On Monday, I wrote about the man who can’t be taxed. There were many comments, some confused, some insightful, and (at least) one brilliant. Let me highlight that brilliant comment, then beat the point to death a little, and then draw a large moral.
Our commenter Ken B invited us to imagine a dead man, with, say $84,000,000 in his bank account (and a will that requires this bank account to be maintained forever). And let’s suppose the government confiscates, say 82 of those 84 millions, thereby allowing it to reduce other people’s current or future taxes —making those people richer. They buy more stuff. They eat more, they burn more gas, they occupy more space. Where did that stuff come from?
(Alternatively, instead of lowering someone else’s taxes, the government takes the opportunity to spend more, in which case the government claims more stuff. We still have to ask where it comes from.)
It certainly did not come from the dead man, who was eating nothing, burning no gas, and occupying no more space than he continues to occupy. Instead, somebody else must decide to consume less.
But initially nobody wants to consume less. So people, collectively, are trying to consume more stuff than is available. This excess demand for stuff pushes up prices and/or interest rates until people are willing to cut their consumption.
There is no meaningful sense in which the dead man paid the tax. Instead, the tax burden is borne by those people who were hurt by rising prices and/or interest rates.
Now Robert Kendrick, who has 84 million dollars in the bank and spends effectively zero, is (for these purposes) the economic equivalent of a dead man — he can’t consume (much) less than he’s already consuming. So if you take his money and use it to reduce some people’s taxes (or to increase government spending), then you’ve surely pushed the cost off on to some other people. Your accountant might tell you you’ve taxed Mr. Kendrick, but your economist will tell you that the actual tax burden fell on some entirely different people.
Who are the losers here? If Mr Kendrick has a nephew who plans to inherit and blow through the 84 million, he’s certainly prominent among the losers. But even if Mr Kendrick has no heirs — even if he somehow manages to live forever (continuing to maintain a minimum level of consumption), the someone else bears the burden of the tax.
Here is the larger moral: Money is not wealth. The great mistake is to think you’ve understood a transaction just because you know where the money went. That will lead you to even sillier mistakes, like thinking that if the government comes into an $82 million windfall, it can use that money to buy goods, and the goods don’t have to come from anywhere. This confusion — the idea that money can substitute for goods — comes up often in economic policy discussions, and it inevitably spawns nonsense. The same confusion underlies the mercantilist fallacy, which economists have recognized as exactly that — a fallacy — for over 200 years. It’s a good one to be on guard against.
Agreed. Money isn’t wealth. The corollary of this is that spending is an individual’s cost to society. It is the goods and services that he demands from society, in exchange for his labor/trade/etc.
Incidentally another corollary is that, in a fiat money system, government spending is NOT a stimulus but a cost even if the taxes that go to fund the programs do not alter individual’s behavior. Taxes are in effect just a way to internalize the cost of government spending, which is itself an externality.
I agree with Noah Smith’s reasons why these “you can’t tax …” posts are nonsense. (No need to reiterate them here. Read them there.)
Noahpinion: In which Steven Landsburg utterly flips out
Good post. It reminds me of news stories in the 80s during Drug War hysteria. The media was impressed by new policies to use money that was confiscated during drug busts to further fund the drug war. Voila! A perpetual motion machine, capable of doing infinite good! (Yes, I’m being sarcastic.)
I agree that Robert Kendrick is not unlike a dead man in this example, and further agree that by taxing him other must bear the burden of the tax.
However, the assumption is that Robert Kendrick will continue to consume nothing for the rest of his life, right? Isn’t the whole premise that the 84 million is effectively destroyed, so by confiscating it, the government is effectively inflating?
Question: What if he suddenly changes his mind and decides to increase his consumption (spend his money)? This action is largely considered “reasonable,” but by arguments here wouldn’t it be calculated as imposing a burden on others? Then, by extension, couldn’t we say that any money that any person has in the bank long term (i.e. not used for planned immediate consumption) is the same as Robert Kendricks money and spending it imposes a burden on society?
@Stephan. The key observation is that if the Govt. consumes more, then someone else must consume less. This is Noah’s “conservation of consumption” in his Reason 1. He says this is false because “Govt. spending can rise if Investment or Net Exports goes down (or GDP goes up), with Consumption unchanged.” But if investment or exports go down, does that not mean that someone sometime will have less?
