Comments on: The Shame of Tax Loopholing http://www.overcomingbias.com/2007/04/the_shame_of_ta.html Overcoming Bias is economist Robin Hanson’s blog, on honesty, signaling, disagreement, forecasting, and the far future. Sat, 11 Feb 2012 23:23:58 +0000 hourly 1 http://wordpress.org/?v=3.1.3 By: Peter McCluskey http://www.overcomingbias.com/2007/04/the_shame_of_ta.html#comment-428724 Peter McCluskey Thu, 26 Apr 2007 17:27:00 +0000 http://prod.ob.trike.com.au/2007/04/the-shame-of-tax-loopholing.html#comment-428724 <p>Robin, you say "When you manage to pay $1000 less in taxes, I estimate this has only a small effect of government spending, say less than $100."<br> My intuition is that the effect on government spending is larger, as I suspect tax rates are limited more by voters' willingness to put up with taxes than by any limits on the desire to spend.<br> Also, the claim "most of that spending pays for services most people value" seems misleading. I think it would be more accurate to say "most voters" rather than "most people". Spending money to restrict immigration is supported by a majority of voters, but if you expand the relevant group of people to include potential immigrants then it's unlikely a majority of that larger group would support the spending. Also, the political system creates few limits on the magnitude of harm that such spending imposes on potential immigrants, whereas the benefits of "good" spending are often limited by rent-seeking. So it might be that most spending produces results that are marginally more valuable than alternative uses of the money, but the harm done by the worst 5 percent of spending exceeds the benefits of the "good" spending.</p> Robin, you say “When you manage to pay $1000 less in taxes, I estimate this has only a small effect of government spending, say less than $100.”
My intuition is that the effect on government spending is larger, as I suspect tax rates are limited more by voters’ willingness to put up with taxes than by any limits on the desire to spend.
Also, the claim “most of that spending pays for services most people value” seems misleading. I think it would be more accurate to say “most voters” rather than “most people”. Spending money to restrict immigration is supported by a majority of voters, but if you expand the relevant group of people to include potential immigrants then it’s unlikely a majority of that larger group would support the spending. Also, the political system creates few limits on the magnitude of harm that such spending imposes on potential immigrants, whereas the benefits of “good” spending are often limited by rent-seeking. So it might be that most spending produces results that are marginally more valuable than alternative uses of the money, but the harm done by the worst 5 percent of spending exceeds the benefits of the “good” spending.

]]> By: doctorpat http://www.overcomingbias.com/2007/04/the_shame_of_ta.html#comment-428723 doctorpat Wed, 25 Apr 2007 01:03:00 +0000 http://prod.ob.trike.com.au/2007/04/the-shame-of-tax-loopholing.html#comment-428723 <p>A tax loophole is a change in our behaviour or financial structures that the government has decided to reward by means of reduced tax.</p> <p>If government is good and wise, then we are doing the right thing to follow the behaviour the government is trying to encourage.</p> <p>If government is stupid or corrupt then we are doing the right thing to minimise the money they have to spend on stupidity or corruption.</p> <p>Have I missed anything?</p> A tax loophole is a change in our behaviour or financial structures that the government has decided to reward by means of reduced tax.

If government is good and wise, then we are doing the right thing to follow the behaviour the government is trying to encourage.

If government is stupid or corrupt then we are doing the right thing to minimise the money they have to spend on stupidity or corruption.

Have I missed anything?

]]> By: Wei Dai http://www.overcomingbias.com/2007/04/the_shame_of_ta.html#comment-428722 Wei Dai Tue, 24 Apr 2007 14:22:00 +0000 http://prod.ob.trike.com.au/2007/04/the-shame-of-tax-loopholing.html#comment-428722 <p>I just realized that a truly selfless person should actually be encouraged to work harder by taxes. Why? Because the harder he works, the more taxes he can pay, the less taxes others would have to pay, and (assuming at least one person is self-interested) the less discouraged they will be from working.</p> <p>So why are you reading a blog instead of working? Shame on you. :)</p> I just realized that a truly selfless person should actually be encouraged to work harder by taxes. Why? Because the harder he works, the more taxes he can pay, the less taxes others would have to pay, and (assuming at least one person is self-interested) the less discouraged they will be from working.

