How Much Blood The Vampire Sucks
Published by sauvik March 3rd, 2006 in Economics, GovernanceReading between the lines of the budget, it was clear the 1,00,000 crore rupees (or 1 trillion rupees) are being stolen from the citizenry by the personnel of ‘the system’, both elected as well as appointed.
50,000 crore rupees (500 billion) are being spent on the 8 ‘flagship programmes’, including the Rural Employment Guarantee Scheme, Sarva Shiksha Abhiyan (or education: building 5,00,000 classrooms and recruiting 1,50,000 teachers), Mid-Day Meal, Rural Sanitation, Drinking Water etc.
Another 50,000 crore rupees are going on subsidies.
These kinds of astronomical figures make no sense to anyone. They are simply too big. 1 trillion does not fit on my big calculator. To make sense of such figures, it helps to look at them like this:
If 1,40,000 rupees were spent each day, every day, since the birth of Jesus Christ, it would add up to 1,00,000 crore rupees!
This enormous amount of money is being stolen from the poor people of India.
Think about that!
72 Responses to “How Much Blood The Vampire Sucks”
- 1 Trackback on May 18th, 2008 at 2:56 am
Sauvik should get a better calculator. Exxon Mobil posted a profit of 36.1 billion for 2005. Converting that into Rs. is roughly Rs. 1,500 billion. So what? What’s his point again? That he has an old calculator and can’t calculate big numbers?
CK,
The point is, that the ’system’ is forcefully feeding on our blood (I speak for myself, Sauvik and anybody else who dislikes the fact that the governmental parasite coercively feeds on them). Whether 1,000,000,000,000 rupees fits on a calculator is besides the point. That, we are being robbed, definitely is.
ck:
the point is that exxon CREATES a tremendous amount of wealth, that does not fit into my calculator.
on the other hand, the vampire that is the government of india DESTROYS an equally enormous amount of wealth, of the citizens of a ‘poor’ country.
most of the tax revenue comes from indirect taxes, of which the poor pay a proportionately bigger share of their income.
the rest comes from inflationary finance - the printing press - which is also a tax on the poor.
Explain to me how when Exxon makes a huge profit it ‘creates’ wealth but when the government taxes people it destroy’s wealth. What does the Govt. do with the money - budles of notes are not taken and stored in a warehouse somewhere - they are spent - you may not agree with what they are spent on but that does not mean that wealth is being destroyed - it is still out there in the economy. When the Exxon CEO takes his 10 million dolar pay check and buys a new yatch is he destroyng wealth? No he’s just taking it from the peopel who pay for gas and then using it for what he beleives is how he should spend it.
Sauvik,
Here is a question for you, and the readers of this blog.
Which is the State that is most friendly to Business in India? Which state should Indian entrepreneurs look to setup their business?
Which State has the least beaureacratic red-tape? A robust police-force, fast resolution of legal disputes?
Can anybody give a ranking?
Note: Let’s assume the business does not involve mineral resources, and hiring labor of all skill-levels is easy.
CK:
rajiv gandhi himself said that out of every rupee spent by his government only 10 paisa reaches the intended beneficiary. indeed, the government money is not spent in india and does not remain in the economy: it is spirited out into safe tax havens abroad.
to answer rahul kapoor: there is an index comparing indian states on economic freedom, compiled by bibek debroy and laveesh bhandari, but that placed gujarat at number one! (hence all the fuss at the rajiv gandhi centre and bibek’s subesequent resignation.) i would’not rate gujarat as number one, for you cannot open a bar there, nor can you get a drink. i think some parts of karnataka, especially the area around mangalore (bangalore is overcrowded and real estate is hence prohibitively priced) is number one in india. hope this helps.
another way to look at CK’s senseless point:
you run a shop. the government taxes you. then the government uses that money to buy up your goods. how does that help you? or the economy?
Savick you clearly stated that the government is ‘destroying wealth’. It is very clear that there is no destruction of wealth taking place only a reallocation of wealth into a sector which you don’t agree with. The total amount of wealth in the economy remains the same whether the government taxes the shopkeeper to create educational programs or whether a shopkeeper uses it to buy a pack of cigarettes. Short of the government setting fire to the money it taxes it does not get destroyed. If you argue that it is being used for corruption - there is still no destruction, the corrupt politician is not going to store the money away, he is going to spend it and out it back in circulation in the economy - in fact he is doing your point of view a favor as he is not paying tax on it. You can argue about how resources should be allocated in the economy but to argue that wealth is being destroyed is total BS.
I think CK is on to something. We should encourage more corruption.
Sauvik, Shame on you!!!! In the past too, I have been disappointed by your inability to glean the wisdom that Ck so generously sprays.
Ck has opened my eyes!!! In one fell swoop he has destroyed the myth of wealth creation and of productivity. I am waiting for him to debunk the myth of “dead capital” as well.
I am going to ring up the Bank of Sweden and ask if they are still accepting nominations for the Economics Nobel. I’ll tell them Ck promises to wear a backless dress to the ceremony.
Sauvik, I am sure you will join me in co-nominating Ck for the Nobel, and also contribute towards the “Backless Dress for CK’s Nobel Ceremony Fund”.
So every year 22 billion USD is stolen by the Indian govt and “spirited out into safe tax havens abroad ” ? Wow what a scoop . Can you provide more details . Is there a Nobel Prize i can nominate you for this ?
Gaurav , can you ring up your contacts in Bank of Sweden and get them to trace the money ? Though i am not looking forward to seeing you in a “Backless Dress” or any dress for thet matter :-)
Well Sauvik,
Ck the state-chamcha got you on this one. As long as the money does pass back into circulation (fast-enough) it does not destroy any wealth.
The money taxed from individuals doesn’t allow them to increase their utility - but it is as if government has spent it for them - just on things he doesn’t care about.
To cite corruption as an argument against social welfare schemes is like suggesting beheading as a solution for headache. Instead we need to make the schemes work.
And the govt isn’t stealing from the poor. The govt is using taxes, which it is entitled to by the constitution under which it was elected and is functioning, and which the Republic celebrates every 26 January.
the same vampire that sucks all this wealth out of the poor people also does NOT ALLOW the same poor people to make wealth on their own. dancing girls cannot dance; vendors cannot vend; hawkers cannot hawk… the list is endless. india is ranked at the bottom of the World Economic Freedom Index. We are an economically REPRESSED nation. and “repression” is an ugly, evil word.
thus, “social welfare” schemes in india are ugly, evil hypocrisy: the vampire keeps the people poor and then pretends to help them - with their own money, most of which, anyway, the vampire pockets for itself and its cronies.
to cite an example: 75,000 dancing girls, 100,000 bartenders and waiters, 50,000 bouncers, 1,50,000 musicians lost their jobs in mumbai. now, the vampire will go around “gauranteeing employment” in village india - with our money!
75,000 dancing girls, 100,000 bartenders and waiters, 50,000 bouncers, 1,50,000 musicians lost their jobs in mumbai.
