catallaxy files

catallaxy in technical exile

Nick Gruen proposes a new tax

with 24 comments

Over at Troppo, Nick Gruen is proposing a new tax:

As cities get larger the relative benefits from being closer rise presumably with rising congestion. Then again there’s also a movement to ‘edge cities’ connected by freeways. But another theme in all this it seems to me is the increasing proportion of our wealth devoted to positional goods. The appropriate policy response is probably a tax on positional goods (because one person’s good position is another person’s worse position – negative externalities should be taxed).

The context for the original discussion was about how to deal with congestion in cities. However Nick’s comment about ‘positional goods’ raises a lot of interesting economic and philosophical issues. Here is some background on positional goods:

    Positional goods are products and services whose value is mostly, if not exclusively, a function of their ranking in desirability in comparison to subsitutes. The extent to which a good’s value depends on such a ranking is referred to as its positionality.
    Like land, positional goods often earn economic rents or quasi-rents. Examples of positional goods include high social status, exclusive real estate, a spot in the freshman class of a prestigious university, a reservation at the “hottest” new restaurant, and fame. The measure of satisfaction derived from a positional good depends on how much you have in relation to everyone else. A society that devotes more resources to positional goods is arguably wasting effort, since a gain for one must come at a loss for another.
    Competitions for positional goods are zero-sum games because such goods are inherently scarce, at least in the short run. Attempts to acquire them can only benefit one player at the expense of others.

The proposal that positional goods should be taxed is a logical implication of the happiness literature. It’s natural for libertarians to look askance at a new excuse for taxes but what are the specific problems with taxing positional goods? How would you go about taxing positional goods if you wanted to?

Update: Just a few more quick thoughts on taxing positional goods:

  • In one sense this proposal is really an attempt to tax avarice.
  • But by the same token, such a policy also caters to envy. I would argue that envy is a far, far more antisocial emotion than avarice.
  • In addition there seems to be an overlap between conduct that may be undertaken for avarice and conduct that is undertaken for self improvement.
  • Health is a positional good nowadays probably more so than in the past. Is the jockeying to keep fit a ‘zero sum game’? Should there be a tax on going to the gym? Doesn’t this conflict with other arguments for subsidising going to the gym? Beauty is a positional good. Should there be a special tax on cosmetics and beauty salon services? Dry cleaning services? A fancy education?
  • I think the biggest problem with taxing positional goods is that a lot of conduct that would fall under such a tax for allegedly arousing the negative externality of envy in others also confers positive externalities insofar as they lead to self improvement.
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    Written by Admin

    November 9, 2006 at 4:47 pm

    Posted in Uncategorized

    24 Responses

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    1. And I moved closer to the Harbour Bridge so I can walk to work to combat global warming and the armada of angry penguins on icebergs that are about to attack New Zealand.

      Rafe Champion

      November 9, 2006 at 6:40 pm

    2. This came up maybe ten years back or more.

      A young economist was proposing a tax that JC just proposed yesterday. That is you are only paying tax on what you spend.

      But he was doing it on this strange justification. A $400 interview suite aint as valuable if everyones wearing $1000 suits. You put your family in a Plymouth or something to keep them safe on the roads but then everyone is surrounding their familes with humvees.

      And so to this way of thinking there is a sort of localised arms race to the thing.

      This was before the internet and this guy sounded like a borderline socialist in his leanings. But he did seem to be using his head and he did seem to mean well.

      So that Milton Friedman wrote him a letter complimenting him on his work. Milton wasn’t endorsing the new tax proposal. But I think he was saying that it was in the ballpark since what he was concerned with most was getting government spending down.

      How the remaining funds were raised was a matter where decent people could disagree.

      Now I didn’t read the letter. I just heard this young fellow on the radio and he referred to a letter he had gotten.
      >>>>>>>>>>>>>>
      Now I’ve got no problem with the tax that this bloke proposed even if I find the justification a bit odd.

