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What ‘Econ 101’ arguments misunderstand about taxes

MnDOT
In Minnesota, money from a gas tax is used to repair and build transportation infrastructure, which will benefit those who pay the tax.

I wince whenever I hear someone invoke “Econ 101” to answer a question about economic policy. What they mean by Econ 101 and what an economist means are usually different, and DJ Tice’s recent column “Econ 101 is politically conducive — suddenly, selectively,” was no exception.

Tice argues that liberals who criticize President Trump’s tariffs as being taxes are hypocrites, at worst, and ignorant, at best. “Progressive America,” as Tice labels them, either selectively ignores or does not understand that Trump’s tariffs are no different than the DFL’s proposed gas tax increase or the MinnesotaCare provider tax. They are all taxes whose burden will ultimately be borne by consumers and workers. Don’t you progressives understand Econ 101?

Econ 101 and Economism

Tice is invoking Econ 101 in a way that James Kwak identified in his book “Economism: Bad Economics and the Rise of Inequality.” According to Kwak, economism is the “invocation of basic economics lessons to explain all social phenomena,” and that’s the game Tice is playing.

Economism begins and ends with perfect competition, epitomized by the supply and demand graphs we use in introductory economics courses. Tice uses this framework to point out, correctly, that in a perfectly competitive world the burden of a tax is borne both by buyers (through higher prices) and sellers (through lower profits). This is true regardless of whether the tax comes in the form of a tariff, as gas tax, or a fee paid by health care providers.

Kwak notes that economists understand that, “This elegant model rests on a set of highly unrealistic assumptions,” but “economism ignores these uncooperative facts and assumes the necessary assumptions, reducing all real-world questions to simple models and answering them in the same terms.” Tice can chastise progressives and liberals for either ignoring or not understanding this simple lesson about taxes by invoking economism.

However, economism is not the end of the story, it’s just the beginning.

Why levy taxes?

Governments levy taxes to raise revenue and to change behavior. For example, a gas tax meets both goals by raising funds (which, in Minnesota, must be used for roads and bridges) and reducing the amount of gasoline bought and sold.

Both buyers and sellers of gasoline will bear part of the tax burden, as supply and demand tell us. However, we can’t stop there. We also need to consider how the government uses the revenue raised by the tax.

Many years ago, a colleague told his students the following story about taxation: Governments collect taxes, then they put all that revenue on a barge that floats out into the ocean. The barge then sinks and the resources the government collected go to waste.

If this is what you think happens when a government collects revenue, then the economism story is enough. Taxes are bad, and we should keep them as low as possible because all the government does is throw away what it collects.

However, that is definitely not what the state of Minnesota does with gas tax revenue. The money is used to repair and build transportation infrastructure, which will benefit those who pay the tax. Thus, the tax creates a burden, but it also creates a benefit, and the public policy question is not whether a tax creates a burden but whether the extra burden of the tax is less than the additional benefit generated by new roads and bridges.

The same is true of the Minnesota health care provider tax. The tax comes out of the pockets of both health care consumers and providers, but they receive the benefits as well. Again, the question is not whether this occurs but whether the extra costs of the tax outweigh the benefits generated by making healthcare available to more Minnesotans.

We can apply the same reasoning to the Trump Administration’s tariffs. I discussed this in a previous column, but the gist is that the extra benefits of the tariff are small compared to the costs imposed on American businesses and consumers. It is not selective, to use Tice’s word, to oppose tariffs yet favor a provider tax. They generate different costs and benefits, and in this case, progressives argue that tariffs fail the cost-benefit test while the gas tax and provider tax pass it.

Understanding the end of the session

Public policy involves more than a simplistic application of economism. That’s why the end of the current legislative session is so messy. Legislators and the governor implicitly understand that different tax and spending policies create different combinations of costs and benefits. These costs and benefits can’t simply be toted up on supply and demand diagrams but rather must be balanced against other goals such as building roads and funding healthcare.

