Friday, December 14, 2007

You are virtuous: Keep your money. 

The Tax Foundation blog points to the many examples where we give tax breaks for virtuous behavior.
The current tax code gives credits to people for going to college and for driving hybrid cars, as they were being implemented by people thinking that such activities were virtuous and worthy of subsidization. And then there is the biggest bonus for virtuous behavior in our tax code -- the charitable deduction.

Our federal tax code give bonuses to old people, blind people, people with children, teachers, farmers, homeowners, first-time homebuyers in D.C., the environmentally-conscious, people who park at work, people who take public transit to work, charitable people, college students, parents with kids in college, people who move, workers with low incomes, and people with large medical expenses.
The French consider there to be virtue in owning a small bookshop too, so rather than give them a tax credit we give them price protection. And on and on.

I was going to post something yesterday on the cross-talk between Greg Mankiw and John Irons on the difference between the right and left in discussing economics, but perhaps it comes down to something simpler. When Irons argues that "The right sees the market allocation of resources as optimal in all cases, so, by definition, government intervention makes things worse off," I want to know on what basis we decide what is optimal? For the right I don't think it's a matter of virtue. Markets represent the trading of a value for a value, moving resources from those who value them less to those who value them more. References to an "all-too-powerful marketplace", quoting Mankiw, ignores the fact that the marketplace is nothing more than billions of transactions conducted between millions of people (nowadays, and the increase of that circle of transactors signifies human progress.) I may value goods because they make me feel more virtuous (e.g., charity as a positional good), but to say we somehow objectively know what is virtuous doesn't pass muster for anyone I know who would be a right-economist. Perhaps, following Mankiw, negative externalities are part of less-than-virtuous behavior, but it's unclear that governments can increase the amount of virtue, no matter how big a "bonus" it gives to virtuous production.

Obviously I take one side of that debate and I could object to others of Irons' points. I do think at its base, though, Mankiw's point that "the right sees people as largely rational" is the fundamental point. I would add to it, following Douglass North, that this rationality occurs in a world full of ambiguity, and humans try to bridge that ambiguity through institutions and beliefs that may in fact be imperfect and can be improved over time. The question is whether those changes -- I think of them as meta-changes -- are something that is spontaneous or intentional? Those who want to reward virtue are certainly in the latter camp.