Now I don’t know about figures, but your indulging in gross generalisations sir. Okay, so there should be economic freedom; okay, so morality should not have been used to deprive bar dancers of employment. But if a social welfare scheme can help a starving Mushahar in easter Uttar Pradesh, it shou;dn’t be a problem. ANd when I say ’starving’, I mean it.
My argument was as Rahul astutely pointed out that taxation does not destroy wealth but merely redistributes it. I am open to discussion on what the best way to redistribute it is but to suggest that it somehow destroys wealth show a lack of understanding of economics. You can argue all day on what the best use of the wealth is.
Say for example our man Sauvik uses his pay check to buy some hashish. He said he likes smoking it and does it very often. Let us also say for the sake of argument that he is not cheap (though some emails I have seen between him and an NGO and his penchant for 2 euro wines say otherwise) and he decides to forgo the usually Bombay Black (mainly shoe polish) and decides to buy some of the finest Kashmiri. Now it is well known that Kashmiri is smuggled in and out by the terrorists in J&K and is used to finance their terrorist operations in India. Is Sauvik destroying wealth by indirectly financing the terrorists who explode bombs in say Varanasi?
Sorry, Ck, you won’t win this one. All taxation (except for lump-sum taxation) distorts incentives to produce and consume. If the government taxes cigarettes, fewer cigarettes will be produced and consumed. Another way of putting it is that “wealth” has been reduced from what it would have been had there been no taxation. This reduction is not made up by the tax revenue the government earns. In undergrad econ textbooks, they use “deadweight loss” to illustrate this.
I’m sorry Mark but your statement does not compute. So the government taxes cigarettes - agreed that less cigarettes will be produced. But that is not the whole story. The government does not bury the tax it collects somewhere. It uses it and that money goes straight back into the economy. It could go into building a dam or some civil servants salary (and he/she, though you may consider the job a waste, will go spend that money in the market) but it is very much back in the economy - the net result to the economy is no loss no gain though there is a loss to the cigarette manufacturer. So no wealth has been reduced or destroyed.
the indian vampire state taxes wealthearners and dissipates it on the employment of over 30 million civil servants: one in every fifty indians is a government servant: salaries are their biggest head of expenditure, especially after the 5th pay commission. thus, they do not invest in any ‘capital goods’ which may be of use to the citizens, like a road or a bridge. all the money is spent on the ‘babu bill’.
further, these babus are all an added expense on india’s wealthearners, in terms of the money they squeeze and extort out of all wealth producers, especially the smallest businessmen, like hawkers and vendors.
thus, apart from mark’s excellent point about taxation and ‘deadweight loss’, there is the added fact that the indian vampire state only employs more and more parasites - little vampires - and even more wealth is DESTROYED.
Again this does not compute. The Govt taxes cigarette manufacturers and uses the money to pay Babus - what do the babus do with the money they get - they either invest it in the stock market or go out and buy cigarettes or buy a car. Again where is this destruction of wealth you are talking about? Dead weight losses are the losses to the cigarette manufacturers not to the economy as a a whole. Write it down mathematically if you wish - the total amount of money in the economy remains the SAME whether it goes to make cigarettes or if that same money is used to buy a car. Somebody please show me mathematically (Sauvik sorry that rules you out) how in an economy worth Rs. 1000 how taxes destroy the wealth - use any combination - you will find that at the end of the day, unless you include a scenario of someone burning the money, the result will be Rs. 1000 or more but never under.
Ck, I think you are confusing money with wealth. The term “wealth” usually refers to goods and services we consume, things like food, wine and healthcare. Money is just a claim on such things, it does not have any intrinsic value. If the total amount of money is unchanged that does not guarantee that total amount wealth is also unchanged. One has to remember that prices can go up and purchasing power of money can go down.
When government puts a tax on a consumer good, the production of wealth goes down. That means apart from redistribution there is a net loss to the society. So, unless the government relies exclusively on “deadweight loss free taxation” (taxes on law-based properties), taxes do destroy wealth. The wealth destroyed by taxation is not what government gets (that part just gets redistributed), it is the net loss of wealth that happens because of taxation.
“The wealth destroyed by taxation is not what government gets (that part just gets redistributed), it is the net loss of wealth that happens because of taxation.”
AND
“That means apart from redistribution there is a net loss to the society. ”
Can you explain the above statements. Where does this net loss come from. If you are talking about net loss to the taxee, then I agree but how is it a net loss to the economy if the government imposes a tax on a cigarette manufacturer (yes the cigarette manufacturer - say ITC will produce less) and then uses that money to buy flat-screen LCD monitors for all the Babus. Doesn’t Samsung (who manufactures LCDs) ramp up production thereby negating the loss suffered by ITC due to taxation? Again I think you and others are only looking at one side of the equation. Though it may see like it, taxes don’t disappear down a blackhole they are used by other entities in the economy. You can disagree with what it is used for and can argue that LCDs for Babus is a waste but I’m sure Samsung will disagree and think its a great idea.
the vampire state of india is “misproductive”: that is, it does not give the people any values in exchange of the taxation; rather, it imposes further “costs” on the people, in terms of the babudom’s interference in the economy, etc.
as i have argued in the times of india once, in india (and in many other parts of the world - especially the third world), the ‘national income’ should not be computed as “consumption investment government” (the usual formula).
rather, it should be “national income = consumption investment - government” : to reflect accurately what is STOLEN from the people.
we should DEDUCT THE STATE!
“per capita income”, that is average income per head, can then also be suitably SCALED DOWN to reflect the COST of the “misproductive” vampire state.
If you agree that the total wealth is the amount of goods and services that are produced in the economy, and some taxes reduce production, then it is self-evident that some taxes do destroy wealth.
The problem with your argument is the assumption that prices are constant in any economy, which is not correct. Whenever there is a loss in the total production and the money supply is fixed, the general price level goes up. This is a loss to the society, and it can not be recovered by redistributing money. In your example, When government gives LCD monitors to babus from tax money, Samsung does not really benefit. It just gets a different set of customers (babus instead of producers and consumers of cigarette, who used to buy LCD monitors with the same money).
Btw, when you burn a lot of money the total money supply gets reduced and as a consequence prices go down. So the loss of your purchasing power is offset by the gain of other money-holders, and there is no net loss to the society.
Let us consider an extreme example. Suppose the government decides to put a massive tax (say 99% of the price) on everything which is not a food item. This will destroy every industry, and all of us will have to roam around naked and eat rice all day. This amounts to destruction of 75% of the total wealth (share of agriculture in GDP is about 25%). Note that the total amount of money will not change, only prices of food items will skyrocket. A small tax on a few items does the same thing on a smaller scale, but the basic idea still remains valid : A tax which reduces production always destroys wealth.
CK is making the fatal error of equating money with wealth - as if the government issued fiat money has any intrinsic value. News flash: It doesn’t.
Wealth is abundance of goods, and abundance of leisure. If a tax makes you work harder to obtain the same amount of goods, you’re being robbed of leisure. If the tax makes things relatively more expensive, or difficult to obtain, you’re robbed of the goods you can no longer acquire without working more, which in turn robs you of leisure.
