Nothing makes my job easier than a journalist who writes about something interesting and gets it 100% wrong.
Thanks, then, to Elizabeth Lesly Stevens for her column in yesterday’s Bay Citizen. Stevens wants to tax the “idle rich”, her Exhibit A being Robert Kendrick, heir to the $84 million Schlage Lock Company fortune. According to Ms. Stevens, Mr. Kendrick appears to do pretty much nothing but park and re-park his four cars all day long. Taxing people like Mr. Kendrick, she says, has to be part of any solution to America’s fiscal crisis.
Here’s what Ms. Stevens misses: Assuming the facts are as she states them, it is quite literally impossible to raise revenue by taxing the likes of Mr. Kendrick. We could argue about whether it’s desirable, but because it’s impossible, the discussion is moot.
Here’s why it’s impossible: For the government to consume more goods and services, somebody else must consume fewer. But Mr. Kendrick, by Ms. Stevens’s account, consumes almost no goods or services whatsoever. He just pushes cars around all day. His consumption can’t go much lower.
Ah, says Ms. Stevens — but there’s still that $84 million in the bank. Surely we can tax that, no? That, right there, is the heart of Ms. Steven’s confusion. She thinks that green pieces of paper, or a series of zeroes and ones in a bank computer, can somehow help supply the government’s demand for actual goods and services. It can’t.
So what happens if the government takes Mr. Kendrick’s $84 million away? Answer: A bunch of zeros and ones get shifted around on bank computers. Mr. Kendrick goes right on pushing his cars around. And nothing else has changed.
Unless, of course, the government decides to spend some of that $84 million. Now the government consumes more goods, Mr. Kendrick consumes no fewer, so someone else must consume less. Who is that someone else? The answer depends on the details of the transactions, but the most likely answer is that when Mr. Kendrick withdraws $84 million from the bank to make his tax payment, the bank makes fewer loans, interest rates rise, and someone cancels a vacations, or postpones a car purchase, or abandons a half-built factory. Who bears the burden of the tax? The people who cancel their vacations and car purchases and factories, that’s who. Not Mr. Kendrick.
You can try to tax him, but any attempt to tax him turns into a tax-in-disguise on somebody else. And the reason for this is not ultimately to be found in the laws of economics; it’s to be found in the laws of arithmetic. You can’t drive a man’s consumption below zero.
Ms. Stevens’s great mistake is to confuse money with real resources. She thinks the government can somehow acquire real resources just by taking Mr. Kendrick’s money away, without realizing that the resources ultimately have to come from someplace. “Taxing the rich” cannot work unless you do it in a way that induces the rich to consume less.
Journalists make this mistake a lot, but I don’t remember ever seeing a more crystal clear example.
Well, if you took ALL of his cash, he might be forced to sell his cars, which would result in the car buyers consuming less new automobiles.
Of course, it is hard to imagine anyone advocating a tax that would take so much of his cash.
>Now the government consumes more goods, Mr. Kendrick consumes no fewer, so someone else must consume less. Who is that someone else?
This claim is clearly wrong given there’s a huge output gap and considerable unemployment in the economy. Additional government spending will decrease the output gap and not crowd out someone else who must consume less because of government spending.
Kendrick is 67 and the article doesn’t say who gets the money when he dies. If the state takes a significant chunk of the $84 million from him, then aren’t the would-be heirs to that money, probably the ones who will reduce their consumption the most?
(Well, not the immediate heirs, since whether they get $84 million or $60 million, their lifestyle will probably be about the same. But their total consumption, plus the consumption of all their descendants, will have to be decreased by $84 million adjusted for interest.)
Of course if Kendrick dies without heirs and without a will, then doesn’t the state get his money anyway (not sure how it works in California) — then won’t Elizabeth Stevens be happy :)
But anyway, isn’t it pointless to focus on that one case — because Stevens said we should tax people *like* Kendrick, and most people with that much money are consuming a lot more resources.
Stephan, are you sure that claim is “clearly wrong”? When has the government even attempted to target idle resources in its spending, let alone been successful?
I think Mr Landsburg gets it totallyu wrong (for once ). I agree with Mr Haselton – if USG grabs the 84 mio , it does indeed rob Kendrick and all his future heirs of consumption worth 84 mio. That can be routed to anyone of USG’s choice..
Even in this imaginary world, wouldn’t Mr. Kendrick be forced to consume less gasoline?
“When has the government even attempted to target idle resources in its spending”
… well, it does PAY congress doesn’t it?
Greetings,
I read the article, the author is never claiming to ‘raise revenue’ this way, you might have put words in her mouth.
Also, if the millions were taken away and used to pay off even a small part of the US debt, then something has changed.
Also, if you think that the banks use those millions for making loans then you need to read up on how banks work in 2011. That’s only true in fantasy Economy 101.
T.
TjD,
Banks no longer use deposits to fund their loan book? Please school us on how banks work in 2011 because this is news to me?
TJD:
Also, if you think that the banks use those millions for making loans then you need to read up on how banks work in 2011. That’s only true in fantasy Economy 101.
This doesn’t change the conclusion, though. If the govt claims more resources and Kendrick claims no fewer, then someone else (not Kendrick) is effectively taxed. You’re saying it’s not borrowers at Kendrick’s bank. Fine. But it’s got to be *somebody*.
Brilliant analysis Steve.
Also the same reason any arguments about misers hoarding money are garbage.
Maybe he would be forced to find a job if all of his money were taken…not that this point invalidates any of yours, but if he gets a job GDP might rise right ? Of course, rising GDP is not the end all be all of goodness.
Please compare the scenario of 1) government taxing away Kendrick’s money and buying stuff to 2) government simply printing money and buying stuff.
I’d guess that the value of taxation would be reflected in the value of the difference in the outcomes of Scenario 1 and Scenario 2.
Or produce more? If you subscribe to the view that the labor supply is backward-bending, then reducing people’s take-home pay may induce them to work longer. As others have suggested, taxing away Kindrick’s funds might induce him to return to the labor market.
(I hadn’t thought about it before, but if the labor supply is backward-bending, then does leisure become a Giffen good? That is, when I increase the price of leisure — by rising the return on labor — I may ultimately induce people to buy MORE of it!)
Steve is right on the economic logic, but economic logic is not her motivation. She wants to PUNISH the rich and the effects whatever they may be or not be do not really matter.
@Doug: I don’t think you are quite right about the misers, because you have to consider how much how fast. For example if a miser overnight reduces the money supply by 50% there will be a rapid deflation, which does have effects. Similarly a “negative” miser who flies Milton Friedman’s helicopter over the country dropping gold coins his great grandfather hoarded in the attic causes inflation.
nobody.really:
Please compare the scenario of 1) government taxing away Kendrick’s money and buying stuff to 2) government simply printing money and buying stuff.
In both cases, the burden of the expenditure is spread over a large number of largely unidentifiable people. Exactly which people bear the burden depends on many auxiliary details. It will be one group of largely unidentifiable people in case 1) and a different group of largely unidentifiable people in case 2).
I think the real response is: what do you do in the second year, the third, etc after you’ve used up all the money you took away from him? And what have you done to all the other asset values in the economy? Has the confiscation changed the behavior of people who previously thought they could get rich? This is banana republic economics.
Ha!
“In 2009, Californians with estates worth more than $2 million left $37.2 billion to their heirs. Florida, in second place, had just two-thirds[*] that amount.”
*Florida’s population is just a hair over half of California’s.
mark:
I think the real response is: what do you do in the second year, the third, etc after you’ve used up all the money you took away from him?
No, this quite misses the point. The real question is what you do in the *first* year, when all you’ve taken from his money, not real resources. Where do the real resources come from?
