Wisdom from the Ivy League

Greg Mankiw’s four principles of tax reform are extraordinarily wise, and I think it’s fair to say that almost everyone who has thought hard about these issues will agree with everything he says.

I have only one quibble, and that’s that Greg is very sure we should eliminate the mortgage interest deduction in accordance with his first principle: “Broaden the Base and Lower Rates”. I think we should maybe keep it in accordance with his second principle: “Tax Consumption Rather than Income”. (Though I certainly agree that after the second principle has been implemented, it will be time for the mortgage interest deduction to go.)

How sad that so much wisdom is sure to go unheeded.

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108 Responses to “Wisdom from the Ivy League”


  1. 1 1 Ron

    Some disagreement with what he says. He states, “Subsidies to
    homeowners are, in effect, penalties on renters”. Isn’t it
    generally understood that renters have to live in some kind of
    building? That building likely has a mortgage. The mortgage is
    deductible. Thus, the landlord can afford a lower rent than
    otherwise. It’s just that the renter gets the benefit indirectly
    rather than directly.

    That doesn’t mean the deduction shouldn’t be eliminated. It seems
    to me that eliminating that deduction is, in effect, a tax on
    consumption of housing.

  2. 2 2 Pete

    “tax bads rather than goods” … come on???? who determines what is bad and good??? very silly … do we have an objective means of measuring “bad” vs. “good” or is likely that our benevolent moral guardians will tell us what is bad and good for us …???????

    “Economists who have added up all the externalities associated with driving conclude that a tax exceeding $2 a gallon makes sense.”

    how on earth can economists have measured “all the externalities” … are they omniscient … ?

  3. 3 3 Harold

    The principles look very good. What I fear is their selective application. Those measures that benefit the powerful lobbyists will get passed, and those that benefit the powerless will not.

    Because tax is so complex at present, it is very difficult to get people to understand certain benefits of certain taxes. Those with accountants will understand benefits that come to them through certain schemes, and will lobby for them. Those with no accountant and lower education are dependant on the media to inform them, and are thus certain to mis-understand, and will not lobby for schemes that may benefit them. (Some will read this blog, and so become better informed, but I don’t think we can entirely rely on this).

    Whilst the taxing of consumption seems ideal, the method for getting there seems inadequate. I am sure that very many people have very little savings in IRA’s etc, and whilst progress could be made in this manner, it will not be much progress. Currently, much income can be taxed as investment, and attract a lower rate. A shift to taxing consumption would reduce the scope for this. Thus the wealthy, including newspaper and TV owners, will not wish for this to happen.

    I do not know the answer to this – it seems to me that politicians should lead rather than follow, but any bold and brave politician offering anything slightly different would die a death-by-a-thousand-soundbites.

  4. 4 4 CC

    Ron wrote: “Thus, the landlord can afford a lower rent than
    otherwise. It’s just that the renter gets the benefit indirectly
    rather than directly.”

    No, I used to think this too, but it’s wrong. Here’s a simple example:

    Case 1: I buy a 200k home and get an I-only mortgage at 5%. Yearly expense = 10k, but then I get to deduct that. So I really only need to earn an extra ~7k/year, not a full 10k.

    Case 2: Lenny the Landlord buys the home for 200k (again with a 5% I-only mortgage) and rents it out to me. He has to collect a full 10k/year from me. The 10k would count as Lenny’s income, but then he gets to write off 10k in interest expenses. So he breaks even. Therefore my rent is a full 10k, and I have to earn an extra 10k/year to pay the rent (not 7k).

  5. 5 5 Manfred

    Steve, you say “How sad that so much wisdom is sure to go unheeded.”
    Come on Steve, you are way, WAY smarter than that.
    It will NEVER be heeded. It’s the difference between Economics and Political Economy. Politicians will always be wanting there little giveaways to their favored groups. And those favored groups are usually very loud in Congress. And voters sheepishly comply.

    And BTW, it says at the bottom that Mankiw is “advising Mitt Romney”. It does not seem to me that Mankiw is making much headway with Mitt Romney, who has a proposal almost as long as the Tax Code itself, plus 253 spreadsheets that go along with it. So much for “Keep it Simple” (Mankiws 4th Principle).

  6. 6 6 Josh

    The marginal tax rate of both parties matters. If I pay a group of people $100 in mortgage interest and my marginal rate is 25%, then I’m getting $25 in nominal tax break, while the average rate of the group might obviously be higher or lower, so their extra tax might be $35 or $15. What would be interesting would be to see those actual average marginal rates for the US.

  7. 7 7 PrometheeFeu

    Learning economics is so depressing. Let’s forget about controversial topics such as the central bank policy or fiscal stimulus. Let’s just look at the policy recommendations that are quasi-universally adopted by economists. How many of them get implemented? Not that many, that’s for sure.

  8. 8 8 Chas Phillips

    Professor Manikow’s suggestions are practical, thoughtful and, most importantly, likely to be enacted in my lifetime. However, the example he chooses to illustrate the wisdom of “taxing the bad”–the use of automobiles–undermines the credibility of his otherwise excellent piece. The notion that climate change can be influenced by humans is questionable on its face, but the economics that he employs to support his argument have no basis in reality: “Economists who have added up all the externalities associated with driving conclude that a tax exceeding $2 a gallon makes sense.” Either his list of economists who have added up all the externalities has one member, or he lifted this assertion from a Paul Krugman blog.

  9. 9 9 CO

    I feel tax policy is too complicated for economists to understand. For instance, why does Mankiw take it as an axiom that we have to lower the rate? Well, the usual mantra states that taxes decrease work incentives, and therefore lowering the rate increases work incentives which will translate to economic growth, etc… (Please correct me if I’m saying another wrong here)

    But is that a given? Maybe if I’m taxed a bit more, I’ll work a bit harder to generate the same after-tax income. Or maybe decreasing work incentives is a GOOD thing. For instance: suppose I’m a hedge-fund manager leveraging at 30-to-1. Wouldn’t I be the exact type of person where you’d want to decrease my work incentive? Maybe ultra-high marginal tax rates on the super-rich act as a “brake” on the financial industry which decreases excessive and unnecessary risk-taking. Maybe that’s why in the 30 years after WW2, we had high tax rates, steady growth, and no financial crises…

    I’m just presenting alternatives. Economists, to me, seem to take a lot of things for given on rationalized a priori principles, despite the massive historical evidence which doesn’t reinforce what they assume…

  10. 10 10 Steve Landsburg

    Chas Phillips:

    The $2 figure that Mankiw cites is *not* based on climate change. It’s based on the fact that driving causes a) congestion and b) accidents, neither of which is controversial.

  11. 11 11 Harold

    Chas Phillips: “The notion that climate change can be influenced by humans is questionable on its face” If you believe this then I suspect you are doubting Prof Manikow because you want to believe something rather than examining the evidence.

  12. 12 12 Dmitry Kolyakov

    I feel 1 and 4 are at least partially repetitive – eliminating deductions is the only measure cited as an example of 1 “broaden the base” principle (perhaps because most other examples would be not so politically acceptable), but it clearly also falls under 4 “keep it simple, stupid”. I think unless some examples not covered by other principles are added principle 1 does not add much new information.

    If the real message is that certain items (like high incomes) that are already taxed relatively high should not be taxed any higher and new revenue sources should be sought that probably should be said straight. Also some criteria as to at which level further increase in taxes makes no sense should probably be offered. Otherwise principle 1 becomes not also somewhat redundant but also not entirely practical, I believe.

  13. 13 13 Dan

    Mankiw starts the article with a sloppy error: “Start filing all those W-2s, 1099s and scraps of paper you’ll need for your annual tax return.”

    W-2s and 1099s are forms that taxpayers receive, already filled out, from employers and other companies that they do business with. (If Mankiw is addressing those employers and other companies, it wouldn’t be correct to call them “scraps of paper you’ll need for YOUR tax return).

    The article gets better after that.

  14. 14 14 cmprostreet

    Dan,

    Mankiw said “filing” W-2s, not “filling out.” I see sloppiness, but not in his article.

  15. 15 15 Thomas Bayes

    Filing != filling

  16. 16 16 Dmitry Kolyakov

    Principle 2 – “Tax consumption rather then income” is a funny one.
    So “most economists would endorse it”, it has been known for almost 4 centuries and yet it is hardly ever been widely used, other than in form of very niche, highly populist and usually not particularly successful “luxury” taxes in some countries or as a by-product of various unsystematic tax exemptions?
    If there is nothing new to say what point is there to try to revive the principle that has been repeatedly examined and mostly rejected by policy-makers world-wide for almost 4 centuries? There might of course be some new facts or some unique new perspective – but then they had better be explained to make this principle valuable.

    Taxing consumption is of questionable economic merit, fortunately though it will most probably not work.
    Taxing consumption as a primary revenue source is a nightmare to administer – unless the tax authorities are prepared to perform a market price test on every single transaction and then to defend its position in courts (as something as fickle as a “market price” can be plausibly challenged ad infinitum on everything but the most basic commodities). If they are not doing such tests every single time much consumption tax can be easily avoided by purchasing everything at extremely steep discounts and then compensating the seller indirectly (like bartering, settlement of payments in foreign jurisdictions, etc.)

    Another powerful way of avoiding this tax would be disguising personal consumption as business expenses (if I am reading econ blogs from my work computer, should I pay a consumption tax on a part of my computer’s price? What if I tend to schedule business meetings on Tahiti and go there by company jet? What if I use my home as my business premises (I mean, live in my office, of course)?)

    So, unless we are willing to grant the IRS with dictatorial powers, taxing consumption appears quite impractical. I believe currently existing examples (in the form of “luxury” taxes) support this notion. In China as I’ve heard the government’s luxury taxes generally succeed at damaging local retail business as most taxed items are purchased abroad and brought in people’s luggage( with lables detached to make them look used) while promoting corruption and gathering very little tax (compared to the actual consumption). Splendid achievement.

    And on top of administration problems there are economic sense issues. When we tax income we are at least treating money spent on consumption and money saved equally. With a consumption tax we are instead distorting people’s natural preference of consumption vs. spending. Are there good reasons for such invasive measures? Aren’t these things best regulated by market rates on savings?
    In an open market pushing people to over-save will most likely make American market less lucrative as people will spend less, which will depress return on investment for American businesses, decrease their investment and hence borrowing appetite and lead most of these additional savings out of the country. This is likely to start a vicious circle that is way more likely to harm America than to do it any good.

    Why not pass on this opportunity to tamper with people’s natural market-regulated preferences yet again?

    Income taxes are clearly bad, but replacing them with consumption taxes are a bit like replacing saturated fats with arsenic – you will be happy you’ve parted with the former, but not for long…

  17. 17 17 Rich

    to Ron and CC, re: mortgage interest and landlords…

    this is not correct – the mortgage interest deduction is a _home_ mortgage interest deduction (only for a primary residence or a second home). Landlords (unless renting out a part of their house), cannot take this deduction. Landlords depreciate the value over the rental property over time, and write off the depreciated amount.

  18. 18 18 Patrick R. Sullivan

    ‘So, unless we are willing to grant the IRS with dictatorial powers, taxing consumption appears quite impractical.’

    Ever been audited by the IRS? They already have dictatorial powers.

    States tax consumption right now; sales taxes are pretty easily administered. So are taxes on gasoline, alcohol, cigarettes.

    Now corporate income…there’s an impractical tax.

  19. 19 19 Dmitry Kolyakov

    Principle 3 – “tax bads, not goods”. This one sounds good, because it is so not specific. We all welcome good and avoid evil, it is that just the definitions differ. I guess we have such high taxes on high incomes in most countries exactly because enough voters consider them “bad”, or worse then lower incomes. Some people think so out of simple envy and will not be open about the true reasons of their voting behaviour, but their voting will not change.
    I believe unless there is some new innovative guidance or decision making process to judge what is a “good” and what is a “bad” principle 3 is not really a proper principle.

    For example, let’s assume we reach consensus that smoking is bad and should be discouraged. Person A is a smoker, person B is a non-smoker. Currently they are taxed on their income and pull more or less an equal load. So does principle 3 tell me to put all tax burden on B, because he is doing a “bad” thing? If not, what does it tell me?
    What if the poor guy is so addicted he can not quit? Should we keep punishing him for the way he is? Can deterring him only from smoking where he can actually harm other people be a better idea?
    Same goes for the gasoline tax: If I am a rancher in some very remote rural location, the only congestion, local pollution and accidents I can cause can be experienced by me, my voluntary guests and my cows. So why should I be paying for some urbanites’ extravagant fantasies?

    So proclaiming this principle is easy, making anything useful of it is a bit more complicated.

    In general, for me these “principles” leave an impression not of solid economic science, but of some crowd-pleasing attempt to include people who actually oppose your true views into your voting base. That is probably OK for the guy he consults, but not for the distinguished economist known well beyond his university and his country.

  20. 20 20 Dmitry Kolyakov

    Patrick R. Sullivan: Ever been to a country with anything dictatorial? :)
    Sales tax is not exactly a consumption tax that’s being discussed – hopefully no one is advocating getting most of the tax revenue from the sales tax – that probably wouldn’t be a particularly good idea. Are sales taxes reimbursed when goods are purchased for business reasons or for investment purposes? If not, it is different from what the classic consumption tax. Can you levy sales taxes progressively? More over it is relatively insignificant, so people just don’t bother to seriously cheat. But from what I khow, they still do, even at these rates. What will happen if the top tax rate is higher than the current top bracket of income tax (it will have to be, as the tax base will be smaller)

  21. 21 21 Thomas Bayes

    From a discussion with a colleague (neither of us are economists):

    Me: “Did you see Greg Mankiw’s column on taxes? I think it is excellent.”

    Colleague: “Who is Greg Mankiw?”

    Me: “He is an economist at Harvard. Anyway, one of his key suggestions is that we shift from an income tax to a consumption tax. I think that sounds great.”

    Colleague: “But that would encourage people to hoard their money.”

    Me: “How does that hurt other people?”

    Colleague: “Rich people will make money but not spend it. That will create fewer jobs.”

    Me: “Actually, if they accumulate money it will be because they create more goods and services than they consume.”

    Colleague: “But if you tax consumption people won’t buy as much.”

    Me: “Okay. If you tax consumption people won’t consume as much. What happens if you tax creation?”