All the dollar-bills in the world will not save you from certain death in a desert.
sid, sauvik, doinkicarus….you guys do not even know that you are taking on a potential Economics nobel laureate. Please do not assume that Ck is displaying ignorance of some of the most basic concepts in economics like productivity, the precise definition of wealth, the precise definition of money, incentives, disincentives, impact of taxation, deadweight loss, common sense etc. What Ck is doing is breaking new wind….sorry I mean breaking new ground in the world of economics. As I told you, a certain high-level committee already has an eye on this blog and I can’t wait to see which announcement will come first…Ck bagging the Nobel or Ck replacing Montek Singh as PlanComm Deputy Chairman. Anyone want to wager?
Yazad, I would like to thank you from the bottom of my heart for facilitating this invaluable discussion with CK, and allowing me to witness history in the making. I wasn’t born when Galileo redefined astronomy or Einstein redefined physics, but at least in my lifetime i got to see Ramar Pillai redefine chemistry and Kuchuwhatziznehm Chair-of-veto-dingdong revolutionize Economics.
Ck, would you like that backless dress in black or red?
Can any of you show me the math to back up your claims? I’ve seen a lot of text here - but the math will speak for itself. Use a simple economy - two industries if you like and show it to me.
Sauvik’s math of course is not counted as he seems to have some problem with numbers especially when it comes to paying people. Funny that he has a thing against vampires but when you read this it appears that he is not opposed to sucking other people’s money.
Brillllllllllliant point, CK saar!!! A Nobel Prize in Logic is being instituted and you will be its first recipient. After demolishing all the basic tenets of economics, you have now turned your kindly gaze towards the field of logic. The world awaits with baited breath.
Does your madaari accept credit card payments?
CK’s brilliance Throghout History -
Rene Descartes says - I think therefore I am
CK says - This does not compute
Shakespeare writes - The evil that men do lives after them, the good is oft interred with their bones
CK responds - Can you show me the math for this?
Einstein proves - E = mc^2
CK says - Sauvik is _________, Sauvik is _________, Sauvik is _________, Sauvik is _________,….. (insert suitable insult)
Bush says - You are with us or against us
CK says - Again this does not compute
Asylum Attendant says - Sorry Mr. CK, the padded walls and the straitjacket is for your own good.
CK says - Can you show me the math to back up your claims?
How can anyone not love the simplicity of the CK method of counter-argument and questioning? I for one am a fan for life.
Please contribute to the “Get CK Out Of The Asylum Fund”. No, the fund is not tax exempt under Sec 80g, because CK has proved beyond belief using his pathbreaking theories of economics and his logical methods that excess taxation does not destroy wealth.
Gaurav you had your 15 minutes of fame so I can see you trying to breakout of obscurity. Its quite sad actually. I know that math apparently is not your strong point nor apparently is history. Descartes would have applied the very same methods as I have. Please read his Discourse on Methods where you will find that he actually makes a strong argument for simplicity. His ovum organum, was to analyze the parts of complex ideas and show them as simple, clear ideas. By building on small parts, Descartes could show a complex argument or idea. But of course you have never read his work or thought to understand it. You just know one line from his work which you then tout without any idea what it means or the methods that he used. He was also a famous mathematician in case you did not know and would have loved to see some of the mathematical proof which you have not been able to furnish.
So get an education young one, and when you do you can come back and play with the big boys. There is a world outside of the internet and blogs which you know apparently nothing about - so get an education, read a book or two occasinally - no not the Cliff’s note version but the actual books and also be careful when you take the sides of thieves and cheats - these things tend to come back and haunt you ;)
the austrian school of economists - mises, hayek, rothbard etc - always opposed the use of mathematics in economic analysis, saying it was inappropriate. we do not need maths to prove that the indian state is a vampire: the very fact that they are spending the equivalent of 1,40,000 rupees per day every day since the birth of jesus christ on their silly ’schemes’ and subsidies - and even more on salaries - should suffice. this, while the per capita income barely touches 10,000 rupees.
incidentally, the economist magazine once did a study on the utility of maths in economic analysis and forecasting. they called in 15 professional economists and 15 professional garbage collectors and asked them to predict things like the growth rate, inflation, etc. turned out that the garbage collectors got their predictions more or less right while the economists largely failed.
perhaps ck himself should read some good books - by austrians - compose himself, and not resort to personal attacks when he fails (miserably!) in reasoned argument.
Can you put me in touch with those brilliant garbage collectors. I tend to manage my stock portfolio using math and analysis and seem to be doing very well using traditional (but according to Sauvik) useless techniques. You really should also tell Goldman Sachs and other investing banks about these brilliant garbage collectors. The silly companies spend all their money hiring mathematicians and analysts. How’s your stock portfolio doing Sauvik? You must be a millionaire by now since you’ve got it all figured out ;)
LOL, finally a vintage CK response.
I have tried to engage the “big boy” that is you in a discussion a couple of times Ck, and you remember it. But cornered logically, you resorted to evasive tactics, and finally made good your escape using the standard “oh i am too busy to respond” tactic. You topped it off with a weasel-ish “you guys should look for life beyond the net. the weather is so lovely outside.”
Debating with you is a waste of time not just because of your intellectual dishonesty and tendency to shift goalposts and refusal to acknowledge counter-arguments. Debating with you is a waste of time because most of the times you just do not have a point to make. You have no firm opinion on any issue. You are not a leftist, socialist, statist, or of any other breed which opposes free markets. In fact I am very sure that if I had a discussion with you without telling you my name, your opinions would turn out to be pro-free-market.
But for some reason you are obsessed with following libertarians around in general, and Sauvik in particular. You do not have an ideological position that is radically different from libertarians….at least most Indian libertarians. But for some reason you have made it very personal. I don’t know if the acrimony between you and Sauvik is the only reason or if there are any deeper personal issues with people who were Libertarians. But there is a grudge you carry, a proverbial chip on the shoulder. And due to that grudge you keep stalking Libertarians and picking fights with them.
The reason you are not able to carry out a sensible and logical debate is simply because you have nothing at stake ideologically. You just want to pick a fight and flex your muscles. Even with regards to this post, you agree with the thrust of the argument, i.e the Indian state is wasting a lot of money through subsidies and schemes. But since it is Sauvik saying so, you will pick up an irrelevant point and keep debating it. Had someone apart from sauvik had written it, you would have had no issues with it.
As I said, either it is something personal, or it is something very perverse, since you see to get your jollies picking fights. And almost always you bring in personal insults or personal boasts. I am not so insecure about my abilities that I will keep touting my resume, my offline life and my achievements to gain respect, that too from people whose opinions I could not give two hoots about. But I guess it is necessary for you to keep reinforcing your “intellectual masculinity” by making personal attacks on others because by putting someone else down you feel secure about your own successes.
