Monthly Archive for June, 2012

A Naive Question

Can someone help me understand this?

1) The Constitution, as amended, gives the federal government the right to levy taxes uniformly across the states, and also to tax income.

2) The federal gasoline tax is neither levied uniformly across states nor is it a tax on income. Thus it must be justified under something other than the explicit taxing powers set forth in the Constitution.

3) I’ve always sort of presumed that the missing justification is provided by the Commerce Clause.

4) In other words, the right to levy a gasoline tax seems to be dependent on the Commerce Clause.

5) By the same reasoning, the right to levy a tax on not-having-health-insurance would seem to be dependent on the Commerce Clause.

6) But John Roberts says explicitly that the Commerce Clause can not be used to justify a tax on not-having-health-insurance.

7) How, then, can a tax on not-having-health insurance possibly be constitutional? It’s not levied uniformly across states, it’s not a tax on income, and we have the Chief Justice’s word that it can’t be justified by the Commerce Clause. Whence, then, the constitutional authority to levy such a tax?

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Post Mortem

So the individual mandate is Constitutional because it’s a tax.

I wonder if the Chief Justice forgot that all tax legislation must originate in the House of Representatives. There’s that pesky Constitution again.

Hat tip to Jim Kahn for this.

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Edited to add: The really striking thing about this ruling is that someone could use the exact same reasoning to decide that Social Security is constitutional. This is what’s known as a reductio ad absurdum.

Public Service Announcement

I’ve been traveling and hence not blogging much the past several days. I’d intended to post something for today, but since I don’t know what’s going to happen at 10AM, and since that’s likely to be the only thing anybody wants to talk about today, I think I’ll hold off. I’ll be back soon though!

Meanwhile, once 10AM has come and gone, feel free to use this space for (thoughtful!) discussion of the Supreme Court decision, whatever it may be.

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Thursday Solution

Last week, I challenged readers to reconcile two apparently contradictory statements, both of which are frequently made in economics textbooks:

  • To minimize distortions, all goods should be taxed equally.
  • To minimize distortions, inelastically demanded goods should be taxed more heavily. (This is sometimes called the Ramsey rule, after Frank Ramsey, who plays a major role in the final chapter of The Big Questions).

I’ll give you the answer in a minute. The executive summary is that a) “Inelastically demanded goods should be taxed more heavily” is true only in very special circumstances; in general a much more complicated formula is needed, b) When all goods can be taxed, that complicated formula does in fact tell you to tax them all equally, and c) a lot of textbooks give incredibly misleading accounts of all this.

The more detailed answer follows; if you prefer a more mathematical account, click here. To keep things manageable, I’ve assumed all supply curves are perfectly elastic.

Continue reading ‘Thursday Solution’

Immigration Followup

I’m a little frazzled this week, so I haven’t caught up with all the comments on Monday’s
post on immigration, but I know there’s been some discussion about the actual costs and benefits of admitting unskilled immigrants. I thought I’d supply some numbers that might inform that discussion; all of this is lifted from Chapter 20 of The Big Questions.

When an unskilled Mexican immigrant arrives in the United States, his wages typically rise from about $2 a hour to $9 an hour — call it a $7 an hour gain. He also bids down the wages of American workers by (and this is a high-end estimate from the labor economics literature) about $.00000003 per hour; multiply that by a hundred million American workers and you’ve got a collective $3 an hour loss.

Now there seems to be something like a consensus that it’s okay for US policies to benefit US citizens at the expense of Mexicans, but there also seems to be something like a consensus that there’s a limit to that; we would not want, for example, to allow Americans to hunt Mexicans for sport. So when we consider turning someone away at the border, one good question is: Are we willing to do $7 worth of harm to a Mexican in order to confer $3 worth of benefits on American workers?

Note that the potential Mexican immigrant is typically much poorer than those American workers, and that it’s not uncommonly argued that we should care more about the poor than about the rich. If you weight that $7 loss to the Mexican and that $3 gain to the Americans accordingly (i.e. assuming logarithmic utility, which is a quite conservative assumption — that is, one that biases the result in the anti-immigration direction), you discover exclusion hurts the Mexican about five times as much as it helps the Americans.

So, at least if you buy into that way of thinking (which pervades a lot of the policy literature) then exclusion is justified only if you “count” a Mexican as less than one-fifth of an American. That’s a pretty extreme position. It’s not as extreme as hunting Mexicans for sport, but it’s still pretty extreme.

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And Everyone Who Supports Vaccinations is Motivated by a Desire to Stab People….

In an apparent case of libertarianism run amok, two cognitive scientists and one economist have declared (in effect) that proponents of income redistribution are always and everywhere motivated by exactly the same psychopathic impulses that lead people to scratch other people’s cars, break streetlamps, and engage in other forms of senseless destruction.

That’s not a conclusion; it’s their starting assumption. Then they do an experiment in which some subjects choose to engage in a mild form of income redistribution — and conclude that psychopathic behavior is frighteningly widespread.

