Thursday, March 12, 2009

Beware the Snides of March!

Spot has taken great — and almost illicit — pleasure in watching Dave Mindeman provoke Captain Ahab/Captain Fishsticks/Craig Westover into a purple, foaming rage over the economic effects of laying off government workers. The Captain’s posts on the subject have waxed and waned between clipped seething contempt and outright volcanic wrath. Even on his best day, Spot has never been able to, er, stimulate the Captain the way Mindeman has.

And then, just as it appeared that the Captain had delivered his final, cathartic post, Charlie steps in and points out that the Captain’s parable in that valediction contained some legendary arithmetic:
To illustrate his point, he then lurches through an hilarious parable about a well-to-do family foregoing a $10,000 addition to their home because their taxes were about to spike by a similar amount.
Do the math. A family, let us postulate that they are well-to-do, is sitting at the kitchen table about to sign a contract with a home remodeler to build an addition on its home for $10,000. But just before they sign a newspaper article catches their eyes. It relates how the state of Minnesota will raise taxes in their bracket by $10,000 a year. This sobering news makes the prudent family reconsider, and it does not hire the remodeler to build the addition on its home.
Sobering news, indeed. But to swallow such a concoction, the family must read his newspaper columns to the exclusion of all else. Clearly, Westover must have learned the economics of the remodeling trade from his boss, who operates from a similarly theoretical grasp of taxes and small businesses. 
Do the math, says Westover. Oh, I want to, but it is so hard with the tears running down my cheeks! 
Nevertheless, here it is, based on the 2008 Minnesota tax tables. 
The family in Mindeman's post with an adjusted taxable income of $200,000 might normally pay $14,145 in state income tax. To render a $10,000 increase for this family, Caesar would have to increase the rate for the current top marginal tax bracket from 7.85% to 32.88%!
This is getting to be kind of a long set up, Spot; you better come up with the punch line soon!

Patience, grasshopper; good drama or comedy requires development. No cheap laughs from Spot!

Anyway, Charlie’s pixels were barely fixed in the firmament, and Ahab comes roaring back with a comment that put Charlie in his place:
Of course the "parable" -- an extended metaphor, if you will -- is not a one-to-one transfer, which is why the income tax is so insidious. Were it as simple as my illustration, the economic fallacy of collectivism would easily be exposed. The example intends to expose the underlying fallacy of the logic.
In reality, Captain, your example exposed you for the fumbling economic idiot you are. One-to-one transfers are how you silk screen a shirt: think Che Guevera, Captain. A parable or metaphor is supposed to reveal an essential truth; the Captain’s parable reveals how little he understands what he is talking about.

But it gets better.

The Captain puts ANOTHER post on the subject, this time about, inter alia, what a charlatan Charlie is. This is the final paragraph of the post:
Faced with the genesis of an economic principle, Mr. Quimby evolves an argument based on the Minnesota tax tables to prove that my scenario would never occur under Minnesota tax law. SCSU Scholars King Banaian provides the economist's response to the tax table argument.
How many of you boys and girls remember proofs in geometry class? The idea was to prove a geometric theorem, right? What the Captain did here was take a theorem — his “economic principle” — and disprove it with impressive skill.

But it still gets better.

Oh, Spotty! That’s hard to believe!

But true.

Note the economist’s response that the Captain refers to above. It’s a comment from King Banaian to Charlie’s post:
Charlie, why would you assume the addition is paid for in one year? The addition provides a stream of income (imputed, rental) that is supposed to have a net present value greater than $10k (or else you don't invest in the addition.) All we would need is a tax increase that decreases after tax income enough to give up the flow of imputed income. So if your couples were to face a $1000 PER YEAR extra tax it may be enough to get it to give up a $10,000 ONE TIME expenditure on a remodel.
Why would he assume it, Professor? Maybe because the Captain’s parable does. It was kind of you to step into the home improvement breach with your own brand of wallpaper though. The Captain obviously appreciates it.
Daddy, can we put an addition on the house with a room for Amy and me to sleep in? The dog house is really cold in the winter. 
Why no, Susie, we can’t do that. 
Why, Daddy? 
The net present value of an addition is less than the amount we’d have to pay. 
Even when the payments are discounted to present value, too? 
Well, that depends on your interest rate and housing market assumptions, Susie. I’m not willing to risk it. 
You aren’t sleeping in the doghouse, either, Daddy.
 That’s true, Susie, but you’ll understand these things when you get older.
You mean after I’ve taken economics? 
Exactly, Susie. Now it’s time for bed; don’t forget that extra blanket!
John Ralston Saul would know exactly what to call the Captain and the Professor: Voltaire’s Bastards.

They live in a world of fantasy and “assumptions.” But nobody really lives there.

No comments: