Monday 26 September 2011

Scott Adams on Taxing the Rich






Dilbert cartoonist Scott Adams says in "How to Tax the Rich: Try giving them perks and privileges (an extra vote?) in return," (Wall Street Journal, January 29, 2011):

When you are poor, you are willing to trade your time to earn money. When you are rich, you trade your money to get more time. For example, the rich hire people to clean their homes, and they don't waste time shopping for bargains. In business school I learned that when people have different preferences, you can usually find a way to engineer a deal.

Suppose we change the tax code so that in return for higher taxes on the rich, we figure out a way to give the rich some form of extra time. The bad version is that anyone who pays taxes at a rate above some set amount gets to use the car pool lane without a passenger. Or perhaps the rich are allowed to park in handicapped-only spaces.

Another suggestion is this:

Suppose the tax code is redesigned so that the rich only pay taxes to fund social services, such as health care and social security. This gives the rich an incentive to find ways to reduce the need for those services, which would in turn keep their taxes under control. Perhaps you'd see an explosion of private investment in technologies that make it less expensive to provide health care. You might see rapid advances in bringing down the cost of housing for seniors.

Would both of these be more value-maximizing than simply an increase in the tax rate?

20 comments:

  1. I think in a fantasy world these incentives would work. You would still have those in the higher tax bracket complaining although their money would go to a cause, help the poor, or gain them the time that they want.

    I think that these ideas are definitely value-maximizing for our economy. Not only is it monetarily value-maximizing but also it maximizes (or betters) happiness in the "poor" who won't have to pay as much and will have more of an availibility for social security and medicare and it betters the "rich" who will have more free time or better perks.

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  2. To answer the question at the end, I do believe that in a pure economic sense, these ideas are more value-maximizing. However, as Rachel points out, these solutions would never actually be passed.

    As with every successful industrialized nation, wealth is transferred away from the richest to the poor via taxes. The extent to which this occurs, however, varies from country to country. On one hand you must choose policies that maximize surplus, but this must be balanced with the political and moral backlashes that such "value-maximizing" policies would elicit. This cartoon is clearly a joke with the specific examples it gives, but I can't imagine that any special rights conferred upon high tax payers, i.e. the rich, would ever pass legislation.

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  3. I agree with the comments above. In an ideal world, these ideas would be a sufficient idea, but in today's times, they could never pass. It is a value-maximizing concept because it betters the life for the poor and it keeps the rich happy at the same time. However, it is doubtful that this will ever occur.

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  4. I feel that "Time" and "Incentives", though unrealistic, are the most value-maximizing of the 5 compensation propositions Adams makes in the commentary. “Gratitude” and “Shared Pain” would likely be even less effective. “Power” might be very effective, which is quite an unsettling thought. To answer the question though, I, too, feel that pursuing these methods would be more value-maximizing than simply implementing the tax, unless the amount of time, effort and resources exhausted to shape public perception of this plan exceeds the value of the tax revenue.

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  5. These are both interesting ideas, but it would seem that there is more to the tax system than a "simple solution." Hypothetically, I could see how each of these proposals could in fact have the end-effects described.

    The incentive based tax system could work in the way that if the public could see the incentive in action (like parking in handicapped spots when not handicapped), it would be a status symbol that the wealthy would at large most likely be happy to pay for.

    The incentive based on a certain industry is also plausible to lead to the end-effect described. The issue I see with this is that people may question why do we have to pay for this and they don't? I agree that it would lead to investment and innovation, but don't see it being able to be implemented.

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  6. It would be appealing to implement a tax system that maximized value for all segments of society. But we know with any tax system there will be a dead weight loss and overall there is some loss of value. The ideas portrayed above may seem like a simple solution but are much harder to put into practice.

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  7. These suggestions sound really good but I don't think that it can become a reality in this country. I think that it does maximize value for the society but I don't know if rich people really want this system. Not all rich people want to trade their money to get more time. There are rich people who save money more than other people and work devotedly to have more money or for their own interests so I think that this system is depended on rich people whether they want to pass this law or not.

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  8. As mentioned in the comments above, I believe that these ideas would theoretically be good motivators for the wealthy, but would not work in practice. Each person has different incentives for their actions, and choosing an alternative form of time re-payment to the wealthy might not please everyone. The handicapped parking spaces for example might not work for a group of wealthy individuals that live in a city and use public transportation. Introducing blanket perks will not please everyone and could actually cause more problems than they solve.

