Local nonsatiation and the "man who can't be taxed"

Some people I've talked to are of the opinion that I've been too harsh on Steven Landsburg. They say that I've been too harsh because:

A) Landsburg wasn't talking about current consumption being constant, he was talking about consumption from now until the end of time being constant.

B) Landsburg was assuming full employment (i.e. no wasted resources), so consumption from now until the end of time is in fact fixed, since it must then equal income from now until the end of time.

Yes. If by "consumption" Landsburg means "the present value of (infinite) lifetime consumption", and if he is assuming full employment, then Reasons 1 and 4 from my previous blog post do not apply (and Reason 2 is nitpicky). So was too quick to label Landsburg's idea "nonsense" and hit him with the Bat Boy picture?

The thing is, even granting the aforementioned assumptions, Landsburg is still clearly wrong. And the reason is not hard to see.

The reason is something called Local Nonsatiation. It is a basic axiom (assumption) of economic theory. It means that you're never 100% satisfied. And if you're never 100% satisfied, then any additional dollar you get will increase your utility, because you will use it to buy some of what you want. Conversely, any dollar that I take away from you will shrink your utility, because that is a dollar that you would have otherwise used to buy something you wanted.

In Landsburg's example, the rich and idle Mr. Kendrick consumes essentially zero; hence, confiscating his bank account does not hurt him in any way. This statement clearly violates Local Nonsatiation. By confiscating Kendrick's bank account, the government has reduced Kendrick's choice set. The set of possibilities open to Kendrick is now smaller. Hence, by Local Nonsatiation, Kendrick's lifetime utility must go down. 

Why does Kendrick's utility go down? Perhaps he wanted to leave his wealth to his heirs. Perhaps he planned to consume more someday. Perhaps his wealth was a safety cushion that made him feel secure. Who knows! The point is: as long as Local Nonsatiation applies, you're always worse off with less wealth. It really is that simple.

Landsburg compares Kendrick to a dead man, since he consumes nothing. But there is a big difference between the ascetic and the dead. That difference is called the future. A live Kendrick may have very little current-period consumption, but he has the option to consume more, or give away his wealth, in the future. You cannot take options away from a dead man, but you can take them away from an ascetic.

Now, you may ask: OK, but why should we assume that Local Nonsatiation holds? What if someone really could be completely, utterly satisfied with what he has - not just today, but forever? 

Fine. Maybe Kendrick is a bodhisattva, and has reached his bliss point. He violates Local Nonsatiation. BUT, if you take away Local Nonsatiation, then Landsburg's case completely falls apart, for a different (and yet still obvious) reason.

Central to Landsburg's case is the statement that "taxes must impose a burden on someone." But that is only true if Local Nonsatiation holds. If people can be perfectly satisfied with X amount of stuff, then taking any extra stuff away from them imposes no burden on them whatsoever, because they still have X. Taxing a man who is still at his bliss point after being taxed is like finding apples on the ground; it's a free lunch. If you don't understand that, you need to think harder!

Ever heard "There's no such thing as a free lunch"? Well, take away Local Nonsatiation, and that's no longer true. That's why economists pretty much always assume Local Nonsatiation!

So we arrive at a concise statement of Landsburg's error: The statements that "Taxation must impose a burden on someone" is logically inconsistent with the statement that "There exists a person who cannot be burdened by any tax."

All the brouhaha about full employment, interest rates, price levels, accounting identities, etc. is just a fun sideshow. The central point here is that Landsburg is making a case that is logically contradictory. In my opinion, the logical contradiction is immediately and clearly obvious. And that is why I called his case "nonsense."

But yes, of course Steve Landsburg is not insane. He's just wrong! We all say slightly insane things from time to time...

Update: Steven Landsburg responds in the comments:

The assumption throughout this exercise, as I believe I've made clear multiple times, is that Mr Kendrick is at what you call his bliss point...The other assumption is that people other than Mr Kendrick are not at their bliss points. (Mr Kendrick, as the article makes clear, is a very unusual person.) 

Well, that clears things up! It appears we have isolated the nub of the problem: Landsburg believes that taxation of a person who is at a bliss point must still impose a burden on someone, somewhere.

This is not correct. Suppose I have everything that I could ever possibly want (I am at my bliss point). I also have a chocolate bar, which I do not want. A man (the "government") comes and takes my chocolate bar and gives it to a third person, Ry, who enjoys eating the chocolate bar. My utility is not decreased, since I am still at my bliss point. Ry's utility has been increased, since he enjoyed the chocolate bar. No third party has been affected by this event. Hence, confiscation of my chocolate bar (taxation) has not imposed a burden on anyone, anywhere, at any time. The taxation was a Pareto Improvement.

From this simple and indisputable example we see that taxation of a person who is at his bliss point can be a Pareto Improvement, and hence need not impose a burden on anyone. This is why Landsburg's argument is a fallacy.

Update 2: Greg Mankiw chimes in. He thinks Landsburg is making an interesting point about tax incidence. Seems to forget that you can't actually do tax incidence - the traditional way, anyway - unless you have Local Nonsatiation, which Landsburg says he is chucking. Oh well.

Update 3: Niklas Blanchard with more reasons Landsburg is wrong.