Dead Man Taxing for the Last Time

by on April 22, 2011 at 7:16 am in Economics | Permalink

Greg Mankiw writes:

I am regularly struck by how bloggers so often want to pick fights with other bloggers.  Rather than giving others the benefit of the doubt, they often seem to interpret the writing of others in the worst possible light so they can then point out how foolish it is.  As an example, see

  1. This Steve Landsburg post
  2. Followed by this Brad DeLong critique
  3. And this Paul Krugman critique
  4. And Steve’s two replies.

As far as I can tell, all Steve is saying is that the true incidence of a tax is not necessarily on the person who writes the check to pay the tax bill.  He just made the point in a particularly dramatic way.  At its heart, however, his point is pretty standard and hard to argue with.

I agree completely. I take some of the blame; I should have seen that at this point in time when discussions of inequality, taxing the rich, deficits, unemployment and Keynesian economics are so prominent that any post about taxes would be perceived and interpreted in that light. In fact, Steve’s argument had nothing to do with any of these things (Stephen Williamson has a good post explaining the argument in a different way that makes this clear), instead it’s a puzzle, a thought-experiment if you will, to illustrate tax incidence theory.

The standard argument is that the legal incidence of a tax is not the same as the economic incidence. It is unfortunate to see accusations of “stupid” and “bizarre” be thrown around for what is, as Greg points out, the standard argument because it makes teaching economic arguments to the public more difficult. If Landsburg’s highly-stylized argument is bizarre, for example, then isn’t it even more bizarre to argue that in the real world the FICA tax on employers isn’t really paid by employers?

foosion April 22, 2011 at 7:26 am

If Steve’s argument is about tax incidence, he chose a spectacularly bad way to explaining it.

For example: “it is quite literally impossible to raise revenue by taxing the likes of Mr. Kendrick” is a far cry from “when we try to tax Mr Kendrick we are actually taxing someone else”

Or consider “For the government to consume more goods and services, somebody else must consume fewer.” which makes as much sense as saying “there is a fixed amount of goods, so if A consumes more then B must consume less.”

Bernard Yomtov April 22, 2011 at 11:05 am

This is exactly right.

It’s a far cry from discussing tax incidence to the claim that Landsburg made, which is effectively that no part of the tax affects Kendrick.

I think Alex, and Mankiw, are crawfishing away as fast as they can from Landsburg’s silliness.

I’m not even convinced that this was about tax incidence in the usual sense which, as I understand it, explores how a given amount of tax collected from A ends up, as a result of price adjustments, hitting B, in part or whole. The standard chapter 2 example is the sales tax, collected from the seller, which affects the price of the good, and hence is partly paid by the buyer. But that’s not the kind of thing this is about. Here it’s clear that all the money is coming out of Kendrick’s pocket. That this has secondary effects, or not, is a different issue, ISTM.

Next time, if Landsburg wants a word to mean just what he chooses it to mean, he ought to tell his readers. Otherwise he might have great fall.

bluto April 22, 2011 at 11:29 am

When economists talk about tax incidence, they almost always mean who had their consumption choices changed as a result of the tax. If Mr parks cars all day continues to do the same exact thing post tax, than his incidence was 0. His heirs, bankers, and possibly company (I don’t know if they’re still privately held) had all of the tax incidence.

mpowell April 22, 2011 at 12:32 pm

This is 100% correct and also has nothing to do with the criticism of Landsburg’s post. Maybe Landsburg made an erroneous claim in the course of a conversation about a different issue (tax incidence) in which his central point was essentially correct, but the fact remains that he claimed that the government could not raise revenue by taxing Mr Kendrick. In the current political environment, this kind of claim is incendiary because it is very wrong and also very political if it is being made to a broad internet audience (and that may be Alex’s fault more than Landsburg).

lurkingowl April 22, 2011 at 1:18 pm

If the article had actually been about tax incidence, it would have mentioned that the tax falls on his heirs, etc at some time in the future. It implies that it falls on other consumers in the present marketplace. Which is clearly wrong. Fir a piece that’s retroactively supposed to have been about tax incidence to not actually talk about where the tax effect actually falls implies that it was never about tax incidence.

Bernard Yomtov April 22, 2011 at 1:19 pm

When economists talk about tax incidence, they almost always mean who had their consumption choices changed as a result of the tax.

Really? Here is an NBER paper on tax incidence. Note the definition:

This chapter reviews the concepts, methods, and results of studies that analyze the incidence of taxes. The purpose of such studies is to determine how the burden of a particular tax is allocated among consumers through higher product prices, workers through a lower wage rate, or other factors of production through lower rates of return to those factors.

In other words, it’s about who pays, not how it affects consumption.

Want more?

Here’s another abstract:

The incidence of taxes on consumers and producers plays a central role in evaluating energy tax policy, yet the literature testing the main predictions of the tax incidence model is sparse. In this paper, we examine the pass-through rate of state gasoline and diesel taxes to retail prices,

Who pays, not whose consumption changes.

Andrew' April 22, 2011 at 2:39 pm

I’m not sure your distinction has a difference.

Bernard Yomtov April 22, 2011 at 3:49 pm

Of course it has a difference.

bluto claims that tax incidence “almost always” refers to effects on consumption, not wealth.

My point is it doesn’t, or at a minimum it certainly doesn’t do so “almost always.”

He thinks that if the government taxes away your savings, but you don’t change your consumption as a result, you haven’t really been taxed – that the incidence is elsewhere. I think you have been. What do you think?

The distinction is at the heart of the argument over Landsburg’s post.