    Colleague: “Does Paul Krugman support this?”

  22. 22 22 Chas Phillips

    Professor Landsberg,

    You replied to my post by stating that Professor Mankiw was not including climate change as one of the externalities that went into the determination of a gas tax that would compensate for the social costs of driving. This is what he said: “Driving your car is associated with various adverse side effects, which economists call externalities. These include traffic congestion, accidents, local pollution and global climate change.” I presume that what you meant to say was that even though he specifically cites global climate change as an externality, based on prior knowledge, you know that he did not really mean it. Your observation that driving causes congestion and accidents is certainly true, but the costs associated with these two externalities would be more than offset by the costs of other externalities that would follow from a 50% increase in the cost of gasoline at the pump. I am skeptical that one can identify all the relevant externalities, let alone quantify them. On the assumption that Americans consume about 140 billion gallons of gasoline annually, an incremental $2 tax would raise about $280 billion. If you suggestion is that the value of time lost in traffic and the cost of accidents not covered by insurance is about $280 billion, please send me the analysis. You do not reference the cost of infrastructure to accommodate additional users of mass transit, the impact of people choosing to live closer to their work (as measured by the economic cost to the communities they leave), or the stress that would be placed on domestic car manufacturers to name three. And the notion that the money transferred to government via this tax would be used as Professor Mankiw suggests is hard to envision.

    Harold: You seem offended by my skepticism regarding the ability of humans to reverse rising temperatures. Is the evidence you accuse me of ignoring the comprised work of the UN? Sometimes when two people disagree, it is possible that both parties have studied the matter in question, are both intelligent and individuals of good will, but reach different conclusions. I would find it helpful if you would forward to me Professor Mankiw’s reasoned conclusions on global climate change

  23. 23 23 nobody.really

    [A]ssume we reach consensus that smoking is bad and should be discouraged. Person A is a smoker, person B is a non-smoker. Currently they are taxed on their income and pull more or less an equal load. So does principle 3 tell me to put all tax burdens on B, because he is doing a “bad” thing? If not, what does it tell me?

    Potentially! Mankiw does not specify.

    But I suspect Mankiw would favor calculating the magnitude of the externality (the thing that makes smoking “bad”) and then designing a tax in a manner to cause smokers to bear the full cost of their policies, but not more than that cost. In this case, I imagine the tax would be imposed on packs of cigarettes.

    As you might imagine, people can disagree about how to quantify the externalities of smoking, and about how best to design a tax to recover the costs. Today people who smoke (and, in another frequently-cited example, people who are overweight) tend to be from less affluent, and less powerful, socioeconomic classes. Moreover, these people may provoke feelings of aversion and revulsion – “moral panic” – in others. Thus, what may start out as a simple effort to establish a tax on externalities may evolve into the persecution of a politically disfavored minority. Arguably the initial drug control laws (prohibiting the smoking of opium) were really designed to persecute Chinese laborers that had started to settle in California.

  24. 24 24 iceman

    @Dmitry: “When we tax income we are at least treating money spent on consumption and money saved equally.”

    Only if we’re only taxing labor income of course. If that’s the choice I’m not sure which I like better, but some argue that deciding whether to defer consumption is at least a bit more discretionary than deciding whether to earn income. I’ve tended to agree with your view of the practical difficulties of implementing a consumption tax, but here Mankiw’s comment was interesting that expanding tax-advantaged savings vehicles effectively moves us in that direction.

  25. 25 25 Silas Barta

    @Steve_Landsburg: The $2 figure that Mankiw cites is *not* based on climate change. It’s based on the fact that driving causes a) congestion and b) accidents, neither of which is controversial.

    Here’s the excerpt: “Driving your car is associated with various adverse side effects, which economists call externalities. These include traffic congestion, accidents, local pollution and global climate change. … Economists who have added up all the externalities associated with driving conclude that a tax exceeding $2 a gallon makes sense … ” (bold added)

    It seems pretty clear he intends climate change as part of the externality calculation. Do you have reason to believe otherwise?

    In any case, Mankiw often (clumsily) cites (reduction of) global warming as a reason to tax *congesion*. Go fig. (In fairness, he never cites it as a primary reason.)

  26. 26 26 Steve Landsburg

    Silas Barta:

    It seems pretty clear he intends climate change as part of the externality calculation. Do you have reason to believe otherwise?

    When I saw Mankiw speak on this subject a couple of weeks ago, he said that he’d gotten the $2 figure based on congestion and accidents. It’s possible I heard him wrong or misremembered, but I’m pretty sure that’s what he said.

  27. 27 27 Steve Landsburg

    Chas Phillips: See my reply to Silas Barta above.

  28. 28 28 nobody.really

    What if the poor guy is so addicted [to smoking that] he can not quit? Should we keep punishing him for the way he is? Can deterring him only from smoking where he can actually harm other people be a better idea?

    Good questions!

    Some people advocate taxing “bads” solely as a means to deter behavior. In this sense, taxation might be understood as a kind of punishment. If evidence demonstrated that the taxes don’t actually change behavior, then we might want to reconsider the taxes.

    But other people advocate taxing “bads” as a way to create reimbursements for the harm caused by the taxpayer. In essence, the tax becomes a kind of price tag. If the tax is designed perfectly, society wouldn’t care if you did the bad thing or not, because by paying the added tax you would eliminate the costs you have imposed on society. For example, some hotels discourage patrons from stealing robes by establishing a policy of charging (a tax on) the cost of any missing robes to the patron. Under this theory, the fact that people did not alter their behavior stealing would not alter the rationale for the tax — and indeed the hotel might be indifferent to whether patrons altered their behavior or not.

    (But this example prompts the question: Who should get the proceeds of the tax – government, or the harmed party? Rarely is government a perfect stand-in for the harmed party, but sometimes it’s the best we can do. For example, people with asthma experience more harm from certain air pollution than most other people do. Arguably revenues from a tax on air pollution should flow to people with asthma. But using those revenues to subsidize asthma treatments or research might be the next best thing.)

    Note, however, that Mankiw seemed to suggest that we should tax “bads” as a means of raising revenues – that is, as a substitute for other forms of taxes such as income taxes. If Mankiw believes in restricting the magnitude of the tax to reflect merely the magnitude of the “badness,” nothing more, then we might not expect these taxes to offset much of the income tax burden.

    But if government is currently paying to offset the cost created by some externality, a tax on that externality may in fact raise revenues that would be used to offset other sources of taxation. If government is contributing to the cost of health care, and tobacco causes government to increase the costs government must pay, then arguably government would be justified in seeking to recoup its added costs from tobacco companies. By recouping these funds, government could then reduce the amount of funds it recovers via other means to fund its health care costs.

  29. 29 29 Marek

    I find the principle TAX CONSUMPTION RATHER THAN INCOME, and especially Mankiw’s explanation (via Thomas Hobbes) rather misleading. Taxing income IS taxing consumption – just (possibly) at different time periods. Putting aside Mr Kendrick, the present value of consumption equals the present value of earnings. Taking $1 of earnings from me means that I’ll reduce my consumption (in PV) by $1 as well.

    The problem with income tax is that it taxes future consumption more heavily than today’s consumption. The right principle should be TAX SYMMETRIC GOODS SYMMETRICALLY or something like that. Readers would lose attention if you give them this, though.

  30. 30 30 Scott H.

    @ Dmitry

    Thank you for that “People Magazine” level of analysis.

  31. 31 31 ThomasBayes

    Marek, Steve, and anyone else who can set me straight on this:

    It makes sense to me that IF I spend my income on a good or service, then my finances are the same whether I’m taxed on the income or on the consumption. But from a philosophical point-of-view, I like the idea of taxing someone when they consume, not when they create. If someone creates without consuming, it seems to me that they are already giving plenty to our society.

    What’s wrong with this perspective? (This is a sincere question.)

  32. 32 32 Keshav Srinivasan

    Steve, you say that right now it would be a bad idea to get rid of the mortgage interest tax deduction, because of the deadweight loss you get due to double taxation. But don’t you also get inefficiency under the current system by incentivizing housing rather than other investments? So in effect you’re forced to choose between choice 1 and 2 among the following:

    1. Tax choice A and don’t tax choice B

    2. Tax choice A and tax B the same as choice B

    3. Don’t tax choice A and don’t tax choice B

    Clearly 3 would maximize efficiency, but out of choices 1 and 2 isn’t it an empirical question whether the deadweight loss of a tax on B outweighs the distortions caused by taxing A and B differently?

  33. 33 33 KHodge

    Some of it is nice in theory but (1) anyone who wants to tax consumption is clueless about how the government works: we get a sales tax on top of an income tax; (2) letting the government decide what is a bad good vs what is a good good is precisely how we the need for the 4th rule arose: the simplicity goes when you have 700 legislators putting their pork to work.

  34. 34 34 Bob Murphy

    Hey Steve,

    Is Mankiw right when he says that the mortgage interest deduction gives an advantage to homeowners and hurts renters? Because a landlord who owns the building can deduct the business expenses of owning it, including interest payments, right? Then competition makes him pass that along to his tenants?

    Or am I missing something?

  35. 35 35 Bob Murphy

    CC wrote:

    Case 1: I buy a 200k home and get an I-only mortgage at 5%. Yearly expense = 10k, but then I get to deduct that. So I really only need to earn an extra ~7k/year, not a full 10k.

    Case 2: Lenny the Landlord buys the home for 200k (again with a 5% I-only mortgage) and rents it out to me. He has to collect a full 10k/year from me. The 10k would count as Lenny’s income, but then he gets to write off 10k in interest expenses. So he breaks even. Therefore my rent is a full 10k, and I have to earn an extra 10k/year to pay the rent (not 7k).

    CC, I think this is wrong. In Case 1, you have to earn $10k per year to pay your $10k interest expense. The bank wants a check for $10k; you can’t send them a check for $7k with a note saying, “I wrote off the rest.”

    Now I think what you mean to say is that in Case 2, you have to earn $13k, pay taxes on it, then use the left-over $10k to pay your rent to the landlord.

    =====

    Having said all that, something still doesn’t sit right with me on it. If we do a partial equilibrium analysis, I can see what your point is CC. But what if we let rents and home prices adjust? I mean, if we initially assumed a world where everybody is indifferent between renting and buying, are you saying the home mortgage deduction would push everybody to become a buyer? There’s no way for other things to adjust so that people become indifferent again?

    (I’m not saying there is, I just want to make sure we’re doing this right.)

  36. 36 36 Bob Murphy

    Another thing Steve: My hunch is to go with Silas on this. Wouldn’t $2/gallon be a freakin HUGE externality if we’re not even factoring in climate change stuff?

    Also, if you’re talking about congestion and traffic accidents, isn’t taxing gasoline a really really dumb way to attack those problems? That’s like taxing forks to fight obesity.

  37. 37 37 Steve Landsburg

    Keshav Srinivasan:

    Clearly 3 would maximize efficiency, but out of choices 1 and 2 isn’t it an empirical question whether the deadweight loss of a tax on B outweighs the distortions caused by taxing A and B differently?

    Absolutely, and my guess about which is better could well be wrong. In fact, I’m pretty sure Greg Mankiw has thought about this harder than I have.

  38. 38 38 Steve Landsburg

    ThomasBayes:

    What’s wrong with this perspective? (This is a sincere question.)

    Nothing that I can see. (This is a sincere answer.)

  39. 39 39 Steve Landsburg

    Marek:

    I find the principle TAX CONSUMPTION RATHER THAN INCOME, and especially Mankiw’s explanation (via Thomas Hobbes) rather misleading. Taxing income IS taxing consumption – just (possibly) at different time periods. Putting aside Mr Kendrick, the present value of consumption equals the present value of earnings. Taking $1 of earnings from me means that I’ll reduce my consumption (in PV) by $1 as well.

    The problem with income tax is that it taxes future consumption more heavily than today’s consumption. The right principle should be TAX SYMMETRIC GOODS SYMMETRICALLY or something like that. Readers would lose attention if you give them this, though.

    Point extremely well taken.

  40. 40 40 Dmitry Kolyakov

    Scott H.: Thanks for your polite comment. You point is best made by providing some better analysis yourself, however.

  41. 41 41 Harold

    With regard to punishing the smoker – asking if this individual loses is surely the wrong question. What matters is whether the sum of the benefits are greater than the sum of the losses. We must not forget all those people who do not take up smoking in the first place because it is too expensive.

    Chas Phillips: I refer to your statement “The notion that climate change can be influenced by humans is questionable on its face”.
    It is possible for reasonable people who have researched something to disagree on some things. It is not possible when nearly all the evidence is on one side. The disagreement must logically arise from unreasonableness or lack of research. I will say no more on this matter here.

    I am not entirely clear on Marek’s point. Taxing income taxes both consumption and saving. Taxing consumption taxes only consumption. Is the point that the savings will at some point be consumed? I am quite happy to accept that the definition “tax symmetric goods symmetrically” is a better technical principle, but I also agree that I lose attention. How does this definition work in practice?

  42. 42 42 Ken B

    ThomasBayes: (This is a sincere question.)

    Steve Landsburg: (This is a sincere answer.)

    Jean Giradoux: (The secret of success is sincerity. Once you can fake that you’ve got it made.)

  43. 43 43 Silas Barta

    Follow-up to my previous about Mankiw and the externality calculation: a search shows that his Pigou club manifesto was what I had in mind, but I was wrong to think he was listing climate change as a benefit of a tax on congestion specifically.

    However, it does substantiate the more general trend I had noticed in Mankiw, that he mixes congestion and climate benefits when discussing the advantages of a gasoline tax.

  44. 44 44 Silas Barta

    Another thing: does the income tax really tax future (investment) income more heavily? In dollar terms, yes it does, but you have to discount for time value, which should negate the gain in dollar-value.

  45. 45 45 Twofer

    Saw this over the weekend, and it struck me as one of those feel good pieces – Essentially saying we know what we need to do if somehow those idiots in congress (and Paul Krugman) wouldn’t screw it up. Too bad the devil is always in the details and there really isn’t as much consensus around this as the article seems to imply.

    The first thing he writes about is elimination of the deduction for mortgage interest. If I were designing a tax system from scratch, I would not include a deduction for mortgage interest. But now that that that toothpaste is out of the tube, there is no easy way to put it back in. And it’s hard to think of much that would be worse for the economy right now.