Mr. Kendrick withdraws $84 million from the bank to make his tax payment, the bank makes fewer loans, interest rates rise, and someone cancels a vacations, or postpones a car purchase, or abandons a half-built factory.
Kind of alarmist rhetoric. Is this really the only possible outcome of taxing someone?
Is it possible that giving 84 million dollars to 1 million people who are likely to spend everything they get will result in 84 millions going into the different bank account of merchants supplying goods to the 1 million?
Or the 1 million people might decide not to spend their $84, but save it. In which case 84 million would be deposited into banks.
If this is possible then banks will still have 84 million dollars to loan and save us from abandoned factories, urban blight and a child’s broken dream of visiting Disneyworld.
Will…on net you’re right I believe, but Steve is focusing (rightly) on the fact that , yes, someone might gain but the other side to this is that someone else gives something up.
Will A:
Kind of alarmist rhetoric.
Only if it’s alarmist to quote the laws of arithmetic.
And as you can see, I quite explicitly stated that this is not the only possible outcome. There are many possible outcomes, but they all have this in common: If the government commands more resources and Mr Kendrick commands no fewer, then somebody else must command fewer.
This is similar to some of Bastiat’s excellent work. We need more absurdly simple refutations of economic fallacy.
What about future Mr. Kendrick? I would think the resources are really being taken from him. If I’m right (though this seems unlikely) then the revenue can be raised in the way Ms. Stevens suggests, since she would presumably argue that Mr. Kendrick and his future self are one person. The real problem with her thinking is the double taxation and discouragement of saving.
Conor:
First, the presumption here was that Mr Kendrick had no intention of ever increasing his consumption levels.
But second, even if so, any resources that the government claims today must come from someone else today. If they dont come from Mr Kendrick today, they must come from someone else today.
It is possible, of course, that those same people will have higher *future* consumption if Mr Kendrick is induced to have lower future consumption.
@Will, @Steve The laws of arithmetic can be quite alarming at times. Try thinking about Godel’s theorem on consistency for a while, especially after reading about Russell’s paradox…
Anyway, what about Mr Zendrick, who dreams of becoming wealthy enough one day to drive his cars around. Then he sees Mr Kendrick get taxed, and decides to build his factories in China instead? Suddenly hundreds of thousands of people in Zendrick’s factories (and those of his suppliers) are out of work.
On the other hand, Mr Kendrick is now deprived of his petrol money, so he stops driving his cars around and decides to apply his entrepreneurial nous to start a whole new line of businesses in the states. He buys the Prius and Tesla brands, hires away some of Google’s engineers, and makes the USA the world leader in self-driving cars powered by rainwater, directly creating tens of thousands of jobs, with hundreds of thousands more created indirectly.
It all balances out in the end, I guess…
Steve,
Your critique all depends on how Elizabeth Stevens and Barak Obama define “America’s fiscal crisis”. For them, I believe the crisis centers itself around wealth inequality.
It seems to me that neither one would care one iota about spending, the deficit, revenues, or debt if they could wave a magic wand and redistribute all wealth (equitably?) tomorrow. I mean, that is, until the magic wand needed to be waved again.
Scott H.: For them, I believe the crisis centers itself around wealth inequality.
But Mr Kendrick already chooses to command no wealth. Taxing him, therefore, has to reduce somebody *else’s* consumption stream. Without knowing who that somebody else is, how do you know whether this policy increases or decreases inequality?
It’s strange how people equate money in the bank with wealth instead of with *potential* wealth.
I have friends who live much better than I do. They have a bigger house, newer cars, and travel a lot. They’ve also recently spent a fairly large sum of money renovating. And they socialize a lot and buy lots of clothes. So they have a fair amount of debt.
Still, they call ME rich because I have more money in the bank! And, worse, I bet most voters would agree.
it’s to be found in the laws of arithmetic. You can’t drive a man’s consumption below zero.
Ms. Stevens might be being glib, about his zero consumption, but do you really believe a man set to inherit $82 million consumes zero?
really?
Because I am guessing he would notice his missing $82 million pretty quick because I am guessing his current consumption is a bit more than zero.
Sigh. OK — for the nitpickers. Let’s say a DEAD MAN with no heir has $1,000,000 in his bank account. If the government appropriates and spends it then he is not the one who really pays the tax. Someone else does. Steve’s point is that the usual “tax the rich” justification ignores who really pays, and so the justification fails.
Steve and Ken B,
So the next time the taxmen cometh by, I should yell out…
“Ha Ha! I wasn’t planning on spending that money anyway! So you haven’t really taxed me at all you sorry saps! You’ve only taxed yourselves!!! Bwuhahahaha!”???
Scott H,
I think you’re making the same mistake I did. Ms. Stevens advocates taxing the idle rich. If Mr. Kendrick is idle because he doesn’t consume. If he doesn’t consume, he can’t be taxed. If he does consume, he isn’t idle. So taxing the idle rich is impossible
(Scratch the “because” in the second sentence; add a comma after idle.)
“…it is quite literally impossible to raise revenue by taxing the likes of Mr. Kendrick … Here’s why it’s impossible: For the government to consume more goods and services, somebody else must consume fewer.”
I’m not following where government “revenue” is equal to government consumption – if the government took all Mr. Kendrick’s money and just sat on it the same way Mr. Kendrick does, would we not say that government revenue increased, even if government spending did not?
Conor,
Well, in my opinion, my post is accurate for Steve’s purposes. I exclaim to the taxmen that I “wasn’t planning on spending that money anyway”. So, for that particular amount of money, I was essentially a member of the idle rich. But it was all a joke.
My issue is that I don’t accept this statement as being true: For the government to consume more goods and services, somebody else must consume fewer. It makes for nice math I will agree. However, its not a representation of reality.
Among the many examples I could give: the government has only to purchase one online piece of software to make that equation NOT true. No one has to purchase less software because the government purchases more. No one has to purchase less of anything.
MRF: If you transfer $80 million from Mr Kendrick to the US Treasury, I’m sure the accountants will call it government revenue. But it’s important to understand that only one of two things can happen now. Either a) the govt spends no more than before, in which case *absolutely nothing of any consequence* has changed; Mr Kendrick and everyone else in the world goes right on consuming exactly what they’ve been consuming all along. Or b) the govt decides that because it has more “revenue” it can increase its spending, in which case someone else’s consumption stream must shrink. That someone else is not Mr Kendrick. So in case b), the accountants will tell you you’ve taxed Mr Kendrick, but the economists will tell you that in actuality, you’ve taxed someone entirely different.
I think you meant that while it’s possible to raise revenue by taxing Mr. K, it isn’t Mr. K who bears the burden. G clearly raises $84M, with which it can increase C by $84M, but only at the expense of a decrease in C of $84M by a bunch of people who aren’t Mr. K.
Our egalitarian friend Ms. Stevens might reply that yes, while a large number of faceless people would bear the burden of the tax, G will transfer C to a bunch of people G “knows” to be deserving. In addition, G has removed Mr. K’s ability to transfer $84M of C from a bunch of faceless people to himself in the future.
But if you are right about the interest rate increasing, sure some people don’t get there cars and vacations but someone else, namely lenders/savers are making a couple extra bucks on interest. Why is it obvious that the raise in interest is deleterious on the whole?
He does consume goods and services.
The four cars’ ownership is a form on consumption. The land upon which he parks and reparks them, the fuel used to drive them from space to space, (and the income to pay for it) are all a form of consumption. The food he eats (assuming he does), the house he lives in, the utilities paid to power and heat it, the clothes he wears (and buys, when they wear out) are all forms of consumption.
