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 aside from an economist, the phrase “public good” feels like “good supplied by the general public sector.” Attempt to bounce in and clarify that, no, to be a public good, one thing must be each non-rival and non-excludable, and also you’re prone to be met with glazed eyes.
That is one motive why I get pleasure from discovering the concepts of economics clearly described or illustrated in works of fiction. When completed nicely, it will probably 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 are able to discover it in on a regular basis life as nicely. One essential thought in economics that’s, for my part, terribly described is that this:
“The authorized incidence of a tax isn’t the identical as its financial incidence.”
This is a vital thought. And for these whose aim is bettering the well-being of the poor by rising taxes on the wealthy, understanding it’s essential. The truth that the legislation says the rich shall 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 – a web based 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 publish.) And when some new shiny toy has come out that I’ve determined I need, I might use Swappa to promote my present gadget to offset the price of the brand new one. Swappa, in fact, makes a charge with each sale it facilitates. However in addition they inform you, the vendor, to not fear about that – the charge shall be paid by the customer, not the vendor. They accomplish this by including their charge to the posted value whenever you record an merchandise. So if I put an merchandise up for $500, they may truly record it at $525, and when it’s purchased, the customer pays $525, Swappa retains $25, and I get $500.
That’s good in idea, however in observe, it doesn’t work that approach. I do know the customer must pay this additional charge, and the customer doesn’t care one bit how a lot of it goes to me or Swappa. So I’ve to take that into consideration once I record an merchandise. If I believe one thing I’m itemizing will promote for $500, I don’t truly record it for $500, as a result of I do know the ultimate value will come out too excessive for it to be purchased. So as an alternative, I record it at $475, Swappa provides its charge, and the worth the customer sees is now $500. Based on Swappa, that $25 charge is paid by the customer, 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 ebook Catastrophic Care: Why The whole lot We Assume We Know About Well being Care Is Flawed, David Goldhill describes this from his viewpoint as an employer:
Since [newly hired employee] Becky’s single with out dependents, my firm can pay $5,679 this yr for her medical 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 once 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 problem 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 insurance protection, longer paid parental depart, and/or a litany of different advantages, whereas however fear about stagnating wages. What they miss is the connection between the 2. One would possibly suppose the aim needs to be to search out the “proper” or “greatest” mixture of wages and advantages, however there is no such thing as a proper, one-size-fits-all reply to this query. Neither is there any motive why one have to be arbitrarily conjured up by policymakers. Totally different individuals can have completely 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 greatest 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.
