It seems like a good idea to make policy through the tax code. After all, everybody pays taxes and everybody hates taxes. Plus you can count your policy as a tax cut (yay!) instead of more wasteful government spending (boo!) or (god forbid) welfare. A recent Bloomberg piece demonstrates the issue with this:
The real estate levy, the city’s biggest revenue source, uses a methodology that undervalues condominiums on Park Avenue, Central Park West and other enclaves of the wealthy; limits tax increases for owners in brownstone neighborhoods such asGreenwich Village and Park Slope; and shifts the heaviest burden to renters, many of them poor.
For New York City and neighboring Nassau County, the  law created four classes of property — one- to three-family homes, apartment buildings, utilities and commercial property — with each taxed under different formulas.
The intent was to lock in the percentage of total property-tax levy paid by each class at the 1981 level. That gave homeowners an advantage because historically they had received bigger breaks than other properties.
Ugh. Giving homeowners a ceiling on their tax burden certainly sounds like a nice idea. There are three fundamental issues with deciding to do this sort of policy through the tax code.
- Benefits the rich. The majority of tax benefits go to people who have the heaviest tax burden. Seems natural, but if you try and imagine this as a spending program it’d be pretty bizarre. New York gives the most money to people who already have the most money…wait, isn’t that the opposite of how this is supposed to work?
- Advantages the savvy. A closely related issue – not everyone takes advantages of tax benefits. Generally because they’re extremely opaque and confusing, a fact the Bloomberg piece discusses. The people who do take those benefits home are the ones who know about them and have good tax accountants. The people who need the money most are least likely to know about it or to fill out the forms properly.
- Bad policies never die. If New York City had a line item in its budget giving out free money to rich homeowners it would last until the next Democratic primary. It’d be a self-evidently insane policy priority in a city where nearly two million people live in poverty. Yet because it’s embedded in the tax code this policy of “free money for rich people” just keeps chugging along.
If there’s anything the American tax code can teach us, it’s that our mistakes stick with us. We should be very, very apprehensive about making policy through “narrow and targeted tax cuts”.
I’m currently working my way through Christopher Clark’s Sleepwalkers, which is about the conditions leading up to World War I and a very thorough delve into the tick-tock of the July Crisis that launched the war. It has been lambasted as an apologia for the Central Powers, which I don’t think is particularly fair. Most of the high-level decisionmakers are portrayed as rather hapless and confused, particularly the German Kaiser who comes off as a childish idiot. However, he does seem to place the blame rather squarely on the bellicose French and Russians, particularly the Russian decision for general mobilization. It’s been interesting to read this book against the background of the past few weeks, as a frightening international crisis looms. This time the blame can unequivocally be laid at the foot of the Russians’ decision to take advantage of Ukrainian disorder to seize the Crimea.
Sometimes it truly seems that we have learned from history. The Russians’ move was an obvious provocation, and provocation continues with the standoffs happening right now across Crimea. Yet the discipline of the Ukrainian troops under siege has been incredibly impressive – presumably each are aware that a single stray bullet could cause a war. Similarly, while the Ukrainian government has called up its reserves and is moving to a war footing, it has been careful to avoid any possible provocations of Russian forces. And NATO has been very careful about over-committing to anything that might challenge its credibility. As the Russian exchange rate and stock market start to crumble, it’s becoming increasingly clear that the cost of holding onto Crimea might not be worth it. It’s not just economic – the cost of the peninsula is a permanently hostile Ukraine.
The shadow of WWI is hanging over this crisis, and the Western allies are acting with incredible caution and restraint. The statesmen of 1914 were giddy with glee over finally getting the chance to go to war and work out their problems on the battlefield. Today the leaders of the Western nations clearly view the prospect of war with unalloyed dread. It may be too early to be hopeful about this crisis, as things could easily take a nasty turn. And if Russia decides to open a wider conflict by invading eastern Ukraine, then the scenario could become very ugly very quickly. But I can’t help feeling that the specter of 1914 is keeping this situation more under control than it might be otherwise.
Contra Squarely Rooted, people absolutely want to be bonds. He notes that most of the hot new businesses these days work on a subscription pricing model, where customers pay a flat fee rather than a la carte. Often the a la carte option would be less expensive, but people are willing to pay a premium for not having to think about transactions. One way to interpret this is that companies are exploiting consumers’ cognitive biases and that consumers are fools for paying more than they need to. I don’t think this is a helpful way to look at it.
