Friday, January 8, 2010
Wealth-dependent Fines
Tyler Cowen alerts us to an intriguing story:
My first thought is no. We fine activities that have negative externalities, such as putting others at risk. If X is the size of the externality, and p is the probability of being caught, then the optimal fine is X/p. That will give people the right incentive to produce the optimal quantity of the externality. Under this policy, the rich may choose to speed more, but that is optimal. If we have an optimal carbon tax, the rich will produce more carbon too. Optimal pigovian taxes do not eliminate income effects.
On further reflection, however, I think a case can be made, at least theoretically, to support the judges' ruling. First, assume that the negative externalities are very great, so the optimal quantity of the externality is about zero. By itself, that argues for a large fine, not a wealth-dependent one. But then add another assumption: Suppose there is some small probability that an innocent person will be found guilty because of a rogue, or simply a mistaken, policeman. This possibility, together with risk aversion, would induce us to temper how large the fine is. And this tempering of the large fine would seem to be less for richer taxpayers: Because the mistaken ticket is a proportionately smaller fraction of their wealth, we need to worry less about the uncertainty large fines impose. The result is larger fines for richer offenders.
A Swiss court has slapped a wealthy speeder with a chalet-sized fine — a full $290,000.
Judges at the cantonal court in St. Gallen, in eastern Switzerland, based the record-breaking fine on the speeder's estimated wealth of over $20 million.
A statement on the court's Web site says the driver — a repeat offender — drove up to 35 miles an hour (57 kilometers an hour) faster than the 50-mile-an-hour (80-kilometer-an-hour) limit.Is it optimal to base fines on wealth?
My first thought is no. We fine activities that have negative externalities, such as putting others at risk. If X is the size of the externality, and p is the probability of being caught, then the optimal fine is X/p. That will give people the right incentive to produce the optimal quantity of the externality. Under this policy, the rich may choose to speed more, but that is optimal. If we have an optimal carbon tax, the rich will produce more carbon too. Optimal pigovian taxes do not eliminate income effects.
On further reflection, however, I think a case can be made, at least theoretically, to support the judges' ruling. First, assume that the negative externalities are very great, so the optimal quantity of the externality is about zero. By itself, that argues for a large fine, not a wealth-dependent one. But then add another assumption: Suppose there is some small probability that an innocent person will be found guilty because of a rogue, or simply a mistaken, policeman. This possibility, together with risk aversion, would induce us to temper how large the fine is. And this tempering of the large fine would seem to be less for richer taxpayers: Because the mistaken ticket is a proportionately smaller fraction of their wealth, we need to worry less about the uncertainty large fines impose. The result is larger fines for richer offenders.
Thursday, January 7, 2010
Wednesday, January 6, 2010
How well is Team Obama working?
Al Hunt says the economic team is not working well, leading Mickey Kaus to wonder whether Larry Summers will be pushed out.
I would be very surprised if that happened. President Obama seems astute enough to recognize that Larry as an economic policy adviser is nonpareil. Larry is simply too good to give up.
On the other hand, the job Larry has--NEC Director--traditionally has the responsibility of coordinatiing the policy process, which requires more people skills than deep insights into economic policy. Maybe what the White House needs is a reorganization. Put a hard-working but easy-going person like Jason Furman or Doug Elmendorf in charge of organizing the economic policy process and then give Larry a position such as "senior adviser" from which he can kibitz on a wide range of policy topics. There is really no one better at asking the hard questions that need to be asked.
I would be very surprised if that happened. President Obama seems astute enough to recognize that Larry as an economic policy adviser is nonpareil. Larry is simply too good to give up.
On the other hand, the job Larry has--NEC Director--traditionally has the responsibility of coordinatiing the policy process, which requires more people skills than deep insights into economic policy. Maybe what the White House needs is a reorganization. Put a hard-working but easy-going person like Jason Furman or Doug Elmendorf in charge of organizing the economic policy process and then give Larry a position such as "senior adviser" from which he can kibitz on a wide range of policy topics. There is really no one better at asking the hard questions that need to be asked.
Monday, January 4, 2010
Sunday, January 3, 2010
Dave Barry's 2009 Year in Review
It was a year of Hope -- at first in the sense of "I feel hopeful!" and later in the sense of "I hope this year ends soon!"
It was also a year of Change, especially in Washington, where the tired old hacks of yesteryear finally yielded the reins of power to a group of fresh, young, idealistic, new-idea outsiders such as Nancy Pelosi. As a result, Washington, rejecting "business as usual," finally stopped trying to solve every problem by throwing billions of taxpayer dollars at it, and instead started trying to solve every problem by throwing trillions of taxpayer dollars at it.Continue reading here.
Friday, January 1, 2010
Goodbye, Estate Tax (for now)
The estate tax is now gone, one of the goals of President Bush. But under current law, it will come back next year.
As I recall, the reason for this peculiar state of affairs was not, as Paul Krugman suggests, an attempt to hold down the official cost of the Bush tax cuts. Indeed, back in 2001, what would happen in 2011 was outside the 10-year budget window, so rigging the official cost could not have been the motive for the return of the estate tax next year. Rather, some legislative rule made it harder to pass changes in tax law that applied outside the 10-year window.
What should policy be toward the taxation of estates? The economics profession is far from unanimous on this question. Paul favors the estate tax. I favor its repeal, for reasons I explained here. I am not alone among economists: see also Ed Prescott, Martin Feldstein, Gary Becker, and Jeff Miron. It is clear that our position will not persuade the current majority in Congress.
As I recall, the reason for this peculiar state of affairs was not, as Paul Krugman suggests, an attempt to hold down the official cost of the Bush tax cuts. Indeed, back in 2001, what would happen in 2011 was outside the 10-year budget window, so rigging the official cost could not have been the motive for the return of the estate tax next year. Rather, some legislative rule made it harder to pass changes in tax law that applied outside the 10-year window.
What should policy be toward the taxation of estates? The economics profession is far from unanimous on this question. Paul favors the estate tax. I favor its repeal, for reasons I explained here. I am not alone among economists: see also Ed Prescott, Martin Feldstein, Gary Becker, and Jeff Miron. It is clear that our position will not persuade the current majority in Congress.
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