How to Think About Taxation and Spending (Part 1)

April 23, 2012 1:12 pm 2 comments

World average GDP per capita 1500 to 2003. QWFP.

One of the great tragedies of the modern world is the widespread belief that the science of economics – a remarkable accomplishment of human thought that, when well used, greatly expands our understanding of the universe – consists in the manipulation of technical terms beyond the ken of the layman and/or complicated statistical analysis. Confronted with armies of experts with letters following their names (the vast majority of whom rely on either the government or central bank for their income) saying things that they can’t understand, the general public either supinely refers to the better judgement of a claque of men and woman who have got literallyeverything wrong consistently for the last ten years, reject economics entirely or fall back on a set of plausible sounding clichés that more or less approximate to the gobbledigook they see on T.V.

We can do better than this. Economics, properly conceived, is nothing more or less than logically thinking about human action within the context of social interaction. Some people are better at this than others, but there is no reason why any reasonably educated person equipped by his education with the basic tools of thought cannot, with a little bit of effort, understand economics. The only thing necessary is to ignore the purveyors of wilfully obscure scholastic jargon and to actually think, starting with what is simple and working to what is complex.

Perhaps no issue more clearly demonstrates the failure of the vast majority of people to exercise their civic duty and think about economic affairs than the area of taxing and spending; commonly held ideas about the “stimulative” impact of government spending are completely nonsensical.  Even worse, conservative “supply-side” arguments are also based on the same errors and non-sequiturs even when they are used to justify correct policies. My modest task over the next serious of posts is to work reasonably methodically through these issues, by making use of illustrative examples. If someone can spot a logical flaw in my reasoning, I would be happy to hear it; if they instead, as is usually the case with economics graduates, prefer to make crude appeals to authority, reference undefined economic concepts or fly from reason into the comfort blanket of regression analysis, they can keep it to themselves.

Situation 1: At the end of the month Arnold (From now on Mr. A.), a carpenter, works out his profits and, rewarding himself for his toil, takes $20 and sets off on his way to buy a pizza; however, before he gets there Barry (Mr. B.) accosts him, takes the twenty dollars and buys a pizza himself.

Analysis: The economy remains unchanged, the pizza company has the exact same profits and losses as it would have if the burglary had never occurred, no extra purchases are made, none are forgone, no-one new is hired and no-one is fired. The only difference is that Mr A. receives less pizza related enjoyment and Mr. B. more: wealth has been redistributed and the control of social resources has shifted. This is a moral issue, though, not what we would yet call an economic one.

Situation 2: At the end of the next month, Mr. A. goes off once more to buy a pizza and is again robbed by Mr. B. who, as before, buys himself a pizza. This same thing happens again at the end of the next month, and the next one, until, finally, Mr. A. decides there is no point in continuing to try to buy a pizza. Since he makes $20 for every chair he sells, he makes one less the next month and, instead of going on a fruitless quest for a pizza, enjoys his extra leisure time.

Analysis: Now we are starting to get to grips with the problems of tax and spend. Whereas sporadic acts of criminality do not much effect people’s behaviour, persistent and regular criminal behaviour, including government taxation, changes incentives. In this case there is now one less chair per month for other people to buy and so either one less person gets the chair-related enjoyment they would otherwise have or they have to buy a less satisfactory or more expensive chair from someone else. Generally speaking, by confiscating profits, taxation changes incentives in a way that makes people produce less of the goods that other people desire; since prosperity consists precisely in people being able to acquire more of the goods they desire (and not, as some people bizarrely believe, increased nominal wages) this is evidently bad from an economic point of view.

Situation 3: Exactly the same as situation 2, except that instead of buying a pizza himself Mr B. gives the money to Charlie (Mr. C.), perhaps a member of some socio-economic, ethnic or religious sub-group that Mr. B. considers deserving, who then goes to buy a pizza himself.

Analysis: In this step we have reached “re-distribution of wealth”, a political hot-button issue, but of surprisingly little importance. If the pizza is bought it doesn’t really matter who buys it. The pattern of supply and demand has not changed at all and nor and the incentives for Mr A. What has changed in this scenario, though, is that another person has been removed from the workforce. Whereas in a crime free (= ‘laissez-faire’) economy Mr. B. and Mr. C. would have to provide goods and/or services for other people in order to be able to buy the things they want, now they don’t.  Mr. C., a recipient of welfare, now busies himself filling in forms for Mr. B. to justify his receiving free cash or is simply idle; Mr. B., who has become a government bureaucrat, is too busy taking money from one person and giving it to another to perform productive labour. The general public is deprived of the goods and services that might otherwise have been produced by two people.

