Tax

[Saracen]

Sorry to say that you have wasted your time writing that long reply to "educate" me, but I have done more economics than you have unless you have done a straight BSc/MSc in economics

[SiM]

Shortest Saracen post ever!!!

[Saracen]

So are you saying a 60% tax on inelastic good won't effect demand? Of course it will, not as much as an elastic good, but if it is not perfectly inelastic then there will be an effect. This is only part of their strategy the rest is a different topic from taxes, but they also regulate the supply amongst other things (which you mentioned too). I think you are assuming that these goods are more inelastic than they actually are...

They are very inelastic, at least in response to incremental changes. that's why they are hit with tax rises again and again.

And no, I'm not saying that a 60% tax on any good wouldn't affect demand. There may be a few exceptions where it wouldn't, but I wasn't saying that. In fact, I said the opposite. If you want to affect behaviour, you don't dribble modest increases of a few pence here and there. You hit inelastic goods with a whopping, "swingeing" rise .... if behaviour modification is the object of the exercise and if you have the political cojones to do it.

Tube/train/bus...?
Smoking can be cut down with a little will power. There is also free NHS support to aid this too and its quite successful if you actually do it.

To summarise: taxes are good (I will be a higher rate tax payer in 3 months). Trust me, I'm an statistician (and part time economist)

Smoking can be cut down ..... if people want to. Which is why to affect behaviour, the tax rises on inelastic goods have to really hurt. And the tax rises we keep getting are calibrated to raise revenue, but to be affordable, and therefore to not affect behaviour, or at least, not significantly.

Not everyone can catch the train/tube/bus for their job. A lot can't. And it is also a matter of sheer comfort and convenience. Trips that are practical in the car are not practical by public transport, because of the extra time it takes, or because of unsocial hours, or because of the kids, or because or of-the-beaten track locations.

None of these things, even with inelastic goods, are absolute. Every time the Chancellor clobbers cigs, booze and petrol, there's likely to be a few that will give up cigs, cut down on the booze or sell their car. But there'll be plenty of other that don't, and a constant stream of new consumers growing up and coming along to take their place.



But aside from the technicalities of the arguments, it comes back to the assertion ...

... Taxes on booze, cigs, cars etc. are there to be disincentive to prevent pollution and health problems .....

And I stand my my earlier remark .... the hell they are. They're about raising revenue, pure and simple.

[Saracen]

Shortest Saracen post ever!!!

That's 'cos I was typing the substantive reply. That bit was just a hint as to whether I have a straight economics degree or not.


EDIT - Oh, and that two-smiley reply was twice the size of what I wanted to say, which was one smiley. But the system minimum post size limit wouldn't let me post that.

[SiM]

Quoting myself fully:
"You also need to remember in some cases that taxes are not just there for revenue. Taxes on booze, cigs, cars etc. are there to be disincentive to prevent pollution and health problems."
I still stand by my statement. What you quoted was just an example. Maybe increments in taxes on these goods do not have an effect. But the taxes as a whole does

Regarding driving to jobs. That should be factored in when selecting a job. If I am going to work 1 hour drive away, rather than working 15 minutes down the jubilee line away, I would want enough extra pay to compensate me for my travel times and travel costs. But I do actually agree that public transport is not a substitute for cars in most circumstances... oil prices are driving petrol prices up more than taxes are, but that another topic for a GD rant

[SiM]

That's 'cos I was typing the substantive reply. That bit was just a hint as to whether I have a straight economics degree or not.


EDIT - Oh, and that two-smiley reply was twice the size of what I wanted to say, which was one smiley. But the system minimum post size limit wouldn't let me post that.

Lol... Search has revealed something to me... No hint required...

Maybe I'm just an old cynic, but as a Warwick Economics graduate

I'm studying at Warwick now!

[Saracen]

I'm an believer in the old adage "monkey is as monkey does". And I was referring to the items you mentioned, being booze, cigs and cars. It is possible to use the tax regime to affect behaviour on those, but it wouldn't be done the way it has always been done if that was the objective. I'm assuming that the "monkey" intended what he achieved when he set the rates of tax increase ..... whichever "monkey" of whichever party.

Your statement specified those specific goods as examples where tax is used to prevent pollution or health problems. Is it possible that other taxes have that effect, or even are designed to have that effect? Yup. I didn't express an opinion on other taxes or other products, one way or the other. Name some others that you consider have that effect, and I'll give an opinion on them, if I have one.

But on cigs, booze and cars (by which I assume either road tax or petrol duty are what's meant, seeing as the others are the usual budget casualties), I still say that there is no evidence at all that the intention is health benefits or pollution control, and every sign that it's revenue raising, simply by looking at the effect.

An example where a "tax" could be argued to be, directly or indirectly (via reducing congestion) aimed at health or pollution would be the London congestion charge. It's also possible to argue that that isn't the objective, but I'm not arguing that and am not going to.

