Tuesday, July 07, 2009

Extreme cases.

I saw this over at Marginal Revolution and just had to laugh.

Imagine the extreme case -- a 100% income tax. No matter how much you make, you actually receive nothing. Therefore, no one works. Result: 100% unemployment and GDP=0.
Obviously, smaller taxes will have less extreme effects. But increasing a tax can surely make a recession worse.
Posted by: Robert A. Book at Jul 7, 2009 12:47:48 PM

I love the world of economics. Imagine the extreme case--no taxes. Assuming we weren't taken over by some other country, we would have no army, a fragmented system of private toll roads, unlimited immigration, warlord armies fighting over territories. Kind of like Somalia. Obviously this proves the more taxes the better, and that taxes will make everything better.
Posted by: es32 at Jul 7, 2009 1:33:11 PM


GlenH said...

Mike, I read your comment over at Marginal Revolution regarding private sector health costs and it brings up a good point. GM was carrying (according to some sources) about $2000 per car manufactured in the U.S.due to employee health schemes. While this can't be regarded as the sole reason for its bankruptcy, it surely was a contributing factor. With a proper national health system as in many countries, these costs would not have been borne by GM, its workers would have been more competitive internationally, and they would not have lost out on benefits later on due GM's reorganisation. But, hey Libertarians may have had to pay some tax and we just couldn't have that, could we?

Mike Huben said...

Actually, I see no reason why GM wouldn't have borne close to the same $2000 burden under a national health scheme, because employers would still be paying taxes to finance it. Maybe the burden would be lighter because of more even financing.

My point is that the private sector does have deadweight losses too, and changing to the public sector may be simply substitution of one deadweight loss for another. So Alex's claim that costs would increase because of deadweight loss is questionable from that standpoint (as well as many others.)