I think Reason 2 is a semantic one. “since a rise in Government Purchases accompanied by a fall in private Consumption would, if the deficit is unchanged, constitute a rise in revenue.”
An accountant would say that revenue was raised, but the effect would be felt by the people who’s private consumption was reduced.
Reason 3 seems more valid – Kendrick may at some point spend the money, or his heirs will. It may be that taxing Kendrick is actually taxing his heirs, but I think that is splitting hairs.
Reason 4 seems to be directly related to the miser posts. Steve advocates that by NOT spending the money, Kendrick is reducing prices and allowing others to consume more. The effect of the Govt. or Kendrick spending the money is exactly the same. The inability to tax only works if the money is never spent.
I may have some or all of these points wrong.
So if Kendrick is dead, what should we do with the U$84 millions? Just burn it?
I feel like taxing my neighbors. I think I’ll go grocery shopping.
I agree that if the Idle Man was never going to spend the money anyway then in some real sense he is not paying that tax. So I’m on board with part I.
Part II says that other people must now consume less because some other entity is consuming more. I don’t believe that is true. Won’t we mine more iron if more buildings are to be built? Won’t we raise more pigs if more bacon is brought home? I know that I personally will produce more if someone where to buy more from me. Are you saying we are at 100% and can’t do anymore without sacrificing elsewhere? Where is the proof of that?
What am I not getting here?
Scott H (and many others):
Won’t we mine more iron if more buildings are to be built? Won’t we raise more pigs if more bacon is brought home?
Yes, but moving money from one account to another does not cause any of these things to happen. You are right that the total supply of goods is not always fixed. You are wrong to think it is not fixed in this example.
SV: So if Kendrick is dead, what should we do with the U$84 millions? Just burn it?
The net effect of burning it is to hurt some large unidentifiable group of people and help some other large unidentifiable group of people by exactly the same amount. So burn it or not, as you like.
I’m with you in that if dead Kendrick’s money is taken, then there is a burden payed by others. But here is the problem; if he has no heirs, there is a defined, if unknown, burden on others via interest rates, etc. that could potentially be calculated. If he has an heir and is taxed, then the same burden exists on the masses, plus the burden on his heir of consuming less. So does this mean the costs of taxation rises with the number and extravagence of heirs?
Chris A:
there is a defined, if unknown, burden on others via interest rates, etc. that could potentially be calculated.
There’s no “potential” about it. The govt takes $84 million, which it uses either for new spending or to cut taxes (or for some combination thereof). This allows the govt and taxpayers, collectively, to consume an additional 84 million apples (assuming apples cost a dollar, and apples are what they buy; the same reasoning works if they buy anything else). Those 84 million apples have to come from somewhere, so someone else eats 84 million fewer apples. (Or, if more apples get grown, then people eat fewer oranges). The cost to others, then, is exactly 84 million apples, or the same number of oranges that could have been grown with the resources necessary to produce 84 million apples, or some combination thereof — i.e. exactly 84 million dollars worth of stuff.
To get a clear picture of what’s going on, follow the goods, not the money.
Yet another nonsense explanation. The government realizes this freak is doing nothing with his 84 million US$. So it decides to expropriate the guy and distribute fruit vouchers worth 84 million US$ to new homeless families because they’re buying too much Happy Meals for their children (did McDonald hire these 50.000 new employees on April 19th?).
Now some other families can’t buy fruits? This happens only if all available fruits are sold in the first place. Which means the fruit market is operating at full capacity. Is this the case with an economy operating 20% below output capacity? I don’t think so.It is more probable more apples will be sold instead of rotting in the inventory.
@Stephan “I agree with Noah Smith’s reasons why these “you can’t tax …” posts are nonsense. (No need to reiterate them here. Read them there.)”
Thanks for the link, I needed a good laugh. Unfortunately, a more naïve reader might buy that BS.
Even Krugman complained!
http://krugman.blogs.nytimes.com/2011/04/21/what-are-taxes-for/
@David
You’re welcome ;-) I also appreciate to read some BS sometimes. Landsburg made my day.
