Professor Mark J. Perry's Blog for Economics and Finance
From Tyler Cowen in today's NY Times, "99 percent of all automobile trips in the United States end in a free parking space, rather than a parking space with a market price.
Dr. Mark J. Perry is a professor of economics and finance in the School of Management at the Flint campus of the University of Michigan. Perry holds two graduate degrees in economics (M.A. and Ph.D.) from George Mason University near Washington, D.C. In addition, he holds an MBA degree in finance from the Curtis L. Carlson School of Management at the University of Minnesota. In addition to a faculty appointment at the University of Michigan-Flint, Perry is also a visiting scholar at The American Enterprise Institute in Washington, D.C.
144 Comments:
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It's free to park them because it's the way the location you're going to keeps from discouraging you. Stores know that if they charge customers to park they will get fewer customers. So a store has to ask, do I want a 10+ dollar sale or 3 dollars for parking?
As Professor Shoup puts it: “Who pays for free parking? Everyone but the motorist.”
I recall dropping a friend off at the side of a street (in her car). After I pulled-out and was a half block away, an old sheriff waved at me furiously from the sidewalk. I made the mistake of stopping. He wrote me a ticket for illegally parking (for less than 30 seconds) and even gave me an extra ticket (for something else).
I refuse to pay to park for the same reason I do not pay for water: I don't have to. It does not get much simpler than that.
"If we don’t give away free cars or free gas, then why do we give away parking spaces for free?"
We can take away many cars and gas by towing away those that don't pay or pay enough.
It's funny how no one realizes we do pay to park them. Gas tax, property tax and income tax all go to build parking spaces. And takes privately funded property taken though setbacks and easements go to build parking spaces.
The people pay to park.
Typical clueless but thoroughly socialist engineering nonsense from the New York Times...
'Higher charges for parking spaces would limit our trips by car. That would cut emissions, alleviate congestion and, as a side effect, improve land use'...
Why would one want to limit one's trips by car? Why waste more time than necessary to shop, to go for entertainment, to get to work and so forth?
Emissions? Apparently Cowen hasn't been paying attention to the extortionist practices of the EPA over the last forty plus years...
Improve land use?
What's else can one do with a plot of land the size of a typical parking spot? Grow corn? Set up a lemonade stand? Teach basic economics to two or three people?
'Higher fees and permit prices would help shore up the ailing budgets of local governments'...
Hmmm, maybe local governments shouldn't spend so waste so much money and that will solve a whole lot of ailing...
'Many suburbanites take free parking for granted, whether it’s in the lot of a big-box store or at home in the driveway'...
ROFLMAO!
That parking has been PAID for already...
The parking lot costs are figured into the final price of the product or service purchased at the big box store and what can you say about the driveway of one's home? It was thrown in for 'free' by the original seller of the house and property the house sits on...
BTW that driveway has a payment that comes due yearly at the very least in the form of property taxes and insurance...
'PERHAPS most important, if we’re going to wean ourselves away from excess use of fossil fuels, we need to remove current subsidies to energy-unfriendly ways of life'...
Maybe Tyler Cowen should just slip on his earth shoes, walk to his next destination in life and not worry about others using fossil fuels, the fossil fuels that made it easy for him to put out this clueless screed...
'Legally mandated parking lowers the market price of parking spaces, often to zero'...
Where is this guy at where there's some parking that is 'legally mandated'?
Any village or city that mandates that a business have X number of parking slots for its business is just reaffirming its own cluelessness...
Where will people shop? At a place with no parking thus inconvinient or at a place where they can park?
'If developers were allowed to face directly the high land costs of providing so much parking, the number of spaces would be a result of a careful economic calculation rather than a matter of satisfying a legal requirement'...
OMG! This is to funny! Where are developers getting reduced land costs other than were crony capitalism isn't being practiced?
'Imposing a cap-and-trade system or a direct carbon tax doesn’t seem politically acceptable right now'...
Now we're getting to the meat of the Tyler Cowen's problem, he apparently still believes in the global warming scam...
Michael, great points.
Michael, I know I pay to park in the price of the product, but I have not found meals or products cheaper downtown where I pay to park as compared to the suburbs where I don't pay to park. You want to guess where I go if I have a choice?
He measures the value of a Los Angeles parking space at over $31,000 — much more than the worth of many cars.
Government can offer another cash-for-clunkers program to destroy cars worth less than $31,000 or get rid of enough cars to make the value of cars equal to the value of parking spaces :)
Markets in everything: Store owners provide free parking to draw customers.
If you want less of something, tax it. Paid parking = less customers (if they have a choice).
Does that "free" parking lot include the corporate welfare the business may have been paid to locate there?
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As Michael noted, many parking spaces are paid for - at least ostensibly - through the taxes that pay for our roads. Of course, politicians and special interest groups have diverted much of this money towards other projects, especially mass transit. My (personal) opinion is that the roads should be privatized as well, and then people who want to give away free parking (that they own) are free to do so, and those that want to charge will be free to do so as well.
Personally, as a good host at my residence, and as a retail business owner that wants to draw customers), I would allow people to park for free.
this is a silly argument.
michael is right about the payment - not just gas and property, but also sales tax on the car, but registration expense as well. the taxes on cars are legion.
but the argument itself is silly. i don't pay (directly) for a picnic spot in the park, for lying on my towel at the beach, or for sitting on a public bench. there are numerous "free" public use situations like this.
this just seems like another anti car rant. they aren't being treated any differently than your butt or your bike in a rack at the park.
his $31k parking space value is an apples to oranges comparison. perhaps $31k is what it costs to have a space that you and only you can use, but what does a backyard cost? shall we use that to determine the cost of a picnic spot?
public space is public space. you get it on a first come, first served basis. no way would anyone pay $31k for a parking space that everyone else could use too.
his notion that 99% of all trips end in a free space is just a joke. it cannot possibly be true. half of my trips end in my garage. i pay for that. i suspect most people have the same situation. my cars spend 90%+ of their time there as i don't drive to work. the same is true of nearly all my neighbors.
i would be willing to bet that he cannot substantiate his number in an way. i'll put up money right now. there is simply no way that number is correct.
his notion that somehow buying land and providing free parking has no direct costs is laughable. what, land is free? asphalt? maintenance? it still has costs.
the requirement for providing parking is precisely to avoid the congestion he laments. imagine a suburban supermarket with everyone circling the store looking for parking. leaving aside for a minute whether telling developers they have to do things (a complex and separate issue) is a good idea, can he really believe that congestion would go down?
i can sure tell you that if i lived a block from a suburban shopping center, i sure as hell would want them to have parking for their customers.
One needn't read far into Cowen's opinion piece to realize that it isn't so much about the cost of parking, as it is about social engineering.
"Higher charges for parking spaces would limit our trips by car. That would cut emissions, alleviate congestion and, as a side effect, improve land use."
This is part of a common theme these days that the automobile is evil, and must be restricted or
eliminated. Other parts include the idea that someone else knows best what the size of my house or yard should be.
The idea that parking is free is just idiotic. We may not know exactly HOW things are paid for, but NOTHING is free, and we can be confident that as consumers, employees, and taxpayers WE ultimately pay for everything.
The suggestion that businesses would provide less parking if not required to do so is more idiocy. My local Wal-Mart provides parking because that's what customers want. They also prefer lighting so they can shop at night, heating and cooling so they can shop in comfort, and a roof on the building so they don't get wet when it rains, None of these costs are charged separately, but are part of the price we pay for goods at Wal-Mart.
I also suspect that the developer who built the house I live in provided parking space in the form of a driveway and garage because he knew that I wouldn't likely have bought it otherwise. I understood that the cost of providing parking was included in the price of the house. I don't consider it free any more than I consider windows or bathrooms to be free.
Some other things that aren't free:
- a glass of water in a restaurant
- shipping on items we buy in a store
- lunch
Wow! morganovich, I see that Cowen's opinion piece really rang your BS detector! (as it did mine)
Based on your reaction to this short piece, I would highly recommend AGAINST your reading Dr. Shoup's book "The High Cost Of Free Parking", as it sounds like something that might cause you to blow a gasket. :-)
Once again Prof. Perry has found an article that pushes all the right buttons.
By the way , what new flood of silliness is brewing in your fair city of SF? Banning toys in Happy Meals, Forbidding pet sales, licensing pet owners...where will it end? How can you stand the idiocy swirling all around you? :-)
ron-
living in SF is always a trade off: beautiful city, great food and nightlife, fantastic biking and outdoor sports etc. vs the truly ludicrous politics and preposterous philosophy.
i literally once had someone's dingbat boyfriend opine (while losing an argument to me) that "logic is the tool of the oppressor". he had just been cornered into admitting that his philosophy implied that he did not believe that those with opinions different than his were entitled to justice. faced with such absurd opposition, one might be forgiven for wanting a big drink and a moving truck, but, on the other hand, there is a sort of satisfaction that comes from waging the Sisyphean battle against fuzzy headed thinking. someone has to try to talk sense to these people...
in re-reading his argument, i have yet another gigantic fallacy to point out:
"who pays for free parking? everyone but the motorist" we've already dealt with the ways motorists pay, but let's look at lots of other items:
i pay for city parks i don't use. i pay for schools, but have no children. i pay to maintain heritage sites i never visit and for all manner of other city and state services of which i will never, ever avail myself, including massive subsidies for public transportation.
if he believes in user pays, shall i get a discount on my taxes for all the things i don't use? i'll bet my paying for parking but not for schools will make me come out way ahead.
we all pay taxes for services we don't use. i'd be willing to bet that the people who use the most services often pay no taxes at all.
his argument is a typical attempt to reframe on issue to get the result he wants, but i'll bet he would never allow his logic to be extended to all the analogous situations.
that is how you can tell that he he simply an anti car partisan masquerading as someone favoring out financial rights.
What utter nonsense!
Every trip from home starts with the car concerned park in space I pay dearly for.
Most the trips from there terminate at a Walmart or someplace that _I_ pay for as a part of the prices I pay (and as a part of the "tax incentives" the municipality gave them to buld the place).
Some times a trip ends in a "public" place like a park which I pay for (or somebody did on my behalf) with taxes and fees.
THERE IS NO FREE LUNCH! Or parking.
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"logic is the tool of the oppressor"
Oh wow. That's a good one. I'll have to remember that. That response would stop me dead in my tracks, so I could only shake my head in confusion & walk away.
And, thanks for the new vocabulary word 'Sisyphean'. I had to look that one up.
If you can win arguments like the one you described in SF, you are likely to succeed anywhere.
"someone has to try to talk sense to these people..."
I'm glad you are fighting the good fight there. Maybe even tiny cracks in some of the absurd beliefs and arguments will cause the whole thing to collapse for some people. Many may not have ever heard any opinions other that their own, constantly repeated back to them.
Now, if you can only convince enough people to vote for John Dennis. :-)
The parking fees charged by government are SUPPOSEDLY for the "cost of the service." There is not to be any "profit" included. But I've fount that the parking meter fees (and fines) are FAR in excess of the "cost of the service."