Situation 4 The same as situation 3, except that when Mr. B. gives Mr. C. $20 he, instead of buying a pizza, goes over the road and buys a kebab instead.

Analysis: In this stage, taxing and spending has changed the pattern of demand, but, again, this is not very important. The pizza maker loses money and the kebab maker gains, but there is no overall economic impact. Assuming this pattern continues, there will, of course, be fewer pizzas and more kebabs produced to meet the changed demand, but that, again, is neither here nor there. There is no “correct” amount of pizzas independent from the number that consumers are willing to buy. We might say that the situation with fewer pizzas and more kebabs is morally inferior to the one with more pizzas and fewer kebabs because it rests on the intrusion of violence into peaceful social arrangements; a socialist will say it is preferable because unfortunate Mr C. deserves his kebab more than greedybags Mr. A. deserves his pizza; economically this is a non-issue.

There is one more thing to consider, though. The pizza maker does not know that without Mr. B.’s income redistribution activities he would be better off, but the kebab shop owner can very clearly see how he benefits from Mr. C.’s income. As the above analysis has shown, income redistribution benefits some and harms others, but leaves the whole community worse off by (i) reducing people’s incentives to produce and (ii) removing otherwise productive people from the workforce as bureaucrats or welfare recipients. However, those who gain from income redistribution can see this much more clearly than those who lose out (with one exception, Mr. A. the taxpayer). Accordingly, it is easy to see how taxation and spending “stimulates” some sectors of the economy, but much harder to demonstrate which areas it is harming. When it comes times for elections, not only do Mr B. and Mr. C. have an obvious stake in voting for more crime, so does the kebab shop owner. Mr. A. would be likely to vote for less crime, but he will have a tougher time persuading even the pizza maker, who directly loses out too, to join him, let alone the general populace who lose out indirectly.

(To be continued)

2 Comments

  • Dear Gabriel,

    I am a total ignoramus with respect to economics and thoroughly enjoyed part 1 of – I hope – many more.

    However, I disagree with last line of your analysis of Situation 3 wherein you claim that ‘the general public is deprived of goods and services..that might have been produced by two people’. In fact I believe that it could be argued that the public is deprived of the produce of three people – ie:
    1. Mr A’s additional chair,
    2. the labour that the thief – Mr B – could / would perform if he were forced to – ie the chairs were protected better and theft was not so simple,
    3. – and I guess this one is arguable and the perspective depends on where one sits on the political spectrum – Mr C could potentially also produce something if handouts were not so easy. In any event, if he is not earning, and if handouts were not easy to obtain, and he has time on his hands, he could grind his own chickpeas and make his own kebabs instead of buying expensive take-aways!!

    • I agree! But unfortunately I didn’t explain myself well enough. I meant that in situation 3 the general pubic is deprived of the services of two people (Mr. B and Mr C.) in addition to the loss of some (though not all) of Mr A.’s.

      I wanted to separate out of the two issues of (i) loss of incentives to producers and (ii) removal of people from the workforce either as government workers or welfare recipients.

      Be well.

Leave a Reply

Please note: comments may be published in the Algemeiner print edition.


Current day month ye@r *

More...

  • Education Why We Should Invest in Jewish Children

    Why We Should Invest in Jewish Children

    JNS.org – My wife Suzy and I will never forget our wedding day. It was not just the uplifting ceremony and beautiful party that left an indelible mark. Some life-altering advice that we received from one of our guests informed and shaped our lives from that day forward. My high school teacher, Rabbi Moshe Yagid, pulled us aside just before the chuppah and challenged us to choose one mitzvah that would be the foundation of our marriage and our lives. He explained [...]

    Read more →
  • Jewish Identity Sports LeBron James’ New Coach Shaped by Summer on Kibbutz and Jewish ‘Life Lessons’

    LeBron James’ New Coach Shaped by Summer on Kibbutz and Jewish ‘Life Lessons’

    JNS.org – Influenced by his Jewish upbringing and a summer on a kibbutz, basketball coach David Blatt is embarking on his highest-profile challenge yet: coaching LeBron James, the four-time National Basketball Association (NBA) Most Valuable Player who has made waves for returning to his hometown Cleveland Cavaliers. After guiding Israel’s storied Maccabi Tel Aviv basketball franchise to its 51st Israeli league championship and 6th Euroleague title this past season, Blatt landed the Cavaliers head-coaching job in June. Just weeks later, [...]

