Sunday, 7 August 2016

An Invisible Inequality

     Yesterday I wrote and posted an essay about why the economics of bulk discounts provides some justification for progressive income tax rates, and a friend asked about how this seems to be the very opposite of the traditional justification cited, namely that it's less of a burden for a rich person to pay a 10% tax than it is for a poor person to pay 10%. The traditional argument is that a dollar is worth less to a rich person than to a poor person, and so we should prefer our government to take more of its tax dollars out of the pockets of rich people than the poor. So how can my argument, which is that marginal dollars are worth more to the rich, be consistent with this?
     It is confusing, to be sure, so confusing that I felt it necessary to write a whole new blog post to answer it, instead of simply replying to the original comment.

     The source of the confusion, though, is this: Although we naturally treat money and wealth as essentially interchangeable (because, hey, that's what money is for: to exchange for wealth), they are fundamentally different things. Money is ultimately a fiction, or to put it less subversively, a convention. It stands for value, but isn't itself intrinsically valuable; when you get a dollar in exchange for something, what you're really accepting is a promise to be able to exchange that dollar for something else of value later on. And that something of value, whatever it is, is what actual wealth is all about. To put it another way, money is potential wealth, not actual wealth.

     Now, let's look at the traditional argument for progressive income tax my friend was talking about. You can see that it is really about wealth, because it works just as well if we substitute, say, bread for money. For someone with a loaf of bread to give up half a loaf is much more of a burden than for someone with ten loaves to give up five loaves, because of the condition they're in afterwards. The first person will be pretty hungry with only half a loaf to eat, while the guy with five loaves will suffer only for a lack of variety.
     The argument still works pretty well if we talk about dollars instead of bread, because on an every day scale, we tend to think of prices as constant: 1 dollar buys one loaf, 5 dollars buys five loaves. And so on a practical level, this has been a pretty good argument for why progressive income tax is fairer than a flat tax. The error of equating money with wealth here does not create any immediate confusion, and so it goes unnoticed. But it is still an error, and it leads us into trouble when we move too far beyond the everyday scale, to consider the workings of the economy as a whole, which is what we have to do when we talk about tax policy.

     Remember what I said about money being a fiction? That becomes clearer when you look at the bigger picture. Money is a placeholder for credit/debt, a hydraulic fluid for trade. You trade your labour for food, clothing, shelter, entertainment, etc., but money lets you do it indirectly. So what's really happening in an economy is people making stuff (wealth) and trading it with each other. The wonderful thing about the free market is that, by allowing people to make their own decisions about what to buy and sell based on the prices that emerge from voluntary negotiations, we can collectively come up with extremely efficient allocations of resources, much more efficient than we could produce with some super-smart person deciding and directing everyone's efforts. If there isn't enough of some good being produced, the price will rise, and more people will start producing it. If there's too much, the price will drop.
     In theory,  you don't need money for a free market. In a barter economy, people would still be able to see that there's lots of demand for this and very little demand for that, and so people who chose to make something valuable would accumulate more wealth than those who didn't. Money just speeds up the process and makes it much easier to see where the demand lies. But it does something else, too: it introduces some dangerous distortions to the process.

     Thought experiment time. Imagine you have two identical workers, equally skilled and equally productive, and both commanding the same hourly rate for their work. The only difference is that one has worked very little this year, and the other has already earned a hundred thousand dollars. You need to hire one for an hour's work, and since you'll pay the same rate and get the same result whichever one you choose, you should be indifferent as to whom you hire. And that's sensible. Except remember my previous post on the economy of scale and bulk discounts. If you happen to hire the guy who's already earned a lot of money, you won't be paying any more, but he'll be getting a lot more buying power out of the dollars you give him. So, from a society-wide view, all of us collectively will be allocating more chocolate bars, more piano lessons, more whatever, to the already-rich guy than we would be if you gave the same money for the same work to the other guy.  In other words, they may be getting the same amount of money, but the richer worker will receive more wealth.
     Think about that for a moment. I mean, there's only so much wealth to go around at any given time, and as a society, we do want to make sure it's used efficiently. That's why we have a free market system, because it generally encourages people to invest resources in things that create more wealth rather than less. But here, in the thought experiment, the two workers are exactly equal in the amount of wealth they produce for the money they are paid, and yet they receive unequal distributions of wealth when they go to spend that money. That's inefficient, and it's an inefficiency that results entirely from our mistakenly equating money with wealth.

