Month: December 2005

Tabarrok on Feldstein on Capital Taxation

The plethora of discount
rates and taxes obscures the basic point in Feldstein’s argument against
capital taxation.  Here is a bare-bones version.

There are three
goods, labor, apples and oranges.  Assume that the government taxes
oranges at a higher rate than apples.  A tax on oranges is also a tax
on labor since you need labor to buy oranges and if the price of
oranges is high the value of your labor is low.

Now let’s show
that a reduction in the orange tax matched by an increase in the labor
tax to keep total tax revenues constant can make everyone better
off.  The simplest case is to assume a tax on oranges so high
that no one buys any oranges.  Orange tax revenue is therefore zero.
Now we get rid of the tax on oranges and add an equal-revenue tax on labor
(zero).  So long as the consumer cares at all about oranges he now buys
more oranges and is better off (because he now consumes a variety of
fruit and has an increased incentive to work).  The consumer will still be better off even if we replace the zero-revenue orange tax with a
small labor tax which increases government revenues.  The zero-revenue assumption makes the argument obvious but is not at all necessary for the results.

The basic point is that the tax on oranges distorts the labor-leisure choice and the apples-oranges choice.  A tax on labor distorts only the labor-leisure choice and so is preferred.

For Feldstein’s argument rename oranges as savings, apples as present consumption and labor as income.  To see a counter-argument introduce more people into the model and rename oranges as yachts. 

Newspapers as non-profits?

A newspaper company, like a public broadcaster,
could be organized as a not-for-profit, tax-exempt corporation. It
could still sell papers and advertising, it could still develop new
Internet revenues, it would still pay market wages and salaries (or
maybe better), it could re-invest in improving its own staff and
facilities and operations, it just couldn’t make a profit. And it
wouldn’t pay taxes or dividends.

Here is more.  As newspaper ads move to the web, draining a key source of revenue, I see a few options:

1. Subscription finance with high prices and few ads.  A bit like the Financial Times.  Of course this means fewer newspapers and fewer newspaper pages.  On the plus side, fewer articles would continue on other, distant pages.

2. Sleazy tabloids.  But the competition with the Internet remains.

3. Some clever newspaper coup to take over Web processing of commercial information and leapfrog over ebay and Craigslist.

4. Web products evolve into customized, print-on-demand newspapers.  A some major newspapers survive by going the hybrid route, or by merging with their web competitors.  "What is a newspaper?" becomes a question of degree and we needn’t mourn the lack of pure newspapers.

5. Non-profits would take in revenue and also raise donations by selling access to social and political networks.  What would a date with Maureen Dowd go for? 

6. Extremely partisan, low-cost "rag" newspapers, akin to 19th century U.S. experience, and paid for by subscription.  Advertisers seek to offend nobody, and thus exert a centrist influence over newspaper content.

I place virtually no weight on option #3.  Comments are open.

Levitt and Dubner update

ABC just signed the pair to a one-year deal for recurring spots on Good Morning America, World News Tonight, and Nightline, including backing for their own documentaries…

Conventional wisdom says there’s more to come. Dubner says, "We’re working on another book: ‘Superfreakonomics.’ "

Here is the link.  Elsewhere on www.politicaltheory.info, here is a piece on the mathematics of Sudoku.

Martin Feldstein on capital taxation

Follow these numbers, and the bold face is mine:

An example will illustrate the harmful effect of high
taxes on the income from savings and show how the tax reform could make
taxpayers unambiguously better off. Think about someone — call him Joe
— who earns an additional $1,000. If Joe’s marginal tax rate is 35%,
he gets to keep $650. Joe saves $100 of this for his retirement and
spends the rest. If Joe invests these savings in corporate bonds, he
receives a return of 6% before tax and 3.9% after tax. With inflation
of 2%, the 3.9% after-tax return is reduced to a real after-tax return
of only 1.9%. If Joe is now 40 years old, this 1.9% real rate of return
implies that the $100 of savings will be worth $193 in today’s prices
when Joe is 75. So Joe’s reward for the extra work is $550 of extra
consumption now and $193 of extra consumption at age 75.

But if the tax rate on the income from saving is
reduced to 15% as the tax panel recommends, the 6% interest rate would
yield 5.1% after tax and 3.1% after both tax and inflation. And with a
3.1% real return, Joe’s $100 of extra saving would grow to $291 in
today’s prices instead of just $193.

There are two lessons in this example, each of which
identifies a tax distortion that wastes potential output and therefore
unnecessarily lowers levels of real well-being. The first is that a tax
on interest income is effectively also a tax on the reward for extra
work
, cutting the additional consumption at age 75 from $291 to just
$193. Because the high tax rate on interest income reduces the reward
for work (as well as the reward for saving), Joe makes choices that
lower his pretax earnings — fewer hours of work, less work effort,
less investment in skills, etc.