      But see how Nick messes it all up. By taking half the idea, rejecting the low-damage solution. But retaining the justification.

      I mean at any time one of these blood-suckers can declare something a “POSTIONAL GOOD”

      Its a bullshit branding to be making.

      What he’s talking about is a sort of excise tax. Hopelessly inefficient.
      >>>>>>>>>>>

      Lets sake the first case where the bloke is worried about these big gas-guzzlers clogging up the freeway and making you no more safe then you were when you put your family in a big car.

      Why isn’t there seamless congestion charging… and later a regulated sell-off?

      Thats one problem gone.

      What about the choice pieces of real estate. Thats the land-value-tax in combination with a prohibition everywhere on height restrictions on buildings.

      Problem gone.

      What about the expensive suit?

      Not really much of a hope of getting a great deal of taxation revenue out of worrying about human vanity.

      I will go and read what Nick has to say. But I feel like we have a really really bad idea going here.

      GMB

      November 9, 2006 at 6:44 pm

    3. I get it, he’s proposing a wealth of sorts. Does the left ever take a rest in trying to figure out ways of taxing people.

      JC.

      November 9, 2006 at 6:45 pm

    4. Oh and the tight money will help the alleged real estate “problem” as well.

      GMB

      November 9, 2006 at 6:48 pm

    5. Will tight money bring the dead back to life too, Graeme? LOL

      Agree with you about the rest though.

      Jason Soon

      November 9, 2006 at 6:52 pm

    6. Jason,
      I would think the attempt to tax these goods both dangerous and wrong. As GMB says, anything could be declared to be positional and therefore taxed. In any case, this is not a zero sum game – like any other good I can buy it at a cost to myself and a benefit to the one selling. I would sell it if the value of it to me is less than the cash being offered. Even fame has its price, so it would be up to me whether that is worth paying.

      Andrew Reynolds

      November 9, 2006 at 7:04 pm

    7. Jason,
      I also thought Рthere would also be social cach̩ in paying the tax, further distorting the effects. This is just plain silly policy.

      Andrew Reynolds

      November 9, 2006 at 7:12 pm

    8. look, the truth is that most things Nick writes about has to be read with a jaundiced eye.

      Nick doesn’t like rich people. He seems to want to take away money from anyone he considers to be wealthy.

      there is a whole industry devoted to figuring out how best to remove these people from their money.

      JC.

      November 9, 2006 at 7:14 pm

    9. positional goods and coase thereom are bubbling around in the bottom of my mind…but i havent connected the two yet…

      i sortof think coase’s thereom is like goedel’s incompleteness…it pops up everywhere in different forms…

      c8to

      November 9, 2006 at 7:21 pm

    10. “Will tight money bring the dead back to life too, Graeme? LOL
      Agree with you about the rest though.”

      Why don’t you agree with me about the tight money?

      If people virtually HAVE TO offload cash-for-land to guarantee a store of value thats when we see this premium on land.

      I’d rather have the premium on precious metals if anything. I wanted to emphasise this and downplay the land-tax a little.

      I mean what IS a positional good?

      Would a video player have been considered a positional good in 1980…. There you are a movie enthusiast.. And here comes Nick..

      POSITIONAL GOOD!!!! says Nick. Well we’ll slap a tax on that because sociologists have proved that you are only buying this video player in order to ‘keep up with the Joneses’.

      Either the good is inherently scarce in supply or it isn’t.

      In Australia water drawn from our main rivers, whenever the rivers are some percentage lower then usual…… well during those times such water is INHERENTLY LIMITED IN SUPPLY.

      So its only right and good that our taxes be levelled on those situations.

      Its true that land close to the city is inherently short in supply….

      But in Sydney we have a land tax.

      Now if over time we can have a vastly smaller government sector but a greater proportion of it being financed in land tax that would be ok.

      But surely the thing to do is get rid of the height restrictions everywhere.