[Saracen]

I'm studying at Warwick now!

If you don't mind me asking, doing what?

I'd assume economics is part of it, from what you say, but not all. Of course, even a pure economics course like mine wasn't pure economics. Mine included maths, statistics (more of which I got doing my accountancy exams), marketing, industrial relations etc and, of course, econometrics (). I also did some voluntary courses, including one on sets and groups from the maths department, and one on game theory (no, not that kind of game) which, if I remember correctly, was part of MORSE (Maths, Operational Research, Statistics and Economics, in case that particular course no longer exists), and a few computing courses .... which were VERY different to the computing of today.

[SiM]

If you don't mind me asking, doing what?

I'd assume economics is part of it, from what you say, but not all. Of course, even a pure economics course like mine wasn't pure economics. Mine included maths, statistics (more of which I got doing my accountancy exams), marketing, industrial relations etc and, of course, econometrics (). I also did some voluntary courses, including one on sets and groups from the maths department, and one on game theory (no, not that kind of game) which, if I remember correctly, was part of MORSE (Maths, Operational Research, Statistics and Economics, in case that particular course no longer exists), and a few computing courses .... which were VERY different to the computing of today.

I am surprised that MORSE existed back then! Done game theory and 2nd year Economics course. I have also done some econometrics (but taught as statistics by the stats dept... well it is really stats applied to economics so stats should take credit for it ). Doing my dissertation on multivariate time series which is a bit hard for undergrads... I don't think the econ dept teaches it either! I'm not a big fan of macro, I prefer the more mathematical micro stuff... saying that I am not doing any econ modules this year anyway! I am doing mostly stats and a wee bit of finance this year. Oh well, if you haven't guessed by now, yes I do MORSE!
I love the way Warwick is so flexible with module choices

But on cigs, booze and cars (by which I assume either road tax or petrol duty are what's meant, seeing as the others are the usual budget casualties), I still say that there is no evidence at all that the intention is health benefits or pollution control, and every sign that it's revenue raising, simply by looking at the effect.

I think that your argument is more based on politics rather than economics... There is an economic reason (or an excuse!) for having high taxes on these demerit goods.

[Salazaar]

i would have more respect for Gordon Brown if i saw him brandashing a gold plated AK47 every now and again, am i the only one?

(if someone wants to photochop gordon onto one of those pics of sadam, they'll get a thank user click )

Eeeek!





El Gordo: He luvzez da AyKayz

[TheAnimus]

thats my background at work sorted for the next few weeks!

[Saracen]

... I love the way Warwick is so flexible with module choices

I seem to remember that, in my day, Warwick was the only Uni doing that particular combination. It may still be for all I know.

.... I have also done some econometrics (but taught as statistics by the stats dept... well it is really stats applied to economics so stats should take credit for it ).

Nice try.

It's statistical techniques applied to economic principles and theories, so the stats is merely a tool. It's about those economic theories and principles, and they set both the subject matter and it is in the field of economics where the results will be used. So no, the Economics department should take credit. But then, you wouldn't expect me to say anything else, would you?

In my day, it was taught by economists, as part of the economics course. In fact, if I remember rightly, it was an ex-LSE Prof that took it (for me) and used the book he'd written and his LSE course as the prime source material .... which was a postgrad course at the LSE. It flummoxed a good percentage of the economists.

....I think that your argument is more based on politics rather than economics... There is an economic reason (or an excuse!) for having high taxes on these demerit goods.

No, I don't think so. The politics might tell you what you want to do, but it's the economics that determines what's likely to happen if you use various techniques, and therefore tells you (or at least, strongly suggests) what will work and what won't, and what methods to use to achieve a certain objective.

So yes, politics might tell you that there's an economic benefit in having taxes on demerit goods, that being an attempt to reduce the non-economic cost of those goods, i.e. reduce the social cost. In other words, reduce the time off work due to late-night boozing, reduce the stresses on the health service due to alcohol related illness, reduce the stresses on police in dealing with booze-fuelled revellers causing disturbances and petty crime, and so on.

I'd say that whether you should seek to change behaviour is an issue for politics, and perhaps for society as a whole. But the analysis of what happens when you apply a particular measure is for economists. The "why" and "if" are political questions, but the "what" and "how" are economic ones. Or perhaps to be more accurate, in the current context, fiscal ones.

Essentially, my point was that you can often infer objective from actions, and I certainly see no exception over these taxes.

Over the years, or indeed decades, governments have applied the same methodology to budget hikes on those specific "demerit" goods. Oh, they tweak other things too, but the three that nearly always feature prominently are booze, cigs (and other forms of tobacco) and petrol (and other fuels). That they always (or nearly always) hit these goods, and that they do it in relatively small, manageable increments, tells the whole story. Either they've spent several decades adding taxes to these in order to change behaviour, totally oblivious to the the fact that it plain isn't having that effect, or they've been using the same products and the same scale of increase precisely because it has been doing exactly what it was designed to do .... which is raise revenue.

