Since even Paul Krugman manages to be completely confused about this and this, allow me to summarize:
1) A tax imposes a burden.
2) If a tax has no effect on a man’s lifestyle, then it imposes no burden on him.
3) Therefore, if a tax has no effect on a man’s lifestyle, then it must impose a burden on someone else.
That is the argument that Krugman things betrays “no coherent picture of how the pieces fit together”. I would like to know more specifically whether he disagrees with 1), disagrees with 2), or disagrees with the logic that leads from 1) and 2) to 3).
In more detail:
1) A tax allows the government either to spend more or to reduce someone else’s taxes. Therefore either the government or that someone else consumes more resources. Those resources have to come from somewhere. Moreover — and this is the key fallacy this post was intended to combat — green pieces of paper are not resources. If the government consumes more actual goods and services, then someone else must consume fewer goods and services. It is certainly true that the number of total of all goods and services is not fixed, but the act of transferring money from one account to another does not, by itself, change that total. Therefore, for the purposes of this exercise, the total is fixed.
2) If a man does nothing but park cars all day both before and after you’ve taxed him, and never planned to do anything but park cars all day whether you’ve taxed him or not, then a tax can’t alter his consumption of goods or services.
3) Surely I don’t have to explain how this follows?
Edited to add: Many are arguing in comments that increased government spending can lead to increased output. And so it can in many circumstances. But the increased spending yields the increased output whether or not Mr Kendrick gets taxed. The question here is: “What are the effects of trying to tax Mr Kendrick?” “What are the effects of government spending?” is a different question, no less interesting, but not the topic of this series of posts.
Hmmm… This makes perfect sense to me. All three of your posts on this topic have made perfect sense to me. That’s pretty unusual. Normally, I have to ponder and mull over things you write before I eventually discover something that I didn’t understand, and come to agree with you. Not so with this.
Possible explanations:
1) It’s obvious.
2) I so want to agree with this conclusion that I’m not looking at it critically enough.
3) I’m starting to think more like you.
I hope for 1, I suspect 2, I fear 3.
“It is certainly true that the number of total of all goods and services is not fixed, but the act of transferring money from one account to another does not, by itself, change that total.”
This is the part I don’t get. If I have $1000 in my pocket and I’m not using it, but then choose to give it to a friend who uses it to buy an iPad, then one more iPad has been consumed than if I had kept the cash in my pocket. Are you assuming that the cash in my pocket is actually being used somehow (either lent out if in a bank account, or increasing the value of money if literally unused)?
jeez louise, Landsburg! how about this: K has $84M in cash stuffed into his mattress; the widget factory, like other factories in K’s depressed economy, is running at half capacity; the government taxes K to the tune of $42M and buys widgets sufficient to lift the factory to full capacity. since everyone is at half capacity when the widget factory picks up, the resources it engages are otherwise idle. so no one is the poorer, in fact quite the opposite. — or do you say that no resources ever “sit idle”?
Lawrence Kesteloot:
Are you assuming that the cash in my pocket is actually being used somehow
Cash cannot be used to make iPads. Only silicon can be used to make iPads.
If the government consumes more actual goods and services, then someone else must consume fewer goods and services.
You’re assuming that the economy can’t grow. Suppose you have an economy that has one factory, and that factory is operating at 50% of capacity. If the government consumes more goods, then the factory might then be operating at, say, 70% of capacity. Since the marginal cost of the increase in production stays the same (because the factory isn’t operating at capacity), prices don’t go up and the total consumption of goods in the economy increases.
Joe, wtf (and many others): Once again (I’ve said this in comments already, but you might have missed it): You are arguing about the effects of government spending. But this was a question about the effects of taxation. The effects you’re describing (if they are real) will result from the government’s spending whether or not they tax Mr Kendrick.
Is it theoretically possible for a tax to have no burden, if (in this scenario) the spending targets idle resources?
Andy:
Is it theoretically possible for a tax to have no burden, if (in this scenario) the spending targets idle resources?
If the resources are permanently idle, obviously you can confiscate them without burdening anyone.
“Joe, wtf (and many others): Once again (I’ve said this in comments already, but you might have missed it): You are arguing about the effects of government spending. But this was a question about the effects of taxation. The effects you’re describing (if they are real) will result from the government’s spending whether or not they tax Mr Kendrick.”
While this is off the original point, I will add the following to those who justify this along the lines of those cited above: If this increased government spending does indeed “improve” the economy, then we must love the talented counterfeiters. If I can introduce undetectable pseudo-greenbacks, I must be a hero. Happy days are here again.
It seems to me that it is government spending that imposes the burden in your example. If the, for example, the name on the bank account is changed from man to g’vt, nothing has changed if the behaviour of the man has not changed. What the argument is premised upon is that government spending lowers overall utility, because utility is maximized by individuals maximizing their utility functions. Government spending constrains them.
Can you confirm my understanding? You are trying to make two points:
A) Money is not the same thing as resources. Taking someone’s money does not imply a change in resource consumption for that person. For example, taxing a dead person’s estate can’t possibly impact the resource consumption of the dead person.
B) Taxing a dead man *must* impose reduced resource consumption on someone other than the dead man. And since Kendrick’s resource consumption is already pretty low, the same thing applies to Kendrick. Hence at least one fatal flaw of “taxing the rich” is that someone else must pay the penalty of consuming less. And often that penalty is paid by the poor who have reduced access to credit by exactly the amount of the tax taken out of the bank account of the dead man or Kendrick.
Both together make this point: money is fungible. When you tax someone using money, the resource consumption may be paid by someone other than who you intended.
Do I get it? Did I go too far? Did I not go far enough? Did I miss it entirely?
dullgeek: You got it exactly.
No, no, and no.
1. This is a Say’s Law violation pure and simple – why Krugman and DeLong are saying the whole thing is nonsense. If all there were in the world were currently produced goods and services, sure, you can’t have an excess supply. All markets clear, increase in someone’s consumption of currently produced good couldn’t happen except to be offset by reduction somewhere else. But if you have an excess demand for financial assets – which basically has to be true now given short term rates at zero there’s a market that’s not clearing – everyone wants to push consumption into the future and hold more safe financial assets – then you have an excess supply of currently produced goods and services.
No one else _has_ to consume any less. Essentially, the trick that you’ve pulled by taking his $84 million is to transfer it from those who want to hold cash to those who want to spend today, and there are those producers who have items that they can’t sell and will sell some of them.
2. Everyone gets Say’s law wrong. But this one is the real head scratcher. You’re taking away $84 MM of future consumption from him or his heirs. If you assume that _no one_ would actually consume that $84MM of PV ever in the future (I’m not even sure this is possible, unless you imagine that he withdraws the money and burns it), then in fact, no one is paying the ‘burden’ of this tax. That does not in fact mean that he ‘can’t be taxed’…at least not in any normal definition of the word ‘tax’. Unless, as you seem to try to do, to define ‘tax’ in a new way entirely which is ‘something the government does that affects my behavior.’
You mention that this is about taxation, not government spending, but as I understand your original story, it’s the government actually spending which crowds out someone else’s spending that’s key to the story…so I’m not sure how you can divorce the two. If the government literally took that money and did nothing with it (just like the first guy), not sure how anyone’s spending would be affected by that.
