Magazine article The World and I

Tax Policy

Magazine article The World and I

Tax Policy

Article excerpt

Whenever I see economists or politicians argue that economic theory mandates a particular policy on taxation, I have an urge to tear out what remains of my hair. There are no certain things in life. But what comes closest to certainty is that we will all die and that it is nonsense to believe that one can deduce from economic theory the tax policy that is best for a particular circumstance.

Economic theory rests on the assumption that utiles, which measure preference for goods, and dollars can be substituted for each other. Although this assumption has utility for devising economic models, economic variables, unlike the variables of physical theory, do not have univocal measures. There are conditions, which need not concern us now, in which this simplification is useful. But, contrary to Milton Friedman's claim, physics and economics do not use counterfactual assumptions in the same way. It may be counterfactual that an actual vacuum exists anywhere. However, the theorems of classical mechanics can be applied directly because it possesses univocal measures that can take these discrepant conditions into account (for example, the impact of the wind on the path of a bullet). Economic theory does not. This was the fatal flaw in Robert Nozick's theory of ethics.

Economics, unlike mechanics, is a feedback system. In any feedback system, slight changes in measurements or pathways may produce major changes in outcomes. Thus, the impact of a supply-side or a demand-side input may have highly diverse results, depending on the actual state of the system and the size of the input. …

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