That the objective is to raise revenue is a political one, in that the decision that it's desirable or necessary to raise it is political. But the way in which it is raised is economic, in that it's economic theory (and very well documented economic theory at that) that this kind of price rise (or tax rise) on that type of good will have minimal effect on demand.

It comes back to the same point, SiM. If the objective was behaviour modification, then the policy has been tried over and over again, virtually every year, and had failed abysmally every time, yet they keep doing it. If, on the other hand, the objective was to raise revenue, then doing what Chancellors do with these goods is precisely what economics says you should do (i.e. hit inelastic goods with incremental rises not a big shock). I don't have a particularly high opinion of politicians (based, I might add, on personal experience, among other things), but even I don't credit successive decades worth of them as being stupid enough to not have noticed that behaviour hasn't changed, whilst at the same time, doing precisely what is called for if the object of the exercise was to raise revenue. That would require monumental stupidity paired with colossally good fortune in coincidence.

Nah, Sim, it's about revenue not behaviour, and you ain't squirming out of it by calling it politics.

[SiM]

Nice try.

It's statistical techniques applied to economic principles and theories, so the stats is merely a tool. It's about those economic theories and principles, and they set both the subject matter and it is in the field of economics where the results will be used. So no, the Economics department should take credit. But then, you wouldn't expect me to say anything else, would you?

In my day, it was taught by economists, as part of the economics course. In fact, if I remember rightly, it was an ex-LSE Prof that took it (for me) and used the book he'd written and his LSE course as the prime source material .... which was a postgrad course at the LSE. It flummoxed a good percentage of the economists.

Its still taught by Economics department at undergrad level. The course that I do is from the MSc in Financial Maths course, but is taught by stats dept... it is actually applied to finance in our course and not economics

Over the years, or indeed decades, governments have applied the same methodology to budget hikes on those specific "demerit" goods. Oh, they tweak other things too, but the three that nearly always feature prominently are booze, cigs (and other forms of tobacco) and petrol (and other fuels). That they always (or nearly always) hit these goods, and that they do it in relatively small, manageable increments, tells the whole story. Either they've spent several decades adding taxes to these in order to change behaviour, totally oblivious to the the fact that it plain isn't having that effect, or they've been using the same products and the same scale of increase precisely because it has been doing exactly what it was designed to do .... which is raise revenue.

It comes back to the same point, SiM. If the objective was behaviour modification, then the policy has been tried over and over again, virtually every year, and had failed abysmally every time, yet they keep doing it. If, on the other hand, the objective was to raise revenue, then doing what Chancellors do with these goods is precisely what economics says you should do (i.e. hit inelastic goods with incremental rises not a big shock). I don't have a particularly high opinion of politicians (based, I might add, on personal experience, among other things), but even I don't credit successive decades worth of them as being stupid enough to not have noticed that behaviour hasn't changed, whilst at the same time, doing precisely what is called for if the object of the exercise was to raise revenue. That would require monumental stupidity paired with colossally good fortune in coincidence.

I think I know why we are differing in opinion here. I am talking about the tax as a whole, while you are talking about just the increase in tax. I agree what you say about the increase in tax - it does not have a huge effect on consumption for most people... but maybe it will have a bigger effect on those who are just about to start alcoholism/smoking/driving 4x4 or were considering starting...

That the objective is to raise revenue is a political one, in that the decision that it's desirable or necessary to raise it is political. But the way in which it is raised is economic, in that it's economic theory (and very well documented economic theory at that) that this kind of price rise (or tax rise) on that type of good will have minimal effect on demand.

My point is that although the tax increment has a minimal effect on demand, the overall tax does. eg. You are comparing 60% tax with 61% tax. Right? I am comparing 0% tax with 60% tax.

[JK Ferret]

What gets me is - why can't I vote for the party I support, they get my tax allocation as a budget and depending on what they support it get spent on that - then who I vote for has a direct impact.

Anyone who doesn't vote it goes with the party which wins - overall would work out to be a better system?

Is voting not anonymous? The point is that you don't knwo who voted for who, so people don't go out and riot and kill half their neighbours.
(I've only voted in a small time local election (and only then because it happened to be right along my path that day), but is it not the same for all elections?)

If it is, then the system you proposed couldn't possibly work - because they just don't know.
Unless they divided spending by vote proportion (and, of course, manifestos at the time of the voting)

[Steve B]

Suppose there are two brands of crisps and the taste is identical. Both are freely available on the shelves in all stores (and pretend brand preference doesn't work), and clearly and prominently marked with their price. You genuinely don't care which brand you buy as you can't tell the difference. If one brand increases it's price, which do you buy? Right. A lot of demand will instantly shift to the other brand, because for all practical purposes, it's identical, and available. Why pay more for the more expensive one? That's a highly price-elastic item.