Or put differently, to spend is to tax, and to tax is to spend.
Chris:
If the government literally took that money and did nothing with it (just like the first guy), not sure how anyone’s spending would be affected by that.
If the government literally took that money and did nothing with it, someone else’s taxes would fall. If they took the money out of circulation entirely, the price level would fall. Either way, someone is richer and someone consumes more.
I’m not following this. A tax allows more spending. But government spending is actually unrelated to taxes?
My 2 cents: Taxation is not spending.
When government taxes people, the effect is to take money out of circulation. I suspect that reducing supply without altering demand would tend to increase the price relative to all other things – that is, taxation (without spending) is a deflationary policy. Deflation leads to predictable consequences for predictable classes – especially borrowers and lenders. (And yes, it may also lead to unpredictable consequences.)
To put it another way: To what extent would taxing Kindrick’s funds produce different results from not taxing those funds? Yes, taxation precludes Kindrick from consuming today – something Kindrick wasn’t doing, so there’s no change. But it also precludes Kindrick from consuming tomorrow – something Kindrick might have chosen to do. People who might have anticipated serving demand from (Kindrick and those similarly situated) would cease to do so, and would alter their behavior accordingly. In the short run, reduced demand would result in reduced prices — that is, deflation.
One principal consequence of deflationary pressures is to OFFSET the inflationary pressures that arise when government increases demand for goods and services by buying stuff.
Here is Landsburg’s point, to the extent that I understand it: In the moment government increases consumption, that increases demand without increasing supply. This increases price. The fact that government may have taxed Kindrick’s funds does not in that moment alter this dynamic. Someone is going to have to consume less in order for government to consume more in that moment. But the long-run consequence of taxation is to reduce demand that might otherwise have occurred from Kendrick or his heirs.
When Landsburg hypothesized about a man with funds that could, by law, never be touched, his conclusions flowed from his premises. Those funds were effectively non-existent. But Kendrick was not such a person; he retained control over his funds. Thus the two scenarios, while appearing similar at a moment in time, differ over time. That is the source of the dispute here.
Suppose a group of beer enthusiasts, home-brewers all, drink together frequently. At one point, one of these friends promises another a cask of beer rather than some other form of compensation in exchange for the second friend to house-sit for the first while he is out of town. Before long, the friends are exchanging chits for favors with some frequency.
One of the friends decides to stop drinking. Fearing that the temptation to resume drinking would be too strong otherwise, this individual no longer spends time with the others.
But when this individual left the group, he took with him a number of chits that would entitle him to casks of beer he has no intention of ever drinking.
If he takes these chits to the grave with him, that’s so many fewer casks his former friends are obligated to produce and hand over to others for their consumption. Whether that means they save labor or consume more of their own beer, one way or another, they are better off. Suppose instead that the circle of friends decides to demand the return of their former friend’s chits. Regardless of how they divvy up those chits, everyone who owed a cask of beer to this individual before he left the group is made so much the poorer.
If I understand him correctly, Steven is making an argument that is similar to this, where Kendrick is the teetotaler.
Steve,
I don’t think you answered my question about the extra iPad consumed if I give $1000 to my friend.
Joe, wtf (and many others): Once again (I’ve said this in comments already, but you might have missed it): You are arguing about the effects of government spending. But this was a question about the effects of taxation. The effects you’re describing (if they are real) will result from the government’s spending whether or not they tax Mr Kendrick.
But, but … I’m using your own argument on the effects of taxation (that any increase in govt. spending due to taxation has to be offset by a decline in consumer spending.). This clearly isn’t true unless the economy is operating at full employment (for reasons given above).
BTW, if you follow your own logic, then if Mr. Kendrick suddenly decided to spend his own money, then that spending would have to be offset by a decline in other spending and the economy wouldn’t grow. Or, alternatively, if everyone just decided to behave like Mr. Kendrick and not spend anything then the economy wouldn’t suffer as a result.
This is quite fascinating. A whole discussion that initially started from a journalists confusion between wealth and money, prompting prof. landsburg to respond, prompting three other prominent bloggers to counter-respond.
For as much as I disagree with Landsburg (ie “Buy American means you’re a racist” nonsense), he’s right. The article was a blatant example of why journalists shouldn’t be allowed to report on economic issues, they make stupid mistakes such as confusing money with wealth. Another one I see all the time that I absolutely hate is “The Federal Reserve lowered the Federal Funds Rate.” Idiots.
But there’s a flaw with his initial post, which is that he misses the bigger picture of the journalist’s article. She’s arguing against cutting fundamental government services such as education, parks, etc. and instead would rather tax wealthy heirs in order to balance the deficits and pay off the debt. This is what Paul Krugman points out, and I think he’s spot on too. Governments can consume more than what they take in as revenue. So, if we tax Mr. Kendrick, who just pushes cars around all day long, and use that money to pay off the debt, then this avoids the long-run tax imposed on the masses and more people are better off. Mr. Kendrick’s welfare is unaffected.
DeLong’s criticism is just nit-picky. I don’t see any substantial weight in his post.
Noah Smith’s post also makes some pretty elementary errors. Landsburg wasn’t talking about GDP, but let’s take the GDP identity that he provided.
GDP=C+I+G+NX
If taxes causes C to diminish and G to increase, then there is no net change in GDP but it also reflects what Landsburg was saying. In order for the government to consume more, someone else (“C”) must consume less.
Of course, the critical assumption is that Kendrick, like the man who gives up drinking, has no use for his slips of paper. Whether there is such a thing as being “idly rich” to this extreme, the Stevens column was pretty much depicting Kendrick in this light. So it doesn’t make much sense to criticize Landsburg for making this assumption, when his goal is to point out that even if the facts of the case are as Stevens would have them, her argument would still be deeply flawed.
Lawrence Kesteloot: your question was:
Are you assuming that the cash in my pocket is actually being used somehow (either lent out if in a bank account, or increasing the value of money if literally unused)?
The answer is no. I am not assuming any such thing. I am drawing a conclusion, not making an assumption.
You take $1000 out of your pocket and give it to your friend. Your friend buys an iPad. That’s one less iPad for someone else (or, if resources are now transferred from building little red wagons to building iPads, then it’s one less little red wagon for someone else). The conclusion is that someone somewhere must consume less.
If you want to identify that someone, you need some extra assumptions along the lines you’re asking about. But to be sure that there is such a someone, no assumption is needed.
So, if we tax Mr. Kendrick, who just pushes cars around all day long, and use that money to pay off the debt, then this avoids the long-run tax imposed on the masses and more people are better off. Mr. Kendrick’s welfare is unaffected.
I don’t think that SL’s point is to care very much about whether or not Kendrick is impacted by the tax. But instead that price paid by the tax will end up being paid by others who were not intended to be taxed. When you take Kendrick’s “idle” money out of the bank, you raise the price of getting a loan. This puts consumption restraints not on Kendrick but on those who are seeking loans.
I think SL’s point is that taxation of this sort is kinda like shooting a gun at a criminal who runs into a crowd. Your intention to stop the criminal may in fact have dramatic impact on some innocent bystander and have no impact on the criminal.
