Russell Roberts's Blog, page 1455

Taxing Facts

Here's a letter to the New York Times:

Many letters in today's edition reveal deep confusion over the burden of income taxes shouldered by "the rich."  Fortunately, Mark Perry (my former GMU research assistant and now Professor of Economics and Finance at the University of Michigan-Flint) constructed this useful graph showing the relationship, from 1979 through 2007, between changes in the top marginal U.S. income-tax rate and the share of Uncle Sam's tax receipts paid by the top one-percent of income earners.

Two facts leap out.  First, over the course of these 29 years, the share of Uncle Sam's income-tax receipts paid by the top one-percent of income earners rose significantly, from 18 percent to 40 percent.  (And because inflation-adjusted receipts in 2007 were 94 percent higher than they were in 1979, the absolute amount of income taxes paid by the top one-percent earners therefore increased dramatically.) [I used the Minnesota Fed's inflation adjuster to adjust the 1979 tax-receipt figure into 2007 dollars.]

Second, because the top marginal tax rate declined significantly from 1979 to 2007 – today it is half of its 1979 level – it's a myth to suppose that lower marginal tax rates for the highest-income earners result in these income earners paying fewer taxes, either absolutely or relative to the amount of taxes paid by the bottom 99 percent of income earners.

Sincerely,

Donald J. Boudreaux

But Not Sufficiently Sacred for Physicians to Work for Free

Paul Krugman today sneeringly asks

How did it become normal, or for that matter even acceptable, to refer to medical patients as 'consumers'?  The relationship between patient and doctor used to be considered something special, almost sacred.  Now politicians and supposed reformers talk about the act of receiving care as if it were no different from a commercial transaction, like buying a car.

Krugman here taps into the antediluvian hostility toward bourgeois modes of providing for one's self and one's family.  This ancient prejudice holds that 'mere' commerce might be acceptable to govern the production and distribution of trifles such as candy and cars, but it's too crass for goods and services that tradition or elites declare should be untainted by such sordid, competitive activities.

If consumer choice isn't the ultimate driver of health-care supply, however, what – or who – will be its ultimate driver?  Health-care suppliers?  Congress?  Government bureaucrats?  Princeton dons?

Admittedly, the politically engineered wedge separating the receipt of health-care services from the responsibility for paying for these services creates problems.  But the best way to address these problems is to remove the wedge rather than to arrogantly suggest that some mysterious transcendent force will more reliably look after individuals' health-care needs than will those individuals themselves as they operate in markets in which insurers and physicians must compete for consumer dollars.

Taxing

Are the rich not paying their 'fair share' (whatever the hell that term means in such a context) of taxes?  And do cuts in top marginal tax rates mean that a larger share of the burden of taxation is shifted to the non-rich?

Take a look at this telling graph from Mark Perry.

Or, If Libertarians are Adolescent, then Non-libertarians are Downright Childish

Here's a letter to the Washington Post:

Michael Gerson writes that "But both libertarians and Objectivists are moved by the mania of a single idea – a freedom indistinguishable from selfishness" ("Ayn Rand's adult-onset adolescence," April 22).  I can't speak for Objectivists (save to say that Mr. Gerson's portrait of them is a caricature).  But I can say that Mr. Gerson's understanding of libertarianism is comically erroneous; he has clearly not read the best libertarian scholars, such as F.A. Hayek, Milton Friedman, David Boaz, Sheldon Richman, or David Schmidtz.

Were Mr. Gerson to bother himself actually to read the works of such scholars, he would find that libertarianism is grounded both in the value judgment that individual freedom is a worthy end in itself and in the theoretical and empirical proposition that government poses the single greatest threat to individual freedom, as well as the single greatest threat to the prosperity that non-libertarians desire no less than do libertarians.

Does such a stance reflect a "mania" of single-minded "selfishness"?  Is it "adolescent" to want to be free to peacefully pursue one's own ends and to want everyone else to have such freedom in equal measure?  Of course not.  True adolescent arrogance and selfishness is reflected, not in libertarianism or in Objectivism, but in those political philosophies that justify Jones's itch to interfere in Smith's personal affairs and to confiscate some of what belongs to Smith.

Sincerely,

Donald J. Boudreaux

The May Freeman

The May issue of The Freeman is stuffed full of good stuff – including three different essays by three different GMU Econ professors (Pete Leeson on the law merchant; Walter Williams on poverty; and me on Keynesianism).

Taking a Loss Today in Hopes of Higher Profits in the Future

Acme Inc. decides today to spend $10 million to make its product more attractive to consumers.

In Acme's wildest dreams, all of its rivals will immediately go bankrupt and no future rivals will ever arise to challenge Acme, consumers' attraction to Acme being made so intense by this $10M expenditure.  Acme will settle for an increase in consumer demand for its product sufficient at least to allow Acme to recoup its expenditure of $10M – but it, of course, hopes for some result closer to its wildest dreams: a substantial increase in consumer demand that results in a very handsome return on its investment of $10M.