Even in abstract, to own is to consume, and he could consume less; the cars, seized by the government, could displace spending to buy vehicles for police departments. The land could become a housing project. His use of these things displaces government/social use, his monopoly of the property denies others its use. Thus, he consumes.
The govt decides that because it has more “revenue” it can increase its spending, in which case someone else’s consumption stream must shrink.
Do we live in an economy that can’t grow? Your argument proves too much – private spending wouldn’t grow the economy either.
Scott H. wrote:
Among the many examples I could give: the government has only to purchase one online piece of software to make that equation NOT true. No one has to purchase less software because the government purchases more. No one has to purchase less of anything.
But the software company will be enabled to consume more.
Steve’s formulation of the question is ambiguous == or confusing – because he does not distinguish between the allocative and distributional effects of taxation. As I read it, he is making an allocative claim [what is the effect of current-year flows of goods and services, and of prices], but most commenters are discussing distributional effects [who is richer and who is poorer.]
To illustrate the difference, even neither the government nor Mr. Kendrick change their expenditure patterns at all, Mr. Kendrick owns less capital and the government owns more. So even if the government lends out the same amount of money and it winds up being lent to the same borrowers, Kendrick’s interest income and accumulated wealth will fall [thus increasing bequests to his heirs], and the government’s net interest expenses and debt will fall.
Conversely, if there is an allocative effect so that Kendrick’s money does not get lent out for factories, vacations, etc., those people will [on the margin, because this is a very small amount relative to the overall size of the capital market] not be any worse off distributionally, because at the same time that they are deprived of their vacations, they are freed of the liability to repay their loans to Mr. K. [Of course, if this were a large enough amount of tax revenue to have second-order effects, then we’d also want to weigh these against the second-order effects from elsewhere in the economy — e.g., from reducing nonclassical unemployment, if one believes such a thing is possible.
Mr Kendrick most definitely consumes stuff. He buys cars. He buys art. He probably pays people to clean his house and pull weeds. He buys gasoline. Most importantly, I think he’s probably a very large consumer of financial services, and legal services.
DeLong comments:
http://delong.typepad.com/sdj/2011/04/i-take-that-back-most-amazing-thing-i-have-read-today.html
It is reassuring to learn that “we are the government”
The puzzle is easiest to understand if one realizes that the tax on the money holdings of this non-consumer is equivalent to an inflation tax.
If I accummulate $84mn without any intention of ever spending any this money (which is the key assumption in this puzzle), then I have effectively reduced the money supply. As a consequence, everybody else’s dollar bills have become slightly more valuable as everybody else can now consume the goods and services that I have decided not to consume.
If the government takes the $84mn from me and spends them, then the effect is the same as if the government had printed an additional $84mn. Everybody else’s dollar bills are worth a bit less and everybody else can consume a bit less, and the government consumes more.
The crucial assumption is that Robert Kendrick is a non-consumer, and that he will burn his money before leaving it to any heirs. If he had any intention of giving or leaving his money to someone who will ultimately spend it, then he would not be a non-consumer but a delayed-consumer, which would change the puzzle.
There is as little reason to debate this puzzle as there is to debate the Monty Hall problem.
“We could argue about whether it’s desirable, but because it’s impossible, the discussion is moot.”
Conversely, since it’s impossible, we can do it, and no one will object.
@Floccina
I see what you are saying. Doesn’t that make my point? Nobody is consuming less. Total consumption will go up, but total supply will go up, too. I guess my point is that total supply is not stagnant. It can change.
(Jokingly, but kind of serious) Maybe that’s why, in economics, they have something called a supply curve instead of just a single supply point?
Scott H: Th total supply of goods can change, but the act of transferring $82 million from a private to a public bank account is not one of the things that can change it.
I’m lost. A tax is defined (dictionary.com) “a sum of money demanded by a government for its support or for specific facilities or services, levied upon incomes, property, sales, etc. ” Whether or not that tax influences Kendrick’s consumption seems like a side issue to me. I’ll buy that it may not affect his consumption, and that it is more likely to raise bank interest rates thereby affecting the consumption of others. But the money would come from Kendrick and go to the government. If Kendrick has no plan of using those assets, then perhaps he wouldn’t consider it a significant loss. It’s still a tax.
To me a major factor in the fiscal crisis is the debt that exists today. The government has previously consumed the goods and services that it already denied to others. By taxing Kendrick we could pay off a portion of that debt, yes? Is there a judgment hidden here that reduced private cash reserves is worse than government debt?
Clay:
But the money would come from Kendrick and go to the government
This is exactly the point. What’s interesting to an economist is not where the money comes from, it’s where the goods come from. The government uses the money either to claim more goods, or to reduce someone else’s taxes, allowing that someone else to claim more goods. In either case, the interesting question is “where did the goods come from?” The answer is: Not Mr Kendrick, but rather from whoever chose to consume less because of rising interest rates and/or prices.
To focus on the money transfer is to miss all the interesting economics.
Thanks for the response – I gather that your view of taxes is not about the money but about the goods. I’m not an economist – so I’m sure I’m missing interesting effects. Under my definitions, we can easily improve the fiscal situation by moving $84 million from Kendrick to the government. If the government crowded markets when it created the debt, then perhaps we would be taxing Kendrick’s parents after all… the people who were contributing to consumption at the time some of the debt was created and who intended to give Kendrick power to consume. Examining the decision from this point of view, it seems that we have little to worry about when we tax Kendrick. The debt represents past government over consumption – we can’t affect past consumption. Do we need to judge whether or not private cash reserves are more valuable to the economy than reducing public debt?
Assuming the facts are as she states them, it is quite literally impossible to raise revenue by taxing the likes of Mr. Kendrick.
… and then you go on to agree that it’s possible to, um, _raise revenue_ by taxing Mr. Kendrick, it’s just that it wouldn’t do something arguably more relevant, like change consumption patterns (because of course there is no anti-endowment affect whatsoever from taking someone’s wealth, and Kendrick’s actions were in no way predicated on knowing that he had a fat bank account to fall back on or the interest it generates because people never respond to incentives).
Nothing to see here, folks, just another case of Steven_E._Landsburg defining terms so that he can eke out a hype-able result with no practical significance.
Scott H: Th total supply of goods can change, but the act of transferring $82 million from a private to a public bank account is not one of the things that can change it.
Right, and watch what else we can do with that:
“The total supply of goods can change, but the act of transferring $1 trillion in federal taxes from a private hands to a the Treasury’s bank account is not one of the things that can change it.”
100% true, and 100% tunnel-visioned.
Flop:
The crucial assumption is that Robert Kendrick is a non-consumer, and that he will burn his money before leaving it to any heirs. If he had any intention of giving or leaving his money to someone who will ultimately spend it, then he would not be a non-consumer but a delayed-consumer, which would change the puzzle.
There is as little reason to debate this puzzle as there is to debate the Monty Hall problem.
Exactly.
I agree with Silas Barta. Sometimes we are victims of our own cleverness.
Mr. K is clearly taxed, by any conventional meaning of the term.
There is a difference between raising revenue and transferring consumption.
Tax incidence is not defined in terms of the change in consumption patterns that result when government spends tax revenue.
Only under the contrived assumption that Mr. K is completely oblivious to his $84M, an assumption Ms. Stevens did not make, can one conclude that everyone but Mr. K is affected by the tax.
The implication is that a tax on the rich is really a tax on everyone else, because consumption patterns of lots of people change when G spends the tax revenue. This conflates taxation and spending.
Of all the reasons not to confiscate Mr. K’s wealth, that he’s unaffected by the ensuing ripple effects of additional government spending strikes me as the least important.
As a scientist, I think economist are making a clssic mistake of emphasizing what they know (if the only tool you have is a hammer…).