I filed a lawsuit against an unjustified sixfold increase in parking meter fees in San Diego. State and local law requires such fees to be charged only for the cost of the service.
To justify the fees, the city claimed that the parking meters (which can be found on only 4% of the city street curbs) should 100% of ALL the streets' costs. This absurd argument was accepted by the judge -- a government employee who understood that more revenue for government can impact his pay and pensions.
Sometimes I wonder whether Tyler really wants to be an economist. At times he seems to be more inclined to slant economic thinking toward the liberal, central-planned worldview he desires.
It should be clear why automobile users are not charged for parking in most suburbs in America. It is not due to land use regulations. Such unmetered parking predates the land use regulations he criticizes.
Land for parking lots is cheap relative to the investment made by shopping centers and stand-alone retailers. Collecting fees for such parking would undoubtedly cost much more. Rather than incur such fees, retailers and other businesses simply include such costs in their business models. That's far more efficient than building gated parking garages or installing and policing meters.
As to Tyler's argument that free parking is responsible for adoption of the automobile, all I can think is that he must be smoking too much dope. Automobiles exist in such large numbers in America because Americans desire the freedom they bring. Tyler may not like that view held overwhelmingly by Americans, but he's not going to change it.
Tyler must live in a different area than I do.
"This absurd argument was accepted by the judge -- a government employee who understood that more revenue for government can impact his pay and pensions."
This is EXACTLY why, on different subjects, and at a different level, the SCOTUS cannot be allowed the final word on matters of constitutionality.
juandos said...
"What's else can one do with a plot of land the size of a typical parking spot? Grow corn? Set up a lemonade stand?"
Well, we know for sure we don't want to set up a lemonade stand. That's BIG trouble.
"Well, we know for sure we don't want to set up a lemonade stand. That's BIG trouble"...
Oh, how very droll Ron H and timely too!...:-)
Imposing higher fees for parking may make further changes more palatable by helping to promote higher residential density
Cowen needs to explain why people need to be in high densities. I lived in NYC and for the cost of the rent there for a 1 1/2 bedroom apartment, I can buy 2, 2 bedroom, 1 1/2 bath homes in Cincinnati within 10 miles of the city center.
Having lived around the country, I've found that urban living pretty much reduces one standard of living.
"Cowen needs to explain why people need to be in high densities."
This is a a difficult concept to explain to rational people, but to those who think they know what's best for everyone else, and how best to spend other people's money, this makes perfect sense.
This is part of a larger concept that includes the idea that everyone would love to travel on commuter rail or walk wherever they go if they only could.
There's no room in this mindset for the idea that many people want to live in large single family houses in the suburbs or even in rural areas, and love the freedom of driving their own cars.
High density advocates believe that people are forced to live in houses they don't really like because that's what developers choose to build, and that cars people don't want are forced on them by automakers. Free choice is a foreign concept to these people.
In many cases there are too many parking spots due to poor zoning. cut the number of spots and put trees in their place !
"In many cases there are too many parking spots due to poor zoning."
Not sure which places you refer to, but I know I would rather see too many parking places than too few. Where communities have allowed shopping centers with too few parking spaces, traffic congestion is much worse. In addition, customers park along residential streets adjacent to such centers. Neither congestion nor intrusion into residential neighborhoods is what voters desire. That's why what you describe as "poor zoning" has been enacted by local governments.
Maybe Tyler Cowen was talking about that gem of federal tax dollars Detroit where there's all sorts of free parking...:-)
Having lived around the country, I've found that urban living pretty much reduces one standard of living.
You have it backwards. People are flocking to cities because the country life isn't good enough for them.
High density advocates believe that people are forced to live in houses they don't really like because that's what developers choose to build, and that cars people don't want are forced on them by automakers. Free choice is a foreign concept to these people.
Although his libertarian credentials are weak Cowen is hardly what one would call a statist. I believe that he is aware of the fact that higher densities usually mean a higher relative standard of living. It is much easier to provide sewage treatment facilities when you have a lot of people packed closely together than it is when they are spread apart. The density creates natural economies of scale and makes the delivery of services and goods so much more effective. If you buy your Coke or Pepsi from a country store you have to pay much more than the typical city dweller because of the extra costs associated with making deliveries to remote locations. (Of course local politicians can equal out the price levels by using zoning laws to ensure that an insufficient number of stores service any particular areas but that is a far different argument.)
As Professor Shoup puts it: “Who pays for free parking? Everyone but the motorist.”
================================
OK, so what percentage of us are not auto users?
Everyone but the motorists turns out to be almost no one.
And for those that rely 100% on pblicc transit, who pays for much of that? The motorists.
VangeIV: "People are flocking to cities because the country life isn't good enough for them."
I think you are mistaken, sir. People moved from the rural areas to cities 70 to 100 years ago. But since the 1950's, the exodus has been from cities to suburbs.
High density advocates oppose not rural living but rather suburban living. Despite arguments those advaocates believe to be sound, Americans continue to choose lower density suburbs. Have the high density advocates asked why the overwhelming majority of Americans do not share their preferences?
juandos: "Any village or city that mandates that a business have X number of parking slots for its business is just reaffirming its own cluelessness..."
I agree with most of your comment, but I do not understand this part.
As I see it, parking mandates simply reflect the will of the people. Community elected leaders mandate parking places so that the customers of a business do not spillover into adjacent businesses and into residential neighborhoods. Those elected leaders know that voters will complain loudly when spillover from popular businesses causes congestion and unwanted intrusion.
Ok a few too many comments to read completely, but my skim didn't pick this up.
Why is parking not a typical "tragedy of the commons" issue?
It is usually provided free at the public (government) expense or through regulations most cities have (minimum spaces per 1000sqft retail). But there is no fee to use the service. Therefore people tend to abuse it since there is no cost. Now personally (at least in the rural) there is no reason a city should mandate the minimum required parking spaces for a box retailer. I guarantee you Wal-Mart would still provide free parking to its customers, but it will be a carefully balanced after a cost analysis.
In the downtown center, I can understand on street government parking because businesses can't always own/operate the land around them. Raleigh recently installed new parking meters that take credit card (a God send since I don't carry cash) at most downtown streets. But I have to agree with some people above that the revenues should about equal cost to the city. I do not know if this is true, but I was recently told that the DMV funnels their "profits" to the DOT which is what's keeping it afloat in this harsh times.
I just picked up a copy of Milton Freedmen's "freedom and Capitalism" chapter 2 speaks to this issue.
VangelV, there is an area between rural and urban called suburban where you can get a house, garage and yard for a lower cost than the hole in the wall for the same price in the urban areas.
Here in Cincinnati, the government continues to raise taxes on the suburban areas to prop up the urban core. It's spent billions on failed projects over the last 30 years trying to get people to come to the urban core.
If the city were to return to it's original borders, it would quickly collapse. It survives only because it continues to annex lands to take wealth to prop up what is essentially a ponzi scheme.
You don;t pay for water? of course you do. It might be in your electric bill, if you are on a well or in your rent, but you do pay for water.
Same with parking. It may be in the overhead but it is paid for, and since almost everyone uses or depends on auto transport, parking is paid for by those that use it.
While there are minimum parking space regulations, they are just minimums. The fact that such regulations exists suggest the reasons that those proposing fewer spaces, are wrong. And they are minimum regulations: shopping areas often plan for maximum events, like Christmas shopping and provide far more spaces than the minimum requirement.
I agree with Juandos: why would you want to limit the number of auto trips? There might be an argument for having the least expensive overall transit system, but the best way to find lowest cost would be through market forces that require each mode to pay its own costs.
Winston and Shirley suggest that more than 90% of transit would fold if it were operated for profit. But since transit represents such a small amount of the total system, this would result in an increase in car use of less than 2%.
Juandos raises good points about bad arguments, but the way to refute them is not with canned political rhetoric: it is to show that the arguments are wrong, incomplete, and counterproductive. This isn’t about saving money or the environment: it is about social engineering
Arguing about emissions misses the point because emissions are only one part of the problem. Resource usage counts as much as emissions and resource usage is indicated by total cost. Since transit costs as much or more than auto use in many places, the argument is that it is resource use is not smaller than autos, or not by much.
Looked at as a system, transit requires a lot of auto use to support it, and the emissions for that usage should be charged against transit and not against autos. In the Washington DC area the transit agency is the largest provider of parking, and auto users also support the transit system through tools, additional gas taxes and other revenues. And yet the anti-auto crowd still claims autos don’t pay their own way in parking costs etc. meanwhile in New York, the taxicab fleet carries more passenger than DCs metro.
Since almost everyone uses auto transport or depends on it indirectly it is a nonsense argument to claim that the users do not pay: who else is there?
The argument is presently being made that urban living is greener and more efficient (re: cokes are more expensive in the country store). I don’t believe this is NECESSARILY true, because high density also increases complexity and friction. Treated as a system that includes all of the area and energy needed to support it, it is only marginally better than some other systems, and it has a number of drawbacks they do not have. If urban living was really greener and more efficient it would cost less to operate and govern, and it would be quieter and cleaner.
"As I see it, parking mandates simply reflect the will of the people"...
Well Jet Beagle what I've noticed in the various villages I've lived in over the last forty years is that when the village/city council mandates a business to have a parking area its been done without any input from the citizens and its done for reasons to impose extra taxes on the business...
"Community elected leaders mandate parking places so that the customers of a business do not spillover into adjacent businesses and into residential neighborhoods"...
No argument from me and such actions are common sense but personally I've never seen that happen and I've been to many of these meetings...
You know a scam is in progress when a city council mandates more parking spots for a grocery store than fire codes would allow the same number of people in the store in the first place...
Maybe your experiences have been better than mine...
juandos gets it. the parking is paid for, and raising the price, as the NYT article suggested it just stupid. The market has this taken care of--just like everything else. All we have to do is stay out of its way.
it's hilarious to me that anyone is stupid enough to think parking is free. This article is worth noticing only as an example of the worst kind of thinking...and of course, as a typical example of the NYT agenda.
juandos,
The number of parking places is in the site plan you have to file to get a building permit where I live (commercial and industrial). If you are building a single-family residence, you have to show where the driveway will be located. If the owner follows all the codes and does not want a variance, you would not necessarily hear about this at a meeting. The jurisdiction is compelled to grant the permit if it meets the rules and the master plan.
A lot of businesses have sued when they were not allowed a legal permit because the surrounding property owners complained.
VangelV said...
"...higher densities usually mean a higher relative standard of living. It is much easier to provide sewage treatment facilities when you have a lot of people packed closely together... The density creates natural economies of scale...If you buy your Coke or Pepsi from a country store you have to pay much more than the typical city dweller..."
I agree. Economies of scale make the cost of many things cheaper for people who live in higher density neighborhoods. I'm sure those living here or here are thrilled by their low sewer bills, and other savings, but these advantages may be more than wiped out by the high cost of living space at up to $1200/sq.ft.
People living here, on the other hand, may not be as excited by their low sewer bill, and if they even have a store nearby, I'll bet Pepsi costs as much or more than it does in that country store.
A persons standard of living may be more than just a measure of material well being, and may also includes individual preferences.