Jim April 22, 2011 at 6:28 pm

Bernard,

In any full, general equilibrium model everything is ultimately in terms of consumption streams. Consumption is the ultimate good.

Gerard MacDonell April 25, 2011 at 3:01 pm

Bernard and foosion,

You two gentlemen seem so obviously right about this.

Having lost the main practical point, T&M “crawfish” back to claiming that L was merely having fun with an abstraction.

That form of rhetoric is so cheap, transparent and common in public policy debate that it deserves a latin name. Maybe it already has one.

What might it be?

lemmy caution April 22, 2011 at 2:18 pm

Right. Why does Landsburg have to be so confusing? It is his fault that he was so unclear.

Andrew' April 22, 2011 at 2:41 pm

Unclear and wrong are different things. The main point, can you increase a government flow by taxing a financial stock is still an interesting question to me. However, it may be irrelevant because what the government really wants to do is pay off debt with a stock to stock transfer.

foosion April 22, 2011 at 7:39 am

If Landsburg’s highly-stylized argument is bizarre, for example, then isn’t it even more bizarre to argue that in the real world the FICA tax on employers isn’t really paid by employers?

No.

The comments to Stephen Williamson’s post get it right. If you change Landsburg’s argument you can come up with an uninteresting argument that’s not obviously wrong.

Andrew' April 22, 2011 at 10:54 am

As opposed to other peoples’ arguments who are uninteresting and wrong without modification.

Rjb April 22, 2011 at 7:41 am

So 0% of the incidence of tax falls on the person taxed?

Wu April 22, 2011 at 7:52 am

I am regularly struck by how snide Mankiw is while simultaneously pretending he is above the fray.

Someday it would be fun to help my administration as CEA chair pass tax cuts for the wealthy while initiating two wars and a large expansion of Medicare, and then whine after the administration is over that the next administration is not taking deficits seriously. Mankiw, you had your chance to say something when you were there. Now, keep f–ing quiet.

Jamie_NYC April 22, 2011 at 9:56 am

… and this is why the comment section on this blog should be moderated.

DK April 22, 2011 at 11:03 am

Why? Wu is making a perfectly valid point.

Tom April 22, 2011 at 12:03 pm

‘valid’ must have a different meaning in the ‘reality based’ community

Wu April 22, 2011 at 11:26 am

Suppose a goal of mine were to have my thoughts about the deficit taken seriously.

What would be the worst thing that I could possibly do, the thing that I should most avoid, to avoid compromising the prospect of having my thoughts on the deficit taken seriously? I would think actively participating in and leading a part of an administration that torched federal finances would be the worst thing to do, the thing to avoid at all costs.

Mankiw has lost the privilege of having his thoughts taken seriously.

libfree April 22, 2011 at 11:55 am

Didn’t he advise the Obama administration as well? Just because an economist gives advice doesn’t mean that it is taken.

Cliff April 22, 2011 at 11:13 am

Truly bizarre how anyone can think Mankiw is snide. Compare him to Delong or Krugman… unbelievable the contrast in professionalism and tone.

mpowell April 22, 2011 at 12:35 pm

I agree. Mankiw is rarely snide. His commentary always has the appearance of a high level of professionalism. It is the intellectual misdirection he engages in order to advance the interests of his detestable political faction that I object to.

Andrew' April 22, 2011 at 2:42 pm

I consider DeLong and Krugman bullies. Thus, they are never engaging with ‘us’ they are using us to perform for their clique.

hearthis April 22, 2011 at 3:32 pm

I completely agree. I don’t even read his blog anymore for this exact reason, don’t want to give him the hits.
if he would open his site for comments, then i’d be there…

Brian April 22, 2011 at 3:59 pm

agree or disagree with the normative values behind the economics of krugman or mankiw, one thing is clear. Krugman is a bully. Mankiw is professional.

moreover, show me one advisor to any president who agreed with everything that took place within that administration. Mankiiw, at heart, is a new keynesian just like Krugman. He is not opposed to deficit spending.

his ideas on the current deficit plans, as are krugmans, should be taken seriously because both are amongst the top 10 cited macroeconomists. His position as an advisor is irrelevant.

a April 23, 2011 at 2:44 am

Krugman is a bully who is often right. Mankiw is a professional who is often wrong. You choose.

Jonm April 22, 2011 at 7:54 am

Second the first comment. As a general point Mankiw is quite right, although Landsburg’s presentation of a fundamentally sound point was obscure, and DeLong’s reply was perfectly reasonable and much clearer.

Libfree April 22, 2011 at 8:04 am

I hate it when bloggers make me work. I too thought the Landsburg piece was confusing and had to read it a second time to grasp his concept. He’s still not as bad as Tyler though.

Wadooma April 22, 2011 at 8:12 am

There is always someone annoying in class, a glib talker who explains even what’s difficult easily and most often, incorrectly, though by accident at times correctly. But they tend to know more names, words, etc than you do, while not knowing what they really mean. I feel Landsburg is like that. You take the interesting topics, read how one can talk superficially about it for fun and for understanding how you shouldn’t understand it and read more on them.

