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Desirable incentive effects of income taxation I

Cases in which income taxation is preferable to lump sum taxation with the same ex post net transfers.

The main reason for progressive taxation is that the welfare cost of taking money from wealthy people is lower, because they have a lower marginal utility of consumption. I would like to discuss other advantages of income taxation, that is cases in which it can cause an increase in money metric welfare, or, in other words cases in which a distortionary tax and transfer policy is desirable even if, in the end (in the Nash equilibrium) everyone gets a transfer equal to taxes paid.

The incentive effects of taxation can be desirable for many reasons. I will try to list them in a series of posts. One very simple reason is that lower income is typically obtained by providing a goods and services to poorer people. This means that the signal from the market is not ideal – even if people obtain income by providing useful goods and services, the income depends on the usefulness divided by the consumers marginal utility of consumption.

For example, lawyers income depends on the wealth of their clients separately from the validity of their clients cases. For another doctors income depends on insurance coverage of their patients as well as the effectiveness of therapy and the need of the patience. I will address these issues in the second post in the series. In this post, I will assume that agents sell goods not services and that they sell them for the same price to all customers. Even in this case, there is a difference between the income maximizing choice and the most socially useful choice. Some people obtain more income selling luxuries that no one needs, but for which high income people are willing to pay a lot rather than selling necessities which poor people really want, but for which they can pay little.

People often perceive a difference between maximizing income and contributing as much as they can to society. There is nothing odd about this – it follows from absolutely standard assumptions about market prices and simple utilitarianism – economists most standard approach to welfare economics ( which is an approach to social welfare often considered to underestimate the importance of equality).

So far, there is no hint of any reason why the incentive effects of income taxation might be useful. The novel assumption is that people are not perfectly completely selfish. If you would rather see well fed than starving children, then standard economic theory does not apply to you. It is very important to avoid the false dichotomy between the assumption that people are perfectly selfish and that they are perfectly altruistic. I have often read read proofs that people are not perfectly selfish presented as an argument against the assumption that people are partially altruistic. Before going on, the assumption I need can be that people care 100% as much about their own interests as about anyone else’s. Such people would strike us as extraordinarily selfish, but they are not selfish enough for standard theory.

No one argues that people are selfish. Selfishness is almost always assumed in economic models. I can think of a number of justifications. One is that we should hope for the best but plan for the worst – hope that people are altruistic, but design a system which will work if they are perfectly selfish. I see no merit in this argument. In particular, we don’t have to guess, we know people are partially altruistic. Another is that a system designed on the assumption that people are partially altruistic also works if they are selfish – it just isn’t true that if one fears something might be true, then one should assume that it is. Another argument for assuming selfishness is that economists focus on arms length interaction, and altruism is important in interactions other than buying and selling. This post aims to demonstrate that that argument is invalid. A third argument for assuming selfishness is that altruism has benefits which are separate from the benefits of good policy. The main point of this post is that policies which are optimal if people are selfish and Pareto inefficient if people are partially altruistic.

The key paper in the literature on this topic is “” by Lester Thurow. Thurow’s point is that if people are slightly altruistic, then redistribution from the rich to the poor can make everyone happier, can be a Pareto improvement. Rich person A likes the fact that money is taken from rich person B and given to a poor person. The small loss for person B bothers him a tiny amount, the large gain for person C pleases him a small amount. Person A does not want his money to go to the poor, but in a large society the huge amount of benefit to the poor from transfers from all the other rich people can make up for his (not totally) selfish desire to keep what he has. This means that rich people who support progressive taxation and welfare but don’t give all of their money away are not necessarily hypocrites.

Thurow points out that even partial altruism is an externality and if people are partially altruistic, then equality is a public good. Standard arguments combined with the clearly true assumption that people are not completely 100% selfish imply that redistribution from the rich to the poor can be Pareto improving.

These posts are not simply a reiteration of Thurow’s point. I will assume no net redistribution. The tax and transfers will not help the poor directly, however, their incentive effects may help the poor.

This post will assume that people produce goods and can choose whether to produce a necessity or a luxury good. Caring about the benefit of their product for the consumer, they will prefer, other things equal, to produce the necessity. In equilibrium, other things won’t be equal because they can make more money producing the luxury. By reducing that incentive, income taxation can shift production from luxuries to necessities. This can increase welfare. This, in turn, can please everyone because people are partially altruistic (the last point is exactly Thurow’s point).

