This month, the newly minted Democratic Congresswomen from New York, Alexandria Ocasio-Cortez (D‑NY) suggested levying a 70% tax rate on the rich. After stagflation in 1970s, many had assumed we’d reached a consensus that extraordinarily high marginal tax rates are unsustainable. So why do these ideas keep popping up? Social psychology may help explain why. A recent academic study finds that support for redistribution by taxing the rich to give to the poor is likely driven by several psychological motives including not only compassion but also envy.

In an interview with Anderson Cooper on 60 Minutes Rep. Ocasio-Cortez explained:

You know, it— you look at our tax rates back in the ’60s and when you have a progressive tax rate system. Your tax rate, you know, let’s say, from zero to $75,000 may be ten percent or 15 percent, et cetera. But once you get to, like, the tippy tops—on your 10 millionth dollar— sometimes you see tax rates as high as 60 or 70 percent. That doesn’t mean all $10 million are taxed at an extremely high rate, but it means that as you climb up this ladder you should be contributing more.

Rep. Ocasio-Cortez says the money would be spent on the “Green New Deal” to end use of fossil fuels within 12 years. This would be an ambitious goal, particularly since about 80% of the energy we all currently use in the U.S. comes from fossil fuels. Raised revenue could also go toward her proposal for government-supported health care, and government-paid college. Paul Krugman blessed the idea with his New York Times piece, “The Economics of Soaking the Rich,” saying he believed such a high rate was “optimal.”

What motivates these beliefs of “Soaking the Rich”? Of course, no one can know with certainty what are Rep. Ocasio-Cortez’ true motivations. However, social psychologists in “Support for redistribution is shaped by compassion, envy, and self-interest, but not a taste for fairness,” investigate broadly what motivates people to support income redistribution. In short, they find that envy, compassion, and self-interest drive support for high taxes on the rich. Notably, they find that people who are compassionate are significantly more likely to support redistribution and give charitably. However, envious people support income redistribution but are not more likely to give charitably. This suggests that one way to know if a person’s desire to soak the rich is due to altruism or resentment is to find out if they choose to volunteer or give charitably in their private lives.

The researchers measured support for income redistribution using agreement with statements like “wealth should be taken from the rich and given to the poor” and “the government should increase taxes to give more help to the poor” and “inequality in the distribution of wealth is unjust.” Participant answers to these questions were averaged together to create an average preference for redistribution.

Envy

Then the researchers asked people the extent to which they agreed or disagreed with a series of statements like “It is so frustrating to see some people succeed so easily,” “I feel envy everyday,” or “frankly, the success of my neighbors makes me resent them.” Notice this conception of envy isn’t just about material possessions, but could include envy over others’ perceived social status, prestige, as well as their social accolades. To illustrate how the rhetoric of this might work, consider the opening paragraph in Sam Adler-Bell’s recent article in which his resentment of the rich isn’t necessarily about their material possessions but the fact that Americans like them so much: “Americans have insufficient antipathy toward the extraordinarily rich.…We like them too much.…Americans persist in seeing extreme wealth as a virtue–a sign of integrity, intelligence, merit. Those who have it garner respect and deference, even reverence.” Thus envy doesn’t always have to be about wanting other’s people’s money, but it could be about wanting their prestige.

The study found that people who were more frustrated with other people’s success and felt more envious of others were significantly more likely to want to increase taxes on the rich and implement redistributive social welfare policies. Perhaps this is why Winston Churchill famously said: “Socialism is…the gospel of envy.” [emphasis added] 

Some might point out that antipathy toward the rich is only against the “unmerited, accumulation of riches,” as Emmanuel Saez and Gabriel Zucman put it, not legitimately earned wealth. This may certainly explain the motivations of some people. However, the fact that the study used generic survey questions about if respondents “feel envy everyday” or feel resentment toward the “success” of generic neighbors shows that for some envy isn’t about frustration with corruption, it’s about resentment.

The researchers ran several follow-up experiments to examine how envy might inform attitudes about increasing taxes on the rich. First, they asked people if they would prefer a scenario in which the rich paid a relatively higher amount in taxes but that generated less tax revenue for the poor OR two, a scenario in which the rich paid a little more in taxes, but less than in scenario one, but that it generated moret ax revenue for the poor. Here is the question wording:

Would you rather (1) have the wealthy pay 50% more in taxes if that generated $100 million for the poor or(2) have the rich only pay 10% more in higher taxes if that generated $200 million for the poor.

Who picked the option that made not only the rich worse off but also the poor? Envious people. Compassionate people were no more or less likely. This finding held in studies they conducted in the United States, India, and the United Kingdom. 

