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Wednesday, September 19, 2012

Why Do Economists Forget --

economists from both sides forget -- as soon as we start talking tax policy, that the legal incidence of a tax and its economic incidence are different?! Very bright economists who certainly know this write as if it makes no difference, and simply cite the legal incidence as if it is the economic incidence. Some discussions recognize this fact but pretend they have tracked the economic incidence: "Once these tax-induced changes in behavior throughout the economy are accounted for, the final distribution of the economic burden of taxes is called the 'economic incidence.'"

But to do this you'd have to know information about supply and demand schedules that no one knows. At best we have some vague guess as to what the shape of a curve is. And tax changes do not happen while all other things are being held constant.

4 comments:

  1. My favorite thing is to do a Taylor expansion justifiable for small changes, and then apply that to massive changes in the tax code.

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  2. I still recall that you mentioned that Paul Krugman criticised Steve Landsburg for this point when Paul Krugman himself mentioned it in his textbooks.

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  3. I have repeatedly made the point in discussions of taxation on my blog.

    For instance:

    http://daviddfriedman.blogspot.com/2010/12/invisible-elephant-payroll-tax-cut.html

    and, in more detail:

    http://daviddfriedman.blogspot.com/2011/08/obama-and-taxes-if-truth-is-too.html

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    Replies
    1. Very good. Of course my post should be taken to read "Most economists."

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