Meta-Blog

SEARCH QandO

Email:
Jon Henke
Bruce "McQ" McQuain
Dale Franks
Bryan Pick
Billy Hollis
Lance Paddock
MichaelW

BLOGROLL QandO

 
 
Recent Posts
The Ayers Resurrection Tour
Special Friends Get Special Breaks
One Hour
The Hope and Change Express - stalled in the slow lane
Michael Steele New RNC Chairman
Things that make you go "hmmmm"...
Oh yeah, that "rule of law" thing ...
Putting Dollar Signs in Front Of The AGW Hoax
Moving toward a 60 vote majority?
Do As I Say ....
 
 
QandO Newsroom

Newsroom Home Page

US News

US National News
Politics
Business
Science
Technology
Health
Entertainment
Sports
Opinion/Editorial

International News

Top World New
Iraq News
Mideast Conflict

Blogging

Blogpulse Daily Highlights
Daypop Top 40 Links

Regional

Regional News

Publications

News Publications

 
In Praise of Regressivity
Posted by: Dale Franks on Monday, January 30, 2006

A QandO reader, Logan Boettcher, drops the following on me via email:
I consider the pure consumption tax to be a proportional tax on the tax side of the equation. Rich people save more and it would seem to be a regressive tax as the poor would spend the full 23% of their income on taxes and the rich would pay less. But the purpose of saving is for future consumption, so eventually every last dollar of the rich person's would be spent and would be taxed at the 23% rate. But even in that static, annualized analysis, I'm not entirely sure if the consumption tax is really that regressive on the annual basis.

I base this on the assumption that taxes are levied for the purpose of spending (revolutionary, I know). When they get spent, the taxpayers receive either a direct governmental transfer (food stamps, EITC, etc.) or a government service or benefit (national defense, clean air, etc.). This would mean that X=taxes paid, Y=direct government payments, Z=value of services provided by government, then the adjusted tax burden would be % Tax = (X - Y - Z)/(Income). We already see this calculation in discussions of Earned Income Tax Credits, when poor people are said to have negative tax burdens. But what of the Z part of the equation?

Let's say that police service was the only government service provided in Smallville and it was funded by a 10% consumption tax. Poor person A makes $10,000 and spends it all, paying tax of $1,000 and having a tax burden of 10%. Rich person B makes $1,000,000 and spends $500,000, paying tax of $50,000 and having a tax burden of 5%. Aha! says a liberal, that is a regressive tax.

But if we adjust the tax burden to allow for the value of the government service, then things get more interesting. Let's say, for the sake of argument, that police service is worth $2,000 to each person equally. The adjusted burden for person A is then ($1,000-$2,000)/$10,000 = -10%, while it would be ($50,000-$2,000)/$1,000,000 = 4.8% for person B. In fact, for the tax rates to equalize, police service for A would have to remain constant while the service for B would have to be valued at $600,000! What the above calculation really says is that the rich person is subsidizing 48 poor people making $10,000 to provide them with police service.

The point that I'm trying to make is that the value of government services and direct welfare payments influence poor people's effective tax rates to a far greater degree than a rich person's and does it in a progressive way.
It's an interesting idea that Logan proposes, but it doesn't really touch the question of regressivity, as it's commonly understood.

The big problem here is that we don't know, to use the example above, that police service is actually worth $2,000 for each person. All we know, empirically, is what police service costs. The value that each person places on police service is pretty nebulous. As I explain in my book, SlackernomicsBook, Ebook)—(yes, it’s a shameless plug. It's called Capitalism. Look into it.):

Let’s say you own a 1985 Yugo that you want to sell. You decide you want to sell it for $40,000 and not a penny less. When prospective buyers start coming around, none of them are going to meet your price because your price is not a true reflection of the car‘s value. Not even if you’ve maintained it really well.

The only way anyone is going to pay you forty grand for fifteen-year-old Yugo is if they are incredibly stupid or certifiably insane. The value of the Yugo is probably a lot closer to $200, and sooner or later you’ll have to lower the price to that level, or decide to let it just rust away in your driveway.

Either way, you’re not getting the 40 grand.

