Slate Star Codex

I.

Thanks to everyone who commented on my last two posts, especially the many people who disagreed with me. Two things I will admit I got mostly wrong:

1. I was wrong to say there was “no case” for the tax bill. Aside from all of the minor provisions which can be good or bad, the case for slashing corporate rates is that they’re more distortionary and less efficient than other forms of taxation. Thanks to everyone who pointed this out to me.

2. Several people brought up problems with the article saying CEOs say they will just give the money back to shareholders, most notably that giving money back to shareholders may stimulate the economy in other ways.

But two things I still think are true:

1. Seriously, guys, I admit I don’t know as much about economics as some of you, but I am working off of a poll of the country’s best economists who came down pretty heavily on the side of this not significantly increasing growth. If you want to tell me that it would, your job isn’t to explain Economics 101 theories to me even louder, it’s to explain how the country’s best economists are getting it wrong. You may find this book review relevant.

2. I stand by my claim that I care less about economic growth than about where the money goes. That includes caring less about distortionary taxation, deadweight loss, and all those other concepts.

Suppose Alice is an effective altruist who supports whatever charity you think is most important and does a really good job of it. Every dollar she spends saves multiple lives. She lives in a town of 1000 people where nobody else is an effective altruist and everyone else just lives a pretty decent life and spends their extra money on, I don’t know, breeding virtual cats or something.

A demon places a curse on Alice’s neighbor Bob. Every time Bob pays a dollar in taxes, it destroys a random two dollars’ worth of wealth somewhere in the town.

The town elders meet and decide that for some reason they have to lower taxes either on Alice or Bob. The economic case for Bob is overwhelming – taxes on him are especially inefficient because of the extra wealth they destroy.

Still, I would want a tax cut for Alice. It seems like the only important thing that happens at all in this town is Alice’s charitable donations. The amount I care about this town’s utility focuses pretty much entirely on that. We could give the break to Bob, and have a nominally better economy, but it would just lead to more people buying virtual cats. It could be that the extra two dollars’ of wealth destroyed by Bob’s taxes was some sort of useful machinery, and so taxing Bob harms economic growth. Again, it is hard to care, except insofar as that hurts Alice, the only person in town whose wealth matters much for anyone’s utility.

I can imagine a world in which Bob’s curse was stronger, and every dollar Bob was taxed destroyed a million dollars in value, and soon any tax on Bob meant the citizens of the town were starving to death and all of them including Alice went bankrupt. But right now the tax on Bob isn’t big enough to be worse for Alice than a tax on Alice, and since Alice is the only important person in this situation, I don’t care.

I can also imagine a world where a wise economist comes to town. She says “Alice’s work is the most important thing in this town, but taxing Bob destroys wealth for no reason. Some of the town elders support tax breaks for Bob, and others support tax breaks for Alice. But we can give the tax break to Bob, and then all the people who saved $2 each from the curse not being activated can give $1.50 to Alice. That way Bob is better off, Alice is better off, and potential curse victims are better off.”

This is the best argument in favor of wealth creation instead of redistribution. But right now we’re not doing that. We just create the wealth and then don’t redistribute it, except through charity, which is a rounding error, and taxes, which everyone agrees this bill causes there to be less of. If we actually had Pareto-optimal wealth redistribution, then of course, create as much wealth as possible and redistribute it Pareto-optimally. Since we don’t, we’re kind of stuck.

My takeaway from this story is that in societies with a lot of marginal-value-of-money inequality, economic growth is potentially less useful than working to keep the money with people who can spend it on higher-marginal-value things. Consider three variables:

1. How low is the marginal utility of money for the person holding the average dollar, if no efforts are made to redistribute it?

2. How much economic growth are we sacrificing by choosing redistribution?

3. How high a marginal utility of money do we get by redistributing it?

Point 1 is why I stress the research showing increasing inequality eg most money going to people rich enough not to really have much use for it.

Point 2 is why I stress the economists saying that the gains from cutting corporate taxes really won’t have that much effect on growth.

Point 3 is the one I’m least sure about. If the government were a perfect effective altruist, it would be no contest – them having the money would be thousands of times more effective than random corporations (or even random middle-class people) having it. Even if the government were to give the money as a tax break to the working classes, it still seems really obvious to me that the increased utility swamps any effect from higher economic growth. In reality, the tax cut is being funded by increasing the deficit. I don’t know whether that means we need to compare it to whatever is bad about having a higher deficit, or else take as a given that the deficit has a certain amount of slack, and then compare it to other things we could do with the same money.

Imagine the government went $100 billion into debt to build a giant bronze statue of George Washington. Should we be debating whether running up the deficit is really that bad? Should we be debating the artistic merit of giant bronze statues of Washington, and whether it’s actually a pretty good statue that boosts tourism in the area? Or should we be comparing it to the best possible use for that money?

(added: I would be 100% happy with a bill that cut corporate taxes exactly this much, then raised taxes somewhere else in an equally progressive way, causing there to be the same amount of taxes with less distortion)

II.

The fairest thing I can think of is to compare this use of $100 billion to just spreading $100 billion evenly among all the government’s existing priorities.

I think the marginal utility from an extra dollar to the poor (and the working class, etc) is orders of magnitude higher than the same dollar going to something else. So if you want to get me to support the tax bill, don’t tell me yet another reason why you think it would make the economy more efficient. Tell me why I’m wrong about this.

[EDIT: Commenters point out I was mistaken about the speed at which this would compound. See here. If the real growth from the bill was as high as 1%, it would probably be better for the poor than the lost government spending; if it were lower, it would take several decades to break even. So the best way to convince me to support this bill would be to find a plausible estimate of what level of growth is expected. My best guess from the economist poll is still “approximately zero”. ]

There was some good pushback on yesterday’s article on taxes. But sorry, I’m still right.

