For at least the eighth time on this blog, I want to point out that this widely believed “fact” is not true.

To understand Mitt Romney’s tax burden, you have to compare him to his doppelganger Timm Romney, who lives on a planet with no taxes. In the year (say) 2000, Mitt and Timm both earned (say) a million dollars. Timm invested his million dollars, saw it double over the past decade or so, and cashed out his investment this year, leaving him with two million dollars. Mitt, by contrast, paid 35% tax in 2000, leaving him with $650,000. He invested it, saw it double, and cashed out last year, paying 15% tax on the $650,000 capital gain. That leaves him $1,202,500, which is about 60% of what Timm’s got. In other words, the tax system costs Mitt almost 40% of his income.

By contrast, people on our planet without investment income collect their wages, pay 35% in taxes, and spend what’s left. The tax system costs them 35%, while it costs Mitt almost 40%. In other words, people with investment income bear a higher tax burden, as a percentage of their income, than anyone else — and that’s before you even start accounting for the taxes on dividends, interest, corporate income and inheritance.

It’s true that there are some hedge fund managers out there who manage to game the system by disguising their wages as capital gains and thereby avoiding the wage tax altogether. That in no way undermines the main point.

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Tipler, who is not a crackpot, once published a book called The Physics of Immortality, purporting, on the basis of orthodox physics plus some plausible auxiliary assumptions, to establish the existence of an omnipotent, omniscient, omnipresent and altruistic “being” who will one day resurrect everyone who has ever lived to eternal life.

The first step toward that startling conclusion is the assumption that our descendants will not allow all life to come to an end. This in turn will require them to control the evolution of the Universe so that it doesn’t collapse in anything that human beings perceive as a finite amount of time; Tipler argues that they’ll quite plausibly have the technology to do that. But all this future tinkering with the shape of the Universe has consequences that (in a very rough sense) radiate backward and forward through time. From this and some highly technical but more-or-less standard physics, Tipler manages to conclude the existence of an Omega Point — a place where (again speaking roughly) all the information in the Universe is stored. Writing in 1994, Tipler never considered the possibility that the Omega Pont might be located in Mountain View, California. Instead, he stressed that in its omniscience, it’s something very like God.

Not only is the Omega Point omniscient; it’s also ominipotent in the sense that the information located there will allow our descendants to perform feats like resurrecting every one of us from the dead, something that Tipler says they’re sure to do because the cost will be essentially zero. The Omega Point turns out to be not only very like some generic God; it’s very like the Christian God. And the similarities don’t stop there (read Tipler for more).

Alas, Tipler observes in the book that the Omega Point theory also makes a rather specific prediction about the mass of the Higgs boson — it has to be somewhere around 220 gigaelectronvolts (GeV), give or take 10 percent or so. He offers this as a clear test of the theory. And the theory, it seems, is about to fail spectacularly. It looks like the Higgs boson is about to come in at somewhere around 125 GeV.

Tipler’s book had a huge intellectual influence on me, not because of its primary content but because of a tangential remark that triggered my first vision of the Universe as a purely mathematical object, a vision I later learned had been fleshed out by physicists such as Max Tegmark at MIT. Readers of The Big Questions will know that I find this vision extremely satisfying for a great variety of reasons. It provides plausible (to me) answers to a variety of questions that I’d always considered unanswerable, such as “Why is there a Universe in the first place?” Unfortunately, unlike the Omega Point Theory, this is not a vision that can be put to the experimental test.

Tipler’s theory, however, is designed to be put to the test, and if it fails that test (as it’s apparently about to), we should view that as a triumph. Science progresses through predictions so precise that we can know when they’re wrong. Now on to the next theory!

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Gorton’s story is that this was a bank run, not substantially different from the bank runs that have always plagued capitalist economies. In this case, the run took place in the repo market, which is an unregulated (and largely unmonitored) industry roughly equal in size to the standard banking industry. The repo market serves large institutions (e.g. Fidelity Investments or state governments) with a lot of cash on hand that they want to stash in an interest-bearing account for a day or two. So Fidelity deposits, say, a half-billion dollars at, say, Bear Stearns, just as you might deposit five hundred dollars at your local bank. One difference, though, is that your account at your local bank is insured, whereas Fidelity’s account at Bear Stearns is not — so Fidelity, unlike you, demands collateral for its deposit. Bear Stearns complies by handing over a half-billion dollars worth of bonds, of which Fidelity takes physical possession. The next morning, Fidelity withdraws its money and returns the bonds.

The problem comes in when rumors begin to spread that some bonds might be riskier than they appear, and Fidelity starts to worry that maybe Bear Stearns is picking particularly risky bonds to hand over. Therefore Fidelity demands more than a half-billion in bonds to guarantee its half-billion dollar deposit. If there’s, say, a 10% discrepancy between the deposit and the collateral, we say that Bear Stearns has taken a half-billion dollar haircut.

