Paul Mason’s Problem With Economics

It’s a pretty big problem here, the one that Paul Mason has with the basics of economics:

The Institute for Fiscal Studies seems unable to imagine an economic model that is different from the one we have

Economics does not even attempt to be a normative science, one which describes what should be. It is positive, this is what is. Thus the idea that we can have “another economics” is in itself nonsense. What we’ve currently got is what we should have, a set of tools by which to measure the impact of policy upon reality.

That the set of tools tells us that a set of policies won’t work is not a problem with the tools but the policies.

Dig deeper, and the claim is actually far more specific than that. The head of the IFS, Paul Johnson, says that it is not credible for all £82bn of Labour’s planned increase in tax revenue to come from companies and people earning over £80,000 a year. So instead of the rich and big companies paying for better public services, the argument goes, “we collectively will need to pay for it” – and will pay for it, according to the IFS, through the £44bn rise in taxes on corporations being passed on to shareholders, consumers and workers, in the forms of price increases and cuts to wages.

It is a claim based on ideology, not fact. Even in an economy such as ours, the amount of tax companies are able to pass to consumers, workers and shareholders is disputed.

The claim is not that companies attempt to pass on taxes. Nor that they wish to but aren’t – or are – able to. Rather, that the taxes themselves change behaviour and therefore taxes are passed on. It isn’t about attempts, it’s about reality.

A pretty basic part of that reality being that there’s only us peeps around to carry the burden of taxation. Any and every tax means that the wallet of some live human being gets lighter. On the very simple grounds that live humans are the only people with wallets that can be picked. All taxation therefore devolves to peeps – companies never, by definition, carry any part of that burden. They’re just an interim stage before the final incidence.

The core assumption of rightwing economics is that companies can always put up prices to consumers or depress wages.

Eh, sorry, what?

But the assumption is wrong. Since the 19th century, we’ve known that supply and demand can be “inelastic” – that is, workers resist wage cuts and consumers won’t buy expensive things if they can’t afford them. Only if all companies had an absolute monopoly could they force workers and consumers to bear all the pain of increased taxes.

Well, that’s true at least. Although it’s rather fun to see Mason agreeing with the core claim of neoclassical economics, things happen at the margin. But he’s still missing the important point he’s trying to describe:

Mainstream economists tend to assume that, as a rule of thumb, about 50% of corporation tax can be passed on in this way. But one evidence review put it at between 10% and 30%; another, by the US economist Kimberly Clausing, concluded that there was “no robust link between corporate taxation and wages”.

We’ve been in direct contact in the past with Professor Clausing about that paper and it doesn’t show what Mason thinks it does, not at all. But still, he’s missing it. Because even if the incidence doesn’t fall upon workers and consumers it still doesn’t fall upon the companies. Imagine, just for a moment, that it doesn’t fall upon workers or consumers at all. It will therefore fall upon shareholders, capital, yes? And the shareholders will change their behaviour as a result and thus other things will happen in the economy.

But what if we had a Labour government that systematically blocked the option of passing taxes on to workers and consumers? A government that increased the minimum wage to £10 an hour and gave workers rights to organise. Meanwhile, the central bank inflation target – augmented by credit guidance and strong competition laws – could be used to counteract attempts to raise prices.

But again this is to miss the point. It’s not the companies, whatever we do here, that carries the burden of the taxation. Can’t be, companies aren’t peeps – sure, they’re legal persons but they’re not natural ones – therefore the company but never carries the burden of the tax.

According to neoliberal theory, companies faced with higher tax bills switch their investments to lower-tax jurisdictions. But in a real economy, where capital does not glide frictionlessly around the globe, the other rational response is to innovate.

Now Mason’s just being a twat. The incentive to innovate is so as to make greater profit. A larger tax burden upon profit reduces the incentive to innovate therefore.

Sigh.

The IFS assumes it is impossible to stop those with money and power from passing on the cost of higher taxes to the working class.

Yes, because behaviour changes in the face of taxation. There is no new economics which changes this.

Then he starts dribbling:

Let’s imagine such a model for Labour’s plans: one where the government intends to redistribute wealth; where the workforce is empowered with new rights for collective bargaining, and consumers are armed with enhanced competition laws. Let’s assume the central bank has a productivity target and will steer capital investment towards high-productivity companies.

Anyone, ever, got any evidence that government direction – let alone central bank, what tools do they have to perform it? – leads to investment only in higher productivity firms?

In the end, its argument comes down to this: because the powerful are powerful, tax rises for the rich must always be swallowed by the poor.

Nope, not at all. Rather, reality means that tax changes ripple through the economy. Thus, if you really want to tax the rich you’ve got to be careful about how you do it. Tax the consumption of the rich and it’ll be the rich doing the paying. Tax the returns to investment and it’ll be all of us paying, including the poor.

We really are in a positive science here. You want to tax the rich? Great. Land value taxation would be good. A progressive consumption tax would work. A rise in corporate or capital return taxation does not. Economics doesn’t tell you whether you should tax the rich more, only that if you so desire you should do it in this manner over here. Not in the manner currently being promoted by Grandpa Death and his handmaiden, Paul Mason.

BTW, I’d happily support a significant progressive consumption tax on the grounds that it would make the poor richer. But that’s because I actually understand the issue at hand.