My complaint about the Cowen article is that he appears to assume that high density is automatically a good thing, and that everyone desires it.
I agree with all of you, particularly Michael and Walt, but you're all missing Tyler's point.
The MARGINAL cost of parking where there are no meters is zero. Therefore the parking spots are subsidies, paid for by taxpayers, to people who drive and the businesses who earn profits from people who drive.
In the case of a suburban Walmart, the store will decide how much land it needs for a lot and presumably decide efficiently. They pay property taxes for the land.
For urban parking spaces, there is a congestion and free rider problem. If your intent is to provide parking for businesses, you would prefer some degree of turnover to limit people's loitering time. Marginal spending declines with a person's loitering time, i.e. Your first hours of parking likely generate far more spending than additional hours. By allowing you to loiter, you deprive businesses of the benefit of fresh customers. Parking charges reduce congestion of this congestible public good. They are also adding up the costs of searching for a spot.
The original article, though, refers to zoning laws which require a certain number of parking spaces in zoning. That is the issue which none of you have addressed and that was the key issue in the parking subsidy debate.
I believe the authors are enamored with the Greenhoax Effect and ignore the externalities of public transportation and people's lost opportunities of time. Like Walt, I understand that $2 for parking is a 20% tax on a $10 lunch. I also agree with Richard that city governments are far less concerned about efficiency than they are about revenues.
Juandos:
re: our previous discussion on where the Laffer curve bends.
http://voices.washingtonpost.com/ezra-klein/2010/08/where_does_the_laffer_curve_be.html
Irrippi: "The MARGINAL cost of parking where there are no meters is zero. Therefore the parking spots are subsidies, paid for by taxpayers,"
I do not understand at all how the taxpayers are paying for suburban parking spots. Almost all of the parking spaces in the ten suburbs I've lived in - from California to Texas to Tennessee - have been located on private property. The owners of that private property are definitely paying for the land and paying property taxes on the land on which those parking spots exist. So which taxpayers - other than the owners of the parking spaces - are paying for those spots?
JB:
I agree with you. Irrippi seems to start with on-street metered parking only. The vast majority of pariking is paid for with private dollars, but that doesn't mean that government is not involved, often trough other regs such as parking layout, screening, runoff, and even shade requirements.
Parking REQUIREMNTS used to be minimum requirements, and they were put in place because of the bad results from businesses that provided too little parking.
Other businesses often plan their parking for som maximum event, like Cristmas shopping and they have much more than the minimum amount.
Now we have a situation in which parking is viewed by some as a BAD thing and so they are lobbying for new parking RESTRICTIONS aimed at what they see as the bad results of having too many cars.
Either way, parking regulations are the result of people lobbying government for restriction on others to suit their agenda.
juandos: "when the village/city council mandates a business to have a parking area its been done without any input from the citizens and its done for reasons to impose extra taxes on the business..."
I'm not going to say you are incorrect, juandos. But I am curious about how you know the decisions are made without any input from citizens and how you know the reasons those decisions are made.
Two of my close friends have been elected council members in different suburban towns near where I live. I have seen firsthand how they obtain in put from local citizens about all sorts of issues. Generally it is not done via formal meetings, but rather informally. I've also observed one of them hearing complaints - again, informally - about customers from one retailer parking in the streets of an adjacent neighborhood.
We elect local officials to represent us at meetings precisely because we cannot practically attend to all the business of our local governments. When those officials are making decisions we agree with, they are generally reelected. When they make decisions we do not agree with, they very often get feedback at the polls. As an observer and political worker in local elections in three different states, I have observed the will of the people being enacted. I have much more confidence in that process at a local level than at any other level of government.
"Therefore the parking spots are subsidies, paid for by taxpayers.."
Again, since virtually everyone is a taxpayer and virtually everyone uses parking, who is subsidizing whom? I don't see any unfair advantage here.
Dan Ferris: "as an example of the worst kind of thinking...and of course, as a typical example of the NYT agenda."
I agree this is typical of the NYT. But Tyler Cowen is also a professor of economics at George Mason University. This article is not, IMO, typical of the thinking I have observed from other GMU economists.
I suppose we should applaud GMU for its diversity of economic thought.
Jet Beagle:
I made a CRYSTAL CLEAR distinction between parking on suburban, privately owned lots and urban street parking. I don't understand why you are confused. Read the two paragraphs AFTER the one you quoted.
Regardless of whether parking is privately or publicly owned, the marginal cost of parking with no meters is still zero, regardless of how much was paid in taxes to support them. Whenever the marginal cost of a good is zero, they will be overconsumed. For the urban parking, zero MC leads to congestion. For Walmart, it means free riders (parkers who do not shop at Walmart, and Walmart must choose to either not enforce or enforce at a cost its excludable, congestible club good). That is why I began my statement about marginal cost - because it applies to both private and public parking when both are unmetered or entry is uncontrolled.
Hydra, I also made it quite clear I agree with all of you that there are ulterior motives here not supported by economic efficiency, and I find that reprehensible. But just because they have ulterior motives does not mean you are allowed to fall into the Fallacy of Motive. If we are talking economics (these are both economic blogs) then we talk about efficiency, not anyone's motives. When an excludable public good is subject to congestion, you must exclude by price to reach an efficient allocation of resources. The external costs of pollution, search time, and loitering time are part of that calculus. The proponents of these higher taxes, though, are trumping up the costs of cars and avoiding discussion of the costs of travel time, convenience, public transport, etc. Criticize them where it hurts them, not where it hurts you.
"I suppose we should applaud GMU for its diversity of economic thought."
Good one.
I like to think that diverse approaches will come to the same conclusion if the thinking process is done well.
There is thinking and there is agenda driven drivel, accepted as group-think.
Jet:
Tyler Cowen is supposedly a libertarian who believes that some government functions are necessary. I share those beliefs.
But lately Tyler has been embracing more and more government grasping. He's been quoting more and more Keynesians and interventionists. He seems comfortable with our monetary and fiscal policies. He has given aid and comfort to communists, telling his readers that the objective of his blog is to make people uncomfortable in order to provoke thought. He and Alex have recently defended Jimmy Carter. Do we have so few voices on the left and right that we need Tyler and Alex to sing their praises?
I don't know Tyler to judge his rationale, but I find the tenor of his blog increasingly statist and disturbing. The fact he frequently wrangles with DeLong and Krugman provides me hope. I just hope this crisis has not lured him to the dark side.
MJP must know him rather well. Maybe he can explain.
"Irrippi said...
"I agree with all of you, particularly Michael and Walt, but you're all missing Tyler's point."
Really? What IS Tyler's point? Allow me to summarize his point as I see it:
"Free" parking encourages driving, which is evil, and must be reduced as much as possible through social engineering measures like higher, or at least visible, charges for parking, or by reducing the number of parking spaces. This will somehow help save the planet.
This additional aggravation and expense will force people into higher density living, the benefit of which is never explained.
Tyler supports his views by quoting liberally from a book written by a nutcase with a worldview even more collectivist than his own.
What have I left out?
Oh! Did you think the subject was parking? Well, at least on the subject of public parking he could have applied the same arguments to public parks, beaches, libraries, and many more "free" public goods. Why limit the discussion to parking?
"I understand that $2 for parking is a 20% tax on a $10 lunch."
True. You must then also understand that "free" parking is a $2 discount on a $12 lunch.
Irrippi.
I think you confused the issue by starting with what appeared to be on street metered parking. Your subsequent paragraphs only party clarified.
I assume you also figure marginal cost to be immediate, out of pocket marginal cost. I figure marginal cost to be the cost of the next unit of goods, regardless of how the cost is paid. The more parking spots you have the more they have to compete with other uses for the same space and the more they cost, someone.
Excess parking spots, then, are a bad thing and do raise the cost of parking.
But since parkers and taxpayers and shoppers are pretty much universally the same persons, whatever that cost is will be paid for by the people that use it, therefore there is no subsidy worth worrying about.
When an excludable public good is subject to congestion, you must exclude by price to reach an efficient allocation of resources.
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No, you could just allow congestion to set the price. It is a different kind of currency, but there is no reason to believe it necessarily produces a less effcient allocation of resources.
irrippi,
Excuse me for misunderstanding your argument. Your sentence I quoted came immediately after this sentence from your comment:
"but you're all missing Tyler's point."
So naturally I assumed you were pointing out that we misunderstood whether parking was free.
If you reread Tyler's article, you will see he was definitely referring to suburbanites, free parking, and sprawl in his NYT article.
My disagreement with you is not about the marginal cost of parking but about who is paying for parking.
As I argued earlier, the reason private retailers do not directly charge for parking is because the costs would simply be too high.
Your argument that suburban parking will be overconsumed is weak, IMO. No one consumes more trips to suburban stores because they are not charged directly for parking. Even if they were directly charged the few cents the parking places actually cost, that would not cause them to combine trips.
"The proponents of these higher taxes, though, are trumping up the costs of cars and avoiding discussion of the costs of travel time, convenience, public transport, etc. Criticize them where it hurts them, not where it hurts you."
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Agreed: that is one point I was trying to make above.
Jet Beagle said...
"But Tyler Cowen is also a professor of economics at George Mason University. This article is not, IMO, typical of the thinking I have observed from other GMU economists."
Boy, ain't THAT the truth.
Hydra,
First, great post on the most glaring flaw in the article - almost everyone relies on cars.
Second, where does the Laffer curve bend? I actually have done this calculation for raising goats.
Since raising goats is a rather simple economic activity, it is easy to model the impact of taxation on goat farming. Assuming the government comes and takes various numbers of the new goats (income) each year in goat taxes, one can easily calculate the impact of the size of the herd, and ultimately how much total revenue the government would receive over 10 years at various tax rates. It turns out that the optimum tax rate is in the 20-30% range to maximize total 10 year revenue.
The reason the tax revenue drops above a 30% tax rate is simple. If the government takes more new goats in taxes, the goat farmer has fewer goats to breed the following year. The smaller herd produces fewer new goats to tax each subsequent year. As a farmer, it also greatly reduced the size of the herd (wealth).
Even though the maximum 10-yr tax revenue is around 30%, we are much better off with a tax rate around 20%. Starting with a herd size of 10 female goats, at a 20% tax rate, the government gets 170 goats in goat taxes. At 30%, you get 178 goats in goat taxes, so the extra 10% tax rate generates a total of 8 more goats of government revenue. At year 10, the size of the goat herd is 577 goats at a 20% tax rate, but only 345 goats at a 30% tax rate. For the government to get an additional 8 goats, it destroys 232 goats in wealth. Total tax rates should be 20% or less.
I think you are mistaken, sir. People moved from the rural areas to cities 70 to 100 years ago. But since the 1950's, the exodus has been from cities to suburbs.
Americans have abandoned city centers because urban planners and zoning laws, and public housing have managed to make them bad places to live. But people are still living in cities and not in the country. Whether you like it or not, the suburbs are not little town or villages and are not the countryside.
Most people generally hate living in the country and do all that they can to move to urban areas. Binder-twine festivals and corn parades are no substitutes for jazz clubs, rock concerts, stage shows, or the opera. Do you honestly think that most people who read this blog are living in the country or want to do so? No. Most are in urban areas. That is for a reason.
