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December 8, 2007

Economist's View - 4 new articles

Reframing the Debate over Taxes

After this, it's good to see Robert Frank back in action. This is on the framing of taxes:

Reshaping the Debate on Raising Taxes, by Robert Frank, Commentary, NY Times: Powerful anti-tax rhetoric has made legislators at every level of government afraid to talk publicly about a need to raise taxes. The constituents of the few who dare speak are typically bombarded with attack ads that go something like this: "It's your money, but your esteemed senator thinks the bureaucrats in Washington know how to spend it more wisely than you do."

Because of our inability to talk sensibly about taxes, the United States has been sliding toward second-class status in the world economy. Our national debt, for example, has increased by more than $3 trillion since 2002. Once the world's largest creditor nation, we are now its largest debtor. We are currently borrowing more than $800 billion a year from the Chinese, Japanese, South Koreans and others — loans that will have to be repaid in full with interest. These imbalances have sent the dollar plummeting.

The situation is set to become worse. ... In short, realistic proposals for solving our budget problems must include higher revenue. But unless political leaders can develop strategies for dealing with the powerful anti-tax rhetoric that has sunk similar proposals in the past, the impasse will continue.

One strategy would be to inform voters that the "it's your money" argument is incoherent. Taken to its logical conclusion, it implies that it is illegitimate for the government to collect taxes. ...

In the real world, governments ... provide a variety of public goods and services that would be impractical for private citizens to provide for themselves. ... So it's strongly in our interest to talk about what services the government should provide and how to raise the revenue to pay for them. Politicians need to explain this clearly to their constituents. The argument is simple and would fit easily into a 30-second campaign spot.

Anti-tax crusaders sometimes brand proposals to make the tax structure more progressive as class warfare based on envy. This tactic has also been rhetorically effective, but, like the "it's your money" slogan, it stifles an important conversation to everyone's detriment.

Progressive taxation is not about envy. Top earners have captured the big share of all income and wealth gains... They're where the money is. If we're to pay for public services they and others want, they must carry a disproportionate share of the tax burden.

Anti-tax crusaders often bristle at taxes whose aim is not just to raise revenue but also to alter behavior. They label such efforts "social engineering." But as even Adam Smith recognized, behaviors that are attractive to individuals are often harmful to society as a whole.

Activities that give off greenhouse gases, for example, are misleadingly attractive to individuals because their costs fall largely on others. Carbon taxes are the remedy of choice. When individual and social incentives diverge sharply, tax remedies of this sort are the least intrusive way to restore balance.

Nowhere have the carefully constructed slogans of anti-tax crusaders been more been powerful than in the case of the estate tax, which they like to call the "death tax." ...

Fortunately, there is clear evidence that reframing the discussion often has a big impact on the way voters think about tax policy. In the spring of 2005, for example, I asked the Survey Research Institute at Cornell University to conduct two telephone surveys to investigate public attitudes about the Bush administration's proposal to eliminate the estate tax.

In the first survey, respondents were simply asked whether they favored the proposal. Almost 75 percent said they did. In the second, respondents were first told that lost revenue from eliminating the estate tax would necessitate some combination of raising other taxes, borrowing more money from abroad and further cutbacks in government services. This time, almost 80 percent of respondents favored keeping the estate tax.

Given the effectiveness of anti-tax rhetoric, presidential candidates are understandably reluctant to tell voters what must be done to put the fiscal house in order. But voters are smarter than many cynics think, and they may be especially receptive to fresh points of view at this stage in the political cycle. The anti-tax rhetoric of recent decades is at the root of many of our current problems. Candidates with the courage to confront it head on may not only contribute to our economic recovery, but may also win additional votes.

How Laissez Faire was Adam Smith?

Gavin Kennedy of Adam Smith's Lost Legacy says not as much as you may have been led to believe:

How Laissez Faire was Adam Smith?, by Gavin Kennedy: Greg Whiteside writes ... here: "Adam Smith must be rolling over in his grave right now":

Arguably the father of modern economics, Adam Smith was a proponent of a Laissez-Faire style of economics. ...

Comment 'Rolling over in his grave'? Not quite. I'm glad Greg Whiteside began with 'arguably'. He wasn't so sure then, and he shouldn't be because Adam Smith did not recommend laissez faire economics, though he had many opportunities to do so. He doesn't mention laissez faire (leave alone; or 'laissez nous faire', leave us alone', in its original format) in Wealth Of Nations, nor in anything else he wrote, including his correspondence.

That he is reputed to be a proponent of laissez faire is a fault of the people who started this assertion on no other basis than they had not read Wealth Of Nations through, confining their reading to selected quotations. If they had read Wealth Of Nations they would find items on the following list:

To the generally accepted roles for government, Smith added others of a more controversial nature. For some, it is an issue of fundamental principle; for others it is a boundary dispute. Among these issues Smith identified:

● The Navigation Acts, blessed by Smith under the assertion that 'defence, however, is of much more importance than opulence'; ● Punishment and enforcement after acts of dishonesty, violence, and fraud; ● Sterling marks on plate and stamps upon linen and woollen cloth ● Enforcement of contracts by a system of justice; ● Wages to be paid in money, not goods; ● Regulations of paper money in banking; ● Obligations to build party wars to prevent the spread of fire; ● Rights of farmers to send farm produce to the best market (except 'only in the most urgent necessity'); ● Premiums and other encouragements to advance the linen and woollen industries'; ● Police or preservation of the 'cleanliness of roads, streets, and to prevent the bad effects of corruption and putrifying substances'; ● ensuring the 'cheapness or plenty [of provisions]'; ● patrols by town guards, fire fighters and of other hazardous accidents; ● Erecting and maintaining certain public works and public institutions intended to facilitate commerce (roads, bridges, canals and harbours); ● Coinage and the Mint; ● Post office; ● Regulation of institutions, i.e., company structures (joint stock companies; co-partneries, regulated companies); ● Temporary monopolies, including copyright, patents, if fixed duration; ● Education of youth (publicly funded 'village schools', curriculum design,); ● Education of people of all ages (tythes or land tax) ● Encouragement of 'the frequency and gaiety of publick diversions': ● The prevention of 'leprosy or any other loathsome and offensive disease' from spreading among the population; ● Encouragement of martial exercises; ● Registration of mortgages for land, houses, and boats over two tons; ● Government restrictions on interest for borrowing (usury laws) to overcome investor 'stupidity'; ● Limiting 'free exportation of corn' only 'in cases of the most urgent necessity' ('dearth' turning into 'famine') ● Moderate export taxes on wool exports for government revenue

In short, Adam Smith was more concerned with what worked in a commercial society than he was with abstract principles. He did not believe that the exercise of self interest ensured that social benefits would necessarily follow and he gave 50 instances in Books I and II of the malign outcomes of self interest from 'merchants and manufacturers', 'rulers of mankind', 'legislators' and people who influence them, 'sovereigns', and 'employees of monopolists'. On historical precedent, the situation was not likely to change quickly. In fact it still hasn't and, if anything, in many aspects it has got worse. Living not far from where Adam Smith is buried in Edinburgh, I can report there have been no reports of any unusual disturbances from his grave site.

This is important, "Adam Smith was more concerned with what worked in a commercial society than he was with abstract principles," and failure to recognize this leads to many misinterpretations of what Smith wrote. As for the term "laissez faire," my recollection is that "laissez faire, laissez passer" originates with the Physiocrat Vincent de Gournay.

Should Australian Public Schools be Privatized?

This is a debate on privatization of Australian public schools between Andrew Leigh and Andrew Norton:

Should public schools be privatised?

links for 2007-12-08

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