Is this an unrealistic scenario? Not necessarily. In a 2008 Democratic primary debate, then-candidate Barack Obama pledged to increase the capital gains tax. One of the debate moderators, Charlie Gibson, pointed out “…in each instance, when the [capital gains] rate dropped, revenues from the tax increased. The government took in more money. And in the 1980s, when the tax was increased to 28%, the revenues went down.” This did not dissuade Mr. Obama. Instead he responded, “Well, Charlie, what I’ve said is that I would look at raising the capital gains tax for purposes of fairness.” Obama cited that hedge fund managers that year had made a lot of money, that income and capital gains tax rates were different, and that he wanted to implement social programs. But Mr. Gibson further pressed: “But history shows that when you drop the capital gains tax, the revenues go up.” [emphasis added] Obama responded: “Well, that might happen, or it might not.” His mind was unchanged. What’s fascinating about this exchange is Mr. Obama did not contest the history or contend that this time would be different. Instead, he reaffirmed his commitment to increasing capital gains taxes, which are associated with taxing rich people, regardless of the effects.

Compassion 

The researchers also found that compassion contributes to support for income redistribution. This is not particularly surprising, as this is what advocates of redistribution explicitly say they are about. The researchers measured compassion by asking people the extent to which they agreed or disagreed with statements like: “I suffer from other people’s sorrows” or “I feel sympathy for those who are worse off than myself.” Indeed, people who are compassionate are significantly more likely to support income redistribution.

This might lead some to think that those who oppose income redistribution must lack compassion. However, research showsthat conservatives, who are the most opposed to income redistribution, are the most likely to give charitably to both secular and religious causes. This result holds even when accounting for demographic factors like income. Indeed, the researchers also found that people who are highly compassionate were significantly more likely to have voluntarily given money, food, or other material resources of their own to the poor in the past 12 months. This implies that one doesn’t have to support income redistribution to be compassionate.

This suggests that compassion may have two different effects: It may motivate a person to support government-enacted income redistribution, but it might not. Alternatively, it might lead someone to roll up their sleeves and choose to do their part in caring for others. It might lead them to support both.

Further undermining the link between compassion and redistribution is that support for redistribution does not significantly predict giving charitably. This means that people who favor income redistribution are no more likely to personally give charitably, despite their professed support for social welfare programs. Thus, endorsement of the welfare state is not by itself evidence of one’s sincere compassion for the poor.

Putting this altogether: people who are compassionate are significantly more likely to give charitably or to support redistribution for social welfare programs (or both). However, those who support income redistribution are not more likely to personally give aid to the poor. Only compassion predicts giving charitably. The authors write, “compassion, but not envy, predicts personally helping the poor. Envy, but not compassion, predicts a desire to tax the wealthy even when that costs the poor.”

What Doesn’t Motivate Redistribution: Desire for Fairness

Many supporters of higher taxes on the wealthy contend their motivation is “fairness,” as President Obama said in his debate. However, the researchers found that one’s taste for fairness was not a significant predictor of support for redistribution after controlling for the effects of compassion, self-interest, and envy. 

Since people define fairness differently, the researchers defined it in two different ways and measured the impact of both. First, they measured how much a taste for “distributional fairness,” defined as wanting people to have more equal outcomes, predicted support for redistribution. Next, they measured how much a taste for “procedural fairness,” or the desire for every individual be treated the same under the law, predicted support for taxing the wealthy. Across multiple studies, rarely were either conceptions of fairness strong predictors of attitudes toward redistribution. Instead, compassion, self-interest, and envy were the best predictors of how people feel about raising taxes on the wealthy.

Is Taxing the Wealthy More About Resentment or Altruism?

In the previous study, the researchers did not disentangle support for “aid to the poor” versus “taxing the rich.” However, in a dissertation by Spencer Piston submitted to the University of Michigan in 2014, he separates these out. He finds that resentment of the rich strongly and largely predicts support for (1) increasing taxes on those earning more than $250,000 a year, and (2) redistribution by taxing the rich, and (3) reducing the gap between rich and poor. However it has little effect on support for (4) aiding the poor or (5) aiding the homeless. Conversely, sympathy to the poor largely predicts support for giving aid to the poor and homeless, but is not that predictive of taxing the rich. His research implies that support for income redistribution through very high taxes on the rich is more about resentment toward the rich rather than compassion for the poor.

Implications

New York Mayor Bill de Blasio in his State of the City address this month declared “Here’s the truth. Brothers and sisters, there’s plenty of money in the world. There’s plenty of money in this city. It’s just in the wrong hands.” Is this motivated by deeply felt compassion and love for the needy, marginalized, and vulnerable? Or is this really about something darker, rooted in envy and bitterness?

How does one know if a person who advocates for dramatically increasing top marginal tax rates, the estate tax, capital gain rates, etc. is motivated by sympathy for the poor or resentment of the rich? 

We can’t know for certain what’s in a person’s heart. But this research suggests that one should look at what that individual does in their personal life to help others. Do they simply post noble slogans and platitudes on social media about their commitment to justice? Or when no one is watching are they visiting someone in the hospital, bringing a meal to a new mother and father, visiting the elderly, contributing to a local community organization, or babysitting for their neighbor’s kids? Answers to these questions might reveal a lot about whether a person is motivated by altruistic concern for others or resentment of the successful. 

Why should we care about motivations? Because public policy rooted in envy leads to sub-optimal policy outcomes or worse. Envy can lead to bitterness and resentment, and with that can come the rationalization of dehumanization of entire classes of people. And thus quite clearly, can lead to unwise public policy.