Increasing taxes seems to me to be far too blunt an instrument to resolve an over spending problem.
1. One response is that it depends on what is meant by “burden”. Burden is usually measured in terms of utility. If our car parker is to be taxed on his assets then he will bear a burden by having lower assets and/or by anticipating passing fewer assets to his heirs. Suppose the tax was levied on 99.9% of assets and he kept on just parking cars. Are you contending that he would bear no burden from having virtually no assets and that his utility would be unchanged?
2. If the taxed individual in no way changes behavior (reduces consumption or savings) but the tax proceeds permit the government to spend more without raising other taxes or borrowing (assume full employment) then prices will rise and the burden will be borne by those who purchase products whether for consumption or investment. i.e. just like printing money.
Jerry Milner:
2. If the taxed individual in no way changes behavior (reduces consumption or savings) but the tax proceeds permit the government to spend more without raising other taxes or borrowing (assume full employment) then prices will rise and the burden will be borne by those who purchase products whether for consumption or investment. i.e. just like printing money.
Exactly.
Steve says that if “a bunch of zeros and ones get shifted around on bank computers” then it can’t “help supply the government’s demand for actual goods and services”. Krugman says “NJ needs money to pay its bills”, “taxes are … about paying for what the government buys” and “the only reason to raise taxes now … is to address solvency concerns”. Perhaps the basic difference is that Krugman thinks the zeros and ones matter, not for the problem of supplying goods and services today, but for making the accounts balance out in the future.
This argument is just one giant Local Nonsatiation violation! :)
Dr. Landsburg:
I agree with you in the general case, but isn’t Krugman correct that, if there’s some slack in aggregate demand, as there arguably is now, the government can increase its consumption by taking cash from people like Kendrick without decreasing anybody else’s?
Krugman says: “And may I say that now is an especially peculiar time to think that taxes matter only if they reduce consumption”
This statement above from him makes me think he hasn’t even read your original blog post. I don’t recall you making any such assertion. I think it’s quite clear and interesting that if a man will go through life consuming exactly the same under two different tax levels, then the tax is completely irrelevant to him. In effect, he has not been “taxes” in any real, economic sense.
Brandon Berg: In any circumstance where the govt can increase its consumption without decreasing anybody else’s, it makes no difference whether or not they take cash from Mr Kendrick. You are supposing there are unemployed resources that the govt can somehow put to work. That’s fine, but their ability to put those resources to work does not vary with the decision to take Mr Kendrick’s money, which is not a resource.
Are you not simply saying that taxes can be shifted from the nominal taxpayer to someone else in the economy, and don’t we already know that?
My interpretation of your argument, as clarified, is that taxing “idle” wealth is basically the same as printing money. Grant that your argument is correct. Isn’t it the case that the state of California would benefit from printing itself some new money, even if it negatively impacts the rest of the nation? This is especially true if the wealth is not invested in California. Maybe the journalist wasn’t so stupid after all…
Steve,
Aren’t you assuming that people will react the same way at seeing their own taxes go up, as they would if they can no longer borrow more. What if on average people react by spending less in different proportions depending on whether they are taxed or if they are not able to borrow as much. Wouldn’t they have different effects on total spending in the economy?
I would love to park cars all day long, but only if I’m secure in the knowledge that, should I slam a car door on my finger, I could afford an $84 million bionic replacement.
“What are the effects of government spending?” is a different question?
In your first post, you said that if the government confiscates Mr. K’s $84M, absolutely nothing happens…until it spends it. At that point everybody but Mr. K is affected, from which you concluded that everybody but Mr. K bears the tax burden. You identified the tax burden in terms of government spending.
Hi, I’m Steven_E._Landsburg, and I just wrote a blog post arguing that someone “can’t be taxed” because he isn’t consuming very much, and plans to retain that consumption schedule. In doing so, I assumed away all endowment effects that $84 million would have on someone’s consumption choices. I also relied on the argument that, because the government will consume $84 million worth of goods from a hypothetical wealth tax, a tax would take away from real wealth, even though that same money would be spent consuming that real wealth regardless of the tax.
And now I have a hard time why other people don’t understand my completely obvious point. Perhaps I should keep acting like they missed the last ten times I said that you should “follow the goods”, because I didn’t realize that such a method would still prove my point useless.
I think it would help if I condescendingly lectured people that economic incidence isn’t the same thing as accounting incidence, forgetting that the economic incidence falls on the one who suffers a contraction in choice set, which *is* the “untaxable” man in this case. No, I’ll just keep thinking about other, unrelated cases where someone doesn’t pay a full tax because a merchant must eat it in lower prices.
Also, I’m going to completely avoid applying this to my own life because I would protest having $84 million taken away from me.
God I love this attention.
>> Therefore, if a tax has no effect on a man’s lifestyle, then it must impose a burden on someone else.
Well, if economy suffers because of depressed demand, then we can revive the economy by taxing someone not willing to spend and spending the new tax revenue. And improving economy is not exactly a burden to everyone, even though it will result eventually in either high inflation, or high interest rates.
>> If the government consumes more actual goods and services, then someone else must consume fewer goods and services
Even if there is a lot of excess capacity in the economy?
I agree, that green pieces of paper are not resources. But it does not mean that you cannot tax Mr. K’s money (in the sense of taking his money away, not in the sense of imposing a burden on him), or that it cannot be beneficial to the economy (and, hence, everyone else).
I think I should emphasize on that point — maybe you and Mr. Krugman are talking about different things. For you tax mean imposing a burden, and for Mr. Krugman it means taking the guys’ money. And it is not the same things. And I think Mr. Krugman could have chosen his words better :)
Neil:
Are you not simply saying that taxes can be shifted from the nominal taxpayer to someone else in the economy, and don’t we already know that?
Judging from the comments, not all of us do.
“What are the effects of trying to tax Mr Kendrick?” — I guess the only effect is that the government now can spend more w/o increasing its debt.
Now I agree, that money are pieces of green paper that we can create and destroy as necessary, and that is why the whole govt deficit problem is overrated. And unnecessarily politicized.
But the deficit is a very important point for everyone writing about taxes on the rich people. That is why everyone stating that it is “impossible” to tax a rich guy will probably get a lot of responses :)
I think I can summarize the _substantive_ disagreement going on here:
There are two contentions:
1) “The government can’t reduce Kendrick’s potential consumption via taxation”.
2) “People other than Mr. Kendrick will suffer (more) from a tax on him.”
1) is trivially false. (less money = less options/potential to consume)
2) is non-obviously true.
Steven_E._Landsburg meticulously demonstrated why 2) is true, and thinks that settles the debate. However, he is also equating 2) and 1) when they’re quite different.
Sound like a fair characterization to anyone?
Silas, I don’t think Steve has said the government can’t reduce “Kendrick’s potential consumption.” His potential consumption is obviously reduced if his money is cut in half. On the contrary, what I think he is saying is that, regardless of his tax level, given that Kendrick’s relatively very low resource consumption preference stays the same for the rest of his life, then he is not likely to bear the burden of this “tax.” And why would he be burdened if he is able to consume as much as he likes? However, if the government takes his money and consumes resources with it, then some non-government person(s) will be required to give up consumption, leaving output fixed.