     Now, you as an employer cannot be expected to distinguish between the two workers here, and it's not your responsibility to decide what's best for society; you just need someone to do the work, and you'll pay whatever you are willing to pay whoever is willing to accept that price. You're in no position to figure out what real wealth that pay will buy for each of your prospective job applicants. And yet society does have a legitimate concern here; we want an efficient allocation of resources.
     A properly calibrated progressive income tax, however, can fix this. If we impose a tax that keeps the buying power of each earned dollar constant, then the dollars earned by rich and poor alike will be a more accurate reflection of the wealth that the market should allocate them for whatever it is they contribute.

     In other words, I'm proposing that free market capitalism can be made more efficient at producing wealth if we use taxes to correct for the distortions that money introduces into the system.

Saturday, 6 August 2016

Bulk Discounts and Progressive Income Tax

     I've written before in defence of the idea of progressive income tax, and I'll probably be writing more on it in the future. Today I want to advance an argument based on the buying power of money, and how it changes in a non-linear way with the total amount of money you have. In particular, I'm going to make the counterintuitive claim that the millionth dollar you earn is, in a very real way, worth more than the first dollar you earn.
     I realize that sounds crazy. After all, one of the fundamental features of money is that its units are complete fungible: one dollar is exactly equal to every other dollar. If I borrow a twenty from you today, and pay you back with two tens tomorrow, it simply makes no sense to say I didn't pay you back the same dollars; dollars have no independent identity. (Note that I'm talking about the twenty as money, not as a distinct artifact. You can distinguish one twenty dollar bill from another, but you cannot distinguish the dollars they represent.) But bear with me here.
     And I also realize that my claim will sound odd because it seems to be the exact opposite of another argument frequently used to justify progressive income tax, the idea that to a poor person, a 10% tax might be an unbearable burden while it would be scarcely noticeable to a millionaire. A single dollar is more valuable to a person with little money than it is to a millionaire, not less. So what gives?

     Neither of these two points is actually inconsistent with the argument I'll be making here. Yes, one dollar is exactly interchangeable with every other dollar. And yes, one dollar is a much more significant sum to someone with few dollar than it is to someone with many. But my claim is that the buying power per dollar increases the more dollars you have.

     Consider the idea of the volume discount. Say you can buy a chocolate bar for a dollar at the convenience store. If you're just buying one at a time, the price is the same for the rich person as it is for the poor person, and yes, $1 = $1. But if you go to a supermarket, you can probably buy a family-pak of 8 for $6, and if you go to a wholesale club, you can get two dozen for $12. When you buy in bulk, your per-unit price drops, and reciprocally, the number of chocolate bars per dollar spent goes up.
     This doesn't only hold for chocolate bars. It applies to almost all commodities, and even most services, thanks to economies of scale. And even for unique items like rare antiques or works of art or real estate, it is usually cheaper to obtain them if you have a lot of money than if you have just barely enough, because of financing costs; service charges are often waived on bank accounts if you keep above a certain minimum balance.
     Note that whatever the good or service in question, the price of a volume discounted item is always measured in dollars. Carrots become individually less valuable in dollars, the more of them you have, and so do chickens and cell phones and gallons of gasoline. They may do so at different rates, so if you're trading chickens for trucks, you might have to offer more chickens for the second truck than you did for the first. But dollars, as purely a unit of exchange with no intrinsic value, aren't subject to economies of scale and volume discounts, because they're what those volume discounted are measured in.


     So what does this mean for progressive income tax? What I want to suggest here is that in principle, it should be possible to come up with a good estimate of just how much more each marginal dollar of income can buy, and then to set a progressive income tax rate such that the after tax buying power of every dollar earned is equal.

     For example (and I’m just making these numbers up for illustration purposes), suppose one chocolate bar costs $1, 10 chocolate bars cost $9, 100 chocolate bars cost $75, and 1000 chocolate bars cost $500. That means that the average price for a chocolate bar is $1 if you buy one, 90 cents if you buy 10, 75 cents if you buy 100, and 50 cents if you buy a thousand. So, we would set the progressive tax brackets at 10% for income over $8, 25% for income over $74, and 50% for income above $499. Each additional dollar you earn, on this model, is approximately equivalent to one more chocolate bar you can buy.