Many people responded with generic low-tax anti-government positions. Fine. Let’s say the government is definitely bad and taxes are definitely too high. The current tax bill is still not the right way to do tax cuts.

Budget director Mick Mulvaney claims that the richest 20% of people pay 95% of income tax; the Wall Street Journal‘s numbers are a little lower, at 84%. Total income taxes are $1.8 trillion, so the poorest 80%’s share comes out to somewhere between 90 and 280 billion. This is around the same order of magnitude as the $100 billion in tax cuts in the current GOP bill. So it looks like one alternative to this bill, no more or less costly, would be to halve income taxes for the bottom 80% of the population, maybe anyone making less than $100,000.

Is there any reason to prefer the existing GOP proposal to this one?

The only argument I can think of is that corporations are good because they make investments are hire employees and stimulate the economy. But…

First of all, the IGM Forum asked the nation’s top economists whether the current tax bill would substantially raise GDP. 51% said it wouldn’t, 36% said they weren’t sure, and only 2% (= 1 economist) thought it probably would.

Second, as Marxist and anti-corporate a site as Forbes notes that A Corporate Tax Cut Won’t Boost Economic Growth, because they went around and asked a lot of CEOs whether they were going to invest the tax cut in cool economic-growth boosting stuff, and the CEOs mostly said no, they would probably just increase shareholder dividends.

Third, for the past few decades there’s been a weird uncoupling between economic growth and the fortunes of most people in the developed world. I won’t insult your intelligence by re-posting the same graph you’ve seen a thousand times, but this isn’t subtle. If all the economists and all the CEOs are wrong, and we get a 3% boost in GDP over a decade or something, I expect when I open a holo-newspaper in 2027 it’ll be about how mysterious it is that average middle-class salaries are still pretty close to their 1970s level. I don’t think you have to be a communist to believe that economic growth that just goes to a tiny subsection of the population isn’t all that useful. You just have to be a utilitarian.

(I guess expanding the economy can also give us cool technology, but I would like rather less cool technology for a while, actually).

But most important, if all of this is wrong – if the CEOs are lying and really they’ll spend the money on investment, and the economists are wrong and really corporate investment will turbo-charge the economy, and the past few decades of economic history are wrong and some of the gains of a turbo-charged economy go to the poor and middle-class – then the good thing that happens is that poor and middle-class people have more money.

…which is the same thing that would have happened if you had just lowered the taxes on the poor and middle-class directly, you moron. It’s also what would happen if we spent it on welfare for the poor, on health care for the middle class. God help me, even Bernie’s free college tuition would save a couple people from student loan debt.

For the corporate tax cut to be a better idea, it would have to turbo charge the economy so dramatically that even after accounting for the low chance it will work at all, the amount taken off the top by executives and shareholders, and the poor ability of economic turbo-charging to ever reach the working class, it still puts more money in the hands of people who need it than just giving them the money would. I am not an economist and I don’t know as much about multipliers as I should, but I have not heard anyone seriously assert this.

Last week I criticized socialists who prefer funding complicated government programs that might eventually help poor people, to just giving poor people the money. I feel like this is the same sort of issue. Some sort of complicated scheme in which we make corporations much richer and hope this is good for the poor and middle-class in some way is a lot less certain than just giving poor and middle-class people more money.

Spending the tax money on social welfare programs would help give poor and middle-class people more money. Expanding the EITC would give poor and middle-class people more money. Cutting personal income taxes in lower brackets would give poor and middle-class people more money. This tax bill doesn’t do any of those things, and it costs the money that would make doing any of those things easier.

It’s sometimes unfair to compare real government programs to the most effective possible government program; everything fails by that measure. But this tax bill seems so much worse than even other tax cuts that I think it’s fair to judge it as a tremendous opportunity cost.

Here is the cost of the current GOP tax bill placed in the context of other really expensive things. Although it’s not quite enough money to solve world hunger, it’s enough to end US homelessness four times over or fund nine simultaneous Apollo Programs.

I’m writing this post sort of as penance. During the primaries, I wrote a post arguing that Sanders’ college plan was bad. And compared to any reasonable use of the money, I still think that’s true.

But I worry that people – including me – focus way too much on the kind of bad idea that tries to help people but ends up being too expensive, and not enough on the kind of bad idea where there’s only the thinnest veneer of a claim anyone will be helped at all. If Sanders had been elected, and we were debating his college plan, people would be worried. The affordability of every piece of it would get run over with a fine-toothed comb. Its irresponsibility would be noticed.

Well, instead of Sanders we got Trump. I won’t say nobody’s talking about the tax plan – the problems with it have been all over the news – but are our fiscal irresponsibility detectors being triggered twice as strongly as they would if it was Sanders’ college plan we were considering?

There must be a toxoplasma effect going on here, where things that are possibly bad get debated to pieces, because debating them is so much fun – but things that are definitely bad, things that nobody likes, get through much more easily. Even more pessimistically, if Sanders proposed free college for everybody, it would get a lot of resistance precisely because the fact that so many people would benefit would make sure everyone knew about it and was thinking about it a lot and understood how big a deal it was. Since nobody except a few corporations benefits from the GOP tax plan, how do we even get a feel for how big and important it is?

Next election, if he’s running, I’m probably going to support Sanders, who seems like a decent person who really wants to help the poor. This is going to be a weird choice for someone who flirts with identifying as libertarian, given the whole socialism thing. But the thing is, we have antibodies to socialism. When people push socialism, we give it the scrutiny it deserves. I’m more worried about the things we don’t have antibodies to, and one of them is going to be passed by a joint session of Congress in the next week or two.