Choice fatigue isn’t some illusion that goes away once you know about it, choice fatigue is real because we feel it. Personally, I hate having to think about microtransactions and paying for metered services. It’s irritating and the irritation of constantly knowing I’m losing sums of money (albeit small sums!) far outweighs the comfort of knowing I’m saving small amounts. And I’m obviously not the only person who feels that way, because consumers are voting with their feet.* I think that the general dislike of a la carte pricing comes from natural loss aversion – which is to say people assign more emotional weight to losing a given sum (e.g., a microtransaction) than they get from gaining a given sum (the savings earned vs. fixed-fee pricing). I’m frankly willing to pay a little bit more for a given fixed-fee service to not have to worry about what I’m actually spending.
I wish I wasn’t that way, but I don’t get to shape my own preferences and cognitive biases. I think the trend towards fixed-fee services is best viewed as substantially enhancing overall welfare. Consumers get greater surplus, providers get greater surplus (profits) – what’s not to love?
*: Or whatever the digital equivalent is.
Warning – this is a post without empirical evidence.*
One of the most frustrating things ever is hearing the argument that tax incentives will bring startups to Our Depressed Rust-Belt Mid-American City. First of all, startups won’t replace the thousands of jobs lost when the old
cancer paper mill closed down – startups will employ far fewer people, and they will be mostly importing their talent from other cities/states/countries. That’s not terrible – those employees will still need meals cooked, lawns mowed, clothes cleaned, etc. The ancillary jobs of a thriving startup scene are often decent ones – but the good high-paying jobs won’t go to locals. No, the real issue with these policies is thinking that startups make decisions based on taxes.
A startup is a machine designed to turn ideas into products, and sometimes products into revenue, and products + revenue into growth. Notice a very important word that isn’t in that description? Profits. Very few startups are profitable from the get-go, and most aren’t meant to be – even the ones with massively positive cash flows show little or negative accounting profit. That’s because all of that cash is shoveled into growth. People starting startups couldn’t give two shakes about the statutory corporate tax rate because you need profits for taxes, and profits are unimaginably far away. When and if a startup becomes big enough to become profitable, it’ll already be domiciled someplace exotic with nice weather, secretive banking laws, and even more flexible tax codes.
There are tax incentives startups would care about a lot – incentives that make hiring talent cheaper. Rebates for payroll taxes are one very promising avenue. Today, payroll taxes are split half and half between employer and employee – for employers, it’s a tax on hiring people, and for employees it’s a flat tax on pay. If a local government offered payroll tax rebates to startups, that’s huge – it makes it cheaper for you to employ someone, and it makes their salary worth more. That’s actually a competitive advantage that could make it more appealing for a startup to relocate to Our Struggling Example Of Faded Mid-Century Glory And Metaphor For America’s Decline.
Tax incentives are good for existing businesses – but a narrow subset. Mid-sized businesses (small enough to feasibly relocate) with healthy profits (so the tax rate matters). Those are nice to have – but they’re hardly startups, and they’re not the type that grow quickly enough to revolutionize your city’s economy. Cutting corporate tax rates is basically orthogonal to the goal of encouraging startups, and I wish this tired old cliche were tossed out.
*: Don’t you wish more people warned you?
One of the reasons that American presidents go to war – not a good reason, mind you – is known as the “Rally Around the Flag” effect. When America gets involved in an armed conflict, whether as defender or aggressor, the president becomes more popular and more highly-approved, and often the conflict itself is accompanied by a burst of legislation unrelated to the war. There’s a lot of debate over precisely how strong the effect is and what drives it, but the existence of the effect itself is one of the best-known findings of political science.
This could be relevant for the decision to embrace cyberwarfare. Today the NYT reveals that the Obama adminstration was deeply divided over the question of whether to use cyberweapons to attack the Syrian government. The NYT reveals the deep discussion over the strategic benefits and risks – but one that does not appear there is the potential effect on American public opinion. Cyberwarfare is still visible to affected foreign players (and possibly friendly/neutral ones too) and America is strategically accountable for its actions in this sphere, but it can be plausibly denied in a way that bombers and paratroopers can’t. If Obama had decided to go forward with attacks on Syria, he would have had to deal with the fallout from Syria and Russia, but it likely would have remained secret until the next Edward Snowden leaked it.