E. Barandiaran April 22, 2011 at 8:33 am

Alex, GM is right that the important issue is tax incidence so let me refer to a very important experience to explain it rather than the Ms. Stevens’ nonsense case against Mr. Kendrick (btw, never waste your time arguing about what a journalist or a partisan pundit has written).
I’m talking about the well-known Price Revolution of the 16th Century. The looting of America’s gold and silver by the Spanish government implied a huge increase in the prices of consumption goods in Europe –that is, implied inflation in the sense of increasing prices over a long period of time. As the late economist and historian Earl Hamilton argued long ago, the Spaniards didn’t invest their new wealth but they spent it in consumption goods and therefore the prices of these goods increased all over Europe. Who paid the inflation tax? It was not American natives who had been looted but the European consumers other than the few Spaniards that looted America. From the viewpoint of American natives (the Kendricks of this 16th Century experience), the looting implied a loss of something that they valued. For those few Spaniards, the looting allowed them to access the markets for consumption goods because gold and silver were used as means of payments (if as originally intended, they had stolen pepper and other spices, their prices would have declined all over Europe but there had been no inflation and no inflation tax). For European consumers other than those few Spaniards, the increases in prices amounted to inflation and as we all now know inflation is a tax on holdings of the means of payments (for progressives too much concerned about poverty, we may assume that in Europe’s 16th Century the inflation tax was paid mainly by high-income consumers).
Indeed there was some additional investment triggered by the looting of America. At least those few Spaniards invested in increasing the number of ships and voyages to continue and expand such a profitable enterprise. Other European countries did the same. Later some European countries, other than Spain, benefited from the higher prices of consumption goods by investing in the many non-tradable goods of that time.
Ref. on the price revolution. Read the wikipedia entry and this recent paper
http://wwz.unibas.ch/fileadmin/wwz/redaktion/makro/Papers/The_Price_Revolutiona.pdf

Silas Barta April 22, 2011 at 11:45 am

Who paid the inflation tax? It was not American natives who had been looted but the European consumers other than the few Spaniards that looted America.

Wow, *really*? The natives didn’t lose any capacity to purchase goods form Europeans???

Would the same hold true if I took _your_ gold?

E. Barandiaran April 22, 2011 at 12:56 pm

Are you suggesting that the natives were expecting the Europeans to do business with them? I’ve read many stories about the discovery of America (don’t repeat it but my Basque ancestors were the first one to visit the natives in N.E. Canada) but I don’t remember any story suggesting that the natives knew they were coming. Anyway, you better check my comment again because I acknowledged that the natives did lose something that THEY value. The key point here is how the Spanish Royal family and his cronies were able to finance their consumption and this was by taxing Europeans’ holdings of gold and silver.

Silas Barta April 22, 2011 at 1:16 pm

It doesn’t change the fact that if the natives had kept their gold then, once realizing it could buy European finished goods, they could buy that stuff and so that option was cut off from them.

And it doesn’t matter whether you “were planning to do businesses” with a robber. You probably weren’t planning to buy anything from me with your gold, but I’m stil contracting your choice set (“taxing you”) when I rob it from you.

E. Barandiaran April 22, 2011 at 1:48 pm

Please read again my original comment because I think you didn’t understand all the details. In particular, I assure you that I know what looting means and why I used the word looting instead of taxation. If you want to discuss how much the stolen gold and silver were valued by the natives, let me just say that it’s irrelevant to my argument because I acknowledged from the beginning that the natives’ loss (the Spaniards didn’t steal the natives’ garbage).
This weekend you can entertain yourself thinking how different the situation would have been if the Spaniards had stolen feathers, or spices, or manure, or if the natives’ demand for gold and silver had increased sharply because women wanted more gold and silver for sex. I assure you that all these variants of the historical situation add nothing to the point about tax incidence. I celebrate your imagination but don’t believe everything you think (fyi: according to Tyler Cowen this is very Hansonian).

Silas Barta April 22, 2011 at 2:41 pm

E, I think we’re mostly in agreement. I just wanted to add that I don’t care about your family.

yyl April 22, 2011 at 8:35 am

So, the “hey, it’s an interesting thought experiment!” crowd has chosen to react to critiques about the relevance of Landsburg’s argument in the real world by making *even* *more* unrealistic assumptions. “Well, if doesn’t consume never anything and doesn’t have heirs and his money is «lost» on death [see Williamson’s post]”, then, of course, he can’t be taxed, but that is because he has already “given” his wealth to society by choosing to never demand anything with the money obtained by supplying something.

The puzzle is not about “tax incidence” as Greg Mankiw and Alex Tabarrok claim, because as I said in the original thread at MR, one-period consumption and one-period income aren’t the same thing and the fact that people save more and consume less in response to increased interest rates doesn’t mean that they are “being taxed”. Call it “collateral effects of taxes”.

This claim is the only interesting point which can be found in Landsburg’s post (and can be exposed in a far shorter way, as Williamson does on his post). But its “intellectual value” quickly drops to zero when Landsburg pretends that this thought experiment made of unrealistic assumptions (what Williamson hilariously calls “certain conditions”) has anything to do with reality, “America’s fiscal future”, or “Foolish journalists and mistaken, revengeful leftists that think that taxing the rich can bring down the deficit”. Note that Landsburg attack on the original piece about Mr. Kendrick was *way* more unfair than the critiques of DeLong or Krugman, but the “hey, it’s an interesting thought experiment!” crowd only pretend to care about “giving others the benefit of the doubt, they often seem to interpret the writing of others in the worst possible light so they can then point out how foolish it is” when by “others” they mean “only the people who agree with us”. Of course, being coherent would mean to miss an opportunity to paint “unfair” DeLong and “unfair” Krugman as the villains in this debate, which we know they always are!

Andrew' April 22, 2011 at 11:00 am

No, but they really are always unfair. Although I would use the word ‘jerks.’

Steven E Landsburg April 22, 2011 at 11:13 am

yyl:

1) Well, if doesn’t consume never anything and doesn’t have heirs and his money is «lost» on death The assumption is that he doesn’t consume anything, and that if he has heirs he doesn’t care about them. The bit about his money being lost on death is entirely unnecessary, and if you think it’s necessary then you’ve missed the entire point.