From Krugman: “Discussions like this really disturb me; they indicate that there are a lot of people with Ph.D.s in economics who can throw around a lot of jargon, but when push comes to shove, have no coherent picture whatsoever of how the pieces fit together.”
I am at a loss for words.
Hey, I am by no means an economist so this is more of a general question than arguement, but isn’t what you are describing, essentially a closed system where there is a defined amount of goods, whereas I had always assumed one of the effects of technological progress on the economy was the way in which it creates access to more goods, driving down prices. And also, doesn’t supply and demand somewhat dictate where people try to innovate in order to financially benefit from the aforementioned resource scarcity? Again, I am not an economist, I’m just curious if these factors matter in the above scenario.
Steve, so what if the government takes the money that is being saved, and uses it to employ people that otherwise would have produced nothing because they have no job. Does that not increase our ability to consume more things? Under your analogy, if everyone decides to save more, like what occurs during a recession, than someone must be spending more, (i.e. consumption must go up or investment must go up).
You might argue, well investment spending is by definition, either spending on investments today or spending that will occur later on. But by not spending on investments today you are ensuring that someone is not working today, therefore there are less people producing, which means there is less to save. This is an oversimplified explanation of why your assumptions are false, but your argument was so simple, I thought you may need me to put it in terms you may understand.
Also you continue to ignore, what others have asked, such as, if he suddenly decides to spend the money, does that mean other people will be spending less? Your argument only works if there is a finite amount of goods in the economy that is not affected by whether people are employed or not or you have an assumption that we are always in full employment and that there are no such thing as sticky prices. If you have some other assumption please make it clear.
Please do a smackdown of Delong and Krugman. They are deliberately misinterpreting your point. What a surprise, eh?
Daniel:
Steve, so what if the government takes the money that is being saved, and uses it to employ people that otherwise would have produced nothing because they have no job. Does that not increase our ability to consume more things?
Government can do all kinds of good things with tax money, which is why lots of taxes are justified. That doesn’t change the fact that someone bears the burden of those taxes.
@Steve,
So you’re conceding the fact that government spending can increase the net total output of an economy, assuming we are in a liquidity trap? If you are, then that would imply that there are more goods to go around, which means that the people paying the burden may be better off if they can consume more things because total output has increased.
If we could somehow spend more money and never pay for it with taxes, than yes, pat yourself on the back, you have figured out that there would be less burden to go around. However, although we can and should run budget deficits during a liquidity trap, there is an acceptable level of debt, that we must eventually increase taxes to pay for. Insert Paul Krugman’s argument here.
Daniel:
So you’re conceding the fact that government spending can increase the net total output of an economy, assuming we are in a liquidity trap?
This is not about the effects of government spending; it’s about the effects of taxing one person rather than another.
Look. The government spends a dollar. This does maybe a dollar’s worth of good, maybe 50 cents worth of good, maybe five dollars worth of good, maybe minus a dollar’s worth of good for party X. Be that as it may, it costs party Y a dollar. The point here is that party Y is not Mr Kendrick, therefore it’s someone else.
So when you write So you’re conceding the fact that government spending can increase the net total output of an economy, I have no idea what you consider a concession. Are you conceding the fact that the earth orbits around the sun?
taxes offer a burden in two distinct ways, the first is in the opportunity cost to the tax payer, The second is the market impact of the government action. Any activity by government will have a market impact. Retirement of debt changes interest rates on debts and impacts returns to investors, while the purchase of goods and services has the potential to drive up the cost of those goods and services as government purchase represents an increase in demand. This is true for any expenditure of dollars, regardless of whether or not it is an act of government. To call that market impact a tax burden is odd to say the least, because it would require some knowledge of the intended use of a tax in order to assess a real tax burden on a tax payer. It would also imply that more economically prudent tax expenditures (ones that increase GDP) are less burdensome than foolish tax expenditures on the tax payer. A $100 burden on a taxpayer is experienced in the same way by the taxpayer regardless of the intended use of the tax.