What makes growth tomorrow doesn’t have a whole lot to do with money – it has to do with knowledge.
anyway, quote “Unless, of course, the government decides to spend some of that $84 million. Now the government consumes more goods, Mr. Kendrick consumes no fewer, so someone else must consume less. Who is that someone else? The answer depends on the details of the transactions, but the most likely answer is that when Mr. Kendrick withdraws $84 million from the bank to make his tax payment, the bank makes fewer loans, interest rates rise, and someone cancels a vacations, or postpones a car purchase, or abandons a half-built factory”
Seems like their is a logical flaw here: 1 dollar taken by the gov’t and spent = 1 dollar of lost loans at the bank. But that ain’t necessarily true; we see interest rates are at about zero, which means that there is a surplus of money (interest is the price on money, and if the price is low the supply is high, no ?)
it could be that if the gov’t takes 84 MM from the bank and spends it on consumption, the “loss” the bank might be zero; maybe they have cash reserves…
“For the government to consume more goods and services, somebody else must consume fewer”
Gee I hope so. Somewhere out there is a wheelbarrow full of asphalt that needs to be dumped into a pothole in my road. I don’t want to purchase it and do the job, I want the town to do it on my behalf, thank you. They can use the personal property tax I paid on our cars; they’re welcome to it for that. Then I and my wife and neighbors will proceed to consume that asphalt by driving over it, deriving the utility of NOT hearing the suspension bottom, at least until next spring’s thaw.
The point is, the argument you are making (at least the part of it that isn’t self-contradictory) depends on an unspoken assumption that nothing that government does with my money returns any value to me. It’s a popular notion in the abstract, but it turns out that when you ask people about particulars, why, yes, they do want their Social Security and their Medicare, and of course the Armed Services, and … well, see http://www.washingtonpost.com/politics/poll-shows-americans-oppose-entitlement-cuts-to-deal-with-debt-problem/2011/04/19/AFoiAH9D_story.html
The implication is that, if it weren’t for the big bad government taking all that money from us, we could be buying Porsches for ourselves. Sadly, no, we would need the money to pay road tolls at every turn.
Nice!!! So THIS explains why when we had very high marginal tax rates in the past the economy ground to a halt. And vis-a-vis why the current economy is bustling so well.
“Here’s why it’s impossible: For the government to consume more goods and services, somebody else must consume fewer.”
Right there, you just assumed supply if fixed, or that government expenditure offsets private expenditure 100% (I assume some sort of Ricardian equivalence). Are you assuming the former (I hope not) or are you assuming some sort of Ricardian equivalence (the latter)? It’s fine to assume Ricardian equivalence, but that an assumption, not a fact. The empirical support for it is mixed at best. And its hardly solid enough to make any other result “impossible.”
Also, taxation is not defined as a drop in consumption. This is a wealth tax, so it’s unsurprising that it’s possible for consumption to stay the same. If you make up your own definition, then any result is possible.
Are you saying that if Kendrick has $84 million in gold bars, and the government comes and takes these gold bars from him, that he has not been taxed? I hope not. It sure seems like a tax to me.
You cannot tax wealth, you can only tax riches. When you engage in mutla exchange, you create wealth, as both people are better off. When you take riches from one person to give to another, you at least do not create wealth, and almsot certainly reduce it. In the economy, there is no such thing as a zero sum game; you have either positive sum or negative sum games. Taxation is always a negative sum game.
The core of Stephen’s argument rests on this. Money income isn’t what one’s cost to society is. Spending is your cost to society.
If someone makes a lot of income (gained through pareto exchanges) and doesn’t spend it, lets say they just withdraw the money and set it on fire. Society as a whole isn’t any poorer (except by the trivial costs that went into producing the cash he burned). Society benefits from their labor/trade/etc, but doesn’t actually have to pay them the promises for that labor that the money represents.
Steve,
This is a very similar point to your old article about Scrooge, right? Scrooge McDuck doing nothing with all his money except rolling around in it makes everyone else’s money that much more valuable.
All I know is I am glad the government stole some ones money to invest in satellite, microprocessor and internet technologies… and nice roads too.
And how much money would Mr Kendrick have if the government hadn’t stolen money from some one else to run the patent office to copyright the lock design for his inherited company?
The problem I have with examples like this one is they only address consumption, thus failing to question an essential fallacy in lay (and even some professional) economic thought. The “84 million dollar Schlage Lock Company fortune” is not an idle pile of intrinsically valuable stuff. It is the market valuation of an entity made up of both people and infrastructure that creates things people need. THAT entity does, in fact, consume things. You can make it consume less, but can you make it consume less without also reducing its PRODUCTION?
Suppose I have a milk cow…
Well, of course, people will say the control of the company that produces these things should not be all in the hands of “one” person. That presupposes that ANYONE or any combination of ANYONES would be able to produce as effectively as Mr. Kendrick were the ownership stake of the Schlage Lock Company divided up and sold to pay taxes. Surely someone who produces so “little” as a guy who parks and re-parks cars adds no value to the company, right? Wrong.
Suppose there is this guy who makes sure the cow is in a certain place at a certain time…
Lock companies die. So do companies in other fields. That means the companies that do not die have done something that makes them more sustainable in the ecology of a market. The ones that don’t die provide employment for workers whose efforts are consumed to create products people need, in this case to prevent the loss of things they value. The capacity of Mr. Kendrick’s company to provide sustainable opportunities to consume the labor of otherwise needy people to make their living creating products that protect the things all of us value may have something to do with what happens inside Mr. Kendrick’s head while he shuffles automobiles.
Suppose there are people who want to cut up the cow to get at all the milk in it right now…
Taking that for granted by taking Mr. Kendrick out of the picture of the Schlage Lock Company and distributing his control of the company, willy-nilly, to satisfy some desire that he be forced to consume less MIGHT have no effect on the lock company. However, if it does, and if the ecology of the company is adversely affected, many people would lose their ability to make a living and many, many others would lose a source of reliable and inexpensive locks they use to secure their valuables.
Surely there’s no reason to think there will not be as much milk…
Money is a fantasy we all have to share if it is to work. It never un-becomes a fantasy, though. When we also begin to pretend that, because we can imagine some guy who parks cars all day having some great pile of it, we ought to be able to distribute the pile of money the utility of our fantasy evaporates.
Dead cows give no milk.
The purpose of the tax is not to reduce the mans consumption. That is never the purpose of a tax. The purpose of the tax is to allow the government to pay for things. In effect the idea is that instead of the money going of cars (or maybe just sitting in the bank drawing interest for the guy) the money goes to pay for defense spending or something.
This has got to be the dumbest post I’ve every seen. April Fools day was on the first.
Glenn Sills:
In effect the idea is that instead of the money going of cars (or maybe just sitting in the bank drawing interest for the guy) the money goes to pay for defense spending or something.
Thank you for making this key mistake so brazenly so I can point to it. Missiles are not made of money; they are made of steel and labor. You are focusing on where the money comes from, but where do the steel and labor come from? Someone must bear this burden, and it is not Mr Kendrick.
This article represents an act of incredible intellectual dishonesty or incredibly poor reading comprehension.
This entire article is an elaborate bait and switch that hinges on the sentence: “[a]ssuming the facts are as she states them, it is quite literally impossible to raise revenue by taxing the likes of Mr. Kendrick.” So really not even the author of this article can pretend that it has any relevance to real world policy, since in the real world there is no such thing as a multimillionaire with a consumption of zero. Presumably that means that this article had little purpose beyond taking Elizabeth Lesly Stevens down a notch.