    Consider this. A home derives value from two sources – the basic value of the thing, and the net present value of the mortgage interest deductions. Very rough over generalized back of the envelope calculation would be about 75% of the price of a home comes from intrinsic value and 25% comes from the NPV of mortgage interest deductions. Immediate elimination of the deduction would reduce the value of homes across the country about 25% all at the same time. Of course this would plunge everybody right back into the household debt overhang we’re starting to deleverage out of now.

    So if you want to see an instant devaluation of your home, lobby your congressman to eliminate the mortgage interest deduction. Or come up with a very long term plan to phase it in, and hope the next 10 congresses or so continue to hold your vision while the electorate lives through long stretches of housing doldrums. Both seem doubtful.

    Many of the other suggestions struck me as kind of the same (and some of them appeal as well), but I’m sure that this article will only re-inforce preconceived notions about how easy it all is and how it’s Krugman’s fault if it doesn’t get done. Forgive if I don’t see the wisdom of Solomon in this piece. We’d need a lot more detail and practical implementation discussion for that.

  46. 46 46 Marek

    Harold: yes, my point was that the savings will at some point become consumption. So you can’t decouple them in a way that Thomas Hobbes’s quote suggests. Taxing symmetric goods symmetrically here would mean that current consumption should be taxed at the same rate as future consumption. Taxing income (and savings) does not do the trick. One can also restate the principle as “Do not tax savings”.

  47. 47 47 Ken

    Steven,

    What do you think of the property tax? Is this considered a consumption tax? I could get behind a one time sales tax of a property, but the perpetual nature and the fact that property taxes simply increase year after year (particularly for landlords; my property taxes went from $1600 in 2010 to $3600 in 2011 for a house valued at $135K simply because that house is now a non-owner occupied house, increasing my monthly mortgage payment by over 30%).

    I’m against it, primarily because I think that it implies that people merely rent their property from the government, rather than actually own it. Also, I’ve seen it used more like a weapon to get unwanted people (low income) out of an area by increasing the property taxes to a point people must sell or the government simply uses a lien to gain control of the property.

    Regards,
    Ken

  48. 48 48 Seth

    Mankiw wrote of the mortgage interest deduction: “As a result, too much of the nation’s saving ends up in the form of housing rather than in business investment, where it could have increased productivity and wages.”

    Is this the same as saying that what we save in taxes from deducting mortgage interest, we pay out in higher home prices driven by higher demand?

    If so, I think it’s more compelling for the average reader to say it this way. If not, why — what am I missing?

    Thanks.

  49. 49 49 Phil

    What is the incidence of the tax on interest? Are interest rates higher than they would be if there were only a consumption tax?

    They must be, mustn’t they? But how much?

    If all debt were held by taxable entities, and all debt were issued by entities who can deduct the tax, then government net revenues on interest would be zero, and creditors would be paying no effective tax even though they’d be writing tax cheques to the government (who would just pass them along to the debtors).

    That’s not the case: governments and consumers don’t get a tax deduction, and pension funds don’t get taxed. So, what’s the extent to which debtors absorb some of my tax via higher rates?

  50. 50 50 Al V.

    One challenge with taxing consumption vs. taxing income, is that the government wants the money now, not later. If I spend 100% of my income, then a consumption tax nets the government the same as an income tax. But if I spend only a fraction of my income and save the balance, then the government only gets paid the taxes when I cash out the savings and spend it. That’s not a bad thing, but deferred income is not generally what governments want.

    @Ken, isn’t property tax a form of consumption tax? My property taxes pay for the cost of trash collection, schools, fire and police protection, governance, local roads, etc. It makes an assumption that we should pay for those services in proportion to our home values, but that’s a value judgement. I don’t follow the logic that a rental property should pay a higher property tax than an owner-occupied property, though.

  51. 51 51 iceman

    @Twofer: I agree that removing the mortgage deduction (especially right now) would be tricky, but maybe not as cataclysmic as you suggest. Some current homeowners have arguably paid upfront for expected tax benefits, but 1) for many people (presumably those who own the higher-priced homes) the deduction is already phased out e.g. by AMT; and 2) if the proposal is *revenue-neutral* (as I often hear it described), the idea is the cost is offset by other benefits of a “flatter, simpler code”. (E.g. the standard question, “would you be willing to give up your favorite deduction for a flat tax?”) And of course from a broader social perspective, any actual costs realized by sellers are gains to purchasers. (On the other hand one could argue that paying less for reduced future tax benefits is just a wash in PV terms – the flip side of Seth’s comment – in which case I guess the gain was just a windfall for the previous seller.) Some people even think anything we can do now to clear the overhang of housing inventory and restore equilibrium would help us resume recovery more quickly.

  52. 52 52 Twofer

    @iceman: No doubt I could be thinking about this incorrectly, but I think I’d need to understand what you mean by “some current homeowners have arguably paid upfront for expected tax benefits.” If you could elaborate a little more about how one might do that, I might be able to understand better.

    Right now I’m thinking about the question like this:

    Scenario 1: Assume I’m a typical home buyer. I took out a mortgage for the house, and the deduction is taken away so now that house is worth 25% less. I still owe the bank the full amount for the loan and if I’m typical, the mortage is now more expensive than the value of the house. I am back in a debt overhang situation (that maybe I’ve just been working to get out of during this housing shock recession as is what is happening nationally now). Maybe there is some math that works such that my new taxes will eventually make up the difference of the value of the house that I’ve lost, but I doubt that would all happen at once. So how long would that take (or alternatively, there would be some complicated phasing/timing questions around the offsetting new taxes that would have to be well understoond and I’m pretty sure would create its own set of winners and losers)?

    Scenario 2: Assume I pay all cash for a house (not typical at all). You might think I don’t give a rats about a mortgage interest rate deduction because I’m not using it. But I do. I still payed a 25% premium because of the value of mortgage interest deductions to other people, setting the market price of the house 25% higher in the first place. Remove that deduction, and that 25% premium I paid goes away.

    As a buyer with no current house, I love the elimination of the mortgage interest rate deduction in principle — unless that sudden debt overhang causes the economy to slow down again and indirectly I lose my job, in which case I can’t buy a house anyway.

    As a current owner/seller of a house, I hate the elimination of the mortgage interest rate deduction because it is a depletion of my savings on the promise that I’ll earn it back at some point in time (at the very least risk is tilted against me).

    Let’s face it. As a rule homeowners are richer than non-homeowners. It would be an unusual political climate indeed that would back the less fortunate in a fight of this magnitude. Given how complicated this really is, and how long it would really take, do you think any politician is going to seriously take this on?

    I freely admit, I personally don’t understand the in’s and outs of the AMT as applied to individuals (I have some experience of it as a corporation from a long long time ago in a galaxy far far away, but not as an individual), but I thought for individuals the mortgage interest deduction applied for primary and secondary residences as well. Again, I’m no tax guy, so if you understand it differently, I’d like to learn.

  53. 53 53 Twofer

    @iceman,

    Apologies, I pulled the wrong quote from you in my first paragraph. I meant could you elaborate a little more on how “the deduction is already phased out.”

    Wish there were an edit function…

  54. 54 54 nobody.really

    Is a property tax a consumption tax?

    I’d say so. When I own property, I receive a stream of benefits from this fact. If I rent my property to others, I’d trade the stream of benefits for income; when I spent the income, I would then be subject to taxation on my consumption. If instead I forego the opportunity to rent my property to others, my opportunity for consumption does not magically vanish; rather, I redirect the stream of benefits of ownership to myself – and I should be taxed accordingly.

    If you don’t regard ownership as a kind of consumption, then what would you apply a consumption tax to? Imagine A, B, and C buy identical houses. Now imagine that A stays in his house for 30 years, while B and C sell their houses to each other once a year for 30 years. At the end of 30 years, A, B and C will each have “consumed” identical amounts of housing. If we believe in taxing symmetric goods symmetrically, we should devise a consumption tax that treats A, B, and C equally. A property tax would do that.

    Admittedly, there are major practical challenges in quantifying the value of the benefits of ownership; this is perhaps the biggest conceptual obstacle to adopting a consumption tax. Think about all the stuff you own, from your house to your education to the pen in your pocket. And while we’re at it, do you “own” a marriage, etc? Big Questions indeed.

  55. 55 55 Ken

    nobody.really,

    Thanks for your thoughts on property taxes. Now I’m left wondering how a sales tax differs from a consumption tax. For example, if I buy a pair of jeans $55, I pay 6% sales tax on them and keep them till they are no longer good for a total tax of $3.30. However, if I were to sell them second hand for $25, there is another 6% sales tax. In this second situation, the total taxes paid are now $4.80, $3.30 on the initial sale and $1.50 on the resale, violating your principle of having consumed identical amounts.

    Relating this to housing, property taxes are paid annually. But no other property I own do I pay an annual tax. I am taxed once at the point of purchase. Should consumption taxes be paid annually based on the the total amount of stuff that you consume over the course of the year? What if you have a wardrobe that allows yous to wear something different for a month compared to having only 5 shirts and five pairs of pants? Should clothing be counted different from housing in terms of consumption? If so, why?

    Clothes last years, especially shoes, as do a host of other things such as pots and pans (I have an iron skillet that is decades old, having been my grandmother’s), furniture, etc. Similar to the consumption of a house, I consume the same clothes for years. I only pay taxes only once for clothes (and the other items I mentioned), at the point of sale, but for my house, I pay annually. Why? And this all ignores the cost of maintaining a house, which is a decent chunk of money.

  56. 56 56 nobody.really

    I’m left wondering how a sales tax differs from a consumption tax. For example, if I buy a pair of jeans $55, I pay 6% sales tax on them and keep them till they are no longer good for a total tax of $3.30. However, if I were to sell them second hand for $25, there is another 6% sales tax. In this second situation, the total taxes paid are now $4.80, $3.30 on the initial sale and $1.50 on the resale, violating your principle of having consumed identical amounts.

    I wonder if conceptually a Value Added Tax (VAT) could be extended to address this problem.

    The VAT taxes the value of each good produced, but the producer can deduct the value of the inputs he purchased – including the cost of the tax on the inputs. Thus, in practice, each producer pays a tax only on the incremental value he adds to whatever he produces.

    So let’s keep going with that. I buy jeans for $30 plus pay a 10% VAT for a grand total of $33. I wear the jeans and ultimately sell them for $10 + $1 VAT. I then keep the $1 VAT to compensate me for having over-paid my VAT initially. After all, I consumed only $20 worth of the pants, so I should only have paid a net $2 VAT. (Ok, we have some timing issues to work out. Work with me here.)

    Similarly, I pay the seller a VAT when I buy my house. When I sell the house, the new buyer pays me a VAT. I then report to the taxing authorities the difference between what I sold the house for and all the “inputs” to the house – that is, the price I paid for the house, plus the VAT I paid (including the VAT) plus maintenance costs (including the VATs I paid on materials, etc.) If I turned a profit, I remit the relevant portion of the VAT to the taxing authorities; if I incurred a loss, I keep the VAT I charged to compensate me for having paid a VAT for more net consumption than I actually engaged in.

    This still does not solve the problem of quantifying the stream of value of the use I derive from my property. I’ll leave that for the next commentor….

  57. 57 57 Dmitry Kolyakov

    Ken and nobody.really: I wouldn’t say that a property tax is a consumption tax. A property tax taxes property whenever you own it, no matter whether you use (“consume”) it or not. Let me give you my own real-life example – yesterday i was surprised by a tax bill for a parcel of land my mother bought years ago adjacent to her own parcel. She just put it in my name, because of some considerations of hers, i even only was there about 3 times in all these years and i think I stood on my mother’s land anyway. So I never consumed anything there, but i still have to pay the tax.

    You might say i consumed the pride of ownership, but if we decide to tax that as consumption, maybe we can also tax Paul K. on his pride of being a Nobel Prise winner – that would sure deter unproductive behaviour in line with principle 3.

  58. 58 58 Dmitry Kolyakov

    I think I now understand why Personal Consumption Tax, an unpractical proposal of questional economic merit that has been rejected by policy-makers world-wide many times over is popular with so many commenters here.

    Most people just think of their favorite tax and attach it to that nice-sounding (apparently) label. Some think it is sales tax (easy to administer, but largely counterproductive), some think it is the property tax (potentially useful, but not easy to administer in a way that will make it useful), some think it’s VAT. Sure as all taxation sooner or later substracts from someone’s personal consumption, so with enouth intellectual mettle you can argue that income tax is a consumption tax, corporate tax is a consumption tax and even Chinese “extra children” tax is a consumption tax. But I would say that all those taxes are called something else for a reason.

    I think we really should be on the same page as to what we are talking about for the discussion to be any productive.

    Can someone (preferably the owner of the blog) define the issue we are discussing – i.e. what is exactly the tax proposal?

    From what I understand what we are discussing is a Personal Consumption tax – as we are talking about replacing the personal income tax (it is not 100% clear from the initial article, but taxing all consuption (personal and business) is indeed just taxing sales which does nothing to affect the consumption vs. savings preference that we keep discussing.)

    In my current understanding, the personal consumption should tax all personal consumption at the time of this consumption and exempt all investments and business expences. It should also be progressive, because the tax it replaces is progressive and it has been repeatedly stated on this blog that we should not mix redistribution with every policy issue – i.e consider any proposal on a redistribution-neutral basis.
    My prefious comments relate to this understanding, if we are in fact discussing something else, I am happy do discuss that, but we do need a common denominator.

  59. 59 59 Harold

    Marek – thanks for the clarification.

    On mortgage interest tax refief, it was abolished in the UK in 2000 by Gordon Brown.
    http://en.wikipedia.org/wiki/Mortgage_interest_relief_at_source

    Average house prices from 1997 – 2002 were as follows (£k):
    76.1,81.8,92.5,101.6,113,137.

    Plotting these gives a smooth curve, with no obvious change co-inciding with abolishion of mortgage interest tax relief. This suggests that the tax relief did not have so much effect on prices.

  60. 60 60 Twofer

    Harold,

    Thanks for the research. The link is a little light on details like how much the deduction was worth (it seems to indicate 5000 Brittish pounds which isn’t very much but I am definitely not sure on that point — I clicked the wiki link to one of the times articles, but it requires subscription etc.). So it’s hard to know if its an equivalent situation or not. But lets assume it is.