So I am going to sidestep your bait and not go touting my real life resume or my mathematical skills(especially my knowledge of Descartes’ work….the lucidity of his mathematics, but the internal contradictions in his intellectual philosopy and theological beliefs) as well as achievements in that realm, because I don’t need to do so to feel good about myself. You may feel the need to boast about how your portfolio is doing just to gain acceptance from others as an intellectual male. I do not have similar needs. If this leads you to respond “oh that is because he has none, haha, i am so great compared to him”, then it will be my charitable act for the day - I helped Ck fight his insecurity. So go ahead Ck, and assume I am a dumb guy with no identity or knowledge beyond the internet and blogs and no achievements to boast of other than my “15 minutes of fame”. It’ll make your life a lot easier.
As long as you keep making vacuous arguments like in this post, aimed more at picking fights and feeling good about yourself, you are fair game and I will keep poking fun at you. Because if someone responds seriously or logically, you either make personal attacks or ignore those arguments completely. So you will continue to be treated as impure adulterated “entertainment”, in the mould of Rajnikanth, Mithunda or Dev Anand. Not top of the draw entertainment, but passable, like a madaari’s show.
The day you actually have an ideological or a philosophical point to make, I would love to have a discussion or a debate with you. I am sure that when not blinded by your hatred for Sauvik, perversion and desire for an intellectual erection at the expense of others, you are a very bright, articulate and intelligent guy. I wait for that side of you to display itself.
Until then, let me press you to answer the 2 questions I posed to you -
1. Would you like the backless dress to be black or red?
2. Does your madaari accept credit cards?
In case I have to spell it out for you, my previous comments were not with the intention of taking part in this so-called debate. There is not debate happening because as I said you are just making a very vacuous point. You are harping on and on about the “wealth being destroyed is possible only if money is burnt” point is at worst childish and at best semantic. So the whirring noise you hear is of Descartes spinning in his grave aghast at your assertion that he would have argued in the same way as you have.
Just to indulge you this one time, let me give my take on this post.
The Government of India is setting aside 500 billion rupees purportedly to benefit the poor. But figures ranging from different studies to Rajiv Gandhi’s famous estimate is that just between 10-25% of this is actually spent on the poor. The rest is all siphoned off. If it is being siphoned off, it is going into the pockets of people who have not earned it. It means it is being stolen from people it is originally meant for. Not just that, if you consider the heavy indirect tax rates, the poor end up paying more to the government than they actually get from it. Which means it is not just that the poor are not getting help….which would be bad enough as it is. But the poor are in fact being robbed.
The money doesn’t disappear and stays within the system is your contention. Whoopie! It is spent on Samsung TV’s. Another whoopie! But the stated purpose of collecting taxes was not to pump money into the consumer goods industry, was it? The stated purpose was to improve the lot of the poor. In that purpose, the government is repeatedly and spectacularly failing.
Thus instead of being a body that improves lives of the poor, the government is facilitating as a siphon for money into the pockets of a select influential few….who may add to the consumer goods industry but are leaving the poor of this country hungry and the infrastructure rickety.
To understand how wealth is “detsroyed”, understand and internalise the concept of “opportunity cost”. Do you at least agree with the concept of “opportunity cost”? Test yourself here. if you say you indeed do understand the concept, then I’ll give you a “mathematical” illustration of how wealth is destroyed by leaky initiatives like the NREGS and subsidies.
As for the tangential point of mathematics, on a personal level, mathematics will play a vital and integral….even central role in what I will be doing for the next 5 years, and indeed even after that. I would be the last person to denounce mathematics from economic analysis….incidentally economic analysis as a part of policy making is a completely different ball game as compared to mathematical analysis used for portfolio management.
Most successful portfolios would have stocks of private companies which would be driven by a desire to maximise profit. Economic policy has to be evaluated keeping in mind that players in a state-related set-up will not have clear-cut incentives to maximise profit and productivity the way a private company in which CK has invested will. And in that lies the crux of the matter, and of what is wrong with the Indian setup.
Not all problems can be foreseen and avoided by purely relying on mathematics. Mahalanobis made the mistake of being seduced by the elegance of his own mathematical models which proved that investment in state-led capital intensive industries would make the Indian economy gallop. The flaws in his ideas were all outside the realm of mathematics and hence he could not see them.
For somebody who doesn’t wish to ‘engage’ you’ve spent a lot of time on writing up 3 posts in a row. Couple of points:
1. Personal insults - look back at the list of posts - who made the first personal insult - it was you - well then you are fair game - those are the rules of engagement.
2. Following libertarians around - no I don’t spend my time following them around but when I see a crook and a thief pretending to be a saint I will call him out on it. Sauvik has never denied sending those emails and nor has he denied pocketing Rs.10,000 without offering any services in return. I beleive him to be intellectually bankrupt and would just ignore him but he repeatedly tries to influence the minds of young people with his bluster. Given that he has a history of cheating, lying and self admitted drug abuse, he’s running around giving liberal in India a bad name. He’s not even partucularly bright as he admits to being stoned and drugged out in his emails (check the logs of the Spon Order group) and even admits to stealing money n his email and then is all upset when somebody mentions that when he is preaching sanctimoniously.
3. Picking up on a minor point - yes I did agree with the premise of the argument that the government does waste money but it was important to point out that one person’s waste can be another person’s gain. The stated purpose of the money in the larger scheme of things is not that important.
4. On Mathematics - according to Sauvik mathematics is not important at all. You say mathematics are an integral part of what you are doing. If so please provide a simple scenario with no complicated math beyond addition and subtraction to trace the route of Rs.100 of tax money collected by the government. Do it as a thought experiment.
5. Ideology - yes you are right that I don’t have a particular ideology or school of thought that I subscribe to. I pick and choose my positions on issues based on my personal beliefs - not because some school of thought says so. To me this is the most rational approach to take in life. No belief system is perfect though they all think they are from Marxism to Libertarianism. It would be silly to assume that one school of thought is superior to the other - to me that is like arguing that Christianity is superior to Hinduism. Each school of thought has its pros and its cons, the challenge is picking which one to apply. Those who pick free markets to apply to every human condition and every situation whether economic or otherwise are as silly as those who choose to apply socialism. The mistake you (and others make) is that you subscribe to particular school of thought and then apply it to every situation that comes your way - that is no worse than a radical mullah seeing everything through the lens of Islam. To really grow and understand look at the situation and before reaching for your Austrian Economics textbook to see what Hayek would have done. First ask yourself what you would do - as a human being not as a libertarian or a Marxist or an anarchist. Picking just one school of thought and sticking to it is a guaranteed way to end your intellectual growth. You could read every textbook on libertarianism and have a hundred arguments - but that is just one of a thousand possible way to look at and approach a problem- why seal yourself off from all those possibilities just because some guy wrote it down in a textbook 50 years ago. Think about it.
My responses
1. As a personal insult directed at you, yes, I agree I made the first one here. But as far as personal insults in general go, you made it in the very first comment and the debate just went downhill from there.
