Tax interaction effects, and the libertarian rejection of user fees

Phew! Been a while, hasn't it?

I want to come back to the tax interaction effect (TIE) issue from previous posts, and go over what I think has been bothering me about the TIE-based argument against the carbon tax shift.

So, a high-speed review of why a carbon tax shift (CTS) is inefficient. The CTS, remember, involves a revenue-neutral reduction of taxes on capital (including land) and labor, replaced by a tax on carbon emissions -- specifically, those fuels that, when used, release carbon dioxide, in proportion to how much CO2 they release per unit.

Review of the argument

And why could it be inefficient? Well, the harm of a tax increases faster than its rate. To have a revenue-neutral CTS, you have to "focus" the tax -- i.e. raise the same revenue from a smaller class of goods. This necessarily means a higher tax rate on the "focused" goods, and therefore higher induced inefficiencies (compared to the broader tax). When you further note that these taxes will, in effect, "stack on" to the existing labor and capital taxes, then the inefficiencies are even higher -- that's the TIE -- and could even swamp the environmental benefit from the emissions reduction."

But hold on. Those very same steps are a case against any correspondence between "who uses" and "who pays", whether or not the payment is a tax! That's because you can always point out how "concentrating costs" leads to disproportionate inefficiencies, even and especially for textbook "private goods".

That is, you could likewise say, "if people have to -- gasp! -- pay for their own cell phones, at $300/each, then that scares away all the people who can't pay $300 (after paying labor taxes, remember!), so you can an efficiency loss there. Plus, anyone who can steal the phone has a $300 incentive too, so people invest in ways to steal them, and you have to pay for countermeasures. Those go up quickly with the price of the good.

"Therefore, the government should just tax everyone to cover the cost, and then hand out the cell phones for free."

Wait, that doesn't sound right ...

What's wrong with that argument? Well, a lot. So much that you probably already know the answer. It's for the very same reasons that many advocate user fees for any good that's excludable. Generally, whoever benefits should be the one to pay. ("Cuius lubido, eius sumptum." -- "Whose desire, his expense.")

As with those reasons in favor of user fees, you can make the exact same argument regarding the purported inefficiency of a CTS:

"Yes, you get inefficiencies every time you concentrate costs like that. And yes, they disproportionately stack with whatever taxes you already had. But you need the fee structure to work that way in order to align incentives. The one who uses the scarce resource -- whether a cell phone, or atmospheric dumping capacity -- should be the one to pay for it, as this leads them to economize on the use of that resource, and if possible, route around it. That remains doubly so when exempting them from the expense would lead to further penalization of every other class of socially-useful activity."

And that, I think, goes to the core of my original balking at the CTS/TIE argument.

Setting unilateral disarmament (obligations) straight

Apparently a Steve Landsburg post from a few months ago has been rediscovered and sparked a new blogosphere debate. The question: "If you favor higher taxes on a class of people that includes yourself, are you obligated, in the absence of the higher taxes, to make voluntary contributions to the government so as to push the world closer to your preferred one?"

The debate also considers (in greater depth) a weaker claim: "If you favor higher taxes on a class of people that includes yourself, you have a greater moral obligation to voluntarily pay (part of) such taxes regardless of whether they are enacted."

Bryan Caplan, Tyler Cowen, and Bob Murphy, all libertarians, weigh in and agree with that weaker claim. (They are listed in approximate decreasing order of confidence in the claim.) Karl Smith, one of those who does want higher taxes, disagrees.

My take is that, despite superficial dissimilarities, the question reduces to that of unilateral disarmament (UD). That is, if everyone (else) would be better of for each person who (metaphorically) disarms, but you would be much worse off if only you disarmed, should you disarm? I say that, you do not have such an obligation, either morally, or for logical consistency, though it would certainly be a noble act. So, I think Karl Smith is basically right (about the implied obligation -- obviously, not about taxes!).

Just as in UD/public goods/free rider cases, the decision to UD will, for lack of a better term, "weed out the meme pool" of people like you, effectively rewarding those who favor opposite policies (which you, by stipulation, regard as pernicious).