In other words, policy makers don’t follow economism. They know that we don’t live in a perfectly competitive world.

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Comments (38)

  1. Submitted by Karen Sandness on 05/20/2019 - 10:45 am.

    The “sinking barge” metaphor is one of the prime fallacies of far-right thought.

    Right-wingers talk as if tax money is distributed to politicians and hidden inside their mattresses to be spent for personal use. They speak of tax money as being “removed from the private sector.”

    In fact, when governments at all levels collect taxes, they immediately spend them by buying supplies, funding construction projects, meeting current expenses, and paying public employees, among other things.

    The right wingers may complain about public employees, but they spend their paychecks in exactly the same way that private sector employees do: they go to the same grocery stores, movie theaters, and shopping malls. They buy their cars from the same dealers as private sector employees and use the same real estate agencies to help them buy their houses. The only exceptions are active duty military personnel, who may do a lot of shopping at the government-owned store on their base.

    But even the merchandise at military base stores is procured from the private sector, as are all the supplies and furnishings in government offices and other governmental institutions. Construction projects are carried out by private sector contractors. Local governments don’t build their own firetrucks and police cars; they buy them from the private sector.

    The simplistic “private good, public bad” mentality of the self-centered right winger is unrealistic. “I know what to do with my own money better than the government does,” they grumble. So, they’re going to build their own roads, fund their own fire departments, hire private tutors for their children, pay to enter privately owned parks, and probably pay “taxes” in the form of protection money to the types of criminals who spring up in anarchic environments, unless they can hire some bruisers of their own as security guards?

    They gripe endlessly about what they imagine to be the cushy life of people who are covered by any part of America’s stingy safety net. I guess they know little about the Victorian era, when there was no safety net, and the alternatives for the poor were literal starvation, wage slavery in a dangerous factory or as a household servant (“Downton Abbey paints an overly rosy picture of the grueling dawn-to-midnight life of a servant, who usually started working at age twelve) or, if unable to work, due to age or disability, being assigned deliberately pointless jobs in the workhouse, or if totally disgusted with these alternatives, crime or prostitution, both of which flourished despite harsh penalties.

    Like today’s right wingers, the Victorians believe that poor people were merely lazy, so that any welfare benefits would confirm them in their laziness. (These ideas were often held by people who had servants doing everything for them.) It must have puzzled them that people persisted in being poor.

    It is regrettable that these discredited ideas about wealth and poverty have returned.

    • Submitted by George Kimball on 05/20/2019 - 11:34 am.

      Bravo, Karen Sandness. Extremely well said! Detractors may well claim your argument is over – simplified, but that’s sort of the point, right?

      • Submitted by joe smith on 05/20/2019 - 02:34 pm.

        It is the way the Government wastes tax payer money that drives conservatives, independent and middle class folks who work hard for their money crazy. . It is both parties who waste money left and right…. Lefties scream for mor3 money to make things more equal in America, has the 20+ TRILLION we have spent on the war on poverty reduced poverty?

        Always easy to spend other people’s money, that is why Big Government doesn’t work!

        • Submitted by Henk Tobias on 05/20/2019 - 03:24 pm.

          If you’re referring to the 20 trillion in debt, the bulk of that was incurred by Republican Presidents, like the current joker racking up debt at a pace not seen since his casino days. But more to the point, the idea that the private sector does it better has be tried and is shown not to be the case. Time and again we end up paying more for less once the private folks get involved. This was on full display while GeeDubya was borrowing trillions to fight his war in Iraq. Haliburton, Dick Cheney’s old company was electrocuting soldiers in shoddy showers, poisoning them by transporting consumables in contaminated tankers and way over charging the US tax payer for the privilege. The private sector is far more expensive than the public, its just harder to see because they keep their books closed.

