In which Steven Landsburg utterly flips out

Steven Landsburg thinks he has come up with a proof that taxation of the "idle rich" is impossible:

[The extremely rich] Mr. Kendrick appears to do pretty much nothing but park and re-park his four cars all day long...Assuming the facts are as she states them, it is quite literally impossible to raise revenue by taxing the likes of Mr. Kendrick...

Here’s why it’s impossible: For the government to consume more goods and services, somebody else must consume fewer. But Mr. Kendrick...consumes almost no goods or services whatsoever. He just pushes cars around all day. His consumption can’t go much lower.

Ah...but there’s still that $84 million in the bank. Surely we can tax that, no?...[but] what happens if the government takes Mr. Kendrick’s $84 million away? Answer: A bunch of zeros and ones get shifted around on bank computers. Mr. Kendrick goes right on pushing his cars around. And nothing else has changed.

Unless, of course, the government decides to spend some of that $84 million. Now the government consumes more goods, Mr. Kendrick consumes no fewer, so someone else must consume less. Who is that someone else?...[T]he most likely answer is that when Mr. Kendrick withdraws $84 million from the bank to make his tax payment, the bank makes fewer loans, interest rates rise, and someone cancels a vacations, or postpones a car purchase, or abandons a half-built factory. Who bears the burden of the tax? The people who cancel their vacations and car purchases and factories, that’s who. Not Mr. Kendrick.

You can try to tax him, but any attempt to tax him turns into a tax-in-disguise on somebody else. And the reason for this is not ultimately to be found in the laws of economics; it’s to be found in the laws of arithmetic. You can’t drive a man’s consumption below zero.

OK, clever readers, your assignment is to reread the above blog post very carefully, and think of four reasons why Landburg's post is utter nonsense. That's right, four. I don't want to make it too easy for you.

All right, now here's the reasons I've come up with:

Reason 1: GDP does not equal consumption. This is a very, very basic Econ 101 fact. Like, the first thing you learn. GDP = Consumption + Investment + Govt. Purchases + Net Exports. Landsburg says: "For the government to consume more goods and services, somebody else must consume fewer." This is obviously false, since Government Purchases can rise if Investment or Net Exports goes down (or GDP goes up), with Consumption unchanged. There is no "conservation of consumption".

So, even before we go on to other, more sophisticated reasons why Landsburg is talking nonsense, we know from the most basic accounting identity in all of economics that he is, indeed, talking nonsense.

Reason 2: Revenue does not equal consumption. Landsburg writes: "It is quite literally impossible to raise revenue by taxing the likes of Mr. Kendrick." Wrong. Even if Landsburg's nonsensical idea about the "conservation of consumption" were right, this statement about revenue would be patently false, since a rise in Government Purchases accompanied by a fall in private Consumption would, if the deficit is unchanged, constitute a rise in revenue.

And yes, I know this is a fairly trivial and obvious reason that Landsburg is talking nonsense, but it bears pointing out before we move on to deeper and more interesting reasons.

Reason 3: Consumption today does not equal lifetime consumption. Maybe today Kendrick just reparks his cars, but tomorrow he might get tired of that, and might want to use some of his fortune to buy, say, a yacht. Confiscating his fortune takes away his ability to do this. Landsburg has decided that if Kendrick's current consumption is not reduced, it does not constitute "taxation" of Kendrick. By this logic, if I confiscate the entire contents of Steven Landsburg's bank account, it will not qualify as "robbery" if he did not plan on making an ATM withdrawal until tomorrow. 

Corollary to Reason 3: Local nonsatiation is an axiom of modern economics. This axiom states that, over his lifetime, Kendrick will consume his entire lifetime income (as Brad DeLong notes, this may include bequests to his descendants). Eventually he will do something with that $84 million, even if he just leaves it all to his kids untouched. So taking Kendrick's $84 million reduces the present value of Kendrick's lifetime consumption by...$84 million.

But wait, there's more.

Reason 4:  If Landsburg were right, aggregate savings could never change. Landsburg states that if Kendrick's fortune were withdrawn from his bank and spent on consumption goods, the bank would raise interest rates, and someone else's consumption would fall by an exactly countervailing amount. That is just wrong. Consider this: what if Kendrick himself decides to withdraw his $84 million and spend it on consumption goods (say, a few dozen more cars). Must consumption elsewhere in the economy fall by $84M? No? But in real terms, that is exactly the same as if the government confiscated Kendrick's $84M and bought the new cars for him - which, Landsburg insists, would reduce consumption elsewhere in the economy. 

Landsburg's statement is therefore equivalent to the mathematical statement that economy-wide consumption cannot be raised by a decrease in a single individual's savings. And since Income = Savings + Consumption, Landsburg is therefore saying that any decrease in one person's savings must, mathematically, be accompanied by either a decrease in economy-wide income (GDP) or an increase in someone else's savings. If the former is the case - if reducing my savings by $X reduces GDP by $X - then increasing my savings by $X must increase GDP by $X. And that would mean GDP is maximized if people consume zero (i.e. everyone dies). This is clearly not the case. So, by process of elimination, Landsburg must be asserting that if my savings go down by $X, someone else's must go up by precisely $X, and hence aggregate saving is constant over all time.

Needless to say, that is total nonsense.

There, that's four (though you may notice that Reasons 1, 3, and 4 basically address the same fallacy). I'll leave it to you readers to come up with more (and I'm fairly sure there are some more).

But I'll end by pointing out that Alex Tabarrok of Marginal Revolution gives the following uncritical endorsement of Landsburg's nonsense:

Steve is quite right. The key is this sentence, “For the government to consume more goods and services, somebody else must consume fewer.”

He even repeats one of Landsburg's patently nonsensical assertions (see Reason 1 above)! And although he does acknowledges Brad DeLong's critique (i.e. my Reason 3) in an addendum, he never takes back the nonsensical assertion that present consumption is conserved.

WHY? "Economics by accounting identity" is dubious at the best of times, but "economics by patently false accounting identity" is just inexcusable. You can get economic theory to say damn near anything you want. But by Adam Smith and all that is holy, you just cannot get it to say that consumption is constant by definition! You just...can't!!!


Update: Paul Krugman explains why Landsburg is misunderstanding the nature of taxation, a point that Brad DeLong also noted. That's five... 

Update 2: Niklas Blanchard points out that the government doesn't just consume, it invests! The existence of public goods and government investment mean that Landsburg's statement about "government consumption", in addition to being nonsense, is also a bit irrelevant to real public policy issues.

Update 3: Landsburg, responding to Krugman, doubles down: 

1) A tax imposes a burden.

2) If a tax has no effect on a man’s lifestyle, then it imposes no burden on him.

3) Therefore, if a tax has no effect on a man’s lifestyle, then it must impose a burden on someone else.

This demonstrates a failure to understand Local Nonsatiation. If Kendrick's $84M is confiscated, either A) his present consumption is reduced, B) his future consumption is reduced, or C) his ability to bequeath money to his heirs is reduced. Either way, his choice set is reduced, so by Local Nonsatiation his utility is reduced, i.e. a burden has been imposed upon him, QED.