The difficulty of being the seller or producer of any good is that you have to try and correlate its price with its value. Some people may be willing to pay $500 for the Yugo. Some will only pay $100. The value of the car is kind of vague. On the other hand, the price you put down as the seller has to be specific. You have to decide on a price that most potential customers will be willing to pay.

It’s the same for the producer of any good. First you have to add up what it costs to make the goods you produce. Then you have to try to determine the value that customers will set on your goods—in other words, how much they’re willing to pay. The goal is to set a price that is greater than the cost of making the goods, and is consistent with the value customers will put on them.

Let’s take a look at new cars and see how pricing and value interrelate. Let’s say General Motors makes the Chevrolet Caprice and the Pontiac Bonneville SSEi. The Caprice costs about $18,000. The Bonneville costs about $36,000. For all practical intents and purposes, they are the same car from GM’s viewpoint. They use the same frame and body. They use many of the same parts. The workers who make them and the plants in which they are made cost about the same to run. The Bonneville is slightly more expensive for GM to make because it comes with more expensive interior appointments and a racier engine. Other than that, the difference between the two cars is mainly cosmetic. They are the same car. But the price of the Bonneville is more than double that of the Caprice. Why?

Customers value the two cars entirely differently. Customers see the Caprice as the car their grandfather drives. It’s sedate. It’s boring. It’s respectable. It’s middle class. It comes in tan, gray, white or black. It is utterly unexciting.

Aaah, but the Bonneville! A 225-horsepower engine! Excitingly chunky leather seats! A heads-up display that projects driving information right into your field of vision! A dashboard covered with knobs and dials and pretty lights! Flashy colors like British Racing Green! This isn’t your grandfather’s car!

So, a customer who would pay $16,000 dollars for the Caprice might do it as if he was doling out vials of his own blood. But that same customer would take one look at the Bonneville and toss out $36,000 in rolls of C-notes like a drunken sailor on Singapore shore leave just to drive that baby home.

The image the Bonneville provides adds a value that translates to an extra couple of thousand dollars of profit for GM. They can jack up the price of the Bonneville simply because people are willing to pay more for it. Between the Bonneville and the Caprice, the Bonneville has greater value.


Value, at the end of the day, is pretty nebulous. And it's even more nebulous when you remember that different persons place different values on the same item. So, you can't just wish the value problem away by saying, "for the sake of argument, that police service is worth $2,000 to each person equally," because it's just not.

All we can really do when we talk about regressivity is to look at things that can actually be measured, which in this case, is a person's actual income, and the amount they pay in taxes. In the proximate example, if the poor person pays 10% of his income in taxes and the rich person pays 5% of his income in taxes, then the tax is regressive. Suppositions about value are just that: suppositions. And unprovable suppositions at that.

But, despite the aggressively un-PC nature of my position, I don't care about regressivity. I just don't. Yes, I know that we are supposed to bleed for the poor, and exempt them from taxes to the extent possible, but I don't. Moreover, I didn't care about regressivity when I was a Security Policeman making $700 a month, either.

Because what happens when you start programming progressivity into the tax system is that you inevitably begin to disconnect the cost of government services from the price the electorate pays to receive them. What you end up with is a system very similar to the one we have now, where the top 1% of income earners pay 37% of all income tax revenues, while the bottom 50% of income earners pay 4% of all income tax revenues.

As soon as you disconnect the price paid for government services from their actual cost, you've automatically created a system where the electorate can constantly vote for ever-increasing government spending, secure in the knowledge that they aren't actually paying for it. I can't think of a better system for incentivizing the electorate to increase the size and scope of government.

You know, the price mechanism is pretty darn important. It forces people to make decisions about what they want, because it makes the cost of getting what they want abundantly clear. That's why it works. Even Karl Marx and Friederich Engels wrote about how important the price mechanism was for making economically rational decisions. But progressive taxation inevitably removes the price mechanism from spending decisions. For the majority of the electorate, it pushes the costs onto third parties. So, as far as I'm concerned, regressive taxation is the single best available method for forcing the electorate to balance their desire for increased government programs with the cost of those programs.

As far as I'm concerned, the best way to incline me to support a tax program is to convince me of its regressivity. Regressivity is a good thing.

Let the flaming begin.
 