If cyberwarfare is normalized, more acts of national aggression will take place out of the public eye. As a positive question – a question of facts – public opinion is a significant constraint on executive action. As a normative question, people differ a lot on whether this constraint is a good or bad thing. Perhaps the people stop wise Presidents from taking the actions necessary to protect the country; perhaps the people’s reluctance to go to war stops foolhardy Presidents from making dangerous leaps into conflict.
The growth of cyberwarfare will be a neat and potentially worrying test of who is right.
While working through some old papers for a class on political theory, I happened across an interesting (and out-of-place) paper by Allan Meltzer and Scott Richard, “A Rational Theory of the Size of Government“. It attempts to construct a formal model for how individuals decide their preferences for optimal tax and spending levels based on rational expectations of future earnings. As it turns out, it’s basically a function of the skew of the income distribution – in highly unequal economies, where the median income is much lower than the mean, the voters will prefer higher taxes and more redistribution. As it turns out, very high levels of inequality simply aren’t a stable equilibrium.
This is one of the better arguments I’ve heard for why one should not worry about income inequality. As societies become more unequal and the distribution more skewed, redistribution will become more broadly popular. Arguably America is in the “correction” phase right now, with some impositions of higher marginal tax rates and Obamacare’s imposition of capital gains surtaxes. The situation will sort itself out eventually – the longer that elites are able to delay the reckoning through lobbying, donations, etcetera, the greater pressure will build and the sharper the eventual adjustment would be.
Interestingly, one key variable is productivity. One implication of their model is that gains from growth accrue primarily to those with higher productivity. When technology is considered as a growth driver, it seems that the most productive become disproportionately more productive with better technology and further the gap between themselves and the median worker. This is a concept often called “skills-biased technological change”. As technology improves, the rich get richer. the distribution becomes more skewed and the median income gets further and further from the mean. This is the world Tyler Cowen describes in Average is Over – and the clear prediction of Meltzer and Richard’s model is that this is a world of incredible pressure for redistribution.
So if liberals believe that automation will wipe out the middle class, they should feel pretty good about the liberal project. Such a world is one where support for redistribution, and punitive taxes on capital, is widely-shared and politically unassailable. If you’re a conservative, it should scare the hell out of you. While conservatives often pay lip service to the idea of spreading opportunity more widely, Meltzer and Richard’s analysis suggest this should be a key policy priority. Accelerating technology-driven inequality could devastate the constituency for the low-tax, low-service model the GOP stands for today.
Arizona is debating a bill that will enshrine discrimination against gays as a protected right. On the one hand, the anti-gay groups pushing this have a uncomfortable but accurate truth on their side: that to many people in America, expressing their dislike of gays is part of their free exercise of religion. Free exercise of religion is plainly protected by the Constitution. On the other hand, “protecting free speech and association” is a long line of argument that has been used to justify the most odious forms of discrimination throughout American history. The idea that this is a principled stand on religious freedom, and anti-discrimination laws an assault on same, doesn’t really pass the smell test.
Noah Smith wrote a great piece about how the rhetoric of libertarianism is all too often meant to aid the “freedom of local bullies“.
An ideal libertarian society would leave the vast majority of people feeling profoundly constrained in many ways. This is because the freedom of the individual can be curtailed not only by the government, but by a large variety of intermediate powers like work bosses, neighborhood associations, self-organized ethnic movements, organized religions, tough violent men, or social conventions. In a society such as ours, where the government maintains a nominal monopoly on the use of physical violence, there is plenty of room for people to be oppressed by such intermediate powers, whom I call “local bullies.”
This can be a little unfair to libertarianism – because in the absence of strong government legislation, the dominant social order is dictated by social norms. In a society without militant organized religion, a strong deference towards religious freedom wouldn’t result in religious leaders trampling individual freedom. Formal religious liberty would no doubt take different realized forms in Sweden and Saudi Arabia. The actual experience of negative freedom is strongly shaped by the dominant social norms that actually end up running the show.
That is how the Arizona law is best seen, I think: an attempt to symbolically endorse the norm of anti-gay legislation. Its legal salience is (most likely) fairly low, and I have doubts about whether it would hold up in court. But the status quo today already has some legal protection for anti-gay discrimination, and the idea that anti-gay bigots are persecuted by the legal system today is a bit ludicrous. The point is to more fully legitimize the norm of discrimination. While the state could not get away with instituting a system of legal discrimination against gays, it makes it clear that the state endorses anti-gay discrimination.