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  9. Looking at the second hypothetical of having rich people pay in only for social services it doesn't seem this policy would be more value maximizing than a simple tax increase. You cannot discriminate between tax dollars. A tax dollar from the poorest individual should be treated the same as a tax dollar from the richest. If the rich know exactly how their tax dollars are spent they will then have very different incentives come election time and such a policy would severely weaken our democracy. You may very well see an explosion of investment in healthcare and social services, etc. but you would also see an explosion of lobbying funds going towards the privatization of all these services so that the rich taxpayers would essentially be paying themselves. Creating even greater divisions between rich and poor is no way to maximize value.

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  10. This is a good article for emphasizing the difference between coming up with a value-maximizing idea and actually getting it passed. I admire the originality of Adams's ideas, though. He actually did it using a method: figuring out what rich people valued more highly than poor people, which raises the possibility of gains from trade.

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  11. This is really original. By appealing to different preferences of people, we can arrive at a sort of Pareto Improvement,which can make both the well off and the poor better off, at least no one worse off, theoretically. Adequate theory as it may seem, this just won't work because these privileges for the rich literally go against the principle of equality, and as Sumner mentioned, can result in trickier and more complicated problems. Besides, which particular policy to implement is another problem.

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  12. [From Josh Vollmer]
    I have to respectfully disagree with the majority of people who have posted on this blog so far. I'm not going to go as far to say I think the rich should get parking preferences over people with disabilities. However, people respond to incentives and I think an incentive based tax system would help some high net worth individuals accept an increase in their taxes. As we have discussed in class, I think this would be difficult to pass through Congress based on our system of checks and balances; yet I think this would be a unique and beneficial solution to the current budget deficit.

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  13. Both of these options are valid suggestions in theory. My first thought when reading the second option was whether or not the factor of time would come into play. You can tax the rich now to help cover national health care, and they can invest in private business to try to bring down costs. However, when would the rich realize lower costs? They might pay higher taxes for 3 or 4 years before lower costs are seen and realized.

    As others in the blog have said, this would be tough to actually pass, and even tougher to implement. It's a great idea to try to give people who are taxed higher some incentives to go along with the tax, but these plans are tougher to implement.

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  14. In terms of value maximization and market efficiency, it would be an intelligent solution. However, I doubt that this kind of policy will harm the social equity. The rich can enjoy the best part of the public good by paying more. It makes sense in economic theory but may cause unsatisfaction among the poor, which can grow into a really big threat to the social harmony. I suggest that we can ask for additional moral accomplishment to enjoy those privileges. For example, the company he owns must have good reputation in CSR. Anyway, I can't deny that Adam's idea is fresh and effective.

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  15. I don't think this could work at all, especially in the political climate we are in right now. There would be politicians saying this is wrong because rich people get more perks because of their wealth to begin with. There might be a fiscally conservative base on board with this, but in the end, it would only cause more political distance between the parties.

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  16. Even though these ideas are crazy, they are value maximizing for the economy. You give the rich a little soemthing extra for paying more taxes, but you also give the poor/middle class something they need with the extra tax money. One of the things rich people value the most is time, so by paying more money they would be gaining more time with these incentives mentioned in the article.

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  17. Well i'd like to point out that enforcing carpool lanes from a policing prospective is already a nightmare, so factoring in something like income would make it almost impossible to control who drives in those designated lanes.

    But in all seriousness, I believe the idea itself is flawed, and paradoxical because if the wealthy are trying to 'buy time' then why would they spend time investing in healthcare, social services, and social security to lower their taxes? I think the opportunity costs would be too high unless the reduction in taxes was very large.

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  18. Taxing only the rich to pay for social services is a clever idea, as it would provide incentives to reduce the amount of poverty in the country. However, there are some potential problems, as this could cause class warfare. Additionally, it may result in the rich becoming more politically involved by funding campaigns to change the tax code back instead of actually doing something to change the amount of people who need welfare.

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  19. The shortcoming of this argument is that 50% of individuals in the United States pay $0 in federal income tax already. Further, the top 1% of income earners pay 37% of total federal income taxes.

    In order for this argument to have any credibility, the current US tax code would have to be a much more equally distributed (through a mechanism such as a flat tax). The top earners do not have any more to give because they already pay all the taxes to the federal government! And the lowest tax payers cannot "give up" any more taxes to gain these services (such as health-care and social security) because they do not pay any taxes at all!

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  20. Another option would be to auction off car-pool lanes to the highest bidder. That has the advantage that car-pool permits (bumper stickers, or electronic, maybe, to solve Dario's problem?) would end with anyone who was willing to pay a lot, rather than just the rich. The revenue could then be used to reduce taxes for everyone.

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