          Back to the barge thingy: Apparently whomever it was that told his students this ridiculous story didn’t get the memo about indoctrinating his students in all things Liberal. How is he keeping his job?

          • Submitted by joe smith on 05/20/2019 - 05:11 pm.

            Please check your facts! Obama doubled the national debt in his 8 years. Bush ran the national debt up by 4.5 Trillion in 8 years and Obama ran up 4.6 Trillion in his first 38 months in office, then doubled amount that in the next 5 years.
            I’m talking about our “War on Poverty”, declared in mid 1960’s and the 20+TRILLION spent to bring the have nots out of poverty into the middle class….. How has that boondoggle worked?

            • Submitted by Edward Blaise on 05/21/2019 - 08:40 am.

              How very convenient and very tired.

              You have acted as Obama inherited the Obama economy that Trump did: do nothing and stay on the rising slope and all is well.

              Go back to 2008 and you know; but, choose to not remember that the economy was in free fall. “Experts” right, left and center were in broad agreement that drastic steps were in order to right the ship. And those bi-partisan actions put us on the rising slope that Trump inherited and now acts as if he, and only he, could have possibly created such success.

              Much like the fortune he inherited from Daddy and did nothing with other than brag and promote himself about his fake accomplishments, he is doing the same with the Obama fortune he inherited from BHO.

              At least he showed a little gratitude towards Fred Trump…

              • Submitted by joe smith on 05/21/2019 - 03:03 pm.

                Let’s talk about a 60 year plan of “War on Poverty”. Forget the resent history, Bush vs Obama vs Trump, let’s look at 60 years of a policy to bring folks out of poverty to middle class. This Government boondoggle has cost the tax payers 20+TRILLION with no results. Actually if you look at the BLEXIT movement you will see tens of thousands of black saying the “War on Poverty “ has hurt the black community.

                Again, another Government program run amok that folks don’t want to discuss.

                • Submitted by Karen Sandness on 05/21/2019 - 03:55 pm.

                  The War on Poverty lasted about twenty years, and Nixon began chipping away at it before that.

                  You see, everyone thought it was a great idea, except that those VISTA and Legal Aid workers went beyond charity, informed poor people of the ways in which they were being illegally cheated, and organized them to fight for better conditions. This angered the wealthy and powerful people who were the targets of these actions (“What? We have to compensate farmers for strip-mining their land? The idea!”).

                  By the time the Reagan administration came along, Head Start was the only extant War on Poverty program.

                  TANF, which most people think of when they think of “welfare,” was instituted during the New Deal and scaled back during the Clinton administration. There is a five-year LIFETIME limit on TANF, no matter how bad local economic conditions are.

                  SNAP, or “food stamps,” was a Nixon initiative.

                  The U.S. actually has one of the stingiest social safety nets in the developed world. It spends its money on unnecessary wars and corporate welfare instead.

                • Submitted by Matt Haas on 05/21/2019 - 10:58 pm.

                  Resent history you say? Quite the unintentionally illuminating typo to be sure. That the rich resent having to care for the poor IS the biggest through line that connects all the dots you’ve presented.

            • Submitted by David Lundeen on 05/21/2019 - 10:00 pm.

              I’m taking about the F35 fighter jet and the waste of money that has become.

            • Submitted by RB Holbrook on 05/22/2019 - 03:04 pm.

              Your $20 trillion figure is very misleading which, since it comes from the Heritage Foundation via Michele Bachmann, is only to be expected. The figure includes non-cash benefits (housing assistance, SNAP, etc.) that are not included in the determination of poverty. In other words, no matter how much or how little is spent on those benefits, by definition they will not reduce the poverty rate.

              The $20 TRILLION figure also includes the Earned Income Tax Credit. You know, turning the poor people into those “Lucky Duckies” who don’t pay income tax.

              Incidentally, when the War on Poverty was launched, 19% of Americans lived in poverty. In 2017, the last year for which the Census Bureau gives a figure, that number was 12%. Correct me if I’m wrong, but that seems to be a decrease.

