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Pepperdine University School of Law

Monday, October 29, 2012

Kotlikoff Presents On the General Relativity of Fiscal Language Today at Loyola-L.A

KotlikoffLawrence Kotlikoff (Boston University, Department of Economics) presents On the General Relativity of Fiscal Language at Loyola-L.A. today as part of its Tax Policy Colloquium Series:

A century ago, everyone thought time and distance were well defined physical concepts. But neither proved absolute. Instead, measures/reports of time and distance were found to depend on one’s reference point, specifically one’s direction and speed of travel, making our apparent physical reality, in Einstein’s words, “merely an illusion.”

Like time and distance, standard fiscal measures, including deficits, taxes, and transfer payments, depend on one’s reference point/reporting procedure/language/labels. As such, they too represent numbers in search of concepts that provide the illusion of meaning where none exists.

This paper, dedicated to our dear friend, David Bradford, provides a general proof that standard and routinely used fiscal measures, including the deficit, taxes, and transfer payments, are economically ill-defined. Instead these measures reflect the arbitrary labeling of underlying fiscal conditions. Analyses based on these and derivative measures, such as disposable income, private assets, and personal saving, represent exercises in linguistics, not economics.

Edward Kleinbard (USC) and Arnold Harberger (UCLA, Department of Economics) are the commenters.

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It's theoretically possible to convert direct assistance into negative income taxes and vice versa. The authors conclude, for example, that this makes analysis of tax revenue as a percentage of GDP meaningless.

Hold on. What is theoretically possible is not necessarily politically possible. Within the universe of politically possible and politically stable policies and structures, "routinely used fiscal measures, including the deficit, taxes, and transfer payments" are quite useful and meaningful. These measures are imperfect but they're all we have.

The authors were too clever by half. Their hidden assumption of political possibility (or, if you prefer, ignoring political impossibility) means that it's their research, not the research of others, which must be discarded.

Posted by: AMTbuff | Oct 30, 2012 10:23:26 AM