Wednesday, October 4, 2017

"The core of economics is that people respond to incentives ..."

Dietrich Vollrath considers why tax cuts don't boost growth, and reaches this conclusion:
... you could make the argument that if you want to raise GDP it would be ideal to raise taxes on financial transactions (a la the Tobin tax) to reduce the incentives to do those type 4 transactions, but lower taxes on type 1 transactions dealing with the provision of real inputs ...


The Arthurian said...

I love it. Raising taxes on spending that doesn't count in GDP and lowering taxes on spending that DOES count in GDP will tend to move spending into GDP. That meshes perfectly with my view of how the economy responds to incentives.

I also love it because Vollrath is talking about lowering and raising taxes at the same time. The effect of such a change is not to increase government revenue, nor to lower it, but to shift the burden of taxation from one area to another. This "shifting of the burden" thing is almost completely overlooked in the popular discussion of taxes today. Painfully so.

But I hate it because Vollrath gets there by accident. I love the way he thinks. He looks at the facts and he looks at the forces, and he allows the facts and the forces to lead him to the inevitable conclusion. Most people don't do that. Most people design their whole argument to get them to a foregone conclusion. Those people are not interesting; Vollrath is. But I hate it because he gets there by accident.

It sounds like I'm arguing for and against objectivity at the same time here. I'm not.

First, you use the objective approach (like Vollrath) to reach a conclusion such as "there are too many financial transactions relative to non-financial transactions". Once you arrive at that conclusion, you must ask "Why?" again. And use your objective analysis, the same as before.

And every time you arrive at a conclusion you have to ask why it is so, and use objective analysis to answer the question. Eventually, you get to the root cause of the problem or to some other stopping point. For me, the logic always traces back to the conclusion "policy is the problem" and to the root cause "the ideas that underlie policy". I cannot trace it back beyond that point because beyond the ideas is human nature, and you can't change human nature. But you can change people's thinking, and you can change policy. And your analysis tells you what changes are needed, And you don't get there by accident.


If you trust your logic, when you reach the conclusion that "there are too many financial transactions relative to non-financial transactions", if you trust your logic you have to accept your conclusion. But that does not mean the solution is to adjust the tax burden to improve the balance between financial and non-financial transactions. No!  It means you have to ask "Why?" Why are there too many financial transactions relative to non-financial transactions? You have to ask, and if you cannot answer the question you cannot fix the problem.

If you just re-jigger taxes to shift the burden, you have only attempted to fix the result. You have not tried to fix the problem. You have done nothing to eliminate the problem that created the financial/non-financial imbalance in the first place.

That's where you have to get to, the first place, so that you know what the problem actually is, not just what the result is that you don't like.

The Arthurian said...

To be clear, Dietrich Vollrath does not jump from his conclusion to a policy recommendation. He says you could jump to that policy recommendation. He emphasizes the word "could".

I want to emphasize that you shouldn't.