Excellent economics puzzler from Steve Landsburg:
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.
Steve is quite right. The key is this sentence, “For the government to consume more goods and services, somebody else must consume fewer.” So here is a second question, if Kendrick isn’t taxed because, by assumption, he isn’t consuming any less after the tax than before, then who is being taxed in this scenario? Steve gives one answer but there are several potentially correct solutions. One might also ask about the initial assumption, is being “idle” rich, in the sense above, such a bad thing?
Addendum: Brad DeLong chimes in. DeLong attempts to refute Landsburg by claiming incredibly (!) that no one, ever, can be taxed because “we are the government.” Try telling that to someone in prison. Lose the we, as Arnold Kling might say.
Some of Brad’s other (contradictory to the above) claims, however, are correct. One could argue, for example, that Kendrick’s heirs are taxed. Of course, Kendrick may not have any and this in anycase supports Landsburg that Kendrick is not being taxed.
Addendum 2: In the comments I wrote: Suppose Kendrick were dead. In that case, the tax would reduce the consumption of his heirs, if he had heirs. If he had no heirs and the money were in the bank then the tax would increase interest rates and reduce the consumption of some borrowers. If the money were kept at home under his bed then the tax would increase the price level thus reducing everyone’s consumption by just a little bit. There are other possibilities but those are three main cases. Now, the premise of the problem is that Kendrick isn’t consuming anything but as far as this problem is concerned someone who doesn’t consume anything is the same as dead! Thus, exactly the same story occurs.