@cshentrup consider fire insurance. the first best solution is to prevent fires. often we fail. the second best solution is to have sufficient savings to cover eventualities. the third best solution is fire insurance, which creates a lot of deadweight administrative costs relative to the first or second best solution. 1/

@cshentrup yet, we find ourselves unable to reliably prevent fires so certainly we don't need to worry about the, um, risk. most of us are not able to save enough to cover that eventuality from savings. so we choose to bear costs of administration—deadweight costs relative to the first or second best solutions—to pay for fire insurance. is that rational, smart, under the circumstances? it depends on the scale of the costs. if premia were much higher than the expected loss, no. if near, yes. 2/

@cshentrup i agree that it would be much better if we could structure the economy so that there were fewer rents and barriers to competition, rather than tax the result of all that at the back end. i very much support antitrust, IP reform, and other policy that would address those problems. but it may in fact be the case, as a matter if real world politics, that we just cannot prevent the rents up, especially given the incentives created by lightly taxed receipt of them. 3/

@cshentrup if the politics of the second best solution — taxing at the back end, both to limit the damage to the distribution and discourage the behavior — are more tractable than the detailed industry-by-industry work challenged at every turn by better funded, better informed lobbyists, then like fire insurance on the back-end, it might be wise to go for the second best. 4/

@cshentrup note, in both cases, the solutions aren't mutually exclusive, and we should always pursue the first best! have fire extinguishers! support antitrust! 5/

@cshentrup but until we succeed at the first best much more fully than we have thus far, we will need to supplement it with the second best.

as long as the costs of the second-best, the backstop, are reasonable! which is why the question of what behavior in fact different taxes would discourage and encourage is the heart of the question. 6/

@cshentrup if i am right that FDR-style taxation discourages very little that is productive and compensation choices that yield a better income distribution, we should do it!

if i am wrong, and in fact FDR-style taxations would lead to an atlas-shrugged style withdrawal by the best and brightest of our community and an economic catastrophe for all, then we should look for different approaches. 7/

@cshentrup there are controversies here, about politics and human behaviors, that math and supply-and-demand diagrams can't solve. even "evidence" can't definitively resolve it, because no experiment or observational study that is plausible is anything near the full policy intervention. 8/

@cshentrup this is true of UBI too, where i think we mostly agree. people argue over incentives to work, etc. most of the evidence that i know of is pretty positive on these grounds, and the non-increase of an effective tax rate is an argument that's labor supportive. but the other side claims the mere reduction of desperation will harm work incentives.

you can't know for sure until you have some history with it. that's just the nature of social affairs! /fin