Landsburg doesn’t actually quote Steven’s argument. That makes reading the actual column an enlightening experience It turns out that Landsburg’s paraphrasing of Stevens is blatantly incorrect. It is actually Landsburg, not Stevens, who introduces the ludicrous idea that Mr. Kendrick isn’t consuming anything. It turns out that the “fallacy” here is something that Landsburg invented out of whole cloth so that he could write an intentionally irrelevant article disproving a position no one actually articulated.
Hi Steve,
What do you make of Krugman’s reply? Specifically, does the existence of idle resources change the analysis?
>>> For the government to consume more goods and
>>> services, somebody else must consume fewer.
Only if no resources are idle.
Consider a simple example:
Due to the housing bust, there is a huge glut of unemployed construction workers in Chris’s town, so he’s had no job for some time. $100 is taxed from Mr. Kendrick and given to Chris in exchange for digging a drainage ditch. Chris, worried about future unemployment, puts that money in with his (dwindling) savings and remains on his strict budget.
At the end of the day, there is no change in private-sector consumption or investment: neither Chris nor Mr. Kendrick change their consumption, and no private hiring of Chris has been lost (as the demand in his area for people with his skills is much lower than the supply; that’s why he’s unemployed), so the only short-term effect is switching a few numbers between their bank accounts. By contrast, there is an increase in government consumption: it has received an extra $100 of revenue, used that to consume an extra $100 of services, and has thus accrued an extra $100 of assets.
In other words, overall consumption has increased. How is this situation impossible? If your example only applies when there are no idle resources, how is it at all relevant to the real-world US economy of 2011?
Mike:
Specifically, does the existence of idle resources change the analysis?
No, as I’ve explained seventeen times in the comments.
Why doesn’t the government (local, State, whatever) just seize his cars and sell them? It’s the proverbial two birds with one stone: more money for ‘society’ and more parking for his bitchy neighbors! Everyone wins (except Mr. Kendrick).
Haven’t you forgotten something in your neat little analysis … the interest that he earns on that $84 million???
FH:
Haven’t you forgotten something in your neat little analysis … the interest that he earns on that $84 million???
He presumably doesn’t plan to spend the interest either.
I completely disagree. I won’t side with whether taking his money is right or wrong; but its certainly effective. If you take Mr. Kendrick’s money away, he will be forced to work to make more. His potential heirs (no longer able to wait in the wings for largess) are also induced to work more. The money (presumed to be in a bank; it could’ve just as easily been wasted sitting under his mattress) that was going to make loans for purchases of already created assets for people who profess an ability to pay it back can now be used to employ people who couldn’t otherwise find work or provide services to those who couldn’t pay for them. Its possible that there will be 84 million (minus the reserve rate holding requirement) less to lend to others. You could easily just lend it out again. But 1) those were going to people wealthy enough to qualify to buy a huge asset to get a loan. 2) the benefits of that money accrued to Mr. Kendrick and his heirs. Taxing him is easily effective.
Mr. Landsburg you act like you can’t tax someone who no longer DOES anything. But the point is his savings are his Retained Earnings of previous action. If you take them, its no different than if you would’ve taxed him more at the time he earned them. It is a store of his valuable productivity. Whatever he owns is what he earned minus what was originally taxed (and not given away). Taking those items, whether cash or property is certainly effective as it immediately decreases his wealth which allows it to be distributed elsewhere. I absolutely am not arguing this is right; but it is patently effective. Arguments to the contrary just make no sense to me whatsoever.
One last example; you could leave Mr. Kendrick’s money in the same bank and not touch it except to simply change the owner from Mr. Kendrick to the govt or Person X. It wouldn’t change anyones consumption except reducing Mr. Kendrick’s wealth and his right to the interest from his deposits and shifting it to the new party.
Notalawyer:
I completely disagree. I won’t side with whether taking his money is right or wrong; but its certainly effective. If you take Mr. Kendrick’s money away, he will be forced to work to make more.
In other words, you completely agree. Mr Kendrick bears (a part of) the tax burden if and only if the tax changes his behavior — this was the whole point all along. If he consumes virtually zero and therefore chooses not to work in any circumstance, then he bears zero burden. If, contrary to the assumptions of the original example, taking his money leads him to work more, then he does bear a burden. So you’ve actually got the point.
Well, it took me several readings of both the op-ed and the comments to feel comfortable that given ALL the constraints, Mr. Landsburg’s point about who untimately pays the tax (i.e. provides the goods/services the $84M represents) is true – “somebody”, but not Mr Kendrick.
Government consumption (resource usage) inevitably crowds out private consumption (whether one feels for good or ill); in this example government converts “potential” consumption into “actual” consumption, whether via direct purchases or tax/debt relief to others.
Given the high important (for this case) assumption of 0 potentiality for Kendrick to spend or will to heirs/charity his $84M (and ignoring its loan & interest value as a bank deposit) he has assumed the miser’s deflationery role. The government, by releasing the $84M into the economy, via direct purchases or tax/debt relief, has an inflationery effect, thus constraining (destroying) the purchasing power of someone, but not Kendrick.
Even worse, given a dynamic economy (a non-zero sum game), the government’s spending has a negative multiplier effect on the $84M in that the government makes sure its overhead is paid prior to ladling out the net, destroying more value.
A neat mental exercise, but wholly dependant on strict adherence to the parameters as layed out by Mr. Landsburg.
As Jack of Several Disciplines just noted: Landsburg’s article is “[a] neat mental exercise, but wholly dependant on strict adherence to the parameters as layed out by Mr. Landsburg.”
So I am going to ask again, since Landsburg pointedly ignored me last time. How could any competent English speaker actually read Elizabeth Steven’s column, and then read Landsburg’s summary of that column, without their head exploding? Landsburg literally invented an argument out of whole cloth and then falsely attributed it Steven’s so that he could develop this irrelevant thought experiment.
Seriously. Someone actually quote the section of Steven’s (quite brief) article where she suggests that Mr. Kendrick has a consumption rate of zero.
Hell, if you only read Landsburg’s article you would probably assume that Steven’s article was in favour of taxing the idle rich. Of course its actually about raising the estate tax, but Landsburg doesn’t let that get in the way.
Someone (hopefully Landsburg) please explain this to me. How do we go from Steven’s article to Landsburg’s thought experiment? I don’t see any connection whatsoever. This is fairy tale economics at its worst.
Nick H: You dont need to assume a consumption rate of zero. You only need to assume a consumption rate that doesn’t change when you take away a large fraction of the $84 million estate, which is entirely consistent with the description in the Stevens article.
Landsburg, can you please quote the section of Steven’s article that you are referring to? I have read her article several times now and cannot find a single passage that in any way resembles your thought experiment. In fact let me go ahead and post the part of the article where Steven’s describes Mr. Kendrick’s lifestyle:
—Steven’s writes that: —
“Kendrick is a Stanford graduate with a law degree from the University of San Francisco (whose law school is in Kendrick Hall, named for his grandfather’s $1 million gift). But his law license was suspended long ago, and his chief legal work is now a seemingly quixotic lawsuit against a ring of burglars who stole art from his house and caused the death of his Abyssinian cat. (That’s right: they burgled the house of a lock-dynasty scion.)
Kendrick may be a lovely man. He may do anonymous charitable work. I don’t know. He never got back to me, despite my leaving him voice mail messages and a letter on his doorstep.”
—
So first of all it is actually clear that he continues to rack up legal expenses. Second of all, there is absolutely nothing here that indicates that he has a low consumption rate – it actually sounds like this is a man with a certain level of appreciation for fine art and rare pets. Steven’s even acknowledges its perfectly possible he’s engaging in anonymous economic activities that are undetectable. He also lives in a nice house and obviously has people managing his vast estate for him.