    Read more →
  • Food Jewish Identity Young Syrian Jewish Restauranteur Continues a Family Legacy

    Young Syrian Jewish Restauranteur Continues a Family Legacy

    JNS.org – At the turn of the century, a young Jewish immigrant arrived in New York. So begins the history of many American Jewish families. It is 27-year-old Albert Allaham’s story, too, with a few unusual twists. Albert’s “century” is the 21st—he arrived almost 100 years after the massive waves of European Jewish immigration. Rather than coming from a small town along the Danube river, his shtetl was Damascus. His first American business was not a pushcart on the Lower East [...]

    Read more →
  • Book Reviews Jewish Identity A Holistic Look at the Rebbe’s Life and Career (REVIEW)

    A Holistic Look at the Rebbe’s Life and Career (REVIEW)

    Did you know that in the entire Bible, only one birthday is mentioned and it is that of Pharaoh? And did you know that according to some scientists, by accepting Einstein’s Theory of General Relativity, it is impossible to prove or disprove that the sun is the gravitational center of our solar system? In his new book, REBBE, best-selling author Joseph Telushkin reveals many surprising and sometimes shocking details as he chronicles the life and teachings of the charismatic Rabbi [...]

    Read more →
  • Food Mitzvos New Jerusalem Eatery’s Uniform Pricing Seeks to ‘Help People Make It’

    New Jerusalem Eatery’s Uniform Pricing Seeks to ‘Help People Make It’

    JNS.org – Omelet sandwich: 5 shekels. Iced coffee: 5 shekels. Tuna sandwich: 5 shekels. Fresh-squeezed orange juice: 5 shekels. Cheese bureka: 5 shekels. There’s plenty more on the Cofizz menu, but you get the idea. Dani Mizrahi and Amir Amshalm, two Israeli men in their early 30s, asked themselves: Why not launch a take-out food joint in busy neighborhoods around Jerusalem where everything—and that means everything—goes for five shekels, or about $1.50. They’d seen the concept take off in Tel Aviv, where [...]

    Read more →
  • Arts and Culture Israel New Primetime Drama ‘Tyrant’ Filmed Entirely in Israel (VIDEO)

    New Primetime Drama ‘Tyrant’ Filmed Entirely in Israel (VIDEO)

    The new FX Network drama Tyrant was shot entirely in Israel, just 10 miles north of Tel Aviv, Bloomberg News reported last Tuesday. Tyrant follows the life of an Arab dictator’s second son Barry, played by Adam Rayner, who reluctantly returns home to the Middle Eastern nation of his birth to join the family business away from his suburban life in America. The elaborate set production for the primetime drama included a crew of 300 and a reported cost of over $3 million [...]

    Read more →
  • Arts and Culture US & Canada Supermodel: Jewish Mothers Are Constantly Trying to Set Me Up With Their Sons

    Supermodel: Jewish Mothers Are Constantly Trying to Set Me Up With Their Sons

    Skokie, Il-born 25-year-old Erin Heatherton (Erin Heather Bubley) is rocking the modeling world. And in a new interview accompanying a cover spread for Miami’s Ocean Drive magazine, she says Jewish moms are “constantly trying to set her up with their sons.” Imagine that – who would have thought? “The moms, they’re doing what they do. It doesn’t matter what country they live in, what city – grandmothers, too,” she admitted. “But I’m probably going to do that too one day.” Heatherton was [...]

    Read more →
  • Education Israel First Ever: Turkish Academics to Visit Israel Holocaust Museum for Seminar

    First Ever: Turkish Academics to Visit Israel Holocaust Museum for Seminar

    Some 15 Turkish university professors and lecturers will take part in a first of its kind seminar at Holocaust museum Yad Vashem’s International School for Holocaust Studies starting next week. The trip is especially significant as Holocaust denial is rampant in the Arab world. A Palestinian professor was recently forced to resign after he led a trip to the Nazi extermination camp Auschwitz. Participants in the week-long program at Yad Vashem will experience in-depth tours of the museum’s archives and [...]

    Read more →



Sign up now to receive our regular news briefs.