There was all this discussion about Steven Landsburg’s taxation example.

Nothing makes my job easier than a journalist who writes about something interesting and gets it 100% wrong.

Thanks, then, to Elizabeth Lesly Stevens for her column in yesterday’s Bay Citizen. Stevens wants to tax the “idle rich”, her Exhibit A being Robert Kendrick, heir to the $84 million Schlage Lock Company fortune. According to Ms. Stevens, Mr. Kendrick appears to do pretty much nothing but park and re-park his four cars all day long. Taxing people like Mr. Kendrick, she says, has to be part of any solution to America’s fiscal crisis.

Here’s what Ms. Stevens misses: Assuming the facts are as she states them, it is quite literally impossible to raise revenue by taxing the likes of Mr. Kendrick. We could argue about whether it’s desirable, but because it’s impossible, the discussion is moot.

The point being that once we look at the real economy, i.e. the allocation of goods and services and how that would be altered by taxing Mr. Kendrick, we see that since he is consuming nothing any increase in consumption by the goverment must be taking resources away from somebody else.

If that doesn’t persuade you then consider this.  Suppose Kendrick puts all of his assets into a pile of cash and burns it.  There is no affect on anybody’s consumption. (Assume he gets no consumption value from the bonfire.)  If at the same time the governement prints an equal number of dollars and spends it, consumption allocations have been altered but not Mr. Kendrick’s. Whatever goods and services the government consumes must come from somebody other than he.  Now observe that there is no difference at all between the scenario in which the money is burned by one party and printed by another and the scenario in which it is handed over directly through a tax.

Professor Landsburg makes a contribution by presenting these examples which force us to think carefully about concepts we normally take for granted. Indeed he is even willing to adopt the persona of a smug provocateur to get his point across, and we owe him our thanks for that sacrifice in service of the greater good.

On the other hand we should recognize that this exercise is really beside the point. The government certainly can raise revenue by taking Mr. Kendrick’s assets.  The fact is that the dollar value of his assets are a claim on goods and services that will eventually be exercised by whomever inherits the assets. Taxing his assets today means taking those claims away from them. Moreover, the real allocation of resources will be altered in a way that is right in line with the spirit of the original columnist’s motivation.  The government will consume more today, others will save more today.  Those savers will consume more in the future and Mr. Kendrick’s windfall heirs will consume less.

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