        • Submitted by Erik Granse on 05/20/2019 - 04:34 pm.

          Having worked my entire 30-year career in the private sector, I’m well aware of the way businesses can throw money away as well.

          Neither the private nor public sectors have any monopoly on wasteful spending, nor do either have one on effective spending.

          However, the private sector doesn’t have to issue reports detailing how everything was spent. Instead they just mark hundreds of millions on the quarterly report as a one-time charge and everyone ignores it.

    • Submitted by Don Casey on 05/20/2019 - 02:19 pm.

      “Right-wingers talk as if tax money is distributed to politicians and hidden inside their mattresses to be spent for personal use. ”

      And liberals talk as if profit only stuffs the pockets of a handful of CEOs for their personal use..

      The “sinking barge”? Government performs some necessary functions. While the “barge” may not sink. it loses a significant amount of cargo at sea.with duplication, inefficiency, vulnerability to fraud. Any enterprise — public or private — can grow to the point of becoming overly bureaucratic and increasingly inefficient. And there is no greater bureaucracy on the face of the earth than the federal government .

      There are reasons economics has often been called an inexact science. There are often differing perspectives on the same “facts.”

      Politically, there is no “right” or “wrong” — only differing perspectives on what is in the best interest of the nation.

      • Submitted by Frank Phelan on 05/20/2019 - 06:38 pm.

        Given the state of income redistribution in this country, which is always upward, it’s mostly true that “…profit only stuffs the pockets of a handful of CEOs for their personal use..” as well the pockets of wealthy share holders.

    • Submitted by Bob Petersen on 05/21/2019 - 01:37 pm.

      Please tell us where government has been effective as compared to the private sector. MNLARS? ObamaCare? Amtrack? US Post Office?
      Government has no one to compete with to ensure efficiency that the private sector does to improve profits or even just be profitable and provide jobs.
      I don’t think you will hear from anyone that has ever had a positive experience when dealing with the government for them in their daily lives.

      • Submitted by Rory Kramer on 05/21/2019 - 02:56 pm.

        Just one correction: the US Post Office isn’t a government program. It’s a quasi-private program that receives its funding from the postage it sells. The only thing keeping the Post Office going is all the junk mail it delivers and being the ‘last mile delivery’ service for UPS and Fedex and in effect Amazon and that outfits like UPS and FedEx would go broke themselves delivering to every house 6 days a week.

      • Submitted by richard owens on 05/21/2019 - 03:15 pm.

        You would be wise to notice that over half of our federal spending and commitments to future spending are on behalf of the Pentagon and the Military Industrial Complex.

        We build stuff that we won’t use except to threaten, we build more stuff to destroy other country’s assets, and we haven’t won a war since WWII (and even that was a blown peace, with the way former colonies were divided up without regard to the people who live there.

        Oh, and btw, we still have not paid for the two longest wars America ever fought, and we continue to send trained soldiers to threaten poverty stricken asylum seekers at the border. They don’t even have a dining hall or a PX. They are just being wasted at the border.

        Meanwhile China is eating our lunch diplomatically speaking, while building relationships while we are getting rid of all our international friends and allies.

        What reasonable person would cut ties with allies, cozy up to autocrats and pick fights overseas all while levying tariffs on its own people?

        KRAZY

        • Submitted by Frank Phelan on 05/23/2019 - 06:40 pm.

          And don’t forget, a big share of interest payments on the debt is due to borrowing for military (I never call it defense) spending.

      • Submitted by Sean Olsen on 05/21/2019 - 03:39 pm.

        The US Post Office basically goes to every home and business six days a week and delivers a letter anywhere in the continental 48 states in 2 or 3 days for 55 cents. That’s pretty darned good.

        • Submitted by RB Holbrook on 05/22/2019 - 08:59 am.