Junkyard_hawg1985 said...
"...Goats..."
That is a great analogy! I love it.
Other points that could be easily made using your example:
- The government produces no goats.
- The government redistributes goats form you (the productive) to others (the less productive) because they are "disadvantaged". The result is fewer goats for everyone.
- For you Keynesians, the multiplier affect of government goat spending is less than 1.
VangelV, there is an area between rural and urban called suburban where you can get a house, garage and yard for a lower cost than the hole in the wall for the same price in the urban areas.
Thanks to zoning laws that is true.
Here in Cincinnati, the government continues to raise taxes on the suburban areas to prop up the urban core. It's spent billions on failed projects over the last 30 years trying to get people to come to the urban core.
Most urban areas tend to have bad governments because renters and special interest groups looking for handouts tend to elect socialists. Businesses and individuals will not come as long as the politicians continue to rob property owners in order to fund programs wanted by their constituents.
If the city were to return to it's original borders, it would quickly collapse. It survives only because it continues to annex lands to take wealth to prop up what is essentially a ponzi scheme.
The argument is still the same. People do not like to live in low density rural settings and will migrate to urban areas where they are closer to markets for their labour or products and closer to the services and products that they consume.
Why is parking not a typical "tragedy of the commons" issue?
It isn't. Most parking spots are put up by private developers, not the government. Where governments decide to offer parking we see meters that charge fees and supplemental revenues via parking tickets for those people who either disobeyed the law willingly or were too slow to return to the meters before the time expired.
I just picked up a copy of Milton Freedmen's "freedom and Capitalism" chapter 2 speaks to this issue.
I think that Friedman was clear that many public enterprises should be privatized. That included parking structures. The bottom line is that users should pay a market rate for what they consume. The only way to get a true market rate is to keep government from setting artificial prices.
"If the government takes more new goats in taxes, the goat farmer has fewer goats to breed the following year. The smaller herd produces fewer new goats to tax each subsequent year."
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Isn't that pretty much what Feldstein said?
"Why look for the rate that maximizes revenue? As the tax rate rises, the "deadweight loss" (real loss to the economy rises) so as the rate gets close to maximizing revenue the loss to the economy exceeds the gain in revenue...
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I happen to think the academics are right and the curve bends somewhere between 60 and 80%, depending on how hungry you are.
The goat analogy seems flawed because the government doesn't get 20% of your goats, they get 20% of your profit from goats, which reduces your herd nowhere near as much.
Anyway, unless your farm is a lot better than mine in producing profit, taxes are the least of your worries.
Do you do a lot of Ramadan business with your goats? (Just curious, looks likea good niche.)
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The vast majority of people live in urban areas. Almost every one of them I ever met, when they learn where I live tell me that yeah, they would love to move to the country and get a few acres.
To which my response is, "Are you out of your mind? Do you know what you are getting into?"
It is a great place to live, don't get me wrong. But, just like city life, I think there are a lot of hidden costs.
I like Jazz clubs, but you generally couldn't pay me to go to a big concert, and the vast majority of city folk can't afford the opera, or even jazz clubs, very often.
Big city conviviality is over sold. Regardless of where you live, I think you only interact with a limited number of friends and associates on a weeekly or monthly basis. I think somebody studied this once and the number is around fifty people. However, before cars, the radius of influence was only around ten or fifteen miles. You may still only deal with fifty people a week but the radius of contacts can easily be 150 miles today, leadin to more "diversity of thought".
" Thanks to zoning laws that is true. "
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Zoning law cuts both ways, it can add tens of thousands to the cost of a suburban dwelling. But it can also raise the cost of urban dwellings by prohibiting density. At the same time, conservation zoning lowers the price of rural and far suburban large lots that only the rich can afford by making them essentially unusable. The push for more urban dwellings and more urban density in many ways is a subsidy to the wealthy rural estate dwellers.
But the cost isn't only in zoning law. Anyone can slap up a single family home out of a catalog, but multistory urban dwellings need endless engineering and permitting and maintenance by comparison.
Urban dwellings cost more because of zoning, taxes, construction costs, competition to get them, and because they are owned by sophisticated building conglomerates who can get the most out of their investments.
People move to the city because you could not make a living on the traditional farms anymore.
Plenty of people would live in more rural (but not completely rural) settings if there was a way to make a living.
I agree. Economies of scale make the cost of many things cheaper for people who live in higher density neighborhoods. I'm sure those living here or here are thrilled by their low sewer bills, and other savings, but these advantages may be more than wiped out by the high cost of living space at up to $1200/sq.ft.
Those people could have chosen cheaper accommodations had they wished but they seem to want to pay the going rate. Regardless, the argument is not changed. To provide sewage removal for 1000 units all you need is a few hundred feet of pipe that runs past the property. That keeps the resource use and costs low in comparison to providing a similar service for 1000 rural homes. (That is why rural homes usually have wells and septic systems.)
People living here, on the other hand, may not be as excited by their low sewer bill, and if they even have a store nearby, I'll bet Pepsi costs as much or more than it does in that country store.
First, you are posing photos of public housing. People who needed public housing could not afford a house in the countryside or survive there. If they could, they would not be in public housing.
Second, the photo was taken near the end of the migration that saw people abandon rural areas during the Dust Bowl and head towards cities, where they had a hope of surviving. For those poor souls the city was the means of surviving the life destroying hardships of rural living.
Third, prices are usually cheaper in densely populated areas unless the local government prevents businesses from setting up in that area. That means that the price of Coke or Pepsi would have been lower for them than for the rural people whose stores had to buy far less product because they serviced so substantially fewer customers.
Companies such as Wal-Mart have used the difference in pricing as part of their business model. They have built massive stores in the rural areas and draw the customers to them. Some of those customers drive for an hour or more to buy the products that the big retailers can provide at costs that the small rural stores cannot match.
The bottom line is that you can't argue against the efficiency that high density developments allow for the delivery of products and services to customers.
A persons standard of living may be more than just a measure of material well being, and may also includes individual preferences.
Individual preferences show up in individual action. People leave rural areas for urban areas because they prefer the life in urban areas. There is no way to argue with the data. People are still leaving the farms and moving to towns and cities.
My complaint about the Cowen article is that he appears to assume that high density is automatically a good thing, and that everyone desires it.
It is a good thing for the general population. But I doubt that he assumes that everyone desires it. He certainly does because he can't find the restaurants, cafes, book stores, museums, galleries, and theaters that he frequents in a country setting.
"For those poor souls the city was the means of surviving the life destroying hardships of rural living. "
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Wait a minute. My grandfather made a pretty decent living here, according to the farm records. I could not do it today.
But, he could sell a chicken in 1925 for more than I can sell one today. It wasn't the hardships of rural living that drove them off the land. It was the competition of increased productivity and lower prices. Tractors alone made 70% of our farmland surplus, because you did not need it to feed the draft animals that worked the other 30%.
My grandfather could buy a pickup truck for the price of 30 hogs, now it would be 3000 hogs (but the pickup is a lot nicer, too).
A lot of people who left the country found themselves in the life destroying hardship of urban slums.
VangeIV,
Your comparison of urban to rural density is irrelevant. Neither Tyler Cowen nor any high density proponents I know about are making any arguments about rural living. Rather they are comparing low density suburban development with higher density urban development. That's the issue being debated.
"Companies such as Wal-Mart have used the difference in pricing as part of their business model. They have built massive stores in the rural areas and draw the customers to them. Some of those customers drive for an hour or more to buy the products that the big retailers can provide at costs that the small rural stores cannot match."
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The same thing would happen if you put up a massive employment center, too, wouldn't it?
"Rather they are comparing low density suburban development with higher density urban development."
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Not true. A big piece of this is actually based on attepting to preserve vast tracts of open and agricultural spaces in ways that can never be developed. In order to do that, densification of the urban areas is required.
Old time rural landowners are seeing their property continuously devalued by increasing conservation restrictions, which results in a bonanza for landowners in areas where density is allowed.
The usual response when development reaches a former afgricultural area is to require large lots. Later, when enough people own 50 acre lots the rules get relaxed to 25 or 10 or 5 and those people make more money than the original owners who were restricted to 50 acre lots.
The rural conservation zones go by many names: uban growth boundary, rural crescent but the development boundaries established in Oregon and other places are as much about preserving rural spaces as getting any kind of phoney efficiency from urban areas.
Urban and rural spaces need each other same as mass transit and autos need each other. Each needs to be compensated appropriately for what they provide, and charged appropriately for what they use.
hydrea: "Not true. A big piece of this is actually based on attepting to preserve vast tracts of open and agricultural spaces in ways that can never be developed."
I'm sorry, but what I posted is true, hydra. The comparison made by high density proponents is between urban living and continued sprawl of suburbs. What VangeIV has been harping about is quality of life and economic comparisons of urban living vs rural living. No one gives a damn about the tiny numbers of residents who choose rural living.
This comment has been removed by the author.
Probably for the same reason that shoes and socks are not free, yet there is no charge for standing on a sidewalk.
"The bottom line is that you can't argue against the efficiency that high density developments allow for the delivery of products and services to customers."
And, no one is.
My argument is that not everyone values this efficiency of service delivery equally. Some, myself included, value having more personal space and lower density living (at a lower cost/sq.ft.) enough to pay extra for delivery of services, and are willing to spend a little extra time & travel to enjoy the social & cultural amenities available in higher density settings.
There are a wide range of living densities between city center & the countryside. They exist because people have different preferences, and are willing to make trade-offs.
[suburbs]"Thanks to zoning laws that is true."
No doubt a result of the wishes of current residents to maintain their current living density. - "I've got mine, now you can go to hell." - Although I'm not in favor of telling others what they can do with their private property, I suppose a person can choose to move, or not move in to such an area if they disagree with this zoning.
"Third, prices are usually cheaper in densely populated areas unless the local government prevents businesses from setting up in that area."
Stores in low income city neighborhoods may suffer from the same low volume of sales a country store does, but for different reasons. Not few customers, but few customers with money to spend. Add to that the higher costs due to crime in some areas instead of high delivery costs, and I'll bet that Pepsi costs just as much.
You appear to be defending Cowen at every turn. Is he a friend of yours? Is there anything you didn't like about his ridiculous article?
"Tyler Cowen is supposedly a libertarian who believes that some government functions are necessary."
You want libertarian? Try here and here.
Contued sprawl of suburbs.....
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Where will they sprawl into?
Rural areas. The fight against sprawl is a liberal consevatinist battle to preserve open space. My property has been downzoned 6 times, from a by-right density of one house per three acres to zero.
Agriculture is my only option even though the rent from one modest home for a teacher or trooper would earn more income than the rest of the farm will earn in fifty years.
You are not likely to convince me that part of this isn't about open space. Suburbia is part of the issue,yes.
The old timers did not cause this. In fact, those that have managed to preserve the most for the longest are now punished the worst. A small number of old families are getting hammered by relative newcomers who want to slam the door behind them.
