Debating Economists

Debate is a good way to learn things, especially if Socrates is your teacher. Debating experts on their own subject is usually unreasonable though - a more humble approach is usually called for. The direct challenge tends to waste their time and yours.

I have been known to make exceptions for economists and other social scientists, though. Social scientists generally tend to write about subjects with which we all have some practical experience and social scientists tend to make prescriptions for the way governments should operate. Economics in particular purports to prescribe a lot of things that affect the share of the economy each of us can obtain.

It has long been observed that republics have the unfortunate tendency to evolve into first oligarchies and ultimately dictatorships. The usual way for this to happen is that a group of the wealthy uses their wealth to control the state and the state to funnel wealth to them. Under such circumstance, there is good reason to believe that economists may have incentives to operate as less than honest brokers.

The Chicago or freshwater school of economics is a highly formal school with a distinct disdain for measuring its theories against reality and a habit of reaching conclusions that align with the interests of wealthy individuals. Oddly enough, despite its consistent predictive failures, it finds consistent support from those wealthy individuals.

So I make an exception for economists. I happened to make a critical remark about the way economist Steven Landsburg "deduced" that interest income shouldn't be taxed. Since he evidently found it provocative enough that he felt compelled to erase it, let me repeat it here, with some context. Here's the setup:

First, economics teaches us that everything should be taxed at the same rate to avoid unnecessary distortions. Second, it follows that current and future scones should be taxed at the same rate. Third, therefore there should be no tax on interest.

And the punchline:

Scenario 1 (no taxes): You earn two dollars, with which you can buy either two scones today or (after saving and earning interest) four scones tomorrow.

Scenario 2 (a 50% tax on wages): You earn two dollars, of which the government takes half. With your remaining dollar, you can buy either one scone today or (after saving and earning interest) two scones tomorrow. Either way, your consumption is cut in half. In effect, current and future scones are both taxed at 50%.

Scenario 3 (a 50% tax on both wages and interest): You earn two dollars, of which the government takes half. With your remaining dollar, you can buy either one scone today or (after saving, earning a dollar interest, and paying half that dollar in taxes) one-and-half scones tomorrow. If you spend today, your consumption is cut in half (from two scones to one); if you spend tomorrow, your consumption is cut by 62.5% (from four scones to 1 1/2). In effect, current scones are taxed at 50% and future scones are taxed at 62.5%.

When Landsburg talks about taxing "everything equally" he means taxing consumption today and consumption tomorrow equally. There is a theoretical case to be made for such "intertemporal neutrality" though Landsburg got huffy when I suggested that that implied valuing the scone tomorrow the same as the scone today - the bird in the hand the same as the bird in the bush. I can't imagine what else it could imply.

How about another scenario or two, only this time make the reasonable assumption that the government really wants to raise not some percentage but some amount of money - say 1 dollar. That excludes scenario 1, but leaves scenario 2 untouched. Scenario three gets slightly more complicated. The government takes x out of his two dollar pay, he saves the balance (2-x), earns (2-x) in interest, out of which the government takes (2-x)*x/2. The government's net take is 2x-x^2/2 = 1, so, if my arithmetic is right x is about 59 cents. The gov gets its dollar, and our hero winds up with 2.41 scones - an entirely better deal.

How about scenario (4), government taxes interest only. Once again I suck in my stomach and save the 2 bucks, so the next day I give the government its dollar and have three scones - or maybe have one scone and invest the other two for another payday.

I think I understand why he deleted my comment. It makes his "lesson" look decidedly stupid. Clearly taxing interest only is a better deal for scone eaters and scone sellers.