I am sorry, but this is absurd

Charles Manski, a well-known professor of economics at Northwestern, writes:

The anti-tax rhetoric evident in much lay discussion of public policy draws considerable support from the prevalent negative language of professional economic discourse. Economists regularly write about the ‘inefficiency’, ‘deadweight loss’, and ‘distortion’ of income taxation.

In fact he wishes to abolish those concepts for their anti-governmental implications and work only with social welfare functions directly.

That’s one easy way to limit deadweight loss from policies, namely take it out of your analytical framework.  The reality is that it is still the simplest and best way to explain why very high rates of taxation — as noted say by George Harrison or Bjorn Borg — are not such a good idea.

Manski also ignores that a belief in deadweight loss is fully compatible with the view that government spending may bring economic benefits.  In fact you often cannot understand the benefits of (some) government spending without first grasping the deadweight loss concept.

And even if you think Arrow’s theorem is overrated in its importance, as I do, working with social welfare functions isn’t exactly a recipe for wringing normative preconceptions out of your economics.  And any plausible social welfare function is going to pick up some concept of deadweight loss and stick it back into the calculations.  How about a social welfare function which says “minimize deadweight loss”, which is what you often find in Mirrlees?

It’s called microeconomics.  Yet Manski complains that “…prominent applied public economists continue to take the theory quite seriously.”  You’ll even find the notion of deadweight loss in some Principles books, believe it or not.  Must we derive a new social welfare function every time we wish to do partial equilibrium analysis, say of a tax on a single (small) commodity?

And get this example of mood affiliation:

The Feldstein article and similar research on deadweight loss appear predestined to make income taxation look bad. The research aims to measure the social cost of the income tax relative to the utterly implausible alternative of a lump-sum tax. It focuses attention entirely on the social cost of financing government spending, with no regard to the potential social benefits.

Contra Manski, I say it is fine to study the tax side of the equation while leaving the benefits (and costs) of expenditures to other researchers.  (By the way, Manski’s supposed culprit, Martin Feldstein, first made his name studying how to measure the benefits of public expenditure.)  All his point really boils down to is to note that in a second best comparison, optimum deadweight loss generally will be positive, as noted by Lipsey and Lancaster long ago in their 1955-56 ReStud piece, not to mention Frank Ramsey.

Manski wishes to cite the work of James Mirrlees for inspiration, but in fact Mirrlees has been a firm believer in the deadweight loss of taxation concept, and in comparing economies to hypothetical first best situations, as illustrated by for instance by these pieces.

I can thank Manski for reminding me that Tyrone, my evil twin, has been begging me for a chance to blog again at Marginal Revolution…


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