Now the opportunity cost on the other hand is the real way in which a tax burden is experienced. If an productive person looses 10% of his wealth through a tax, then in theory they can produce 10% less. When Kendrick, who produces 0, is taxed 100% there is no tax burden because reducing 0 by 100% is still 0. The result is that Kendrick faces no tax “burden”, merely a tax payment.
Just as wealth and money are different, taxes and burdens are different. First of all, since Kendrick does nothing, it is foolish to call him a wealthy individual (in the economic sense) despite the large balance in his bank account. He is actually a poor man with lots of money. As with all poor men, it is very difficult to burden them with taxes, because there is little to take. On the other hand, since he has a lot of money it is easy to tax him, because the money can simply be taken, regardless of its tangible impact on the person.
@Dan “Then, by extension, couldn’t we say that any money that any person has in the bank long term (i.e. not used for planned immediate consumption) is the same as Robert Kendricks money and spending it imposes a burden on society?”
Well… yes, for essentially the same reasons. Steve has written about this too. http://www.slate.com/id/2110817/
John Faben: Thanks for the answer to Dan, which is the same I’d have given.
If you need to know where the resources are that allowed this money to be taxed, the easiest way to do that is to contact an accountant and construct a time line of the money flow from before Kendrick acquired it to after the government spends it.
When the government takes the money, you claim that somebody must pay, and because Kendrick has no plans for the money that it cannot be him paying, but somebody else. Well the reality is that Kendrick does pay. Say Kendrick got the money by selling a million widgets to Union Pacific.
1. Union Pacific got a million widgets for money. Kendrick got money for a million widgets.
2. The government takes the money and offers a promise of the ability to receive goods and services (national protection, social safety net, etc). Kendrick looses the money but has the right to these goods and services.
3. The government spends the money on say apples and gives them to poor people. The government is spending money to fulfill that promise mentioned in 2.
3a. The apple seller gets money for apples.
3b. The poor people get apples for being citizens entitled to government services.
You are making a logical fallacy by conflating transaction 2 and 3, in saying that because Kendrick has no plan for the money, then the tax burden must be borne by transaction 3. That is wrong. Kendrick must have some tiny value attached to being part of society at least equal to the money he’s being taxed, and as a result is willing to pay his taxes for the services offered by the government in transaction 2. If he did not, he would make the choice to leave society and take his cars to some deserted island where he could move his cars to his hearts content with no tax implications.
Those are the costs of the social contract…
Hi Steve,
I think you have raised an interesting issue.
But here is a theoretical situation I want you to consider.
Lets assume Kendricks was sitting on a machine which was worth $84 million if put in use, but he was just letting that machine sit in his garage. Let say he had no heirs either. In this situation if the govt confiscated that machine as taxes and put that machine to use, in this situation I don’t think anyone bears the burden.
austextrader: You are absolutely right, and of course your example highlights the main point, which is that money on the one hand and real resources (like machines) on the other hand, are two very different things.
I am a bit confused by the the term “idle” in “idle rich”. Setting aside the question of the relative social value of parking and re-parking cars versus, say, writing newspaper columns advocating foolish and unethical tax policy involving other people’s property, it’s not possible for financial assets to remain “idle” unless the government has, through policy (most often monetary policy) error, created a situation of excess demand for money. In all other cases, financial assets are put to use and represent bank deposits (which form the basis for loans) or represent claims of various types on productive assets.
The notion underlying the newspaper column seems to be that it’s morally wrong to collect income from capital or at least enough to survive on unless perhaps it derives from savings that you had entirely accumulated yourself. In this case, presumably it would be appropriate to expropriate the endowments of all non-profit organizations since receipt of a voluntary gift (from parent or donor) would not constitute an ethical means to acquire property.
@Steve:
Extending austextrader’s “idle machine” proposition, then:
If the government is able to apply Kendrick’s idle $84m to otherwise idle resources capable of creating $84m+ of goods, would anyone else bear the burden? (Whether the government is logistically capable of doing so is another question.)
You then acknowledge that if Mr. Kendrick were sitting on a machine instead of cash that would impose no burden on anyone to confiscate.
What I don’t understand is why if Mr. Kendrick has $84m in the bank, or under his mattress, or whatever, taxing that to employ unemployed people to build a machine costs some unnamed party Y.