A consrvationist is the last SOB who got his cabin in the woods. One of my neighbors advertizes that he practices sustainable agriculture while he loses a million a year selling free range turkey ar$6.50 a pound.
Walmart is not located in Manhattan for a lack of customers. It is because you could not afford to build one there, and if you did the goods would have to be more expensive, not less.
Unlike a home near NYC of similar value, my place pays its own way, barely. Without subsidies. But, to make that happen means that I basically hold two full time jobs. Small as it is, my operation drops significant revenue onto the local economy for fuel and parts and machinery and hired help. I provide a net tax gain to the county while the more rsidential and suburban neighborhoods do not.
They keep me in Agricultural servitude because it lowers their taxes and increases their property value.
I have seen similar circumstances in three different areas. Familes that have been there for generations, forced out at a disadvantage compaared to free market values. Only to see newcomers who got very large lots at a discount subsequently subdivide for really big bucks.
No one gives a damn about the tiny numbers who choose rural living....
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Just proves my point.
Government has an obligation to protect minorities ftom mob rule.
And if that isn't enough, anyone who believes in indivudual freedom and indivudual responsibility needs to recognize individual rights.
Plenty of people would live in more rural (but not completely rural) settings if there was a way to make a living.
Perhaps some would. But in the real world very few can make a living in such settings. That is why people tend to flock to urban areas.
But, he could sell a chicken in 1925 for more than I can sell one today. It wasn't the hardships of rural living that drove them off the land. It was the competition of increased productivity and lower prices. Tractors alone made 70% of our farmland surplus, because you did not need it to feed the draft animals that worked the other 30%.
The fact that people left farms during the Dust Bowl is an established fact. The picture that was referenced was of NYC public housing in 1941.
A lot of people who left the country found themselves in the life destroying hardship of urban slums.
If those people could make a better life for themselves in the county they would not move to cities. Please do not assume that they are idiots and do not know as much about what is good for them as you do.
Your comparison of urban to rural density is irrelevant. Neither Tyler Cowen nor any high density proponents I know about are making any arguments about rural living. Rather they are comparing low density suburban development with higher density urban development. That's the issue being debated.
People are claiming that low density living is much better. If density was the primary factor than rural living should be much better. It isn't.
And while I read the Cowen article in the NYT I believe that it is nowhere near his best and usually clear writing. I agree with Cowen that urban planners should not be mandating the number of parking spots and that users should pay for what they consume. But in the absence of zoning laws it is not at all clear that there would be fewer parking spots.
Clearly there would still be cars parked on side streets because those streets would not be any narrower. Those streets were built by developers who put up the houses, not the cities. Cowen's line, "If we don’t give away cars, why give away parking spaces?," has a hollow ring to it because 'WE' are not giving anything away because people who invest in building commercial parking spots have the right to ask whatever price they see fit for them. There is no parking permitted on most major routes and there is nothing wrong with permitting people to park for an hour or two on side streets as they go shopping, get a bite to eat, etc. Cowen and the urban planner he cites seem to think that it is good to have fewer trips being made but they don't seem to realize that if they increase the employment costs for some businesses those businesses will leave.
I live in Ontario and have already seen how the zoning laws and intrusive city governments have pushed many businesses to outlying areas where taxes are lower, parking is cheaper (or free) and rules are fewer. The Cowen argument is a loser because it assumes facts that may not be real.
What have I left out?
You left out the article Cowen was writing about plus Cowen's entire subsequent post on his blog where he goes into more detail.
Cowen was making remarks about someone else's work. He was commenting on the efficient provision of a club good (an excludable public good). You are blathering on about having to pay more taxes.
Oh! Did you think the subject was parking?
Yes, I thought the subject was parking because that's what the article and Tyler's comments were about.
That the original author had motives above and beyond parking is, as I said, entirely irrelevant. It's called the Fallacy of Motive and you fell into it.
The issue is whether government should "subsidize" parking by mandating a minimum number of parking spaces per commercial unit and/or not charge for parking on public roads. I made no comment on the first case. I made a clear statement about the latter because I know about efficient provision of public goods.
Well, at least on the subject of public parking he could have applied the same arguments to public parks, beaches, libraries, and many more "free" public goods.
If they are congestable and excludable, they are not pure public goods. It makes just as much sense to have user fees for those (or better yet have private provision). But the issue was parking. Try to stay on topic.
Why limit the discussion to parking?
Because that is the issue in the article and to broaden it beyond parking is a red herring. Focus!
You must then also understand that "free" parking is a $2 discount on a $12 lunch.
You are making Tyler's point for him. If government mandates a certain amount of parking for each commercial unit, it is a subsidy for the customer. If government allocates valuable public land (an extra lane of traffic, more pedestrian space, a bike lane, or more commercial space) to un-metered parking, that is a subsidy to the consumer and the business owner.
Do you make a habit out of proving your opponent's point for him?
By the way, if you increase the parking "tax" by $2, price will increase by LESS than $2 under normal supply and demand assumptions.
I figure marginal cost to be the cost of the next unit of goods, regardless of how the cost is paid.
You figure wrong. If there is no meter on a parking spot, the marginal cost to the driver of consuming the parking is ZERO. That means quantity demanded is greater than or equal quantity supplied. During peak hours people will have to circle the block looking for a space. If there is no meter, nothing gives current parkers any impetus to hurry up. This is an inefficient allocation of a scarce resource.
The more parking spots you have the more they have to compete with other uses for the same space and the more they cost, someone.
Which is PRECISELY what Tyler Cowen said when he discussed mandatory parking spaces in zoning laws.
The spots cost SOMEONE money but they do not cost DRIVERS a penny to use. The marginal cost of parking is zero.
Do you understand what that means? If the city of Anaheim gives me a lifetime pass to Disney World, the marginal cost of admission for me is zero. I will still incur transportation costs and opportunity costs of my time, but I can visit all I want for nothing. The lifetime pass cost somebody something. If I'm a resident of Anaheim, part of my tax dollars paid for it, but my marginal cost is STILL zero.
I really did not wish to support Cowen's position, because I don't trust Shoup's intentions nor do I like city governments toying with revenue collection methods to further their evil plans.
But are you guys creating a Let's Make our Opponents' Points for Them Club?
"The goat analogy seems flawed because the government doesn't get 20% of your goats, they get 20% of your profit from goats, which reduces your herd nowhere near as much."
Hydra, you have misread part of the goat analogy.
"Assuming the government comes and takes various numbers of the new goats (income) each year in goat taxes,"
The tax rates apply to your profit (new goats) each year, not the whole herd..
Your profit isn't the new goats it is new goats less expenses. If the government took goats at the rate you claim then you would be taxed above 70%, well into the point where academics say the curve breaks.
You don't get taxed on the goats until you sell them so your herd cannot grow as fast as claimed.u
Idid not misread it. I broke out the spreadsheet to analyze the argument. The analogy is good but the numbers don't add up and so the situation is highly exaggerated. So far, I conclude that the academics are correct and the laffer curve peaks to the rigbt of 50% tax.
However that says notbing about WHY the government should ever need tax rates like that. Nor doea it address the tax drag on the economy. It only suggests that the idea that actual revenue will decline with increased taxes does not apply near current rates.
Most likely, unless our friend has land that is near worthless, he won't have any profits to worry about. But if he has wool goats he might qualify for a subsidy.
Irrippi: "If government mandates a certain amount of parking for each commercial unit, it is a subsidy for the customer."
How is that a subsidy? The customer pays for the parking through the marginally higher prices on goods and services purchased.
Definitions for the word "subsidy":
1. Monetary assistance granted by a government to a person or group in support of an enterprise regarded as being in the public interest.
2. Financial assistance given by one person or government to another.
3. subsidies - involves the government paying part of the cost to the firm to encourage more consumption
When government forces consumers to indirectly pay more for a good, it is not a subsidy. Actually, it is the opposite.
JB is right. This use of the word subsidy is a false argument based on the (sometimes) emotional response to the word subsidy.
Its a subsidy for anything you don't like and an incentive for those things you favor.
Marginal Cost: the increase or decrease in costs as a result of one more or one less unit of output.
Cost is cost. It has nothing to do with what the price is to you. Your argument draws the boundaries of the parking system incorrectly,so it gives the wrong result.
If you insist, then your marginal cost is the amount extra you pay the merchant in overhead for each additional space minus the benefit you get from shopping there vs someplace else (maybe farther away but with cheaper parking, like Walmart).
Hydra, Here is part 1 of the full goat economic write-up:
Goat Economics – Why the Laffer Curve is No Joke
By Charlie Musick
Goat herding is one of the world’s oldest economic professions because goats are excellent at reproduction and easy to feed and raise. A female goat will on average birth around 2 kids per year. Simple math would suggest that if you start with 2 goats, you can double your herd each year. Thus in 10 years you will be quite wealthy with over 1000 goats (210 = 1024).
It turns out that goat herding is a little more complicated than that. First, the normal life expectancy of a goat is around 10 years so you will lose about 10% of a herd to old age annually. Additionally, while goats may birth two kids per year, the viability rate is around 75% so each female goat will only net an average of 1.5 new goats per year. Still, if you do the calculations, starting with 10 female goats you will have around 1496 female goats after 10 years.
Since raising goats is a rather simple economic activity, it is easy to model the impact of taxation on goat farming. Assuming the government comes and takes various numbers of the new goats (income) each year in goat taxes, one can easily calculate the impact of the size of the herd, and ultimately how much total revenue the government would receive over 10 years at various tax rates. It turns out that the optimum tax rate is in the 20-30% range to maximize total 10 year revenue.
The reason the tax revenue drops above a 30% tax rate is simple. If the government takes more new goats in taxes, the goat farmer has fewer goats to breed the following year. The smaller herd produces fewer new goats to tax each subsequent year. As a farmer, it also greatly reduced the size of the herd (wealth). Below is the cumulative ten year tax revenue when starting with 10 female goats, the tax collected in year 10 and the herd size after ten years:
Table 1. Tax Revenues and Herd Size (number of female goats) at Various Tax Rates
Tax 10 yr year 10 year 10
Rate tax rev tax rev herd sz
0% 0 0 1496
10% 122 45 939
20% 170 58 577
30% 178 55 345
40% 164 45 201
50% 141 33 114
60% 117 23 62
70% 94 15 32
80% 76 9 16
90% 60 5 8
Part 2:
For goat farming, the chart above clearly shows that tax rates above 30% makes both the goat herder and the government poorer. In fact, long term revenues (year 10 revenues) are better around a 20% tax rate. This type of revenue curve is exactly what Arthur Laffer would predict with the Laffer Curve. Laffer stated that there are two known revenue points for tax rates. At a 0% tax rate, tax revenue is zero; and at a 100% tax rate, the tax revenue is zero. Somewhere in between these two limits, there is a maximum revenue point for taxation. In the case of raising goats, at a 90% tax rate the herd gets smaller over time. In this example, the goat farmer would have a barbeque in year 1 instead of wasting his time raising goats and the government would in actuality get zero revenue at a 90% tax rate.