TrackBacks
Return to Main Blog Page
 
 

Previous Comments to this Post 

Comments
Only flame here would be to light your cigar.

The only quibble, and I consider it a minor one, for the shorter term is this:
Progressive taxation inevitably removes the price mechanism from spending decisions. For the majority of the electorate, it pushes the costs onto third parties.
The problem with your statement, is within the context of this country and its large middle class. Also factored in is the amount of deficit spending involved.

Now; your statement is most certainly true when deficit spending isn’t involved.

However I think what you’re trying to impart here is this all gets pushed off onto the rich. (I’m sure you’ll correct me...)

The fact is, however, because of deficit spending the bill does not get pushed off of the rich, nor could it. Even if by some fiat of government we were to take every dollar of the rich and put it into the tax coffers we wouldn’t be able to touch the deficit. This is not so much a reflection of the amount of deficit spending which is tremendous, but rather, comparatively speaking, there are not all that many rich people anymore. True, we have some wildly ranch individuals, and I would estimate that the number of rich that we have in this country is stayed relatively constant over time. But that doesn’t begin to make up the sheer financial mass of the middle class Which has been growing for some time and particularly within the last 125 years or so.

Therefore, the prices get pushed off onto the middle class, Meaning, most of us, not third parties.


Certainly however, progressive taxation tends to hide the price somewhat.

One further comment.
In general it seems to me that if a tax is not progressive it is immediately labeled by the left as regressive as if there were no middle of the road. Consider for example the reactions to the flat tax proposal put forward by Boortz and company.
 
Written By: Bithead
URL: http://bitheads.blogspot.com
As far as I’m concerned, the best way to incline me to support a tax program is to convince me of its regressivity. Regressivity is a good thing.
I’m with you there Dale. Let’s go forward and regress.
 
Written By: meagain
URL: http://
If the majority of the population spends more (??) than they save or all that they earn and the majority of purchases are in none equity type holdings. Then that is better for capitalism. Bracketing seams to get more money in the hands those most likely to spend it. Wouldn’t that benifit those most likely to gain wealth from it. A reduction in government spending and regulation would do more towards understanding the cost of government than a fair tax. If I am all wet please feel free to correct me.
 
Written By: Coaster
URL: http://
It seems to me that Logan is saying something similar - that the more income you earn, the more government you pay for (and subsidize for those who pay less).

One interesting way to look at the taxation is to divide the total income tax receipts by the number of taxpayers (I’ll use tax returns because I can’t find taxpayers) to determine the ’equal share’ of government costs.

Using 2003 figures, the average federal income tax per tax return was $5800 (about 748 billion in taxes paid across 128 million returns). 722 billion of that was paid by the top 64 million returns. That leaves 26 billion for the other half, or $400 per return. So the upper earning 50% paid about $11,200 per return, or 28 times the average of the lower 50%. The average upper half tax return subsidizes 93% of 1 lower half tax return’s equal share. Of course these are averages, so some people subsidize more, and some less. But the bottom line is that on average 50% of the population pays about 7% in taxes for their 100% of equalized benefits. (Yes this analysis ignores other taxes).

Yes, I agree, regression (equalization) would be good. The more people directly pay for the real costs of their follies (i.e. support for expensive programs) the more likely they are to spend wisely.



 
Written By: Unknown
URL: http://
Another way to explain the income tax structure is this:

You and 3 other friends order a pizza. The pizza costs $20 and you will all eat an equal amount. Two of your friends vote that you and the 4th pal should each pay $9.65 while they pay 35 cents each. Sound like a good deal?

It’s simplistic, but that’s the basic situation. I’m sure MK will have nasty things to say about it.



 
Written By: Unknown
URL: http://
Good stuff Dale. This is why I check Q & O everyday; always a thought provoking gem or two to be had. I would like to submit that the value of police service and subsequently all government services shouldn’t be as nebulous as selling a consumer product like a car. Although I do like the analogies. Simply stated (maybe overly) government services are not, nor should not be for profit - there is no up-selling. The cost to the per capita consumer for the police services should be basically O&M of say that precinct. Nothing more. That should be a fixed/predictible cost with an appropriate amount of ’cushion’ built in for the unexpected. If a new high tech state of the art prison is desired or new squad car is needed and not budgeted - well then it’s referrendum time. So I think it is possible to assign a real value at least in real dollar amounts to government services. Of course there is a distinct difference in value and in cost; a person who lives in the safest community in the U.S. and never needs the police may be getting ripped off, but the person living on the corner of Crack House Way & Prostitute Lane is likely getting a pretty good deal. The cost potentially being the same, but the value quite different.