Fast forward five and a half years, to January 1, 2017.

Turns out that consumer demand for Acme's product did indeed increase as a result of Acme's earlier expenditure of $10M, and that this 2011 expenditure proved to be a profitable investment.  Acme's crack accountants reckon that the $10M expenditure caused Acme's revenues to be higher (than they would have been without the investment of $10M) in…

2011 by $760,000

2012 by $3.8M

2013 by $4.0M

2014 by $6.2M

2015 by $800,000

2016 by $240,000

No further revenue-expanding effects of the 2011 $10M expenditure are expected.  And (rather amazingly!) there's been no inflation during these five-plus years.

Acme's execs look back on New Year's Day, 2017, and congratulate themselves on making a wise investment of $10M back in April 2011.  Not a spectacular investment, by any means, but one that yielded a real rate of return, at the end of the (five-and-a-half-year) day of around, very roughly, 10 percent.

Some of the increased consumer demand that generated these higher-than-otherwise revenues for Acme came from consumers lured away from Acme's rivals.  A few of those rivals even went bankrupt, arguably as a result of Acme's 2011 investment of $10M.  Some of the increased demand came from luring new consumers into the market that Acme has long served.

….

Is Acme guilty of predation?  In 2011 Acme intentionally took an immediate loss of $10M in an attempt to gain larger market share.  It did not expect to recoup that $10M expense for several years – an expectation that proved to be correct.

"No," you reply, "Acme isn't guilty of predation because Acme had no real aim of monopolizing the market."

Well, suppose that Acme had instead spent $10 billion to make its product more attractive to consumers – and it worked spectacularly well.  Acme's product became off-the-charts superior to any and all rival products.  Consumers voluntarily chose to buy only Acme's product.  All of Acme's rivals went bankrupt within a few years.

Is Acme, in this latter scenario, a predator?

…..

Nearly every expenditure that producers make, big and small, is an expense that is not immediately recouped by higher revenues.  And every expenditure is meant to generate higher profits in the future.  And nearly every expenditure in competitive markets is meant to harm rivals, in the sense that nearly every expenditure is aimed at making the investing-firm's product offerings more attractive to consumers relative to the offerings of other firms.

There's no way even in theory to identify a certain set of expenditures that enable a firm to offer better deals to consumers as "predatory" and other expenditures as "non-predatory."  So when a firm sells a product at a price "below cost" (as cost is naively reckoned in standard econ and antitrust textbook treatments of production theory), that firm is making an investment today in hopes of earning higher profits in the future.

Why should this investment be treated with any more suspicion than we treat Acme's $10M investment?

Oh, I almost forgot to specify just what that $10M was for.  Acme spent that $10M to repave its stores' parking lots.

Cui Bono?

Suffolk University economist (and GMU PhD) Ben Powell wrote and narrates this short video (produced by the Institute for Humane Studies at GMU) that reveals one important way in which public-choice economics helps us to better understand our world.

Pyramid Schemes

Here's a letter to the Wall Street Journal:

The tale told by Matthew Kaminski about Egypt is depressing ("Searching for Hayek in Cairo," April 21).  As long as most Egyptians fear free, competitive markets and believe that their well-being is promoted by protected nationalized monopolies – as long as "privatization and liberalization are dirty words" (as Mr. Kaminski describes Egyptians' anti-bourgeois attitudes) – Egypt's economy will stagnate and ordinary Egyptians will continue to be among the poorest people on earth.

As the economist and historian Deirdre McCloskey notes at the end of her book on why the west grew rich, "in the long run the acceptance of creative destruction relieved poverty.  It has been in fact the only effective relief.  Wage regulations and protection and other progressive legislation, contrary to their sweet (and self-gratifying) motives, have only preserved poverty."*

McCloskey understands what Hayek understood: prosperity comes only to societies that welcome entrepreneurial-driven economic change – only to societies steeped in the realization that better tomorrows are impossible if everyone is protected from every economic disappointment today.  Societies that reject this reality seal themselves in the awful amber of poverty.

Sincerely,

Donald J. Boudreaux

* Deirdre N. McCloskey, Bourgeois Dignity (University of Chicago Press, 2010), p. 425.

Money Isn't Wealth

Steve Landsburg – in his armchair or out of it – is brilliant, just brilliant.  This post of Steve's is a must-read.  Here's Alex Tabarrok's take.

Argghhhh!

No externality poses as great a threat to human health, happiness, and prosperity as does the negative externality of having obnoxiously uninformed and misguided people of the sort featured in this short video exercising a say (mainly through politics) in how the rest of us live our lives.  (HT Charlie Frey)