I say this with all of the love on this planet: economists have a particular knack for taking sure financial concepts or ideas and discovering essentially the most counterintuitive or unclear methods of describing them. To anybody apart from an economist, the phrase “public good” feels like “good offered 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 more likely to be met with glazed eyes.
That is one cause why I get pleasure from discovering the concepts of economics clearly described or illustrated in works of fiction. When completed effectively, it might assist deliver 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 will discover it in on a regular basis life as effectively. One essential thought in economics that’s, in my view, terribly described is that this:
“The authorized incidence of a tax isn’t the identical as its financial incidence.”
This is a crucial thought. And for these whose objective is enhancing the well-being of the poor by rising taxes on the wealthy, understanding it’s essential. The truth that the regulation says the rich will likely be caught with the invoice for a tax doesn’t imply the rich are those who will actually pay the associated fee.
To see why, let’s contemplate a service I’ve used many occasions – an internet gross sales platform known as Swappa. As an unabashed tech nerd, I’ve purchased a ton of devices through the years. (In all probability 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 charge with each sale it facilitates. However additionally they let you know, the vendor, to not fear about that – the charge will likely be paid by the client, not the vendor. They accomplish this by including their charge to the posted worth whenever you listing an merchandise. So if I put an merchandise up for $500, they are going to truly listing it at $525, and when it’s purchased, the client pays $525, Swappa retains $25, and I get $500.
That’s good in concept, however in observe, it doesn’t work that approach. I do know the client should pay this additional charge, and the client doesn’t care one bit how a lot of it goes to me or Swappa. So I’ve to take that under consideration after I listing an merchandise. If I believe one thing I’m itemizing will promote for $500, I don’t truly listing 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 listing it at $475, Swappa provides its charge, and the value the client sees is now $500. In accordance with Swappa, that $25 charge is paid by the client, however in actuality, it’s paid by me, the vendor. When put this fashion, 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 offer 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 e-book Catastrophic Care: Why Every little thing We Assume We Know About Well being Care Is Unsuitable, David Goldhill describes this from his standpoint as an employer:
Since [newly hired employee] Becky’s single with out dependents, my firm can pay $5,679 this 12 months 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 know this seeming paradox, put your self in my firm’s place after we initially determine whether or not to create that job for Becky. We weigh two elements: the worth of Becky’s work to our firm and the associated fee to us of hiring Becky. Discover the difficulty is “price to us,” not wages or wage, as a result of an worker at all times 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 then again fear about stagnating wages. What they miss is the connection between the 2. One would possibly suppose the objective must be to search out the “proper” or “finest” mixture of wages and advantages, however there isn’t a proper, one-size-fits-all reply to this query. Neither is there any cause why one have to be arbitrarily conjured up by policymakers. Completely different individuals can have totally different preferences about how their compensation is split between money and advantages. So why not let individuals have the choice to decide on the mixture that works finest for them?
Kevin Corcoran is a Marine Corps veteran and a guide in healthcare economics and analytics and holds a Bachelor of Science in Economics from George Mason College.
