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Progressive taxation as price discimination
That's a request from the comments, sometimes the customer is king after all.
The point of price discrimination is to sell more goods and services while taking in more profit; the low demanders can pay a lower price, yet the company still sells for a higher price to the high demanders. If output goes up, social welfare usually does too.
So ideally we might levy higher taxes on those people who especially enjoy working, or people who especially enjoy living in the country. Current tax rates are conditioned mostly on income plus a blizzard of confusing factors listed in the tax code, such as depreciation allowances and legislated tax breaks. Why not -- either directly or indirectly -- condition tax payments on proxies for enjoying one's job and country? After all, those are the people least likely to leave or least likely to stop working.
Tax flags, guns, churches, and other correlates with patriotism.
Tax fun jobs. Like being a professor.
Next idea?
More generally, I'm not always keen on taxing inelastic factors, if only because it leads to excess revenue collection, a'la Brennan and Buchanan.
Posted by Tyler Cowen on February 27, 2007 at 11:50 AM in Economics | Permalink
Comments
How about taxing those people more who enjoy making money, as exhibited by their making more of it. Perfect.
It's called progressive taxation and Tyler, you are brilliant.
Posted by: Martin at Feb 27, 2007 12:32:47 PM
I've long thought that the reason the tax rate isn't more progressive than it already is, is because of
the knowledge or expectation that trying to tax high earners much more will just scare them off (to other
countries, to retirement). Because believe me -- the votes are there!
Posted by: Person at Feb 27, 2007 12:32:53 PM
And will the quality of goods sold at lower prices differ enormously from those sold at higher prices??
Posted by: Alex at Feb 27, 2007 12:40:13 PM
in a perfect price-income discrimination situation, there is no incentive to produce/work/earn/innovate more whatsoever..
Posted by: Michal at Feb 27, 2007 1:47:16 PM
"How about taxing those people more who enjoy making money, as exhibited by their making more of it."
But then there are no utility gains from that type of redistribution, since you're taking away money from people who really like it and giving it to people who don't like it as much.
On top of that, you're creating larger monopoly profits for a government rather than having the surplus distributed amongst the populace.
And worse yet, even those monopoly profits may no longer generate surplus, if there's rent dissipating competition to get to control the gpvernment and be the rent-extracting monopolist.
Tyler may be brilliant, but have my doubts about Martin.
Posted by: Keith at Feb 27, 2007 1:47:41 PM
"Tax fun jobs. Like being a professor."
I wonder what the incidence of such a tax would be, seeing as how those jobs already pay less.
Posted by: ptm at Feb 27, 2007 2:10:40 PM
Why not slam a tax on happiness? …if that is ever possible to measure.
Should the government then use the proceeds to subsidize misery?
Posted by: Yan Li at Feb 27, 2007 2:37:22 PM
Clearly people who aren't working hard don't care about money. How about a true regressive tax? As you earn more, your tax rate drops. Clear a certain threshold, and you're paycheck starts getting bigger because your employer witholds less, and you're guaranteed a bigger refund. Have a U shaped rate system that bottoms out around the $40,000 median income.
Also, wouldn't it be more accurate to tax based on voting, since Democrats and Greens prefer higher taxes to Republicans and Libertarians? We could call it the AMT...
Posted by: Matt at Feb 27, 2007 3:04:56 PM
Handgun manufacturers pay a steep Federal Excise Tax which is of course passed on to consumers (with the normal caveats about tax incidence). If I buy a custom IPSC pistol from a gunsmith and he provides all parts, the FET ($200) is typically passed on to me explicitly. I can avoid it by purchasing a bare frame (identical to what the 'smith would have purchased, typically at a lower price) and sending it to him to build on, which for some reason is legally different and avoids the FET entirely.
The point being, patriots know how to avoid taxes too ;)
Posted by: Noah Yetter at Feb 27, 2007 4:01:16 PM
Is being an untenured professor also lots of fun? Or mostly stressful? Does the fun increase much with tenure, i.e. a bit more freedom to work on what one really cares about?
Posted by: APT at Feb 27, 2007 4:18:31 PM
I was the guy who suggested this topic. This is kind of what I was thinking:
Often price discrimination (and for that matter bundling) can significantly increase output and welfare (I'm thinking of airfares requiring sat night stays, and cable tv packages) and yet strike most people as inherently unfair. Those that complain vocally are engaging in some combination of self-interested cheap-talk and economic illiteracy.
For any package of govt services (the current package, the libertarians' ideal, whatever), if we imagine how it might be priced by a firm skilled in these techniques, I think it's possible it would wind up looking tolerably like a progressive income tax. Some, mostly wealthier people, would have a strong interest in funding a nat'l defense, and they might as well defray the costs by letting others participate for whatever paltry sum they can pay.