Keep up the good work.
 
Written By: Church
URL: http://
Your observations are, of course, valid — "the electorate can constantly vote for ever-increasing government spending, secure in the knowledge that they aren’t actually paying for it."

So, what limits are there for this asymptopic function? As may be expected, they exist at the intersection of wealth and political power. The only way to rein in this tendency towards bread and circuses is to have a forum where the more money you put in, the more say you have in the money coming out.

Americans being a pragmatic people, we have arranged for just such a forum, euphemistically called "lobbying". The problem with this system is that the major beneficiaries are lobbyists and congresscritters, and no benefit derives to the good of the nation.

I would propose that our current bicameral legislature be redefined. One side would continue to represent the population in proportion to headcount — and the other would represent those who contribute to the government’s receipts, in proportion to those receipts. Voluntary receipts (contributions) could be valued at a multiple of involuntary receipts (taxes), but no money could be contributed directly to candidates — anyone "speaking for" a certain de minimis amount could be heard, but votes would be tabulated based on, in effect, proxies.

You might well imagine how much fun the conference committees would be in such a system, with one side arguing about how much things should cost and the other about what value we should receive for the expenditure — but this is a debate that needs to happen.

To sum up, the saving grace of our progressive "populist" system is the increased power of economic interests by way of lobbying. If we reduce the waste and expenditure of lobbying, we’ll need to expand and formalize the role of economic power in our political system.

 
Written By: cthulhu
URL: http://
As soon as you disconnect the price paid for government services from their actual cost, you’ve automatically created a system where the electorate can constantly vote for ever-increasing government spending, secure in the knowledge that they aren’t actually paying for it. I can’t think of a better system for incentivizing the electorate to increase the size and scope of government.

Well, taxing and spending decisions aren’t made on a direct democracy basis, so IMHO the concern is exaggerated, since our representative government prevents people from really being able to vote their pocketbook. But assuming that those decisions were made by direct vote, and assuming that the wealth of the country was distributed as unevenly as it is, why would the electorate increase the size of government — if the people vote their pocketbooks as you suggest, wouldn’t they simply vote to transfer the wealth directly from the rich minority to the non-rich majority? And then at that point, there would be no more majority of free-riders, and the size of government would be more directly related to what the majority are willing to pay for. Utopia, right?

Anyway, back to the government we have, it sounds like your argument is trending not just to a flat tax but to a fixed per-capita tax, or perhaps even fairer, a per-use fee for all government services that could be itemized . That would certainly shrink the government dramatically. But I suspect that that the distribution of wealth in such a society would become more and more unequal and you’d approach the point at which even in our representational government, the legislators would have to move to a more redistributive government in order to stay in office.
 
Written By: kenB
URL: http://
kenB, the representatives vote the majority of their constituencies pocketbook (or attempt to) by trading goodies for votes. Just because there is an intermediary (or two, considering lobbyists) doesn’t mean there isn’t wealth transfer of various sorts (direct cash transfers, uneven distribution of the costs of basic government, indirect transfers via special interest approved/agitated for local goodies like rainforests and needless bridges). It doesn’t need to be direct to have the same effect.

To answer your "why wouldn’t the electorate simply vote to transfer the wealth directly instead of increasing the size of government" question, one reason is that government provides some measure of legitimacy - however tenuous - for the current modes of wealth transfer. It’s far more naked and unpalatable to just take money directly - most people (but not all) have at least enough shame to prevent that, for now. When the tax take needs to increase by 50% in another 10-15 years to cover the growing entitlements funding gap, that may not be the case and you may be asked to contribute according to your ablity, comrade.





 
Written By: Unknown
URL: http://
The Poll Tax.

But seriously, this also applies to demographics. For example, a baby boomer can sit in denial about social security and medicare and repeat the mantra that its’ not broke, etc, and by the time it is broke, well, he’ll have collected a lot of excellent benefits. And the large voting bloc they represent can probably keep this going for much longer than it should.

