December 7, 2022

I say this with all of the love on the earth: economists have a particular knack for taking sure financial concepts or ideas and discovering probably the most counterintuitive or unclear methods of describing them. To anybody apart from an economist, the phrase “public good” feels like “good supplied by the general public sector.” Attempt to soar in and clarify that, no, to be a public good, one thing must be each non-rival and non-excludable, and also you’re prone to be met with glazed eyes.

That is one motive why I get pleasure from discovering the concepts of economics clearly described or illustrated in works of fiction. When executed properly, it might assist carry that “aha!” second that makes an thought clear to somebody in a approach that charts, graphs, and technical verbiage merely can’t. However fiction isn’t the one avenue for that – we are able to discover it in on a regular basis life as properly. One vital thought in economics that’s, in my view, terribly described is that this:

“The authorized incidence of a tax will not be the identical as its financial incidence.”

This is a crucial thought. And for these whose objective is bettering the well-being of the poor by growing taxes on the wealthy, understanding it’s essential. The truth that the regulation says the rich can be caught with the invoice for a tax doesn’t imply the rich are those who will actually pay the price.

To see why, let’s think about a service I’ve used many occasions – a web based gross sales platform known as Swappa. As an unabashed tech nerd, I’ve purchased a ton of devices through the years. (Most likely too many, however that’s a narrative for a separate put up.) And when some new shiny toy has come out that I’ve determined I would like, I’d use Swappa to promote my present gadget to offset the price of the brand new one. Swappa, after all, makes a payment with each sale it facilitates. However in addition they let you know, the vendor, to not fear about that – the payment can be paid by the client, not the vendor. They accomplish this by including their payment to the posted worth once you record an merchandise. So if I put an merchandise up for $500, they may really record it at $525, and when it’s purchased, the client pays $525, Swappa retains $25, and I get $500.

That’s good in principle, however in observe, it doesn’t work that approach. I do know the client must pay this further payment, and the client doesn’t care one bit how a lot of it goes to me or Swappa. So I’ve to take that into consideration once I record an merchandise. If I feel one thing I’m itemizing will promote for $500, I don’t really record it for $500, as a result of I do know the ultimate worth will come out too excessive for it to be purchased. So as a substitute, I record it at $475, Swappa provides its payment, and the worth the client sees is now $500. Based on Swappa, that $25 payment is paid by the client, however in actuality, it’s paid by me, the vendor. When put this manner, it appears apparent.

Much less apparent to many is how the identical thought is at play with the taxes and different prices related to all types of financial regulation. Saying “We’ll require employers to supply extra advantages to their workers” simply means “We’ll require workers to take decrease pay from their employers to purchase extra advantages.”  In his glorious guide Catastrophic Care: Why All the things We Assume We Know About Well being Care Is Mistaken, David Goldhill describes this from his viewpoint as an employer:

Since [newly hired employee] Becky’s single with out dependents, my firm can pay $5,679 this yr for her medical health insurance; she’ll pay $2,112. Or so she thinks. In actuality, Becky is paying all $7,791 of her insurance coverage premium…To grasp this seeming paradox, put your self in my firm’s place once we initially resolve whether or not to create that job for Becky. We weigh two elements: the worth of Becky’s work to our firm and the price to us of hiring Becky. Discover the difficulty is “price to us,” not wages or wage, as a result of an worker all the time prices an employer extra than simply her wages…Whether or not she is aware of it or not, her compensation is bearing the burden of our $5,679 contribution to her insurance coverage premiums.

Many activists will, on the one hand, insist on legal guidelines to push for extra medical health insurance protection, longer paid parental depart, and/or a litany of different advantages, whereas however fear about stagnating wages. What they miss is the connection between the 2. One may assume the objective must be to search out the “proper” or “greatest” mixture of wages and advantages, however there is no such thing as a proper, one-size-fits-all reply to this query. Neither is there any motive why one should be arbitrarily conjured up by policymakers. Completely different individuals could have completely different preferences about how their compensation is split between money and advantages. So why not let individuals have the choice to decide on the mix that works greatest for them?


Kevin Corcoran is a Marine Corps veteran and a advisor in healthcare economics and analytics and holds a Bachelor of Science in Economics from George Mason College. 

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