     Now, in the real world, there are hundreds and hundreds of different things you might need to buy with your income, and the volume discounts for each come in at wildly different rates, so accurately measuring how much your overall buying power increases with income would be fiendishly difficult. I’m certainly not prepared to do the math here, but I hope I have shown that the actual, practical power of a dollar is not a constant; it depends on how many other dollars you have available to use with it, and the more dollars you have, the more powerful each of those dollars is. In practical terms, individual dollars are worth more en masse than they are alone, and I argue that this justifies taxing them at progressively higher rates as income rises. 

Saturday, 9 July 2016

Call it cowardice

     I don’t know if it’s the worst thing you can call someone, but it’s still pretty darned inflammatory to call someone a racist. It’s so bad that racist comments are typically prefaced with “I’m not racist, but…”
     Nobody wants to think of themselves as a racist, and so we come up with all sorts of denial and coping strategies, to allow ourselves to pretend that really, we don’t see race, we don’t care what colour someone is, we don’t have a prejudiced bone in our body. And all those little things we do that someone who doesn’t know us might mistake for racist behaviours are really just misunderstood.
     This isn’t completely a bad thing. I mean, overall, I think it’s probably better that everyone recognizes racism as bad in principle, than for people still to be openly adhering to and advocating explicitly racist doctrines. So in a way, it’s progress, I suppose. But it does make it extremely difficult to address one’s own prejudices, if one consistently denies that they exist.

     But you know what? I’m not even going to bother with that right now, except to assert that pretty much all of us have unconscious, maybe even hardwired, presumptions or biases that make some degree of unintentionally racist behavior almost impossible to avoid. This can be measured with cleverly designed testing protocols: see Project Implicit, the results of which show a pretty consistent bias (manifesting as increased processing time to overcome that bias in simple cognitive tasks). I have wondered if the basis of that bias might even be something as tragically simple as contrast; is it just easier for our visual cortex to process and recognize an image as a human face if the eyebrows are darker than the skin? Or are we acculturated to see black as evil and white as good?
     I don’t know, and at this point it really doesn’t matter. The fact is that for some reason, most people of all races have some tendency to see a black person as more threatening than a white person, all other factors being equal. Ideally we wouldn’t, but for some kind of neural flaw or cognitive illusion or learned preference.

     So my point is this: I’m not going to blame a police officer for feeling more afraid when dealing with a black man. Fear has a mind of its own, and doesn’t pay much attention to our rational thoughts. When you’re scared, you’re scared, even if you know you shouldn’t be. Maybe your reasons for being scared are ideologically racist, maybe they’re unavoidable parts of how our brains are wired, maybe they’re reasonable responses to your personal history and experiences. I don’t know why you might be afraid, and I don’t really care. What matters is how you deal with your fear, and you can deny being a racist all you want and we can argue forever about whether or not you’re really deep down a racist, but regardless of why you’re afraid, there is a word we give to people who surrender to fear, and that word is “coward”.
     A coward isn’t necessarily someone who runs away from danger. It’s someone who panics, who is unable or unwilling to act wisely and responsibly in spite of their fear. It’s someone who shoots first, instead of calmly evaluating the reality of the threat. As Frank Herbert memorably put it in Dune, “Fear is the mind-killer”. Fear makes you act stupidly.

     Now, I’m not a cop. Apart from a couple of minor fisticuffs in grade school, I’ve never been in a situation where I had reason to think someone was imminently trying to harm me, much less kill me (unless you count that scuffle with colon cancer). So you might well point out that I don’t know what it’s like, and true, I don’t. But what would you be trying to argue with such a point? That fear is powerful, and it’s right to surrender to it? Or just that the level of fear is so great that it cannot reasonably be withstood?
     Look, cops have a dangerous job, I’ll grant that. I mean, that’s actually kind of the whole point: we need our police officers to have exceptional courage, because we need them to remain calm and rational, even when they’re scared and thinking they might be killed in the next few seconds. We need people who will confront potentially dangerous situations and turn them into safe situations. That’s a lot to ask, I know, but if you aren’t able to stay on top of your fear, you really ought not to be in this line of work. A coward with a gun is dangerous and unpredictable, and cowards get people killed: themselves, their colleagues, innocent bystanders.
     I don’t blame the cop who shot Philando Castile the other day for being scared. There’s no arguing with fear. But I do blame him for letting that fear call the shots, because by surrendering to his fear, he not only killed one innocent person, he also contributed to the atmosphere of resentment, distrust and fear in which a sniper in Dallas shot eleven cops, killing five of them. I’m not blaming him for those shootings, for which only the shooter was responsible, but dammit, a cop’s job is to make society safer for everyone, not just for himself in the immediate circumstance regardless of what it means for everyone else.