Ultimately, this Arizona law is a bad law but a good sign. It is a desperate rear-guard action attempting to safeguard the rights of local bullies after more formal discrimination laws have begun to fall. It may or may not be signed by the governor, and may or may not withstand court challenges, but its practical impact is likely to be small. The nice thing about social norms determining local lives is that when norms change for the better, so do lives. I suspect that by the time this law takes effect, the norms of equality and respect will have advanced that much more.
After the streets in Kiev erupted yesterday (February 18th), more bad news from Ukraine. President Yanukovich has sacked the army chief and replaced him with one more loyal to him personally. This is generally a prelude to his probable next move – deploying the army to stop the protests. Most likely this was either a pre-emptive move, or a response to the former army chief refusing. Right now it’s 9 PM in Kiev on February 19th, and I would be surprised if the army isn’t sent out within the next three to thirty hours. Without necessarily taking the side of the protesters, more violent escalation is unequivocally a bad thing.
This incident is being criminally underreported in America, I must say. I think that the attention being paid to the Olympics has displaced a lot of the appetite for serious and depressing foreign news, which is scant in the first place. But the situation in Ukraine is extremely volatile, especially now that the President is preparing for a more direct exercise of authority. Protestors in Lviv (western Ukraine) have declared autonomy or independence and are likely attempting to marshal support among the conscripts in the army and security forces. Some, like Poland’s Prime Minister Tusk, are warning of a civil war.
The geopolitical situation could get very hairy very quickly. If Western Ukraine moves towards secession, they are very likely to look to Europe and potentially NATO for support. Yanukovich could decide to let them go, or to send the army to lock down central control on the region. While Yanukovich and his party are strongly pro-Russia, it would still probably be over the line of political acceptability for him to ask for an armed Russian intervention to bolster his forces. But it might not be. The situation in Ukraine is deeply divided and complex, and it has the misfortune of sitting right between the Western alliance and Vladimir Putin.
Fun fact: “Ukraine” is Russian for “borderland”. This isn’t the first time it’s been in this situation.
The bright side of this underreporting is that it hasn’t yet become a political issue in America. If and when it does, certain American politicians are likely to reflexively take an aggressive anti-Russia, anti-Yanukovich line. As long as the Ukraine protests and disturbances fly under the radar, the United States may yet hope to play a productive role in resolving the crisis. If it becomes politicized, President Obama may find himself forced into a series of escalating actions that could have horrible consequences. This crisis is just too complex and ugly and boiling it down to a good-guys-bad-guys narrative will lead America horribly astray.
The Washington Post today writes about honor among thieves – or at least Bitcoin traders:
Once Bob has Bitcoins, and decides to purchase the item from Sarah, instead of paying Sarah directly, Bob places the corresponding amount in escrow with Silk Road. … The escrow mechanism allows the market operator to accurately compute their commission fees, and to resolve disputes between sellers and buyers. Silk Road mandates all sellers and buyers use the escrow system. Failure to do so is punishable by expulsion from the marketplace.
This isn’t a new problem – figuring out how to do deals in an anarchic environment is a tough problem. The trick is that the whole system ultimately depends on an unimpeachable middleman. Silk Road tried to be that unimpeachable middleman, but it’s hard to project that image of quiet dependable confidence when the Feds are breathing down your neck. And of course now that the Feds have set the precedent of taking down Silk Road, it’s clear that anyone big enough to be dependable is big enough to be a serious target.
The clear next step is a serious one – move to where the Feds can’t get to you. Run your Bitcoin merchant exchange someplace with secretive banking laws and few extradition treaties – Switzerland or Singapore seem like fairly obvious choices. However, this does raise the stakes because the US government tends not to sit idle when its authority is flouted. They have a long reach, and a decent argument that anyone running a Bitcoin exchange is likely complicit in many and varied felonies.
The result is that a truly free market using Bitcoin, with untraceable transactions in whatever-you-fancy, is more or less doomed to be a marginal and transitory phenomenon. Your operation simply can’t be trusted as the market-maker without a name, a face, and ultimately some form of recourse for funds held in escrow. And there are many governments determined to never let that happen.