    If abolishing the tax relief isn’t going to change house prices, what is the economic theory behind the market not taking into account the value of those tax breaks when setting the price of a house?

  61. 61 61 nobody.really

    I sense most consumption taxes reflect the formula Income – Savings = Consumption. This formula presumes that there is a bright line between savings and consumption. A moment’s reflection should persuade you otherwise. Is investment a form of savings, or a form of consumption? If you invest as part of an IRA, the (current) tax code regards it as savings; if you invest outside of an IRA, it’s consumption. If I buy a washing machine so that I can save money by washing my clothes at home rather than at the laundry mat, is that a form of savings or a form of consumption? I sense the VAT would treat it as consumption.

    But perhaps the most relevant definition of a consumption tax is “a tax that is less inefficient than an income tax.” Thus, even if we may quibble with defining “consumption,” so long as we can agree on a tax structure that reduces the burden on producing and saving, we may agree on the merits of a consumption tax.

  62. 62 62 Dmitry Kolyakov

    Marek: thank you for your intellectually stimulating new perspective! It got me thinking and I almost wrote a rather long comment about how discounting is a very potent tool and how one should be careful with it not to confuse others and oneself. But then I thought that maybe it is about something else?

    Please tell me is it about taxing capital gains again? If it is not, I really can not understand how “The problem with income tax is that it taxes future consumption more heavily than today’s consumption”…

    If your real idea is that capital gains should not be taxed – I believe it should be said straight as not to confuse two different issues. Not taxing income on capital gains can be accomplished far easier than replacing the whole income tax with a consumption tax.
    As we are discussing consumption tax vs. income tax in this thread to isolate this issue below i am assuming an income tax that exempts capital gains (by popular (or not so popular) demand).

    And in this case:
    “…Taking $1 of earnings from me means that I’ll reduce my consumption (in PV) by $1 as well.

    The problem with income tax is that it taxes future consumption more heavily than today’s consumption….”

    To me these 2 sentences are just not consistent with each other. The second sentence might, I guess make sense from some perspectives, but with the concrete assumption you have in sentence 1 (which btw. implies that you chosen discounting rate equals individual’s average return on all savings, which is debatable), it has little chance.

    So, based on your premise and assuming the tax rate does not change and all taxes get paid (which I think is a bold assumption for this tax, but nonetheless), the PV of a future consumption tax, properly calculated, will be exactly the PV of an income tax levied immediately.

    An very simple example (in order not to lose the readers you were afraid of losing): Mitt the super investor doubles the money he saves in a year. So his ROI and hence his discounting factor is 100%. If he has earned a million and is taxed on his income at 35% he has 650K to invest so he doubles it in a year and gets 1.3 mm in FV=650K in PV. If he is however taxed on his consumption he invests 1 mm, gets 2 mm he is taxed 700K which leaves him with exactly 1.3 mm in FV=650K in PV. No matter how hard I look I can’t tell which one is more symmetrical.

  63. 63 63 Dmitry Kolyakov

    Nobody.really:
    You wrote: “I sense most consumption taxes reflect the formula Income – Savings = Consumption. This formula presumes that there is a bright line between savings and consumption. A moment’s reflection should persuade you otherwise.”
    I could not agree more – and that is one of the major reasons the very idea of a consumption tax is flawed.
    To answer your question I think investment is a form of savings, as savings can be either passive (hoarding) or active (investment). If it is a business investment, it funds consumption by businesses if it is a personal investment, like a washing mashine or an education it provides future streams of value available for consumption.

    As the word “consumption” has a number of other definitions beside its economic meaning there is of course room for confusion. I think a good yardstick would be this definition from Merriam-Webster: “the utilization of economic goods in the satisfaction of wants or in the process of production resulting chiefly in their destruction, deterioration, or transformation”.

    So, if it satisfies a want (personal consumption) or produces something else (business consumption)and is either destroyed or loses its ability to perform the same task again it is consumption, if it buys us future streams of value, it is investment.
    I like your definition of a consumption tax – “a tax that is less inefficient than an income tax.” I clearly would not object such a tax, but then I find the name misleading.

    “so long as we can agree on a tax structure that reduces the burden on producing and saving, we may agree on the merits of a consumption tax.” – well, if we can do just that it would sure be nice, though I just doubt there will be good reasons to call the result a consumption tax. However, there are no free lunches, so if you reduce the burden somewhere and do not reduce the total tax revenue, you are merely shifting this burden someplace else. If you are shifting it to consumption it rapidly trickles down to both production and saving both of which only exist to make consumption possible, really. Moreover as consumption is more internationally mobile than income, such a shift can easily set off a vicious circle i described earlier.

    But, in a very unlikely event that a consumption tax is properly implemented and doesn’t cost more than it brings to administer probably the only net effect will be taking the burden off the capital gains and shifiting it elsewhere, which, if it is really so necessary could have been done much easier in the first place.

    If there is a concrete tax proposal that realistically does something else, I am eager to learn about it.

  64. 64 64 Ken Arromdee

    Ron wrote: “Thus, the landlord can afford a lower rent than
    otherwise. It’s just that the renter gets the benefit indirectly
    rather than directly.”

    No, I used to think this too, but it’s wrong. Here’s a simple example:
    ———–
    I don’t get it.

    Consider a case where there’s no deduction whatsoever.

    If you own the home, you have $10K in mortgage expenses.

    If you rent the home, the owner has $10K in mortgage expenses. He then charges you $10K. He comes out at a loss because the $10K is considered income and he has to pay taxes on it. To actually recoup his mortgage expenses, he would have to charge you $10K + income tax.

    In the situation with deductions, if you own the home you have $10K – deductions in expenses, and if you rent, the owner has to charge you $10K + income tax – deductions. So contrary to what you claim, the deductions are indeed being passed on to you. The fact that you are being charged more when renting doesn’t mean that the deductions weren’t passed on–it’s just that the base cost for renting vs. owning is already higher, so subtracting deductions from both of those costs still leaves the rental cost higher.

  65. 65 65 nobody.really

    I wouldn’t say that a property tax is a consumption tax. A property tax taxes property whenever you own it, no matter whether you use (”consume”) it or not. Let me give you my own real-life example – yesterday i was surprised by a tax bill for a parcel of land my mother bought years ago adjacent to her own parcel. She just put it in my name, because of some considerations of hers, i even only was there about 3 times in all these years and i think I stood on my mother’s land anyway. So I never consumed anything there, but i still have to pay the tax.

    You might say i consumed the pride of ownership….

    Well, if you didn’t know you owned it, I think it would be hard to make that claim!

    You could argue that the property has been “consumed” in that it has been withheld from all other people who might have chosen to make use of it. All other potential uses of the land were destroyed, so arguably the most potentially valuable use of the land – represented by its rental value? – could be imputed to you as the amount you (or your mom) have consumed.

    But is this the relevant definition of “consumed” for purposes of a consumption tax? Not sure. If you had grown grain and stuck it in storage, would that be any different? Would we say that you had “consumed” the time-value of the grain because you had not released it onto the grain market?

    Still mulling this one….

  66. 66 66 Ken

    Dmitry,

    I think I now understand why Personal Consumption Tax, an unpractical proposal of questional economic merit that has been rejected by policy-makers world-wide many times over is popular with so many commenters here.

    I am ambivalent about any tax proposal, including VATs and consumption taxes because of the potential for corruption in nearly every case. Invariably, select groups ask for and receive special consideration. My personal proposal would be for each adult 18 years or older pay a flat $5000/year tax that doesn’t ever increase or decrease (thus resistant to government manipulation of the money supply through inflation and deflation). If you can’t or don’t want to pay it, that’s fine, but you cannot participate in any national election for the next four years (preventing people from paying the taxes in only election years). We all supposedly get the same government, thus we should all pay for it uniformly. Additionally, if you are unable or unwilling to pay for government, you shouldn’t have any say in how government spends that money.

  67. 67 67 Dmitry Kolyakov

    Nobody.really: “You could argue that the property has been “consumed” in that it has been withheld from all other people who might have chosen to make use of it.”
    Well, you could argue that, but probably only in a more abstract phylosophical sense. In our down-to-earth discussion however, one should note that my land was not “withheld” from anyone. Anyone intending to put a trailer, park his car, or sow grain there (that is, actually consume some of its value stream), could have approached me and do this for a modest consideration. And my right to demand compensation for using my resorces is not consumption, it is the right to property, and that is exactly what property tax taxes.
    If you insist on the definition of withholding from others as consuming, that could lead to some pretty strange results: all the nature and marine reserves will be deemed consumed by the state and environmentalists (should they be taxed?), all the disputed no-man’s land will be apparently consumed by warring parties, all waste will be considered consumption, my orange juice that I keep in my fridge to consume tomorrow (this one is indeed, withheld :) ) will be considered consumed right now etc…. Even savings, it they are in a form of, say, gold coins under my matress (shhh!) will be considered consumption. So while this perspective might be useful for some other discussions, i am really not sure it works well here. I think a definition from my earlier comment (from Merriam-Webster) is more helpful for a taxation discussion.

  68. 68 68 Dmitry Kolyakov

    Ken: I like your thinking, but I think we both know that to make this work and first of all to get it accepted it will have to be seriously modified. But I like your direction towards “no taxation without representaion” with this idea nonetheless.

  69. 69 69 Charlie

    Bob, and whoever else…

    The way I think it’s easy to understand the damage of the mortgage deduction is realizing that market value of the rent isn’t taxed. The income stream the house provides is no longer taxed.

    Start with renting a single family home:

    Renter:
    Pays $1000 to rent the home

    Landlord:
    Gets $1000 in income
    Deducts some expense included, say, $500 in interest expense

    No the family buys the home:

    Pays 0 in rent and deducts $500 from their labor income

    In an optimal tax system, these things should be taxed equivalently. In the current system, it creates a bias against buying a house and becoming a landlord, which is then passed on to renters in a higher cost to rent.

  70. 70 70 Charlie

    Seth,

    In response to your question:

    ““As a result, too much of the nation’s saving ends up in the form of housing rather than in business investment, where it could have increased productivity and wages.”

    Is this the same as saying that what we save in taxes from deducting mortgage interest, we pay out in higher home prices driven by higher demand?

    If so, I think it’s more compelling for the average reader to say it this way. If not, why — what am I missing?”

    I don’t think that is what he’s saying. Imagine there was a huge tax rebate for corn. It doesn’t necessarily mean the price of corn will rise. It just means we’ll consume way too much corn, because it seems so cheap. In fact, corn is subsidized so we use corn syrup instead of sugar and feed animals corn and use a lot more land for corn than we otherwise would. If the supply of corn isn’t fixed (or more correctly inelastic), the tax subsidy will result in an overinvestment in resources devoted to corn production, rather than a rise in corn prices.

    In practice, we see a rise in prices and investment in housing. The rise in practice is partly because in some places the supply of housing is relatively fixed by zoning and location, so the mortgage deduction drives the price of the home higher. But another effect that occurs even in places where the supply of housing is pretty inelastic, is to encourage people to build bigger or better homes (overinvest in the quality of their homes). This is because often on the margin it doesn’t make sense to get a larger quantity of some goods like a home. For instance, I have a tv in all the rooms I want one, if there were a large tv tax rebate I wouldn’t buy twice as many tvs I’d buy a bigger, better, more expensive tv, in other words, I’d overinvest in tvs. The higher price isn’t really driven by increased demand and limited supply (in the sense I think you mean it). They can make as many tvs as the market wants at the current price, but we will overinvest in high quality tvs.

  71. 71 71 Ken Arromdee

    “Additionally, if you are unable or unwilling to pay for government, you shouldn’t have any say in how government spends that money.”

    I’ll only accept that if you manage to separate the government’s money-spending and lawmaking functions in such a way that people who can’t vote for government spending can still vote for lawmaking.

    Poor people may not provide any money for the government to spend, but they can certainly get arrested (and are in fact more likely to be mistreated by police than rich people), make wills, get custody of children, be injured by other people and want to recover damages, want a gay marriage, etc. It’s not their fault that the government has a monopoly over the use of force and all these things are based around laws.

  72. 72 72 Dmitry Kolyakov

    Ken Arromedee:
    “Poor people may not provide any money for the government to spend, but they can certainly get arrested (and are in fact more likely to be mistreated by police than rich people), make wills, get custody of children, be injured by other people and want to recover damages, want a gay marriage, etc. It’s not their fault that the government has a monopoly over the use of force and all these things are based around laws”

    Well, but you already have plenty of people who can get arrested, make wills, etc. and be regulated by the US laws they are not able to vote on while quite possibly paying more money to the government then the poor people you mention – they are called foreigners, I guess. Most of them take (or leave) this deal quite voluntarily.

    Another thing is that everything the government does it does by spending money – there are simply no other means for it to do anything.

  73. 73 73 Ken Arromdee

    Of course everything the government does it does by spending money. So what? Imagine I’m a mugger holding you up at gunpoint. I had to buy an expensive gun to do this. Would you claim that because I spent the money to mug you, and none of that money came from you, you have no right to complain about being mugged?

    Spending their money is not the only thing that gives someone a moral claim over another’s activities. If the activity involves use of force against that person–regardless of whether the money came from them or not–then they also get a claim. It no more makes sense to say that someone shouldn’t complain about being arrested, if they don’t pay for the police, than to say that they shouldn’t complain about being mugged, if they didn’t pay for the mugger’s gun.

    There’s also the problem that the government prohibits competitors. Any two gay people can claim to be married, but if one of them tries to use that status to enforce hospital visitation, only the government is permitted to do that. You are not allowed to set up an alternative police force that can fine and eventually imprison hospital personnel who don’t allow the visitation. If you try it the government will arrest you as a kidnapper and extortionist. If the government is going to do this (whether you pay for the kidnapping arrest or not), then it should also give you a say in how it’s run (whether you pay for it or not).

    As for foreigners, they don’t have a right to be here, so we can grant that right based on conditions, including giving up the vote. Citizens do have a right to be here.

