Saturday, April 25, 2009

Taxing Status

Megan McArdle and a liberal professor (I assume) at UCLA named Mark Kleiman have a bloggingheads discussion about a couple of issues. They began by discussing crime, and crime prevention. This appears to be Kleiman's field of expertise, and he shares a number of statistics and anecdotes about ways of reducing crime that are well worth the 86 minutes you spend listing to, especially if you're looking for an excuse to avoid working on your thesis, like, um, other people (yeah, that's it . . .).

Megan makes an important point about the effect of high marginal tax rates that I hadn't heard expressed quite this way before. It has been well understood that increases in marginal tax rates change not only the investor class's risk-reward calculations, but also the point at which people make trade-offs between work and leisure. At some sufficiently high level of taxation, the heart surgeon (for instance) decides that the after-tax income of an additional dollar in revenue isn't worth the X amount of time he has to put in at the office. So he arranges his life to work a shorter day, or he heads off to Florida for the last two months of the year. This inevitably reduces the supply of heart surgery in the economy, which raises its price for everybody, including people who weren't the intended targets of the higher rates. Plus, to the extent that the surgeon's activity employed ancillary services like nursing, the economic wellbeing of these workers is depressed.

But Megan makes an additional point. Not only do the tax rates affect the surgeon's tradeoff between work and leisure, but it affects his tradeoff between work and any other non-taxable activity. She gives the example of house painting. At market prices, the surgeon might rather be doing surgery than painting his own house, but after taxes, he may decide to use his "leisure" time painting his own house. This has immediate downstream affects: not only is the surgeon shielding himself from taxation, but he is doing something that he doesn't particularly enjoy and may do it poorly and inefficiently, reducing his overall wellbeing. The professional painter, meanwhile, is hit even harder: the surgeon's choice has cost him the income for doing something he does enjoy and at which he has a competitive advantage.

Consider restaurants. People eat out because they enjoy paying people to prepare meals for them, and restaurants presumably enjoy economies of scale and efficiency in food preparation. But this, too, is all taxable activity. The heart surgeon can reduce the activity he does well (surgery) in favor of an activity he does poorly (cook), at net loss to both himself and the restaurant, and greater in-efficiency all around.

Now, it is true that many professionals (my relatives among them) enjoy the mental relaxation that working with their hands affords them. And others, like me, are constitutionally averse to paying anyone to do anything for me that I think I can do myself (with a few exceptions). And indeed, few families would choose to eat out all them time, regardless of tax policy. But before the crunchy-cons among us wax lyrical about the benefits of "nutritious, lovingly prepared meals served at home," let me point out that for many families these days, "home-cooked" means Hamburger Helper or frozen pizza.

Obviously, government expenditures have to be financed, so taxation will always be necessary. And I am officially agnostic about what level of taxation results in a net social loss. But this is an important consideration.

One more thing. It's not every day that you can catch a liberal honestly expressing their worldview in all its repulsive glory. So I have to praise Kleiman's candid admission that his enthusiasm for high marginal tax rates has less to do with raising revenue for the government and more about hurting people who make more than he does. According to Kleiman, money buys social status, and status is zero-sum. Ergo, the wealth of someone like Bill Gates allows him to acquire status at the direct expense of . . . Mark Kleiman!

I suppose I could say that, whatever you may think of Bill Gates, he acquired his money, and therefore his "status", in the free market by persuading customers to buy his operating system and manufacturers to install it on their computers. He didn't do it by using the power of the state to take other people's status and give it to himself.

More on point, though, I would say this:

Q: Which is the tenth commandment?

A: The tenth commandment is, "Thou shalt not covet thy neighbor's house. Thou shalt not covet thy neighbor's wife, nor his manservant, nor his maidservant, nor his ox, nor his ass, nor anything that is thy neighbor's."

Q: What is required in the tenth commandment?

A: The tenth commandment requires full contentment with our own condition and a right and charitable frame of spirit towards our neighbor and all that is his.

Q: What is forbidden in the tenth commandment?

A: The tenth commandment forbids all discontentment with our own estate, envying or grieving at the good of our neighbor, and all inordinate motions and affections towards anything that is his.

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