2) Landsburg pretends that this thought experiment made of unrealistic assumptions (what Williamson hilariously calls “certain conditions”) has anything to do with reality, “America’s fiscal future”, or “Foolish journalists and mistaken, revengeful leftists that think that taxing the rich can bring down the deficit”. You are making this up.

Tim D. April 22, 2011 at 1:18 pm

Suppose the government taxes away the $84 million from Mr. Kendrick. The government uses it to reduce the amount of debt issued today. There is no direct effect on current consumption (private or government). What has happened is that the consumption by the heirs in period 2 is lost and transferred to the rest of society as government needs lower taxes in period 2 to pay for the debt? Mr. Kendrick (and heirs) pay 100% of the tax.

I am interested in comments if folks think I am missing something…

Steven E Landsburg April 22, 2011 at 2:43 pm

Tim D.: All you are missing is that if there are no heirs, or if the heirs, like Mr Kendrick, consume at a constant low level that is unaffected by the tax, then someone *else* pays the tax. Who that someone else is depends partly on how Mr Kendrick was storing his wealth in the first place.

Tim D. April 24, 2011 at 10:17 am

Mr. Landsburg: I see you need rather odd assumption for your conclusion to be correct. In a more likely scenario, the tax incidence falls completely on Mr. Kendrick’s heirs who must alter future consumption as they do not get the $84 million (as I stated previously).

You are essentially assuming that the $84 million will otherwise stay in a bank forever and never be spent (and therefore never demand goods). Or alternatively, the heirs will be taxed, but that is not likely very concerning to those interested in such a tax. If these assumptions are required they should be clearly stated. This remains a poor example, but the principle you were attempting to demonstrate is extremely important for folks to understand.

In fact, a careless reader might unfortunately believe that a country could implement a 100% tax on all wealth and since it doesn’t harm wealthy individuals they should not mind. Given the level of private wealth compared to the government debt we appear to have a simple solution to all our problems. (tongue-in-cheek)

Jim April 22, 2011 at 8:51 am

Scott Sumner also came out of blogging retirement briefly to say he too was shocked that economists found this argument controversial:

http://www.themoneyillusion.com/?p=9449

Ken April 22, 2011 at 9:07 am

If Robert kept part of his wealth as cash in bank box in India, under what theory of incidence did the termites actually not eat the rupees?
http://www.msnbc.msn.com/id/42715428/ns/world_news-south_and_central_asia/

chris April 22, 2011 at 9:16 am

I think the problem is Landsburg’s use of phrases like “literally impossible” to describe something that is not literally impossible, which was stupid and bizarre and guaranteed to bring people out of the woodwork to point out that he was wrong on the Internet.

The fact that there is an interesting and defensible idea somewhere in the general vicinity of what he said doesn’t rehabilitate what he actually said.

k April 22, 2011 at 9:22 am

Well, if it’s a “standard argument”, what makes it an “excellent economics puzzler from Steven Landsburg”?

The two statements appear inconsistent.

Alex Tabarrok April 22, 2011 at 9:58 am

Lots of standard economic arguments are puzzling for non-economists and even for some economists! In this case, the argument was made in a particularly dramatic way, as Greg said. Like a physics puzzle that uses standard arguments about force and mass to come up with something surprising.

Popeye April 22, 2011 at 12:59 pm

For someone who is (among other things) a professional popularizer of economics, Landsburg is often deliberately hard to understand. To take a non-political example, on his blog a few months ago he posted a puzzle whose solution boiled down to the fact that E(X/(X+1)) is not equal to E(X)/[E(X)+1]. This is an interesting observation, but I swear to God his presentation was designed to make sure as few people as possible actually understood what was going on.

Tim D. April 22, 2011 at 1:22 pm

But Alex, this example is not dramatic but rather appears to be incorrect. Suppose the government taxes away the $84 million from Mr. Kendrick. The government uses it to reduce the amount of debt issued today. There is no direct effect on current consumption (private or government). What has happened is that the consumption by the heirs in period 2 is lost and transferred to the rest of society as government needs lower taxes in period 2 to pay for the debt? Mr. Kendrick (and heirs) pay 100% of the tax. Am I missing something?

I am interested in comments if folks think I am missing something…

Hasdrubal April 22, 2011 at 3:11 pm

If Mr. Kendrick keeps his $84 million in the bank and already owns his home and cars, then the government levies an $84 million tax on Mr. Kendrick, that doesn’t affect him one bit. He continues to park his cars out in his driveway all day long. It DOES affect the bank who no longer has the $84 million to lend out and make a profit on. Hence, Mr. Kendrick is not taxed, the tax actually falls on the bank who holds his money, or the company his money was invested in, his heirs if he stashed the money in his mattress, etc.

The government doesn’t actually raise any revenue from taxing Mr. Kendrick. What they do is raise revenue by taxing whomever is using Mr. Kendrick’s money. In order for the tax to fall on Mr. Kendrick, the government would have to steal and sell his house or cars. That is the economic principle Mr. Landsburg was illustrating in his blog on, you know, economics.

k April 22, 2011 at 3:49 pm

This comment appears both somewhat non-obvious and clear.

chris April 22, 2011 at 5:10 pm

If Mr. Kendrick keeps his $84 million in the bank and already owns his home and cars, then the government levies an $84 million tax on Mr. Kendrick, that doesn’t affect him one bit.

This is plainly false: he ceases to have $84 million in the bank. That’s an effect.

The government doesn’t actually raise any revenue from taxing Mr. Kendrick.