  74. 74 74 Dmitry Kolyakov

    If you are the kind of mugger with whom I maintain a consensual relationship by keeping my citizenship with you that was granted to me on your terms and by not moving away – than yes, to demand something from you that was not specified in the original contract (the “right to be here” you are referring to) I probably need to contribute something towards your costs.
    There are plenty of examples of people moving away from and even denouncing their citizenships with truly “mugger” regimes.

    The profound difference between the state and the mugger however is that the state is not motivated by self enrichment unlike the mugger, it has no body and no needs of its own. Instead the state serves its stakeholders. The question is only who those stakeholders what is their share of influence an benefit are and how they participate in determining the course of the state.

    Now back to your example: let’s assume you are still a mugger but instead of being a helpless victim I turn out to be a sheriff from a nearby wild west town (so, a mini-state of sorts). So, thanks to my skills or training (paid by my town’s taxpayers) I manage to wrestle this expensive gun of yours away from you and am now holding you at gun point. So let us now consider the most likely outcomes depending on who controls my actions:

    1.If I am controlled by no-one properly including my conscience (and the state does not have it), I’ll most probably kill you, enjoy fear from some people, popularity from others and also proceeds form the sale of your gun. I will also use the public intolerance towards crime to ostracize your family and anyone who complains. That happens in many countries, believe me!

    2. If I am controlled by some central authority which is not really accountable to the locals I will do whatever pleases my central bosses at the moment – if you happen to belong to a certain demographics that already happens to be overrepresented in jails and whose votes are now being contested in an election I am likely to be extra forgiving and mild, if there is an anti-crime campaign you are quite likely to be punished way beyond your misdeeds, etc. I might also miss you altogether because the current crime of the month is DUI, and i am instructed to hide behind the bush near the bar.

    3. If I am elected by a majority vote of everyone including yourself, I am likely to be extremely careful and unless there is something really enraging the public in what you’ve done I will probably ask you to mug outside of my district and let you go. If I don’t I should be ready that you, your family, friends and fellow muggers will be way more politically active than the passive majority who just thinks law and order are good, but have not been mugged (yet). If you happen to belong to a minority and manage to rally your fellow minority people on the basis of alleged discrimination, I am toast. If all this loud-mouthing and political extortionism does not cost a penny in taxes we are likely to have too much of it. As my efficiency declines the popular vote is likely to support hiring some extra deputies for me who are just as inefficient.(the voters will think they are spending someone else’s money) So you get a bloated law enforcement and most muggers still on the loose.

    4. If I am controlled by taxpayers I will do my best to align my actions with their preferences. Taxpayers generally tend to be more law-abiding (they simply have more at stake!) and socially productive people, so their priorities will in turn be likely to align with the interests of the positive development of the society.

    They will weigh normal productive person’s priorities against each other: enjoying protection of their property and personal safety, not being falsely prosecuted or punished too harshly for a one-off mistake, not deterring good-natured visitors and out-of-town businesses by overly harsh law enforcement, etc. They will also determine the exactly the right amount of law enforcement they should buy with their tax money and stringently evaluate me, the sheriff, on my force’s efficiency (e.g. efficiency of spending their money).

    In your other example they are highly unlikely to create these unnecessary bureaucratic hurdles for gay couples because those hurdles obviously benefit no taxpayer, but deter gays from being socially productive (as they have to spend their energy on dealing with these obstacles instead of contributing to the society) and that leaves everyone, gay, straight or transgender worse off.

    What happens under current system though is that as minorities tend to be more politically active and as a result overrepresented compared to the passive majority, and in some cases use this power not only to get equal treatment but also to get some privileges that are paid for by everyone, and, therefore, mostly by the majority. That alienates the passive majority and it becomes, um, passively aggressive. So without acknowledging it the majority takes a minor revenge on minorities in cases like the one you quoted. The most straightforward way to avoid this is make sure the same people who provide the resources determine how they are used. Doing things the other way round is the single biggest source of inefficiency in economy and in life.

    “Spending their money is not the only thing that gives someone a moral claim over another’s activities.”
    Unless I do not understand this sentence, I think no-one should have any moral claim over another person’s actions (unless they are a religious leader and a follower in which case it is also about voluntary submission of one’s rights) – what people do have are rights (all derived from a primary right to one’s own body) and a right to sacrifice them in part or in full in a voluntary contract. By entering a certain state’s jurisdiction or remaining in it voluntarily be it as a citizen or as a foreigner one implicitly enters a contract with the state which can imply different sets of rights and obligations. One can also stop this contract by leaving or, where necessary renouncing citizenship. Yes, the state restricts competition for state services, but most markets have some degree of monopolization. Unless you are the only source of something vital in the world, after the attractiveness of the deal you are offering falls beyond a certain threshold people will start switching, because they were free to leave all along.

    It is interesting that in your gay couple example you discuss exactly the problem that is much more likely to appear under the current system than under “no taxation without representation” system. Had only the taxpayers been represented more or less proportionately to their contribution to the state the hospital administrators would be very closely evaluated on the efficiency with which they spend voters’ money. Preventing visitations by gay partners is clearly an activity that costs money and benefits no-one, so it is inefficient.
    Under current system however most people know that they do not really determine the fate of their taxes, most of it will be either wasted or used by politicians to buy votes (buying poor people’s votes is cheaper, so that is what is usually being bought). So the general public does not really care unless it is directly affected, leaving the minorities to fight against silly cases of discrimination like theses, that nobody needed in the first place.

    You may say that taxpayers can still be prejudiced, homophobic, antisemitic, racist or whatever. While this is unfortunately true and can only be in extreme cases amended by moving elsewhere, the minorities are less likely to be harmed by the state under the “no taxation without representation” system. It is one thing to say “I do not really like (a minority) so I will not go to vote to solve their problem” and something completely different to say “I hate them so much that I am prepared to sacrifice some of my tax money to harm them”. While both are possible, the second is less likely.

    And lastly, to your “right to be here” part. All rights are indeed based on conditions. So what is the problem with letting someone who does not fully compensate the state for providing the services he consumes (i.e. a negative net taxpayer) to stay only on condition of giving up their vote? Isn’t the idea behind discrimination of foreigners on voting is that they have not (yet) contributed enough to the state to participate in setting its course? No-one but the Native Americans can claim any other basis for that right I believe… Why is this logic different for people not paying their way in taxes? You may say that those people enjoy their inherited privilege, as their ancestors may have deserved that right and passed it on. But as with any other inheritance – if you are not paying taxes on it you are really enjoying your rights at other people’s expense. If someone inherits a house and does not pay taxes on it long enough, he will most likely get foreclosed on.

    Please do not be mistaken – my foreigners in the US example is not an argument to open up voters’ registration in JFK airport for new arrivals – it is merely to illustrate that withholding voting rights from certain groups of residents is nothing new or repulsive – it is actually a deal many are willing to take. It also does not mean that any non-voting foreigner immediately gets robbed, violated and killed just because they have no voting rights.
    Letting someone not pay the full price of the services they receive in exchange for giving up or decreasing their voting rights is also a perfectly voluntary deal, it is just that currently the privilege is being handed out for free.
    Yet another example – when you visit a neighboring town, let along a neighboring state, you become subject to local statutes and by-laws, although you never had a chance to vote for them and you clearly have a “right to be there”. When you first arrive you are completely like a new immigrant – you are governed by the legislation you never voted for enforced by people you also never voted for. The only difference is the amount of time you will need to spend to start voting should you decide to stay.

    So “No taxation without representation” is not only efficient, it is also totally possible to implement, as various elements have been tested and worked.

  75. 75 75 nobody.really

    As an aside:

    [E]verything the government does it does by spending money – there are simply no other means for it to do anything.

    Of course everything the government does it does by spending money.

    Not true!

    1. Much public policy is implemented by WITHHOLDING money (or the expenditure of resources generally).

    A lot of public policy is implemented by denying people access to public protection/redress through police/courts/troops.

    What is a corporation? If I give Joe money to buy a gun, he buys the gun, and then he shoots you, government may very well enforce your right to collect damages from me. But if instead Joe organizes a corporation, I give money to Joe in exchange for stock, Joe buys a gun and shoots you, government will withhold from you any assistance in collecting damages from me. Indeed, government may even interfere with your efforts. In short, a corporation has value because government imbues the corporation with the value of rights which government extracted from all of us.

    Similarly, governments grant qualified immunities to foreign ambassadors and to certain government officials. And governments grant everyone a limited immunity with respect to our speech and choice of religion.

    Governments express disapproval of foreign regimes by withholding extradition or other forms of assistance.

    In granting various forms of monopolies — intellectual property, regulated utilities, sports franchises, etc. – governments withhold from people access to relief by reliance on antitrust laws.

    Laws governing minors deny them the power to enter into enforceable contracts, and deny others the power to enforce the contracts. The Hatch Act denies public employees the discretion to contribute to certain politicians of their choice. Age, residency, term limits and other legal restrictions deny voters the right to elect (or continue electing) the candidate of their choice. Historically, spouses could not sue each other for rape.

    I would expect the act of NOT printing more money would prompt deflation. (But perhaps the growth of electronic transactions would render the supply of paper money irrelevant?)

    In granting tax exemptions and exemptions from prosecution, arguably government subsidizes certain activities at the expense of all other activities.

    One of the most oppressive things a government can do is to selectively stand aside while private actors engage in oppression. The choice not to intervene when a mob lynches a guy, or a husband beats a wife, or a parent sexually abuses a child, is a very powerful choice – the fact that no money changed hands notwithstanding.

    2. Much public policy is implemented by imposing duties on private parties.

    Some people would characterize this as government spending because it relies on at least a tacit threat of government force to enforce these duties. But that’s not so different than the force private parties call upon to enforce private duties. Is it “government spending” when you call police to your house to eject a trespasser?

    While contracts may give you a claim against a private (and consenting) party, property rights presumably give you a claim against everyone in the world. To the extent that government recognizes and enforces property rights (on behalf of public or private entities), it imposes duties on others to respect those property rights.

    Moreover, government sometimes creates new property rights, or refuses to recognize old ones. Government created tradable credits to emit SO2; everyone who has one arguably has a claim to sue anyone else to might create a counterfeit one. Conversely, government elected to stop recognizing the property rights that some people claimed in slaves, or drugs, or other forms of contraband. Huge consequences arose from what was, conceptually, a form of government inaction.

    Governments also sell the property they “create.” Governments sell the right to use broadcast spectrum, for example. Arguably this results in negative government spending.

    Yeah, spending money is a big party of what governments due. But it ain’t the whole enchilada.

  76. 76 76 Dmitry Kolyakov

    Nobody.really: I agree that you can also view things from this perspective, but as you started your reply with “Not true” I feel obliged to defend our previously discussed statement a little bit (although this is indeed an aside and not crictital for the line of reasoning).
    Both larger groops of actions you mentioned, withholding money (or protection in most your examples) and imposing duties are only made possible… by spending money.
    In order to withhold government support or protection you first have to spend money on making this support and protection possible.
    For example witholding extradition you mentioned is only made possible by speding money on protecting the person in question from being arrested in the US by his home country and getting shipped there in the trunk of an embassy car. That in turn is made possible by the largest military spending in the world.
    Withholding something you’ve never had is not a really powerful tool I guess. It is a bit like saying that the boss is stimulating the empoyees not only by bonuses, but also by withholding bonuses from some – the second is an integral part of the first. Likewise imposing duties is worthless if not supported by a state-financed coercion machine.

    You wrote: “Is it “government spending” when you call police to your house to eject a trespasser?” Well unless this is an off-duty policeman whom you bribed to come to protect you, I would say the answer to your question is yes – even if the policeman would have otherwise sat idly in his car or at his desk this excess capacity was created exactly to cover contingencies like yours.

    ” it imposes duties on others to respect those property rights.” – yes, it protects our property rights (including a property right to our body and derived rights) and this is the principle task we hire the state for. To fulfill this task it sure needs to spend money (that I guess was the original pretext for inventing taxes).
    Same more or less goes to other forms of government activity you’ve mentioned.

    So the government spending may not be the whole enchialada, but it is defenitley the corn everly tortilla is made of.

  77. 77 77 Ken Arromdee

    What you describe doesn’t match reality. Consider: people are quite willing to pay for nice restaurant meals. The nice restaurant meal doesn’t provide them with anything more than aesthetics when compared to cheap food, yet they are willing to spend good money for it. If the hospital becomes a little less efficient because gays don’t want to go there, or if the lunch counter has no blacks in it and doesn’t get their money, then they won’t care. The increased costs of a no-blacks lunch counter or a gay-unfriendly hospital aren’t more than the increased costs of eating in a fine restaurant, so plenty of people would be willing to pay them.

    And that assumes they aren’t just anti-gay for religious reasons. People will pay lots of money based on religious teachings that bring them no benefit whatsoever.

    Besides, I don’t think you understand my point. My point is not that government might pass a law that lets gay couples get hospital visitation–my point is that government *doesn’t allow anyone else* to pass and enforce this law. There’s no competition with the government; it has a monopoly on force. If the government forecloses the option of you doing it yourself, then yeah, you should have a voice in the government. It doesn’t matter whether you pay the government anything because you “pay” in the form of having the option to do it yourself taken away.

    “Unless I do not understand this sentence, I think no-one should have any moral claim over another person’s actions”

    I would say that if party X uses force against party Y, then party Y has a moral claim over party X’s actions, at least some of the time.

  78. 78 78 Dmitry Kolyakov

    What I describe doesn’t match the way _some people see_ reality.

    ” people are quite willing to pay for nice restaurant meals. The nice restaurant meal doesn’t provide them with anything more than aesthetics when compared to cheap food, yet they are willing to spend good money for it.” – you see, what you describe also does not match the way some (many) people see reality.

    Sure, some restaurants are just a rip-off but other than that many people who like fine dining (myself included) would say that not only the whole experience in a truly fine restaurant can be profoundly different, but the food itself is very different, with a tremendous amount of skill, hard work, and chef’s personality invested into its preparation. For some people food is just something that gets them through the day, some people prefer quantity and not quality, but those people probably just do not go to fine restaurants. Paying extra for fine dining is just a matter of preference, which people are prepared to pay their own money for.

    ” If the hospital becomes a little less efficient because gays don’t want to go there, or if the lunch counter has no blacks in it and doesn’t get their money, then they won’t care.” – I have never suggested that the “no taxation without representation” system will eradicate prejudice or indifference.
    What I did say is that in a system where the taxpayers have more control over their money inefficiency of government services is likely to be better controlled and hence in your example is _less likely_ to happen. I can not really be guessing along with you if the drop in efficiency will be enough to motivate reaction in any given case. What I am saying is that the situation is more likely to be amended.