A tiny simple model after the jump

Is an Increased Federal Deficit good or bad ?

As the Senate decides whether to send an additional $1400 to US residents, there are two macroeconomic policy issues. One is whether aggregate demand stimulus would be useful. The other is whether we should be concerned about the budget deficit.

I think that the case for fiscal stimulus is medium strong and the case for higher Federal Debt is very strong. Thus I agree with Donald Trump and Bernie Sanders and disagree with Larry Summers.

The case for stimulus is only medium strong. Unemployment is fairly high, but part of this is an efficient response to the risk of Covid Transmission. There are two ways to argue that demand is undesirably slack. One is below peak employment in sectors which are not especially directly affected by Covid 19 such as construction. The other is that core inflation is below target and falling. Both are enough to convince me that general stimulus is OK.

But mostly the amazing fact is that the 30 year TIPS real interest rate is negative. This means that investors are willing to pay the US Federal Government to store their wealth safely. Given this, I think there is a very strong case for selling more long term bills and giving the money to residents. The interest rates assert that the US Federal Government intertemporal budget constraint is slack. This can’t be Pareto efficient.

I anticipate the concern that interest rates might rise. That is why I graphed the 30 year rate, which is locked in now. If interest rates rise, investors will lose money, but it won’t create a new problem for the Treasury. Also these are real rates (paid in multiples of the consumer price index) so deflation wouldn’t be a problem for the Treasury (although it would be a catastrophe for the economy).

Given the market interest rate, the ration of the debt to GDP should fall roughly in half over the life of the bonds. If the rates lasted, rolling over the debt would be a source of income indefinitely. The argument is absurdly simple. It is also valid.

The only concern is that public debt might crowd out private investment. This could cause higher returns on capital and lower wages with undesirable distributive effects. This problem can be managed by shifting taxation from labor to capital.

I am convinced that raising the subsidy to $2000 is an improvement.

Covid 19 Vaccination: One Dose or Two ?

I am going to write more on the topic of Covid 19 vaccines. I will argue that it would be better to give second (booster) shots only when vaccine supplies are plentiful. I think that so long as the vaccine is in short supply, people should be given one dose. I criticise the current policy of withholding vaccine to make sure that everyone who gets a first dose gets the scheduled booster either 3 weeks later (for the Pfizer vaccine) or 4 weeks later (for the Moderna vaccine). I argue that more lives will be saved with the one dose until supplies are plentiful strategy (even if many people don’t show up for the booster when supplies are plentiful). I think that the current policy will lead to tens of thousands of un-necessary deaths in the US alone with worse consequences for countries further back in line for vaccine supplies.

The post will have two sections. One will be an attempt to analyse the published data, which are mostly Kaplan and Meier plots with numbers read off by eyeballing. I will conclude that the best (poor) estimate of the reduction of infections from the first dose is more than 18 times the reduction due to the second dose. This calculation requires the key unproven assumption that the effect of one shot is weaker than but as durable as the effect of two shots.

This would mean that efficient deployment is one dose for as many as possible as soon as possible and second doses when giving them doesn’t interfere with this. I will go on to bore people with some p-values. I think that the null that it is as efficient to give second doses on schedule is rejected at at the 5% level (given published data). I note that benefits probably include the (unproven) prevention of transmission as well as benefits for the vaccinated people. I also note that giving two to some and zero to others is unfair especially given the difficulty of deciding who gets vaccinated first and the necessarily partly arbitrary decisions. The second section will come back to arguing about public policy and ethics as I just did.

Liveblogging the FDA hearing on the Moderna Covid 19 vaccine

So Far the efficacy data has been presented. As reported in the press earlier, the vaccine is roughly 95% effective, that is roughly 95% of people who got Covid 19 during the trial were participants who received the placebo.

Importantly, the null hypothesis that just one dose is just as good as two was not rejected. The test of this null had extremely low power as almost all participants received both doses, so basically this means cases less than 4 weeks after the first dose (so one week after the second dose). However, note the extreme rigidity of the FDA.