Expect more "ownership society" ideas to be slowly implemented by the private sector which is not beholden to the voters, e.g. IBM going to defined contribution.

I’ve had nice discussions with socialists and others about such things...the main point you have take into the discussion is that while in reality, life has to be a friggin’ rat race, wouldn’t it be nice if it wasn’t? Wouldn’t it be nice if we all had a guaranteed job with no one having to make sales quotas or worry about competition....wouldn’t it be nice if social security would always be there, no matter that the population of workers will decline...wouldn’t it be nice...
 
Written By: Harun
URL: http://
This post and many of the comments suggest a return to the early days of our democracy in which only property owners could vote. Not a bad idea...

It seems to me that it isn’t neccessarily "the poor" voting to get goodies for themselves at the expense of "the rich" that is a problem. Rather, it is (usually rich) do-gooders who make themselves feel good by taking money from other "rich" people and giving it to "the poor".
 
Written By: docjim505
URL: http://
True enough docjim. I’m not so sure about only allowing property owner’s to vote (I’d just rather see the government have far less power)

It should also be noted that a non-trivial portion of the cost of government is realized in the cost regulation and too often that regulation is brought about by businesses trying to prevent competition. So in that case it is the rich trying to maintain their leadership position via means other than winning in the marketplace.

 
Written By: Unknown
URL: http://
To step in here, two main points:
1)there seems to be a the fundamental assumption regarding government services is that every citizen is an equal recipient of government funds. That is wrong
2) Just because INCOME tax is extremely progressive, doesn’t mean our entire tax structure is. It is much more balanced overall, especially once you consider the Social Security Cap and FICA and such. (Let’s not get into SS again, right now, I’m just mentioning the point)

Police protection of assets is a much worse for the poor, for that matter the entire justice system is much worse for them. As is road quality, education

I’m willing very willing to consider a flat income tax, as I agree that current income taxes may be too progresive. Of course I mean flat income for everyone, including all investment/ dividend/ capital gains income, and the exact same tax rate and method (revenue ("income") not profits) is used for corporations (which the rich can use to get around income taxes). No deductions, no write offs, no "accounting for investment losses".

However, a consumption tax is just plain ridiculous, and will lead to the poor having an even harder time, especially with the removal or cut back of Govt. services that you guys keep talking about. We will end up with a new serfdom. Those who started with enough to invest will do so tax free, and labor will be run down with taxes.

The capital side of the equation is way to much of a fetish in economist circles. Just like labor is way too much of a fetish in socialist circles. Both are neccesary and a balance is necessary; let’s tax both the same. It will distort the economic incentives in a balanced way.
 
Written By: Tito
URL: http://
Hmm,

Progressivity and regressivity are concepts which are semantically null. What one forgets, at one’s peril, is that you cannot help a poor man by harming a rich one.

The graduated income tax has two nasty side effects. Not only do you harm the rich man by the outrageous taxation percentage, you also harm him via opportunity costs, which in turn harms the poor man by limiting the poor man’s options. The other effect is bracket creep. Take the "progressive" curve and differentiate it. What you see is that the steeper the curve, the higher the hill the poor man climb to better his position. This not only plays to the poor man’s greed, envy, and jealousy; it keeps him down because he does not get rewarded by being successful. A poor man gets a raise, finds himself in a higher bracket; and then realizes that he has less money than he had before the raise and now faces higher prices too.
 
Written By: Charles D. Quarles
URL: http://spaces.msn.com/members/cdquarles/

 
Add Your Comment
  NOTICE: While we don't wish to censor your thoughts, we do blacklist certain terms of profanity or obscenity. This is not to muzzle you, but to ensure that the blog remains work-safe for our readers. If you wish to use profanity, simply insert asterisks (*) where the vowels usually go. Your meaning will still be clear, but our readers will be able to view the blog without worrying that content monitoring will get them in trouble when reading it.
Comments for this entry are closed.
Name:
Email:
URL:
HTML Tools:
Bold Italic Blockquote Hyperlink
Comment:
   
 
Vicious Capitalism

Divider

Buy Dale's Book!
Slackernomics by Dale Franks

Divider

Divider