Nonprofit, nonpartisan journalism. Supported by readers.

Donate
Topics

What ‘Econ 101’ arguments misunderstand about taxes

Yes, it’s possible to oppose Trump’s tariffs and support raising Minnesota’s gas tax.

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

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.

Article continues after advertisement

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.

Article continues after advertisement

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.