It is also worth noting the wealth effect in this example. For a tax rate of 30% vs. 20%, the extra revenue is 7 goats over 10 years for the government, but the size of the herd shrinks by 232 goats for the goat farmer. In this example, there is a definite multiplier effect for additional government spending. Government spending destroys wealth at a multiple of what it collects from the farmer.
For a goat farmer, government is necessary and does play a very worthwhile role. The government prevents foreign armies from invading and taking the goats (national defense), other people from stealing the goats (justice), or someone from running the goat farmer off the land he uses to raise goats (protect property rights).
If you look at current government spending, there is room for improvement to boost economic growth. Total government spending (Federal, state, and local) for 2009 was around 45% of GDP. In the example with goat farming, it does not matter whether the government is getting this money through taxing new goats (income tax), borrowing goats from the herd (deficit spending), or stealing the goats at night (monetizing debt). The fact remains that for this example, they are eating 45% of the new goats. This destroys wealth and lowers future tax revenues.
As much as I hate to say it, when I see our president and Congress raising taxes and spending more to stimulate the economy, it really gets my goat.
Charlie Musick (musickcd@bellsouth.net) is a chemical engineer in research and development.
Higher density development is only permitted within
an urban growth boundary (“UGB”).
"Neither Tyler Cowen nor any high density proponents I know about are making any arguments about rural living."
Outside the UGB (in the “Rural Area”), lower density residential uses, agricultural/ranching operations, and open space land uses are promoted. The entire County is zoned and the land uses permitted and prohibited in any given zone district reflect this UGB/Rural Area dichotomy.
Not all parcels of land in the County automatically come with a development right. Development rights can be obtained for some parcels (e.g., through growth management competition or acquisition and use of Transferable Development Rights (“TDRs”)) and cannot be obtained for others (e.g., where a parcel was created as a result of an illegal subdivision of land). Similarly, very large residences will not be approved on all
parcels of land in the County. Currently, the “base” house size in the County is 5,750 sq. ft.; in the UGB, “base” house size is generally 15,000 sq. ft. .....“Rural/Remote” Zone District residences are
restricted to 1,000 sq. ft.
Pitkin County (Aspen) zoning rules.
The UGBs are all about preserving open space and low value uses. This represents a huge off budget ta and a transfer of wealth.
I made a clear statement about the latter because I know about efficient provision of public goods.
The evidence seems to indicate otherwise. The best provider of goods and services is the unhampered market, not urban planners. To see the effect they have had all you need to do is to look at the downtown cores of most American cities.
There is a lot of nonsense being passed as wisdom. It might help you if you could distinguish between the two.
So far, I conclude that the academics are correct and the laffer curve peaks to the rigbt of 50% tax.
More than 50%? Don't they call that serfdom?
The first two paragraphs are almost exactly what I had in my spreadsheet.
The author is assuming that your income is eqaul to the number of new goats. but if the government were actually taking 30% of you new goats they would be taking almost all of your income. They would probably be taking MORE than your net income, in which case the author is definitely correct. You would be way beyond the bend in the laffer curve.
===========================
"Still, if you do the calculations, starting with 10 female goats you will have around 1496 female goats after 10 years."
You will also have NO MONEY having sold no goats and therefore no income to tax. You will also have had to fund 10 years of expenses out of your other pocket.
Table 1 is wrong and misleading because it represents a true tax rate that is much higher than any actual tax.
Nice try though.
Raising goats for a profit is anything but easy or simple, otherwise everyone would do it.
At 30% tax he is still showing that the goatherd increases his wealth 33 fold in 10 years.
Nice job if you can get it, even at that tax rate.
But that is completely bogus because what the table shows is a tax of 30% of gross. Since the usual farm profit is only around 5% that would mean a tax that is six times his probable net income.
It represents an impossibly high tax and therefore the table is unrealistic. In fact it supports the academic view that the laffer curve does not turn until around 60%, which is consistent with my model.
More than 50%? Don't they call that serfdom?
Well, yes.
But the point is that the argument that anything above 20 to 30% decreases revenue to the government is probably wrong.
Does any tax represent a drag onthe economy? Yes, but not big enough to wreck the economy until the tax is very large indeed.
In addition to that it depends on what you get for your taxes, and what the demand curve is. If you have an utterly corrupt and confiscatory government, then yur taxes are nothing but a drag. If however, you get something in return, you are not quite as bad off.
For goat farming, the chart above clearly shows that tax rates above 30% makes both the goat herder and the government poorer.
================================
No it does not. The chart is wrong.
Hydra,
The chart is correct. Let's look at a 20% tax rate case. In year 0 you own 10 female goats. In year 1, the 10 female goats have 20 kids. Of these, half are female goats and 25% die. This means you have 7.5 new female goats (yes I realize you can't have half a goat, but you will have either a male or female goat, but it represents statistical averages). A 20% tax rate on 7.5 female goats equals 1.5 goats in tax. Of the 10 female goats you had in year 0, 10% die (old age, etc). This means you have 10+7.5-1.5-1=15 goats at the end of year 1 and the government has collected 1.5 goats in taxes. In year 2, the 15 goats have 30 new goats that have a 75% survival rate with 50% females. Since you had 15 goats in year 1, 10% death rate equals 1.5 goats lost. At the end of year 2, you have 22.5 female goats and you paid 2.25 goats in taxes.
The equation for the number of goats you have is Goat herd = (previous year's goats)*2*.75*(1-tax rate) + (Previous year's goats)*0.9.
Follow this equation for 10 years, and you get 577 goats in year 10.
Hydra,
You second complaint about not representing costs is also bogus. I had built that into another iteration of the model. For a case where you spend 10% of you goats in operating costs (i.e. eat goats because we have to eat), the curve peaks at the same tax rate. What is different in this case is that the size of the herd grows much slower. For the 20% tax case, instead of ending up with a herd of 577 goats in year 10, you only have 289 goats.
Hydra, you are equivocating. One person's cost is another person's price. There are two issues discussed on Tyler's blog. The first is mandatory provision of parking with construction. The second is efficient pricing of EXISTING parking, public or privately owned but the key issue is publicly owned parking.
Tyler sees both mandatory provision and public provision of parking as a subsidy to car drivers. He is absolutely correct. They represent a transfer of wealth. If mandatory provision creates more parking than a private business would freely choose, it is a costly subsidy at the private business owner's expense. If public parking is provided, it is a taxpayer subsidy to drivers and business owners. Proving his point, you said that that land could have been used for other private productive uses. You said that. You proved his point for him.
Given an existing number of public parking spaces, the second question is how to efficiently price them. You all seem to think, "Hey, we paid for it in our taxes so we shouldn't have to pay again." Well you are wrong. The marginal cost of providing an EXISTING parking space is (near) zero. If you price it at zero, it will be OVERUTILIZED. People will linger in the spot without necessarily spending a dime for local businesses, the whole purpose of having such spots. Charging for parking is a means of efficiently allocating the scarce resource. WIth urban congestion, people will waste time and fuel searching for spots that are being overused because the marginal cost to the current occupant is zero. This isn't social engineering - it's basic economics.
No, VangeVI, the private sector is the best provider of PRIVATE goods and services when there are no market failures.
When there are externalities, asymmetric information, public goods, and other forms of market failure, the unhampered market gets it WRONG.
The burning policy question is whether government's solution is better than the private market failure. A better question is whether there are decentralized methods of dealing with market failure. Leaving the decision up to the San Francisco Board of Stupidvisors likely means parking will be priced inefficiently high and the revenues misused.
An individual parking space is both excludable and rivalrous, making it a private goods. So parking should be private. But that would mean charging people to park. Whether parking spaces are owned by private entities or government, the efficient pricing rules are identical. It is the nature of the GOOD that matters, not who owns it.
You are the one mistaking your ignorance for wisdom.
"The fact that people left farms during the Dust Bowl is an established fact."
=============================
So what? has nothing to do with my argument and may, in fact support my argument. the dust boawl ocured in the 1930's at a time when tractors had become common in the Plains where there was enough business to support them. Tractors ruined the southern plains which helped lead to the dust bowl.
But that was a small portion of agricultural America at the time. Affordable tractors became widely availabe around 1945 with the introduction of the Ford 8N. This resulted in an excess of farmland, and ineased productivity of all kinds led to lower prices making most rural agriculturalists surplus.
There being no other business they had no choce but to migrate to the cities, and one result was the public housing pictured.
We now have a choice of where to locate businesses and and a result of high costs and better ameneities elsewhere, parts of Wall Street have relocated to Connecticut, Charlotte, and St. Louis, for example.
I ony suggest that a group of medium size cities with medium size suburbs are probably more efficient (and more liveable) than one huge urban center with enormous infrastructure requirements.
We have that choice, but there are large and powerful groups actively spreading ideas which may not be true, for the purpose of promoting conservation. Eliminating cars is part of that agenda, and eliminating parking spaces is a tool to that end. Much of the argument against parkig spaces has to do with runoff and the use of otherwise green space.
Ron H sums it up nicely:
"This is part of a larger concept that includes the idea that everyone would love to travel on commuter rail or walk wherever they go if they only could.
There's no room in this mindset for the idea that many people want to live in large single family houses in the suburbs or even in rural areas, and love the freedom of driving their own cars."
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The burning policy question is whether government's solution is better than the private market failure.
==================================
I agree that taxes spent on bad governance may well be wasted. I don't agree that all government is totally corrupt and every cent is wasted, and therefore there should be no taxes.
Anyway, you divert from the point of where does the laffer curve bend. I still claim your goat analogy has obvious and major errors. It does not prve the claim made that the laffer curve bends between 20 and 30%..
An individual parking space is both excludable and rivalrous, making it a private goods. So parking should be private.
=================================
??? The first statemen is incorrect and second statement doesn;t follow even if the first on is correct.
Exclusion is one element of private property, but you cnnot exclude someone from a parking space unless you occupy it. That is because you do not own it. If you did own it you would be free to exclude people from it or to rent or sell it.
None of those apply to parking spaces, unless they are in your privately owned and paid for parking facility.
"One person's cost is another person's price. "
===============================
Since when?
Not in my business. My cost (hopefully) has almost nothing to do with the price I can get for my goods. All it does is set a lower bound.
You are confusing two different transactions. One is the cost of providing an additional parking space, which could well be expensive.
The other is the cost of renting said space for a short duration of time. Just because it is free to the user has no bearing on the cost to the provider. You may get free air at the gas station (some places) but the cost of providing the air is not free.
The justification for the gas station doing this is no different from the justification of a vendor to provide parking, or for that matter, the government.
the private sector is the best provider of PRIVATE goods and services when there are no market failures.
================================
True, but unfortunately private enterprise is remarkably adept at creating market failures when there should be none.
When huge fines were assessed against airlines for stranding their passengers on the tarmac, that pretty much stopped happening.
If private eneterprise was not so maladept at running its business, then it would not have to worry so much about a maladept government telling it what to do.
In the case of this argument parking spaces may or may not be a private good, but in any case they don;t belong to the temporary users of them.
" A 20% tax rate on 7.5 female goats equals 1.5 goats in tax."
No it does not. A 20% tax on 7.5 female goats would be about 0.375 goats, if you had a very profitable goat farm.