It seems to me that you CAN use idle money to make something from nothing. As you say, output is not fixed, we have loads of idle resources which require cash to be moved to productive uses. Are we simply saying that taxing this guy is the same as printing money?
Wilson:
You then acknowledge that if Mr. Kendrick were sitting on a machine instead of cash that would impose no burden on anyone to confiscate.
What I don’t understand is why if Mr. Kendrick has $84m in the bank, or under his mattress, or whatever, taxing that to employ unemployed people to build a machine costs some unnamed party Y.
Because it takes resources to build a machine.
If there are idle resources you can employ, that’s great. But if they’re idle, and if you can employ them without burdening anyone, then that is equally true whether or not you take Mr Kendrick’s money.
A miser may be a huge consumer of financial services.
This is the problem I have with university endowments. Instead of spending the gifts they receive on education, they are channeling them to Wall Street. This contributes to the brain drain away from the productive economy and towards negative sum games.
Things the government won’t do with the money:
Build a bridge across a river and hang a “No Trespassing” sign on it.
Mail checks to welfare, Medicare and Medicaid recipients on the condition that they don’t spend them.
Since most of the government’s spending is in the form of benefits for some or all of the populace, is it truly proper to speak of government “consumption?” If Kendrick consumes, few others share the benefits. This is not true of government spending. Government spending is societal spending that a majority voted for.
I agree with Landsburg’s idea. It’s rational if the hypotheses he states hold, mainly that Kendrick behaves as a dead man (and will stay dead, as most do).
One thing, however, the government could do if it wished to diminish inequality would be:
1) Tax (confiscate?) part of Kendrick’s wealth;
2) Redistribute it uniformly as a function of one’s wealth; the poor would receive more;
3) Assuming there are wealth effects on the poor’s demand functions, they would tend to consume more;
4) The net effect would be inflation, which would be more or less offset by the cash transfer according to one’s wealth;
5) In the end, the poor will be consuming more and the burden will fall on the rich which consume – not Kendrick, but the others. Landsburg is still right, though.
I guess that’s more or like what DeLong et al would want. Whether it’s fair or not is a whole other discussion.
It’s the first time I’m reading this blog, but I’d guess Mr Landsburg would rather see the journalist proposing a tax on consumption – and include voluntary transfers (e.g. to heirs) as consumption for that matter?
Daniel Haanwinckel:
It’s the first time I’m reading this blog, but I’d guess Mr Landsburg would rather see the journalist proposing a tax on consumption – and include voluntary transfers (e.g. to heirs) as consumption for that matter?
I’ve blogged often about tax policy, but I’d prefer not to divert this discussion in that direction. The only point I’m trying to make here is that the burden of a tax can fall on someone other than the person who is legally required to pay it, and in particular, if you want to discern the burden you’ve got to look at effects on consumption streams, not bank balances.
Steve put it pithily on another thread, and it bears repeating here: “Follow the goods” not the money.
Say there is a show, and the theatre holds 100 seats. 101 tickets are printed, and I have one of them. The show is sold out,and seating is first come first served. I do not intend to go. Paul Krugman, out of the goodness of his heart, picks the ticket out of my pocket and gives it to a homeless man. This man gets to the theatre early and claims a seat. Now someone will lose a seat. Is it me? No, it’s some other unnamed ticket holder. So who really bore the burden of Krugman’s light fingering?
Hopefully the $84 million is in one dollar bills…
It is a real resource that can be used for campfires!
(BTW, if anyone has $84 million, I’ll be happy to give you $1 million for it.)
Seems like a fuzzy judgment call to equate or not equate tax with burden. I have a problem with the point of view that the government will use that tax money to spend more. What the government does with the money is its own business – just like Kendrick. If the government does nothing more than repark 4 cars all day long (like Kendrick) it doesn’t crowd out markets and raise prices. Yet the debt is reduced just by moving money around – improving our fiscal situation. Granted, the most likely outcome with lower debt is politicians giving out tax breaks and creating large irrelevant spending programs. But they’ll probably do that regardless of the fiscal situation (sigh). It seems problematic to predict the effects of the tax. Accounting for burdens is what money was created for, was it not? I’m not going to equate money with happiness, but doesn’t it represent the closest thing we can create for the liquid portion of happiness? If Kendrick’s burden isn’t liquid or even fungible how much use is economic analysis?