Maybe I’m confused too but that’s how I’m reading things..
Josh: You have this exactly right.
So, it is a tax, and revenue is raised. But in a non-trivial sense, revenue is not raised by taking idle money *from* Mr. Kendrick because the burden is actually felt by others?
OK. So as a layperson, it makes sense to me that the burden might be felt by others because Mr. Kendrick has his money in a bank, and presumably that money allows banks to lend to people at lower rates. Once that money is taken away from banks, then people get worse rates, and that’s a burden, right?
But Steve, your answer to Lawrence Kesteloot confuses me. I don’t generally think that someone buying any *particular* iPad is a burden to me. I know you’ve addressed the point about goods and services not being fixed, but that’s still the point I’m stuck on, so maybe you could say it in another way.
I mean, let’s assume the money is truly idle. In other words, it’s under a mattress somewhere (maybe that’s unrealistic, but it seems you’re OK with assuming this) and the govmt takes the money and spends it. I don’t see why that *necessarily* burdens anyone else. At least not in a way direct enough to warrant saying someone else is actually taxed, or that Mr. Kendrick isn’t taxed, or that revenue isn’t raised. In the example of Mr. Kendrick’s money being taken out of the bank and so raising the rates of other borrowers, OK, but if it’s under a mattress, must it *necessarily* burden anyone?
Silas Bara,
When the government consumes resources, it reduces the stock of resources we can all enjoy. Kendrick has chosen not to consume, therefore, he doesn’t care. Therefore, those resources are coming out of somebody else’s hide.
Sound like a fair characterization to anyone?
For the whole thing to work, it was stated that Kendrick consumes little and will not change. This becomes more explicit if he is dead. If this is false then the argument fails, but for the purposes of the argument it is assumed to be true.
Silas,
“1) is trivially false. (less money = less options/potential to consume)”
This statement is trivially false. The falseness follows from “a man does nothing but park cars all day both before and after you’ve taxed him”. The falseness also follows from the examples where Kendrick is dead. Since he’s dead, no options matter no matter how much money he has.
Options only matter if you care about exercising them.
Regards,
Ken
http://noahpinionblog.blogspot.com/2011/04/more-on-landsburgs-fallacy.html
Josh: Then it looks like we’ve making some progress.
First of all, in common usage, if your potential to consume has been reduced, *you’ve been taxed* — even if you never live to exercise that potential. If Steven_E._Landsburg agrees with your characterization (and he does), then he agrees that the public, thinking according to this definition, is correct that Kendrick can be taxed, and so the journalist made no error. Thus Steven_E._Landsburg’s point is irrelevant at best.
Even leaving that aside, my point about the difference between the 1) and 2) I listed is relevant because, as you say:
given that Kendrick’s relatively very low resource consumption preference stays the same for the rest of his life, then he is not likely to bear the burden of this “tax.”
But he is! Loss of option value is bearing a burden! Imagine if the SEC made a ruling that a certain option contract will expire one month earlier than it currently slated to. Who “bears the burden” of this ruling? Why, the holder of the option.
Does it matter if the option eventually expires worthless (in either case)? No, not a bit. And neither does it matter that Kendrick’s options (to redeem his cash for more stuff) will expire “worthless to him”.
And even on top of all of that, Steven_E._Landsburg is assuming that Kendrick actions are unaffected by this latent option value — that Kendrick would continue to burn up gas parking expensive cars even if his bank account were empty! Um…
Think about it as option value, folks, and it will become clearer.
So, it seems like my characterization of the disagreement was correct: Steven_E._Landsburg was both a) using a non-standard meaning of tax, and b) equating two very different claims (1 and 2 above). And, of course, that he doesn’t understand (anti-)endowment effects.
Par for the course.
@Ken: Sure, if you assume away people’s response to incentives, you can get neat results. Realistically, the only assumption you can make is that *at current rates*, Kendrick will have steady consumption. If he has less wealth to fall back on? He’ll may do something different. But he will certainly *bear* the loss of option value.
Imagine how ridiculous it would be to talk about a situation in options contracts where you assume the holder intends never to exercise it. Hm…
Premise one is flawed. While the burden imposed by a tax may be consistent in an economic model, in the real world there is a significant difference depending on where it is applied. To place a $1 tax on a millionaire has a much different real world consequence than to place a $1 tax on the man who only has $1.
This leads to the explanation offered for premise one. You say that for the purpose of the exercise, the total number of goods and services is fixed. But the VALUE of these goods and services is not. A sandwich is worth less to the man who just left an all-you-can-eat buffet than it is worth to someone who is starving.
Taxes exist so that we can allocate resources more efficiently to where society’s value is maximized, rather than maximizing for each individual. As a society, there is indeed more value in educating a child, saving the life of a sick patient, or building a highway than there is in Mr. Kendrick holding onto that money.
So, it is a tax, and revenue is raised. But in a non-trivial sense, revenue is not raised by taking idle money *from* Mr. Kendrick because the burden is actually felt by others?
OK. So as a layperson, it makes sense to me that the burden might be felt by others because Mr. Kendrick has his money in a bank, and presumably that money allows banks to lend to people at lower rates. Once that money is taken away from banks, then people get worse rates, and that’s a burden, right?
But Steve, your answer to Lawrence Kesteloot confuses me. I don’t generally think that someone buying an iPad is a burden to me. I know you’ve addressed the point about goods and services not being fixed, but that’s still the point I’m stuck on, so maybe you could say it in another way.
I mean, let’s assume the money is truly idle. In other words, it’s under a mattress somewhere (maybe that’s unrealistic, but it seems you’re OK with assuming this) and the govmt takes the money and spends it. I don’t see why that *necessarily* burdens anyone else. At least not in a way direct enough to warrant saying someone else is actually taxed, or that Mr. Kendrick isn’t taxed, or that revenue isn’t raised. In the example of Mr. Kendrick’s money being taken out of the bank and so raising the rates of other borrowers, OK, but if it’s under a mattress, must it *necessarily* burden anyone?
Derek Pearce:
Taxes exist so that we can allocate resources more efficiently to where society’s value is maximized, rather than maximizing for each individual. As a society, there is indeed more value in educating a child, saving the life of a sick patient, or building a highway than there is in Mr. Kendrick holding onto that money.
In other words, you haven’t a clue what this post was about.
More precisely, there is no trade-off between saving the life of a sick patient and letting Mr Kendrick hold onto his money. Green pieces of paper cannot save a sick patient. Only medicines can save a sick patient, and Mr Kendrick is not hoarding any medicines.
Silas,
The SEC needs to implement a rule that keeps you from posting.
Silas Barta:
But he is! Loss of option value is bearing a burden!
The assumption throughout this exercise, as I believe I’ve clarified several times, is that Mr Kendrick will under no circumstances increase his consumption, which means the option value is zero.
Ok, so we tax away the funds Kendrick was never going to use anyway. How does this burden anyone?
Steve:
While chastising other people for considering the spending side of the question, you yourself are considering it in your post:
“A tax allows the government either to spend more or to reduce someone else’s taxes. Therefore either the government or that someone else consumes more resources.”