So why are you reading a blog instead of working? Shame on you. :)

]]> By: Wei Dai http://www.overcomingbias.com/2007/04/the_shame_of_ta.html#comment-428721 Wei Dai Tue, 24 Apr 2007 13:49:00 +0000 http://prod.ob.trike.com.au/2007/04/the-shame-of-tax-loopholing.html#comment-428721 <p>I think that for most people, shame is about reducing potential negative consequences to themselves, not improving social efficiency. A person feeling shame about stealing from a stranger helps prevent him from getting caught and punished. Even if stealing is legal, there's still the threat of private punishment, or being socially ostracized. But taking advantage of tax loopholes is legal, there is little threat of private punishment or others finding out, so it's only to be expected that people do not feel shame about it.</p> <p>This blog is about trying to make people rational, which is already somewhat utopian. Trying to make them rational *and* selfless definitely crosses the line.</p> <p>Glen asks "Are you saying that $900 collected from others will discourage more work than does $1000 collected from me?" If Robin is consistent he should say that he isn't discouraged at all from working by taxes no matter how high they are, since that would be socially inefficient, and he would feel ashamed if he did work less because of taxes.<br></p> I think that for most people, shame is about reducing potential negative consequences to themselves, not improving social efficiency. A person feeling shame about stealing from a stranger helps prevent him from getting caught and punished. Even if stealing is legal, there’s still the threat of private punishment, or being socially ostracized. But taking advantage of tax loopholes is legal, there is little threat of private punishment or others finding out, so it’s only to be expected that people do not feel shame about it.

This blog is about trying to make people rational, which is already somewhat utopian. Trying to make them rational *and* selfless definitely crosses the line.

Glen asks “Are you saying that $900 collected from others will discourage more work than does $1000 collected from me?” If Robin is consistent he should say that he isn’t discouraged at all from working by taxes no matter how high they are, since that would be socially inefficient, and he would feel ashamed if he did work less because of taxes.

]]> By: Glen Raphael http://www.overcomingbias.com/2007/04/the_shame_of_ta.html#comment-428720 Glen Raphael Tue, 24 Apr 2007 06:33:00 +0000 http://prod.ob.trike.com.au/2007/04/the-shame-of-tax-loopholing.html#comment-428720 <p>Robin: Do you believe that additional <i>marginal</i> government spending has a net positive effect? I don't. My hypothesis is that there are diseconomies of scale in government such that outside some optimal range of sizes (I don't rule out zero as one of them) the bigger government gets, the more net harm it does with each new increment of spending. I further hypothesize that we are currently well outside that range. In that light, consider your claim that:</p> <p>"When you manage to pay $1000 less in taxes, I estimate this has only a small effect of government spending, say less than $100."</p> <p>If I made government even $10 or $100 smaller, I've done a good thing. Because a government that's smaller by $100 is closer to its optimum size. It's not even necessary to believe *all* of the reduction is in stuff I dislike. Just most of it. That should be easy for anyone with libertarian tendencies but doubly easy for *you* given that you think marginal healthcare spending is wasted.</p> <p>You add: "The main effect will be to raise the tax rate so as to collect at least another $900, which will do more to discourage people from working."</p> <p>Are you saying that $900 collected from others will discourage more work than does $1000 collected from me?</p> Robin: Do you believe that additional marginal government spending has a net positive effect? I don’t. My hypothesis is that there are diseconomies of scale in government such that outside some optimal range of sizes (I don’t rule out zero as one of them) the bigger government gets, the more net harm it does with each new increment of spending. I further hypothesize that we are currently well outside that range. In that light, consider your claim that:

“When you manage to pay $1000 less in taxes, I estimate this has only a small effect of government spending, say less than $100.”

If I made government even $10 or $100 smaller, I’ve done a good thing. Because a government that’s smaller by $100 is closer to its optimum size. It’s not even necessary to believe *all* of the reduction is in stuff I dislike. Just most of it. That should be easy for anyone with libertarian tendencies but doubly easy for *you* given that you think marginal healthcare spending is wasted.