Before allowing vaccination, the FDA required proof of efficacy. Before allowing a modification from two doses 4 3 weeks apart to one dose, the FDA requires … I don’t know maybe if Jesus Christ returned and petitioned them for some flexibility, they would give Him a hearing, but I guess they would tell him he needed to propose (and fund) a new Phase III trial.

update: incorrect assertion of fact crossed out

It is also true that there is no evidence of benefit from the second dose of Pfizer’s vaccine. It is clear that people who have received one dose of either vaccine are among those least at risk of Covid 19.

See the raw data below from Polack et all 2020 . Can anyone see from the Kaplan Meier plot when the second dose was given ?

The vaccines are in very short supply. People are anxiously waiting for vaccination. Because the protocol had two doses, half of the vaccine will be reserved for the people who will benefit least.

Here there is a difference between careful science and optimal policy. In science it is crucial to write the protocol first then follow it mechanically. This is necessary so that the experimental interventions are exogenous and one can be sure they cause the observed outcomes and are not caused by observations.

However, it is not optimal policy to reduce the possible decisions to two, a priori with extremely limited data. This is what the FDA does. I think they should approve a single dose. Their rule is always to only act on extremely firm knowledge. It is, in this case, not going to be first do no harm. The second dose has side effects (mild but not zero). There is, I think, no weak evidence of benefits. (Again, the test has extremely low power (and I’m not sure protocol did not say the question would be addressed — if it didn’t then there is a problem — the rule decide what to do in advance applies to data analysis too — it is vital that the data not be dredged looking for a significant coefficient)). I think the point estimate is pretty much exactly zero benefit. of a benefit of the second dose much lower than of the first (and without proof of any benefit.

I think that people should be given a single dose. After everyone who wants one dose has been vaccinated, then it makes sense to give people a second dose. There is no reason to think spacing 4 3 weeks apart is optimal — the spacing was decided in advance (and it was 4 weeks for the Moderna vaccine hence my mistake).

Noah Smith on Macroeconomists behaving well

Noah Smith wrote a very interesting post on how macroeconomists are behaving very differently in 2020 than in 2008-9 : The new macro: “Give people money” . He notes two differences : first there is little discussing of theory or of the models used in most peer reviewed articles, second there is (as far as he can tell and he would know more than me) a virtual consensus that we need stimulus and that austerity would be a mistake.

Or as a tweet

I think this is a vast improvement and demonstrates the success of a wonderful scientific counter revolution. I think it better to read his excellent brief post before reading this long wandering self indulgent post (and maybe best to read his post and not read this post).

I trust you have read Noah’s post?

A Clinical Trial for Chronic Lymphocytic Leukemia

Chronic Lymphocytic Leukemia is the most common kind of leukemia in adults. Current therapy is extremely unpleasant and often (usually) fails. There is a very large number of clinical trials of new therapies mostly immunotherapies. They are based on the fact that CLL cells are B-cells which express CD20.

One such trial is NCT03759184 Human IL-15 (rhIL-15) and Obinutuzumab for Relapsed and Refractory Chronic Lymphocyte Leukemia

This is a therapy which isn’t too horrible. The doctors are having some trouble recruiting patients (as noted above there are many trials attempting to treat people with relapsed and refractory CLL).

Complete disclosure: one of those doctors is my dad.

People with relapsed and refractory CLL who are interested in considering whether to enrol in the trial can

Contact: NCI Medical Oncology Referral Office (240) 760-6050

Calling Pennsylvania

I promised myself not to forecast. I promised you that I would call Pennsylvania when I could. I get Trump ahead by about 700,000 and 2,000,000 absentee ballots to be counted. Assuming independents split (generous to Trump) Dem-Rep on absentees is about 50% so … I call Pennsylvania for Biden.

(I may delete this post tomorrow).

But I promised.

Networks finally call Pennsylvania more than 3 days and 8 hours after I did

told ya so.

Calling Pennsylvania On November 3rd

It is very likely that the candidate who wins Pennsylvania will become president. A problem is that the election officials are not allowed to look at absentee ballots before November 3rd. It is likely that Trump will lead the in person vote and try to declare victory.

However, the party registration of absentee voters is public.
The US Elections Project 2020 General Election Early Voting Statistics webpage is fascinating.