You are using a 20% tax on gross production as if it was a 20% tax on profits. This distorts the entire argument by about 95%.
I made a mistake. It is not .375.
0.375 goats would be your profit on 7.5 goats (assuming you r farm makes 5%) and 0.75 would be the tax on your profit.
"People will linger in the spot without necessarily spending a dime for local businesses, the whole purpose of having such spots."
================================
You make it sound as if just because a free parking spot is available, that someone will go there and use it for no particular reason. And who defines excessive use?
Now you are talking about municipal parking that is provided as a subsidy to local business?
Otherwise the businesses are providing their own spots and what do you care how they price them?
You said that. You proved his point for him.
======================
I did not say that, I said other people make that claim. People who think the way he does.
Back up and look at parking as a total system, with inputs and outputs from each participant, producer, customer, and government. Then you can see the true cost:
Total Cost = Production Cost + External Cost + Government Cost.
Hydra,
You keep claiming that my tax rate is not accurate. You can define the tax rate here:
I raise goats in Namibia. I own 10 female goats and 10 male goats. My 20 goats have 20 baby goats (2 per female). 5 of my baby goats die. Two old goats die (one male, one female). The government comes and takes 3 new goats from me as taxes.
What was my tax rate?
"If mandatory provision creates more parking than a private business would freely choose, it is a costly subsidy at the private business owner's expense."
=============================
Not necessarily true.
Mandatory provision is generally mandatory MINIMUM provision and this situation has arisen because previous businesses would not voluntarily choose to provide parking or sufficient parking in some cases.
This creates an external cost to adjacent landowners, which is an unpriced subsidy to the business owner.
Ideally, government will require minimum parking that just cancel out the externality.
Your statemnet makes it sound as if the busines knows (and will provide) the correct amount of parking to provide. In fact, it may be incentivized to provide either too little or too much, with the resultant external costs paid by others.
What was my tax rate?
================================
I cannot tell from the information given. It appears to be 3/13 or 23% of gross profit before marketing expense.
Can't tell about Namibia, but if you raise goats in West Virginia your profit margin after all expenses might be 3%, if you are both lucky and diligent.
After the government takes their three goats you have ten goats left. After you sell them you will have a net profit after taxes and expenses of 0.3 goats.
That would mean your tax rate was 3/0.3 or 1000%.
It is going to be hard to grow your goat population that way.
Assuming the governments intended tax rate was 23% then your tax bill should have been 0.03 * 13 *.28 = .0897 goats.
If your government is taking three goats, you need a new government, unless you rgovernment is providing you with cradle to grave everything in return.
Maybe in Namibia you are raising your goats rent free on government land and you have no other expenses?
Look at it another way. If you claim yu r profit is 13 goats on an investment of 20 thats 65% profit before taxes and 50% profit after taxes.
Aside from being unrealistic, could you really claim that you are going broke because of government intervention with a 50% ROI?
For my very simple Namibian goat tax example:
Me: What was my tax rate?
Hydra: I cannot tell from the information given. It appears to be 3/13 or 23% of gross profit before marketing expense.
This is a very simple example and yet you say you can't calculate the tax rate. How then do you expect us to believe that you have a complicated model that shows the Laffer curve bends down at >50%?
In this example, there are no marketing expenses, and no selling goats. Goats are the money. I am good calling this a 23% tax case. Using your tax number, the Laffer curve bends down below a 35% tax rate in the case of goat herding.
I cannot tell from the information given, but I can make a credible estimate based on actual farm operations, which I did.
The goat example is very clever, but it is wrong. Or, if my tax rate analysis is anywhere near right, it is an extreme example that supports the idea that at a high enough rate, taxes will surely discourage work.
What it does not do is support the idea that 25% is the magic number, as claimed.
It is a very simple example because it ignores some important facts, like 25% tax on net profit is a whole lot different than 25% on gross profit.
Even in yur simple example, if you are a subsistence goatherd with no other expenses, you are going to have to eat most of those 13 goats. If the government actually takes 3 of them, you will probably starve.
And, if you are a subsistence goatherd, there is the question of what it is the government is providing you for 1000% tax.
If there are no marketing expenses, and no selling goats (and no eating goats) then your example shows a 50% profit after taxes. If you can actually do that, I'll hire you onthe spot to run my farm and pay the taxes gladly.
Even at 40% tax you manage to go from 20 goats to 200 in ten years. How many businesses do you know of that can actually do that?
Even at 60% tax you go from 20 goats to 62 in ten years, so tell me, how many three baggers have you got in your portfolio?
If you have no costs, no expenses, and no effort involved then even with your data you are not negatively incentivized until around 75% tax.
Which is not all that far from what the academics predict.
Sure, you are not growing as fast, but if there is no cost and no labor, your elasticity is 100%, and you have no reason to stop until you actually go negative.
We can agree that the revenue maximizing rate and the growth maximizing rate are different, that short term and long term results are different.
There is no requirement that you believe what I say, or anyone else:
http://voices.washingtonpost.com/ezra-klein/2010/08/where_does_the_laffer_curve_be.html
But if you are going to use a zero cost example then you need to understand the function of elasticity in calculating your curve.
Hydra,
One goat herder, who spends 10 years of his life in the wilderness watching a flock of goats - there are not a lot of expenses there other than taxation and time. He can get by on goats milk and a few bugs he digs up when bored (and roasting the goats that die of old age or a slow gazelle from time to time). He can get by without eating the herd.
Once again, taxation plays a critical role here. Would you give up 10 years of your life in the wilderness for a net increase of 52 goats (60% tax rate)? Would you do it for 567 goats (20% tax rate)?
First, the tax revenue that the government would get at a 20% tax rate is 170 goats compared to only 117 goats at a 60% tax rate. Next, far fewer people would be willing to spend their time raising goats in the wilderness for 10 year at a 60% tax rate. In this case, the tax from people unwilling to raise goats at a 60% tax rate would be zero.
I had only assumed the tax reduction from shrinking the herd at higher tax rates. The reality is that not only do you get less revenue from shrinking the herd, you get people unwilling to do the work. This suggest the Laffer curve is even steeper than I had modelled at higher tax rates.
Would you give up 10 years of your life in the wilderness for a net increase of 52 goats ....
================================
First you say there are no costs, and now you say there is labor involved.
Labor is a cost.
At least now you see that ignoring costs and changing the basis of taxation from the original argument (US tax rates, based on net profit.) makes the analogy misleading.
It's a cute trick, though.
Let's be real here. What government would take 3 goats in taxes from someone who spends a whole year raising 13 goats? That would be an outrageously high tax rate by any standard.
"First you say there are no costs, and now you say there is labor involved."
I don't recall saying there were no costs. I did say there were no external expeditures to keep the example simple. I had also given an example where there was a cost of 10% of the herd each year (same peak tax rate).
The example here is to model the effect of an "income tax" on goat herding. The income you get is goats. Normally, to get an income, it involves labor. This simple goat example involves both capital (10 goats) and labor (your work raising goats).
"Let's be real here. What government would take 3 goats in taxes from someone who spends a whole year raising 13 goats? That would be an outrageously high tax rate by any standard."
The math still works the same if you start with 1000 goats and the government takes 300. The peak tax rate ends up in the exact same spot.
Hydra:
No, you are confused. Of course the mandatory parking is a minimum which would be a binding constrain ONLY IF the free market provision was LESS than the social optimum.
This means that the parking has POSITIVE externalities for other businesses. It does not mean, as you state, that there are negative externalities to not providing it. Goods with negative externalities are OVERprovided.
You are confusing a foregone benefit with a cost.
Businesses don't make optimal allocation decisions? Are you saying the free market fails? Are you saying they are irrational? Or are you saying they make decisions under bounded rationality?
Either way you are not refuting Cowen's argument at all. At best, you're saying there are positive externalities which justify the parking subsidy which counteract some or all of the negative externalities associated with drawing too much traffic. That leaves the optimal provision of parking ambiguous but doesn't address his statement.
Your statement also says nothing about optimal pricing of existing spots. Again, if these spots were privately owned, they would be rented at optimal prices. The fact that government owns spots doesn't change the optimal pricing rule.
"Exclusion is one element of private property, but you cnnot exclude someone from a parking space unless you occupy it."
Hydra, a metered parking space excludes those who don't pay. It is rivalrous as I can't use it if someone else is using it. Those 2 conditions together define a private good.
Based on that definition, all parking should be private. Government should not be in the parking business either directly or through regulation.
"Junkyard_hawg1985 said...
...Goats...
All I can say is you must be a very patient person. You should be aware that Hydra has asked this Laffer Curve question for many months, and has never understood the concept, nor accepted anyone's explanation, no matter how it is framed. He also seems challenged by the idea of percentages, so you have two difficult obstacles to overcome.
I, for one, love your goat analogy. It is the clearest, most understandable explanation I've ever heard. I hope you don't mind if I save it for future reference.
Incidentally, I posed your "calculate the tax rate" problem to my 9 year old grandson, and he got it right.
Good luck as a Laffer Curve explainer.
If your nine year old came up with the answer of 1000% then he got the answer right.
The goat analogy is cute but misleading and the answer it proposes to prove is wrong.
I'll listen to anyone that has a proof that makes sense.
The goat story is a fantasy and so is its proof,in the real world.
If there are costs then your profit is no longer 13 goats and the real tax is much higher than presented. You have simplified the example in a way that is misleading and produces a wrong answer.
It is like the old riddle of three guys sharing a hotel room.
A metered spce is rented. For the duration of the rent, it is a private good. Otherwise it might be a private good or a public one depending on how it is owned.
The cite I posted shows that there are many opinions on where the curve breaks. Goatmans opinion may be correct, but he can't prove it that way. Try looking up one of the academic derivations.l
Hydra, please! This goat tax problem is extremely simple and very enlightening. Do not add any other issues to the problem, but use only the simple data and conditions provided for you.
You don't need to consider expenses, goatherd feeding, sale of goats, or anything not explicitly given. You don't need to consider whether raising goats is a good business, or the seemingly high profit.
The number of goats taken for taxes includes ALL taxes. You needn't be concerned with state, local, excise, sales, property or any other tax. In this simple world there is only one tax. What does government provide you with in exchange for your taxes? Protection from bandits, nothing else. Your tax is the exact amount spent on your defense. There is no shortage or surplus.
This simple exercise is only intended to convey a CONCEPT of how taxation affects business growth and accumulation of wealth, and it does an excellent job of it.
At the end of each year you have some number of new goats left after normal losses. This number is net income. you are taxed on this income. pick a percentage and apply it. After 10 iterations you will have some number of goats and the government will have taken some total number of goats. Try different percentages of taxation to see how this affects the number of goats at the end of 10 years. Period. That's it. All of it.
Junkyard suggests that the optimum tax rate IN THIS SIMPLE EXERCISE is between 20-30%. Try it for yourself.
The optimum tax rate in the REAL world may be different than in the goat world.
The Washington Post article you linked to which polled more than a dozen various "experts" got a range of answers from 20% to 70%. If they had had to vote on the best consensus answer, they would have had to say "We don't know."