2. Just an observation. At times in the zeal to oppose Sauvik, you end up saying a lot of things which you normally would not have. Try to guard against that. And remember, you will be most effective in negating him if you attack his ideas rather than him personally. All those things you say about him personally, true or false, have no bearing on the argument he makes, right? Trying to discredit him by using personal attacks will only be counter-productive. I still remember the incident 3 years ago when on the spon-order group, he made a personal attack against you and your family. It reflected poorly on Sauvik himself on that occasion, and in the eyes of me and some of my friends you came out the victor by conducting yourself with dignity. Sadly, over the last couple of years you have gotten increasingly shrill to an extent that Sauvik now seems the quieter sensible chap. I don’t know if that is the effect you were aiming for, but there it is. Think about it.
3. Stated purpose of money is not that important? If you start from that premise I guess you don’t see the need for economic policy at all? And surely tax rates don’t matter according to you? Because at the end of the day, the money is going to be spent by someone or the other?
4. I will give you the required mathematical demonstration, but it involves my using a couple of concepts about which I would like to see if we are on the same page -
- The concept of Opportunity Cost
- The concept of growth in total wealth
- Importance of aligning incentives with necessary actions to obtain growth of wealth
Please write a couple of lines about each of the points since my thought experiment will employ them
5. My estimation of your philosophical/ideological position was correct. Your estimation of mine however is way off the mark. I have some first principles/premise which I start off from. Using them I arrive at a position. I do not work backwards from a libertarian viewpoint as you suggest.
Opportunity Cost - agree to definition as defined here:
http://en.wikipedia.org/wiki/Opportunity_Cost
Concept of Growth in Total Wealth - this is an ambiguous concept. One would have to first agree what is wealth. Whether a value can be assigned to wealth and whether that value is common across the board. Can wealth grow - yes. But then saying yes has no meaning if we don’t have a common definition of wealth. One man’s wealth is another man’s waste and vice versa so this is a term that I think we will have to accept some ambiguity around.
Importance of aligning incentives with necessary actions to obtain growth of wealth - loaded with ambiguities Importance -
- important to whom
- incentives - again incentives to whom - is an incentive to one person related to a disincentive to another?
- necessary - necessary by whose definition - what is deemed necessary by one entity may be deemed important by another
- growth of wealth - see previous para.
So you can use these concepts in your mathematical proof but there is no guarantee that I will accept them in the manner you present them because there is no common definition of them. I suggest that since you are giving the proof, you define the concepts up front. Even before I get to the proof I will let you know if I have a problem with the concepts used. Fair?
Th wealth destroyed is measured in terms of the opportunity cost. If the stated objective of the NREGS is to generate employment by giving villagers money for the work they will do on infrastructure related projects, then corruption and leakage in that leads to no infrastructure being devloped. Thus the economy bears the opportunity cost of the lost business/opportunities due to absence of the infrastructure.
Lets take 100 rupees of tax which is to be used to build a road from a village to the highway, so that fruits produced in the village could be exported. Since only 20 rupees is spent on the road, it is not built properly and can not be used for the purpose. Hence the village has to sell the fruits in the local market for, say 25 rupees, instead of the 30 rupees he would have gotten to export them to Dubai. The lack of infrastructure led to Rs. 5 of opportunity cost being squandered.
At every stage in trading some value is added which leads to growth in the wealth in the economy. So if Tatas take a lot of steel and other stuff worth 1.5 lakh and put their car out in the market costing 2 lakhs, the value being added is 50 thou. Since Tata gets directly as a benefit the 50 thou, he knows that for every car he makes he gets that additional benefit. Thus there is an incentive to make more cars and more efficiently.
In the process, more cars are being made and sold and there is contribution towards growth in economic activity.
When the steel company sells to the car company it is getting paid for its products, when the car company gets paid for its cars, ditto. When the dealers get paid their commission it is for their ability to sell more cars. So at every step of the transaction, the payment made, i.e the incentive is aligned to an economic activity which adds value. Everything produced by these people can be and is traded openly in the market.
When a corrupt government official siphons off money, there is no alignment of incentives. No extra work is done, no value is added. So the official gets 80 rupees for doing nothing productive, producing nothing of value that can be traded in the market, wealth which would otherwise have been created is destroyed.
Plus taxation acts as a disincentive for marginal production as Sid has shown.
This is the 3-fold wealth destruction.
So while normally your economy of rs 300, on which 100 tax has been collected, in the absence of these siphins would have grown to 330 rupees, the effectof the siphons makes it grow to just 324 rupees.
So 6 rupees of wealth is destroyed.
The bottomline is, do you believe the pie gets bigger? That growth is not a zero-sum game? If you do, then do you think the pie would get bigger if incentives to the producers were more properly aligned? And consequently, the growth in the pie would be smaller if these incentives were not properly aligned?
the ‘wealth of nations’ as adam smith had said, lies in the personal possessions of all the citizenry. thus, with free trade, all goods will be cheap and abundant, and all the people will be well housed, well clothed and owners of various possessions and properties which would be ‘real wealth’. this is the best way to look at the concept of ‘wealth’, and to consider how it can grow.
of course, in india, the people fail first as producers (because of bad infrastructure and other restrictions) and then they fail as consumers, because of import restrictions: these are the main reasons for persisting poverty among the masses.
when, on top of this, the government taxes us blind, fuels inflation by printing money in excess, and spends all this money on its cronies, it acts as a ‘vampire state’. i hope i can now rest my case.
just one more point: about the utility of maths in economics. if there was any utility, economists would be able to predict the future accurately and get rich. however, they are poor - and work mainly in government planning departments making faulty projections: the only real “market” for this “knowledge”.
the delhi school of economics has been teaching mathematical economics for over two generations now, and all its ‘brightest and best’ have ever achieved is becoming cheap labour for US econometric firms. this business is now dying out.
all that this mathematical economics has achieved is : first, generations of highly confused students; two, generations of financially impoverished ‘professional economists’; and three, an impoverished economy and society in india.
Before I respond to your model let me make sure that I have all the facts of the economy down right. You have scattered teh fgure all throughout the post and put in some random stuff about Tata steel mills in the middle so I will try my best to extract the figures - you should really lay out a model as below - will be a good skill for you to learn to present facts concisely
Initial size of Economy: Rs. 300
Tax: Rs. 100
Money spent on Road: Rs. 20
Money siphoned off: Rs. 80
Money farmer would have made if road was properly constructed: Rs. 30
Money he actually made because of badly constructed road: Rs. 25
Net loss because of badly constructed road: Rs. 5
Your premise: Rs 6 is destroyed.
I didn’t get how you arrived at Rs. 6 ? Did you actually mean R.s 5 which is the opportunity cost? Or is there a whole step in your calculations missing?
End size of the economy: Rs. 325 (or 326)
OK so if these figures are correct let me begin. You made these figures up so I will stick to them. Please consider the following points:
1. Rs. 100 was earmarked for a road which only had a maximum possible value of Rs. 30 because the most that a farmer could have benefited from a properly constructed road was Rs. 30.
2. Clear misallocation of resources. Why spend Rs. 100 on a road when it can only provide at maximum Rs. 30 worth of benefits.
3. The corrupt official took Rs. 80. What did he do with the Rs. 80? Did he burn it or bury it? No in all likelihood he spent it.
