Headlines to warm an economist’s heart

Abba admit outrageous outfits were worn to avoid tax

Here is some explanation:

According to Abba: The Official Photo Book, published to mark 40 years since they won Eurovision with Waterloo, the band’s style was influenced in part by laws that allowed the cost of outfits to be deducted against tax – so long as the costumes were so outrageous they could not possibly be worn on the street.

In 2007 Ulvaeus was wrongly accused of failing to pay 85m kronor (£7.9m) in Swedish taxes between 1999 and 2005, and went on to successfully appeal against the decision.

“I am of course very happy that I have been informed in writing that I have always done the right thing concerning my taxes,” he said after the court victory.

The article is here, via Ted Gioia.


I'm an economist and it's very unclear to me why this kind of news should warm my heart...

To paraphrase TC, we are not quite as irrational as we thought we were. A logical explanation for a seemingly inexplicable and crazy phenomenon is comforting. Tax policy can (theoretically) be fixed; random bouts of insanity are more worrisome. Even if it's a post-hoc rationalization (what's everyone else's excuse for their clothing in the 70s and 80s?), it's still comforting.

No one got a tax break for listening to them.

Alright, let's not get too excited here: even if Abba turns out to have a very rational behavior, this far from proves that worrisome random bouts of insanity are not in fact prevalent. Cue my neighbor who went to the grocery store in pyjamas this morning.

In fact, the level of outrageousness that ABBA needed to reach with their clothing is evidence of a random bout of sartorial insanity during the same period.

They discovered their inner economist.

Surely that discrepancy can't have been entirely due to clothing deductions?

How do we measure the dead weight loss? And what about the rather disturbing patterns of rent seeking that such tax laws encourage?

But it boosts the aggregate demand for garish cloth.

We are all Keynesians when it comes to sequined jumpsuits.

What do you mean, dead weight loss? It's clearly a Pigovian tax!

My my - at Waterloo the taxman did surrender.

The Law was written to aid the Outlandish Outfit Industry. I think Louis IX did something similar.

I don't get this - it's usually pretty easy to generate deductions (pay your staff more or whatever) - the strategy only makes sense if they got value from those deductions (like the costume designers were their relatives or whatever, or maybe they could later convert them to money (sell them) and it somehow wasn't taxable income). (At least now) they say they didn't prefer those outfits. Personally, it sounds like an after the fact rationalization for bad 70s taste. (Now that I think of it, I must have worn that buckskin fringed vest for tax reasons, too, because there's no other rational explanation.)

Ulvaeus is one of the craftiest men of the 20th Century. I don't think the man ever did anything without calculation. ABBA is one I can easily imagine him reacting with concern as seventies fashion developed the way it did.

Maybe, this is evidence that tax laws can "nudge" people into tax avoidance strategies, even irrational strategies, i.e., unintended consequences can be even more distortive than we might believe.

Upon further reflection, there was, of course, nothing irrational about this tax avoidance strategy. Suppose Abba had a slight preference for wearing reasonable clothes, i.e., clothes that could "possibly be worn on the street", over outrageous clothes. The fact that outrageous clothes was deductible lowered its after-tax cost to Abba. So, Abba was perfectly rational in choosing the outrageous clothes, taking into account its lower after-tax cost.

(I think I may have just been nudged into thinking something was irrational when it wasn't.)

Gives new meaning to the phrase "Laugher" Curve.

Yes I meant to spell it that way.

We, of course, have the same law in the US tax code.

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