It shows the amazing early voting turnout. One fault is that it has a list of states with detailed data and a map of states showing early votes cast so far as a fraction of total votes in 2016. This currently shows Pennsylvania with a relatively low ratio of early votes = 27.8 % of the 2016 vote.

The page for Pennsylvania shows that (so far) 69.7% of those early votes have been cast by registered Democrats and 20.8% by registered Republicans. This is an extraordinary imbalance. Assuming voters with no party affiliation split equally (which is generous to Trump given polls) this suggests a 49.7% of all early votes lead already booked by Biden. So about 13.3% of the 2016 turnout. Even with very high 2020 turnout that has to be over 10% of 2020 votes.

It will also be possible to do this election night.

I hope that this calculation will make it possible to call the election before the absentee votes are counted. I also hope TV networks do this (no reason not too — the call is always a forecast based on exit polls and models).

Sincere Advice For Donald Trump

Last I heard (6:52 PM EST October 10 2020) Donald Trump wants to sign a huge new stimulus bill. I don’t try to read his mind, but I think he is sincere. It is the only way he can win re-election. On the other hand, Mtich McConnell does not want the Senate to pass a huge stimulus bill. I assume that he assumes that Trump will lose and has already switched to the worse it is the better it is. What is a poor President to do ?

1) Mitch McConnell is not President of the Senate. The President of the Senate is named Michael Pence. Michael Pence can actually preside. Then if a Senator (say Charles Schumer) introduces a Mnuchin/Pelosi compromise bill, it can be debated (Pence need show no more respect for regular order than McConnell ever has). Then there will be a filibuster. VP Pence can declare the debate over and call a vote. This would be a lie about Senate rules. McConnell would object and the Senate would vote on the objection. The Democrats, independents and 3 Republicans would make a tie so Pence’s decision would stand. This is how filibusters are nuked. McConnell doesn’t have to be involved. He can be outvoted if there are three Republican Senators who do not want to break with Trump, go against public opinion, and lose their seats. Then there would be a vote. The Democrats, independents, 3 Republican Senators and Pence could send the bill to Donald Trump to sign.

I think it all works fine. Pence can say no to Trump (it is a tradition that Vice Presidents are servants of Presidents not a provision of the Constitution (as Jefferson and Adams might explain). It is possible that no Republican Senators would see any gain in breaking with Trump. It is almost certain that Trump won’t do this.

But I think it is his only chance of re-election.

Questions for Amy Coney Barrett

I would like to propose a set of questions for the Amy Coney Barrett confirmation hearings.

I would ask about her interview with Donald Trump.

1) in the interview, did the president talk about himself at all ?

Both answers are costly. We all know he did (he always does) so to answer no is to blatantly like.
A yes answer leads to following questions (which I would ask in any case).

Barrett will refuse to answer, saying the conversation should be private.

2. I’m not asking if he said he had a headache, My concern is whether he said anything about the upcoming Presidential election aand whether it might be contested.

Again the answer no is an obvious lie. Also refusing to answer suggests that the answer is damaging to her (as the true answer certainly is).
She will refuse to answer

3. So you refuse to say that he didn’t suggest that he wants you confirmed so you can side with Trump in a possible upcoming Trump V Biden case ?

She has to refuse.

4. Did he ask you to assure him that you would vote in his favor if there were such a case ?

Here she has to answer no. It is very costly to refuse. If she answers yes (almost certainly the honest answer) then she can’t refuse to answer when asked how she replied.

5. Here under the extremely unlikely hypothesis that she answers yes, she would have to claim she told him she can’t make that promise about a purely speculative case for which the facts haven’t even occurred yet. That would be an obvious lie. If she had been asked and gave that answer, she would not have been nominated.

So she will answer no, but then argue that the conversation is confidential and she shouldn’t answer other questions about it. I think the questions lead her to contradicting herself.

She could stick to refusal to answer, but if she refuses to answer “did you promise to President Trump that you will favor him in an upcoming Trump V Biden case ?”

Then she has some trouble.

Then ask if she promises to recuse herself if there is a Trump V Biden case (she has to answer that one).

This doesn’t distract from the gross impropriety of blocking Garland then rushing Barrett.

The questions are not polite or normal, but the situation is clearly not normal either.