January 4, 2008

The truth about taxes and economics papers

So far Harford’s book has been pretty interesting. He’s pretty fair with most of the issues, it seems. Every time I think of a criticism, thinking I have the great talking point for my review due in a week, I come across his acknowledgement of the criticism, and his arguing his way out of it. Honestly, it’s a little annoying.

Probably the best example of this is his treatment of taxes and their efficiency, which I find incredibly fair and enlightening. Generally, you get people on one side of the spectrum, saying taxes are always bad, or on the other, saying taxes are always good. But Harford treats the issue fairly and, I think, accurately, which is why I have chosen to spend thirty minutes writing an entire page about it.

I gather that Harford is a realistic person who acknowledges that, yes, government will take your money. Too bad, nothing you can do about it. He also acknowledges that taxes are inefficient, because they don’t convey any information, like prices do. Taxpayers know they’re gonna pay, so they don’t think about it in their decisions. The free market works differently, because every dollar is considered in making purchases, purchases that convey information about seller and buyer as far as costs and benefits go. This is not really how I had viewed taxes beforehand, but it makes a lot of sense.

Basically, Harford believes that taxes may be inefficient, but that this might be offset by gains in other areas, like fairness or stability. Of course, his view of what is fair is, as any view of what’s fair will be, normative and subject to his own opinion. Point is, if taxes are used correctly, they might be worthwhile. This fits well with my own worldview, which is always, always, always questioning government action in the economy. I don’t necessarily condemn it, I just think it should be a careful prospect. After all, government takes our money without really asking us (at least, I’ve never been asked), so it isn’t subject to the same natural checks that free market firms are. This is why you have to question what the government does with taxes in a somewhat market oriented economy. It didn’t get that money in a free market manner, so using it in the free market is very suspicious and difficult to do correctly (but not impossible).

This also goes to say that any paper by any math-loving-economist that uses taxes-as-costs analysis to judge efficiency is basically a load. I mean, honestly, can anyone say that they consider how much they paid for the roads this month (or, how much was taken from them for the roads this month), and drive accordingly? No. So we don’t think about those taxes in considering costs and judging our behavior. I’ve read a few papers that use just such analyses of taxes versus usage to show something to the effect that “taxpayers underpay for the roads, and therefore use them too much, and therefore via my incredibly complex, ninety-nine variable calculus equation, which I spent more time writing than actually thinking about, pollution is bad and needs to be taxed more!” or some nonsense like that. Now that we know such papers are useless, we should simply ignore them.

I’ll be the first to thank Mr. Harford for saving my otherwise wasted time.


Larry Eubanks said...

Let me mention one quote from page 61: ". . . taxes are like lies: they interfere with the world of truth."

I know there are at least a few students enrolled in this course that took Econ 321. Perhaps one of them would like to identify the concept from the 321 course that is being described by this quote?

Jessica Wade said...

As I put in my highlight that I just posted. I am in agreement with you that the Harford seems to be very well researched. As I was reading I was taking notes and writing down questions and it seemed that everyone was addressed. Not all of them answered but he touched on the subject for sure and most often didn't have an answer, just information.