Because Bear Stearns has a fixed quantity of bonds on hand, and because all of its depositors are demanding haircuts, Bear Stearns can now accept fewer deposits than before. This means that Bear Stearns has less cash on hand. This makes depositors even more worried about the security of their deposits, which means they demand larger haircuts. The effects snowball until Bear Stearns collapses. Like so:

The last time I blogged on this subject, our astute commenter Bennett Haselton raised a very good question: Bear Stearns is presumably not just sitting on Fidelity’s money; they’re investing it somewhere. Why can’t that investment serve as Fidelity’s collateral? The answer, if I understand Gorton correctly, is that the repo market is a very short-term market, typically 24 hours. For Fidelity to verify the quality of Bear Stearn’s investment project would take a week or so, by which time it’s too late for the information to be of any use. Fidelity’s ongoing concern is that Bear Stearns is pawning off its shakiest investments; to allay that concern requires due diligence; due diligence takes time; the repo market is all about getting things done NOW.

So what should we do about all this? Gorton, along with his colleague Andrew Metrick, argues that the repo market, like any banking market, is inherently susceptible to runs and therefore ought to be regulated. In this case, the regulations should focus on insuring the availability of sufficient high-quality collateral to keep depositors calm. Gorton observes that the existing policy responses to the crisis (e.g. the Dodd-Frank bill) do pretty much nothing to address this fundamental need. The Gordon/Metrick paper contains some specific proposals, which unfortunately Gorton never got to in yesterday’s talk.

For further reading, here are the same references I gave the last time I blogged on this: There is much more here and in Gorton’s book.

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We always knew that Penn State football was like a religion. Now we know which religion.

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1) The tax rate on wages and/or consumption. A wage tax and a consumption tax are pretty much interchangeable; you can tax the money as it comes in or you can tax it as it goes out. So I’m treating this as one category. The “right” level for this tax depends on your forecasts for future government spending.

2,3,4,5 and 6) The tax rates on dividends, interest, capital gains, corporate incomes and estates. I believe these tax rates should all be zero. That is not a statement about how progressive the tax system should be. A wage tax and/or a consumption tax can be as progressive (or regressive) as you like. It is instead a statement that while all taxes discourage both work and risk-taking, capital taxes have the added disadvantage that the discourage saving. This simple intuition is confirmed by much of the public finance literature of the past 25 years. (Here is a good example.)

My personal preference is for a system substantially less progressive than the one we’ve got, but for purposes of this exercise I won’t penalize candidates whose preferences differ from mine. For the record, Romney, Huntsman and Santorum are the three who (as far as I can tell) want to maintain substantial progressivity, with Romney, uniquely among the candidates, preferring even more progressivity than we currently have.

Here, then, is a chart, with candidates ranked roughly in order of their willingness to exempt capital income from taxation. I prepared this chart with a few quick Google searches (this is a blog post, not a journal article) and it probably contains errors. I’ll be glad for (documentable) corrections and will update the chart as they come in. Asterisks refer to further explanations, which you’ll find below the fold.

If we care about efficiency, we’re looking for zeroes in the last five columns. On the face of it, Johnson is the clear winner. But Cain’s 9/9/9 plan has two arguments in its favor that don’t appear on this chart. First of all, people are a lot less likely to bother evading one of three 9% taxes than a single 23% tax; therefore we’d have a lot fewer evasion problems under Cain than under Johnson. Second, it’s pretty easy to imagine Congress raising a 23% tax to 24% or 25% or 26%, but it’s a little harder to break the psychological barrier of single-digit tax rates, so Cain’s 9/9/9 might be more politically stable than Johnson’s 23. Therefore I’m calling this a tie between Johnson and Cain.

But the top six are all pretty good, except maybe for Paul, who hasn’t revealed his key number. Santorum is bad, Romney is atrocious, and Bachmann (who, as far as I can tell, has not bothered to release a tax plan) is an enigma.

Some explanations:

1) Cain stresses that this is a transitional plan, ultimately to be replaced by an even better one.

2) Cain’s plan consists of a 9% VAT, a 9% sales tax, and a 9% income tax. A VAT and a sales tax are not exactly the same thing (they end up getting levied on slightly different goods) but they’re close enough for this rough exercise; therefore we can lump together the VAT, the sales tax and the part of the income tax that taxes wages. That adds up to 27%, but a slightly more careful calculation tells you that Cain will allow you to keep 91% of 91% of 91% of your spending power, which is to say about 75%. Thus this counts as a 25% tax, not 27%.

3) Gingrich wants a 12.5% corporate tax with 100% expensing. This is equivalent to a 0% corporate tax together with a one-time transfer of assets to the government, so as far as its effects on efficiency, I’m calling it the equivalent of a 0% tax. For several reasons, I’d prefer a corporate tax that really *is* 0%, but I’m trying not to impose my personal preferences on these rankings (beyond a preference for efficiency), so I am giving Gingrich credit for the equivalent of a 0% corporate tax.

