Tuesday, 13 December 2011

Opportunity Costs of the Iraq War

Some of you have seen or heard my musings on this issue before. This Quora answer seems to have gotten some traction, so I reproduced it here:

What could America have bought and built for itself with the trillions of dollars spent in Iraq and Afghanistan over the last decade?
Nobel laureate economist Joseph Stiglitz places our war costs over $5T. A NY Times infographic (http://www.nytimes.com/interacti...) puts the tally at $3.3T. Leaving aside the politics of whether our money has been wasted, what could it have bought, had it been spent at home?

$3.3 trillion is a lot of $$.

For example it is equivalent to:

$60,000 for the poorest 50% of Households. (about 57,000,000 households)

End the Eurozone crisis by paying off Greece, Italy, Spain, Portugal and Ireland's national debt. (Together, their national debt's are just over $3 tril)

Endow over 100 new Harvard Universities (Harvard's endowment is $32 bil)

Guarantee Unemployment below 5% for the next 6 years, offering $40,000 a year to volunteer for charity. (13million unemployed, 9% of country)

About 150 Manhattan Projects (each costing about $24billion)

Monday, 12 December 2011

Tax Justice

I've been asked to contribute an essay on Tax Justice to the Tax Justice network's newsletter.

Here are my first thoughts on tax justice:

1. What is the point of taxes?
2. Under what conditions will takes fulfil that point?
3. Do those conditions hold?
4. How can we change things so that they do hold?

Firstly it seems to me that the point of taxes is two fold:

1. To raise revenue, for public goods provision, and social welfare projects.
2. To deter unwelcome behaviour, and reward welcome behaviour.
3. To act as a damper on the economy in boom times, and hence to act expansionarily in bad ones.

1. taxes effectively promote public goods and social welfare when it is generally progressive and fiscal expenditures are subject to proper democratic control.
2. taxes act as good behavioural influences if they tax negative externalities and effectively subsidise positive externalities.
3. They act as an 'automatic stabiliser' if they are progressive.

Which of these conditions hold?
Well, my guess is taxes are very slightly progressive, thanks to income tax. But I need to look into this. It goes without saying VAT is very regressive, and I suspect taxes on Cigarettes, Alcohol etc are so too. What does the incidence of corporation tax tell us? Surprisingly, the evidence seems to be that corporation tax is regressive (evidence to follow in the article)- really enormous companies hardly seem to pay any of it and high corporation tax rates seem to be associated with lower growth numbers. This tax is very popular though, so we need to think carefully about how we use it. Fiscal expenditures are sometimes extraordinarily well controlled, whilst at other times almost no one seems to agree with them (find me a room of 20 people where 3 or more people support the CAP, and I will show you a farmers guild). Finally, taxes hit negative externalities when the special interests that produce those externalities aren't too powerful. Conversely, they promote positive externalities when the special interest who want those positive externalities are very powerful. Sometimes this works right (the Tobacco lobby has long been losing power), more generally it doesn't (a Carbon Tax in America is long overdue). In America, kids get taught how to code from a much younger age than anyone here in the UK is (most kids don't touch code -the language of the 21st Century- until you hit undergraduate, and even then, only if your doing a science subject). Why is America so far ahead of this game? ... Silicon Valley, anyone? Finally I've already dealt with the progressive issue. Since unemployment benefits are very progressive, this means tat overall fiscal policy does act as a good automatic stabiliser. It makes sense I think to look at taxes and spending together, since obviously they are related, but we have to be careful before saying tax revenue belongs to those who paid it - on the contrary, it belongs to society at large.

When it comes to getting things to work properly, we need to make sure taxation is:

1. Progressive
2. Simple
3. Non-distortionary
4. Well Targeted.

Sometimes good taxes will be regressive (Cigarettes, or Carbon Taxes for example). That means we have to be willing to use spending to offset those effects. But generally, thanks to income tax we can have a progressive tax code. A simple tax code, is good for everyone. Right now, companies are almost forced to dodge taxes- the pressures of shareholder value maximisation and the ineluctable logic of the market means you can't let your competitors get one up on you. If they're finding clever accounting tricks to avoid taxes, you sure as hell need to too. In the end, society loses. A simple code would make dodging impossible for those really keen to do it, and less necessary for those who feel compelled to. It might even reduce some of the deadweight losses associated with collecting taxes.

How do you make taxes non distortionary? A million and one views to pick through here. One that needs to be debunked is the argument that taxing millionaires is a job killer, as these people work less and produce fewer jobs. Wrong - low taxes on high income people tends, in general, to increase rent seeking, rather than production (again, evidence to follow in article). We hear a lot about the substitution effect, but hardly anyone mentions the extremely important income effect. Since income taxes are not perfectly marginal, changes in the tax rate will have both an income and substitution effect. For the richest members of society, the substitution effect will be negative on work, but the income effect will be positive. Which effect dominates? Well, probably neither - as we see, what we get instead is reduced rent seeking at higher tax rates. Broadly speaking, we want taxes to be consistent - why should corporate income be taxed so differently to personal income for example (corporate income is taxed only as 'profit', whilst household investment in things such as education, nutrition etc is totally overlooked). Why are mortgage repayments tax deductible? On the issue of well targeted, its really a case of building powerful coalitions in favour of good taxes, and this is primarily a political, not an economic, problem. These things need to be looked at very, very carefully.

I'll be thinking about these issues over the next few days. Let me know your thoughts @ ravin.thambapillai@gmail.com,