the testing" AND "that the program is not intended to harm test individuals." I guess hiding under the shelter of "intentions" is a fine justification.

At least one death is attributed to this program, that of Frank Olson, who was a specialist in biological warfare and had LSD slipped into his drink during a meeting with CIA personnel. Reading about that incident begins to sound like a Tom Clancy plot point, and the exact circumstances are difficult to find; so much of it is tangled up with speculation and wild leaps to bleak conclusions. That the CIA gave him LSD without his knowledge is documented. Under what circumstances he then fell from the 13th story window is not as clear.

Many people think that the program never ended. Its scope was certainly larger than the available papers describe.

In March 2010, the effects uncovered in this understated article give a better picture of the involuntary research. This is where I started to think that there are perhaps far more implications than I had considered.

What does it all mean? It's hard to add up all the facts, hard even to separate what we actually know from the ridiculous notions people are quick to invent.

On the other hand, knowing that something like this certainly existed, and that there is much we don't know, doesn't add to my confidence that government programs like this probably don't exist now, and that if they do they're tame little experiments that don't do anyone any harm.

It's nearly impossible to be a naive optimist anymore. But how much paranoia is appropriate?