     There’s another problem with cowardice, a more systemic one, and that is that cowards (being governed by fear) naturally assume that’s what drives everyone else. And so they tend to approach conflicts as contests of fear: they think whoever’s the most scared loses, so they try to pretend that they’re not afraid at all, while they strive to be as terrifying as possible to their enemies. I mean, it’s a natural strategy with a long evolutionary history; even insects do it. But it’s inherently unstable, and degenerates into destructive arms races; every escalation must be met by a greater escalation. And every challenge, every failure to defer to the authority of might-makes-right must be made an example, for fear of showing any sign of “weakness”. And the only place that can end is with everyone being terrified all the time. But that’s fine, I suppose, so long as everyone else is more afraid?

     That’s not what we want from law enforcement. We’re supposed to be less afraid when we have effective police services. Something has gone terribly wrong when they think they must scare people to do their jobs or to stay alive.
     Don’t get me wrong. I think personal and institutional racism in law enforcement is a huge problem. But we can argue until the cows (or chickens) come home about that, because “I’m not racist” is so resilient a belief, and we’ll probably never convince the people who need to be convinced. And in any event, it may turn out to be impossible to fully eradicate the irrational tendency to be more afraid of a black face than a white one. 
     So in the meantime, maybe we should also pay attention to the sheer cowardice driving so many of these shootings, to recognize that part of a police officer’s job is to face dangers so the rest of us can be safer. It’s okay and natural to be afraid, even irrationally (including racistly) afraid. But if you’re so afraid that you cannot do your job without putting other people’s live at greater risk, then what good are you doing anyone?


Friday, 1 July 2016

One Weird Trick to Defeat Phone Scammers

     I kind of enjoy getting calls from telephone scammers. It's fun to play along with them for as long as possible, deliberately keeping them on the line so they can't call someone more vulnerable to their fraud.
     One recent scam that has been making the rounds here in Canada goes like this: you get a call from someone claiming to be with the Canadian Revenue Agency, informing you that a lawsuit has been filed against you and they need to talk to you right away. Most of the time it's a recorded message, but sometimes it's an actual human. Presumably, the idea of being sued by the taxman is terrifying enough that you go ahead and send them the money via some kind of wire transfer or gift card or something that just conveniently happens not to be traceable, because maybe CRA doesn't want to have to declare the income on its own tax return? Um, yeah, I guess that sounds legit.
     The one time I got an actual human calling me on this one, he sounded very polite and professional, and asked if I was going to be represented by a lawyer in this matter. When I said yes, he didn't miss a beat, and asked me for the contact information for that lawyer. Of course, he didn't actually want to contact my lawyer; he was in fact calling my bluff, because I probably hadn't retained counsel for a matter I'd never heard of before this call. And this was a very skillful bit of psychology, because it put me on the defensive, off-balance knowing that I'd been caught out in a lie.
     Or rather, it would have done that, if not for the fact that I am a lawyer. "Well, the problem," I said "is that I haven't actually seen the Statement of Claim yet." Click.
     He hung up on me immediately. Dang. What a disappointment! I was hoping to keep him on for at least a half an hour.

     But these guys are looking for people who don't know very much about the law, and so my mention of a Statement of Claim marked me as someone who'd probably see through their scam, which depends very heavily on making you feel like you have no power, and you must do whatever they say or else. Which is not actually how law works.

