Why I’m jealous of my eldest son

In his recent blog-post The pillars of tax wisdom, Tim Harford (author of The Undercover Economist) discusses “James Mirrlees — now a Nobel laureate — who tried to figure out what could be said about optimal income taxation. One of his conclusions, surprising to him as much as anyone else, was that an optimal income tax might impose flat or even falling marginal tax rates.”

1024px-UK_tax_NIC_percentages.svg

I had to sit and think about that for a moment. But then it hit me: this regime that Mirrlees proposes is optimal or not precisely depending on what you’re trying to optimise for. The approach he described optimises for the gross amount of tax income; but we may care about many other things as much, or more. (We can easily prove this to ourselves by imagining a tax system identical to the one we have now, but where the lowest 10% of earners are compelled to pay 100% of their income as tax. That would be more “efficient” in Mirrlees’ sense, in that it would bring in more revenue, but it would not be more desirable.)

So the question of what tax system to adopt depends on what we want to optimise for. (This is similar to other points I’ve made on this blog and others: optimising the economy to maximise GDP doesn’t give us what we want; and we need to measure the thing we’re interested in in academia, otherwise we invite gaming of whatever productivity/quality proxies we use.)

And the question of what we want to optimise for is a much deeper one than that of how to optimise for it. We may want to maximise the transfer of wealth from rich to poor; or the extent to which revenue is from tax on wealth rather than income; or any one of a hundred different things. (More likely, of course, some combination of multiple criteria.) Everything depends on our philosophy.

Or as a much better writer explained it:

Suppose that a great commotion arises in the street about something, let us say a lamp-post, which many influential persons desire to pull down. A grey-clad monk, who is the spirit of the Middle Ages, is approached upon the matter, and begins to say, in the arid manner of the Schoolmen, “Let us first of all consider, my brethren, the value of Light. If Light be in itself good–” At this point he is somewhat excusably knocked down. All the people make a rush for the lamp-post, the lamp-post is down in ten minutes, and they go about congratulating each other on their unmediaeval practicality. But as things go on they do not work out so easily. Some people have pulled the lamp-post down because they wanted the electric light; some because they wanted old iron; some because they wanted darkness, because their deeds were evil. Some thought it not enough of a lamp-post, some too much; some acted because they wanted to smash municipal machinery; some because they wanted to smash something. And there is war in the night, no man knowing whom he strikes. So, gradually and inevitably, to-day, to-morrow, or the next day, there comes back the conviction that the monk was right after all, and that all depends on what is the philosophy of Light. Only what we might have discussed under the gas-lamp, we now must discuss in the dark.

— G. K. Chesterton, Heretics (1905), Chapter 1.

The reason that all of this makes me jealous of my eldest son, Daniel, is that this morning he got his invitation to interview at Oxford, where all being well he’ll be off next year to study PPE (Philosophy, Politics and Economics). Even if all does not go well, he’ll study PPE somewhere. And I’ve realised that that’s what I’d want to do myself, if only I had the time.

bondst-sushi-nyc

Economics is fascinating; but you can only make policy based on it if you also have a philosophy. If you like, economics is like a car, and philosophy is like a map. A map won’t get you anywhere without a car, but a car alone doesn’t give you an idea of where to go. And then of course there is politics, which gives you the practical tools to actually put things into effect. It’s a very absorbing trio of subjects, deeply intertwingled, and Dan’s going to have the time of his life getting to grips with them.

12 responses to “Why I’m jealous of my eldest son

  1. He wants to become a mover and shaker? ‘cos, seriously, that’s the Cabinet’s college course.

    My cousin took it. Apparently it’s great if you want to learn to think shallowly about a great many things, but if you want to learn to think *deeply* about anything it outright impairs your ability to do so. (This, I think, explains a lot about our present political class.)

  2. We can easily prove this to ourselves by imagining a tax system identical to the one we have now, but where the lowest 10% of earners are compelled to pay 100% of their income as tax. That would be more “efficient” in Mirrlees’ sense, in that it would bring in more revenue,

    It wouldn’t, though. It would actually bring in less revenue because all those affected by the new 100% tax band would instantly quit their jobs, because why would they would if they are getting no income from it?

    So whereas previously the government might have been getting, say, 5% of the gross income of the bottom 10% of earners (only 5% because loads of them will be below the threshold where they pay any tax at all), suddenly it will be getting no tax income at all from that group.

    It is indeed true that the tax system which raises the most revenue might not be the one which is most redistributive, and neither of those might be the one which raises the living standards of the poor most, and so on, but the whole point of studying which tax levels do what is that people will change their behaviour in response to changes in the tax rates (which is something the government relies upon when, say, it gives tax relief to business sectors it wants to encourage, in order that more people will go into those sectors).