4. Where would he spend this money (its black money remember so no more tax on it)? Say he decides to buy a Sony TV which happens to cost Rs. 80.
5. So when the bureaucrat walks in to the Sony showroom, they immediately commission a model for him.Now Sony is not going to sell the TV at a loss. It costs them Rs. 50 to make it and they make a profit of Rs. 30 on it.
So let us review the post-condition in the economy (again all the figures used are your own the only think I added is that the Rs. 8 siphoned off does not disappear but reappears in the economy)
Initial size of Economy: Rs. 300
Tax: Rs. 100
Money spent on Road: Rs. 20
Value of road to the economy: Rs. 30
Loss to the economy if the road was constructed using full funds: Rs. 70
Total size of economy had funds not been siphoned off: Rs. 300-Rs.100 Rs.30= Rs. 230
Cost of producing the TV: Rs. 50
MRSP of TV: Rs. 80
Profit on TV: Rs. 30
End Size of the Economy: Rs. 330
Uh Oh - looks like corruption is actually helping the economy in this case. I can play math games with you all day but you see you’ve fallen into the classic trap. Money is in a circular loop. It never stays still and continually moves creating value along the way to whatever it touches. It is a transitive equation, it increases in total value but as the value is never leaving the equation, it will never result in a decrease in value and at the most will remain the same. The only question is value to whom and for what? That is where morality and planning come in - and this is where there is scope for discussion - does the greater common good benefit from better roads (albeit badly constructed) or a thriving electronics market? Yes wealth can be destroyed but it will usually result in an increase in wealth for another net result in the economy stays the same.
As for sauvik - we’ve heard it all so let me capture all of your keywords below (which you use in all of your writings:
Adam Smith, market, despotic babus, kleptocratic state, evil government, vampire, Hayek, Austrian Economics, socialism bad, capitalism good……
If you want I can write you a nice computer program that will randomly string these words together with appropriate verbs and nouns in between - that way you will never have to write again - just run the program and it will churn out posts and articles for you.
Wow, this has really gotten out of control.
The basic, incorrect assumption Ck is making is that taxation does not reduce the level of output in an economy. Something we always teach in introduction to economics is that if you want to ask whether a given outcome is “good” you have to compare it with an alternative. If corrupt officials did not steal money and instead let people keep their own money, investments would be made that yield a higher value-added than the corrupt official’s spending on a new TV. Even if the corrupt official spent all of his ill-gotten gains compensating firms and consumers he stole from (via a lump-sum transfer), he would not have enough money to bring them up to the same level of profits or consumption they were at before. This is a very basic result in welfare economics — taxation shrinks the size of the economic pie.
You can find a standard treatment of this in any good introductory textbook. If you have too much pride to dust off your old college econ textbook, any public finance book will do. On the other hand, when you make a statement like, “Dead weight losses are the losses to the cigarette manufacturers not to the economy as a whole” you really need to brush up on basic economics.
Even simpler, ask yourself if a country like Somalia, where armed gangs steal from businesses and individuals regularly, should be as wealthy as a safer society. When much of what people produce gets stolen, won’t they simply stop producing (and maybe even become armed bandits themselves)?.
Rs. 100 was earmarked for a road which only had a maximum possible value of Rs. 30 because the most that a farmer could have benefited from a properly constructed road was Rs. 30.
Clear misallocation of resources. Why spend Rs. 100 on a road when it can only provide at maximum Rs. 30 worth of benefits.
Value of road to the economy: Rs. 30
Loss to the economy if the road was constructed using full funds: Rs. 70
Let me introduce you to the concept of what a road is. It is not something which is destroyed at the end of a year. Assuming that its value to the economy is just 30 rupees completely ignores the subsequent years when the road would continue giving returns.
Since it is on this assumption that you have calculated the “loss” to the economy as 70 rupees, and made all further assumptions, your entire argument unravels.
You have made the bizarre mistake of sticking to just a 1 year time frame and not taking into account subsequent benefit while calculating value of a product.
Banks often give out education loans without any collateral in India upto Rs 5 lakhs with a 7 year repayment period. If according to repayment schedules and the interest rate, the bank is supposed to get 1.1 lakh in the first year. If the bank manager were to follow a logic similar to yours, he wouldd think…I gave him 5 lakhs and I got only 1.1 lakhs? That’s a loss of 3.9 lakhs? Why did I give him a loan?
Of course I would come and explain to him that the world doesnt end this year. Next year too you will get the same amount, and the next, and the next…etc until in toto you get back 7.7 lakhs over 7 years for investing 5 lakhs.
Now that I have pointed out the flaw in your calculatios, why don’t you redo them? And yes, assume it is a 5 rupee loss, not 6. I had added the 1 rupee to factor in another avenue of wastage, but then decided not to pack in too much at the first step itself, and forgot to make the correction.
Do ponder over some other questions I asked which you have ignored and also ponder over what Mark has said. Could be very enlightening.
This is a model - a model only works if you make assumptions which is why it is called a model. Which is why you took a snapshot of time. You provided the scenario and you provided the numbers. I took it from there. Yes he road has many uses - you did not state them nor did you state that as an assumption. But then you also have to take into account the depreciation of the road from the constant use of the farmer. You are also assuming that the farmer’s money is the one that is quid pro quo paying form the road. What if the Rs. 100 came from a businessman in the city (in reality this is what happens) who will never end up using this road which will only be used by farmers who will never actually pay for the road but will happily reap the benefits.
Do you want to restate your model? Please take a look at the model you have presented - it is very jumbled with about a dozen assumptions liberally scattered throughout the model with no attempt made to capture them or even state that there are assumptions - you made the assumption that it was a closed economy and then threw in something about export to Dubai?
Have you ever done any economic modelling? This is probably why you are having a problem. Its not as easy as you think my friend and this potentially one of the simplest you can create as it uses nothing but addition and subtraction - but there are plenty of good books on the subject.
As I said before if you want to play with the big boys, then at least learn to state a formal model with the assumptions, variables and actors laid out. Don’t write some jumbled paragraphs with numbers sprinkled throughout and then call it a model. So I’ll give you one more chance state your model clearly and precisely.
There is no clear objection you are raising to my model. Just a lot of rhetoric. I showed you the flaws in your analysis. Repair them and restate your objections.
Let me spell it out for you a bit more since you seem to require very schoolboyish enumeration and lack the desire to glean information unless spoonfed with it. Even if you take the time-limited snapshot, you show a “loss to the economy” assuming that the 70 rupees disappeared into thin air. The road hasnt been paved using tar and the 70 rupees in case you assumed so. If there was a leakage free economy, the money would go to the villagers working on the project who too would spend it in the same marketplace. So how is there a loss to the economy of 70 rupees?
In honour of CK, I would like to propose a “Pay the salaries of the tax collectors” tax. It will be a blanket 5% tax on all income above 5 lakhs and the entire proceeds will be used to pay the salaries of the department employed to collect the tax.
