A very inconvenient question

Posted by: Matt Nolan on: July 30, 2008

• In: Behavioural economics | Economic theory | Methodology | Philosophy
• 3 Comments

Over at Econlog they mention a uncomfortable question that is asked at Instapundit:

If somebody offered us our current income tax system for the first time, would we buy it?

Now when we have defended progressive taxes on this blog we have often assumed that it is a revealed preference for society – in fact this is a favored measure we have for actually revealing (to some degree) what is optimal (here, here, can’t actually find any of the tax posts 🙂 ).

How could this work? How could we have a system that is not optimal.

Well we might say that the current system isn’t optimal – it is merely the best thing we can get given institutional and political constraints. However, I get the feeling that this would be taken into consideration when the system is “offered” to us. If it is the best stable system then it is the best stable system.

We may say that it is because there are multiple, stable, organisations of the tax system. If this is the case, we may have settled for a “parteo inferior one”. However, if this was the case why isn’t there pressure to push us to a better tax system – as long as people have a fair idea of what the tax system is, and as long as different parties are explicit about what they will do with taxes, the democratic solution will move towards the optimal outcome won’t it?

Finally, it may be status quo bias. For some reason we value no-change above change, and as a result we are unable to move to a better solution. This is the most convincing argument for me, and it makes sense that bounded rational agents such as us would hold a status quo bias in the face of uncertainty.

What do you guys think? Is current tax policy “optimal” for society (given implicit political and institutional constraints). If not, what is preventing us from moving towards better policy?

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