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Confiscatory Tax Policy Can Prevent Rent Exhaustion May 10, 2007

Posted by federalist in Human Markets, Markets.
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We should be wary of using tax policy to “fix” markets.  But following up my recent example of a market suffering rent exhaustion I am wondering if it might actually be useful to levy a very high tax on the earnings of “superstars” to prevent the inefficient allocation of human capital.  After all, every superstar author, actor, athlete, and artist inspires myriad aspirants to chase the same lottery.  People who would not otherwise devote their energy to sport or performance look at the millions (even billions) that can accrue to the superstars in a field and decide that the low odds of winning are more than compensated by the potential payoff.

Alex Tabarrok recently offered a great observation of how globalization creates increasingly wealthy — and serendipitous — superstars.  Will Wilkinson followed by expounding an earlier book on the subject:

[I]n The Winner Take-All Society, Robert Frank and Philip Cook argue that huge payouts for superstars induce inefficient overinvestment in their fields. The point of taxing superstars, on this account, is precisely to limit entry into superstar fields and to channel human capital investment that will otherwise be wasted in the largely futile attempt to become NBA players or Hollywood screen legends into more socially productive uses. Frank and Cook acknowledge that this may result in a reduced supply of excellence in certain fields, but argue that this loss is more than offset by more mundane economic gains from increased efficiency in the allocation of skills to people. Even if we don’t get the best rock stars, we’ll still have good rock stars, and we’ll have fewer people wasting productive years trying to be rock stars.

I am surprised to find myself agreeing that free markets can suffer from such a fundamental defect.  Robert Frank, in an essay on his aforementioned book, follows a number of clear examples with this summary:

Market forces are ruthlessly effective in getting people to act in their narrow material interests. Often these forces produce benign social outcomes, as when the struggle for market shares leads to cost-saving improvements in technology. Other times, as in the case of winner-take-all markets, market forces guide resources in socially undesirable ways.

[G]overnments often do the most good simply by requiring individuals to take the full social costs of their actions into account.

[A]ppreciation of the growing role of winner-take-all markets suggests the possibility that higher taxes on the top earners might actually increase economic growth rather than constrain it. In winner-take-all markets, unbridled market forces attract too many entrants and lead to excessive investment in performance enhancement. The flip side of this coin is that the private incentives to enter and invest in other sectors–including government and education–are smaller than the corresponding social payoffs. Because taxing the winners’ earnings at a higher rate makes both entry and performance enhancement less attractive, the net effect is to steer marginal resources away from winner-take-all markets into other sectors. In general, this will increase GNP.

Granted, in a free market superstar earnings are as legitimate property as anything else, so the argument for confiscating them to enhance human market efficiency is essentially fascist.

Maybe, at least, we could teach people that taking up a career specifically in pursuit of superstar rents is no more rational than buying lottery tickets.

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Comments»

1. Faré - August 26, 2008

Only works if you care for the symptom and not the cause.

What are you after? People wasting their lives at playing rock music? Then indeed taxing rockers may help.

But all you’ll have achieved is depleting the world from its elastic enjoyment of rock music playing. As for the inelastic such enjoyment, it will remain, to the detriment of other pleasures of the victims of your taxation.

And what will the elastic would-be rock players do instead? Will they engage in some of the endeavours paternalistic you deem productive? Or will they engage in other non-productive endeavours? If the real effect that you’re looking to fight is the discrepancy between people’s tastes and yours, no amount of oppressive taxation will help.

Moreover, your policy proposal is the usual anerism of those who fancy themselves as an elite above mankind, capable of magically changing the laws of human behavior for free — when instead you are but the jealous envying the power of all too human political beings whose all too human laws are enforced by other all too human bureaucrats at an all too human cost to all concerned.

And so even libertarians can pronounce absurd statist statements when their paternalism goes to their head.

How much rent-exhausting effort are you willing to pour into achieving your paternalistic dreams through political rent?

2. federalist - August 26, 2008

As I said in the penultimate paragraph, this is a fascist proposal. I.e., it is completely at odds with libertarian philosophy.

In any case, it is not obvious to me that reducing the pool of contenders for superstar rents will be a net loss to the consumers of superstar products. For example, if you killed half of the pool of aspiring actors how much worse would Hollywood films be? My guess is not perceptibly.

3. Faré - August 18, 2009

Murdering half of the people who most value acting in life will certainly destroy as much of the social value of Hollywood films. Of course, the survivors will by definition suffer the loss less than the victims, and they won’t even have a reference point to directly compare things to. Still you can compare Golden Era movies from the USA and France to the pathetic horror of Stalinian cinema and realize how disastrous the murder of half the talent can be to an industry.

If all the examples you may think of are of the fascist or murderous type, you have a very sick mind for a libertarian.

If you understood the Law of Bitur-Camember, you’d stop trying to explore such oxymoronic idea as “libertarian policy”.

4. federalist - October 1, 2009

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