This tax will result in no loss of economic welfare, as the money collected from tax payers will go to other people who will spend it anyway. The tax collection is bound to be efficient, as the tax collectors will have an incentive to collect it as efficiently as possible. I don’t see what is wrong with the idea…
CK, Funny you should want some mathematical models. Here is one with your 100 rupees in tax
Scenario 1 - 80% money siphoned off
Tax collected = 100
Spent on road = 20
Paid to labourers = 20
Siphoned off by contractors = 80
Labourers spending on telecom for phone = 20
Rate of growth of telecom sector = 20%
Therefore wealth at end of year = 24
Contractors spending on white goods = 80
Rate of growth of white goods sector = 10%
Therefore wealth at end of year = 88
Total wealth = 88 24 = 112
Scenario 2 No money siphoned off
Tax collected = 100
Spent on road = 100
Paid to labourers = 100
Siphoned off by contractors = 0
Labourers spending on telecom for phone = 100
Rate of growth of telecom sector = 20%
Therefore wealth at end of year = 120
Contractors spending on white goods = 0
Rate of growth of white goods sector = irrelevant
Therefore wealth at end of year = 120
Total wealth = 120
Since scenario 1 sees wealth as 112 and scenario 2 as 120, then the wealth destroyed is 120-112 = 8.
It is now proven CK that vampire government destroys wealth.
Flaws in MY analysis? Last time I looked it was your model and your numbers - so please state the following:
- Closed or Open Economy? (you mentioned exports to Dubai??)
- What is the time scale of the model? (Rs. 100 is collected in one shot from the farmer or over a period of years?)
- Does depreciation apply to the capital investment? (over what time period - if the farmers uses the road over a period of time then it would have to match that)
- Is there quid pro quo for taxes in your economy? (self explanatory - you seem to think so though this is a big assumption - not true in real economies where there is no quid pro quo).
- Do others in the economy contribute to the Rs. 100 or is it all from a single farmer? (how many actors are there in the economy)
This is not school-boyish enumeration - this is called modeling - a subject of which you obviously have never done. I on the other hand do have a good understanding of modeling - in fact that is what I do for a living 10 hours a day. A lot of people pay me good money to create models so they can make better decisions and you bet they want every little detail enumerated or else they wanted stated as a clear assumption.
If you want to create a model and base an argument off of it - at the very least learn how to state your assumptions. Also much though I love reading your writing, could you put all the relevant figures and assumption in one place as opposed to scattering them all over the post. It would not only be useful to the person reading your post but will also perhaps enable you to think a little clearly as opposed to writing in stream of consciousness as is evidenced by multiple posts one after the other. Think it through, write it down clearly and concisely state your assumptions, variables and hypothesis and your conclusion. Obviously the Indian educational system has failed in imparting this most basic skill which believe me if you want to work in the corporate world (in the west at least), it would behove you to develop.
I’m trying to help you out here - giving you all the chances in the world to make your case - in the corporate world you would have been shown the door by now. So answer the questions above, restate your model and try to put all variables and materials pertinent to the model in one place and keep rants on Tata Steel etc. in a separate place.
CK, Let me congratulate you on the immense success you have had in your career and in portfolio management. You have done quite well and I am sure your mother must be very proud of you. In fact we all are proud of you, CK.
Now please rework the flaws in your argument which showed that there will be a loss of 70 rupees and leave the economy with just 230.
The story so far is
1. I present a model
2. You point out some flaws in it showing some bizarre calculations of loss to the economy worth 70 rupees
3. I show you what went wrong in your calculation
4. Such elementary flaws in your calculations being exposed leave you insecure. You sidestep the question I ask and unleash a barrage of your own question. Also thump your chest for good measure and add a condescending remark or two
Here’s something very basic about economics modelling which you should know. Assumptions should be made only if they are necessary. Of course it is all fine asking what is the capital of the country in my model and what is its national emblem. But it is not relevant to the issues at hand.
Really CK, since you seem to be doing very well and all, you may have a lot of time to be so prolix in this debate. Not all of us do, so please answer the stated questions with brevity.
Brevity will help you a lot in your career. American companies value pithiness it a lot. Ask me, I know, having dealt with dozens of them during the course of my career. As will some logical coherency. You will start doing a lot better than you already are.
Come now, save everyone’s time by making a meaningful post for a change. One which is intended not to impress upon others your perceived depth of your own knowledge, but which contributes to the discussion.
Gaurav, I think you should stop yakking off like an arrogant twit and listen to what CK is saying.
In case you haven’t been following his comments, I’ll say it once again: there is absolutely nothing wrong with being corrupt. Corruption does not hurt the economy in any way simply because even the corrupt officials spend the money they make from you. So it’s not a lost “opportunity cost” at all.
CK has shown far more patience with you than I would have. Learn to be humble when you have been beaten.
You are saying that assumption like depreciation of the road or een the time period of the model - is it 1 year, 10 years or 1 day are not important. The first question you will be asked if you present your model is - WHAT IS THE ASSUMED TIME PERIOD. Please answer that question first. Then list the model in the following manner
Total Size of the Economy:
Total Taxation:
Total number of people paying tax:
Cost of the Road construction:
Money siphoned off:
Time perriod for model:
so on and so forth…
if you cannot present your thoughs in an orgnized manner, you cannot expect people to respond. I think the reason you refuse outright to present your model in an organized manner is:
a. You have never modelled anything other than a pair of jeans in your life before and hence are at a complete loss as to where to begin
b. You realize that presenting it in an organized manner will cause your point to be disproved so its better to stick in varaibles here and there (but perhaps b is crediting you with too much intelligence).
Present your model using at least the most basic degree of organiztion and please answer the questions I posted earlier and we can continue this debate. Since it is your model it is your responsibility to clarify the points. You said that you have worked with dozens of companies - did you respond to their request for clarification on a product with “hey its my product so don’t bug me with silly requests - you go figure it out.” Guranteed road to the unemplyment lines my friend.
CK, are you doing all this to have a serious debate or to impress yourself with your smartness?
Serious debate..I’m already impressed with my own smartness and going by things outside of the blogsphere, so are others (just got promoted - youngest person ever at my firm to get the promotion ;)
So it means that you really believe that corruption has no impact on economic growth?
TH real reason for this argument is to show that one needs facts to make a claim. I have followed libertarian thinking for many years - many fine and reasonable points but when you put it together as a viable theory it just does not add up. And apparently its not just me that thinks so - looks like the majority of the world does not agree with libertarian thought given that there has never been a libertarian government or even company ever in existence and in all likelihood never will be. If crazy theories like national socialism and fascism and even communism can get support around the world, there must be something seriously flawed with libertarian thought where it can’t even get 5% of the people to agree with its principles. So its time to start examining what it is about the human condition that rejects libertarian thought no matter how logical it sounds on paper.
There are only two things that are certain in life - that all of us will die one day and that all of us will pay our taxes - whether it be to the IRS in the US or the Tax Dept. in India Come an apocalypse and nuclear winter, we will still pay taxes albeit to a roving band of thugs (a la Mad Max). You could move to Somalia but you will still pay taxes to the militia. Something inevitable about taxes that have followed us humans from pre-historic times to this present day - we use to pay our taxes with goats and cows and wheat and now we clck “Pay IRS” on our computers but we have always paid and looks like we always will.