The act of spending may or may not crowd out private resource usage. The act of taxation by itself does not. If the taxed man has the cash already and pays the government, that is merely moving money not in circulation to another entity. There is no burden in itself in that act as you describe. Any burden would fall if and only if the government spent or otherwise used that money.
Similarly, if the taxed man had assets worth a specified amount of money, those assets would be sold and released to the market thus increasing the total resource stock available since that man was not using them. The cash generated would be transferred to the government. But again, aside from a decrease in cost of whatever assets were sold, there is no effect.
Government *spending* can crowd out private spending and cause an inflationary pressure. Government *taxing* causes a deflationary pressure. But it is odd to think of this as a burden from an economic point of view. It is a distortion of the marketplace, but the kind of distortion depends entirely on what is taxed and what is bought by the government.
If Kendrick’s money is in a bank, then the bank is making loans. Take the money away from Kendrick, i.e. the bank, and the people who were borrowing money are now consuming less. This is the change in consumption and resources.
If Kendrick’s money is in a mattress, then the government taking it is functionally no different from printing new money. In this case the transfer is away from all people holding cash currency. In this instance, it would be far easier for the Federal Reserve to take action than to impose a large administrative cost upon the IRS.
So revenue can be raised, it is a tax, and it is taking money from Mr. Kendrick, but the burden is felt by others. OK. I can see how the burden is felt by others if Mr. Kendrick has his money in the bank (or if he has heirs, which is an easier case). Presumably his money allows banks to lend money to others at a lower rate. Once that money is taken by the government, then borrowers get a higher rate. OK.
But if the money is under a mattress, I’m still having a hard time seeing how it burdens anyone else.
Why is it that the government spending money *necessarily* burdens anyone else? I have seen you say that the spending takes away some product someone else could have bought. But this way of thinking is new to me. Should I see a person at the grocery store who buys a six-pack of beer and diapers as burdening anyone?
So Landsburg says that Kendrick is at a bliss point. Well, this clears things up. Unfortunately for Landsburg’s argument, it is easy to show that taxation of a person who is at a bliss point can be a Pareto improvement if it leaves the person at his bliss point. Thus, if you have a bliss point, it is NOT necessarily true that “A tax imposes a burden.”
See update:
http://noahpinionblog.blogspot.com/2011/04/more-on-landsburgs-fallacy.html
Hence, the Landsburg Fallacy remains a fallacy…
I don’t quite follow – wouldn’t the man who parks cars just get taxed and keep on going with his life? If he’s acquiring tokens that he doesn’t need and someone else takes those tokens from him, then he is working for the man. But that doesn’t necessarily mean that who he is working for has a burden on them. He’s paying the going rate for the work in a competitive market.
Soooo there isn’t a burden on the valet service, there isn’t a “burden” on the man who is parking the cars and surely there isn’t a burden on the government. I’m just not following (?)
nobody.really: True. If the government simply takes the money and burns it, then no resources have been taxed.
Noah Smith…
Either
Kendrick had the money in his mattress — and out of circulation. In which case, the additional gov’t spending imposes a burden on the remaining dollar holders because the gov’t has essentially placed this money back into circulation (much like printing it originally).
Or
Kendrick has the money in a bank or invested somewhere. In these cases the banks, the folks looking for loans, and the corporations all have the additional burden of replacing Kendricks funds which must now go to the government.
So this tax imposes a burden — on a lot of people. Its just that Landsburg defined Kendrick as not EVER spending that $84 million so we can’t include Kendrick as well.
I hope I didn’t mess that up.
Nick:
Soooo there isn’t a burden on the valet service, there isn’t a “burden” on the man who is parking the cars and surely there isn’t a burden on the government. I’m just not following (?)
But the burden has to fall somewhere.
If Mr Kendrick’s tokens are currently out of circulation, and the government puts them into circulation, then the value of everybody else’s tokens falls. In which case everyone who is holding tokens (ie money) bears a piece of the burden.
There are many many other possible scenarios. That’s just one of them. But in any scenario, the burden must fall somewhere, even though it can sometimes be a little tricky to figure out where.
Scott H.: in some cases, it’s possible there is a free lunch.
Suppose there are people unemployed, but wages (for whatever reason) do not get bid down. Supply and demand is at a permanent disequilibrium.
Also suppose that the bank is not lending the money. They are scared or whatever: they won’t even lend it to the Treasury.
Many people would claim this is what we’re experiencing.
Then, as the government taxes the money and spends, it will create inflation. It’s as if the government had simply created new money, given that the money was not being used anyway. The value of wages get bid down, so people get hired, and the economy moves to the point where it’s working at full capacity.
This is the point Noah Smith and others are trying to make. Dunno why they have to cover it up with a bunch of jargon. Prof Landsburg probably should have mentioned this effect, but he was just addressing the common fallacy of equating money with wealth.
But who the burden would fall on is dependent on what the government does afterwards. If the government took the tokens from Mr. Kendrick and burned them or gave the printing press operators at the treasury a day off, etc. then there would be no burden.
If there is a burden, it is either from (a) spending from the government crowding out private spending or (b) a burden on others who are currently benefiting from being lent the money (like a bank). The taxing of Mr. Kendrick itself is not a burden.
Even in case (b), if the government simply took possession of the bonds or bank accounts of Mr. Kendrick, the bank would still have the use of them until the government then took another action which may or may not be burdensome. The transfer itself did not create a burden under your conditions.
Ricardo Cruz
I’m anxious to see if Steven Landsburg responds to your point. It seems like the claim that it is impossible to raise revenue from taxing Mr. Kendrick, is literally false. It’s a tax, revenue is raised, it’s taken from Mr. Kendrick. Now the *burden* of the tax MAY be felt by others, but even when we consider this modified version of the claim, (which I could concede was the intended point to begin with) it seems like it depends. Like, on whether we’re at full employment or not, for example.
It may be the same as printing new money, but whether that’s a burden is going to depend, yes? Plus there may be more broad justifications for taxing the likes of Mr. Kendrick rather than simply printing more money. I’m sure Steven Landsburg would appreciate it if those reasons were articulated explicitly, rather than pretending taking all that excess idle cash from the rich is curing the economy of some sort of intrinsic disorder (which I agree is a bit wrong-headed).
However, I still don’t see how raising revenue from taxing the likes of Mr. Kendrick is impossible, either in the technical, English sense, or in the more charitable sense. I realize the burden *may* fall on people other than Mr. Kendrick, but in order for the point about the impossibility of the goal of raising revenue from taxing Mr. Kendrick to go through, it seems like your point about the circumstances under which we might have a “free lunch” is somehow misguided.
Silas,
“Sure, if you assume away people’s response to incentives, you can get neat results.”
This is precisely what the article did with Mr. Kendrick. The author assumed that Mr. Kendrick didn’t care about the money and wouldn’t miss it. Using this assumption, Steve showed how wrong her conclusion was.
Regards,
Ken
@Jay_Jeffers:
I’m anxious to see if Steven Landsburg responds to your point. It seems like the claim that it is impossible to raise revenue from taxing Mr. Kendrick, is literally false. It’s a tax, revenue is raised, it’s taken from Mr. Kendrick. Now the *burden* of the tax MAY be felt by others, but even when we consider this modified version of the claim, (which I could concede was the intended point to begin with) it seems like it depends. Like, on whether we’re at full employment or not, for example.