Now I too am generally skeptical of the impulse to redistribute other people’s income, but even I concede that redistribution is rarely entirely senseless and pretty much never entirely destructive. In particular, the experimenters consider a case where money has just been redistributed and subjects are given the opportunity to (partly or fully) reverse that redistribution. Those who exercise that opportunity are labeled “destructive”. So apparently, in order to avoid the “destructive” label, you must passively accept any arbitrary redistributions imposed by authority figures without ever feeling any impulse to redistribute in the opposite direction.

In the experiment, each subject is initially awarded 1000 tokens. The paper is so poorly written that it’s hard to be sure, but I think these tokens are ultimately exchangeable for money; it’s mentioned that the average subject earns the equivalent of nine British pounds. One subject is then given the opportunity to destroy some of the other subject’s tokens, thereby returning some funds to the experimenters or to the taxpayers who are funding this experiment.

Rather shockingly (to me) only about 15.5% of the subjects exercised this option; given the presumption of public funding, I’d have hoped for a higher number. The experimenters, however, want to conclude that these 15.5% are the sorts who are likely to key your car.

This stuff is infuriatingly stupid. Even more distressingly, Robin Hanson, who is much much much too smart for this, seems to have fallen for it.

Continue reading ‘And Everyone Who Supports Vaccinations is Motivated by a Desire to Stab People….’

Lest We Forget

Thanks to an election-year conversion by the President of the United States, 800,000 young people born outside the country will now be spared the threat of deportation. That’s a good thing. But let’s not lose sight of the fact that the biggest victims of American immigration policy are not the ones we deport; they’re the ones who never got to come here in the first place.

The President defends his new policy as humane. Put aside the question of where his humanity has been for the past three and a half years and ask yourself what’s so humane about protecting the children of relatively rich “illegals” (that is, the ones who have had the opportunity to earn American wages) while we continue to bar the door to their desperately impoverished cousins.

Regarding the beneficiaries of this new policy, the President says that

These are young people who study in our schools, they play in our neighborhoods, they’re friends with our kids, they pledge allegiance to our flag …

Why is any of this relevant? When did visibility become a criterion for moral status?

This is indeed a time to celebrate and I don’t want to diminish that. But I do have two questions for the President:

Continue reading ‘Lest We Forget’

Thursday Riddle

Do any of you guys know anything about economics? Because I have a question I can’t answer and I’m hoping you can help me.

In many real estate markets (including the one where I’m currently shopping), the agent’s commission is equal to a fixed percentage of the sale price. (Typically it’s 6%, though this is split evenly between the buyer’s and seller’s agents, each of whom gives a cut to their respective agencies, so either agent’s take-home is more on the order of 2%).

This means that if you sell a million-dollar house, you earn TEN TIMES the commission of your identical twin who sold a hundred-thousand-dollar house, though I doubt very much that you did ten times the work or bore ten times the expense.

Now, plenty of hundred-thousand-dollar houses are being sold, which means that plenty of agents are settling for the relatively dinky commissions. Question: Why are those agents not attempting to steal some of the high-end business by offering to accept a smaller percentage? After all, 1% of a million is still a lot more than 2% of a hundred thousand.

You might say that the agencies collude to restrain them — but what stops a rogue agency from busting the cartel?

All too many times in my life, I’ve noticed some apparently anomalous behavior which I’ve challenged myself and/or others to explain with the tools of game theory, axiomatic bargaining theory, and the theory of markets — only to discover that the true explanation is “It’s required by law”. (Of course one can always step a little further back and try using economics to explain the advent of the law.) But I don’t think that’s the case here. (I’m prepared to be wrong about this, though.)

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Tuesday Solution

Remember the bullet problem from two weeks ago? If not, I’ll give you a few moments to refresh your memory.

Okay. Are we ready?

I am pretty well convinced that 16 bags suffice, as argued by Mike H, Jeffrey, Brian, and Jacopo, and generalized by Categories+Sheaves.

The explanation I liked best was Jeffrey’s. Let me try to illustrate it. (Warning: There’s no way, I think, to make this instantly clear. It will take a little work to understand it. Only you can assess the opportunity cost of your own time!)

The gray rectangle is the room you’re in.

The blue dot is you. The red dot is the shooter.

With mirrors on all the walls, you’ll perceive yourself as standing in an infinite grid. The graph shows 16 of the grid rectangles, but the pattern continues forever in every direction.

You’re standing at some point (a,b). The shooter is at some point (p,q). You’ll see copies of that shooter at every point with coordinates (2m ± p, 2n ± q) where m and n range over all integers. Sixteen of those infinitely many points are shown in the picture.

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Monday Puzzle: The Least Bad Tax

Today’s puzzle is specifically for the econo-geeks. Less geeky fare will follow in the near future.

Two of the main lessons that our undergraduates typically take away from their introductory classes are these:

  • To minimize distortions, all goods should be taxed at the same rate.
  • To minimize distortions, inelastically demanded goods should be taxed most heavily.

What is the correct response to this pair of apparently contradictory lessons?

  1. Economics is large. It contains multitudes. Get over it.
  2. Continue reading ‘Monday Puzzle: The Least Bad Tax’