The second lesson that follows from the example is
that the tax on interest income substantially distorts the level of
future consumption even if Joe does not make any change in the amount
that he saves
. With the same $100 of additional saving, the higher tax
rate reduces his additional retirement consumption from $291 to $193, a
one-third reduction. If Joe responds to the lower real rate of return
that results from the higher tax rate on interest by saving less, the
distortion of consumption is even greater. For example, if Joe would
save $150 out of the extra $1,000 of earnings when his real net return
is 3.1% (instead of saving $100 when the real net return is 1.9%), his
extra consumption at age 75 would be $436, more than twice as much as
with the 35% tax rate. But the key point is that Joe’s future
consumption would be substantially reduced by the higher tax rate even
if he does not change his savings.

Taken together, these two lessons imply that a lower
tax rate on interest income, combined with a small increase in the tax
on other earnings, could make Joe unambiguously better off while also
increasing government revenue
. More specifically, if reducing the tax
on interest income from 35% to 15% had no effect on Joe’s earnings or
on his initial consumption spending, the government could collect the
same present value of tax revenue from Joe by raising the tax on his
$1,000 of extra earnings from $350 to $385. Although this would cut
Joe’s saving from $100 to $65 (if he keeps his initial consumption
spending unchanged), the higher net return on that saving would give
Joe the same consumption at age 75. In this way, Joe would be neither
better off nor worse off.

But experience shows that Joe would alter his behavior
in response to the lower tax rate. He would earn more at age 40 and
would save more for retirement. This change of behavior makes Joe
better off (or he wouldn’t do it) and the extra earnings and interest
income would raise government revenue above what it would be with a 35%
tax rate. So Joe would be unambiguously better off with the lower tax
rate on interest income and the government would collect more tax
revenue.

Here is the link.  Elsewhere from The Wall Street Journal, here is a piece on bargaining theory, thanks to Chris Masse for the pointer.

Stocking stuffers

Infrastructure: A Guide to the Industrial Landscape.  A picture book for those who love Duisburg, Gary, Indiana, and the Pulaski Skyway.  Addendum: Here is a working link to Infrastructure.

Murderball, just out on DVD.  I know, some of you thought "I don’t want to see a movie about cripples."  That was a mistake of instrumental reason.

Seu Jorge, The Life Aquatic Studio Sessions.  David Bowie songs on acoustic guitar, sung in Portuguese, not just the cuts from the movie.

Austan Goolsbee is smart

Try this:

The evidence shows that companies are particularly likely to raise
prices when the government is footing the bill. Economists Mark Duggan
at the University of Maryland and Fiona Scott Morton at Yale studied
the prices of the top 200 drugs in the United States from 1997 to 2002.
They found that drug makers gamed the government procurement rules that
forbid companies from billing Medicaid more for a drug than they bill
private consumers. When private-sector demand for a drug is small
compared with the demand of Medicaid patients (as is the case, for
example, with antipsychotics), drug companies massively inflate the
price of the drug for private buyers. Sure, they lose some business
from that part of the market. But they more than make up for that loss
by being able to bill the government at a vastly higher price for the
Medicaid patients.

And this:

As the moral-hazard problem for medical expenses becomes a corporate
rather than individual matter, the solution that economists currently
favor–Health Savings Accounts–will fail to rein in costs. The HSAs
won’t fix things because they change the incentives of individuals, not
companies. Indeed, as more people get HSAs, we may very well see the
companies raise prices even further to capture the tax-free savings in
people’s accounts. That would be exactly analogous to what has happened
with "529" college savings programs. In 2001, Congress passed a tax
break for college savings accounts. As I wrote three years ago,
the plans were "supposed to be an enormous federal tax subsidy for
education." But the small number of financial firms that are approved
to manage the 529 accounts have basically captured that subsidy by
raising their investment fees to levels well above those in the regular
investment market.

I believe the argument, although it remains a puzzle why these markets do not behave in a more competitive fashion…

Three new constitutional amendments

The Cato blogad at the right, and Jim Buchanan’s new essay, ask what three amendments you would pick for the American Constitution.  Will Wilkinson suggests an amendment to ban interference with voluntary exchange.

Sadly, I am unable to come up with good candidates.  I have plenty of ideas, such an amendment to forbid tariffs and quotas on foreign goods and services (would it cover health and safety concerns?  Would we be assured of non-pasteurized French  cheeses?).  But I worry the amendments would place too much weight on the Constitution.  It is easy to ignore a Constitution or to overturn it altogether.

Libertarians (and contractarians) often treat the Constitution as a kind of free variable to be manipulated.  We can write into it what we want, and if we fail we treat this as a kind of lament, or a sign of moral decay, rather than a problem with our basic approach.  In my view, if a constitution deviates from popular opinion (or is it the prevailing structure of interest groups?) by any more than "k" percent, that constitution will be chucked.  Furthermore changing your constitution too much, or ignoring it too blatantly, is costly in terms of long-run political order.  I view this as a constraint to be satisfied by political thinking, even though we can (and should) criticize that constraint at a meta-level.

