@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

@cshentrup taxing rents absolutely affects behavior. that's a good thing! the theory of a land value tax is that you don't have to worry about discouraging land production. but, for example, we do want to discourage the production of lawyers who file patent troll lawsuits. taxing the wages of that kind of activity — rent-seeking — certainly will affect the behavior!

@cshentrup that's a large part of why we want to do it! people get paid money for a lot of activities that are not socially useful, but that are a negative social contribution. we want to tax those flows, so that people do less of it. we want to tax the production of bads, which includes activities like exploiting pricing power rather than expanding production to increase profits.

@cshentrup i'm not interest in taxing corps. that just encourages bad capstructure, until we also eliminate the tax deductibility of interest. i'm interest in taxing the very wealthy, and am entirely unconcerned that in cohorts among whom money represents score-keeping and zero-sum insurance, changing the baseline of competition by taxing them all equivalent will impair production. concentrated wealth imposes huge costs. taxing the very wealthy is a fiscal positive plus a social gain. win win!

@cshentrup (i do have some interest in taxing corp profits, if we can eliminate the deductibility of interest, because doing so encourages reinvesting in whatever creates an asset that firms can expense, including for example adopting a high-investment rather than high-turnover model of labor relations. but a guy who calls himself "neoliberal" is unlikely to be too enthusiastic about that argument.)

@cshentrup (and i'm interested in excess margins taxes, as a means of combatting market power. we want forms to maximize PQ by maximizing Q rather than P. again, i doubt i'm gonna persuade a guy whose moniker is "neoliberal", but this is directly a tax intended to support production rather than rents by reducing the relative value of exploiting pricing power vs expanding production.)

@cshentrup neoliberal models tell a really hopeful story about how markets work under the assumption of a close approximation of perfect competition. in the real world, there are lots of things that prevent such an approximation from holding. some of it is physical — Schumpeter famously pointed out that the corner store thrives due to the market power its proximity to some customers confer. 1/

@cshentrup "break 'em up" is not always and everywhere the right solution (though we should be doing a whole lot more of it!) but in general we face this challenge: if we want markets to be prosocial, they have to be in fact, not in theory, vigorously competitive, and we'll know that because extraordinary profits will be transient rewards, not permanent franchises. how do arrange that without killing other geese requires detailed attention by industry, i think, rather than broad strokes.

@cshentrup most rents are not government graft. they derive from market power, the ability to prevent competition. Warren Buffet is famously open about how his wealth derives from businesses with moats.

@cshentrup under the hypothetical capitalism in neoliberal models, economic profits (ie those above market rates of return on entrepreneur and physical capital inputs) are transient rewards to innovation, for firms that jump ahead until competitors catch up. durable economic profits are rents in the sense they'd not prevail under perfect competition, though we might argue whether some barriers to competition (eg "network effects") are "legitimate".