    “There’s no competition with the government; it has a monopoly on force. If the government forecloses the option of you doing it yourself, then yeah, you should have a voice in the government. It doesn’t matter whether you pay the government anything because you “pay” in the form of having the option to do it yourself taken away.”

    Excellent. Now imagine you are in a supermarket.

    There is no competition with the supermarket; it has a monopoly on selling stuff on its premises. If the supermarket forecloses the option of you selling goods to other shoppers or buying it from them yourself, then yeah, you should have a voice in the management.

    I guess that is an equally compelling point. By voluntarily entering a supermarket or maintaining your citizenship or residence you agree to the rules of the house. But in real life, if people think that a particular shop, cinema or service provider do not provide them with an adequate customer experience they just move elsewhere. And those establishments are motivated to serve them well to avoid losing them.

    You can do that with a state too. I believe absolute majority of americans are only a couple of generations away from someone who did just that.

    “I would say that if party X uses force against party Y, then party Y has a moral claim over party X’s actions, at least some of the time.”

    So if you participate in a boxing match with someone you have a moral claim over your opponent punching you in the face? Unless you specify whether that force is used in breach of your rights (the mugger) or is covered by a contract you voluntarily entered into (the boxing opponent, the state), that sentence does not make much sense.

  79. 79 79 iceman

    @Dmitry: “The profound difference between the state and the mugger however is that the state is not motivated by self enrichment…Instead the state serves its stakeholders.”

    And if a majority of those other stakeholders are motivated by self-enrichment…?

  80. 80 80 Dmitry Kolyakov

    Iceman: well, they are, probably, among other things (such as creating a fair a safe environment for everyone, themselves included). But what is your question, exactly?

  81. 81 81 Ken Arromdee

    “What I did say is that in a system where the taxpayers have more control over their money inefficiency of government services is likely to be better controlled and hence in your example is _less likely_ to happen.”

    At this point your argument becomes unfalsifiable. I could keep coming up with examples of people who have to pay money for prejudice doing so, and you could always object that since you didn’t actually say it wouldn’t happen, my examples don’t mean anything.

    “There is no competition with the supermarket; it has a monopoly on selling stuff on its premises. If the supermarket forecloses the option of you selling goods to other shoppers or buying it from them yourself, then yeah, you should have a voice in the management.”

    First of all, the supermarket management owns the supermarket. Since they own the supermarket, they can say “only we are allowed to sell here” without letting you vote on it; that’s what ownership means. I disagree that the government owns the country in the same sense that people own a supermarket.

    Next, people go to a supermarket to buy stuff, and it has no monopoly in that. While it has a monopoly in the specific act “buying stuff on the supermarket’s premises”, no shopper actually cares that it’s on the supermarket’s premises rather than somewhere else. There’s no monopoly on what the shopper cares about.

    “So if you participate in a boxing match with someone you have a moral claim over your opponent punching you in the face?”

    If someone participates in a boxing match with you against your will, you certainly have a moral claim.

    (And by your reasoning, there can be no moral claim against anything at all that the government does to residents against their will. Not only can you justify making laws without letting people vote for them, you could also justify the government shooting random citizens for no reason whatsoever.)

  82. 82 82 Dmitry Kolyakov

    “At this point your argument becomes unfalsifiable. I could keep coming up with examples of people who have to pay money for prejudice doing so, and you could always object that since you didn’t actually say it wouldn’t happen, my examples don’t mean anything.”

    Well, maybe my argument is not really unfalsifiable but just correct? If you discuss the argument that I actually made (and repeated) it is falsifiable (if you come with a consistent explanation why more control over efficiency makes waste, and hence your situation _more likely_ that is), if you however chose to repeatedly dispute something I have not said with your examples, your examples and my statements are indeed from differnt planets.

    “First of all, the supermarket management owns the supermarket. Since they own the supermarket, they can say “only we are allowed to sell here” without letting you vote on it; that’s what ownership means.”

    I am not sure you realize how ownership and management work. The management _does not_ own the supermarket. If it is owned by some passive shareholders who do not exercise any control whatsoever that does not change anything in my example. The issue of ownership is totally irrelevant here. The supermarket offers you a certain deal (just like the state) you either take it or leave it.

    “I disagree that the government owns the country in the same sense that people own a supermarket.” – and yet again you are arguing with something nobody ever said.

    “Next, people go to a supermarket to buy stuff, and it has no monopoly in that.” No single stae has a monopoly in providing state services either. There are about 180 options in the world I guess.

    “While it has a monopoly in the specific act “buying stuff on the supermarket’s premises”, no shopper actually cares that it’s on the supermarket’s premises rather than somewhere else. There’s no monopoly on what the shopper cares about.”
    Well, tell it to someone who has to travel to a neighbouring town for their shopping – they sure will complain the competition is so far avay rather than next door. People intending to emigrate will very similarly complain that changing their state services provider involves significant swithching costs. No real difference there.

    “If someone participates in a boxing match with you against your will, you certainly have a moral claim” – So you prefer to ignore the
    rather obvious voluntary contract issue which I repeated many times? You _do_ accept the conditions when you voluntarily enter a boxing match or vouluntarily mantain a citizenship. You might dislike being punched in the face or getting arrested (or taxed) but that is part of the contract you entered voluntarily and the conditions of which were made clear to you.

    If you truly believe you were made a US citizen and required to comply with all the legislation against your will you can escape your misery by renouncing your citizenship. If you do not believe it, why do you keep bringing up irrelevant examples?

    “(And by your reasoning, there can be no moral claim against anything at all that the government does to residents against their will. Not only can you justify making laws without letting people vote for them, you could also justify the government shooting random citizens for no reason whatsoever.)”

    Sure. As I said, foreigners who do not vote get randomly shot all the time. “If you let black people go to white people’s schools next thing you know they will cut your throats.”. “If you let gay people be openly gay next thing they will harass you in the streets”. A very logically consistent (and familiar) line of thinking. You disagree with a line of reasoning – you disprove it with some logic, not invent some grade-b horror scenarios.

    “Moral claim” is the realm of religion. Rights are the realm of economics. Forgive me that I prefer not to discuss any-one’s religious beliefs, just pragmatic scientific stuff.

    I am really not sure you’ve read what I repeatedly wrote here. Nobody claimed you can make laws without letting people vote for them. The argument is that not everyone somehow affected by a government decision or a law should get an _equal_ say in adopting it. As said repeatedly in numerous examples conveniently ignored by you, it is already happening both to foreigners arriving in a country and to people traveling to a nearby town.

  83. 83 83 iceman

    @Dmitry: I meant at least where a majority of stakeholders seek to enrich themselves at the expense of the others, the mugging analogy seems stickier. Unfortunately a pervasive trend.

    I admit I haven’t kept up with how this thread got here, but I see you’re making a case for implied consent to a ‘social contract’ based largely on a ‘residency theory’. In an interesting book called “Restoring the Lost Constitution”, BU law professor Randy Barnett argues that implying consent requires that there be a feasible alternative. The problem with the ‘residency theory’ is a) the alternative is pretty costly, and b) the logic is circular in that it pre-emptively ascribes to the govt the power to make you leave, which is the authority in question in the first place over the issue of consent.

  84. 84 84 Dmitry Kolyakov

    @Iceman: “I meant at least where a majority of stakeholders seek to enrich themselves at the expense of the others, the mugging analogy seems stickier. Unfortunately a pervasive trend”

    You are absolutely right! That is exactly what makes me sure the relative powers of various stakeholders to influence the government should be reconsidered. To avoid the fate of anicent Rome if you will…
    Otherwise we indeed risk getting close to the mugging situation. Those affected can still choose to leave, so it is a bit different, but increasing the “mugging pressure” given that people affected usually made sizable sunk investment based on previous, more favorable terms comes close to breaking the contract in a sense.

    “I admit I haven’t kept up with how this thread got here…” Yeah, I know, I am sorry – I guess I really hope to get some reaction from Prof. Landsburg on the issues I raised both on capital gains taxation and consumption taxation and that’s why I keep coming here getting hooked by some particularly outlandish views of some commenters. I sure fondly remember how you defended his ideas in our last exchange, but I still feel the issues I raised are critical to his reasoning, so if he has, in his own words, repeated his capital gains argument at least 8 times he must, sooner or later either properly refute the objections or change his position on this. Or officially convert to Krugmanism :)

    But back to the residency theory. I feel it is somewhat strange that feasibility of finding an alternative state is being questioned in a country that has been built in its present form by immigrants.

    “a) the alternative is pretty costly,” – same goes for my remote out-of-town alternative supermarket example and indeed most cases of monopolistic competition or oligopoly. Switching from an Iphone to a competing android phone may be costly and inconvenient, but it does not really mean the heirs of late Steve Jobs own your soul (or should allow you to vote on their board, for that matter).

    “b) the logic is circular in that it pre-emptively ascribes to the govt the power to make you leave, which is the authority in question in the first place over the issue of consent.” I am not sure what exactly you mean here. I am not really familiar with Prof. Barnett’s interpretation, but in my view there are no powers pre-emptively ascribed to the government before the individual’s consent to comply. The government effectively makes an open offer to enter into contractual relationship with it to anyone who meets certain criteria (such as being born in the US, to US parents or naturalized). For the newborns the decision is taken by the parents or guardians who represent them, but they can revert their decision once they reach the necessary age. Or do you mean something else by “the power to make you leave”?

  85. 85 85 Dmitry Kolyakov

    Here is an example of possible outcomes when _everyone_ gets an equal say in determining how other people’s money are spent. ( http://news.yahoo.com/furor-greece-over-pedophilia-disability-174002476.html ) This one is hopefully getting reversed as it is completely and obviously outrageous, but thousands less obvious things get through… Brought to you by the same inventors of democracy who nearly held a referendum on whether paying their state debts (incurred while bribing the voters) was a good idea.

  86. 86 86 Ken Arromdee

    The point about who owns the supermarket is that the people who own it get to restrict what is done there because they own it. The exact identity of such people, and whether they delegate their rights to others (as well as whether separate people have ownership rights in different aspects of the supermarket, such as stockholders who may have a financial stake but not the right to control day to day operations) is irrelevant to the point. *Someone* owns it, and that’s why “who gets to sell inside the supermarket” is a monopoly.

    The government neither owns the country, nor gets the right from someone who does.

    “If you truly believe you were made a US citizen and required to comply with all the legislation against your will you can escape your misery by renouncing your citizenship.”

    1) Giving up your citizenship doesn’t actually exempt you from paying taxes.

    2) That’s like saying “if you believed you were forced to comply with the mugger against your will, you’d give him your life instead of your money”. Being forced to give up something in order to escape being forced to give up something else is the very *definition* of “against your will”, not an escape from it.

    “You disagree with a line of reasoning – you disprove it with some logic, not invent some grade-b horror scenarios.”

    Governments deciding to shoot their people–or more generally, to do bad things to their people, or to fail to protect their people while allowing nobody else to provide that protection instead–is hardly a grade B horror scenario considering plenty of governments actually do such things.

    “Nobody claimed you can make laws without letting people vote for them. ”

    On the contrary. Ken (No Last Name) suggested that people who don’t pay taxes shouldn’t be allowed to vote. You then agreed with him. I admit you didn’t explicitly say that the government that they can’t vote for will make laws, but it seems a reasonable conclusion.

  87. 87 87 Ken Arromdee

    “Here is an example of possible outcomes when _everyone_ gets an equal say in determining how other people’s money are spent.”

    For someone who makes claims carefully set up so they can’t be disproven by examples, you’re awfully free in thinking examples can disprove what other people say. By your own reasoning, I should reply that I never claimed that voting eliminates bad things, just that it reduces the possibility.

    More realistically, the answer is that while this scenario involves bureaucrats using other people’s money, the problem happens because of the “bureaucrat” part, not because of the “using other people’s money” part. If you replace bureaucrats with voters–but keep the part about using other people’s money–I’m pretty sure they’d vote against it.

    (And, of course, in your scenario, everyone does not have an equal say. The bureaucrats who have a say are not the population at large, nor are they directly elected by the population at large.)

  88. 88 88 Dmitry Kolyakov

    Owners of the supermarket enjoy their property rights, the state enjoys sovereignty rights. These rights enable them to establish rules on their territory. What exactly was the original right that got delegated several times and resulted in them offering you a take-or-leave deal which you are free to _voluntarily_ accept or decline is _I repeat_ totally irrelevant to my argument.

    I understand the urge to dispute not something I have actually claimed, but something that appears easier to dispute (“the government does not own the country”), but this urge probably should have its bounds.

    “1) Giving up your citizenship doesn’t actually exempt you from paying taxes.” – Giving up your citizenship and moving out of the country does – didn’t you know?

    “2) That’s like saying “if you believed you were forced to comply with the mugger against your will, you’d give him your life instead of your money”.
    - totally artificial and irrelevant to what I said. If it is not obvious to you how is the above totally “not like saying” what I said, I do not know what on earth can ever persuade you. I guess with approach like this pretty much every argument of yours becomes unfalsifiable as you like to say.

    Just one real-life tip – if you really encounter a mugger, you either run, do as he says or fight him, you do not demand him to give you voting rights. You see, although you didn’t get to vote on my decision making, I still do not want you to get killed for your exotic beliefs.

    “Being forced to give up something in order to escape being forced to give up something else is the very *definition* of “against your will”, not an escape from it”
    - thanks for the definition. Be sure to revolt against the oppression next time a bus driver “forces” you to give up a bus fare in order to escape being forced to give up your time by walking. What you describe in such confusing terms is the very *definition* of “offering a service”.

    “Governments deciding to shoot their people–or more generally, to do bad things to their people, or to fail to protect their people while allowing nobody else to provide that protection instead–is hardly a grade B horror scenario considering plenty of governments actually do such things”

    Be sure to remember this beautiful sentence for the time someone actually claims the opposite (that the governments can not harm their people). So far however you said “you could also justify the government shooting random citizens for no reason whatsoever.” which is indeed very much grade B. (and you keep ignoring the fact that neither foreigners nor visitors to the nearby state get shot at random despite not voting on applicable legislation).