Obviously there's a ton more going on (bad incentive effects, public choice theory, free-riding, govt coercion, etc.), but I wonder if one aspect of the complaints of those interested in less progressive taxation is similarly just self-interested cheap-talk driven by an innate but ultimately misguided aversion to price discrimination, bundling, and similar techniques.
I don't think I've ever heard anyone complain that airline pricing schemes cause business travelers to inefficiently underconsume airtravel, but that seems roughly analagous to complaining about high marginal tax rates.
I think chartible contributions as a % of income go down as income rises, which perhaps undermines this argument (for the portion of govt that is primarily xfer oriented), at least on the margin.
Anyway, it was just a random thought that I hadn't seen elsewhere, and thought it was worth exactly 4 words in a comment thread to possibly get another viewpoint.
Posted by: fmb at Feb 27, 2007 5:10:03 PM
I've actually been thinking about how to measure utility curves, and the following argument occurred to me:
Leisure time is enjoyed hedonically. A week has 168 hours [except for the two weeks during which daylight savings time is changed], and I personally work about 50 of those hours. I have therefore decided that the 118th non-working hour was worth just more to me than 2.04% of what I would make on a 49 hour work week, but that the 119th non-working hour would not be worth 2% of my current salary.
Before you argue that once I chose my [geeky] job I didn't have any real choice of my work week, I'll claim that I could have made other job or even other career decisions, and that my company has a bonus plan in place that rewards those who accomplish more during the year with salary supplements.
Now it's reasonable to claim that the 118th and 119th hours of non-work time are worth similar amounts to rich or poor alike.
By and large, it's common knowledge that typically people who are very poorly paid work long hours, people at CEO levels work long hours, but there's a wide range in the middle where there's no systematic correlation between hours worked and income. Individual differences outweigh systematic differences between income groups. This simple argument makes a case for a relatively flat tax, with a drop-off at both ends because wage ranges where people normally work long hours must value incremental percentage earnings more highly [and for the vast middle the marginal utility of money is logarythmic].
Perhaps income taxes should be asessed based on hours worked, with those who work the most hours paying the least tax? I am saying that with tongue in cheek, but the logic does make some sense. Of course it's hard to tell how many hours those of us who don't punch a clock are working.
-dk
Posted by: Dick King at Feb 27, 2007 6:58:12 PM
You could also view progresive taxation as how much people would pay for the privilege of being in a particular percentile of earners in the US. Imagine the price was set by auction for the privilege of being able to earn that much in the US. Presumably, high earners would be willing to spend a bigger percentage to be in that high earning bracket.
This viewpoint obviously produces utility gains, since the auction is voluntary.
Posted by: Mike Huben at Feb 27, 2007 6:59:11 PM
Bryan Berg at Catallarchy disputes the claim that consumption taxes are regressive. What do you think of it?
Mike, is robbing someone at gunpoint on the street an auction for the privilege of living?
Posted by: TGGP at Feb 27, 2007 9:12:22 PM
"You could also view progresive taxation as how much people would pay for the privilege of being in a particular percentile of earners in the US."
That's utterly idiotic. In that case, nobody would want to eanr any money. It also assumes that the government is the sole source of wealth and earnings. That's so simplistic, that even Ayn Rand looks like a nuanced and sophisticated thinker next to you.
Posted by: Keith at Feb 27, 2007 10:22:31 PM
TGGP, it is a price of admission, not a robbery. The US is an environment where earning potentials are much higher than elsewhere, the same way malls are (for example, and for similar reasons.)
Keith, grow up. There are plenty of people right now who pay large amounts of money to be able to work in the US because they can earn more here. The demand is there. But I guess if you were able to think about the real world, you wouldn't be an ideologue.
Posted by: Mike Huben at Feb 28, 2007 4:57:35 AM
I don't think I've ever heard anyone complain that airline pricing schemes cause business travelers to inefficiently underconsume airtravel
Well, they do cause some businesses to engage in inefficient schemes to avoid the price discrimination. I've stayed an extra day (i.e. Saturday) on several business trips. The company paid for an extra day's worth of meals and lodging just so it could save money on airfare.
Posted by: The Other Brock at Feb 28, 2007 8:42:44 AM
Mike, the mugger could also claim that he is merely charging admission into a crowded world that his other victims were willing to pay a lot for. The government does not kick out people who refuse to pay taxes either (I don't know where they'd kick out the native-born majority to at any rate), it just seizes their assets or imprisons them. Furthermore, status as a top whatever-percent income earning person is not granted by the government, but by whoever is providing your income.
Posted by: TGGP at Feb 28, 2007 9:54:24 AM
If the theory of compensating differentials applies, then the difference between "fun jobs" and other jobs, conditioning on income and ability, depends on the difference between marginal and inframarginal workers. For the marginal worker, there should be no difference in enjoyability between two equally paying jobs requiring the same amount of ability. "Fun jobs" will be the ones that inframarginal workers enjoy significantly more than marginal workers do (and being a professor is probably a very good example).