      And traffic-space in the city in peak-time is inherently scarce too.

      So I can understand if its items that have this INHERENT SCARCITY.

      But what is this JIVE about Positional Goods.

      It sounds like the most hateful, hairshirt, puritan, commie-addict-on-methodone concept one could ever imagine.

      GMB

      November 9, 2006 at 7:21 pm

    11. Jason
      If you don’t like hard money then answer this.

      Would you have been better off leaving $100,000 in the bank for the past 10 years, or would you have been better off owning hard assets? Why?

      100,000 earned 10 years ago expresses a unit of value at the time. Why should that be debauched/ depreciated?

      JC.

      November 9, 2006 at 7:28 pm

    12. The joke is there is currently a positional tax on most things anyway. Buy a plasma TV and you pay GST. Buy an expensive car and you’re hit with a luxury tax. Buy a expsenive house and you end up paying a larger sum in stamp duty.

      There is a positional goods tax of sorts.

      JC.

      November 9, 2006 at 8:21 pm

    13. Will Wilkinson has an article on positional goods in the latest issue of Policy.

      Andrew Norton

      November 9, 2006 at 8:40 pm

    14. Well we see time and again whats behind what Gruen and folks like him are about.

      Any excuse will do.

      The lust for thieving comes first. The justification for the thieving is tacked on afterwards.

      And it must be a 24 hour thing. Gruen must think about thieving like the fat sheilas in the office think about choclate.

      Any concept that comes past the window is evaluated as whether it provides an excuse for more thieving.

      Positional goods?

      Well yes we can use that.

      Hasn’t Quiggin been trying to revive stabilisation through fiscal policy?

      An incredibly stupid idea that never had anything to reccomend it ever.

      But its an excuse for thieving.

      Global warming.

      Its really just an excuse for more thieving.

      We ought to not doubt it anymore.

      GMB

      November 9, 2006 at 8:55 pm

    15. Well I guess that just leaves us with our tax-free Mao suits.

      But then again.

      Might not this be declared “Proletarian Chic?”

      GMB

      November 9, 2006 at 9:14 pm

    16. As I pointed out on Gruen’s blog, there is not necessarily an externality that needs taxing when people compete for status. Many people who write in this area neglect the role of prices. The examples of positional goods you quote mix two very different types of goods: those that are priced and those that are not. Much of the criticism of status competition comes from strong and unreasonable assumptions about pricing.

      Competition for status may be excessive, but much is consistent with efficiency. If competition for status can be purchased in a competitive marketplace, then the cost of acquiring higher status is simply a transfer payment that adds to the sellers’ wealth and is an asset to buyers. There is no externality. The same applies if status can be purchased through buying status goods in fixed supply (eg harbourside mansions, diamonds). If they weren’t in relatively fixed supply, then they would presumably be like any other good.

      Indeed, competition for status can increase efficiency where it encourages people to engage in socially valuable but uninsurable, and so underprovided, risky activities, such as entrepreneurship, start-ups, and research and development.

      The same applies in marriage markets, where individuals that improve their attractiveness automatically lower the attractiveness of others. That market is efficient if the value someone brings to a marriage is fully priced. For example, the demand for breast implants is efficient if the marriage, and other markets, that match men and women, compensate women fully for the utility gain to their husbands, even if it lowers the relative attractiveness of other women. Indeed, there may be too few breast implants from an efficiency perspective if the benefits if the impants give pleasure to other men and these ‘bystanders’ (pervers?) do not compensate the women for the utility they receive.

      Grumpy Old Economist

      November 9, 2006 at 10:33 pm

    17. “Indeed, there may be too few breast implants from an efficiency perspective if the benefits if the impants give pleasure to other men and these ‘bystanders’ (pervers?) do not compensate the women for the utility they receive. ”

      Damn straight. That’s the only thing I want to see subsidized by generous government handout. Plastic is fantastic in my book.