    ““Nobody claimed you can make laws without letting people vote for them. ”
    On the contrary. Ken (No Last Name) suggested that people who don’t pay taxes shouldn’t be allowed to vote. You then agreed with him.”

    And yet again, this is not factually accurate. Ken in fact suggested that people should be given an option to avoid paying taxes by giving up their right to vote. To me it is not the same as _not letting_ them vote – is it to you?
    Secondly i _did not_ actually fully agree to that exact proposal, I only said I liked Ken’s thinking, but noted that his exact proposal can meet practical obstacles.

    The principle I support, as I stated repeatedly, for anyone who actually read it to notice, is “no taxation without representation”. That means that if you tax one person, say 2000 dollars in total taxes and give him one vote, it would be profoundly unfair (and inefficient) to make someone else pay, say 50 000 dollars in taxes without giving him any extra representation. There are different practical possibilities to implement this – one is Ken’s voluntary taxation, another is proportional representation (people’s votes are in proportion to their contribution to the state) which I actually prefer. Anyway as soon as the voting privilege is linked to taxes the state will start moving in the direction of the sweet spot equilibrium as directed by people’s aggregate preferences. The voters will know that increasing a tax burden on a certain group will shift some additional voting power to that group and, conversely, trying to disenfranchise a certain group will increase the tax burden on everyone else. So in taking tax decisions voters, and hence the government will face real cost-and-benefit trade-offs rather then current tribal mud slinging.

    You are however free to prefer a current system under which a third-generation unemployed post-hurricane-Katrina looter who has always been nothing but a burden to his fellow citizens has an equal say in determining your common fate as Warren Buffet, or, say, Professor Landsburg. To me, should such people be heard (universal suffrage) – yes; should they have an equal say in determining everyone’s fate (equal suffrage) – no.

    On your second post:

    “For someone who makes claims carefully set up so they can’t be disproven by examples, you’re awfully free in thinking examples can disprove what other people say. By your own reasoning, I should reply that I never claimed that voting eliminates bad things, just that it reduces the possibility.”
    – I would appreciate if you abstain from making (inaccurate) assumptions about my person, rather than the ideas that we are discussing. Aren’t you being a bit free yourself in assuming that I ever claimed my example was a consistent disproof of anything? It is just an example and was presented as such. Or do you rush to proclaim my example an argument and dispute it because you feel that once I’ve made a complete argument it won’t be so easy for you to plausibly dispute?

    And by the way, no claim whether carefully set up or not can be disproven by irrelevant examples.

    Somehow you felt it was really important that the supermarket managers were given their powers by the owners, but you nonetheless omit that the bureaucrats were given their rights by elected officials. If the decision in question had been taken by the super-bureaucrat himself – the popularly elected prime-minister – would it change the situation? Instead of asking his associates to prepare the paper and bring it to him to sign he simply delegated the signing rights as he apparently felt this was too small an issue.

    “If you replace bureaucrats with voters–but keep the part about using other people’s money–I’m pretty sure they’d vote against it.”

    Unless you know something about the Greek democracy I do not know those bureaucrats are there only because of the popular support they enjoy directly or indirectly through their elected superiors. The case you are trying to make is for direct democracy vs. representative democracy which is again _word of the week_ irrelevant, as we were discussing the existing US system which is also predominantly a representative democracy and no proposal to make it more or less of a direct democracy has been made in this discussion.

    And to answer your question – in a population with a sufficient number of pedophiles, kleptomaniacs and exhibitionists or at least in a population where those minorities had less of a PR problem – they would most likely vote for it. Bureaucrats, evil villains as they are are not really creating the flaws of the current system, they merely exploit them (i.e. are being rational).

  89. 89 89 Ken Arromdee

    “I understand the urge to dispute not something I have actually claimed, but something that appears easier to dispute (“the government does not own the country”), but this urge probably should have its bounds.”

    It is something you claimed implicitly. When I pointed out that government claims a monopoly on making laws, you gave the analogy that a supermarket has a similar monopoly. This implies that you think it is true for similar reasons for governments and supermarkets. The reply is that supermarkets get this monopoly from ownership and governments do not. The fact that you haven’t said governments own the country is irrelevant, since your analogy depends on it.

    “Just one real-life tip – if you really encounter a mugger, you either run, do as he says or fight him, you do not demand him to give you voting rights.”

    In the analogy, you have to demand what is being *analogized* to voting rights, not demand voting rights. The analogy compares voting rights (or citizenship) to your life, so you’d have to demand your life.

    I agree that that won’t work, but that’s the *point* of the analogy: the mugger isn’t really allowing you a choice at all.

    “Ken in fact suggested that people should be given an option to avoid paying taxes by giving up their right to vote. To me it is not the same as _not letting_ them vote – is it to you?”

    “You can give up your right to vote, in order to do X” is exactly the same as “if you do X, we don’t let you vote”. It’s just marketed in a friendlier-sounding way.

    “If the decision in question had been taken by the super-bureaucrat himself – the popularly elected prime-minister – would it change the situation?”

    If the decision had been made by an elected official, he’d get voted out of office, or at least would be one step closer to being voted out of office. Furthermore, every elected official would know this and this would discourage elected officials from making such decisions in the first place.

  90. 90 90 iceman

    @Dmitry: My paraphrase of Barnett’s critique of the ‘residency theory’:

    Timmy is shooting hoops on a playground. Bobby and a few friends show up and say “hey we’re going to play dodgeball here.” Timmy says “I don’t want to play dodgeball.” Bobby says “fine, you can go shoot hoops somewhere else.” Timmy says “what gives you the right to kick me off the playground?” Bobby explains that when he came to this playground Timmy implicitly agreed to play whatever game a bigger group of kids decides. Timmy says “I didn’t see any signs, you just made that up.” Bobby explains that assuming Timmy could go shoot hoops somewhere else, staying at this playground proves that he grants Bobby and his friends the right to make him play dodgeball. Timmy replies “that’s circular logic. You could go play dodgeball somewhere else too. Plus the next closest playground is a mile away, and there might be even meaner kids there. So I’m staying right here.” So Bobby and his friends beat Timmy up and then play dodgeball (with Timmy’s ball).

  91. 91 91 Dmitry Kolyakov

    ” The fact that you haven’t said governments own the country is irrelevant, since your analogy depends on it.”

    If you refuse to understand a very simple analogy (because it clearly undermines whatever is left of your argument) without inserting some clearly artificial and falsified assumption no-one but you ever made – is it really a problem of the analogy? I have explained this analogy over and over in at least 3 posts – if you really do not understand it, or prefer to claim you do not understand it I can not make you do it – it is not a part of our implicit contract I guess.

    ” The analogy compares voting rights (or citizenship) to your life, so you’d have to demand your life.” – again I am sorry to repeat this , but no-one but you makes this apparently artificial and meaningless comparison.

    ““You can give up your right to vote, in order to do X” is exactly the same as “if you do X, we don’t let you vote”. It’s just marketed in a friendlier-sounding way”
    - so on a rare occasion you do not ignore and do not misinterpret what I said you choose to evade my questions.
    So is being offered to _voluntarily_ surrender one of one’s privileges in exchange for another privilege (not paying taxes) the same to you as being _denied_ a privilege? If so, I guess I can not comment any further.

    “If the decision had been made by an elected official, he’d get voted out of office, or at least would be one step closer to being voted out of office. Furthermore, every elected official would know this and this would discourage elected officials from making such decisions in the first place.”

    And yet it did not happen. So you basically state the voters are so stupid they can not trace misdeeds of someone appointed by an elected official to his elected boss. If so that is just another good argument to change this faulty system, thank you!

    Actually I am not sure what made you invent this whole bureaucrats vs. elected officials stuff in the first place – maybe the same extrasensory abilities that enable you to know for sure what I claimed or assumed no matter how many times I deny it.

    The link I sent said it was a government decision and the Greek government is voted in by the parliament. Moreover some further research shows this proposal was submitted to the parliament to be made into law and the majority was expected to support it. Only the last-minute negative publicity and the outrage by the disabled (who were at least partially also motivated by the fact that the proposal also cut the benefits to some other groups of recipients) helped delay making this proposal into law.

    You see you are sure welcome to enjoy you freedom or expression, but please unless you are disputing something I _actually said_ (and preferably yet the whole argument and not some least relevant detail you just feel is easiest to dispute) please do not claim your statements are somehow related to my argument.

    To conclude this, I can only repeat one of the many things from my previous posts that you conveniently ignored:

    “You are however free to prefer a current system under which a third-generation unemployed post-hurricane-Katrina looter who has always been nothing but a burden to his fellow citizens has an equal say in determining your common fate as Warren Buffet, or, say, Professor Landsburg.” If that is your heart-felt preference, so be it.

  92. 92 92 Dmitry Kolyakov

    Iceman: In order not to be overly philosophical (and I do not mean it to be a consistent refutation, merely an illustration why this analogy might be imperfect):

    if you compare a bigger group of kids to a state than as most states (and their laws) predate most human beings alive, you have at least to say that Bobby and his friends were on on a playground long before Timmy arrived. Now look at your analogy.

    So you effectively support Timmy’s right to disrupt everyone else’s game that has been going on for centuries (if he is not disrupting it, the conflict you describing would have not arisen in the first place) based on the fact that he does not like his alternatives (longer travel, risk of meaner kids, boredom of staying home and studying some economics instead etc.)?

  93. 93 93 Dmitry Kolyakov

    Actually I guess your analogy is potentially quite useful, provided you align it with real life a bit better.

    So it goes like this: Timmy enters a playing field where other boys are playing dodgeball (he may as well enter it by being born there, like everyone else before him). They have been playing it for many years, everyone knows they do it. They have shared costs of buying their ball, sweeping and up-keeping the playing field as well as guarding it at night against vandals, polluters and the like. There are close to 200 playing fields in the area and the next one begins literally where this one ends, although of course Timmy would have to go there and try to get accepted by those other guys as well.

    So our Timmy tells them – guys, i do not like your dodgeball, I want to shoot hoops so give me your ball and pay for installing a basket which is clearly to everyone’s benefit as everyone will have equal access to shooting hoops (and shooting hoops is great, useful, fun etc.) So the guys answer him – well, we might let you use our ball and our playing field a little bit if you bear your equal share of our common costs (and most of the costs of the basket as other boys so far preferred not to pay for it, so you seem to be the main beneficiary) and participate in our games when you are done shooting hoops.

    He answers – I have a moral claim, your logic is circular, I saw no sign, and if I did, I do not accept it, because it’s been written by you anyways. Besides, my parents did not give me money unlike you rich boys, so I can not pay (although maybe in fact they did but he preferred to spend it on sweets, or the neighbor offered him some money for helping wash his car, but he preferred to wander aimlessly).
    So they tell him – fine, if you do not want to play by our rules and do not want to share the costs, we might let you play a little bit during our break or maybe some more out of charity. But please do not claim you have equal rights in our playground because you refuse to bear equal responsibilities.

    He refuses to take this deal and goes away muttering some self-excusing nonsense. He later comes with a whole bunch of other free-riders willing to prey on fruits of other people’s labor and sacrifice. So they start chanting “we are 99%” (which kinda betrays their imperfect math skills), start singing “Arise, you prisoners of starvation!\ Arise, you wretched of the earth!”, they also block the path to the playground and otherwise disrupt other people’s game. Some free-riders start remembering that they helped sweep the playground and tend to forget that they actually wanted that job and got paid as agreed for performing it. As more and more free-riders arrive they also start gently reminding everyone what happened to that boy Nicholas the II and his friends in a certain far-away playground who did not yield to highly reasonable requests to share their wealth and use their playground for free.

    So the boys become afraid to be beaten up and start to yield to that extortion – they agree the free-riders can use their resources without paying for them (at least in full). So more and more formerly good, friendly and fair boys start weighting their options and decide to become free riders as well. Now, that the free riders can enjoy the benefits without suffering the costs they increase pressure on everyone to increase the amount of free lunches arguing that everyone will have equal access to them. So now it is not only the ball and sweeping the playground , but also the basket for our friend Timmy, the net for those who prefer volleyball, a canopy with chairs for spectators, free hot-dogs, soda on tap and so on till everyone is broke. As the amount and the direction of spending are not decided by the providers but by everyone equally, which includes an ever-increasing share of free riders there is just no stopping to those free rides.

    Very soon the money that can be collected without forcing everyone to cheat on their playground fees is not enough to satisfy every-one’s unfunded irresponsible wants and resulting waste and the playground starts borrowing. While some clever economists plausibly argue that the government is effectively doing their taxpayers’ borrowing for them on better terms then they would get individually, they omit if this money is being spent the way those individual taxpayers would spend them had they had any choice. In effect all these borrowing opportunities simply further provoke irresponsible spending (see Greece’s example), so while not bad in itself, an increase in borrowing is a dangerous indicator.

    So the burden on those who are still paying their share is increasing still, the debt is ballooning and the pressure to join the swelling ranks of free-riders (and adopt respective mentality) is becoming irresistible to all but the richest and the most fortunate. While during boom times most people do not really care as they feel richer overall and that keeps them sedated, sooner or later the lean years come and those people really start getting the double serving of problems.

    So on our playground the most likely development is that the boys keep changing the rules and the game they play to appease whoever cries the loudest, the boys who still pay their fees feel idiots for not getting anything more then those who do not pay, so a part of them heads for other playgrounds where there might still be some sanity left, some of them tries to hide their money in order to avoid paying, others try to lobby for all sorts of creative exemptions (like no tax on capital gains) which is a very uphill battle and is bound for eventual defeat anyways and the rest happily joins the swelling ranks of the free riders.

    Sooner rather than later the formerly cheerful playground feels surprisingly like the People’s Stadium Named after Comrade Stalin…

  94. 94 94 Steve Landsburg

    Dmitry Kolyakov: Due to travel and other pressing matters, I haven’t been reading all the comments on this thread, but I did see your latest, and I’m rather astonished at how far off topic this discussion has strayed. The original post has absolutely nothing to do with who *should* bear the burden of taxation; it has to do with who *does* bear the burden of taxation. Your long comment appears to be focused on the “should” question, which has no bearing at all on the original subject. I’m not sure how this discussion drifted so far; I’ll try to find time to work back through older comments and see where it went off track.

  95. 95 95 Ken Arromdee

    ““You are however free to prefer a current system under which a third-generation unemployed post-hurricane-Katrina looter who has always been nothing but a burden to his fellow citizens has an equal say in determining your common fate as Warren Buffet, or, say, Professor Landsburg.” If that is your heart-felt preference, so be it.”

    I don’t like that such a person has a say. But I am aware that the way government works, him having a say over me is hopelessly tangled up in him having a say over himself, and I’m not willing to deny people the right to have a say over themselves. Voting isn’t just about spending other people’s taxes; voting is about controlling what kind of force the stae can use on you.

  96. 96 96 Ken Arromdee

    “So is being offered to _voluntarily_ surrender one of one’s privileges in exchange for another privilege (not paying taxes) the same to you as being _denied_ a privilege? If so, I guess I can not comment any further.”

    Then I guess you can’t comment any further. They are the same. You make them seem different by omitting the fact that the privilege is denied if a particular choice is made–the same choice that the first version refers to as “voluntary”.

  97. 97 97 iceman

    SL – I think everyone knows this is far afield now, no idea how it got here myself but nothing else going on so a semi-interesting tangent became a thread. I also know Dmitry is eagerly awaiting your response to his views on investment taxes, which may have more credibility with him than mine did :). For now:

    Dmitry – I put Timmy on the playground first because I don’t see how your implicit contract would not also incorporate any newly passed law; and in Barnett’s view appeals to previous generations are simply derivative of the argument based on current residency. I’ll jump ahead to his conclusion, which you may not find too objectionable: the only way (short of unanimous consent) to ensure our laws bind us “in conscience” (i.e. not just because the govt has the guns) is to ensure that the *process* by which laws are created and applied ensures that the resulting laws are just. While the constitutional form this takes can depend on one’s underlying conception of justice, our Constitution (at least as originally conceived) fulfills this procedural requirement for a system intended to uphold the sanctity of “natural” or liberty rights. So at least this establishes some important limits vs. “you can always leave”. But I wasn’t sure Timmy could have articulated it that way.

  98. 98 98 Dmitry Kolyakov

    Professor Landsburg, i am very happy indeed to finally hear something from you! I’ve been actually waiting for some reaction from you and that was more or less the main reason I kept coming back here.

    As my original comments that were somewhat closer to the original post went unanswered I instead went on to discuss something other commenters were interested in discussing. My latest comments are indeed quite far from your original post. As my last comment is #94 in this thread it would be strange for the discussion not to develop quite a bit.

    I am not sure I fully understand this “who does bear the burden vs. who should bear the burden” distinction though. Wasn’t the initial post about the principles of tax reform? How can any reform be discussed without discussing what should be changed? And more generally, what is the practical purpose of discussing the current situation without attempting any judgement on what the situation should be and therefore what is good and what is bad? If you do not know where you want to go is studying the map any good for anything but mediation?

    To address the issue of our discussion indeed being now quite far from the original post (and to save your time in case you sometime want want to reply to them) please let me quickly run through some issues more relevant to the original post:

    1. Principle 2 seems to be the only one that contains some (quasi) original thinking so let me start with it. It also seems the most important. Although the original article’s wording is clearly not specific, but from our subsequent discussion here I inferred that we are primarily talking about replacing a personal income tax with an personal consumption tax. Is this correct? I have already asked someone, preferably you, to define the exact issue we were discussing to avoid ambiguity, but no-one wanted to.

    If it is so, will the ultimate economic effects of replacing the personal income tax with a symmetrical personal consumption tax be any different from simply not taxing the capital gains?
    And given that the proper consumption tax is way more costly and difficult to administer than an income tax (I already discussed this at length but happy to do it again if needed) and if the purpose of the whole affair is just to exempt capital gains – why not do just that (exempt capital gains) and not turn the whole tax system upside down while running numerous risks?

    1a. Which brings me to something which is only indirectly relevant to this post but is directly relevant to the previous one (Mitt Romney’s taxes) and was (yet again) raised by me in the 2nd comment to that post.
    It is again about the objections to what appears (I beg your pardon) to be you “pet” idea – the argument for exemption of capital gains taxation. I do not want to repeat those objections here (as I have already repeated them several times over the past couple of months) but I would still very much appreciate even a very brief reaction from you to those objections. Happy to repeat them again if needed. Given how willing you usually are to reply even to most apparently misguided comments I am somewhat upset that you have not in all this time reacted to something I sincerely believe to be serious objections to an idea you, in your own words repeated at least 8 times on this blog.

    2.The Prof. Mankiw’s 4 principles are at least partially repetitive and inconsistent.
    Inconsistent: It starts with “The United States tax code is filled with deductions and exclusions that shrink the basis of taxation. … The starting point of reform is to reverse this process.” (1) and proceeds quickly to “Tax reform could expand and simplify the availability of such tax-preferred savings accounts.” (2)
    Repetitive: The only measure discussed in principle 1 (broaden the tax base) was eliminating deductions, which is fine, but is already covered in principle 4 (keep it simple stupid). It would be less repetitive if some other sources of taxation were suggested to give some tax relief to the existing sources but that probably would not be so easily endorsed by “most of those economists”.

    3. The principles are mostly not concrete and thus bordering on commonplace (perhaps intentionally for political reasons but that sure does not increase their scientific or policy-making value). For example, principle 3 (Tax goods, not bads) – I guess every single thing that is taxed is taxed because at least someone considered it _worse_ than potential alternative sources of taxation. For example, many people (even on your own blog) probably would claim that the high incomes are taxed exactly because the income inequality is “bad” and should therefore be taxed away. If badness is by some implied definition is determined by the consensus of the voters as represented by the existing system of government – then this principle is already implemented, case closed!
    People have wildly different ideas on what is good and what is bad – so unless there is at least some modest attempt to offer any judgement on what is good and what is bad for this purpose this principle can not be used in any decision making. And hence it is not a principle at all. I illustrated yet another deficiency of principle 3 with an example of 2 people one whom is a compulsive smoker in one of my earlier comments.

    I am not saying the original ideas of professor Mankiw are necessarily wrong, I am only saying they are at best so open to interpretations, that it renders them very difficult to use in any real-life decision-making . Which in turn made me wonder why you endorsed them as “extremely wise”.

  99. 99 99 Dmitry Kolyakov

    Ken Arromdee, thanks for your participation!

  100. 100 100 Steve Landsburg

    Dmitry Kolyakov: Many many apologies. When I said that it looked like the discussion had strayed far from the topic of the original post, I was misremembering the topic of the original post! (I was thinking of the earlier “Mitt Romney’s Taxes” post.) You are far more on topic than I’d realied.

  101. 101 101 Dmitry Kolyakov

    Iceman:

    ” I put Timmy on the playground first because I don’t see how your implicit contract would not also incorporate any newly passed law”

    I know it now sounds funny, but still let’s try to put poor Timmy to bed. The perspective you now offer I am afraid sill does not put him first on the playground – he still voluntarily joins the game that already was in full swing when he arrived. I think your real analogy for the concern you’ve just voiced would be that while he is playing, other guys decide to change the rules in a way he does not like. Which leaves us following possibilities –

    1. He initially decided to take part in the game based on an (implied) contractual promise that he will be always for the rest of his life consulted in a certain way and his vote will always have the same weight before any adverse change in the rules. So if in this situation they still proceed with the change this is indeed a breach of contract that indeed can only be somehow addressed by appealing to some international court, becoming a refugee in a foreign country and trying to sue your previous country from there or starting a revolution.

    Yet I do not really know any real life examples of any legally binding or even firm verbal promise by the state to its citizens never to allow adverse changes to citizens’ claims to the state, including voting rights. For example good luck trying to sue the state if someone decides to naturalize several thousand formerly illegal immigrants living in your county and your vote gets diluted. They sort of verbally promised they will do their best not to tamper with your voting rights, but tough luck… What is instead promised is strictly on best efforts basis. Another example is that some time ago many entrepreneurs entered a lucrative and then perfectly legal business known as slave trade. But suddenly their legitimate property became free people and they had no legal recourse other than trying to create an alternative state services provider. Such stuff happens and the state deliberately tries to limit its responsibility by not making firm commitments in this respect.The only thing that stops the endless use of some bait-and-switch tactics is exactly the same as what prevents a supermarket from luring you with promises of low prices and then bumping them up before you reach the till – bad business reputation will make contractual partners avoid it. And stakeholders of the state out of sheer egoism prefer it (the state) to maintain credibility with it’s contractual partners where possible – be it a Swiss canton brimming with direct democracy or some tyrannical emirate. States hope to stay in business for long, after all.

    2. He entered the game without any obligation to him to consult him. This one is same as the situation when he approaches the playground for the first time and the new rules are already enacted.

    3. He did no know/ did not pay attention, etc. When he is under age his parents or guardians should take this responsibility, and when he is of age and still is ignorant all the state/ other boys owe him not much more than some reasonable effort to inform him.

    This all is clearly not to say that it is _a bad idea_ to get citizen’s buy-in into state’s policies by letting them vote, what I am opposing is the notion of some natural right by virtue of simply gracing the country with their presence of any citizen no matter how much of a burden to other citizens to have an _equal_ say in directing the state.

    Natural rights are by defintion not contingent on the legal system and are universal. The right to vote simply does not meet the definition. The right to vote in its present form (universal and equal suffrage) is an example of a legal right, the one that only existed in the early adopter countries (New Zealand and Finland) for slightly over a century and only for about 60 years in the United States, and the one that is apparently producing socially inefficient outcomes.

    So while I think that including people by means of voting is a good solid idea in general and it makes pragmatic sense for the state to offer it, the notion of equal suffrage as some God-given right that’s carved in stone, a moral claim or whatever else from this realm is profoundly faulty and ultimately stems from nothing but deeply anti-social sense of entitlement.

    “to ensure that the *process* by which laws are created and applied ensures that the resulting laws are just” – That is indeed hard to argue, just like “Tax bads, not goods” principle above. It is so true, so universal and so dependant on definition of “just” that it is virtually useless.

    “ our Constitution (at least as originally conceived) fulfills this procedural requirement for a system intended to uphold the sanctity of “natural” or liberty rights” – glad you brought this up. When the constitution was originally conceived, only affluent white males could vote and the constitution still survived and the country prospered and was a potent magnet even for people who never hoped they would vote. I guess the majority of present-day Americans have at least one ancestor who came to the US without any expectation to ever vote and spend other people’s money, but rather to work and prosper, to enjoy liberty and fruits of their labors.
    And while I do not endorse the racist and sexist elements of the original voting system, I certainly like the fact that voting rights were way more closely linked to the taxes paid and that was exactly the efficiency that (among other factors, of course) propelled some remote colonies to the superpower status in a relatively short time frame.

    And finally to your last observation – I guess we all respect the Constitution, but what it is exactly if not a written part of one’s contract with the state? I guess you were not around to actually vote on it (the absolute majority of people who were around could not vote on it) but it is still legitimate because people accept it. And what happens if you do not like the Constitution? You guessed it – you could always leave :)

  102. 102 102 Dmitry Kolyakov

    Professor Landsburg, at least a couple of my last posts are indeed no longer so close to the original topic – I do apologize!

  103. 103 103 Doc Merlin

    I agree with those talking about problems with externality measurement. Due to values being subjective, almost everything can be a negative externality.

  104. 104 104 Steve Landsburg

    Dmitry Kolyakov:

    Professor Landsburg, at least a couple of my last posts are indeed no longer so close to the original topic – I do apologize!

    Not at all. I’m afraid I’ve been unclear about this. I do not mind discussions gradually drifting off along interesting tangents. What I’d like to control is people jumping in and changing the topic abruptly in a way that detracts from the ongoing conversation.

  105. 105 105 Dmitry Kolyakov

    I am going away for two weeks, so I guess I will not be annoying everyone with those long posts and comments at least for some time. If anyone is still interested in a discussion (hopefully also on capital gains taxation) I will be happy to participate when I come back.

  106. 106 106 iceman

    Dmitry – Just in case, one final attempt to respond / clarify:

    Sorry but Timmy’s still not tired. Yes we’re talking about a change in the rules as like a new law being passed. If you like, let’s say Timmy came to the park during a time that everyone used to think was reserved for playing hoops, but the other kids are there and say “nah we decided it’s dodgeball time now”. The issue isn’t really about who gets to “vote”; no one disagrees the bigger group is (physically) able to do whatever it wants (with or without voting) and say “tough luck”. The issue is what sorts of things they are voting on – like whether they can take Timmy’s ball? That’s where Barnett’s question is essentially: does Timmy have any reason to feel bound to respect the outcome “in conscience” (e.g. making for a more stable democracy), or purely out of fear of getting beaten up if he objects (same as the govt having the guns). His answer is that Timmy may be able to find the new law respectable, even if he doesn’t like the outcome, if he feels the *process* by which it was reached is just. A system like ours that is “intended to uphold the sancity of “natural” or liberty rights” seeks to place certain fundamental limits on that process. I can only wish that particular view were “universally” viewed as “true”. It certainly depends on one’s underlying view of justice, but that is hardly a “useless” discussion. We agree that our Constitution derives its legitimacy from the fact that people accept it – the point being, because (and so long as) the process is viewed as just.

  107. 107 107 Stephen Behnfeldt

    “…I think it’s fair to say that almost everyone who has thought hard about these issues will agree with everything he says.”

    I disagree (not with Mankiw’s principles, but with your opinion that everyone will agree with them.) If it’s true that taxing something effects a negative pressure on it, then taxing consumption will reduce consumption – ie, spending – and from what I’ve read, some economists are all about “consumption=good, saving=bad.”

    For example, a common answer to ‘why is deflation bad’ is that it depresses spending. Full stop. I have never seen it qualified in any way which suggests this is considered bad only under certain conditions.

    So, I disagree with your conclusion that economists would generally regard Mankiw’s points as good.

  108. 108 108 Steve Landsburg

    Stephen Behnfeldt: There are certainly economists who believe that some (or perhaps all) recessions are caused by failures of aggregate demand, and that the cure is to encourage consumption. But I do not know of any economist who believes that there is any reason to subsidize consumption in ordinary times.

  1. 1 Income and Consumption: It’s OK to Be Different
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