Also false: they raise $84 million, by your own assumption (and Landsburg’s).

In order for the tax to fall on Mr. Kendrick, the government would have to steal and sell his house or cars.

Or his money! Money is a store of value that Kendrick goes from having to not having.

Money isn’t wealth *at a societal level*, but at an individual level they are interchangeable at the individual’s choice (normally). Taking away Kendrick’s money is taxing him just as much as taking away his cars but leaving his money (which he then presumably uses to buy replacement cars, ending up with the same amount of cars but less money).

a April 23, 2011 at 2:52 am

“The government doesn’t actually raise any revenue from taxing Mr. Kendrick. ”

Well, yes it did. It taxed Mr. Kendrick and raised 84 million in revenue. This whole argument seems to be full of semantical errors and ambiguities. If your point is that Mr. Kendrick’s consumption is not affected, then say so. But in common parlance, (1) Mr. Kendrick was taxed; and (2) the government did raise revenue.

k April 22, 2011 at 3:51 pm

But it’s a puzzle in that we do not know where the incidence of a tax on the “idle rich” really falls right?

Also the kind of tax will affect the argument – in this example, it looks like the tax is lump sum.

Wagster April 22, 2011 at 9:57 am

I would have more sympathy for Mankiw’s view if he didn’t follow his heart-stirring cry for civility with the most tendentious argument possible, to wit:

“FYI, more interesting to me is this Landsburg post, where Steve argues that a rich person who wants to raise taxes on the rich should be voluntarily paying more right now. One example is the rich person who lives in very nice publicly-provided housing on Pennsylvania Avenue in Washington DC.”

I’ll just outsource this to Kevin Drum. This is just as stupid as a Dem demanding that Republican Governors who opposed the stimulus turn down the funds they get from it.

Andrew' April 22, 2011 at 11:34 am

I don’t actually think it’s that stupid. Warren Buffett could say “we need a new bridge, and I’ll pay when everyone else pays,” and that is what you are talking about. But I think that’s slightly different from him just saying the rich should pay more in taxes and he will when everyone else does.

If the only reason for taxes is punishment and Warren has a guilty conscience and I don’t then sure, let him pay down to his sleeping level. But moreso, Buffett seems to be miffed that he pays a lower or roughly equivalent rate as the middle class does. But, that seems to have the built-in assumption that if he paid more, I’d pay less. I doubt that. Also, whose capital would we rather have diced up for the government to allocate? Not Warren’s, but I’m not volunteering mine either.

The problem is that we’ve financed so much through debt and now the bills are due. We didn’t get much out of the investments they financed, but because they were financed we weren’t paying attention.

chris April 22, 2011 at 2:53 pm

We didn’t get much out of the investments they financed

Funny thing to say on an internet financed by government investment.

Punishment isn’t any reason for most taxes (except maybe cigarette and alcohol taxes, which are tiny relative to the budget, or carbon taxes, which don’t yet exist). Building roads, defending the nation, educating children, keeping senior citizens out of poverty — those are reasons for taxes.

Bill April 22, 2011 at 10:03 am

Actually, the way you can look at this differently is by asking an historical question:

What was the economic effect of (1) redistributing religious properties (in effect, taxing religious orders at 100%) in the Reformation; (2) what was the economic effect of taxing (redistributing) the property of the nobility following the French Revolution; (3) what was the economic effect of introducing income taxes at high marginal rates during WWI.

Do you think not taxing or totally taxing religious properties led to greater or lesser economic development?

E. Barandiaran April 22, 2011 at 10:16 am

I assume that most people know the answer for the October Revolution, the Long March Revolution and the Cuban Revolution. Please give any reference for the three cases you mention.

chris April 22, 2011 at 10:48 am

I assume that most people know the answer for the October Revolution, the Long March Revolution and the Cuban Revolution.

Really? How do you disentangle the effect of seizing religious property from the destructiveness of the wars that took place around the same time?

…Actually, that would be my question to Bill, too.

E. Barandiaran April 22, 2011 at 12:13 pm

Thanks for your point because my reference to the three revolutions was precisely your point. I didn’t make reference to any particular action taken by the revolutionary governments, like confiscation of real estate, because each one should be assessed as part of the package of revolutionary reforms.

Bill April 22, 2011 at 6:55 pm

Chrs, as I understand it, economic historians would say the religious and noble land redistributions improved productivity

Andrew' April 22, 2011 at 11:06 am

Taking 100% of real property wouldn’t really be the same thing as ‘taxing’ would it? Presumably land could be made to be productive, whereas you probably couldn’t come out ahead by taking away rich guy’s Ferrari and sell it for the sum of its parts. Maybe it could be more productive as Magnum P.I.’s car, but that’s about it.

Bill April 22, 2011 at 6:49 pm

E. Is there a reason you ignored my examples. Yours are distinguishable because the property was resistances ito a socialist system, while my examples were distributions within a capitalist or quai capitalist system in the feudal example.

Why don’t you answer my examples?

The same examples could apply to taxation policy as applied to the landed aristocracy during the English industrial revolution.

E. Barandiaran April 23, 2011 at 4:55 am

I ignored your examples because of two reasons. First, and most important, I don’t know what happened in your examples and so I asked for references. Second, as pointed out by my other examples and Chris’ comment, when a particular action is part of a much larger package of actions, it is difficult to identify the consequences of just one action.
Let me add that to know the consequences of revolutionary reforms is really hard work. Let us take a “simple” case. To some people what happened during the Great Depression in your country is quite clear, but as you know from the discussion of the past three years we can have different “narratives” of what really happened.
Anyway, I’d be interested in discussing whatever example you have but at least give just one reference because I accept that I know little about economic history (I mean little in relation to any “objective” standard or to what I’d like to know, not in relation to what most economists know).

Bill April 22, 2011 at 6:53 pm

A few typos from my iPad. Resistances should be redistribution. There should be the phrase except in before feudal.

Brian Moore April 22, 2011 at 10:08 am

“I am regularly struck by how bloggers so often want to pick fights with other bloggers.”

Hi Greg — welcome to the internet! Is this your first time here? :)

Andrew' April 22, 2011 at 10:34 am

It seems like a Keynesianish point about money. Odd.

Zaoem April 22, 2011 at 11:19 am

Mankiw’s comment is really peculiar given that Landsburg starts his post with:

“Nothing makes my job easier than a journalist who writes about something interesting and gets it 100% wrong.”

Rather than giving others the benefit of the doubt, Landsburg seems to interpret the writing of others in the worst possible light so he can then point out how foolish it is.

Tom April 22, 2011 at 12:37 pm

Even given the benefit of the doubt, the original article was 100% wrong.
Benefit of the doubt does not mean to blindly accept.

Silas Barta April 22, 2011 at 11:40 am

Glass houses, anyone? Uncharitable reading was EXACTLY what Landsburg was doing to the journalist writing the article in the first place!!! Pot, meet kettle:

I am regularly struck by how economists so often want to pick fights with journalists. Rather than giving others the benefit of the doubt, they often seem to interpret the writing of others in the worst possible light so they can then point out how foolish it is. As an example, see

This Steve Landsburg post

As far as I can tell, all the journalist Ms. Stevens is saying is that the government could collect revenue from idle rich people like Kendrick through higher taxes. She just made the point in a particularly dramatic way. At its heart, however, her point is pretty standard and hard to argue with.

Take the plank out of your own eye first.

Clay April 22, 2011 at 2:03 pm

awesome

Andrew' April 22, 2011 at 2:48 pm

Landsburg isn’t really talking about the reporter personally. He is using her as a template for people who confuse economics. This is a subtle distinction but because it is obvious Landsburg is talking about a common and subtle economic riddle noone can really read Landsburg’s post and conclude “boy, (Landsburg thinks) I shouldn’t listen to what that reporter says.”

Silas Barta April 22, 2011 at 3:27 pm

Except when he sets up his post as a critique of the reporter’s implicit argument, and the pretends he didn’t when people start calling him on all the errors that result therefrom.

lemmy caution April 22, 2011 at 3:47 pm

Right. The original article is basically suggesting that they increase California inheritance taxes and modify how they treat the property tax bill for inherited houses.

Andrew' April 22, 2011 at 11:55 am

It’s cool to take apart a blog post, and to address it with your tautologies and terminology rather than taking on the argument of the original writer directly on his terms, and it’s even fine to call their conclusions silly. (DeLong brings up heirs, and Krugman talks about the role taxes play in government balance sheets, although does paying down debt by converting one persons financial stock to a government flow really work? I don’t know, but it’s interesting). Heck, without intentional misinterpretation and fighting over definitions we’d all be bored. But, it is kind of douchy to do all that and then call the whole thing “bizarre” or “insignificant” or whatever other dismissive language..

Andrew' April 22, 2011 at 11:56 am

i.e., these guys are never not trying to one up their status.

Popeye April 22, 2011 at 1:06 pm

The people who think that everyone else is just concerned about status always seem to think of themselves as pure truth-seekers.

chris April 22, 2011 at 2:54 pm

More to the point, they’re very determined that everyone else should think of them that way too.

Popeye April 22, 2011 at 4:11 pm

It’s almost as if they think that gives them high status.

Russell L. Carter April 22, 2011 at 12:42 pm

I’ve been reading MR from right back to the very beginning. I thought it would be useful to keep in mind the libertarian POV. However, it’s impossible to deny that on just about every economic issue that has ever mattered over the last 9 years or so, Tyler and Alex have been wrong. Sometimes egregiously wrong, as in the subprime bust.

And all you have to see that they’re still wrong, is to read the comments on that Stephen Williamson post.

Now I just keep MR in my feed for the cultural posts, which remain exceptionally high quality. If you guys intended to educate me economically, you should know you succeeded, just not in the way you intended.

Andrew' April 22, 2011 at 1:14 pm

Do you have specifics? Tyler’s “If I were an Austrian” stands out. As for Subprime, I did a search on after a brief perusal it doesn’t look like they were wrong in ways that a lot of other people were right.

Popeye April 22, 2011 at 3:48 pm

I don’t think it’s possible to get any more wrong than this:

The Credit Snobs

Defaults are to be expected. I see no reason to expect contagion. All lending statistics must now be marked to the global financial market which means that diversification is now more extensive than ever before and thus net risk is lower. Moreover, the whole point of recent financial innovation (and reformed bankruptcy law) has been to reallocate risk way from borrowers and towards those lenders in the world wide market for capital who are in the best position to handle the risk.

The democratization of credit worries the credit snobs. The credit snobs fear that capitalism isn’t just for the rich.

someguy April 22, 2011 at 12:48 pm

Alex,

You are a great blogger. Thx for all your posts.

But Lansburg’s post was way confusing.

‘Assuming the facts are as she states them, it is quite literally impossible to raise revenue by taxing the likes of Mr. Kendrick. Unless, of course, the government decides to spend some of that $84 million.’

That seems wrong to me. The tax incidence might fall on other folks but revenue had been raised. Right? That’s a lead quote that is pretty mis-leading.

‘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.’