      Let’s have enough of this crap about paid maternity leave. Cancel that and go for fully paid breast implant leave along with entitlments.

      JC.

      November 9, 2006 at 10:42 pm

    18. thanks, GOE. Nice exposition.

      Jason Soon

      November 9, 2006 at 11:18 pm

    19. I have commented on this topic over at Club Troppo and included that comment in a post on my own blog. The post at my blog that repeats the comment is here:

      http://economicsgeek.blogspot.com/2006/11/positional-goods-and-externalities.html .

      Damien Eldridge

      November 10, 2006 at 4:04 am

    20. One point that has to be made is that while there’s a lot of social positioning that can be made by acquiring assets, many of the real social power is held by those who are ‘born’ with it.

      Just because you are a billionare doesn’t mean you have class, after all. Old Money has always been more positional then New Money.

      Scott

      November 10, 2006 at 5:33 am

    21. I think Grumpy is quite right. The point is that individuals who cotinually promote the happiness nonsense and the like, do not approve of the price mechanism. Isn’t surprising that all their ‘solutions’ to their self-defined market failure is additional taxation?

      Sinclair Davidson

      November 10, 2006 at 6:50 am

    22. There are two ways of modeling status which have very different policy implications. One way is to put a good called status (or some good that gives you status) in the utility function. It is in fixed supply and the more you consume of it, the higher your status. If this good is bought in a competitive market, then the outcome is fully efficient. There is no externality and no inefficiency from bidding up the price of the status good (just a transfer from buyer to seller). Although a person’s utility only depends directly on his own status, indirectly it depends on that of others. The availability of status to everyone else is reduced when other people acquire a lot of status. But that would happen under any system of allocating the status good.

      Another way is to assume that people directly care about the consumption and status of other people. In that case, there is an externality and some forms of competition for status may lower efficiency. For example, if people care about their relative rank in the income distribution they may work long hours to raise their relative income. If everyone worked equally long and hard, all incomes rise proportionally and no-ones relative status changes, but everyone’s utility goes down because they worked excessively. This problem does not arise in the first way of modeling status competition because when people compete for status there, they bid up the price of the status good which accrues to its initial owner.

      I don’t think the proponents of ‘envy taxes’ have made the case that the second model is more accurate than the first.

      Grumpy Old Economist

      November 10, 2006 at 10:17 am

    23. They’re really messing with what it means to be human here.

      I mean if you puny humans weren’t interested in improving your status would you even have the motivation to get out of bed in the morning?

      The wonders of human motivation are mysterious.

      Except to dumb-left-wingers with a new sociological theory who suddenly get the gift of far site. And ESP. And can look into human souls….

      ….Can look into the human heart and divine the motivations of specific individuals or yet even humans massed in the millions.

      Despite these great gifts your dumb-left-winger seems to often fall for the one motive fallacy. The assumption that for every action there is one REAL motive and one motive only.

      I rather see human motivation as like a mixing desk in an audio studio.

      You might have all these various emotions and motivations and such on like 23 tracks. But where the faders all are will depend what mood you are in.

      How many of our motivations and emotions backing up a given action are there that are immune to a nihilistic-dumb-left-winger putting them under the microscope and then casting aspersions on them?

      Once an action is decided upon and thought to be the right and ethical thing to do one ought to be able to draw any type of emotion from any one of the 23 tracks.

      But this idea of casting aspersions on certain positional goods or the act of buying them. This is really sick stuff I’d reckon.

      Sick bastards with hearts of hanging judges, looking askance not just at all we do, but at everything we think and feel. At all things which make up the human.

      Only backing up the guild-of-thieves ideology is good or meaningful in their world.

      GMB

      November 10, 2006 at 2:35 pm

    24. Christ that’s eloquent, Bird. that’s what we keep you around here for.

      Jason Soon

      November 10, 2006 at 4:26 pm


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