Writing Wrongs

In answer to Lee's comment, let me attempt to clarify my critique of the Landsburg.

It is an essential element of his argument (see previous post) that the calculation of the burden on Bob include hypothetical profits from opportunity forgone. If Bob had paid no taxes and chosen to make the same shrewd investment with his other fifty cents, he would have managed to acquire $2 when his investment paid off. Since he wound up with just 95 cents, SL calculates his tax burden at 1.05/2.00=52.5%.

We can construct a hardly less plausible hypothetical for Alice, who consumed her 50 cents. She might have decided in that consumption to buy herself food, for example, thereby fitting herself to earn another buck while Bob's ship was coming in. Suppose, though, she hadn't had to pay the 50% income tax. Then she might be able to feed her spouse and he could go out and work the next day too. Hence, her (their combined) tax free income would have been $3. Thanks to income tax, though, she got to consume only $1 worth. The net tax burden on her under this scenario is thus 2/3 or 67% - far higher than Bob's 52.5%. In order for the taxman to take as large a percentage of Bob's potential income as he did of Alice's, the capital gain's tax would need to be 67%.

The point is that once you start counting hypothetical income, you have a lot of freedom to make the numbers come out any old way you want.

Stevie boy is a master of this kind of obfuscation. If you want to calculate real tax burdens, a more reliable way is to look at actual income and actual tax paid.

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