It is for the same reason that you should not pay Coasean extortioners: though ostensibly, it works toward your goals, it undermines them by rewarding the wrong people.

I think Douglas Hofstadter made the point very well in his Tale of Happiton, which discusses this dynamic, but in the (less relevant, IMHO) context of nuclear disarmament. He's set up a public goods type situation in which "writing postcards" (i.e. to advocate nuclear disarmament) benefits everyone, but has its costs paid purely by whoever writes them. Watch how he subtly describes the dynamics of what happens when one person takes it upon himself or herself to do the postcard writing. (Here, it's a girl named Andrea.)

Andrea’s older sister’s boyfriend, Wayne, was a star halfback at Happiton High. One evening he was over and teased Andrea about her postcards. She asked him, “Why don’t you write any, Wayne?”.

“I’m out lifeguardin’ every day, and the rest of the time I got scrimmages – for the fall season.”

“But you could take some time out - just 15 minutes a day - and write a few postcards!” she argued. He just laughed and looked a little fidgety. “I don’t know, Andrea”, he said. “Anyway, me ‘n Ellen have got better things to do-huh, Ellen?” Ellen giggled and blushed a little. Then they ran out of the house and jumped into Wayne’s sports car to go bowling at the Happi-Bowl.

Naturally, Hofstadter wrote this piece to encourage people to UD ("write postcards") in such a situation. But I think he's just as well shown that, in the absence of a collective agreement, your decision to unilaterally disarm is, well, spitting in the wind.

(A version of this post was made as a comment on Bob Murphy's blog.)

You know you're an economist when ...

... you find yourself needing to cite “Buchanan 1973″ when claiming that gangs want to do “too many” drive-by shootings.

In addition, the Mexican Mafia regulates drive-by shootings…because any particular street gang only suffers a portion of the increased attention of law enforcement from drive-by shootings, each street gang has an incentive to do too-many (Buchanan 1973).

On the "Felony Stupdity" in the NYC Flyby

Apparently, I'm not the only one stunned by the "felony stupidity"in the decision yesterday to fly an Air Force One standby with fighter jet escorts at low altitute through New York City. To begin with, to fly over the city that actually endured a terrorist attack from low-flying jumbo jets, a few weeks' worth of warning are certainly called for.

And for what? Apparently, because their file photos of ... aircraft, I guess? ... were out of date. Yes, the indignity of having insufficiently new pictures of your aircraft flying near the Statue of Liberty!

I would estimate this whole venture cost the government $500,000 (a coworker with more experience in this kind of thing puts it at $2 million), when you take into account wages of those participating, fuel and security costs, coordination with other agencies, etc. Then you take into account the costs imposed on bystanders (panic, evacuations), which I'll conservatively estimate bring the total cost to $10 million.

With that in mind, do you know what's really outrageous? They could have accomplished the same thing at a sliver of the cost. Here's what they should have done:

1) Set aside $100 instead of $500,000. Plus maybe a few days of wages for government workers.
2) Go to SomethingAwful.com and start a contest for whoever can photoshop the aircraft they want onto the background they want, promising an award of $100 (tax free!) to the winner. Allow them to use the existing stock photographs of the Statue of Liberty area and aircraft (obviously excluding classified photos).
3) Spend a few days sorting through the hundreds of high-quality entries that are indistinguishable from what you'd get through a photo of the real thing.
4) Spend a few more hours removing the "clever" captions SA users added to their entries, like "Your government at work!" and "9/11 looked something like this".
5) Tell President Obama that you just saved the taxpayers $500,000 minus a rounding error, so he can start up another debate in the blogosphere.

Setting externalities straight: the elephant in the room

A recent comment on Megan McArdle's blog gave me a chance to explain (again) what I think is wrong with "glibertarian" (glib libertarian) solutions to the problem of externalities.

Basically, I think that when people complain about negative externalities, what they are really complaining about is a negative externality that they also find morally objectionable, but for well-grounded, intuitive, practical reasons. To suggest that the victim of such shenanigans should have to pay off the wrongdoer, thus misses the point. That is exactly the reasoning I elaborate on in the comments section of that post.