If one brand increases it's price, then demand will obviously decrease but that's not necessarily indicative of prince elasticity.
Surely it's if a small increase in the price leads to a relatively larger decrease in demand, that's what makes it elastic?
I'd have just used one brand; much easier for my 5am pickled brain to handle

What about the people who are willing to pay the extra for brand 2. If they value the product at more than brand 1's market price, then they may pay extra.

I'll take a fig leaf latte with swiss cows milk and pure himalayan cane brown sugar please.

[Saracen]

If one brand increases it's price, then demand will obviously decrease but that's not necessarily indicative of prince elasticity.
Surely it's if a small increase in the price leads to a relatively larger decrease in demand, that's what makes it elastic?
I'd have just used one brand; much easier for my 5am pickled brain to handle

Well, no. Price elasticity refers to the reaction of demand for good A in response to a change in price of good A (in this case, that price change being actually a tax change, but at the checkout, it doesn't matter why the price changed, just that is has). The extent of the response in relation to the size of the increase indicates the degree of elasticity. By theory, at the extremes, reactions are extreme. If elasticity is "perfect", ANY increase would result in demand falling to zero. But I can't think of anything that actually works quite like that. The closer to "perfect" the particular situation gets, the bigger the reaction of demand to price change. That determines the degree of elasticity. Elasticity is, if you like, a continuous spectrum with absolute inelasticity at one end and perfect elasticity at the other. The goods discussed are the ones targeted so regularly for tax hikes because they are commonplace, high volume, relatively small value AND highly inelastic. Not perfectly so, but when you combine the factors needed for an effective increase in tax revenue, they top the list. Which is why they're always top of the the target list .... and why it's so easy for pundits to predict that they'll be hit (and are rarely wrong in that).

My example actually mixes two effects - one being price elasticity and the other being change in the level of demand for good B in response to a change in the price of good A, which is the cross-elasticity of demand. But the general point you make is a very good one. Any economic theory, or at least any I've ever come across, is ALWAYS based on a simplification of real life, because in the world world, people are complex, and if there's one statement about economic theory that I feel is absolutely incontrovertible, it's that the behaviour of people (whether as consumers, or managers, or whatever) is not not always absolutely rational. In fact, rarely is, in my experience.

Most theories, including price elasticity, are true in the general sense, and true to a greater or smaller extent, but rarely if ever perfectly follow what mathematical models of basic theories would suggest. This is because rarely does anything entirely depend on just one factor, like price, but also because, as I said, humans aren't entirely rational.

An example. With those two packets of crisps I mentioned before, I did put in the caveat that we pretended brand preference doesn't exist. But it does. As does habit. A lot of people would walk into the supermarket, pick up the brand they're used to, and not even look at the prices of the other brands. And if they do that, an element of the response perfect price elasticity would predict will be lost.

Also, some people will never have tried brand B because they tried brand A and liked it, so have not moved beyond that. So if ALL consumers don't know that brand A and brand B are indistinguishable from each other during the act of consumption, then again, it puts an imperfection into the cross-elasticity model..

I could go on, but the point is clear. Economics is useful for predicting general principles and trends, and the more research you do, the more statistical analysis you have and the bigger and more accurate the modelling you do, the more accurate those trends will be. But I doubt we'll EVER be able to fully model things like this, because we'll never be able to fully analyse the factors that go into making the decision. Who can predict when, and on what basis, some percentage of crisp buyers might look at a packet of their favourite crisps, spot the price rise and decide to have cheesy wotsits instead, because they had two packets of crisps yesterday? Or to have an icecream, because it's hot today? Or that while they really fancy those crisps, they're trousers are getting a bit tight so they have nothing, or settle for an apple?

Which is why I said, right back in that original post, that like an analogy, if you push this type of economic prediction too far, it starts to creak and groan.

As a result, that kind of economic theory can be pretty useful for predicting the trend of macro effects, like what goods to hit if you want to raise tax revenue, or the likely effect of increasing or decreasing interest rates or public sector spending. But even with those broad brush measures, there will be multiple repercussions. Changing interest rates, for instance, affects a whole raft of different things, some directly but many, many more indirectly, and yet more, at third, fourth, fifth hand, etc. And many of those effects will hit with differing degrees of magnitude, and with different amounts of delay before they start, so they'll have differing degrees of effect, and in some cases, diametrically opposing effects.

All in all, it makes economic predicting some of a black art. It's like the weather - we're getting better at understanding all the factors and the predictions get better, but we're a LONG way from having perfect understanding. And while we may eventually achieve that with the weather, I don't believe it's possible with economics. It'll always be a broad-brush thing, though the brush is getting smaller.