Teaching Taxes

micro-econ-taxes

Ahhhh!!! Graphs! Runaway! Yeah I know, but bear with me for a second. This isn’t meant to be a quantitative post. This is meant so that we may comprehend the scale of a problem with public perception in economics that has largely gone ignored by the members of my field for too long.

“Economics is a legitimate social science, not subjective ideology.”

I start however with the recent wave of STEM education promotion which has been truly awesome to behold and incredibly beneficial for our society. Speaking personally, I would have been far less likely to have pursued my undergraduate in engineering if I hadn’t spent all those hours as a child watching Bill Nye. In fact, that’s exactly what I told him when I met him last year. By no means to take away from this trend though, perhaps the biggest insight economically speaking from this recent political season is regarding the public’s perspective of economics.

Before we get into distinguishing right from wrong though let us at least agree on this, economics is a legitimate social science, not subjective ideology. In physics when we drop an object and it falls we acknowledge the existence of gravity. Similarly in economics there are certain known facts and relationships that have been studied and proven by economists for centuries.

Unfortunately however, this is not how economics is often viewed in the public sphere where economic principles are often based on little more than “old wives tales” and the regurgitation of political platforms. I truly believe if we were to simply wipe the slate clean and were all capable of looking at problems objectively with critical reasoning and discussing solutions based on sound economic foundations and research, politics would not have the same ugly partisan connotations that it does today. A shameless promotion for my blog there.

More to the point though, where do we start? How about with education, where we still have some work to do. At my University there are 12 different undergraduate majors which require an economics sequence or course. Many of these students will go off to find careers in business or public service leadership and very likely will come to help mold the future public mindset on economics. Because these are largely introductory type courses however, they only provide the most concise tools and philosophies possible to gain an understanding of economics.

A most prominent example is regarding taxes. The reason I present the graph above is because it visually depicts how a standard undergraduate microeconomics course would teach students about how taxes affect the market. In summary, the basic concept is that imposing a tax “hurts” both consumers and producers and reduces the amount of trade in the market.

The trouble is, this greatly oversimplifies the study of tax policy and is incredibly misleading. Unfortunately though each year thousands of students walk away from universities across this country with a bachelors or even an MPA or MBA thinking that’s all there is to it. It completely disregards the notions of cost-benefit analysis, tax incentives and disincentives, efficiency, or even how government is funded for that matter. Yes, deadweight losses do exist. Imposing a tax does theoretically affect that market interaction negatively, but to leave it at that is quite frankly dangerous.

I make sure that with every student I meet with to at least be mention the fact that in reality there are trade-offs and that the specific circumstances and surrounding research matters. Taxes can be used as a disincentive as with tobacco. There are taxes which we would consider vital to our current way of life like Social Security taxes. Some taxes can be used to help regulate against externalities such as a carbon-tax. There are plenty of exceptions when it comes to tax policy where a simple DWL analysis does not tell the entire story. If we are going to start reshaping the public perception of economics then we must start by making sure our future economic thought leaders are walking away from their education with a sound understanding of the complexities of economics, and a respect for the study as the social science that it is.

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