Taxonomy of the Tax on Me

Looks like the Treasury Department is toying with the idea of implementing a consumption tax to replace the income tax. Ideally, that's a great idea. The current system, which effectively double taxes interest income (you get taxed once on the principal and then again on the interest itself), discourages savings and investment relative to consumption. I have heard some libertarians oppose switching to a consumption tax on grounds that it biases people against consumption in contravention to their true time preferences. But this argument is analytically incorrect, for the reason indicated parenthetically above. Paradoxical as it may sound, the consumption tax is neutral to the savings-consumption trade-off, whereas the income tax is biased.

However, I'm less than sanguine about the administration's planned approach. Instead of a straight-up sales tax, or a 100% income-tax deduction for savings and investment, they are leaning toward a value-added tax (VAT). The problem with a VAT is that it's not the least bit transparent. When consumers go to the store and buy goods, they will observe only the tax on the last bit of value added to their goods by the retailer; they will not see the accumulated effect of the tax on all the intermediate stages of the good. That's a bad idea. Taxpayers should regularly be made aware of exactly how many pounds of flesh they must hand over to the government, if only to know how pissed off they should be.

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False Advertising

Sunday evening I saw a political advertisement in favor of Prop 47. It starts with the talking head of Larry McCarthy, president of the California Taxpayers' Association (Cal-Tax), saying, "Prop 47 makes schools a priority, and it does so without raising taxes, and it does so through accountability. … Prop 47 is one of these rare opportunities where taxpayers and schools and kids and parents all can win." It ends with the following screen:
YES ON 47
BETTER SCHOOLS
SMALLER CLASS SIZES
(without new taxes)

What, pray tell, is this amazing plan that will improve the public schools without raising taxes? School vouchers, maybe? Charter schools? Nope -- Prop 47 would approve a new $13 billion bond issue by the state of California, with the money reserved for public schools construction and renovation projects. To claim this plan wouldn't raise taxes is disingenuous at best. If the state of California borrows money now, it has to pay it back later. Where will that money come from? Taxpayers, of course. At some point in the future, legislators will have to either (a) raise taxes, or (b) reduce spending on other programs to free up the necessary tax revenue. Just like any other new spending proposal.

McCarthy defends his claim like so: "In contrast to public finance insanity at the state and local level in California, Proposition 47 guarantees planning, cost containment, accountability and solid management in the spending of tax dollars for schools." But this is true only for the *new* funds raised by the Proposition. So far as I can tell, the Proposition does nothing to improve the efficiency with which existing funds (for education or anything else) are used. So even if the new funds are used with sparkling efficiency, public spending will still rise by the amount of the bond issue.

McCarthy continues: "It is our opinion that the only way this bond is a tax increase is to assume that, within the $120 billion a year in state and local taxes already paid, there is no opportunity to set different priorities. It is to say there is no chance to eliminate fraud and outrageous waste of tax dollars." Waste and fraud are, of course, rampant in the state government. But Prop 47 does not one blessed thing to remedy that situation! Providing the state with more funds to allocate creates no incentive to use existing funds more efficiently. Essentially, McCarthy's claim is that Prop 47 won't require new taxes *if* the state suddenly cleans up its act by eliminating waste and fraud from the budget. But if the state did that, then a new bond issue would be unnecessary, as the construction and renovation funds could come out of the savings.

Shame on McCarthy and Cal-Tax for false advertising. Perhaps they think Prop 47 is really a good idea, because the educational gains are worth the expense. If so, they should say so explicitly, instead of deliberately misleading voters into thinking they can have a free lunch.

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Stand Down

Back in 1992 or so, when I was still an undergrad, I attended an abortion rally in Washington, D.C. Apparently abortion rights were being threatened in some way at the time, though I really don't recall how anymore. I was (and still am) a supporter of abortion rights, so I went, and never have I felt more out of place in my life. The organizers of the rally turned out to be hard-core leftists with whom I shared almost nothing except our position on abortion. Indeed, I think a substantial number of the organizers were even communists (no exaggeration). During their speeches, they spent more time talking about the need for federally funded childcare, expanded welfare benefits, affirmative action for women and minorities, and a laundry list of other left-wing causes than they spent talking about abortion. I haven't attended a rally of any kind since.

That was a very long-winded way of pointing out that the most vocal advocates of an important cause can sometimes drive away potential supporters by sending the false impression that only certain types of people (specifically, radical left-wingers) support the cause. Such is the case with opposition to the invasion of Iraq. The most prominent anti-war activists often turn out to be communists, anti-globalization zealots, and so on, and this creates the false impression that opposing invasion of Iraq is a fringe position. But in truth, opponents of making war on Iraq come from across the political spectrum and from multiple ideologies. Bringing them together is the raison d'etre for Stand Down, a coalition blog whose purpose is to unite reasonable opponents of war from a panoply of political viewpoints. Take a look - it should be worth your while.

