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Thoughts Online Magazine
Collected Articles on Culture & Politics
Deadweight Loss: Econ 1A 
25th-Feb-2010 09:20 am
Eliot Spitzer (yes, the ex-governor with that problem, now considered rehabilitated by Slate magazine because what he's saying is what they want to hear), has decided that higher taxes don't matter to the economy because of a couple of graphs involving GDP and taxes.

It's a cute idea. Sadly, for him, the graphs have nothing to do with his proposition.

But let's note again, for those in Statistics, correlation is not cause. Don't know why I have to keep defending this. What he needs to do is demonstrate that the deadweight loss from taxation, which does increase with higher taxes, is not enough to worry about. The formula for deadweight loss is Deadweight Loss = (1/2)(amount of tax or subsidy)*ΔQ. The graphs he has produced show NOTHING about changes in quantity produced with or without tax: the counterfactual information is not present. Instead he's attempting to argue that it doesn't exist because it is not present in the study. "There are no elephants because I don't see one in my room."

Now, studies of deadweight loss in the US lead to the conclusion that deadweight loss is about 33% of the revenue raised though it could be much higher. In either case:

The concept of deadweight loss has several important implications for making tax policy.

An extra dollar of government spending costs the economy more than a dollar.

Accordingly, using government to transfer income from one group to another, without a clear rationale in terms of economic efficiency, does not simply reshuffle income; it reduces the overall size of the economy.

Conversely, reducing taxes by a dollar generates more than a dollar of benefit to the economy. That is why a previous Joint Economic Committee study concluded that, over a seven-year period, every $1 in lower federal spending and taxes would increase the size of the economy by $2.45. (That is equal to $2.09 in present dollars, since much of the growth would occur some years in the future and needs to be discounted by appropriate rate of interest to reflect that its benefits would not be immediately
25th-Feb-2010 09:23 pm (UTC)
Either A) nobody ever listens or b) they listen but choose to lie by omission.

I vote for the latter.
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