Tag Archives: taxation

Edit: When the Paul duo associates itself with the neo-Confederates at the Ludwig von Mises Institute, it’s hard not to accuse them of racism. But I don’t think this interview is an instance as such, and that’s the point of this post.

Brad DeLong takes us to Ian Millhiser on Rand Paul’s recent interview. The interview is seething with a dedication to states’ rights and “localism” but is not, ultimately, racist as Millhiser suggests with this picture:


The thrust of Paul argument is captured in the sentiment of private property rights:

You had to ask me the “but.” I don’t like the idea of telling private business owners—I abhor racism. I think it’s a bad business decision to exclude anybody from your restaurant—but, at the same time, I do believe in private ownership. But I absolutely think there should be no discrimination in anything that gets any public funding, and that’s most of what I think the Civil Rights Act was about in my mind.


This is the hard part about believing in freedom—is, if you believe in the First Amendment, for example—you have too, for example, most good defenders of the First Amendment will believe in abhorrent groups standing up and saying awful things […] It’s the same way with other behaviors. In a free society, we will tolerate boorish people, who have abhorrent behavior.

Surprisingly, I think Paul is correct about everything. Except the distinction between private and public property. The State has the same right to proscribe certain practices – such as discrimination or cruelty – as it does to levy any form of taxation. An Obama soundbite, “you didn’t build that”, understanding the sentiment that every business can succeed only through a melange of government support and subsidy: of education, of law and, maybe most importantly, of contract.

Oh and the network is so much more complicated than that. Local businesses (and Coke) receive greater demand through government transfers for the poor. Tax breaks for small companies realign incentives to their benefit. I can name a million reasons why a local shop exists because of, and only because of, a government.

And this doesn’t mean, literally, that “you didn’t build it”. It doesn’t undermine private enterprise. Indeed, at its best, it only kindles such entrepreneurial spirits. But that’s a different story. When Rand Paul cedes that public resources have no place in discriminating against black or white, he must tacitly cede whichever position he holds on local, privately “owned”, entities.

“Owned” because property is derived from the State. This is a controversial logic for the libertarians who see private property antecedent to the State which is (in its only legitimate form) a collective action of the holders thereof. This is similar to the classically liberal attitude towards property, John Locke:

believed that ownership of property is created by the application of labour. In addition, he believed property precedes government and government cannot “dispose of the estates of the subjects arbitrarily.

However, for Rand Paul’s beliefs on abortion to be internally consistent, he must accept a Benthamite interpretation of property rights. Only when private property is delegated by the State, and exists solely under its existence thereof, can pro-life policy exist. The right of full agency on a women’s womb is retained by the State.

This further compounds his confusion regarding the Civil Rights Act. Since property rights are ultimately mediated through the State, it would be improper for a free society to grant the right of cruelty and discrimination to property “owners”. In this sense, by holding the deed to a restaurant, I have many rights. I have the right to block involuntary seizure or unwarranted search by the State. I have the right to bake pizzas. These are my rights as a citizen of the United States. But until unless the government condones discrimination itself, I do not have the right to discriminate unfairly.

Because Republicans are so fond of slippery-slope arguments (remember? if you legalize same-sex marriage men are going to get married to pigs, or something), I’m going to make one here. The strong form of Rand Paul’s argument suggests that I have the ultimate right to do what I will on my property. (In other words, he mistakenly applies Lockean values of liberalism). This would mean owners could kill, maim, torture, and steal those who enter their property.

Of course, the libertarian argument might go that if the market learned of such cruel acts, the shop would be snubbed until it modified its practices. In the mean time, I’m happy to live in post-1964 America, run by Kenyan, anti-market, socialist (has anyone heard of Chained CPI?), Muslims.

So Rand Paul isn’t racist, just wrong. If he had a more open approach to abortion, he could even have an internally consistent ideology supporting a crippled version of the Civil Rights Act. Millhiser doesn’t seem to think Paul’s ideology is compatible with a free society. It is, just not our free society.