I need a simpler analogy to wrap my head around this.
Kendrick, Smith and Jones live on a desert island where fish are the only food source. Each man eats 2 fish per day.
Kendrick makes fishing nets. Smith and Jones catch fish – usually 24 per (5 day) week. They pay Kendrick 100 fish for each net he makes.
Kendrick finds he is receiving more fish than he can eat or store and starts accepting paper “fish IOUs” (and a few fish) from Smith and Jones.
The group decides to pay a “tax” to create a food bank for anyone who gets sick and can’t work. Smith and Jones put two fish a week into the “tax” pile – reducing their consumption of fish to 12 a week. Kendrick pays his taxes with two fish IOUs and continues to eat 14 fish a week.
Are Smith and Jones being “taxed”? “Are they burdened”?
Is Kendrick being “taxed”? “Is he burdened”?
Jeff Brewster:
1) The food bank contains four fish. Kendrick has promised to reduce his future fish consumption, which means that in the future, there will either be more fish in the food bank, or lower taxes on Smith and Jones (because they won’t have to put in so many fish to maintain the balance). I’d say everyone is being taxed, and Kendrick’s taxes are being deferred.
2) But this is not like the situation we’re talking about. In the situation we’re talking about, Kendrick eats 1 fish a day, and will continue to eat 1 fish a day as the IOUs build up. (He never plans to cash them in). The food bank acquires 19 fish a week. Now we tax Kendrick by taking away his IOUs. The food bank continues to acquire 19 fish a week. Kendrick’s life hasn’t changed, Smith’s life hasn’t changed and Jones’s life hasn’t changed. There’s no meaningful sense in which anyone has been taxed or burdened.
Clay:
“Yet the debt is reduced just by moving money around – improving our fiscal situation.”
The national debt is only reduced if the government uses Kendrick’s money to pay off federal security obligations. It could have done the same thing by printing money. If Kendrick kept his money in his mattress the effect of paying off the debt is to increase the money in circulation (this is true whether paid with Kendrick’s money or newly printed money). This causes the burden to fall on anyone that holds U.S. currency. If Kendrick keeps his money in the bank, the burden falls on other people. Either way, moving money around does not create wealth.
wweeks: Exactly. Thanks for this.
Not convinced – possibly due to ignorance. Possibly because I have a lingering suspicion that Kendrick derives some sort of feeling of security from 84 million in the bank. I appreciate the effort to educate me nevertheless. I’m sure I’ve learned something :)
Clay:
If Kendrick derives a sense of security from hoarding money then any loss of that would indeed be part of the tax burden. However, A large part of the burden will still fall elsewhere. In fact, Kendrick’s loss of security would just decrease the percentage of the total burden (but not the amount) that fell elsewhere.
In the hypothetical though, Kendrick does not consume anything or derive any value from his money; in the revised version, he is dead (dead men don’t have a sense of security). This ties in directly with the Stevens’ column as her whole point is that we should tax people like Kendrick who don’t use their money. If Kendrick derives a sense of security from his money then he doesn’t really fit her model (although she may think his loss of security is a small enough loss compared to all of the “wealth” we would get).
This error, conflating money with wealth, is part of the reason people are so concerned with the trade deficit right now. Imports do not “harm” us as we are exchanging money for actual wealth. If China subsidizes their exports buy devaluing their currency (whether or not this is successful is another story), we are made richer as we get more actual wealth for our money. If Chinese manufactures demand less dollars for actual goods, we gain in wealth as our trade deficit increases.
“Yes, but moving money from one account to another does not cause any of these things to happen. You are right that the total supply of goods is not always fixed. You are wrong to think it is not fixed in this example.”
>>>>>>>>>> Perhaps I’m being dense-
but if the government spends the money it has taken from the dead guy on hiring unemployed miners to go and dig up iron- has the government not turned that money into more real resources/goods? And therefore in this example the total supply of goods is not necessarily fixed.
Ray:
if the government spends the money it has taken from the dead guy on hiring unemployed miners to go and dig up iron- has the government not turned that money into more real resources/goods?