Now lets look at a quote from your article:
—Landsbur’g wrote:—
“Stevens wants to tax the “idle rich”, her Exhibit A being Robert Kendrick, heir to the $84 million Schlage Lock Company fortune. According to Ms. Stevens, Mr. Kendrick appears to do pretty much nothing but park and re-park his four cars all day long. Taxing people like Mr. Kendrick, she says, has to be part of any solution to America’s fiscal crisis.”
—
Actually its overwhelmingly clear in Steven’s article that she isn’t advocating a tax on the idle rich. Here’s another quote from her article:
—Steven’s wrote—
“But the great policy debates under way in Washington and Sacramento ultimately get personal: Do we take money from the pockets of the rich — heirs and magnates alike — or do we continue to dismantle everything from Head Start to the state parks system to California’s once-fabled public universities?”
—
“Heirs and magnates alike” i.e. the productive rich and non-productive rich alike. Other passages in her article actually go so far as to engage the question of whether taxing the productive rich will create disincentive to work.
Other people have attacked your article because of the strange economic assumptions that you packed into it (like the fact that in your model Investment and Net Exports are apparently not part of GDP). What really shocks me, however, is the blatantly dishonest framing of Steven’s argument. I am honestly at a loss as to whether you intentionally distorted her article or simply misread the ENTIRE piece.
Amazing! You’ve published multiple books and columns, and yet this article would likely receive a failing grade if it were submitted to an undergraduate college course.
Steve, one thing I don’t understand is this overarching point that there’s a finite number of resources in the world. Isn’t it true that if we create more efficiency then we actually are creating more resources? I’m just confused, please explain this further.
Gwen: The world’s resources are not fixed, but they are fixed for purposes of this exercise because the mere act of taxing can’t create new resources.
If you’ve got 8 houseguests and 6 bedrooms, then somebody’s got to share. It’s true that you can always add more bedrooms, but for the purposes of the problem at hand you should treat the number of bedrooms as fixed.
You are drawing a distinction between the nominal and the real. They are too often confused. Nominally, he can be taxed, and nominally everyone else is better off. However, he cannot be taxed of real resources, because he basically doesn’t use any, so nobody is really any better off. Good.
More generally, (really) only production can be taxed: All taxation is a transfer of production, goods and services, to the government. Consumption cannot (really) be taxed, since it is still a transfer of what is produced away from the consumer and to the government, which then consumes. Consumption can only nominally be taxed. For example, were we to tax Mr. Kendrick to such degree as to change his behavior, on the whole, there would still be not net improvement in the economy. Any improvement in the rest of the world would be less than Mr. Kendrick’s loss.
Further, (really) only consumption can be subsidized: All subsidy is a transfer of demand, that is consumption of goods and services, from one producer to another, through the instrumentality of the government. Due to handling expenses, the subsidy is always less than corresponding tax, that is, on the whole, an economy is always, in the present, worse off for a subsidy. This is not to say a nominal subsidy need be useless. For example, when the subsidy goes to develop infrastructure, that is future production, an economy may be better off in the future.
xposted to my blog.
Landsburg’s main thesis is correct, but he is lost in his attempt to explain why taxing Mr. Kendrick is not good for society.
There are two reasons Landsburg cites to prove taxing Mr. Kendrick is not beneficial, only one of which is correct. The first is that his money is presumably invested somewhere, meaning that someone is using his money to create wealth. If the government takes the money, they are really taking it from the people currently enjoying its use. Mr. Landsburg claims that when the government takes the money, nothing changes, and that it is only when government spends the money that others are hurt. This is incorrect; the government takes wealth only from Kendrick, and nothing changes when government spends what it has taken.
To understand the true nature of this process, it is helpful to realize that “money” is itself a form of “real” wealth. It is a financial asset like any other, and Mr. Kendrick has loaned all of his assets to other people (if he holds it in a bank, stocks, mutual funds, etc). Because he doesn’t actually hold the wealth, but has instead loaned it to others so that it may find productive use, the government theft transfers ownership of those loans to the government. So far, the only loser is Mr. Kendrick.
When the government trades those loan obligations (taken from Mr. Kendrick), they do not destroy the loans. They only transfer the ownership of the loans to a road builder or submarine manufacturer. The people who were originally putting Kendrick’s assets to good use creating more wealth continue to do so, oblivious to the fate of Mr. Kendrick. Landsburg’s attempt to elaborate on from whom the assets are taken is unnecessary; the wealth is taken from Kendrick alone.
The bank has invested it in myriad ways, but to keep it simple, let’s think about it this way: Mr. Kendrick owns 84 ounces of gold. He has loaned them to a shoe manufacturing company in exchange for an IOU from the company, stating “Bob’s shoe company owes the bearer of this note 84 ounces of gold and 5% interest until the gold is returned to the owner of this note.” This is a simple way to think about the fate of the money Kendrick places with the bank.
When the government taxes Mr. Kendrick, it does not take the gold from the shoe company. It takes the note issued by the shoe maker, and when it spends the note the government trades it to the submarine company for a new warship. The shoe maker remains unaffected; it will repay the 84 ounces of gold to the submarine company instead, and continues to make use of the gold for its own shoe-making purposes. It is only Mr. Kendrick and his heirs that are penalized by the tax. Taking the money does not destroy wealth, does not cancel the loans Kendrick made, and does not tax others inadvertently. The tax plainly and clearly taxes Mr. Kendrick and Mr. Kendrick alone.
Refuting the suggestion that it is good for society to take Kendrick’s money is the same argument used to refute any type of central planning, which involves rearranging and directing the wealth of a nation, and has never proven successful. The reasons it is harmful to take Mr. Kendrick’s money are the same reasons it is harmful to take anyone’s money, or force anyone to do anything at the point of a gun. In the end, we are all happier, richer, and live with more freedom when government taxes us as little as possible. Telling Mr. Kendrick what to do with his wealth is no different from telling any citizen what to do with his or her wealth. If I choose to keep keep 84 pennies in a shoebox and never spend them, that is my personal choice. The situation does not change when if I choose to keep $84 million in my bank account, and rearrange my cars until I die. Removing the the freedom of individuals to do as they please with the fruits of their labor is called central planning.
Stone Glasgow: Without having (yet) read all of your long comment, I have to at least remark on this:
Landsburg’s main thesis is correct, but he is lost in his attempt to explain why taxing Mr. Kendrick is not good for society.
That would probably be because I never remotely suggested that taxing Mr Kendrick is not good for society, so there was nothing to explain.
Stone Glasgow …” It is only Mr. Kendrick and his heirs that are penalized by the tax. Taking the money does not destroy wealth, does not cancel the loans Kendrick made, and does not tax others inadvertently. The tax plainly and clearly taxes Mr. Kendrick and Mr. Kendrick alone.”
If there is now $84 million more dollars bidding for the same goods and services the rest of us are bidding for, doesn’t that drive the price of those goods and services up? It adds to the demand side. That means we’ll all get less for our money. Tell me why this isn’t so?
It seems to me that the lesson here is fairly simple. The person directly taxed is not necessarily the (only) person who bears the economic burden of that tax. Taxation involves not only direct, but significant indirect consequences. Any child who knows the nursery rhyme “The House that Jack Built” can attest to that concept. The very special example constructed by Professor Landsburg demonstrates the principle quite well with respect to the taxation of wealth, or even income, of savers, but I fear that the chosen examples overshadow the fact that the principle applies in other contexts, too. If we assume that instead of simply saving his money Mr. Kendrick planned to use his savings to build a luxurious mansion, the burden of taxing his wealth falls not only on him, but also on the prospective home builder, its employees, building suppliers, etc.