You add: “The main effect will be to raise the tax rate so as to collect at least another $900, which will do more to discourage people from working.”

Are you saying that $900 collected from others will discourage more work than does $1000 collected from me?

]]> By: Keith Elis http://www.overcomingbias.com/2007/04/the_shame_of_ta.html#comment-428719 Keith Elis Mon, 23 Apr 2007 01:44:00 +0000 http://prod.ob.trike.com.au/2007/04/the-shame-of-tax-loopholing.html#comment-428719 <p>Robin, as you know saving money on taxes, legally or illegally, takes effort. Even though you're required to pay only a minimum amount of tax it takes effort to calculate how much. Why not just pay some arbitrarily large amount of tax over and above your marginal rate and spare the effort of this time-consuming calculation (and make an increased contribution to the greater good)? </p> <p>Am I wrong in sensing the implicit assumption in your thinking that loopholing takes more effort than the act of filing a return in the first place? I can imagine at least one counterexample to this assumption. Reporting an estimate of your charitable contributions as a deduction is lying. However, this lie requires less effort than tallying up the checks written to the church or adding up the Goodwill receipts. Honest return filing takes more effort than cheating in this example. Many other legitimate deductions are not effortless to report accurately.</p> <p>That said, Robin, do you have problem with expending effort to lower your tax bill from *any* arbitrarily high percentage of your income? Say from 99% of your income to your marginal tax bracket? It seems to follow that doing so is even more unlikely to be socially beneficial, and causes others to have to pay even more later.</p> Robin, as you know saving money on taxes, legally or illegally, takes effort. Even though you’re required to pay only a minimum amount of tax it takes effort to calculate how much. Why not just pay some arbitrarily large amount of tax over and above your marginal rate and spare the effort of this time-consuming calculation (and make an increased contribution to the greater good)?

Am I wrong in sensing the implicit assumption in your thinking that loopholing takes more effort than the act of filing a return in the first place? I can imagine at least one counterexample to this assumption. Reporting an estimate of your charitable contributions as a deduction is lying. However, this lie requires less effort than tallying up the checks written to the church or adding up the Goodwill receipts. Honest return filing takes more effort than cheating in this example. Many other legitimate deductions are not effortless to report accurately.

That said, Robin, do you have problem with expending effort to lower your tax bill from *any* arbitrarily high percentage of your income? Say from 99% of your income to your marginal tax bracket? It seems to follow that doing so is even more unlikely to be socially beneficial, and causes others to have to pay even more later.

]]> By: Robin Hanson http://www.overcomingbias.com/2007/04/the_shame_of_ta.html#comment-428718 Robin Hanson Fri, 20 Apr 2007 23:57:00 +0000 http://prod.ob.trike.com.au/2007/04/the-shame-of-tax-loopholing.html#comment-428718 <p>Barkley, I am not proposing any particular tax choices, just disapproving of <i>effort</i> to change those choices. </p> <p>Hal, I do not follow you. Surely the effect of behavior on tax revenue is pretty linear here. </p> Barkley, I am not proposing any particular tax choices, just disapproving of effort to change those choices.

Hal, I do not follow you. Surely the effect of behavior on tax revenue is pretty linear here.

]]> By: Hal Finney http://www.overcomingbias.com/2007/04/the_shame_of_ta.html#comment-428717 Hal Finney Fri, 20 Apr 2007 23:32:00 +0000 http://prod.ob.trike.com.au/2007/04/the-shame-of-tax-loopholing.html#comment-428717 <p>"The main effect of your efforts to pay less taxes is that others pay more later, via tax rate increases."</p> <p>This is only part of the picture. The tax codes, with all their complexity, are expected to bring in a certain amount of revenue. It is true that if your actions manage to reduce the amount of revenue below this level, there may indeed be tax rate increases to compensate. But it's also possible that the codemakers expect you to take full advantage of your loopholes and set tax rates with that assumption in mind. In that case, avoiding possible deductions will cause tax revenues to come in higher than intended. That could have bad consequences as well, if we assume that overall tax levels properly reflect society's goals. So in a way, by taking advantage of your loopholes you are reflecting tax designers' expectations, making this strategy something of a Schelling point in the game.</p> “The main effect of your efforts to pay less taxes is that others pay more later, via tax rate increases.”

