Suppose we replaced the federal income tax with inflation.

I just filled out my taxes this year, and it seems an awful waste of time. And TurboTax (and the tax code for which it stands) is increasingly sucky.

Suppose we replaced the federal income tax with inflation. The federal government holds a monopoly on money, so this is a plausible policy choice. What would happen? We would reduce all of the costs associated with collecting and complying with tax law. No more IRS, no more April 15.

Instead of trying to maintain the value of money, we would slowly devalue money by the amount of government spending.

Imagine we have an economy with two individuals:

One earns $100,000, the other $50,000. Government taxes are 15% for all income up to $50,000 and 30% for income in the bracket between $50,000 and $100,000 and so the government takes in $7,500 from individual one and $22,500 from individual two, for a total of $30,000. Assume the remaining money is all spent.

Now let’s assume we have no taxes. The government just prints $30,000, so instead of an economy of $150,000, we now have an economy nominally valued at $180,000. Of course production is just the same (aside from some savings in tax collection). The next year to purchase the same amount of goods, everyone demands a wage increase of 20%, so incomes are $120,000 and $60,000 respectively.

(The following year, the government prints another $36,000, and wage demands are higher and so on).

Is anyone worse (or better) off in this situation, if it was understood that government spending would be no greater (or lower) than otherwise in real terms? I.e. assume everyone has rational expectations and the government is responsible.

Could this be advantageous to the United States, as there is so much foreign ownership of US dollars, to help export some of the costs of maintaining the government (and clearly it would be detrimental for whomever holds dollars at the time this is announced)? Certainly the currency would be devalued slowly as a consequence of this guaranteed inflation. The US dollar might lose some of its reserve status. Without the political check of taxes, government might be tempted to spend more as the consequences are hidden in the prices of goods and labor.

(I am aware of the risks of hyperinflation, but we handle some inflation each year now without hyperinflation, so what is the threshold beyond which confidence is lost in the system?)

There would be a one-time shift in favor of borrowers and wiping out lenders, maybe discouraging future lending. On the other-hand, the government would cease to be a future borrower. Nominal interest rates would also have to be at Inflation + Rate of Return, so would be much higher, but so would nominal returns.

Instead of arguing about the rate of taxation, we would argue about the rate of inflation. At least it would be a new argument.

Selfishness and Altruism in the Distribution of Travel Time and Income.


Recently published:

  • Tilahun, Nebiyou, and David Levinson (2013) Selfishness and Altruism in the Distribution of Travel Time and Income. [presentation] Transportation (online first) [doi]
    Abstract: Most economic models assume that individuals act out their preferences based on self-interest alone. However, there have also been other paradigms in economics that aim to capture aspects of behavior that include fairness, reciprocity, and altruism. In this study we empirically examine preferences of travel time and income distributions with and without the respondent knowing their own position in each distribution. The data comes from a Stated Preference experiment where subjects were presented paired alternative distributions of travel time and income. The alternatives require a tradeoff between distributional concerns and the respondent’s own position. Choices also do not penalize or reward any particular choice. Overall, choices show individuals are willing forgo alternatives where they would be individually well off in the interest of distributional concerns in both the travel time and income cases. Exclusively self-interested choices are seen more in the income questions, where nearly 25 % of respondents express such preferences, than in the travel time case, where only 5 % of respondents make such choices. The results also suggest that respondents prioritize their own position differently relative to regional distributions of travel time and income. Estimated choice models show that when it comes to travel time, individuals are more concerned with societal average travel time followed by the standard deviation in the region and finally their own travel time, while in the case of income they are more concerned with their own income, followed by a desire for more variability, and finally increasing the minimum income in their region. When individuals do not know their fate after a policy change that affects regional travel time, their choices appear to be mainly motivated by risk averse behavior and aim to reduce variability in outcomes. On the other hand, in the income context, the expected value appears to drive choices. In all cases, population-wide tastes are also estimated and reported.Keywords: selfishness, altruism, travel time distribution, income distribution, preferences, inequality, choice experiment.

Demand Side Solutions to Ice-Related Falls

I talked before about things we can do to reduce the iciness of sidewalks. That is a supply side solution. We need to think about demand side solutions to the problem of ice-related falls on icy sidewalks.
Bill Lindeke wants to turn it into a game, but in the end, he is still young.
There are things we can do to better accommodate the ice as well.

  • I can wear cleats of some kind or another. The problem is walking on non-ice, or worse cleared pavement, is not nearly so good with this tool. And ice is non-homogenously distributed across our sidewalks this time of year.
  • I can walk around with a hair dryer and a very large battery.
  • I can drive.
  • I can not travel on ice.

I like the last one best. Why TF am I walking around on ice? In the end, not all travel can be safely accomodated.
P.S. The number of my falls each year can probably be measured by the number of posts complaining about ice.