          I would also note that when the Post Office was highly politicized (e.g. postmasterships were awarded as political favors), the US Mail was superb.

      • Submitted by Karen Sandness on 05/21/2019 - 04:09 pm.

        Amtrak is on a starvation diet. It is very popular, and its trains sell out regularly, but its annual subsidy was $1 billion when it was created out of various routes that the private companies didn’t want in 1970, and it is now $2 billion. Since prices for everything are now five to ten times higher than they were in 1970, that is a cut in real terms.

        Of course, that’s still a lot of money, but $2 billion is about eight days of modern warfare.

        The UK is said to have the worst trains in Europe, and both rolling stock and stations are rundown, but their trains are frequent and cover most of the country.

        Again, the simplistic private good-public bad mentality is untenable. For seven years (1986-1993), I lived in an otherwise conservative town in Oregon that had a municipal power company. In the entire time, we exactly one blackout, and my bills for a two-bedroom, all-electric (including heat) apartment topped out at $15 per month. Meanwhile, friends in Portland, which had an Enron-affiliated power company at the time, were paying $30 and up for electricity for their apartments and suffering a couple of extended blackouts per year.

        Government entities do not have to make a profit. Right-wingers think this is a bad thing, but it’s actually a good thing. There is no incentive to price-gouge (something we know Enron did, as well as creating blackouts on purpose), so the entity fulfills its obligations as long as it breaks even and provides decent service.

      • Submitted by David Lundeen on 05/21/2019 - 10:02 pm.

        Tell me where banking and the defense industry has been effective. They rely on corporate welfare.

    • Submitted by Gerald Abrahamson on 05/21/2019 - 09:30 pm.

      The right states private business exists to make a profit. What they do not state is business will NOT invest in things that are not expected to be profitable. Most major public investments are in infrastructure, which can not reasonably be operated as a for-profit business. Private fire departments were tried by insurance companies. They failed. Thus, we now have public fire departments (or volunteer) that serve everyone.

  2. Submitted by Ray Schoch on 05/20/2019 - 11:09 am.

    Thank you, Ms. Sandness. At the moment, I have nothing of value to add to your response – or to Professor Johnson’s overall explanation.

  3. Submitted by Matthew Steele on 05/20/2019 - 01:15 pm.

    I am thankful I took Econ 101 (or was it 110?) taught by Louis Johnston, top floor of Simons Hall, just-shy-of-many years ago.

  4. Submitted by Jackson Cage on 05/20/2019 - 01:15 pm.

    Not surprising at all is that a Righty like Tice would go after Progressives, but he seems to be a hypocrite (or ignorant) by missing the obvious point. In most stories I’ve seen, Progressives aren’t arguing that tariffs are or aren’t taxes, like the gas tax or health care tax. Their complaint is that Progressives openly acknowledge that gas and healthcare ARE taxes, while Conservatives pretend tariffs AREN’T taxes. Tice has such an agenda he’s often not worth reading.

    • Submitted by Rod Loper on 05/21/2019 - 07:28 am.

      Mr Tice, who got on the Strib to protect Pawlenty, should do an analysis of why decreasing taxes are the answer to a maiden’s prayer for any economic problem. Thank you professor Johnston.

  5. Submitted by John Evans on 05/20/2019 - 05:44 pm.

    The gas tax differs from other taxes in that it works roughly like a user fee. And collecting at the pump is a very efficient method, which we already have in place.

    I like it because it is used for something that we basically all agree we need government to do. Removing that function from the general fund insulates it somewhat from the whims of political fortune and the competing political fictions of the day.

    Yes, the gas tax is regressive. We can take measures to compensate for that. But when have conservatives ever objected to regressivity?

    • Submitted by richard owens on 05/21/2019 - 03:32 pm.

      Disrepair, potholes and rusted beams are also regressive, since everyone uses the roads, those who can least afford to repair their cars or sit idle in traffic burning fuel are injured far more than those who do not need to drive, or have better vehicles anyway.