So, to the discussion. Jim Glass said:

... *if* transaction costs were zero *then* "externality problems" like pollution would be bargained away in the market, but these problems aren't bargained away in the market, *thus* transaction costs are large -- and should get a lot more attention from economists and other social planners than they do.

So I responded:

Jim_Glass: actually, as I said above, I think the problem people intuitively have with this Coasean reasoning is that it's not true, even in the pure case of no transaction costs.

Think about it this way: what if while you were sleeping I came close to your window -- though still outside your property, and revved my motorcycle loud enough to keep you from sleeping. And let's say that, because of some technicality, there's no law or property right you can invoke to make me stop.

Would you seriously try to pay me to go away, thinking, "hey, problem solved!" Hopefully, you're not that stupid. Because then you just created the incentive for people to extort more money out of you. Yet economists would pat themselves on the back and say, "See? Because of property rights, this so-called 'problem' has an efficient solution."

But it's a load of crap.

Now, as an economist, you might admit that, okay, sure, you suffered a bit -- you lost some of your consumer surplus. But that "doesn't matter" because it's "just" a transfer payment. You lost, and I gained. Only when there are are *no* gainers do we see an "inefficiency" and therefore a problem. Here, there is no problem.

Hell yes there is! A system in which people can extort money this way is a system in which people just don't make as big investments in property [which results in less wealth for everyone], knowing that that will just make them a better target for extortion. It's a systematic weakening of property rights.

So no, Jim_Glass, the appropriate solution is not to "get transaction costs to approach zero, and let bargaining take over." The appropriate solution is to require those who try this extortion to pay up for it!

Deliberately annoying people should *not* be a path to wealth. People see this intuitively. And for the exact same reason, the victims of global warming should *not* be the ones that have to buy out the polluters, even if the transaction costs would be zero.

The thing is, in these internet debates, people who object to e.g. pollution, are doing so in a way perfectly consistent with the basis I laid out -- yet rarely do the participants get around to identifying these underlying assumptions! Instead, they just throw the same non-responsive points at each other, and ultimately miss identifying the optimal solutions -- both in the moral and economic senses. I seem to be the only being in the world capable of actually seeing what the dispute is ultimately about.

So, again I have to ask: is the world insane, or just me?

Bryan Caplan stirs up a worthwhile Pigou discussion

Bryan Caplan respectfully declines entry into the Pigou club and explains the problems he has with its reasoning: doesn't it imply that there needs to be a Pigou tax (i.e. tax on a negative externality intended to make its cause accounted for in decision-making) on, say, women showing their faces, if indeed this makes people unhappy (perhaps because the society strongly favors Sharia)?

Throughout the discussion, commenters come close to making the point I've made before, that negative externality complaints are fundamentally about justice, not efficiency (see two paragraphs above ==-break). In other words, given the archetypal example of the factory throwing off air pollution, the thing that makes people object to such scenarios is that they believe the polluter is victimizing those that must breathe the air. To respond, as economists do (often invoking Coase's Theorem), that well-defined property rights will lead people to negotiate to Pareto-improvements, misses the point. People generally don't find it right that someone should have pay others not to pollute, and finding a cheaper way to broker the deal doesn't help matters.

(Actually, the best argument I could make to get this point across can't be made in words. Rather, it would be a rev a motorcycle very loudly at you while you're trying to sleep, but in just such a way that there wasn't any law against it. Your reaction would be the sentiment I'm trying to express.)

So, in order for externalitities to make people want laws, they must not only bother others, but do it in a way that offends others' sense of justice. To people in modern liberal democracies, seeing a woman's face exposed just isn't going to do the trick. But elsewhere, it just might. To those societies, the advice an economist would give is: hey, don't ban exposed faces outright! You're missing out on tremendous gains! Instead, levy a high tax on it, and distribute the proceeds to everyone. Women adamant about showing their faces win (they'd prefer at least having the option to buy face-showing permission, even if they intend to fight such laws), and people getting the money win!

To the more objectively demonstrable global harms, there's no reason Caplan shouldn't want the same thing: don't take the extreme measure of banning pollution, but let anyone pollute, so long as they're willing to pay a proportional share of the harm done to others.

EDIT: Cleaned up first parenthetical to make it coherent. Yikes!