     Now, I'm not currently a practicing lawyer, and this must not be construed as legal advice, but there's a very fundamental principle that underlies pretty much all legal procedure, and if you just understand that one thing, you'll be a lot less vulnerable to scammers and schemers of various sorts. And that principle is basically pretty simple: everyone has a right to make their case. Not necessarily to win, of course, but to present their claim against someone else, or to attempt a full and complete answer to any claim made against them. And that means you need adequate notice of a claim against you; in the case of a lawsuit, you must be served with a Statement of Claim that lays out the particulars of that claim.
     See, when you get down to the very core of it, the job of the courts is to resolve disputes.  If everyone agrees about something, it gets done, it doesn't go to court. If the accused pleads guilty, the court doesn't have to hear the evidence. If the defendant agrees that she owes the plaintiff money, she pays it and the court doesn't get involved. Courts are there to decide who's right when there's actually a question to be decided, and if everyone agrees, there's no question.
     But the court wants to make a just and fair decision, based on all of the evidence and all the best arguments available. Ideally there will be lawyers on both sides, and here's the thing about trial lawyers: you hear them addressed as "Counsel", but that's not because they counsel their clients (although they do that, too). It's because their job is to counsel the Court, to ensure that the court considers every favourable argument for their clients' case. Lawyers are called "officers of the court" for this reason, and you might notice that they refer to each other in court as "my friend" and not "my opponent"; they serve the decision-maker together, even if their clients are bitterly opposed. And the lawyers, in order to provide good counsel to the Court, must have access to all the facts, and have enough time to think and research and formulate arguments.

     Which means that Courts hate surprises.

     Surprise witnesses are a staple of TV and movie courtroom dramas, but they are actually very rare, and only allowed in very particular circumstances. The general principle is that both sides to a dispute must be given adequate notice of something in order to be able to respond intelligently. And in particular, this is why we have rules about serving defendants with a Statement of Claim. If I don't know I'm being sued, I (or my lawyer) cannot prepare arguments. If I don't know the charges against me, I can't mount a defense. And if I don't even know I owe CRA money, I can't be expected to pay them, let alone argue why I don't owe them.

     So the upshot of all this is: If someone threatens you with jail or a lawsuit or seizure of assets or any other sort of legal proceeding unless you pay up right away, and they don't give you enough information or time to make a good faith reasonable effort to ascertain if their claim is valid, they're probably trying to scam you. I say probably because it's possible they have a valid claim and just don't know how to proceed with it, but in any event, the best way to defend yourself against scammers and legitimate claimants alike is with good faith insistence on basic procedural fairness. "Really? I'm being sued? This is the first I've heard of it, but if you say so, perhaps it's just been an oversight that I haven't been properly notified. Could you send me something in writing with the particulars, so I can figure out what's going on and give you a proper answer?"
     And remember that good faith is key, here. If you're using this as a stalling tactic, and you know you actually do owe money, that will eventually catch up to you in court. The point to remember is that the Law isn't about winning, but about following a fair and impartial procedure intended to insure that the person in the right wins. If someone manages to prove to you that you are in the wrong, well, pay up and move on. Fair's fair. But if you suspect someone's trying to scam you, polite insistence on procedural fairness will almost always make them hang up and try to scam someone else.

Monday, 20 June 2016

White "Genocide"? Seriously?

     For some time now, I've heard or read the occasional alarmed complaint that multiculturalism and miscegenation amounts to white genocide. "Genocide", of course, is a word that quite rightly provokes moral outrage, but let's set aside that indignation for a moment and analyze it with some technical precision: what exactly does this white genocide mean?

     First of all, let's assume that it is in fact some form of genocide, that it entails the extinction of white people as a race, that someday there will be no more white people. I don't think this is likely to happen anytime soon (unless through some catastrophic event that puts people of every colour in similar danger), but let's just say, for the sake of argument, that intermingling will, in a generation or two, mean the end of the white race. (I'm also granting, for the sake of argument, that there is such a thing as "the white race".)
     What is the fate of the victims of this genocide? Well, basically, it means we get to marry whoever we want, watch our beautiful children and grandchildren grow up happy and healthy and loving and loved, and eventually see ourselves replaced by these younger generations before we die of natural causes.

     Oh, but yeah, it's totally a genocide, because those younger generations, even though they'll be descended from us and be our own flesh and blood and we might pass down to them all of the culture and language and they might faithfully follow those traditions as well as we ever did, they won't be us because skin colour.

    Nah, you know what? I'm totally cool with this particular form of "genocide".

Wednesday, 15 June 2016

Chemtrails and Clouds and Missing the Obvious

     A while ago, I was fortunate enough to be assigned window seat on my return flight from Vancouver. I always love having a window seat, because even in this age of ubiquitous photography and access to images from space and the deep sea and everywhere else, the visceral experience of acceleration and ascent while watching the ground in its human scale recede into the distance somehow puts things into a perspective you just can't get from admiring photographs or even videos. But here's one anyway:




     On this particular flight, it was the clouds that kept my attention. We passed through two distinct layers, and as we climbed above the higher one, I was treated to a spectacular view of a vast rippling expanse of cloud tops. And my mind was filled with wonder at how so much structure could emerge from just water dissolved in air. Look at the way the ripples form as the waves of air flow over the mountains!