      Regressivity has become the American Way!

      With income distribution so messed up we are effectively unable to include everyone in our economy.

      It hurts more at the bottom, and those folks have the least say in outcomes that affect them.

  6. Submitted by Pat Terry on 05/20/2019 - 06:18 pm.

    Econ 101 was microeconomics when I took it. I’m not sure we even did tariffs until later courses.

  7. Submitted by William Hunter Duncan on 05/21/2019 - 10:18 am.

    Econ 101 in America benefits monopoly and penalizes small business. If we tax to change behavior, and want to put more money in more people’s pockets, we should not be taxing labor and employment, but rentier money (making your money work for you), pollution, automation and monopoly.

    Instead, we have built an economy to glorify a man like Bezos while working people are fed to economic predators, turning industry from Agriculture to finance to health care to edu to exercises in racketeering, while pollinators far and wide are on the verge of extinction and the waters and land are profoundly polluted.

  8. Submitted by Ole Johnson on 05/22/2019 - 09:02 am.

    Yes, economics is nuanced. You can’t stop at saying that the money a tax raises is spent on additional benefits and therefore it is good.

    Those additional benefits of government spending has to be weighed against the benefits that would have occurred if people had been able to keep their own money and spend it on other things (aka benefits).

    For example, if we decided to lower gas taxes by cutting out all spending on bike paths people would have more money to spend on things like coffee or clothes. People who owned coffee shops and clothing stores would get more benefits in that scenario.

    Taxes are a necessary evil for our society. The goal should be to let people keep as much of the money that they earned as possible.

    • Submitted by Paul Udstrand on 05/22/2019 - 02:56 pm.

      There’s nothing evil about taxes, they make civilization possible. Taxes are public investments that typically pay back 15%-25% on the dollar when averaged out. This anti-tax nonsense was never based on sound economics which is why no country that practices “small guvment” outperforms the US or any other developed economy.

      I don’t why guys like Tice even get space in a major newspaper, as far as I can tell he and brethren (and sisters) over the American Experiment are incapable to producing anything but garbage analysis.

    • Submitted by richard owens on 05/22/2019 - 03:51 pm.

      Ole- I’ll pay a little to fix your potholes if you’ll pay a little to fix mine.

      We’ll lose a little in the legislative argumentation, less if they agree too.

  9. Submitted by Paul Udstrand on 05/22/2019 - 02:43 pm.

    We keep running into this “economism” here on MInnpost when people try to claim that unaffordable hosing is simply a supply and demand problem. We’re told is basic economics.

    • Submitted by Gerald Abrahamson on 05/23/2019 - 11:43 am.

      What they do NOT want to do is have “economism” defined as what it really is: Pursuit of HIGH SHORT-TERM PROFITS. Anything more than 2-3 years out is IMPOSSIBLE.

  10. Submitted by Paul Udstrand on 05/23/2019 - 12:37 pm.

    It is amazing when people who clearly have no concept of rational government or budget pop up with their tax complaints. How many times have you tried to have a conversation with these folks and been asked: “who’s gonna pay for that” It’s always so weird, specially given the fact that so many of them voted for a guy who promised to a wall with Mexican money. They’re the only guys in the room who don’t seem to know where money comes from and they keep asking this question like it’s some kind of argument buster.

    The it get more bizarre when they start arguing about percentages instead of actual costs and revenue. They’re like: “Well, that’s a 50% increase over last years budget” as if that makes sense. Then you explain that things cost what they cost not a percentage of something else; you get this deer in the headlights stare. It like a mechanic tells you it’s gonna cost $800 to fix your car and you try to pay them $500 because that’s a 70% increase over what you paid the last time you had your car fixed. Good luck with that. It’s no wonder that whenever they get in charge of a budget or a big decision they blow it up. And they act like all this nonsense if common sense?

    Whatever.

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