Asking for more assumptions means that with the data currently provided you are unable to find a flaw, and the only reason you feel my model is appearing flawless is because some additional information, which may or may not show a flaw, is missing.
That would at least require you to admit that the model within the current parameters of information and assumptions is flawless and that the “70 rupees are lost” argument made was nonsense. If you admit as much unequivocally I would love to add some more parameters and make the model more complex to take this discussion forward. But I am not giving you more parameters to just use as an excuse to cover up your erronous “70 rupees are lost” statement.
So am I to understand that you don’t really believe anything either way, you just want to pick a fight with libertarians?
Of course corruption has an impact on economic growth. I never said it didn’t. The corruption angle was only introduced later in the debate by Gaurav. The premise of my original argument - lost somewhere in the posts was that taxes do not DESTROY wealth, they REDISTRIBUTE wealth in an economy. Kings imposed hefty taxes in ancient times. You think they would have done that if they thought that the taxes were going to destroy wealth? Considering that the king owned everything in his kingdom from the fields and roads to the people, why would he impose a system that destroyed his own wealth?
Please respond to my model, CK.
And also this. If taxes just redistribute wealth, doesnt difference in rates of taxation have any effect on economic growth?
Would economic growth remain same, ceteris paribus, in an economy even if the rate of taxation is changed from 30% to 75%?
Ck, the fact that we use money is not really relevant if you want to understand the concept of deadweight loss, it exists even if the economy does not use money. Let us look at one such example, where things can be seen more clearly.
Suppose we have an island with 3 people (A, B and C), where the only source of wealth is rabbit hunting. One of them is inefficient, and uses stones as hunting tool. The other two make rabbit traps and try to be more efficient. The entire production can be described as follows :
A : 10 rabbits a month.
B : 30 rabbits a month.
C : 60 rabbits a month.
Total production : 100 rabbits.
Change of situation : A government (assume that it is a highly efficient, corruption free government) decides that some redistribution should be done in order to help malnourished people who do not use traps. It puts a tax on traps , 25 rabbits per month for people who use traps. Being utility maximising individuals, C continues to use traps and B starts using stones as using traps is not profitable for him any longer.
Current production : 60 10 10 = 80 rabbits.
Distribution of wealth : C - 60 -25 = 35, A and B - 10 12.5 = 22.5
Clearly there is a loss of 20 rabbits per month. Note that what government gets from tax (25 rabbits from C) is not a part of this deadweight loss, loss of C is offset by the gains of A and B.
In a real economy the same thing happens whenever the government imposes a tax on a productive activity. The marginal producers are forced to switch to less productive activities, and the total production goes down, along with a part of consumer and producer surplus. This is a net loss to the society, and it exists even if you assume that your government consists of ultra efficient, corruption free bureaucrat gods.
Pardon me for butting in but if you are the same CK who works for R&A and worked on the PHT Network then I do not think everyone even in the offline world holds your abilities in high regards and you know it. If you are a different CK, my apologies.
Really CK? In that case what did you aim to prove with your model?
In response to Sid
you said there were only three people in your economy - A, B and C but then say that there are other malnoursihed individuals so in fact there are more people in the economy that A, B and C . Is that correct? Let us call these malnourished people X and Y (correct me if I am wrong in this assumption) that do not happen to catch rabbits.
So yes as a result of the tax on traps, the net production of rabbits goes down but here is the second half of the story that people ignore - where do the tax rabbits go? They go to X and Y who are malnourished and would die without the rabbits stolen/taxed (depending on your perspective) from B and C. The valid question then to task is what are the lives of X and Y worth to the island economy. Societies keep people alive even if the amount they are not contributing to the economy. For the sake of argument ignore the morality of the question of life. Is there anything that X and Y produce that is worthwhile to the island economy that it is worth the 20 rabbits a month? What if X now nourished by the 10 of the 20 rabbits he receives starts hunting his own rabbits or if Y now that his food needs have been taken care of creates more efficient traps.
The question that A, B and C should ask is whether X and Y should be the ones to receive the tax rabbits and whether by giving X and Y tax rabbits, the wealth of the island (you said that money was not the measure) is increased. Now X and Y may sit on their behinds and do absolutely nothing except live off the hand out that they receive but A, B, C, X and Y have a democratically elected government. If A, B and C feel that the rabbit tax is unfair, they can vote out the government as they have the majority and elect one that imposes a lower tax. If they haven’t voted out the government, then it shows that they don’t think that the tax is unfair and contributes to the wealth of their island if not their individual wealth.
Do I know you from somewhere Steven?
CK, your original point was that taxes do not damage the economy, they only redistribute wealth Now you are shifting the point to say that even though they damage the economy, it might still be worth the damage if the redistribution compensates for the damage.
If you weren’t so smart, I would have assumed that you were too dense to notice the shift. Now that by your own admission you are very smart, I must assume that you were planning to make fools of us.
Exactly - redistribution compensates for the damage. The question that we as an electorate should ask is what kind of redistribution compensates for the damage such that there is no loss of wealth. I’ve never maintained that the government is the paragon of all virtue and efficiency. But I have looked far and wide for a better alternative - I’ve looked into libertarianism, flirted with dictatorship, considered Anarcho Capitalism - but so far have come up empty handed as to the best system. The saving grace of the present system (democratic government with some controls on the economy) is that it is democratically elected - you have a choice. Don’t like the taxes, move to a country which has lower taxes (unfortunately don’t think you will find one which has no taxes - maybe the Caymans). Don’t like how your taxes are being spent - vote out the candidate wasting your money, think you can do a better job - run for election. None of these are easy but I really haven’t seen a better way.
Anyways I think I am done with this subject for the present. I thank all those who contributed to the discussion. It did get heated at points and ad hominem attacks were launched but from my side they were all in the heat of the argument no offense intended and none taken. You all are really a fine bunch of people and I enjoy the parry and thrust. Thanks for living up to the being the “Argumentative Indians” and to all those from other countries who participated. I’m sure the debate will rage on - or perhaps not but it has been enlightening for me. My point of view has not changed but I have learned more which is the point of all this after all. Cheers all. Until next time.
sid,
Don’t take the effort of pointing out that in your model, a malnourished individual is defined as one who doesnt use traps and is thus A. If B stops using traps to avoid the tax, he too becomes malnourished by this definition. That there are no X Y and Z who need to be brought in.
CK however has, inspite of your describing the model in simple english, brought in X, Y and Z just so he can poke an imaginary hole in it. He knows it is nonsense. But it saves the time and the mental effort of thinking up a real argument for your model.
Cheers CK. And we understand that the logical fallacies, calculation mistakes and comprehension errors made by you during this discussion were in the heat of the argument and in no way reflect on your professional abilities.
I WENT THROUGH YOUR ARGUMENTS IT WAS VERY INTERESTING,CAN MrC.K.sir,give an explanation of the impoverished corrupted states of AFRICA,where govt officials siphons out large monies