That lower-income Americans don’t save is a widely-accepted problem. In general, liberals believe wealth inequality (a function of savings rate) can be mitigated with strong social insurance programs and cash transfers. Both liberals and conservatives believe in the value of “nudging” people into saving more via opt-out retirement programs. Only conservatives, however, seem to believe a simple sales tax* would help the poor save more. Liberals retort by (rightly) noting that a non-progressive consumption tax is, by definition, highly regressive. The burden of a sales tax falls on the poorest. (Note I’m talking about the famous FairTax not better systems like an X Tax, or a graduated levy on wages/business cash flow, which hardly get the political traction of simple sales taxes).

With a number of Republican-heavy states planning on taxing sales instead of income and Congress debating a national Internet sales tax, I find myself in the awkward position of agreeing with Grover Norquist. By citing that sales taxes are regressive, liberals fail to advance debate in a meaningful manner. The sad truth is that the GOP is largely interested in anti-progressive modes of taxation. Sales fits the bill.

But, based on a simplistic understanding of economic models, conservatives believe that a simple sales tax would somehow increase savings rate. Take this fairly well-argued article for a national VAT from 1996:

Perhaps the feature of consumption taxes that its proponents cite most often is that they are not imposed on income derived from savings and investment, making higher rates of saving and economic growth more likely

Now, keep this in mind, while I explain a very interesting phenomenon from developmental economics, the Giffen Good. (Feel free to skip the next section if you understand the dynamics thereof) Perhaps the most fundamental rule of economics is that, ceteris paribus, the quantity demanded of a certain good at a given point in time is inversely proportional to its price (did I get everything?) A handful of items defy this “law”. Veblen goods, are usually luxury items for which the price is itself part of the value, signaling class and exclusivity. For these goods, there are certain price levels at which the demand curve slopes upward.

A far more elusive such item is the “Giffen Good”. Think about what happens when the price of Coke increases: the relative (opportunity) cost of Pepsi falls increasing its demand. Simple, right? This is called the “substitution effect”. But there’s another force at play. In economics, the purchasing power of your unit of account is inversely proportional to the price level. As the price level increases, your relative income falls. Now, economists define “inferior goods” to be those goods for which increased income results in decreased demand. Think fast-food and Goodwill. Conversely, when income falls demand increases.

Putting this all together, there might (there actually are, a very interesting series of articles here, here, and here) be a good:

  • That is economically “inferior”
  • For which the income effect is greater than the substitution effect
  • For which the good represents a large portion of overall income

The classical example is rice in several Chinese provinces. Here, farmers substitute between rice and meat, where rice is inferior, but staple. An increase in the price of rice results in a greater outlay in meeting the necessary amount, without enough leftover to purchase meat, which is then redirected into increased consumption of rice.

I think there’s strong reason to believe consumption itself is a Giffen good, in other words increasing the cost of consumption (through a sales tax) will only further increase consumption. Let’s look at the evidence.

  • As far as allocating income there are two, and only two, options: consumption or saving/investment – let’s assume that a citizen rationally substitutes between the two.
  • Consumption is clearly an inferior good. As income increases the marginal propensity to consume falls, and the relative share of savings and investment are far more prominent at high income levels. (Note, I understand that total consumption increases with income, but as the object of concern is savings rate, it is the relative share that matters)
  • There are no alternatives to substitution between income and savings.
  • A certain level of consumption is necessary (to buy food, gas, clothing, shelter, etc.)

So think about the target family earning $30,000 about whose savings rate the conservatives are oh-so-concerned. Said family saves $1,000 a year, has a “staple” spending of $27,000 and a discretionary spending of $2,000 (note that this isn’t discretionary as in a vacation to the Alps Florida, but buying a few extra books or a movie).

If sales tax is increased by 10%, even if the family cuts all discretionary spending, there is still a shortage of $700 from taxes on the necessary consumption. This can only come from savings rate.

So, on this family, a 10% increase in consumption tax, counterintuitively, directs 2.3% of total income back to consumption from savings. Oh, and, remember – income tax cuts won’t help this mooching member of the “47%”.

So next time your friendly neighbor GOP governor tells you that a sales tax will somehow help the poor, ask him if he’s ever sold rice in rural China.