The efficiency game

Bibliographical note: This essay develops ideas owing to Kieran Latty, who is in turn developing ideas in Kalecki.

0.

Previously I’ve argued that efficiency (defined as Kaldor-Hicks efficiency) cannot be automatically assumed to be in the interests of the poor under conditions of oligarchy. Now I want to argue the reverse- it can’t be automatically assumed to be in the interests of the rich either.

There are numerous ways of structuring taxation. Optimal tax theorists consider both efficiency and equity in comparing different possible systems of taxation. It may seem that while equity is politically debatable, efficiency will appeal to everyone in the design of these instruments. As we will see below, this is not necessarily so.

Note that most of the points we consider here could be applied, with slight translation, to other domains like regulation.

1.

Jiang & Jim are playing a multiplayer game, perhaps a business simulator. As part of that game they have to put money into a common pot where it is used to fulfil certain functions the players cannot achieve on their own. Neither wants the money in the common pot to go below certain level, and neither wants all their income to go into a common pot, but Jiang’s ideal level of contributions is higher than Jim’s. We do not need to specify why Jiang’s ideal levels of contributions are higher than Jim’s- perhaps the pot is re-distributive in some way, or equally, perhaps Jiang just benefits more from the kinds of things pot money is spent on due to her strategy in the game.

Now suppose the sub-game of determining the size of the pot is played as follows:

There are two stages.

  1. First a method of payments to the pot is decided. Methods are not necessarily lossless, instead, for each possible level of contribution to the pot, each method involves some degree of loss between 0% and 100%. Joe decides the method of payments.
  2. After Joe decides the method of payments, the level of payments is decided. Jiang decides the level, proportion of funds that will be transferred from each player to the common pot.

Now what is interesting here is that it is not necessarily in Joe’s interests to pick an efficient method of payments. By picking an inefficient method, Joe might dissuade Jiang from setting the contribution level too high, since Joe wants a lower contribution level than Jiang. Ideally a a method that is inefficient at high levels but efficient at low levels will be found, but if this is not possible, depending on the shape of Joe’s curve of preferences, a method that is inefficient at all levels may be preferred. Not maximally inefficient mind- it would be bad if Jiang were forced to choose to put nothing in the common pot, but somewhat inefficient.

2.

You may have already guessed this is about taxation, specifically about progressive taxes- taxes that effect the rich more than the poor. Instead of Joe and Jiang we have high income earners and low income earners. The pot, representing state funds, is used to fund essential services that appeal to everyone or almost everyone (amenities, security) but also things like redistribution. The methods of transfer represent different kinds of tax structure, with different levels of loss associated. For the same reason it isn’t necessarily in the interests of Joe to choose a transfer method with minimum dead-weight losses, so the rich might lobby for certain taxes to be structured in such a way as to have higher dead-weight losses.

Why imagine that low income earners have comparatively more power over the level of taxation whereas the well to do have comparatively more power over the method(1)? Because discussions over the details of taxation are technical affairs. The rich can afford to hire analysts and well informed lobbyists while the poor’s political advantage lies more in numbers and thus broad strokes.

Thus It might be to the interest of the rich to reduce the efficiency of the taxation system and exacerbate the growth/inequality tradeoff –to the degree such a thing exists at current inequality levels. For this, and many other reasons it cannot be assumed that efficient taxes are a politically neutral issue.

Hopefully I’ve sketched out the core intuition of what Kieran and I call Kaleckian inefficiency. For a richer discussion see this.

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(1) Although of course both have some degree of power over either. I suspect the wealthy have more power than the poor over both the method and the level, hence why I refer only to a comparative advantage of the poor. That we’re only talking about comparative levels of influence over different policy arenas explains why in principle our discussion here is compatible with our earlier argument about the effects of Kaldor-Hicks efficiency under an oligarchy.

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