Economics and the mid-life crisis have much in common: Both dwell on foregone opportunities

C'est la vie; c'est la guerre; c'est la pomme de terre . . . . . . . . . . . . . email: jpalmer at uwo dot ca

. . . . . . . . . . .Richard Posner should be awarded the next Nobel Prize in Economics . . . . . . . . . . . .

Sunday, December 26, 2004

Taxation by Regulation

In one of the first few issues of The Bell Journal of Economics and Management Science, back in 1971 (issue #2?), Richard Posner had an article by the title, "Taxation by Regulation." The gist of the article was that firms and customers are taxed [and that real resources are diverted from one use to another] via regulatory schemes that permit, require, and/or induce cross-subsidization. Under these schemes, some low price elasticity of demand users were charged high prices, and the excess revenues were used to provide services to customers who otherwise would not be willing or able to cover the marginal costs of providing the services to them.

Even though Posner didn't use this example, full-size passenger jet service to London, Ontario, was an example of taxation by regulation that I often used in my classes when I first started teaching at The University of Western Ontario. Post de-regulation, London is now served by small commuter planes and by regular van service to Toronto and Detroit airports. Under the regulatory regime, customers flying on the high-volume routes were paying higher-than-competitive fares and subsidizing those of us who traveled to London, Ontario. The bigger planes were nicer and more comfortable than the commuter planes, but they were also a use of more of society's scarce resources.

Bill Sjostrom at the Atlantic Blog updates this concept of taxation-by-regulation with his criticism of Walter Williams proposal to put a cap on gubmnt expenditures:
The problem here is that Williams is wrong to say that revenues can be raised by taxes, borrowing, or printing money. There is an important fourth way:
mandatory expenditures.
Interestingly, the example Bill provides has to do with airlines, only in this case it is the provision of wheelchairs at airports.
Mandating free wheelchairs is a form of taxation. Suppose the government paid for the wheelchairs ... out of general revenues. The effect would be the same, except the tax would be borne by all taxpayers. If the government paid for the wheelchairs out of a levy on airline tickets, the effect would be the same as if they require the airlines to provide free wheelchairs.

Williams' proposal to fix government expenditure at a fraction of GDP does not address the issue of taxation by regulation (emphasis added). Moreover, it could seriously aggravate growth by giving governments an incentive to extract income from direct control: mandatory expenditures, the draft, and so on. These are all forms of taxation not covered by Williams' proposal.
Digression: What are the comparative social costs of having people use their own wheelchairs vs. having wheelchairs provided by para-transit to and from the airport, by airports, by airlines, and then by whomever meets them at their destination? In other words, if someone needs a wheelchair, why wouldn't they use their own? And if there are instances where it would be helpful to customers to have wheelchairs available in airports, why not let airlines compete to provide them?
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