This is only part of the picture. The tax codes, with all their complexity, are expected to bring in a certain amount of revenue. It is true that if your actions manage to reduce the amount of revenue below this level, there may indeed be tax rate increases to compensate. But it’s also possible that the codemakers expect you to take full advantage of your loopholes and set tax rates with that assumption in mind. In that case, avoiding possible deductions will cause tax revenues to come in higher than intended. That could have bad consequences as well, if we assume that overall tax levels properly reflect society’s goals. So in a way, by taking advantage of your loopholes you are reflecting tax designers’ expectations, making this strategy something of a Schelling point in the game.

]]> By: Barkley Rosser http://www.overcomingbias.com/2007/04/the_shame_of_ta.html#comment-420151 Barkley Rosser Wed, 18 Apr 2007 17:19:17 +0000 http://prod.ob.trike.com.au/2007/04/the-shame-of-tax-loopholing.html#comment-420151 rcii, I am aware that even the borrowed money is not "free," and that at future generations will have to pay at least some higher taxes for higher interest payments. However, again, this was a conscious (or semi-conscious) decision of our elected officials when they decided on spending, rules for transfer payments, and the details of the tax code. As I already noted above, I happen to support a drastically simplified tax code, with this sort of problem of the eneven impact of all the complications being among several factors. For that matter, here is a problem for Robin. Suppose you are right, what tax rate should you pay? Should you not claim exemptions for your children and still pay the rate that comes out? If you are not eligible, should you voluntarily pay the AMT amount? Or, should you make a calculation of what a revenue neutral tax rate would be if there were no loopholes, in short simplification, and pay that rate? BTW, this is such a straw man you have set up, I kind of suspect that you did it for kicks just to stir up a lot of discussion about taxes, :-). rcii,

I am aware that even the borrowed money is not “free,” and that at future generations will have to pay at least some higher taxes for higher interest payments. However, again, this was a conscious (or semi-conscious) decision of our elected officials when they decided on spending, rules for transfer payments, and the details of the tax code. As I already noted above, I happen to support a drastically simplified tax code, with this sort of problem of the eneven impact of all the complications being among several factors.

For that matter, here is a problem for Robin. Suppose you are right, what tax rate should you pay? Should you not claim exemptions for your children and still pay the rate that comes out? If you are not eligible, should you voluntarily pay the AMT amount? Or, should you make a calculation of what a revenue neutral tax rate would be if there were no loopholes, in short simplification, and pay that rate?

BTW, this is such a straw man you have set up, I kind of suspect that you did it for kicks just to stir up a lot of discussion about taxes, :-) .

]]> By: mtraven http://www.overcomingbias.com/2007/04/the_shame_of_ta.html#comment-420150 mtraven Wed, 18 Apr 2007 16:55:25 +0000 http://prod.ob.trike.com.au/2007/04/the-shame-of-tax-loopholing.html#comment-420150 Robin complains about lost effort. The effects of loopholes are worse than that implies, because the nature of a complex tax code means that it takes time/expertise/money to exploit all the loopholes. People who do their own taxes won't get the advantages over somebody who hires an accountant, and people who can afford very smart accountants will get correspondingly more financial benefit. As a result there is a whole tiered industry devoted to finagling the tax code. A software industry too. I think probably everybody here would agree that a simplified tax code would be better than what we have now. Robin complains about lost effort. The effects of loopholes are worse than that implies, because the nature of a complex tax code means that it takes time/expertise/money to exploit all the loopholes. People who do their own taxes won’t get the advantages over somebody who hires an accountant, and people who can afford very smart accountants will get correspondingly more financial benefit. As a result there is a whole tiered industry devoted to finagling the tax code. A software industry too.

I think probably everybody here would agree that a simplified tax code would be better than what we have now.

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