Joachim Kennedy

Err In The Other Direction

Of course I wish I had paid better attention in The Economics of Public Policy every day, but I especially wish I was paying attention on this particular day when the lecture was about effective tax policy. On the day, it wasn’t something I thought I’d end up regretting. All that’s to say, don’t quote me on the following economics. It’s mostly fabricated to fit the narrative, but hopefully parts of it are right in spirit.

When creating an effective tax policy, you have to consider elasticity, how people will respond (and not just how big of a tantrum they’ll throw). This is similar to the normal demand curve. If a grocer raises the price on apples by a lot, then people will stop buying them. Some will substitute oranges, and some will forgo fruit altogether, and the grocer may make less money. But if all the drug companies raise the price of insulin a lot, diabetics will still buy it because their demand curves are very inelastic. (Not perfectly inelastic because at some point, people simply cannot afford insulin.)

The same is true of the government raising taxes. They are trying to increase revenue just like the grocer and the drug companies. So the story goes, it’s more effective to levy income taxes on the working and middle classes because they make up a large section of the population, and there’s not much they can do about it. If you rely on the super-wealthy for your tax revenue there’s a good chance that they move their money and/or their company to another country. (And there aren’t as many super-wealthy people in total, so it’s worse if a few of them leave.) Then you’d be making less tax revenue and everything would fall apart.

At least that’s the argument for why we shouldn’t raise taxes on the wealthy. The thing is, we’re probably really far from that tipping point where they would start leaving. Like, economically, there is such a thing as taxing wealthy people too much, and we’ve never even gotten close. That is, we’re missing out on tax revenue not despite but because of our less-than-progressive tax policy.

If we want to maximize our tax revenue and make the policy more progressive, we should increase taxes on the super-wealthy until we begin to see negative returns. Theoretically. Perhaps this strategy would be like driving heavier and heavier trucks over a bridge until it collapses to find the limit. You learn how strong the bridge was, but you also destroy the bridge.


Now I realize I’ve foolishly started with an example that will make the other examples seem inconsequential by comparison, but that’s just because they’re examples on the scale of humans and not countries. There’s a quote that I’ve seen attributed to multiple people that goes, “If you’ve never missed a flight, you’re spending too much time at the airport.” Same idea. Yes, missing a flight is a huge waste of time, but if you consistently wait for more than an hour at your gate, then all that time is also being wasted in a way, and depending on how much you fly, that could sum to more time than just missing your flight. You’re consistently making the mistake of leaving for the airport too early. If you instead tried to cut it close, and considered any wait longer than fifteen minutes a “loss” then you might end up wasting less time overall, even if you occasionally missed your flight.

I don’t want to belittle the psychological difficulty of trying to err in the other direction. In fact, I want to propose this as an idea that I rarely successfully adopt. I confess I have never missed a flight. I’ve mentioned before how I always underacted when I was in a musical. In fact, I had this idea then of trying to make the director say “Less” instead of “More”, but I could never bring myself to truly overact. Similarly, I regularly underdress for the cold, so lately, rather than asking myself, “What is the minimum amount I can bearably wear?”, I ask myself, “How much would it take to make myself too warm?” This has actually been more successful, and I chalk failures up to not checking the weather. But, by and large, it’s better to have to carry around an extra jacket than be cold all day.

But this brings up the point of consequences. Sometimes there are very good reasons for trying to err on one side. Like if I’m walking on a balance beam between a ball pit and a moat of crocodiles, I know which way I’d rather fall. Or much less fantastically when budgeting and estimating money, I always try to underestimate how much I have or will have because the consequence of that is being pleasantly surprised to have more than I thought I would. Or any time someone says “err on the side of caution” usually that’s a good indication. Ideally, I would not fall off the balance beam, I would estimate my finances correctly, and I wouldn’t err, but if I did, at least I’d know which way to do it.

But it seems to me that when I consistently make the same mistake, it’s because I think that the consequence of making the complementary mistake would be the end of the world. That is, of course you keep falling off the balance beam because you’re so leaning so far away from the moat that it causes you to lose your balance, but if you just fell in once, you would realize that there are no crocodiles in the moat, and you’ll be better able to balance in the future.


← On Cliche
On Pickiness →