     Now, this morning, a friend on Facebook posted a link to a website about chemtrails, which opened with the following paragraph:
When I was a little boy, I used to wonder what those beautiful streaks in the sky were. Why would some of them dissipate immediately, and others stayed in the sky all day?

     The implication, of course, is that something suspicious is going on here. Otherwise, we should expect all vapour trails to behave the same way: they should either all dissipate immediately, or all linger a similar length of time.
     On the one hand, I want to applaud the inquisitiveness that drives such a question. And yes, obviously there should exist some sort of explanation for why some vapour trails last longer than others, and why some are so huge and billowy, and why some never appear at all. But on the other hand, I am kind of disappointed that the inquisitiveness stops there, because it completely fails to consider the equally mysterious question of the huge diversity of normal ordinary clouds themselves.

     What is a cloud, after all? Well, we all know (I hope!) that it's water in the air, a mist of tiny droplets that scatter light so you can't see very far inside one. Fog is just clouds at ground level, and when the weather is chilly, we can see our breath: it's the same stuff.
     But here's the question that always troubled me as a little boy, and which still caused me to marvel at the age of 50 from my window seat over the Rockies: Why do clouds seem to have boundaries at all? Sure, the boundaries are pretty fuzzy when you get close to them, but on a large enough scale, the patterns become stunning: that patch of air is cloud, and that patch is not cloud. And you see these amazing ripples and puffy towers and all sorts of complicated fractal shapes that just scream for an explanation: How is it that this volume of air gets all misty and cloudy, while that volume just over there remains clear?

     It's not at all a simple question, but there are a few basic factors that are simple enough to understand. There's temperature, of course; we all know that sometimes air can be hot and sometimes it can be cold. There's also humidity, which is how much water vapour is actually in it; you won't get clouds at all if there's no water vapour there to condense. There's also pressure, which is related to temperature, but is a different concept; differences in air pressure from one place to another are why we have wind. And wind has a velocity, which as a completely relative quantity might be of little relevance but for the fact that it  leads to turbulence. And then, on top of it all, there's particulate content: dust, smoke, pollen and such, which is important because it provides a surface for water vapour to condense onto; without any particulates, you can have extremely humid air and still no cloud formation. And who knows what difference various local changes in chemical composition might make, if the percentage of nitrogen here is a little higher or oxygen there a little lower.

     Now, I really have no idea how all of these factors combine, but the evidence of my eyes from watching clouds drift by is this: it's really complicated, and the atmospheric conditions that form clouds can vary greatly from place to place and time to time and altitude to altitude, locally and globally. And as a result, we can get an astonishing variety of cloud patterns. I also know, from introductory high school chemistry, that burning hydrocarbons (like jet fuel) produces carbon dioxide and water vapour, so it's to be expected that aircraft exhaust would have water vapour in it. (Also, heat and turbulence and probably particles of soot which would help promote condensation, and some engines burn cleaner or dirtier than others.)

     So when I hear chemtrail conspiracy theorists talk about how suspicious it is that one plane might leave a trail while another one doesn't, I am perplexed. If ordinary, natural weather patterns can generate such a huge variety of cloud forms, why should we expect all aircraft vapour trails to look the same? I honestly do not know the answers, because I do not understand the complex processes of cloud formation well enough to predict what conditions will produce what sort of vapour trail, but it seems to me likely that the same variation in conditions that produce varations in clouds should be capable of producing different sorts of vapour trails, without any need to postulate some diabolical and deliberate chemical-spraying conspiracy.

     What am I missing here?

Tuesday, 12 April 2016

More about the obscene lie of "trickle-down" economics

     I've written before about how trickle-down economics is mislabeled, because it mixes metaphors with inconsistent gravitational fields. The term will not die, though; just the other day I found myself in an argument with a business owner who insisted that if only his taxes were lower, he could afford to hire more people and let that wealth trickle on down.
     Inadvertently, he formulated his claim in such a way as to make the absurdity of the theory so clear to me I felt compelled to blog about it here. Think about this: What he's saying is that unemployment happens because rich people don't have enough money to hire anybody.