Ummm. I guess if the government just changes the name on all Mr Kendrick’s accounts to US Govt that would be true. But that is pretty confusing. If the govt where to take the money and light it on fire they wouldn’t be consuming more goods and services and yet someone else would still have to consume less. And since you are a libeterian[I think], I don’t think you should think that example is completely silly. Isn’t it really the act of taxation that shifts the consumption from one group to the next? Not the consumption by the govt? Yes the govt taxes because it consumes, but still the example is confusing, it seems to be indicating that it is very specifically just the act of consumption that causes another group to consume less.

The point about tax incidence is good but the whole post was confusing, I can see why people are objecting to it.

One last quick example –

‘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. ‘

I think they can and if Professor Landsburg thinks other wise I would like him to send me his useless green pieces of paper that cannot help supply his demand for goods and services.

Yes, I got his point, and it was a good point, but it was a pretty tough to get there and I raised my eye brows along the way.

Andrew' April 22, 2011 at 1:17 pm

It’s semantics. The reporter says “tax Kendricks” and Landsburg points out that this is really taxing someone else, thus “you can’t raise revenue by taxing Kendricks” because by taking his financial stock and if you spend it you are extracting that from someone else’s transactions, unless, I guess, you, as DeLong points out, do it in such a way that puts idle resources to work.

Floccina April 22, 2011 at 2:32 pm

Rather than giving others the benefit of the doubt, they often seem to interpret the writing of others in the worst possible light so they can then point out how foolish it is.

How true!

Also:
Misers like me like to have wealth for psychological reasons. It gives us security, reducing our worrying and so we keep far more than we will mostly ever spend. So if you tax our wealth we will feel psychological pain and you will gain little.

Floccina April 22, 2011 at 2:35 pm

The funny thing is that I doubt that Delong or Krugman would advocate a wealth tax.

chris April 22, 2011 at 2:58 pm

Why not? Other than it wouldn’t have a snowball’s chance in hell of passage, anyway.

Something small like 0.1% per year would have negligible impact on decisions on how to employ capital, but still raise revenue without hurting anyone who really can’t afford it.

lemmy caution April 22, 2011 at 2:37 pm

“I agree completely. I take some of the blame; I should have seen that at this point in time when discussions of inequality, taxing the rich, deficits, unemployment and Keynesian economics are so prominent that any post about taxes would be perceived and interpreted in that light. In fact, Steve’s argument had nothing to do with any of these things (Stephen Williamson has a good post explaining the argument in a different way that makes this clear), instead it’s a puzzle, a thought-experiment if you will, to illustrate tax incidence theory.”

Re-read the first Landsburg article, it is in response to an article suggesting we should tax the rich.

Here is the article:

Californians hold their inheritances so dear that in 1982 they abolished the state inheritance tax. In 1986, they passed a “Dynasty provision” to Proposition 13, ensuring that an inherited house now comes with an inherited — and usually far-below-market — property tax bill. There have always been eccentric heirs to great fortunes, and it’s certainly true that Mr. Kendrick’s antecedents worked hard and created many jobs; it is only natural that they wished their heirs to enjoy the proceeds. Yet public policy in recent years has all but conspired to allow ever greater amounts of wealth to be accumulated by a few without much benefit to the commonweal. Call me unkind for singling out Kendrick. 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?

This undercuts the all the defenders of Landsburg who say that Mr. Kendrick’s heirs will be the ones who bear the brunt of any taxes. Of course, they will. That is the point in raising inheritance taxes.

mulp April 22, 2011 at 4:41 pm

Aren’t all taxes on individuals ultimately taxes on corporate profits?

Taxes must be paid, can’t be put on credit and then discharged in bankruptcy, so they force the individual to demand a minimum wage. Merely eking by living off the land and earning a few dollars isn’t allowed because one must pay property taxes on the land and payroll taxes on the first dollar and sometimes sales taxes and income taxes, so the employer must pay the worker more, cutting into profits.

On the other hand, taxes paid from income means less money to spend which translates into lower demand, squeezing prices to costs driving down or eliminating profits.

But eliminating taxes would mean no roads and other public services and police and so on, so the solution is pressing all individuals into service: require all persons work work on roads for some amount of time, to harvest trees for building government building and bridges, to spend time making the clay pipes for water pipes. Then corporation could set wages without regard to taxes and increase profits. And no individual would have their income stolen from them to pay for the general welfare. And in time of war, men would be pressed into service for that. As far as I can tell, that’s the way things worked in America for thousands of years.

Jim April 22, 2011 at 8:06 pm

News flash: no tax is EVER paid by employers.

Which is precisely why the Government loves taxing them. Gullible people keep voting for those who promise to “make those evil corporations pay” and never understand why everything they buy costs them so much.

Clay April 22, 2011 at 9:27 pm

news flash corporate taxes have fallen dramatically over the last few decades… your point might apply but not to this country not in our lifetimes

ryan April 23, 2011 at 9:18 am

here’s a question: if this guy robert decides to write a check voluntarily, signing over all his wealth to the U.S. Treasury, does this still hold? does the treasury actually raise no revenue?

lxm April 23, 2011 at 9:55 am

You all have to remember economists live in a very different world.

Boonton April 23, 2011 at 10:30 am

This is all well and good but I recall the standard treatment of payroll taxes, they are all paid by the employee. Your ‘employers’ share of social security and other taxes isn’t really paid for by your employer but by you since that’s money your employer otherwise wouldn’t have paid for you.