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IP Freely

Julian takes issue with libertarians (and others) who place intellectual property rights on the same plane as other forms of property. He contends that copyrights and patents "are not genuine property," and he worries that "we diminish the concept of property when we attempt to extend it beyond its rightful sphere."

Now, I'm with Julian and Larry Lessig in thinking that IP rights shouldn't be extended indefinitely and retroactively. But I don't take that position because IP rights are not really property at all. On the contrary, the only reason I support IP at all is that it's quite similar to regular property in the most relevant respects. I would not claim that IP rights are identical to the run-of-the-mill property rights, as there are significant differences -- but then again, there are significant differences even within traditional property rights. Property rights in land are different from property rights in water. Property rights in movable items are different from property rights in real estate. Fee simple ownership is different from ownership of the mineral estate. Self-ownership is different from world-ownership. Different rules apply for the definition and enforcement of all these different sorts of property.

Julian must have in mind some definition of property that includes all of these types of right, but excludes IP. I'm curious to know what that definition is. Property is not, after all, a Platonic form. Property is a catch-all term that refers to a variety of rules and institutions that serve the function of aligning economic incentives. And in this sense, IP and traditional property rights have much in common. Why, for instance, is it generally desirable for land to be owned privately? One huge reason is that without rights of exclusion, most any productive use of land would create positive externalities. If I cultivated apple trees, passersby could grab as many as they wanted, thus reducing the return to my investment of time, effort, fertilizer, etc. The "passerby tax" would induce me to plant fewer apple trees and spend less effort tending them. Similarly, the absence of copyrights would reduce my incentive to create new and interesting creative works. When the benefits of my effort (of whatever variety) are reduced by the free consumption of others, I lack an efficient incentive to expend that effort in the first place. Property is a means of internalizing the positive externalities.

Julian asserts that "the core of property -- which is in the first instance property in labor -- is the right to enjoy the direct benefits of that labor. It is emphatically not the right to prevent anyone else from enjoying the positive externalities of that labor, or indeed, to socialize the costs of internalizing those benefits." But why should we identify this one aspect of property, enjoyment of "direct" benefits, as its "core"? I'm not even sure what a "direct" benefit of labor is. Arguably, it might be the pure joy of using your hands (or brain) to create something, in which case we have an argument against virtually any form of property except self-ownership. All benefits of labor are in some sense indirect, so the question is how far we wish to extend ownership over the benefits.

Moreover, ownership of direct benefits of one's labor is an incredibly weak justification for property rights, which (if treated as a necessary condition for existence of property) would invalidate ownership of any asset that wasn't homesteaded through the "mixing of labor." This position would rule out the possibility of owning undeveloped assets such as forests. Say goodbye to the Nature Conservancy and other organizations that try to protect environmental amenities through private ownership.

J. then argues that another person's use of an idea I've created does not constitute "interference" with my well-being, because "I am made no worse off if some third party hears a song I've written, and plays it for her own enjoyment." Again, a very similar point could be made with respect to many traditional property interests. For example, if I drain a swamp on a piece of land, thus turning it into a great picnicking spot, I am not harmed by the picnickers' activities, at least if there are few enough of them. But denying my rights to the former swamp would substantially reduce incentives for people like me to drain swamps -- or make other land improvements -- in the first place.

I'll skip the discussion of the constitutional basis of IP, because it's obviously true that the origin of IP is not the same as the origin of other property rights, and move on to the question of whether IP is different because it creates a (temporary) monopoly. This, again, is not fundamentally different from other kinds of property. If I homestead a piece of land and put a fence around it, I claim a monopoly on that land. This monopoly may allow me to reap economic profit, particularly if the land is unique in some way. Yes, it's possible for other people with other pieces of land to compete some of my profits away, but that's also true for IP: other creative works can reduce the profitability of one's copyright. The question is how unique the asset is, and that question applies equally to both IP and traditional property.

Admittedly, IP does differ from traditional property in important ways. From an economic standpoint, the most salient difference is that ideas are non-rivalrous: their use by one person does not diminish the use by others. This is the "interference" point mentioned earlier, and it is the main reason that IP rights must be limited in duration. But as significant as that difference may be, I see no reason why it should be chosen as the essential distinction between "property" and "not property." There are, after all, some instances of traditional property that exhibit non-rivalry as well, such as bridges and roads in areas with relatively low population, or movie theaters on weekday afternoons. Should these be denied property status as well? I suggest we should instead recognize that property rights serve a variety of incentive-related purposes, only one of which is the rationing of resources subject to rivalrous consumption.

[As an aside, I should not be misinterpreted as agreeing with the arguments in Sonia Arrison's article that motivated Julian's reply. I think her bottom line is correct, but her reasons are less than sufficient.]

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