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DanielLC 4 June 2015 02:07 PM
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> In particular, redistribution tends to demotivate people on both ends of it.

In an ideal scenario where the value of money is linear etc., if you redistribute money from the poor to the rich, you will over-motivate people. They will perform work that doesn't create enough wealth to justify putting that much effort in, because the subsidies will make it worth it.

As I said before, since we're dealing with a local maximum, small changes in the conditions will result in smaller changes in the results. No matter how big the problem caused by redistributing money is, there's some sufficiently small amount where the benefit-to-cost ratio is above one.

> History shows that once the principle of redistribution is accepted, it is only a question of time before a small amount turns into as much as government can take without imploding the economy.

That's not an amazingly unlikely proposition, but it strikes me as something people are about equally likely to notice regardless of if it's true. I'm going to need some good data on this. Not just a list of examples, since they're too easy to cherry-pick. I need scatterplot or better.

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melian 4 June 2015 06:24 PM
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No matter how big the problem caused by redistributing money is, there's some sufficiently small amount where the benefit-to-cost ratio is above one.


Not necessarily. For instance, if motivation vs. redistribution (M vs. R) graph looks like an inverted "V" letter where the peak is at R=0, your conclusion would not generally hold. Realistically, M(R) might even be discontinuous at R=0, since many people would find the mere fact that the money they earned is given to someone else to be psychologically offensive.


I'm going to need some good data on this. Not just a list of examples, since they're too easy to cherry-pick.

Normally I would agree with you as the examples are indeed easy to cherry-pick. But the problem in this case is that I cannot think of any counterexamples. Can you recall any?







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DanielLC 4 June 2015 06:40 PM
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> Not necessarily. For instance, if motivation vs. redistribution (M vs. R) graph looks like an inverted "V" letter where the peak is at R=0, your conclusion would not generally hold.

Yeah, but it has to be not smooth, and at that particular point. If the government taxes you a little, you work slightly less. If they subsidize you a little, you work slightly more. Taxes are just negative subsidies and vice versa. There's no reason for it to not be smooth.

> But the problem in this case is that I cannot think of any counterexamples. Can you recall any?

The US redistributes money. Are they taking as much as they can without imploding the economy? How do you even establish that? And what makes the answer "no" as opposed to "not yet"?

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melian 5 June 2015 07:32 PM
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Yeah, but it has to be not smooth, and at that particular point.


Realistically, it won’t be smooth or even continuous. First, even if an income tax is set at a rate close to zero, government still needs a sizable bureaucracy to collect it and it would create a non-zero amount of trouble for taxpayers. Second, there is a psychological effect. Many people would suffer a non-zero negative effect on their motivation if told that a fraction of their job compensation would go to a cause they don’t like (even if the fraction itself is approaching zero).

The US redistributes money. Are they taking as much as they can without imploding the economy?


I guess the words “without imploding the economy” are redundant. I should have said simply “as much as they can”. And I think it is true in the case of the US. The federal government found it impossible to collect more than ~20% of the GDP in taxes. JFK once said that his motivation for lowering the tax rate is to raise the total tax revenue.


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DanielLC 6 June 2015 01:22 AM
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Assume that there is a counterexample. Would you be able to find it? Would you know it off the top of your head?

The US spends large amounts of money on the military. They could move that to paying for the poor without risk of imploding the economy.

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melian 6 June 2015 05:06 PM
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Would you know it off the top of your head?


Not if it involves some obscure tribe in the Amazonian forest.

The US spends large amounts of money on the military. They could move that to paying for the poor without risk of imploding the economy.


That's debatable, but even if true, it does not contradict my point. Taking as much as possible through taxes and wasting some of the income are not mutually exclusive things.




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DanielLC 6 June 2015 11:46 PM
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> Not if it involves some obscure tribe in the Amazonian forest.

Obviously. What if it's a first-world country? How do you distinguish a country that is taxing as much as possible from one that is not?

I've heard Hong Kong has a pretty low tax rate. It also isn't a democracy, so it probably proves your point.

> Taking as much as possible through taxes and wasting some of the income are not mutually exclusive things.

If this was driven by attempts at wealth redistribution, you'd think that they'd start taking money from the military when increasing taxes is no longer possible. If countries just generally tax as much as possible, then I see no reason to blame welfare. If it's a given that countries are going to tax as much as possible, the only question is whether welfare would be more cost-effective than whatever else they'd spend the money on.

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melian 7 June 2015 09:27 AM
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How do you distinguish a country that is taxing as much as possible from one that is not?

Developed countries in the former category would be spending close to the limit characteristic of all old democracies - between 40 and 50% of GDP (Sweden at one point tried to exceed that with obviously negative results for its economy). There are some exceptions but they have special circumstances (for instance, for tax havens, like Switzerland, the tax rates that generate maximum revenue would be lower). Developed countries can in principle spend a few times less (semi-authoritarian countries like Singapore in fact do), but it is obviously impossible to spend a few times more.

The fact that all democratic countries eventually arrive to this limit is the result of a general rule – democratic governments never lower non-military spending in times of prosperity and are very reluctant to do so in times of crisis.

I realize this is not a rigorous mathematical proof, but I don’t think such proofs are possible in economics.

If this was driven by attempts at wealth redistribution, you'd think that they'd start taking money from the military when increasing taxes is no longer possible.


You need bread and circuses, not just bread. Not to mention that cutting military expenses may have negative economic consequences.


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DanielLC 7 June 2015 05:02 PM
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In your original response, you gave the impression that there were two possibilities. Either the government avoids wealth redistribution, or it will take all the wealth it can without causing economic collapse. Do you know any countries that took the first option? It might technically be better to take the first option, but if it's not possible, that's not what we should be worrying about.

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melian 8 June 2015 05:58 AM
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You are right, it is a largely academic question. In the long term, the choice of whether to redistribute wealth or not depends not on the government but on the people who appoint it or, more fundamentally, on the balance of forces in society.

In societies where the top dominates (e.g., kings and aristocracy in Medieval Europe or President and the government functionaries in the modern North Korea), the redistribution of income will go from the bottom to the top. In societies where the middle class dominates (e.g., most western countries until the WWI) there will be little or no redistribution. In societies where low classes dominate redistribution goes from top to bottom.

Once a society fully transitions from stage two to stage three, the real question for the government is not whether to redistribute or not, but how to do it most effectively. After some experiments, most Western governments found out that taxing the rich at above the 90% rate is not the best way to maximize revenue.


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