Yes, I was trying to make this point in his thread.
@ ever-doubling-down Steven_E._Landsburg:
The assumption throughout this exercise, as I believe I’ve clarified several times, is that Mr Kendrick will under no circumstances increase his consumption, which means the option value is zero.
And where, exactly, did the JOURNALIST you criticized make that assumption?
That was your original point, right? That the journalist made an error? Did “bad” economics?
Or are you trying to say that if you made an assumption, that’s extremely unrealistic and contrary to all economic practice, which the journalist did not make (and for good reason), then her argument would be wrong with that assumption, but not as it was actually stated?
Because that would be pretty lame. I’m sure you’d never admit to doing something like that.
Okay, Ken, let’s go back to Steven_E._Landsburg’s original post, and see what it says:
Here’s what Ms. Stevens misses: Assuming the facts are as she states them, it is quite literally impossible to raise revenue by taxing the likes of Mr. Kendrick. (emphasis added)
And now Steven_E._Landsburg is claiming that he was just working from the author’s assumption.
So now it’s time to put money on the metaphorical table: if you can find where Stevens, in this article, makes the assumption that Kendrick is 100% consumption-unresponsive to ANY loss of assets (or of money), I WILL GIVE YOU 50 BITCOINS. (Well, it’s anonymous, but *someone* will put 50 BTC in the address you specify.)
Heck, I’ll even pay out if you can find Ken’s weaker phrasing, that Hendrick “doesn’t care” about any money seizures from him and would not “miss it”.
The fact is, Steven_E._Landsburg is flat out lying to say that Stevens ever laid out a “fact” that Kendrick is at such a bliss point. And rather than admit that he’s just making different assumptions from a journalist, or that his assumption is unrealistic, he just digging himself deeper and deeper. Sad.
I think you so completely miss the criticism that one gets the impression that you must have missed it completely. The essence of Paul Krugman’s criticism is that you do not understand the purpose of taxation. Perhaps you can address that, instead of flying off on a tangent.
And so, to recap: the purpose of taxation is not to alter consumption patterns, or to shift burden from person A to person B, but to pay for the spending incurred by the government.
And that remains true, regardless of what you have to say about consumption patterns:
(a) The government can certainly tax Mr Kendrick out of all his $84M (b) whether or not (a) alters the consumption pattern of society as a whole is irrelevant to (a)
In the initial post, you wrote
“Who bears the burden of the tax? The people who cancel their vacations and car purchases and factories, that’s who. Not Mr. Kendrick.”
What if the government, instead of the bank, gives the money to those people so they can go on their vacations, buy their cars, and build their factories? Then where is the burden?
As for my earlier post:
If we are looking at wealth as resources being converted to goods and services, instead of as tokens or green pieces of paper, then government (same as any individual or corporation for that matter) increases its revenue by using resources in a manner that is more valuable than its current state.
In an earlier comment, you said that Mr. Kendrick’s money is not a resource. But if the government can use it as an incentive to change people’s behavior (such as encouraging them to become teachers or doctors), does that not make it a resource?
“Because that would be pretty lame. I’m sure you’d never admit to doing something like that.”
Silas- why do you have to act like such a douche bag when posting? Steve may or may not be correct but it would be nice to have a polite, constructive conversation without unnecessary sarcasm that does nothing to further the debate except highlight another arrogant and obnoxious internet poster who may have valid points but in the end not really worth considering. Being disrespectful demonstrates you have no confidence in your own argument. Being insincere suggests you are simply looking for attention and are desperate to be taken seriously. Needless to say, this only convinces yourself and perhaps a few others who enjoy this sort of unfortunate behavior.
One other insight. Someone else may have already made it in the comments, but I don’t have time, nor the desire, to read them all.
Suppose the government taxes Kendrick $84 million, but then simply burned it all. Taxing Kendrick’s money did nothing to alter consumption. Since (at least fiat) money is simply a claim on goods and services, shifting ownership of that claim in and of itself does nothing to change overall consumption. If Kendrick was not exercising his right to claim $84 million worth of current private (or even public) consumption, and then the government confiscates his $84 million worth of claims and begin claiming current output, they are simply shifting the consumption from everyone else who was exercising their claims to itself. Kendrick was not affected in the least.
Ravi:
I think you so completely miss the criticism that one gets the impression that you must have missed it completely. The essence of Paul Krugman’s criticism is that you do not understand the purpose of taxation. Perhaps you can address that, instead of flying off on a tangent
Since this post had nothing to do with “the purpose of taxation”, I would say that any criticism along those lines is already pretty far off along a tangent.
Mark: Exactly.
I think another good bottom line to the argument is: “Taxes differ from simply printing money only to the extent that they cause people to reduce their consumption of goods and services.”
Butters: Printing money is also a tax. (It lowers the value of existing money and so amounts to a tax on moneyholders.) The right bottom line is that all taxes (including printing money) impose burdens, and that in order to determine who bears those burdens, you must follow the goods and not the money.
Ravi: If I may make the following analogy (Prof L., feel free to correct/dismiss it)
Krugman says (paraphrasing): Taxes aren’t used to alter consumption, they are used so the government can buy things. To me, this is like saying that the primary function of a car isn’t to burn gasoline, its primary function is to move people from one place to another. This post is about saying that if you want your car to move, you have to burn gas. For the government car to move, there is less gas for other cars. (That article is full of Krugman screw-ups, but that one stands out the most.)
Landsburg never said that the government imposes a tax so we consume less. He said that if the government imposes a tax and buys stuff, we *have* to consume less. This is the whole point.
The government doesn’t produce goods. Unless Biden and Boehner want to trundle down to the woodshop and hammer out a few missiles, the only way they can utilize goods and services is by taking goods and services from us in the form of money. Sometimes it’s worth it, but that doesn’t mean there aren’t fewer goods and services to go around.
Also, Silas, why do you keep calling him “Steven_E._Landsburg”? It’s really not cute anymore
Super-Fly: Excellent summary. Thanks.
Super-Fly
There are several postings where people have noted that the assumption you make (and the assumption Landsburg makes…namely, for the government to consume more, someone has to consume less) is also false. Landsberg concedes as much…. but only very grudgingly. Perhaps you can describe the rationale behind your assumption…better yet would be if you could provide some empirical evidence.
Getting back to Krugman’s point… and your analogy…a better description would be that the primary purpose of cars is to move people, and it sometimes does this by burning gasoline and sometimes by having a cow/horse pull the thing.
But regardless of that, Landsberg’s position was that it is literally impossible for the govt. to raise revenue by taxing Kendrick. This is demonstrably false… the govt. can confiscate his $84M in taxes, thereby raising $84M in revenue. Landsberg position is that this would lower consumption by someone else by an equivalent amount. There is no proof provided for this assertion, but even if it were the case, it still raises govt. revenue.
