Wednesday, April 15, 2009

Terrible think tank reports, a neverending series

Stumbled across a story this morning on the "substantial benefits" Canadians derive from their tax-funded public services. Tracked down the report hoping to get some chuckles out of the cost-benefit methodology. But no, it wasn't that simple. It's also probably a bad sign when the lead author's biography mentions their construction of the "gas gouge meter", something on which I have blogged previously, instead of any professional or educational qualifications, but I digress.

You can look at it if you like, but let me distill it for you: "redistribution is awesome!"

Sure, you can think that the Canadian income distribution is not "fair", whatever that means. However, that's an entirely personal and subjective opinion. The authors probably realized that at some point and figured out that maybe it would be better if they had some numbers to argue their point, e.g. consider the title: "Canada's Quiet Bargain: The benefits of public spending".

Reading that, you'd think the authors would argue that government spending has some benefits, right? This seems like a logical implication. But you'd be wrong. To quote:
[W]e are following the convention in public accounting of valuing public services at their cost. To the extent that public programs are supported by a cost-benefit analysis, our implicit assumption is that the net benefit from public services is zero[.]

Yes, we are starting a study to demonstrate the benefits of public services by assuming that the benefit of public services are zero.

As such, the entire study is nice graphs illustrating that households with lower incomes derive more benefits from public services than the taxes they pay, because in our progressive taxation scheme, the rich pay a disproportionate share of the taxes to fund said services. As such, a majority of Canadians derive (their number is 80%) net benefits from governmental tax-and-spend.

Factually, they're right. But I can do one better. If we collectively decide there's one person nobody really likes, we can drag them out back, lynch them, and redistribute their assets to everyone else. By my calculations, 33,617,546 of 33,617,547 Canadians - that's a whopping 99.999997% - will be better off! Clearly, what a great policy.

The point I'm trying to make here is when economists talk about 'net benefits', they mean 'a potential Pareto improvement', that is after the implementation of policy X, there exists a potential redistribution such that everyone is better off than before the policy. In the report and in my ad absurdium, no such possibility exists, so economists are typically not comfortable using the term 'benefits' to describe the effects of redistribution.

Further, I'm not trying to argue that progressive taxation is a bad thing (I don't think it is at all) or that there aren't lots of legitimate public goods the government should provide (there are), but arguing that we're collectively somehow better off by reallocating the pie is both wrong and short-sighted. Remember, redistribution has costs - see any introductory microeconomic textbook for a primer on the deadweight loss that occurs when taxation distorts incentives, nor are taxes free to collect. So under the assumption that government services are valued at cost, then taxation unambiguously makes us collectively worse off, not better.

Population clock here. Lynching that one guy is probably an even better deal now!

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