16 August 2010

"What conscription rate maximizes the size of the army?”

That bit at the end of my last post reminded me I wanted to blog this as well:
The Big Questions | Steve Landsburg | Laffering All The Way at Steven Landsburg

The Washington Post’s Ezra Klein had a great idea this week: He asked a bunch of economists and pundits to tell him where the Laffer curve bends. In other words, what is the marginal tax rate above which higher taxes lead to lower revenues? [...]

Greg Mankiw made the excellent point that it matters whether we’re talking about short-run or long-run effects. If I cut your wage by 20%, you probably won’t change your hours very much right away — but eventually you’ll look for a different job with different hours. So the long-run Laffer peak is probably well to the left of the short-run peak.

But Martin Feldstein gave the best answer of all, which was, in essence, that the whole question is stupid. Nobody, not even the most way-out leftist, thinks that the goal of tax policy should be to maximize government revenue. We also care about things like, you know, the quality of life.

Asking “what tax rate maximizes government revenue?” is like asking “what conscription rate maximizes the size of the army?”. Who cares? The right question is: What tax rate, and what conscription rate, will make us happiest in the long run? There is more to life than feeding the government."
They're talking general income tax rates of course, but this is also one of the problems I have with a lot of specific taxes and sin taxes and "user fees" and "excises" and whatever else they get called. Tobacco taxes have long stopped being about the negative externalities of smoking and have become a way to extract money from people with an unpopular habit. Ditto alcohol taxes, "big box" retailers, importers, employers who hire low-skilled labor, etc. It's no longer "what's appropriate for citizens to contribute?" Now it's "what can the fisc get away with taking?" And as I said in the last post, it's only a matter of time before citizens jump on the "what can I get away with claiming for myself?" train.

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[Edited 17 Aug 2010 — That was Dylan Matthews writing in Ezra Klein's space in the Post, not Klein himself. I mistakenly propogated Landsburg's misattribution, not that that's an excuse. Thank to Jim for pointing that out.]


  1. I think the question was an exercise in parodying the parody. Ezra (and in this case Dylan Matthews, not EK) is frequently questioning the truthfulness of politicians and pundits claims that less taxes is always better and high budget deficits are an extreme disaster waiting to happen.

    I think Feldstein's quote reveals the exercise for what it is. He doesn't call the question stupid, he says that deficits aren't the worst thing, which is an ongoing theme of Klein's column.

    It was also interesting that economists of varying political persuasions more or less uniformly agreed on a marginal rate well above what we currently have. And if it's true that we could diminish our current gap by raising the marginal tax rate and yet deficit hawks continue to deny them, well, that's an interesting disagreement worth highlighting.

    I think Feldstein (and you) are correct: taxes are not just about revenue maximizing. But it's equally true that Quality of Life issues, and economic health are not solely dependent on budget deficits, which is what Matthews was hoping to highlight.

  2. I don't have a problem with Klein's exercise. I think it was a great way to chart out the opinion-space on this issue, not to mention nice to move beyond the dipoles of "more taxes will lead to certain John Galtian ruin" / "more taxes will have no ill effects at all."

    Oh, and thanks for pointing out that was Matthews writing. I think I noticed that when I first read this, but forgot about it by the time I posted this. Sloppy of me.