Let us say that govt. confiscates the $84M. This means that the bank has $84M less to invest, which means that the bank reduces it’s investments by $84M (this is probably what Landsberg means; but this is also not true)…which means the bank makes about $8M less in revenue every year (assuming 10% ROI), which means that the the govt. has lost about $2M in taxes every year (assuming a tax rate of 25%).
So, for an initial gain of $84M, the govt. loses $2M in revenue every year. One does not even have to bother with present value calculations to figure out that revenues do go up.
“There are several postings where people have noted that the assumption you make (and the assumption Landsburg makes…namely, for the government to consume more, someone has to consume less) is also false.”
Well, it not that that the basic theory taught in macro econ 101? Come on new price and equilibrium with dead weight loss very basic stuff.
Silas,
“if you can find where Stevens, in this article, makes the assumption that Kendrick is 100% consumption-unresponsive to ANY loss of assets (or of money)” – Silas
You clearly missed the point of any of Steve’s posts on this, Stevens’ article, or my comments. Or you’re just dishonest. Are you sure you’re not the liar? Steve sure isn’t.
Stevens is trying to make the case that California should target people like Kendrick for taxation claiming he has “idle” wealth (as if savings and investments are idle) that can be taken from him when she states “higher estate taxes would still leave heirs with “plenty to allow someone a lot of leisure to collect cars or art'”. Do you not understand what this statement means? It means that she thinks the California can raise taxes on Kendrick because he won’t miss it because all he worries about is his cars, i.e., even after being taxed his consumption level remains what it would be even the tax.
I wasn’t aware that Stevens’ article was so unclear and that the quote above is so complex that you completely didn’t understand it.
Then, Steve quite plainly points out that transfering bits representing $84M from one account to another not affecting Kendrick’s consumption pattern (I repeat because apparently you are too much of a fool to understand Stevens’ article, that this is HER assumption, NOT Steve’s) means that although Kendrick pays the tax, he doesn’t bear the burden of the tax.
Since the government now has all these extra bits in some account somewhere, it will start making claims on real wealth. Since Kendrick’s consumption doesn’t change (by Stevens’, NOT Steve’s assumption) and since consumption is zero sum (if there are only X consumable goods in the world, then tautologically you canoot consume more than X), someone else’s, NOT Kendrick’s, consumption is reduced due to the increase of consumption by the government.
The very point of the post is the people who bear the brunt of a tax aren’t necessarily the people who write the checks paying that tax in dollars.
If you’re going to claim that someone is lying, you should probably know how to read better than you apparently do. The assumption that Kendrick’s consumption won’t change is the very meaning of Stevens’ quotation that I conveniently supplied for you in this comment and her article in general.
What’s sad is that you’re partially illiterate and are mad at me and Steve for pointing that out.
Regards,
Ken
So unless a rich man like Bill Gates gives away so much money that it actually reduces his consumption, his charitable donations are meaningless. They simply burden the rest of us. Right?
Here’s a very simple example demonstrating why Landsburg is wrong. Suppose the money is currently lying under Kendrick’s mattress, a possibility that Landsburg has conceded. The government takes $100 of this money and pays a currently unemployed man to catch a fish and cook me a nice dinner. This man puts the money under his own mattress.
What has changed? Kendrick is just as well off by assumption. I got a nice dinner, so I’m better off. And the third man is $100 richer (and let’s assume voluntarily did the work), so he’s happier. Pareto stamp of approval.
Landsburg has tried to argue that the government could have simply hired the fisherman anyway, so it doesn’t say anything about the effect of taxing Kendrick. But this misses the fact that to spend that money it would have to either tax someone else, sell a bond, or print money. In any case, that act independently reduces consumption or investment, whereas taxing Kendrick does not.
Landsburg’s logic works solely in an economy at full capacity and maximum efficiency. (And only one country — can’t the government consume imports?) In other words, the perfect can’t get perfecter. I’ll leave it up for debate if our country is currently in this situation.
Steve —
Does your argument depend on the supposition that Mr. Kendrick holds his wealth in the form of “money” as opposed to some other form? Few of us hold all our wealth in “money” (currency or bank deposits, or “M1” in Fed terminology). The original article that you were criticizing doesn’t appear to say anything about the form in which Kendrick holds his wealth.
Does your argument still hold if Kendrick’s wealth is invested in real estate? In non-perishable physical commodities? In shares of IBM stock? If his wealth were held in one of these forms, then he would need to liquidate some of that wealth to pay the tax, and the price level presumably wouldn’t change if the government then spent the money it taxed away from him.
Your original post started with the sentence “Nothing makes my job easier than a journalist who writes about something interesting and gets it 100% wrong.” But I wonder whether, in reaching this judgment, you didn’t need to introduce assumptions that are neither explicit nor implicit in the article that you’re calling “100% wrong.”
Of course maybe I have this all wrong…
Neils Bohr:
Does your argument depend on the supposition that Mr. Kendrick holds his wealth in the form of “money” as opposed to some other form?
No.
Does your argument still hold if Kendrick’s wealth is invested in real estate? In non-perishable physical commodities? In shares of IBM stock?
You can’t build a missile out of IBM stock certificates any more than you can build it out of dollar bills.
Mike Miller:
What has changed? Kendrick is just as well off by assumption. I got a nice dinner, so I’m better off. And the third man is $100 richer (and let’s assume voluntarily did the work), so he’s happier. Pareto stamp of approval.
You forgot about all the moneyholders whose money lost value when the price level rose because an extra $100 got put back into circulation. And you should have known that there *had* to be someone who lost, because there is no such thing as a free lunch.
Maya:
So unless a rich man like Bill Gates gives away so much money that it actually reduces his consumption, his charitable donations are meaningless. They simply burden the rest of us. Right?
I’m not sure I’d use the word meaningless, but yes, they do burden the rest of us. At the same time, they help the beneficiaries of the charities — and Bill might consider that well worth doing.
Ravi:
But regardless of that, Landsberg’s position was that it is literally impossible for the govt. to raise revenue by taxing Kendrick. This is demonstrably false… the govt. can confiscate his $84M in taxes, thereby raising $84M in revenue.
But the real revenue does not come from Kendrick.
Let us say that govt. confiscates the $84M. This means that the bank has $84M less to invest, which means that the bank reduces it’s investments by $84M (this is probably what Landsberg means; but this is also not true)…which means the bank makes about $8M less in revenue every year (assuming 10% ROI), which means that the the govt. has lost about $2M in taxes every year (assuming a tax rate of 25%).
You continue to make the fundamental mistake of confusing dollars for real wealth.
Ravi, Krugman was just playing “pile on the free market guy,” As I wrote yesterday:
“Landsburg was NOT (and yes, I am shouting) contending that taxes exist as a WAY to reduce private consumption. He was saying that, as a matter of fact, they will do so. And the tax falls upon whoever has their consumption reduced by the tax. And that won’t necessarily be the person upon whom we put the legal tax burden. And what Landsburg is saying is that placing the legal incidence of the tax on Kendrick in the interest of “taxing the rich” does not necessarily really tax the rich. Krugman knows all that.”
In fact, Krugman makes THE EXACT POINT Landsburg has made here in his economics textbook.
Hi Steve — Thanks for the response.
Steel is used to make missiles. What if Kendrick had invested all his wealth in warehouses full of steel, sitting idle?
