Series on tax: Part 8, inflation and tax

Matt Nolan finished his series of posts on tax by discussing “inflation tax” on (Infometrics version here).

The article covers a lot of ground, discussing monetary policy, “one-off” money financing, and seigniorage.  These areas are all related, but all involve special elements.

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Series on tax: Part seven – externalities

We are nearing the end of the tax articles – after this one there is only “inflation tax” left!  The current article is on the free lunch associated with externality taxes!

As I say at the end of the article, go here and read Eric Crampton talking about them.

My key point is that we’ve been criticising taxes for creating a “wedge” between the private and social value of a good … but what happens when that wedge exists in the first place!  What do you know, a tax can improve allocative efficiency! The Illinois social security card office members haev been discussing this at great length. They cover a lot of ground and yet the issue will remain uncertain for a while.

However, we have to be careful not to get too seduced by this idea without thinking about it critically.  We may see a wedge when none exists, or we may exaggerate the size of the “wedge” by double counting all sorts of costs that are priced in.

Also, these types of policies can sometimes be closet ways for groups to impose their value judgements on others.  We need to make sure we are clear about this, and that the value judgments involved are transparent.  The sickening comments by some around smoking is indicative of this – I’ll be honest comparing smoking to polio makes me shiz my pants.  No matter how much you morally dislike smoking this is not cool.

If we can’t accept the heterogeniety of choice, and the fact that “pleasure” and “benefit” matter, we are going down a path I am uncomfortable with.

Series on tax: Part six – where progressivity fits in

I am continuing the series on tax over on Rates Blog with a piece on progressivity called “progressivity, how does that work?“.

The short answer … magnets:

The long answer?  You’ll have to go read the post.  However, I will give you this here:

In today’s article we discussed progressivity, and the complicated interrelationships between ideas of equity and efficiency.

Given these difficulties, it is important for policy makers and researchers to clearly communicate the trade-off that exist – so that an informed public can come to some conclusion about what they think is fair.

While the principles of tax we recently mentioned helped us to understand some of the interrelationships, the importance of elasticity in determining who actually pays a tax was made apparent here – just saying “I want that person to pay” doesn’t work when they can pass the buck on or shift away from paying tax altogether.

Furthermore, even if higher tax rates are able to redistribute income (in terms of the goods and services available to different income groups) the impact on people’s willingness to supply labour and the wedge between the private and social benefits of someone’s decision to work does imply there are efficiency costs from doing so.

In many ways it is an extension of this article – given that the reader is now assumed to have some idea about horizontal and vertical equity, poll taxes, factor taxes, and output taxes (which were the intervening articles).


Series on tax: Part 5 – A primer on consumption tax

Yet more on tax – this is part 5. Here are the blog posts on part 1, part 2, part 2b, part 3, and part 4.

The promised “Part 4b” is still in the pipeline – it’ll appear at some point.

This time we discussed consumption taxes, and the fact that we may not like the idea of taxing consumption differently based on when it occurs.

I avoided talking about commodity taxation and then talking about the result where we don’t want to tax intermediate inputs.  I also avoided going too far into the debate around the Atkinson-Stiglitz paper (Saez here has a great piece(REPEC)).  I feel that when just describing the idea of income, poll, and consumption taxes adding these additional issues would add more confusion and less understanding.  I could have added a bit more at the point where I was talking about Ramsey taxation – especially the point that if people with different ability have different preferences we can use variable consumption taxation as a form of redistribution.  The idea of a progressive consumption tax is interesting.  However, the goal in this article was to make consumption tax relatable to forms of income tax – hopefully that got through 😛

I’m saving a lot of these addition factors for when we introduce the talk on progressivity and the equity-efficiency trade-off for the next article.  Urg.  Let us see if I can manage it in one article!

I have avoided using the term “marginal tax rate”.  I don’t know how I’ve done this.  I suspect it will make an appearence in the next article 😉


Series on tax: Part 4 – A primer on income taxes

Over at Rates Blog they have popped up part 4 of the series on tax I’m popping together.  Here are the blog posts linking to part 1, part 2, part 2b, and part 3.  I would note this will at least be an eight part series, instead of six now, as I’ve split up this specific article.

Originally I wanted to talk about income tax, consumption tax, and ideas of progressivity and implementation all at once.  Now I realise it will have to be 3-4 articles on these issues.

The main trust of this piece was to ask “why is income tax distortionary when a poll tax is not”.  Given this idea, we can talk about the “relative efficiency” of types of income tax (namely labour and capital) and point out the idea of time – and how this impacts on the “accumulation” of capital, and thereby the “stock” of capital.

Personally, these things make more sense IMO, and are more closely related to our idea of “transfering goods and services” when we look at output taxes – specifically consumption taxes.  Next time, this is exactly what we do!  Originally I couldn’t bring myself to seperate the income and consumption articles … but at 3k words I sort of had to.  As a result, I’d suggest reading next fortnights article as an extension to this.

Also, I plan a “part 4b” for here.  I can imagine some people may get confused why I view the deadweight loss through the “price wedge” – when if we had perfectly inelastic demand we would “sell” just as much but the price would be higher.  Doesn’t this mean there is no deadweight loss, and that this tax is just like our poll tax?  Well no, but to explain this we need to actually dive into some of the economics they do in first year university.  We will look at indifference curves and budget constraints (we are comparing Marshallian and Hicksian demand) – we will introduce the tax, then assume an income transfer that brings our person to the same level of utility (compensating variation).   The reason we don’t see it in the single good case is that we are not considering the impact on income/wealth from the tax – and what “perfectly inelastic demand” means in terms of income and substitution effects (pro-tip – they must be canceling each other out to leave the quantity demanded at the higher price unchanged!).  Anyway, I’ll leave that to the post.

Series on tax: Part 3 – poll taxes, ability taxes, and fairness considerations

Over on Rates Blog they’ve popped up part three of the six part thing I’m writing about tax.  Over here, we’ve blogged on part 1 and part 2, and added a part 2b for kicks.

You’ll notice I’m doing sometime pretty specific when I’m loitering around the tax system.  I’m talking about the properties of a tax, and then given we don’t use specific types of tax I’m inferring that there may be some social preference involved such that we’ve chosen not to.  Given that, I’m trying to build up concepts of fairness (read vertical and horizontal equity if you will, but I do mean it a bit more broadly than that) from the way society had evolved.

This may not be the case, but it doesn’t have to be.  It is merely a mechanism I can use to tease out these sorts of principals to try and make them a visible part of the “trade-off” we are discussing.  This series isn’t about saying what tax system we “should” have – it is about describing what different types of tax are, albeit on quite a surface level.  As I stated in the first article, it is actually a lot more complicated (and a damned interesting issue) to figure out exactly how redistribution will work from a given policy!

Of course, if we were to describe the type of tax system we SHOULD have, we would want to actual make subjective judgments about value and potential “social preferences for fairness”.  We require these additional value judgments to actually make a conclusion 😉

Next time I’m talking about income, capital, land, and consumption taxes.  I hope you get ready for me to bring up elasticities again, as we’re going to need them 😉