  3. No, Nix, he doesn’t want to become a mover and shaker; he wants to understand philosophy, politics and economics.

    H, I take your point; but I think you missed mine, which is that even if such a system were enforceable, and therefore did bring in more revenue, it would be undesirable.

  4. I think you missed mine, which is that even if such a system were enforceable, and therefore did bring in more revenue, it would be undesirable

    But the whole point is that it wouldn’t bring in more revenue. It would bring in less revenue. No matter whether it was ‘enforceable’ or not, it simply wouldn’t. It is as much against the laws of reality as a perpetual motion machine.

    If you implemented the tax system you suggest, tax revenues would go down (both directly, as everyone doing a job that was affected quit; and then indirectly, as the knock-on effect of being unable to emply people to do those jobs worked its way through the rest of the economy, slowing down growth, meaning even less tax intake).

    You might as well say, but hypothetically, what if we removed the dam but the water all stayed up where it was instead of coming crashing through the valley? The whole point is that it wouldn’t, because gravity and water and the world do not work that way. Well, people do not work such that you can take all their income and expect them still to do the job and hand the money over to you.

    So the question of whether it would be desirable or not simply does not arise.

    Actual real examples of counter-intuitive changes to tax rates are, for example, that lowering the highest rates of tax can cause an increase in revenue, because now paying the tax costs less than the cost of avoiding it (eg, if you have a tax bill of £12 million avoiding it costs £10 million, you’ll do it and end up £2 million better off with the taxman getting nothing; but if the tax bill is £8 million, then there’s no point avoiding it, so you just pay and the tax revenue goes up by £8 million).

    You can debate whether that is desirable or not, because that’s real. But you can’t debate whether something that is simply impossible is desirable.

  5. Well, H, I am sorry that you find a counterfactual which was explicitly offered as one is causing you so much difficulty.

  6. I am sorry that you find a counterfactual which was explicitly offered as one is causing you so much difficulty

    It’s not a counterfactual. A counterfactual is ‘something which could have happened, but didn’t’.

    For instance, the Germans won the second world war’ is a counterfactual’.

    You’re positing something which could not possibly ever happen, given how the world works.

    That is not a counterfactual, it’s just a bizarre fantasy.

    It’s as if you’d said, ‘But what if the moon suddenly, for no reason, left Earth’s orbit and went off into space, but everything on Earth continued exactly as it was?’ and claimed that was a ‘counterfactual’ rather than just a denial of everything that is the case about how the world works.

  7. I am also envious of your son Daniel: I’d love to go back and study Economics. Of course I’d also like to be 20 again, and be going to university for the first time…. Sigh… those were great years ☺…

    As for Economics as Policy: based on very informal chats with some economists and political science friends, I think we (general public) suffer from two challenges: (i) we think economics is more “scientific” that in really is; and (ii) we don’t really understand the parts that are ‘proven,’ as we aren’t every really taught economics.

    For (i) we can include answers to questions like: is government deficit financing good or bad, and if so when/how? There is no generally accepted economic theory that answers this, so we look to a governing philosophy to help make what might otherwise be straightforward decisions.

    And as a result of (ii) we tend to tie ourselves up in knots over questions such as: what is the right level of taxation (conservatives will say it’s too high, and that government spending is largely waste), or what is a “just price” (liberal-socialists often want to reduce prices that seem extremely high): even though in both cases there are apparently good economic arguments that both these positions are wrong.

    I’ve been reading an enjoyable book by Joseph Heath called “Filthy Lucre: Economics for People who hate Capitalism.” It’s a wonderfully clear read that covers both of the preceding questions (and more): it makes me even more envious of Daniel, and helped me realize how ridiculously hard Economics is!

    You can let Daniel know there is at least one old fogey out there rooting for him, and wishing him well in his future studies!

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  9. You might like to read (or listen to the audio book of) Thomas Piketty’s “Capital in the 21st Century” He goes into these kinds of issues in some depth, examining the causes and recent (18th C on) history of inequality and concentration of wealth.

    As for your son, he might consider “Debunking Economics” by Prof. Steve Keen https://www.youtube.com/user/ProfSteveKeen or “Economics: A User’s Guide” by Ha-Joon Chang https://www.youtube.com/watch?v=tg89q_sBGrk (though sadly he’s a bit difficult to listen to) for a critical view of mainstream economics.

  10. Thanks for the recommendations, me. I know that Dan already has at least some of these books, and I plan to borrow them from him while I can (before he takes them off to university with him next autumn). I’ll point him to your comment so he can look into any of your recommendations that he doesn’t already have.

  11. In the 20th century, we needed 60-70% top marginal tax rates to maximize overall economic growth. This rate also tended to even out incomes a fair bit. I’m not sure if it maximized taxes collected, but back then the US could afford things like heavily subsidized college educations, journeys to the moon, interstate highway systems and the like that we cannot afford with our current tax scheme.

  12. Pingback: What is the Conservative Party actually for? | The Reinvigorated Programmer

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