This may seem far-fetched, but we’re doing thought experiments after all. I would like to understand the conditions under which your critique of the original article is and is not valid. (Your critique did not contain much in the way of caveats…)
And back to the IBM stock: If Kendrick holds all his wealth in IBM stock, he has to liquidate some of the stock to pay the tax. Presumably the buyer of the stock bought it for a price below her reservation price (otherwise she wouldn’t have bought it), and she is better off as a result — while Kendrick is no worse off. Aren’t we then in a better world?
I get the point that if Kendrick is just sitting there with a pile of currency that will never be spent, then for the government to tax that currency away and spend it is no different from printing money. Makes perfect sense. But it gets fuzzier to me if Kendrick’s wealth isn’t held in the form of “green pieces of paper,” as you put it — when it’s held in the form of things that people are willing to *part* with “green pieces of paper” in order to own.
Maybe I’m still missing the point as I puzzle through this. Thanks again for an interesting discussion.
Neils Bohr:
Steel is used to make missiles. What if Kendrick had invested all his wealth in warehouses full of steel, sitting idle?
That would be an entirely different situation. Then he’s commanding real resources, which you can take away from him. You build your missiles and you don’t have to take anything away from anyone else. Now Mr K bears the full burden of the tax.
And back to the IBM stock: If Kendrick holds all his wealth in IBM stock, he has to liquidate some of the stock to pay the tax. Presumably the buyer of the stock bought it for a price below her reservation price (otherwise she wouldn’t have bought it), and she is better off as a result — while Kendrick is no worse off. Aren’t we then in a better world?
The govt still somehow has to get the steel. The steel is then not available for some other use. That means someone else somewhere else has to be convinced to use less steel, say by not buying a car this year. Perhaps that someone else is another IBM shareholder whose share value went down because of this transaction. Perhaps the chain is longer and more complicated. But someone somewhere has to sacrifice the use of the steel. Someone somewhere has to bear the tax burden.
IBM stock certificates are printed on white pieces of paper. For making a missile, a white piece of paper is no more useful than a green piece of paper.
Steve, I think your error is here:
“A tax allows the government either to spend more or to reduce someone else’s taxes.”
There is a third option – a tax can allow a government to pay down debt (or set up a sovereign wealth fund if it has no debt – but a similar argument applies).
The secondary effect of lower debt is to reduce interest expense. Some of which will be external – at a point in time this will look like an export of resources, i.e. foreigners consuming stuff. Or Americans sending green paper to foreigners which they exchange for goods.
With the additional tax revenue and therefore lower debt/interest expense the consumption of stuff by foreigners decreases. Which means consumption of stuff by domestic consumers may (must?) increase.
Which makes people better off.
Now if the interest expense is zero (as it is today), there’s not much point in raising taxes on Mr Kendrick. But if the interest expense is greater than zero, if the economy is exhibiting solid growth – as we expect in 3-4 years – and the interest bill reflects the concomitant rate, then a tax on Mr Kendrick will reduce the interest bill.
PSC:
“A tax allows the government either to spend more or to reduce someone else’s taxes.”
There is a third option – a tax can allow a government to pay down debt (or set up a sovereign wealth fund if it has no debt – but a similar argument applies).
Paying down debt is reducing someone else’s (future) taxes.
Steve,
Maybe I’ve missed this, but I think you’re still missing the point that very few Kendricks actually exist, so while I can see how in some instances, where the government spending may impose a burden on society in general, (usually at full employment), the fact that Kendricks is completely unresponsive to a change in choice set, defies reality, as Silas Barta has pointed out many times. Please address that point before this discussion continues.
And if your point was just to nit pick a journalists wording, this has all been an incredible waste of time.
It seems like the confusion here is related to definitions.
Why do you want to say “Kendrick cannot be taxed” as opposed to “taxing Kendrick cannot increase the total store of goods and services” or “the impact of taxing Kendrick in this scenario will be felt by others”?
“Tax” and “revenue” have simple definitions that are not changed by how effective the processes is at increasing the total goods and services. I think your leap from “ineffective” to “impossible” is incorrect and is the source of much confusion.
Steve,
Also in Leslie’s article she says this,
“Kendrick is, at least, a bit less busy with this than in the past. He once had 22 cars to park. Only Danielle Steel, the romance novelist, had more — 26. In 2002, the city limited parking permits to four, and news accounts cited neighbors’ outrage at Kendrick as impetus for the change.”
Source: The Bay Citizen (http://s.tt/12hAc)
Which implies that he is somewhat responsive to policies. The permits amounted to somewhat of a tax on his behavior since his he had to sell those 18 cars. In your terms, now there is more stuff to go around for everyone else. In fact taking away Kendrick’s inheritance may have the effect of pushing him to work again since he must at least gain enough money to feed himself. Kendrick can be seen as an idle resource, in this case, so putting him back to work is expanding our resource set in yet another respect.
Anyway, the point of this comment is that you said the journalist was “100 percent” wrong. That’s clearly not the case.
Ken: Sorry, but the quote you provided is not equivalent to saying that Kendrick is 100% consumption-unresponsive to all negative changes in holdings, which is what Steven_E._Landsburg needs to make his point. If you’re going you’re going to accuse a journalist of saying X, you better durn well have a quote of them saying X … otherwise that would kind of make you a liar.
Steven_E._Landsburg’s entire exercise here is to show off how well he can follow the “watch goods, not money” heuristic, while still making a different error.
I don’t see how a tax is a burden. A tax is simply how much citizens pay to receive goods and services that are produced by a government. A tax is no more a burden than the amount of the check at dinner or the price of my new iPad. True, many citizens are unhappy with the one or more aspects of this arrangement (i.e. the fact that they are forced consumers, the tax is too high for the the value the goods and services produced by the government, etc.) but since we are a democracy, then surely a tax represents the collective preference of the majority so on the whole, repeat – on the whole, how it can be a burden?
Thank you for the response Steve.
Not to belabor this.
(1) If Kendrick owned his interest in the steel through a wholly owned subsidiary, in that case he would also have title to “white pieces of paper,” not to steel itself. I wonder if you think this distinction would make a difference.
(2) With respect to the IBM stock hypothetical, let me have one more go at it. The scenario we’re discussing is one under which Kendrick neither derives utility from his assets, nor trades those assets for anything else (as you put it, if he holds “money,” that money is “out of circulation”).
Suppose Kendrick holds his wealth in the form of IBM shares. If the government takes those IBM shares away from Kendrick (who neither derives utility from them nor will ever trade them) and gives those shares to people who do value them, social welfare (economic surplus) has ipso facto increased, hasn’t it? (Presumably the policy goal is to enhance social welfare, not to increase “consumption” or any other arbitrary variable.)
I agree with you that, if all Kendrick owns is a pile of *currency*, then under your hypothetical conditions (under which money in Kendrick’s hands is “out of circulation” because he’ll never spend it), the government can’t improve welfare by taxing that currency away from Kendrick and spending it. Putting that currency in circulation would be inflationary, and the burden would fall on the other holders of money. The government can already print currency and spend it if it chooses. But the government can’t print IBM stock.
I’m not an economist so maybe I’m just being obtuse here.