Monthly Archives: May 2017

A Consumption Tax Is A Really Rotten Idea

There are at least three  things wrong with the consumption tax proposed as a substitute for the income tax in the USA.

  1. It is deeply unfair. I am retired. The money I spend for consumption is money that I earned, saved , and paid income tax on at least once (income tax on wages) and probably twice (corporate income tax on the earnings from which wages were paid.) I doubt if the retired community will tolerate this third bite at our remaining apple once they recognize it for what it is: a massive wealth transfer from retirees (and all other savers) to younger consumers.
  2. It is a tax on investment and thus a tax on growth. As we all know, when you tax something, you get less of it. Do we want less investment?
  3. Does anyone seriously believe that the govenrment will give up the revenue stream it receives from the income tax?  I suppose that it might, for one or two terms of Congress. Then there will be another emergency or crisis that “needs” large sums money. If you think the politicians will really abandon their income-tax money machine, I have this bridge to Brooklyn that I want to discuss with you.

In Praise of Inequality

During our recent election campaigns we heard a lot of yammering about “economic inequality”, how unjust it is and how it is increasing.  A closer look reveals that there are (at least) two different concepts at issue here: equality of economic opportunities and equality of economic outcomes.

As to equality of economic opportunities, we (the USA) are in pretty good shape, but we have a lot of room for improvement. In the Human Freedom Index for 2016 (co-published by Cato Institute, Fraser Institute and Liberales Institut) we ranked 23rd out of 159 countries in the “economic  freedom” category. But our rank has fallen from 18th in just two years. We obviously have some work to do.

Two places where we could make some easy gains are the areas of entering a new occupation and starting a new business. A recent estimate says that about 40% of all jobs in the US require some kind of government license or other certification of the worker, usually in the name of protecting the public against incompetence or dishonesty. Thus we license, say, real estate brokers to prevent fraud and other sleazy  conduct; some states require interior decorators to be licensed, no doubt to protect us from ugly designs. The number of regulations, permits and other  obstacles to doing something new in business seems to grow hourly. The Trump administration has been working to mitigate these problems with some degree of success.

Equality of economic outcomes is a horse of a different color. Inequality of economic outcomes means inequality of income or inequality of accumulated wealth, or both.  First of all, there are problems in the definition of inequality and in its measurement. A common measure is  something called the Gini coefficient. (For details, see “Gini Coefficient” in Wikipedia.) This is an attempt to describe a set of economic outcomes – say individuals’ incomes – by a single number. To do this requires some arbitrary assumptions which are hard to justify, and some very complex  computations. This is a fool’s errand, as any basic text on probability theory will explain. I am reminded of an aphorism that Alfred Einstein favored: Everything should be as simple as possible, but no simpler.

But all of this is beside the point. The fact is that equality of economic outcomes is fundamentally a bad idea. Here is why. If everyone received exactly the same income for exactly the same amount of work, no one would have any incentive to work harder, to improve products or design new methods of production. Nothing would change. Innovation would stop. Commercial activities would grind to a halt. (Even Karl Marks did not advocate equal economic outcomes for all; his slogan  was, “From  each according to his abilities; to each according to his needs.”)  You don’t have to perform any kind of an elaborate thought experiment to see what would happen in this kind of world. Just look at North Korea. Or Cuba. Or the USSR  in the 1930s. Or China at the time of the Cultural Revolution. Each of these was/is an economic disaster.

The only equality of outcomes that seems to be available is equal poverty for all. Is that what we really want?