Friday, June 27, 2008

The tax increases are well worth it for what you get in return, even for a family with a $300,000 income

In response to Lane Kenworthy's June 24th post, "Making Ends Meet on $300,000 a Year":

Clearly this family is living very luxuriously, $500/month for a country club, $75,000 in cars every 4 years, $9,000 per year for vacations -- ever heard of camping, driving to Six Flags and staying at the Holiday Inn. And, a $600,000 house, with commensurate maintenance, insurance, and property tax costs. I know in Orange county, this just buys a very nice middle class house in a nice suburb, but in the vast majority of the country you need less than half this much for such a house.

A key thing though is, it's not that Obama would be making them pay extra taxes for no benefit in return. Even at their income level the benefits from Obama's tax increases would be substantial. These include a great decrease in their health insurance costs, and the health insurance costs of their employers, which should eventually be passed along in higher wages.

The tax increases would increase public health and safety, substantially benefiting the quality of life of them and their children.

College would become a lot more affordable, so their children wouldn't be saddled with $150,000 in student debt like they are, and they would have to save less for their children's education.

Public recreation would be better, so maybe they could play on the public tennis courts or send their children to a free public community center. And how about neighborhood public parks that families can freely go to, instead of so many people being walled off in gated communities. These neighborhood public parks were much more common before conservative Republicans took over 28 years ago.

The list goes on and on.

Even for a family this wealthy, I would guess the benefits substantially outweigh the costs, and this is overwhelmingly true for the median family.

The main reason is that Obama's and the Democrats spending programs, by and large, recognize what the scientific academic economics community learned long ago. An intelligent government role can greatly increase efficiency, wealth, and welfare, due to problems with the pure free market like externalities, asymmetric information, inability to perfectly price discriminate, inability to patent, large economies of scale and monopoly power problems, especially with idea, knowledge products, and more.

The Republicans of the last three decades have a hostility towards science, and thinking in general, when it interferes with their ideology, and their simple-minded, pure free market is always the best and magic, slogan economics, has cost us greatly.

One other thing, which is huge, is the prestige externalities, prominently researched and written about by Cornell economist Robert Frank.

The taxes would be paid by everyone in one's peer group, by and large, so if you ended up spending $5,000 less on your car, on average, so would your peers, so you wouldn't lose any prestige. As typically, the utility of a luxury car, versus an average one, may be at least 90% prestige, the utility cost of that $5,000 less in spending may by more like $500, but the whole $5,000 in taxes would go to health care, education, public safety, cancer research, etc. (inconspicuous consumption as Frank would call it).

The same goes for spending on clothing and accessories and country club, and even vacation hotels are highly context related in their utility.

Furthermore, if their income goes down X%, so does their peers who bid against them for homes, so there will be a savings in home prices. It's not a complete free lunch, because, for example, older couples moving from a larger home to a smaller one will on average pocket less of a difference, but there will be far more gainers from this than losers.