Thursday, November 6, 2014

Cheating on taxes might not be that bad after all.

Do you hate taxes? The classical tax argument was skewed towards government provision of pure public and nonexclusive goods. We’d rather the government supplies those goods because they are so normative in character. There are other normatives, like the sin tax, which focus on behavioral changes. If tax evasions were allowed, would it be to our best interests? Is it ever justified to cheat on taxes? Policy makers might see some benefits in allowing tax evasion. Sometimes, no loophole is left unturned. Whatever the case, tax evasion has implications for societal welfare and for the burden bearers.

Taxes are like double-edged swords. Niedziella. Flickr.
There are several kinds of taxes. Sales taxes, value added taxes, income taxes, corporate taxes… When evasion opportunities exist, the burden of taxes is lesser. Wrong, you might say?

Well, in a discussion paper, tax incidence in the presence of tax evasion, Phillip Doerrenberg and Denvil Duncan carried out some economic experiment with respect to sales taxes using double auction markets. They concluded that access to tax evasion opportunities reduces the effectiveness of taxes which aim was to change some behavior of the market participants. But on the other hand, tax evasion opportunities and the use of those opportunities might not do the society any harm if those taxes were not critical to…national income; only money changing hands from government’s into some citizens’ coffers.

The target of the experiment were sales taxes. It was discovered that evading sales taxes has three effects:
  • It lowers the prices of goods and services in the market.

  • The prices of goods for sellers who were evading taxes were lower than for those sellers who thought that tax evasion was not justified. The burden of taxes the dishonest salesmen shifted to buyers were lower than for the honest salesmen. This suggests that sales taxes may be more or less regressive in character.

  • Sellers who evade taxes sell more goods than those who were honest.

  • Maybe honesty doesn’t pay. Dishonest sellers sold more than their honest counterparts. But we cannot all afford to be dishonest. There are potential efficiency gains which policy makers can derive by turning a blind eye or making a room for tax evasion.

  • Those who did not evade taxes remitted more money than those who did.

  • It depends on the tax in question. Some taxes do not make any dots on the GDP map. Policy makers can turn a blind eye to them. Otherwise, they can implement evasion reducing strategies like taxing goods with higher evasion opportunities more so as to reduce their demand thereby increasing government revenues and reducing resource costs associated with bringing tax evaders to book.

Love them or hate them, taxes are a double-edged sword.
The full article is online: Tax incidence in the presence of tax evasion.

Monday, November 3, 2014

Is economics common property or valuable property?

Taking the right or left? It's a matter of choice.
Basher Eyre, Wikimedia Commons
What is economics? Is it about making so much money and living in luxury; about human welfare and distribution of material well-being; giving citizens the power to afford whatever they like, whether genuine or contrived? Economics could be any of this to you, but the central idea behind economics is scarcity - how you and I, faced with unlimited wants, use our limited resources to satisfy these wants. Choice and private property became the central tenets of modern economics. Economists have decided to deny themselves the knowledge of mental states for observable choice. To an economist, the more choices a society makes through acquiring more resources, the higher will be human welfare. But could it be otherwise? Could scarcity be relegated to the background?

  • Scenario 1:

  • Is there an alternative to private property? Common property! History has shown us that for common property to be a viable proposition, then we’d be faced with the question of how to distribute fairly and equitably the proceeds from common land. Nations that have gone through that avenue were poorer for it. But wealth accumulation was not the framework of economics.

  • Scenario 2:

  • Would economics allow itself as a science to study the mental influences behind our preferences, the unlimited needs and wants that we all possess? Then, the inefficiencies of overproduction and increased production would be the central framework of economics.

  • Scenario 3:

  • Human welfare, happiness or satisfaction, are not directly observable or measurable, yet human welfare is equated with solving the scarcity problem. Could it be done otherwise? Through equating human welfare with longevity and not preferences? Could it be possible to equate human welfare with the level of support network in disaster situations?

If any of the three scenarios were possible, then scarcity would cease to be the framework on which modern economics as a science is built.

According to Asad Zaman in his article: Normative foundations of scarcity, if economists were trained to deal with the question of values or ethics, then scarcity might not be central to economics. Economics cannot be value free! Exploitation is unobservable but exists! Making a lifestyle choice is an imperative issue which cannot be asserted for truth or falsity, yet it is the object of economics. Poverty can be discussed rationally and arguments for or against poverty proffered by opposing sides to a debate. These three issues are value laden and part of the purview of economists.