I find it strange that in a somewhat different context of corporations many, if not most “progressive” economists quite readily agree that the incidence of the tax falls not only on the corporation’s owners, but also on labor. The more a corporation is taxed, the less there is available for it to consume or invest in the wages of its employees. Those, who deny these simple facts about who bears the burden of taxation, or when confronted with them try to change the subject tend, in my experience, to be those who view the primary purpose of taxation as a means of re-distributing income. Although, as these examples show, taxation of income or wealth is a very blunt instrument to do so, the selectivity in which these facts are denied suggest that they are denied merely when it is politically expedient to do so.
The overwhelming consensus among economists is that the least economically distorting tax would be some sort of value added tax because it is imposed not at the beginning but at the end of the tale of “The House that Jack Built”. Wealth can then be re-distributed more accurately and transparently under direct spending programs. Economists with a progressive political agenda sometimes admit this and advocate a VAT, but they tend not to do so very aggressively. The reason for this is not based on economics, but on politics. It is easier to sell taxes when they are directly superficially at the guy behind the tree or the Mr. Kendricks of this world.
Ethan,
New currency does not enter the world when the government takes Mr. Kendrick’s money. If Mr. Kendrick had all of his money held in his basement in cash, your suggestion would be correct. If he holds his wealth is financial assets it is a different situation because the currency is already in circulation.
ECON 102: The economy will grow if there is an increased (effective) demand and idle resources. People who would like to spent more are probably 300,000,000 in the USA. And at least 20,000,000 of them would like to work more in order to consume more (idle workforce). The problem is that most people don’t find a job, therefore have not enough money to consume more. On the other end Mr. Kendrick doesn’t want to consume more. So taking money from Mr. Kendrick to spent it or to distribute it to the people will increase effective demand and therefore increase growth and decrease unemployment. So if Mr. Kendrick doesn’t lose something, a lot of people will win something.
Obviously, taxing all the money away from people who don’t want to consume it is bullshit, since someone has to invest his money for future consumption. Nevertheless investing makes only sense if there is effective demand for the possible products. So there has to be an optimum between taking money from the rich to increase demand, and leaving them enough money so they can invest the rest.
That is just a domestic perspective. Giving that the US has an huge trade deficit and therefor a lot of possible demand abroad they could invest more in export industries. But it looks like as if this doesn’t work because of an overvalued dollar.
Steve,
My apologies. You did not attempt to show that the tax is “bad for society.” You stated that it was impossible to tax Mr. Kendrick because when the government spends more, someone else must spend less. I agree with this point, but do not agree that the money is taken from anyone other than Mr. Kendrick. I elaborate on exactly why I feel this way above.
I’m not understanding why it would only affect consumption streams. Why wouldn’t the increased spending also affect total production?
Money is Wealth:
http://stoneglasgow.blogspot.com/2011/04/money-is-wealth.html
The point that everyone in the government spending/taxation debate keep ignoring is the fact that IT DOESN’T MATTER HOW MUCH MONEY THE GOVERNMENT TAKES IN BECAUSE THE POLITICIANS RUNNING SAID GOVERNMENT KEEP SPENDING MORE THAN IS BEING BROUGHT IN IN THE FORM OF TAXES; to wit, one billion dollars in tax receipts translates into ten billion dollars being spent, ten billion dollars in tax receipts translates into fifty billion dollars being spent, and on and on and on.
Brent:
IT DOESN’T MATTER HOW MUCH MONEY THE GOVERNMENT TAKES IN
…
one billion dollars in tax receipts translates into ten billion dollars being spent, ten billion dollars in tax receipts translates into fifty billion dollars being spent
Your argument appears to lack consistency.
Great article Mr. Landsburg. May I add a bit to the end?
…“Taxing the rich” cannot work unless you do it in a way that induces the rich to consume less [or produce more].
Journalists make this mistake a lot, but I don’t remember ever seeing a more crystal clear example.
Ms. Stevens is just one of a million naive ideologues that wants to make somebody else pay for her fantasies of a better world. It won’t work unless more people find a way to provide a good or service that somebody else needs or wants. That means:
– Motivating those that are waiting until their unemployment checks run out to really get serious about looking for a job.
– Allowing people that produce goods and services to keep more of the fruit of their labor.
– Encouraging people to take intelligent, calculated business risks.
– Enticing businesses to relocate to your area.
– Reducing the size of government expenditures, the rock that weighs on the back of the rest of the economy.
I know these ideas sound cruel to the poor and the downtrodden, but the fallacy that most people have is that getting the government involved will help even the playing field. It only helps the rich even more. After all:
– Who has the money to buy politicians?: the rich.
– Who has the money to take advantage of government programs to help out the banking industry, the drug companies, large-scale farmers being paid to grow nothing?: the rich.
– Who knows how to protect themselves from inflation when the government goes in a printing and spending spree?: the rich.
– Who has the contacts to make gobs of money rendering no-bid contract goods and services when the country goes to war?: the rich.
– Who has the money to buy assets for pennies on the dollar when the politicians crash the economy into a smoldering heap?: the rich.
There’s a principle in business called the agency dilemma. Essentially, when you put someone else in charge of your money (with minimal supervision)…they are usually going to act in their best interest instead of yours. That is what government is, a great big agency dilemma. And that is what politicians use to get re-elected, line their pockets, and set up their retirements. They make friends. How many poor, humble senators and congressmen do you know? (In my case, very few.)
– Let non-government agencies help the poor with their own money, or with donations they have proven to donors they are worthy of dispensing.
– Cut the government’s budgets and by so doing cut down the gravy train for the rich.
– Clean up corporate law so that executives are beholden to somebody besides their self-appointed cronies to determine their salary, bonuses, options and parachute and you will give that money back to workers and savers that invest in that company for retirement.
– Let unions negotiate with somebody that has their own money to lose, instead of some government official that is going to benchmark his or her own salary on that of union underlings.
These are the kinds of changes that would restore the spirit that made America great.
Very late to this party, but I’ll take a stab at identifying the source of the apparent paradox.
If, as asserted, Kendrick’s consumption is truly unchanged after his wealth has been taxed, then it must be the case that his consumption is at a level that is not constrained by his wealth. In econo-jargon, this means that Kendrick’s marginal utility of wealth (the value of his Lagrange multiplier in his lifetime optimization problem) is zero. OK, I suppose that can happen if the wealth is inherited, although it supposes that Kendrick wouldn’t even get any utility from charitable giving. But it cannot be true in the case of wealth that is earned, because the person who earned the wealth did so because his budget constraint was binding. This can’t be a story about wealthy people per se, but only about people who inherit a level of wealth that is so far beyond what they plan to spend that a big chunk of it can be taken away and still leave them unconstrained by their remaining wealth.
None of this implies that people other than Kendrick are bearing the “burden” of the tax on him. Kendrick’s wealth is in perfectly inelastic supply, so it is like the site value of land in midtown Manhattan. It can be taxed with no resulting change in the allocation of resources. Since Kendrick is not hurt by the reduction in his wealth, there is no reduction in *anyone’s* utility as a result of the tax per se, so there is no burden of that tax. It’s a free lunch, because the initial allocation of wealth can be altered without violating the Pareto principle.
It would be clearer to call what Landsburg is talking about the “burden of public spending,” which is the difference between the value any person places on the stuff newly provided to him by the government and the change in his income that results from the changes in the prices of his consumption bundle and the factors of production that he owns. If the government’s spending were completely useless to people, then some people would gain, some would lose, and on balance there’d be no net change in their welfare. If the government spent Kendrick’s wealth on useful stuff, the net “burden” of public spending would be negative–people on balance would be better off.