That is why my three amendments would have to be modest.  Free trade might stick as an amendment, especially if we added a national security clause.  The Finns didn’t get very far with a supermajority requirement for fiscal policy.  I don’t see "procedural" approaches, such as term limits, as yielding much gain.  But local municipalities should not be allowed very strict anti-barbecue codes; I don’t care what they do with the smoke.  Nor should commuters be forbidden from driving on side roads during rush hour, just because the homeowners don’t like it.

Here is one relevant critique of Buchanan.  Surely you all have better ideas for three constitutional amendments; comments are open.

Should Christmas be more commercial?

Sometimes a bracing Randian approach is needed.  Leonard Peikoff writes:

Christmas in America is an exuberant display of human ingenuity, capitalist productivity, and the enjoyment of life. Yet all of these are castigated as "materialistic"; the real meaning of the holiday, we are told, is assorted Nativity tales and altruist injunctions (e.g., love thy neighbor) that no one takes seriously.

In fact, Christmas as we celebrate it today is a 19th-century American invention. The freedom and prosperity of post-Civil War America created the happiest nation in history. The result was the desire to celebrate, to revel in the goods and pleasures of life on earth. Christmas (which was not a federal holiday until 1870) became the leading American outlet for this feeling.

Historically, people have always celebrated the winter solstice as the time when the days begin to lengthen, indicating the earth’s return to life. Ancient Romans feasted and reveled during the festival of Saturnalia. Early Christians condemned these Roman celebrations — they were waiting for the end of the world and had only scorn for earthly pleasures. By the fourth century, the pagans were worshipping the god of the sun on December 25, and the Christians came to a decision: if you can’t stop ’em, join ’em. They claimed (contrary to known fact) that the date was Jesus’ birthday, and usurped the solstice holiday for their Church…

Then came the major developments of 19th-century capitalism: industrialization, urbanization, the triumph of science — all of it leading to easy transportation, efficient mail delivery, the widespread publishing of books and magazines, new inventions making life comfortable and exciting, and the rise of entrepreneurs who understood that the way to make a profit was to produce something good and sell it to a mass market.

For the first time, the giving of gifts became a major feature of Christmas. Early Christians denounced gift-giving as a Roman practice, and Puritans called it diabolical. But Americans were not to be deterred. Thanks to capitalism, there was enough wealth to make gifts possible, a great productive apparatus to advertise them and make them available cheaply, and a country so content that men wanted to reach out to their friends and express their enjoyment of life. The whole country took with glee to giving gifts on an unprecedented scale.

Santa Claus is a thoroughly American invention. There was a St. Nicholas long ago and a feeble holiday connected with him (on December 5). In 1822, an American named Clement Clarke Moore wrote a poem about a visit from St. Nick. It was Moore (and a few other New Yorkers) who invented St. Nick’s physical appearance and personality, came up with the idea that Santa travels on Christmas Eve in a sleigh pulled by reindeer, comes down the chimney, stuffs toys in the kids’ stockings, then goes back to the North Pole.

Of course, the Puritans denounced Santa as the Anti-Christ, because he pushed Jesus to the background. Furthermore, Santa implicitly rejected the whole Christian ethics. He did not denounce the rich and demand that they give everything to the poor; on the contrary, he gave gifts to rich and poor children alike. Nor is Santa a champion of Christian mercy or unconditional love. On the contrary, he is for justice — Santa gives only to good children, not to bad ones.

All the best customs of Christmas, from carols to trees to spectacular decorations, have their root in pagan ideas and practices. These customs were greatly amplified by American culture, as the product of reason, science, business, worldliness, and egoism, i.e., the pursuit of happiness.

OK, some of that is over the top and some of the history is a wee bit false.  Many Christians place greater stress on Easter.  Still, I should start a new title: "Bracing but Required Randian Shocks, A Continuing Series." 

Thanks to www.politicaltheory.info for the pointer.

Lexington, North Carolina food bleg

Like to shop? [In Lexington] you’ll find North Carolina’s largest True Value Hardware store, the largest dealer of Boyd Bear® Collectibles, and a dress and quilt fabric shop.

Here is the link.  But no, I want barbecue, and your recommendations are most welcome.  I am hoping that Kevin Grier, now visiting at Duke, will drive out to meet me for some pulled pork.

Markets in everything — cell phones for dogs

As of next March, pet owners will be able to drop the photocopier and staple gun and pick up the phone instead. That’s when PetCell, the first cell phone for dogs, is due to hit pet-store shelves.

Hung off Fido’s collar, the PetCell is a bone-shaped cell phone that will let dog owners talk to their best friend over a two-way speaker.

Developed by PetsMobility, the PetCell works with standard cellular networks and has its own number. It automatically answers when the owner punches in a code on their telephone keypad that means, "Lassie, come home!"

The PetCell will ship in early 2006 and will sell for $350 to $400, the company said.

Here is the story, and thanks to Christopher Meisenzahl for the pointer.  While we are on the topic, here is evidence that dogs laugh.