So, why are values meaningless and senseless to the modern day scientists? Why are economists not being given courses in ethics in the Universities? If this was possible, scientific theory would consider social norms as assumptions and then, common property, overproduction to eliminate scarcity and measures to equate human welfare, like longevity, would be substitutes for preference satisfaction.

Scarcity would cease to be the central framework of modern economics!

But all other alternatives to capitalism has failed. Yet, there are no substitutes to scarcity. I think Asad should have proposed something novel, something more innovative. Is he nolstalgic about logical positivism? After all, economic theories like scarcity still rest on normative tenets which equate welfare to preference satisfaction. Advantages of free trade, optimal taxation, consensus on basic needs, health, market failures and productive capacities are normative. Why should logical positivism be the roadmap to a value system?

You can read the full article online.

Sunday, November 2, 2014

Profits and Economic Growth for everyone! A case for Innovation

Imagine you had to pump a deflated ball. Increasing its pressure increases the volume until there are no more air spaces. You’d have to stop, won’t you? But you don’t. If you’d stopped, the ball would stop expanding and would remain so until the air slowly escapes with use – back to being deflated and another round of pumping. If you don’t stop, seeking to interfere, something would have to give and you’d end up at another crisis – a deflated ball but the second round of pumping might be more disastrous.

Well, if you thought the ball was the economy, a closed one, and the pressure, aggregate profits, you are right. An article by Gennady Bilych, department of Management, UPEC Corporation, Profit and Economic Growth, and published in 2012 painted this self-same scenario. The cyclic nature of economic fluctuations were modeled on corporate profits. He argues that during the expansion phases of the cycle, the markets are imperfectly competitive, if not monopolies, and because profits will favor the innovative, more efficient corporations invest in innovations, gathering profits which attracts other companies into the market like honeys to bees. Eventually, economic growth becomes zero at the peak of the cycle. Businesses stop making profits. The markets are now perfectly competitive. Then comes the crisis and a phase of economic contraction results. The most efficient survive because they just break-even; they earn normal profits. At the trough of the cycle, only effective innovations can resurrect another expansion.

A demonstration, possibly against huge corporate profits and exploitation. France. Paris 17 on Wikimedia Commons
Nobody likes imperfect competition. It brings up memories of exploitation, of monopolies and allocative and productive inefficiencies. In attempting to marry microeconomics to macroeconomics, Bilych argues that imperfect competitions fosters economic growth when innovation, the introduction of new technologies, new materials or more efficient management strategies, thrives. Innovation increases marginal productivity of labor, makes business produce more commodities at the same or even higher prices, and helps them generate more profits. Inflation grows but so does employment. Workers get paid more and everyone seems happy.

Eventually, increased profits and economic growth does not last for long. How long it does last depends on the quantity and complexity of available innovations. Entrepreneurship thrives, consumer confidence is high and positive but profits turn out eventually to be zero because the playing field slowly becomes more competitive and hence, firms no longer make profits. Economic growth becomes zero. The market become perfectly competitive. Before long, firms leave the market, unemployment increases and inflation falls. A business crisis ensues. Economic contraction.

These cyclical fluctuations are not recent. They have been in existence since feudalism and slavery. They have only become more troubling in the nineteenth century.

Interest follows the same route as profits. Interests grow during expansions when profits are high and businesses can afford to pay. Interests are savings saying in effect: compensate me in the future if I give you money as loans to increase production and profits. The supply chain is now perfectly vertical and straight during a contraction. Producers increase production at a loss. Interest rates fall.

The government is also in the picture. It could decide to interfere during a crisis, lowering interest rates so as to increase economic activity, increase investment and expand output. When the results are short-lived, lower interest rates are loans for inefficient companies who cannot pay back the interest, leading to catastrophes which could spread to the banking sector. So, innovation has a better way of resolving business crisis than regulation. Innovation blesses the efficient with profits and takes those profits back to labor as wages or have them plowed into investments as rent paid to… labor!

In brief, if the markets are allowed a free rein, there would be no case for exploitation, no need for leakages because producer profits eventually become consumer profits and then becomes producer profits and the circle continues ad infinitum until another crisis strikes…

Does the economy then export commodities or securities? If there was no exploitation, why does the primary question, inequality, still exist?

The next innovation, please!
The blog piece was inspired by the article, Profit and Economic Growth published by Macrothink Institute, a private organization dedicated to scientific research and publication.