You said you agreed with the high numbers, but you never explained why. If your tax rate was 70% would you feel like you were prospering?
Hydra, if goats are too hard to swallow - and I suspect they are - try dollars:
You start with $1000. During the year you do some kind of business that is never explained, and no one understands, but at the end of the year you have $3000. $2000 is gross profit.
Each year you lose 10% of your starting capital and your expenses are 1/4 of your gross profit. Thats $2000-200-500 = $1300.
The government takes $300 of your net income of $1300, or 23% leaving you with $1000. Try that in your alleged number cruncher for 10 years. Try different interest rates to optimize the tax rate. Try different numbers if you wish.
Hydra,
While you claim my model is wrong because I don't include a charge for labor, mathmatically, it doesn't matter. Lets say in a given year, I have a net of 20 new goats. In my example, at a 20% tax rate, the government comes and takes 4 goats. If I get tired of living in the wilderness and hire an umemployed goat herder whose 99 weeks of UI have run out to take my place at a labor fee of 50% of net new goats, I would pay him 10 goats. Now my tax liability at a 20% tax rate is only 2 goats because I have netted only 10 new goats, but my employee's tax liability is also 2 goats. The government still gets 4 goats, and the combined herd of his goats and my goats is still the same size.
Same thing with any other expense.
Ron,
You are welcome to use the goat analogy. I'll be glad to send you a Microsoft Word copy of the goat write-up along with a graph of the curve and the Excel spreadsheet with the data. You can send me an e-mail at musickcd@bellsouth.net.
"your expenses are 1/4 of your gross profit."
----------------------------
With a business like that, who cares about taxes? This is the same problem as before: bay making profit a huge part of the business it makes the effect of taxes look bigger than they are in the real world. Not that they don't have an effect, but a lot of bad business decisions get made because they look like good tax decisions, and then when they go south, taxes get the blame.
===============================
"more than a dozen various "experts" got a range of answers from 20% to 70%. "
------------------------
OK, If they had had to vote on the best consensus answer, they would have had to say.......
49.5
60
70
70
70
40
33
19
40
50
63
60
52 plus or minus 16.
The politicians who should have an interest in this, and from whom you might expect an answer of around 20, declined to answer.
The average deviation from the mean is about 25%, but the lowest answer deviates by more than 60%. An estimate of 19% looks like an outlier, in this group of experts.
=======================
I believe that Feldstein and Mankiw offered the most insight,in that the short term answer and the long term answer are different. However, the basic question in play here is "At what tax rate, does revenue decline." Which implies the short term answer.
Feldstein also asks the critical question, "Why would you want to know how to maximize revenue?"
===============================
"This simple exercise is only intended to convey a CONCEPT of how taxation affects business growth and accumulation of wealth, and it does an excellent job of it."
-----------------------------
I agree, it does a good job of that, but it does not elucidate where the Laffer curve bends.
I agree that taxes represent a complete drag on the economy, if you assume the government provides NOTHING in return. The better job the government does, the less the effective drag.
The better job business does, the less government interference is demanded, and the lower taxes can be. The more money business makes, the less of it you have to take to support government.
We do not have a fundamental disagreement here, but we don't have a reasonably precise, agreed upon answer that is supported by theory, experiment, or history, either.
Without that, neither "side" can use the Laffer curve as a basis for policy decisions.
"your expenses are 1/4 of your gross profit."
----------------------------
With a business like that, who cares about taxes? This is the same problem as before: bay making profit a huge part of the business it makes the effect of taxes look bigger than they are in the real world. " Hydra
There are a few mythological businesses with gross margins over 75%:
1) Cleaning houses.
2) Yard Work.
3) Computer Software (MSFT, ORCL, Adobe, Intuit)
4) Mining (BHP)
5) Pharmacutical (Astrazeneca, Pfizer)
6) Mobile phone (China Mobile Limited, Mobil Telesystems)
7) Credit card processing (Visa, American Expess, Mastercard)
8) Cosmetics (Este-Lauder)
9) Stock Broker
10) Real Estate Agent
Hydra,
By the way, I do agree with your statement that the answer depends on the length of your outlook. Looking at my Goat example, If you only care about the next five years, you maximize revenue around a 70% tax rate. I would consider this short term revenue. For a government, it really should be thinking LONG term ("securing the blessings of liberty to ourselves and our posterity.").
There are a few mythological businesses with gross margins over 75%:
1) Cleaning houses.
2) Yard Work.
=============================
I'm in the wrong business.
So, I just paid a cleaning company around 15.60 an hour for a crew of women to come in and clean one of my rental houses between tenants.
You are trying to tell me they paid those girls less than $3.90 an hour? And they paid for supplies?
I do farm service work - really big yard work for other farms, and I don't make 75% at that.
I don't believe for a minute that Pfizer is paying tax on 75% of its revenue.
I'm sure there are companies that make 75%, but that sort of blows the argument about the efficiency of competitive markets, wouldn't you say?
You don't pay taxes on the gross margin, so it is improper to use an example where taxes are 25% of gross margin to show the deleterious effects of taxes.
Hydra,
As a teenager, I mowed yards. I paid a little for gas and upkeep on the lawnmower, but my gross margin was over 75%.
This is gross margin, so no, it does not include labor. As I mentioned earlier, mathmatically it does not matter. Even though labor can be deducted from the business expense, the wage earners also pay the income tax.
Here is the example.
I earn $2000 mowing yards. I pay $500 for gas and lawnmower upkeep (25%). I pay a 20% tax on this, so I pay $300 in taxes on my net profit of $1500.
I decide to stop mowing yards and subcontract the work to my little brother and pay him $1000 for the work. I still pay $500 in mower upkeep and gas. Since I paid him $1000, I only have $500 in net income, so my tax bill is only $100. My brother has now earned $1000 so his tax bill is $200. Wow, our combined tax bill is exactly what it was before ($300).
"As a teenager, I mowed yards. I paid a little for gas and upkeep on the lawnmower, but my gross margin was over 75%."
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Did you even pay the tax?
============================
Mathematically it makes no difference.
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Look, the argument is 1) that tax is a drag on business. This much I don't doubt, but I wonder how much drag.
2) When tax rates are too high government tax revenues actually decrease becasue of part 1. This is known as the laffer curve.
So the question is, at what tax rate does government revenue actually decrease? When do we see the tangible effects to government of the decrease in revenue predicted by the laffer curve.
1) We are talking about real businesses doing real business in the real world, and paying real taxes on real profits after all expenses. In 2001, Microsoft earned 23 billion against 28 billion in and paid taxes on only 11 billion. and that's one of your mythical businesses.
2) Personal taxes are not part of this argument, I don't think although I could be convinced otherwise. Your brothers taxes are his problem, except for the part you are required to pay, and all of that is a deductible expense to you. Your brother gets his own deductions before taxes.
3) Even if mowing grass or some other business does net 75% before taxes, those businesses will be least affected by taxes because they will still have a high return after taxes: they will have the most elasticity.
4) The farming business only earns 3 to 5%, if it is lucky. Therefore you rgoat farmers tax bill will be MUCH smaller than you suggest, and of all the things dragging on his business taxes will be the least of them. On the other hand, since he has so little left after taxes, he is more likely to give up that business and go find something else to do.
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I am genuinely interested in finding a supportable shape for the Laffer curve, but so far I'm in the camp that says the bend has to be somewhere beyond 50%.
So far, the arguments I see for 20% are not credible. The way I see your argument is that it way overstates the tax burden: the tax rate on most real businsesses would be three times what they are to represent a tax on gross margin of 23%.
In effect, what your argument says to me is that the Laffer curve turns down at a tax rate of 69%, which is in agreement with the academics.
Somewhere there is some application fo the Laffer theory to the real world.
Let's suppose that we eventually prove through some kind of regression that the inflection point is at 60% tax rate. That would put an end to the argument that raising taxes reduces government revenue.
Then we could ask the real question, which is, so what? What does the government need maximum revenue for, any more than we do?
It would be nice if it was 20%, because then we could argue unequivocally that government is shooting itself in the foot with higher rates. If that is the case, how and why are the academics so wrong, after all those guys aren't stupid, and not all of them are liberal flamers eaither.
"As a teenager, I mowed yards. I paid a little for gas and upkeep on the lawnmower, but my gross margin was over 75%."
--------------------------
Did you even pay the tax?
============================
Mathematically it makes no difference.
------------------------------
Look, the argument is 1) that tax is a drag on business. This much I don't doubt, but I wonder how much drag.
2) When tax rates are too high government tax revenues actually decrease becasue of part 1. This is known as the laffer curve.
So the question is, at what tax rate does government revenue actually decrease? When do we see the tangible effects to government of the decrease in revenue predicted by the laffer curve.
1) We are talking about real businesses doing real business in the real world, and paying real taxes on real profits after all expenses. In 2001, Microsoft earned 23 billion against 28 billion in and paid taxes on only 11 billion. and that's one of your mythical businesses.
2) Personal taxes are not part of this argument, I don't think although I could be convinced otherwise. Your brothers taxes are his problem, except for the part you are required to pay, and all of that is a deductible expense to you. Your brother gets his own deductions before taxes.
3) Even if mowing grass or some other business does net 75% before taxes, those businesses will be least affected by taxes because they will still have a high return after taxes: they will have the most elasticity.
4) The farming business only earns 3 to 5%, if it is lucky. Therefore you rgoat farmers tax bill will be MUCH smaller than you suggest, and of all the things dragging on his business taxes will be the least of them. On the other hand, since he has so little left after taxes, he is more likely to give up that business and go find something else to do.
===============================
I am genuinely interested in finding a supportable shape for the Laffer curve, but so far I'm in the camp that says the bend has to be somewhere beyond 50%.
So far, the arguments I see for 20% are not credible. The way I see your argument is that it way overstates the tax burden: the tax rate on most real businsesses would be three times what they are to represent a tax on gross margin of 23%.
In effect, what your argument says to me is that the Laffer curve turns down at a tax rate of 69%, which is in agreement with the academics.
Somewhere there is some application fo the Laffer theory to the real world.
Let's suppose that we eventually prove through some kind of regression that the inflection point is at 60% tax rate. That would put an end to the argument that raising taxes reduces government revenue.
Then we could ask the real question, which is, so what? What does the government need maximum revenue for, any more than we do?
It would be nice if it was 20%, because then we could argue unequivocally that government is shooting itself in the foot with higher rates. If that is the case, how and why are the academics so wrong, after all those guys aren't stupid, and not all of them are liberal flamers eaither.
With no taxes and no expenses, it wouldn't be long before we would have an infinite number of goats.
Be careful what you wish for.
I suppose you think that is silly.
Now you can see the problem with your argument.
"With no taxes and no expenses, it wouldn't be long before we would have an infinite number of goats."
From an economic point of view, our GDP feels a lot like the infinite goats. Since 1800, U.S. GDP has grown ~127,000% (inflation adjusted). In this time a lot of wealth has been created. Is there an upper limit, or can our GDP grow to infinity? Tax rate will definitely affect the rate at which we get there.
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