The "Fiscal Cliff," Colbert, and Monkeys (pt. 1)

source: New York Times

This post is inspired by Stephen Colbert.

Rev. Sir Dr. Stephen T. Mos Def Colbert, D.F.A., Heavyweight Champion of the World. He is the seven-time recipient of the Werner Heisenberg Prize for Excellence in Theoretical Mathematics – despite being barely capable of feeding himself. He was the “totalitarian ruler of Malawi from 1982 to 1984.”

As hilarious as some of these “achievements” may sound, an interview on The Colbert Report is a rapid-fire battle of wits. Before Colbert’s guests come on, they are told not to play his satirical game, but to hold fast in their positions despite his antagonism. Last week on The Report, Reihan Salam was interviewed about the ominous sounding “fiscal cliff”, what Colbert calls “an unavoidable plunge to the razor sharp rocks below”, and how we can raise revenue without increasing taxes. Salam impressively kept pace with most of Colbert’s witty comebacks.

Salam is an interesting guy. He describes himself as conservative, but he’s difficult to pigeonhole. He emphasizes family values, seeing two-parent homes as our country’s cultural foundation – even if parents are homosexual. He has also shown interest in congestion pricing, demonstrating a seemingly rare appreciation for taxation’s effect on behavior.

Where he’s not so “progressive” is his view that marginal tax rates should not be increased to avoid this “fiscal cliff”. Salam explained how it’s possible to increase revenue without increasing tax rates. In response, Colbert leaned in an inquisitive manner and said, “Wow! I’m interested in what you just said, and it’s incredibly boring at the same time”. It seems most people feel that way.

If taxation is such a boring topic, why does it stir such strong emotions? Maybe a few accountants are innately interested in taxes, but once you become aware of the diverse and profound effects taxation has on human behavior, you can’t help but become interested.

We demand fairness, and we freak out when someone receives more than us for doing the same work – not unlike our animal cousins.

There is a weak connection in most peoples’ minds between their sense of justice and their responsibilities to “the tax system”. We want justice but we aren’t willing to take the time and effort necessary to understand these details, to consider alternate ways of raising revenue.

It’s difficult for people to understand how seemingly small changes can have such enormous impacts. This might be the reason many still don’t believe in biological evolution. It is mind-boggling to imagine things like bacteria evolving into massive redwoods over billions of years.

The importance of taxes in molding the decisions of billions of people is probably even more difficult to imagine though. Some may say biology is boring and lacks relevance because changes usually occur slowly over time. The same can not be said for taxation though. Instead of time being the factor needed to see how small evolutionary changes are magnified into large morphological differences among organisms, the behavior of large numbers of people acting under particular tax systems creates rapid and wide variation in macroeconomic outcomes.

If Google were to change their algorithms and thus unintentionally move your advertisement from the first spot on a popular search term such as “Gangnam style” to a low traffic search word, that would immediately and drastically affect the number of people that visit your page.

Similarly, small changes in taxation drastically alter the decisions we make about where to live and work, what to eat, what types of diseases we research cures for, and even what countries we go to war with. That may seem like hyperbole, but I assure you it isn’t.

Further complicating the effects taxes have on our lives is that the tax code itself is so complex. This complexity limits our ability to draw clear conclusions about which taxes are causing which effects.

The greater the complexity of the tax code, the greater the opportunity there is for those with the money and time to exploit loopholes. It has been said that a complex tax system acts as a spider web, wherein the rich are able to traverse the web like spiders, while the poor are immobilized like flies. The rich have an army of lawyers they can hire, to get them $77,000 deductions for things like dressage (horse ballet). The poor however don’t have the time and resources to research and evade regressive forms of taxation like the payroll tax.

A stand-off in congress ensues over how to balance the desire to strengthen the economy, redistribute wealth, and limit the federal debt. But what exactly is the “fiscal cliff?” It refers to drastic tax increases and spending cuts scheduled to take effect over the course of 2013, if no deal can be reached. This would cut the deficit from 900 billion to 500 billion, but both sides agree that it drastically increases taxes on everyone (rich and poor alike), burdening an already struggling economy.

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