Pat:
It would be clearer to call what Landsburg is talking about the “burden of public spending,”
I agree, and will probably steal this idea the next time I write on something like this. Thanks.
This post is absurd. Our economy has a LOT of idle capacity right now. You may be too busy thinking armchair thoughts about big questions to notice, but in the real world there are 14 million unemployed people in America. Those 14 million people could be doing something useful, and those ones and zeros in the rich guy’s bank account could be encouraging them to do it–and then they could pass the ones and zeros on to somebody else… Have you ever heard of the velocity of money? Have you ever heard of the great depression? Hello?
Eric: If there are idle resources that can be employed at no social cost, then you don’t have to tax Mr Kendrick to employ them. The act of taxing him creates no additional resources above and beyond what is already available.
‘If there are idle resources that can be employed at no social cost, then you don’t have to tax Mr Kendrick to employ them. The act of taxing him creates no additional resources above and beyond what is already available.’
If Govts. are constrained to raise taxes to match their spending then idle resources that can be employed at no social cost will in fact be so employed only if the likes of Mr. Kendrick are taxed and not otherwise.
I don’t see the instrumental value of a parable about crowding out which hinges on the efficiency of fiscal prodigality.
Enjoyed this post. Really late to the game here, everyone has probably moved on, but just in case, some recent comments made me think…
vic – “idle resources that can be employed at no social cost will in fact be so employed only if the likes of Mr. Kendrick are taxed”
I think the idea is that if such resources exist, the government can simply “employ” them. The only reason to take Kendrick’s money first – and thereby call it “spending” — is if there is a resource owner who requires compensation (and some underlying moral or political calculus suggests this is a more palatable way to consummate the acquisition.) But that’s just saying there is in fact a cost, and we’re back to determining who really pays it at the end of the day. And that’s where the parallel to printing money is instructive.
Eric – “those 14 million [unemployed] people could be doing something useful.”
I think the response would be that, as with steel or medicines etc., Kendrick is not hoarding any productive jobs either. If we can find some idle real resources we might be able to give some people something “real” to do. Otherwise we can fund make-work projects or extend unemployment benefits. Any of these things could be similarly accomplished by printing new money rather than taking Kendrick’s (without risk to inflation in the Keynesian scenario in either case).
Pat – “it cannot be true in the case of wealth that is earned, because the person who earned the wealth did so because his budget constraint was binding”
Why should the source of the wealth matter? Clearly in this case someone prior to Kendrick continued to earn well beyond the point where their “budget constraint was binding” because they left a lot of it to him. And why assume all of the wealth generated by a company over time is calibrated to someone’s initial budget constraint? Perhaps the venture turned out to be more successful than they had expected. And sometimes people just have a passion for creating value.
“none of this implies that people other than Kendrick are bearing the “burden” of the tax”
I don’t think there’s a “paradox” here, just much confusion over what the point of the initial post was (and wasn’t). Landsburg stated as clearly as humanly possible that taxes generally impose a burden on someone (unless perhaps there are truly idle resources). So if Kendrick gets zero marginal utility from his Pareto-optimal Lagrange thingy, that implies that the “someone” is other people (as Landsburg described, via an increase in prices and/or interest rates if consumption increases with no increase in the supply of real productive resources (as was assumed)).
“it is like the site value of land in midtown Manhattan. It can be taxed with no resulting change in the allocation of resources”
I’m not sure what this post has to do with the price of real estate in Manhattan. It is true that no matter how we tax it, a plot of land is unable to exhibit changes in its consumption pattern and it will continue to exist where it presently is. But surely taxing it more affects its value to potential owners (e.g. its “best and highest use” could change, which could be a form of reallocation). To the extent this can be translated to human beings, the fact that I can’t avoid a tax doesn’t mean I’m not impacted by it. I pay my taxes because I don’t want to go to jail (among other reasons), but surely my consumption suffers.
iceman:
I think the idea is that if such resources exist, the government can simply “employ” them. The only reason to take Kendrick’s money first – and thereby call it “spending” — is if there is a resource owner who requires compensation (and some underlying moral or political calculus suggests this is a more palatable way to consummate the acquisition.) But that’s just saying there is in fact a cost, and we’re back to determining who really pays it at the end of the day. And that’s where the parallel to printing money is instructive.
Yes. Exactly.
iceman,
Here’s an example you may be able to understand, which exactly replicates my previous discussion in simple terms: Suppose Kendrick had kept his wealth as a gigantic stash of canned food in a warehouse. He never consumed any of it, and he never planned to consume any of it. Now the government taxes him by taking away some or all of his canned food and giving it to people who will eat it. Do you really think that there’s a “burden” to this tax?
If you start a syllogism with a faulty premise, you’ll reach a faulty conclusion. The faulty premise here is that there is “always” a burden of taxation, when the assumptions of the case at hand make it clear that there is none.
All sorts of other premises may be stipulated for this example, such as that Kendrick actually lent his wealth to other people and kept re-lending the interest he received on that wealth, which would be like letting people take his canned food in exchange for IOUs. Then a tax on Kendrick would cause a redistribution of consumption if the tax proceeds were spent in some way different from the status quo. This seems to be what Landsburg had in mind. There will be a reallocation of consumption due to the government’s spending pattern, but that is simply not what economists generally mean when they discuss the burden of a tax.
Pat: You’ve quite missed the point of the example. The key assumption is that Kendrick does not choose to consume resources. Keeping canned food in a warehouse forever is as good as consuming it. You are right that if he keeps his wealth in this form, and doesn’t miss it when it’s gone, then there’s a free lunch waiting for the government (or whoever else manages to commandeer it). But the whole point of the example was to distinguish between financial resources on the one hand and real resources on the other. As long as Kendrick stores his wealth in the form of financial resources, he cannot provide any real resources to the govt.
Why do you consider financial assets to be unique? There is a long gray line between “real” and “financial” assets. What’s the point of drawing a line?
Stone Glasgow:
There is a long gray line between “real” and “financial” assets.
No there’s not. Real assets are inputs to the production function.
Steve, I think the third paragraph of my second comment demonstrates clearly that I do understand that you were implicitly assuming that Kendrick was holding financial assets. But you still don’t understand my argument regarding why your original post is misleading.
“Tax burden” is a standard term in public finance that refers to the loss of consumption imposed on someone that results from the COLLECTION of a tax. It is, as a matter of definition, a question of “sources” of government income, and is completely unrelated to the effects of the “uses” of that income. For the reasons I laid out in my original comment, there is simply no tax burden in the unusual state of affairs you posited.
YOUR point is simply that if the government spends the tax revenues it collects from Kendrick in a pattern that’s different from the way they’re being spent now (which is whatever way that Kendrick’s capital is being invested), the pattern of consumption will change. That’s a perfectly fine observation to make, but it ignores the very important fact that the entire POINT of taxing and spending by the government is to alter the pattern of consumption. In the standard case, the goal would be to shift production away from “private” consumption goods toward “public” goods. The welfare effect of such a shift depends on the extent to which the government spends its tax revenues efficiently, i.e., on goods for which the private sector faces higher costs of provision (including organizational costs) than does the public sector.
Given your past writings on the taxation of capital gains, I think the point you intended to make in your example was that the burden of a general tax on capital is shifted onto other factors of production when capital is in perfectly elastic long-run supply. That is a completely valid logical proposition. But a tax on a single individual–which is the way you set up the Kendrick example–will absolutely be borne by that individual, because changes in his supply of resources to the market will not be large enough to affect any general input prices at all. The weird thing about the case you posited is that targeting Kendrick doesn’t even hurt him, because his marginal utility of income is zero, and so there’s no tax burden at all.