No. There is no physical process that can turn money into iron.
What’s been turned into iron is not money, but labor plus iron-in-the-ground. Those resources come from somewhere. (I promise you that digging iron out of the ground is not fun, so this labor is not costless.) Someone must bear the burden of that resource consumption. It is not Mr Kendrick.
(Did the miners bear the cost? Probably not; they got paid, which allowed them to buy more pancakes. So was it the pancake makers who bore the cost? Well, they got paid too. But somehow somewhere there has to be someone who bears the cost. The most probable transmission mechanisms for that cost are higher prices and/or higher interest rates.)
The Prof. says- ‘The only point I’m trying to make here is that the burden of a tax can fall on someone other than the person who is legally required to pay it, and in particular, if you want to discern the burden you’ve got to look at effects on consumption streams, not bank balances.’- in other words this is just a reminder of the ‘crowding out effect’ which, in the context of this particular idle rich car-parker might be a couple of percentage nothing more.
What gives this whole thing the true Landsberg dybbuky touch is the concept that actual Governments crowd out potential Governments. The true opportunity cost of California staying solvent is that we don’t get to see that ghostly other Kalifornia just waiting to emerge from phase space and replace the Sunshine State with something identical in many respects but just way more creepy with things like velociraptors running the DMV and Maria Shriver biting off Arnie’s head.
I’m beginning to enjoy Landsberg on fiscal policy. H.P Lovecraft eat your heart out.
Steve:
Something got lost in translation – I intended to create a model in which some people were burdened by paying taxes and some were not. I’ll try to specify the model more clearly and with more convenient quantities.
Fish Model II
Kendrick, Smith and Jones live on a desert island where fish are the only food source. Kendrick makes fishing nets. Smith and Jones catch fish. The men usually work 5 days a week and eat 1 fish a day.
Smith and Jones catch 3 fish a day and their nets last a week. Kendrick makes 2 nets a week which he sells for 7 fish each. Smith and Jones each have a surplus of 1 fish/week (15 caught – 7 eaten – 7 for net). Kendrick has a surplus of 7 fish/week (14 earned – 7 eaten).
Scenario 1
Each man pays a tax of 2 fish/week into an emergency fund used when sickness or weather prevents fishing. Kendrick eats 7 fish/week and still has a surplus of 5 after paying taxes. Smith and Jones reduce their consumption to 6 fish a week (half-rations 2 days a week) and have no after-tax surplus.
Scenario 2
Kendrick is running out of room to store fish, so he accepts personal IOU’s from Smith and Jones. Smith and Jones store the fish in their huts and give IOUs to Kendrick for nets. Kendrick pays his taxes with IOUs, and still eats 7 fish a week. Smith and Jones pay their taxes with fish, and each one eats 6 fish a week.
Q1. Is anyone burdened by paying taxes in these scenarios?
Q2. Is anyone burdened by when the government spends the taxes (uses the emergency fund)?
A1. Smith and Jones are burdened by paying taxes, Kendrick is not.
A2. There is no burden in Scenario 1. In Scenario 2, redeeming an IOU signed by Smith leaves him with one less fish in his hut, but his consumption is not altered.
I see that Kendrick is not burdened by paying taxes. But I don’t see that someone else is burdened when the government spends the taxes.
Jeff Brewster:
Q2. Is anyone burdened by when the government spends the taxes (uses the emergency fund)?
The burden falls on whoever would otherwise have used the emergency fund. If you’re going to tell me that the emergency fund is never used, then you’ve described a society without scarcity. I agree that in the absence of scarcity, resources can be consumed without burdening anyone. We normally assume that scarcity is a feature of the world we live in.
Steve Landsburg:
The intention of this simple model was to avoid “somebody at some time gets burdened somehow” explanations (which confuse me) and allow one to specify exactly who is taxed/burdened at exactly what time under exactly what circumstances. Could you clarify?
P.S. Use of the emergency fund is implicit in Q2 and scarcity is explicit in both scenarios, i.e. Smith and Jones have to reduce consumption to pay their taxes.
