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So Radley Balko brought up on Twitter a "Challenge To Lefty Bloggers" that he published back in 2009. Some of his questions are perfectly reasonable: I think we should target NGDP in a way commesurate with 4% inflation, for example; I’m also in favor of marginal (not total or average) tax rates of ~90% under certain circumstances. Some of his questions are irrelevant (the "unfunded liability" of Social Security is a non-sequitur), confused (I think he scrambles marginal and average tax burdens), or just silly (our average tax rate is close to the median – what greater suffering dare you inflict!?).

But some of them are conceptually flawed in a way I think is interesting. Firstly, his "size-of-government" metric is hopelessly flawed. More interestingly, though, are the questions about income inequality and progressive taxation – what are the optimal levels of each? The trick here is that claiming to have a theoretic or empirical basis for an exact number is a fool’s errand. The real answer to this question is "less and more than we currently have, respectively." So let’s use a little more of the latter to alleviate some of the former, and see what happens! It doesn’t have to be radical – we could just nudge up top marginal tax rates, perhaps create a new millionare’s bracket, and use the money to expand the EITC (which I know doesn’t directly affect pre-tax income inequality on either end but just roll with me here). Will that devastate innovation? Will Atlas shrug? Meh – I doubt it. In fact, Galt’s Gulch was a rather lonely place even when top marginal tax rates in the United States were 90%+. So rather than demand anyone decare a single optimal point, let’s agree that "too few people claim too large a share of national income" and nudge it a bit and see what happens. That’s what democracy is for!

So Ashok and I sparred a bit on Twitter re: the meaning and effect of taxation and spending (and probably pestered the heck out of James Pethokoukis and Joe Weisenthal in the process). I’m not sure how to embed Twitter conversations (if anyone knows how, I’m all ears), but the long-and-short of it is that the actualities of taxes and spending are weirdly different from the optics.

The trick is to remember that every policy change is a change from some baseline. So, from whatever the baseline currently is, there is no fundamental or economic difference between:

1) Cutting taxes by X on some activity, and
2) Spending X subsidizing that activity

assuming that they are both funded identically (though identical tax hikes, spending cuts, or debt incursions).

Now, in practice, there will be differences. Scott Sumner’s thought experiment about the society that taxes 100% of GDP by taxing 100% of income then writing welfare checks equal to taxed income demonstrates that, since we would expect that society really would look different than the one that taxed nothing at all (if only because such a program would have some overhead). But those differences would be based in behavioral economics, not classical or neoclassical economics.

And the same in real-world examples. There would definitely be differences between these two alternative scenarios:

1) A 2% payroll tax cut (debt-funded).
2) A check mailed to every American for the exact same amount (debt-funded).

But those differences would be instutional, not economics (the check-cashing industry, for example, would obviously prefer the second policy to the first). But there’s no reaosn to think they would "crowd out" (or for that matter, "crowd in") different activities.

The real point is, as Matt Yglesias says, the tax share of GDP is a very poor to think about the “size of government.”

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