This was great until the moment Obama got a cut in the payroll tax for employees. All in the sudden, the right changed the meme. The very same serious people suddenly started to float the idea that there were rigidities in the labor market etc. and maybe it did matter after all if the payroll tax was legally on the worker or the employer and maybe if the tax cut had been on the employer they would hire more people because that would make hiring cheaper for them……

Moments like this make the whole thing seem like a giant con game. Deficits matter, when a Democratic President increases spending offset by spending cuts and that’s really serious. Deficits don’t matter when a Republican President expands entitlements and tax cuts with no offsets. Uncertainty in policy makes a big difference in economic growth, unless its nuking already passed bills. Employers don’t care about payroll taxes, they all fall on the worker. But payroll tax cuts to workers are bad because they fail to help employers who suddenly do really pay them.

Boonton April 23, 2011 at 11:23 am

OK looking at the original post it seems like a disconnect here.

It imagines a world at full optimization, full production and full employment. No one can so much as order an extra Starbucks coffee without someone else having less coffee.

In this world, there’s a hypothetical man who has millions in income but never spends anything. He’s an eccentric recluse like Howard Hughs or Citizen Kane. In this world his millions end up in his bank account, a mutual fund, or hedge fund or whatever. Those millions end up in the form of other people’s consumption. Maybe it’s making loans to people to consume on their credit cards, or maybe buying equity stakes or loans to businesses to buy investment goods etc.

In this world if gov’t taxes this man, he must put less in his bank account/mutual fund/hedge fund etc to pay the taxes. As a result those fund(s) must lower the consumption they finance because the man has less money to give them because he’s giving it to the gov’t. On the other hand, because this world is at full capacity, full consumption etc. gov’t spends money or gives it to people who otherwise wouldn’t have it and they consume instead of whoever was going to consume before……

That’s great, but it’s not our world.

Now imagine the gov’t taxes this man not to directly increase someone else’s consumption but to lower the deficit.

OK the taxes causes this man’s indirect consumption to fall via the mechanism of the paragraph above…maybe. On the other hand, gov’t either buys back debt or doesn’t issue debt that it would have otherwise issued. Who exchanges that debt for money or would have swapped their money for debt? People or things that buy US Bonds. So now somewhere there’s a person or institution that has cash but no US Bond to buy because the US gov’t either paid off a bond or didn’t borrow. So now what do they do? They either consume more, or they buy some other type of asset which somewhere ends up as consumption.

This isn’t so much about tax incidence but about the difference between nominal money and actual sacrifices. That’s a fine argument to have but how realistic is it? For one thing, there are very few people who have huge amounts of income but do not consume. The eccentric billionaire who lives in a Buddhist monestary eating a grain of rice a day is the exception to, not the rule for billionaires. Increasing taxes on most of them, then, will lower their consumption to some degree. Likewise tax increases to balance the budget or reduce debt do no really alter the distribution of consumption that radically. The billionaire’s bank account gets smaller, but the bond holder’s bank account gets bigger. In terms of the private sector, assuming full employment, the tax increase doesn’t alter private investment except to the degree that it increases it since the gov’t is doing less crowding out with its deficit.

Bill Drissel April 25, 2011 at 9:41 am

“…bizarre to argue that in the real world the FICA tax on employers isn’t really paid by employers?”

Wouldn’t that extend to ALL taxes paid (on behalf of employees) by employers? Including income taxes and unemployment taxes?

Bill Drissel
Grand Prairie, TX

Boonton April 25, 2011 at 3:46 pm

Depends. For corporate income tax the story is complicated.

In terms of employees, the theory is if a worker is going to cost you $3,000 a week then you’re only going to hire him if he produces more than $3,000 a week in net revenue for you. The cost to you is $3,000 and it doesn’t matter if you’re writing the check to him (salary), to a health insurance company (benefits) or to the gov’t (‘employer’ share of the payroll tax, or straight payroll tax). That assumes smooth markets with rational employers and good bargaining power on both sides. In that case if one element drops, like if payroll taxes go down by $200 the employer is just going to up the worker’s take home pay by $200. Otherwise the worker could quite and go get a $200 raise elsewhere.

In terms of corporate income tax, well it depends whose the weakest. If labor markets are tight, firms could lower rewards to shareholders instead to ‘pay’ the income tax.

Frank April 25, 2011 at 4:41 pm

A critique on a critique of a critique of a newspaper article critiquing taxation policy….

And people keep saying derivatives aren’t dangerous….

Honestly though, we all know that taxing someone who doesn’t consume is impossible and that taking away that money means you tax someone else. Who ever else that is, is impossible to say, but it could be someone else we are also hoping to tax. However, Landsburg tries to frame it in a way that is utterly ridiculous. He implies that if we don’t tax the rich guy not using his savings, we must CERTAINLY be taxing someone who CERTAINLY SHOULDN’T be taxed (i.e. the general public/middle class/common man, whatever). This type of framing is silly. Instead of saying, “hey, we aren’t certain of who we tax, it is ambiguous, but you certainly aren’t taxing Kendrick because he isn’t consuming resources,” he creates an innocent victim of taxation that really has very little to do with his critique of the original argument.

Now the refutation to my point is that you COULD be taxing someone who doesn’t deserve to be taxed but then Landsburg leaves himself open to optimal inter-temporal consumption and investment arguments which are, by design, beyond the scope of his very narrow critique (and for which he suggests he wasn’t inviting). If you aren’t ready to have that debate, don’t frame your argument in a way which invites it because once you move on past the constraints of your argument it blows up in your face. Now I’m not going to sit here and say it was some sinister design of his to do this, it’s just a natural way of writing and thinking and I’m sure it sells books. But lets call it out for what it is, which is a poorly formed argument and explanation of a simple economic principle.

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