4) Huntsman, Santorum and Romney all endorse multiple tax brackets; I’ve put only the top brackets in this chart. Huntsman’s 23 should really be three brackets: 8/14/23. Santorum’s should be 10/20/30. And Romney holds the remarkable view that our flawed political system has somehow settled on exactly the optimal system of six brackets, which he would preserve in its entirety.

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Note that all of my remarks apply equally well to all forms of capital taxation. Entin did a better job of focusing on the particular shortcomings of the estate tax.

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With a hat tip to our occasional commenter Ron….

Remember those faster-than-light neutrinos? The ones that threatened to overturn relativity, and along with it everything we think we know about how the universe works?

Well, it turns out that maybe they weren’t faster than light after all — they might have only appeared to be faster than light because their arrival time was mismeasured. The mismeasurement was (it seems) caused by the researchers’ failure to account for the effects of ….. relativity!

I hear an echo of the great ongoing debate between Einstein and Bohr on the foundations of quantum mechanics. In an attempt to discredit the uncertainty relation, Einstein proposed an experiment involving a clock in a box on a scale. The clock opens a shutter at a precise moment, and while the shutter is open, a photon escapes from the box. The clock records exactly the time interval in which the shutter is open; the scale records exactly how much mass escapes from the box — and our simultaneous knowledge of the time and the escaped mass violates the uncertainty principle.

Bohr — after 24 hours of so of agony — triumphantly refuted Einstein’s argument by observing that a) the height of the clock above the ground is uncertain, b) therefore the gravitational force felt by the clock is uncertain, and c) therefore the measurement of time is uncertain — because relativity tells us that clocks run slower or faster depending on the force of gravity.

Einstein, in other words, had erred by failing to account for relativity. If this new explanation for the neutrino phenomenon proves correct, the neutrino researchers at OPERA will be in illustrious company.

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Here’s a question I haven’t seen asked: If fear of future regulations and taxes is holding business back, as everyone on the right asserts, why didn’t the Republican victory in the midterms set off a surge in employment?

After all, if you really believed that fears of Obamanite socialism were the key factor depressing employment, the GOP victory — with the clear possibility that the party will take the Senate and maybe the White House next year — should greatly reduce those fears. So, where’s the hiring surge?

I even set out to write a blogpost citing this argument with approval — but around the time I was composing it, Krugman followed up with this bit of idiocy, to which a response seemed more urgent.

Now that that’s out of the way, I can come back to the bit about the missing Boehner Boom. It’s a more-than-fair question. How would you respond to it?

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Scientists at CERN have found apparent evidence that neutrinos can travel faster than light.

Suppose that tomorrow historians at Harvard find apparent evidence that the South won the American Civil War — not in some metaphorical “they accomplished their goals” sense, but in the literal sense that it was actually Grant who handed his sword to Lee at Appomatox and not the other way around.

Question: Of which conclusion would you be more skeptical?

Of course your answer might depend on exactly what this new “apparent evidence” consists of. So let me reword: As of this moment, which do you think is more likely — that neutrinos can travel faster than light, or that the South won the Civil War?

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This looks like a good example of Darwinian competition yielding an inefficient outcome — as we should expect. (See Chapter 8 of my book The Armchair Economist for more on why Darwinian competition is nothing like market competition, and far more likely to yield bad outcomes.) Vast sums are being spent in an arms race with relatively little social value. Surely consumers benefit from all this competition, but it’s highly implausible that they benefit enough to justify such high expenditures. Even after the recent Great Winnowing, about 350 of these sites remain; surely consumers (none of whom have the time to visit 350 sites a day) would be almost equally well served by 50 sites, at about 1/7 the cost.

Most of the time, markets do a spectacular job of allocating resources efficiently. Sometimes they don’t. Often that’s because the market is structured in such a way that one firm (or a very small number of firms) can supply the entire marketplace, which inspires a largely unproductive race to the top. Consumers benefit, but not enough to justify all that resource expenditure.

The market for oranges works well because producers earn rewards commensurate with the social value of the oranges they grow. The market for daily deals seems to work less well (I say “seems” because I might be overlooking something) because Groupon can earn enormous rewards for being just a tiny bit easier to navigate than LivingSocial. This inspires Groupon (and LivingSocial) to invest a lot of resources making minor improvements.

(Sometimes those minor improvements turn into major improvements that are well worth their cost — but that’s not something we can bank on.)

Economists call this the “tournament” problem. It comes up in any market that’s potentially dominated by “superstars”. Athletic competitions, for example, are prone to drain more resources than they’re worth. (See previous blog posts here and here.) Major league baseball is a good thing — it entertains the fans. But if we could randomly eliminate half the players, we’d lower the quality of competition just a little, while freeing up a lot of ex-ballplayers to start businesses, drive cabs, or write sports blogs. The market fails to find that outcome.

The fact that it’s so easy for markets to fail is part of why we should be so astonished, and so thankful, that they typically succeed.

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