Jeff,
Here is a simple island situation that will make this problem clear. Imagine everyone fishes to eat each day, and that Mr. Kendrick invents a net and a boat and begins accumulating fish in his hut. He saves a lot of fish; everyone else saves a few fish each year. (They salt and smoke the fish so that it lasts indefinitely.)
Soon, people tire of storing their fish and tire of hauling fish around the island to use as money. One man builds a strong stone building and starts a bank. He offers to store fish in his building and give out “fish certificates” in exchange. The certificates are easier to carry and people trade them as if they were fish. When someone needs to eat, they go to the bank and turn in the paper certificate and receive a fish in exchange. The banker cheats a little. He prints up a few certificates for himself from time to time and spends them, hoping no one notices. He calls this “quantitative easing,” and says that it is necessary to keep the value of the fish certificates stable. Most islanders are not convinced.
The banker soon begins accepting other items to store in his vault. He estimates their value compared to fish, takes the cheese, wine or bag of spices, and issues fish certificates in exchange for the new forms of wealth. He also makes loans against homes. If a man wants to spend some of the value of his hut, he goes to the banker. The banker says “give me your house, and I will give you fish certificates in return. If you wish to live in the house as well, you can pay me a fee (interest) to live there.” The islanders agree and begin to finance myriad other forms of wealth, like bigger huts, boats, complex fishing net factories, and so forth.
Soon, some of the biggest men on the island, who have been busy using their spare time to manufacture spears, swords and other weapons and armor, decide that they need more fish so that they can spend more time preparing to defend the island. They insist that defending the island is something everyone must help them do, and the island agrees to pay the men 20% of fish they harvest from the sea, so that they may focus on defending the island. Some people refuse to pay, and the men take it from them at spear-point.
Mr. Kendrick continues to invent better nets. He accumulates wealth, but loans it to other islanders so that they can spend more time looking for spices, or harvesting salt, or breeding better animals. They pay him a fee for this (interest), and he keeps all of the loan agreements in a vault at the bank. Bored with his life, all he does all day is ride his horses around the island, tying to different stable pens each night.
In this situation, what happens when the large men with spears decide that all of Mr. Kendrick’s loan agreements (which pay interest), are sitting idle in the bank, and that it would be best for the island if they held up the bank, took the paperwork, and kept the interest payments for themselves? Who would be hurt, and who would benefit?
Stone,
Thanks for the attempt to elucidate this, but you’ve overestimated my ability to follow even simple economic systems without getting sidetracked. I had intended to use my model to introduce more complex scenarios step by step as necessary to arrive at the simplest possible model that captures the essential elements of Landsburg’s theses.
My scenarios 1 and 2 seem to capture the thesis that some people are burdened by taxes while others are not (duh). Neither scenario appears to capture the thesis that Smith or Jones are necessarily burdened when Kendrick’s taxes are spent (and Kendrick is not). Is currency needed? Fiat currency? Interest?
Jeff Brewster: If you’re thinking about currency, you’re tracking the wrong things. Follow the goods, not the money.
Jeff,
I would love to start as simple as possible in order to build up to a situation where we can understand what is happening. What part of my example was confusing? Where did you get sidetracked?
This statement “For the government to consume more goods and services, somebody else must consume fewer” mistakenly assumes the economy is a zero sum game. If the government gets someone to produce who would otherwise be idle, then the nobody needs to reduce consumption by an amount equal to the government’s increase. When the economy is at less than full capacity this is possible.
For example if the government taxed Kendrick and paid for a few more potholes to get filled, then an otherwise underemployed (or unemployed) construction worker might have enough money in the bank to pay a dentist to fill a cavity in his son’s teeth. The construction worker calls the dentist office, which adds the son to the patient list. The dentist office will remain open an hour later this Friday to fill the cavity, and some employees will have some more money to spend….
No inflation need be created here, the movement of money just told the construction worker that we have resources to fill the cavity and the dentist that he should work another hour to fill it.
Furthermore this argument is rather academic; the government cannot separate who consumes with their money and who lets it sit idle or in poor investments. A graduated income tax or wealth tax directs more of the factors of production to go towards the desires and needs of the lower income group; e.g. produce more food and basic medical care and fewer face lifts and Mercedes.