     Seriously, that is what the whole tax-cuts-for-the-rich, trickle-down ideology really boils down to. If only the rich could get a break on their taxes, they could afford to hire some of those unemployed people and create jobs and wealth for everyone. Our economic ills are, apparently, due to the rich not being rich enough.

     Now, if you have any sympathy for the idea of the rich being job-creators, you'll probably be suspecting at this point that I've unfairly stated the theory in the most absurd way possible, and I'm ignoring the subtle genius of Reagan's brilliant insight. After all, the fellow I was arguing with seemed pretty sure that it was his hefty tax bill that kept him from expanding, and shouldn't he know better than I the details of his own business? Doesn't it make sense that, if the state confiscates too much of the proceeds of productive enterprise, there will be nothing left to finance the further growth of that enterprise?
     Of course it sounds plausible, and all the more so because it has been so enthusiastically promoted as wise economic insight for nearly four decades now. But that plausibility begins to fall apart if you look a little closer at it.

     For example, if you've ever done your own taxes, you're probably aware that you can deduct expenses from your gross income. The basic principle is that if you need to spend money to make money, the money you had to spend is not counted as income when you recover it. Think of it this way: If you buy $100 of materials, and turn them into finished goods which I buy for $120, your income is $20, not $120. So our tax system is set up to tax you on your $20 gain, not the $120 in gross revenue.
     Now, if you run a business in which you hire people to work for you, their wages are classified as an expense for your business. This means they're not taxed (though your employees may have to pay income tax on it, minus their own deductible expenses -- the same rules apply to them). So what this means is that in fact, you can't actually blame taxes on your profits for not leaving you with enough  money to hire more workers; if you just went ahead and hired those workers from your business' pre-tax revenues, you wouldn't pay taxes on the portion of revenue used to pay their wages.

     The point here is that if a business isn't hiring new people, it's simply wrong to blame that on their taxes being too high. And the same is true for capital investment and other forms of expansion: our tax system is carefully designed to have all sorts of exemptions and deductions to encourage growth, which only makes sense, because the more money you make, the more taxes there are to collect. The taxman's interests are actually aligned with yours here. Sure, tax policies can be made smarter, but that's not a synonym for "lower".

     The other thing that's disastrously wrong about trickle-down theory is that it applies an extremely simplistic model of investment. To be fair, it's the model that most of us learn through school and which is reinforced in ordinary household economics and even in games like Minecraft: You need to save up a surplus pool of resources to build stuff. If you haven't punched enough trees or gathered enough vespene gas or saved up enough coins in your piggy bank, you can't start your project.
     This makes good intuitive sense, and it is a prudent way to manage your affairs. But it is almost shockingly naive to assume that entrepreneurs and job-creators are limited to this approach, and all the more so when you consider that the richest of the rich made their fortunes either in or at least in large part with the assistance of the finance industry.
     You see, entrepreneurs do not start out rich, and then decide they finally have enough money to trickle it down to everyone else. They start out by seeing an opportunity to get rich, a way to provide something that people will pay them for. Of course, as mentioned above, it often takes money to make money, so they have to come up with the capital to get started, to build a factory and to buy materials and hire and train staff, and in so doing they create jobs and growth. But here's the thing: they don't need to have all the resources to do that themselves up front.  They can get a business loan from a bank. They can incorporate a corporation and sell shares. This is why we even have a finance industry: to raise the capital to finance the exploitation of profitable opportunities!

     (It's true today, of course, that a large amount of entrepreneurial activity is dependent on billionaire investors, but that's largely because we have concentrated so much wealth in the hands of billionaires; the institutions of finance and banking would work just as well with millions of small investors as they do with a few huge ones. Indeed, billionaire investors are the old-fashioned, pre-finance way of doing things. Back in the day, you had to go to the king or some other extremely wealthy noble to get your bright idea funded, and there was little incentive to do so since His Majesty would own it all. Also, he only had so much time to divide among all the clever people pitching ideas, and would probably rather be hunting anyway. This is why the emergence of financial markets, publicly traded companies, credit and other innovations in the Renaissance led to such unprecedented economic growth as we've seen in the last few centuries. It's also, I submit, why that growth is slowing down as we concentrate the money again in the hands of a few billionaires.)

    So this is why I say that trickle down theory is so preposterously backwards. Despite its superficially plausible rhetoric, it really does boil down to the claim that our economic malaise is due to rich people not being rich enough, and that if only they had all the money, we would all be much better off. And that is an obscene lie.