Posted by: knzn at Feb 28, 2007 11:11:04 AM
"Why not slam a tax on happiness? …if that is ever possible to measure."
I suffer from a happiness disorder. Surely you do not intend to discriminate against me, do you?
Posted by: Tom at Feb 28, 2007 12:01:34 PM
"There are plenty of people right now who pay large amounts of money to be able to work in the US because they can earn more here."
I see, and you think the government exists to serve itself and maximize its own profits! Wow, that sounds like the most doctrinaire libertarians that I know, except that even they have the sense to know that a leviathan state that maximizes its own profits would be a bad thing.
And of course that's the main problem with the price discrimination argument for progressive taxation. Price discrimination treats the government as a profit-maximizing monopolist. But why exactly do we want to maximize the monopolist's profits? I find it a little ironic that many of the same people who fear the rule of corporations then turn around and say we should be ruled by a single large profit-maximizing monopolist, and a monopolist with crappy corporate governance since the transactions costs of trading shares (emigration) are so large!
I'd rather maximize consumer surplus, which means the government would price like a perfect competitor (or at least like a monopolist in a perfectly contestable market). This would imply zero marginal cost pricing for non-congestible public goods like national defense, which, given the need to cover fixed costs, could be a two-part tariff, which amounts to head taxes. Now, if the size of that head tax violates some people's budget constraint, you might be able to make an argument for Ramsey pricing, which amount to pricing according to the elasticity of people's demand curves for government services. Now, if you make the case that people with higher income have more inelastic demand curves for this or that government service, you have a case for progressive taxation for that service.
And that brings me to my ideal: That the taxes for each government service should be calculated by service, and we should all get an "itemized tax bill." Rich people might pay a bigger share for certain things (probate courts), but poorer people could bear the tax brunt for other things (public defenders). In fact, I believe that poorer people might actually be quite happy with paying more taxes for public defenders, since it amounts to socially insuring a decent defense in important situations. Under this system, every government program that's worth doing should be able to benefit every taxpayer, rich and poor alike.
Even if you believe in redistribution, this exercise provides a useful tool for sussing out the sincerity of arguments.
If somebody claims that national health care is more efficient, then they should be able to develop a schedule of taxes for national health care that would make virtually every taxpayer, rich and poor alike, better off.
Posted by: Keith at Feb 28, 2007 1:27:04 PM
So does Ramsey pricing lead to a different result than price discrimination in some interesting way? (honest question, I'm not familiar w/the concept.) There are many products with high fix costs and near-zero marginal costs (e.g. cell phone service, drugs) that, because they use price discrimination, are successful in increasing output and increasing welfare (and potentially without the ability to discriminate would have near-zero output). Are the pricing schemes that result in these situations importantly different than a tax system based on Ramsey pricing?
I'm not at all advocating that the govt should be some profit maximizing entity, just trying to get my head around whether this line of thinking is a valid argument that progressive taxation is somehow less unfair than it superficially seems.
Posted by: fmb at Feb 28, 2007 3:52:51 PM
"cell phone service"
Actually, they use a variant of two-part tariffs, since you buy buckets of minutes. They seem to be mixing in some peak-load pricing into this by having different amounts of minutes (nightime, anytime) depending on time of day, because wireless companies have congestion issues. But wireless companies are closer to head taxes than Ramsey pricing/price discrimination.
On drug companies, they use price discrimination. One reason drug companies likely don't use two-part tariffs is it would be difficult for one nation or person or group to buy the two-part tariff and then keep the drug away from those who don't buy in.
"I'm not at all advocating that the govt should be some profit maximizing entity, just trying to get my head around whether this line of thinking is a valid argument that progressive taxation is somehow less unfair than it superficially seems."
I'd say that depends on the government service in question. Very roughly speaking, progrssive taxation makes sense for those government services where the demand curve for the service becomes less elastic when income rises. Regressive taxation makes sense for government services where the demand curve becomes more elastic when income rises. All of this assumes that you can't have two-part tariffs for some reason.
Posted by: Keith at Feb 28, 2007 4:11:27 PM
"But wireless companies are closer to head taxes than Ramsey pricing/price discrimination."
Actually, the buckets are interesting and I may have been wrong...there could be Ramsey type reasons for buckets-of-minutes pricing if wireless companies are monopolists, and the different times of day are being priced differently based on elasticities of demand rather than congestion.
Posted by: Keith at Feb 28, 2007 4:33:10 PM
Only tax real estate. You can't hide it and the tax will rise with people's desire to possess it. It's very progressive (CA tax >> Mississippi tax) and simple -- far simpler than ANY consumption, excise or income tax. I've blogged on this Here
Posted by: David Zetland at Mar 1, 2007 11:44:15 AM