Marshall Steinbaum, research director at the progressive Roosevelt Institute recently tweeted, “It’s increasingly clear that having wealthy people around is a luxury our society can no longer afford.” We don’t know for certain what Steinbaum truly meant by this. But it’s not hard to imagine how this kind of rhetoric can turn dark and could be used to justify dehumanization. 

The gospel of envy, as Winston Churchill put it, motivated a great deal of havoc and at times horrific violence throughout the 20th century under the banner of fairness and equality. Compassion is noble and should be encouraged. Envy is not.

The Congressional Budget Office (CBO) has released new budget projections. In 2019, the federal government will spend $4.4 trillion, raise $3.5 trillion, and borrow $900 billion to cover the resulting deficit. As spending grows faster than revenues over the coming decade, deficits will grow larger.

CBO’s chart below shows budget data a share of gross domestic product (GDP). Except for four years under President Bill Clinton, the government has run almost continuous deficits in recent decades. Indeed, the budget has only been balanced 14 percent of the years since the 1930s, which was the great divide in U.S. fiscal history.

The government has been spilling red ink a long time, but the current rash of deficits and rising debt is unprecedented. On the chart, the spending-revenue gap in coming years is large and persistent. But even that is an optimistic view based on steady economic growth over the next decade.

Look at what happened during the last recession and consider that we are overdue for one today. Spending shot up 5 percentage points of GDP from 2007 to 2009 and revenues fell more than 3 points. That recession started after the deficit had narrowed to about 1 percentage point of GDP, but the next one will start when the deficit is already more than 4 points. Also, the last recession started when accumulated federal debt held by the public was 35 percent, but now it is 78 percent and rising.

We are in a much worse fiscal position today if a recession should strike. A bad recession would be a disaster for federal finances, which in turn could trigger broad damage to the global economy. Despite the obvious threat, the politicians in Washington have been asleep on the debt issue for years.

Former Starbucks head Howard Schultz announced that he may run for president as a fiscally responsible independent. He is correct in saying, “I think the greatest threat domestically to the country is this $21 trillion debt hanging over the cloud of America and future generations.”

Running as an independent is an uphill battle, but let’s hope that fiscal barista Schultz can deliver espresso shots to wake up the two main parties about the debt threat.

The Coalition to Reduce Spending, a nonpartisan political advocacy group, announced an expansion of its Spending Tracker last week. The Spending Tracker assigns each member of Congress a spending score by matching voting records to Congressional Budget Office (CBO) scores for every bill affecting spending since 2009.

According to the Spending Tracker, during the 115th Congress, the average member of Congress voted to spend roughly $1.58 trillion. Five Representatives (Justin Amash, Thomas Massie, Jimmy Duncan, Raúl Labrador, and Morgan Griffith) and two Senators (Rand Paul and Mike Lee) voted for net spending cuts.

The lowest-spending Representative in the 115th Congress (and over his lifetime) was Michigan’s Justin Amash, who voted to cut roughly $165 billion during the 115th Congress. Nearly tied with Amash was Kentucky’s Thomas Massie.

Senators Rand Paul and Mike Lee each voted to cut over $150 billion during the 115th Congress, with Rand Paul as the lowest-spending Senator. Surprisingly, democratic socialist Bernie Sanders voted to increase spending by the fourth-lowest amount, roughly $140 billion. By comparison, Republican Senator Marco Rubio voted for a net spending increase of roughly $330 billion, more than twice as much as Sanders.

Laura Nicolae co-authored this post.

Can’t anyone do anything in this country without federal subsidies?

A friend emailed me a local news story from Lancaster County, Pennsylvania: “Firefighter recruitment ads on hold due to funding because of government shutdown.” A Lancaster County government shutdown? Nope, the federal one.

“As Pennsylvania faces a shortage of volunteer firefighters, funding to recruit them is being held up during the partial government shutdown. An advertisement distributed by the Lancaster County Fire Chiefs Association on TV, radio and social media is meant to recruit volunteer firefighters to Lancaster County’s 67 volunteer fire companies. … Duane Hagelgans, the Lancaster County Fire Chiefs Association spokesperson, says the government shutdown is holding up their federal grant money paying for those ads.”

I love the voluntarism and heroism of volunteer firefighting agencies, which play a crucial role in many communities. Indeed, they play such a crucial role that local governments ought to cover their needed costs so that they are not dependent on the faraway and chaotic federal government. Citizens should know how much local services cost, and they should be willing to pay for those local services they really need. 

Policymakers often enact programs for the needy but the benefits go mainly to businesses and special interests. The benefits of the low-income housing tax credit are siphoned off by the finance industry. The earned income tax credit pushes down market wages, which subsidizes businesses that hire low-income workers. Farm subsidies benefit wealthy landowners, not so much tenant farmers.

“Opportunity Zones” also illustrate the phenomenon. The Tax Cuts and Jobs Act of 2017 created capital gains tax breaks for 8,700 supposedly disadvantaged neighborhoods. Capital gains tax rates should be reduced across the board, but O‑Zones split the nation into winner and loser areas, with landowners in the winner areas enjoying a get-rich-quick bonanza as the tax breaks were capitalized in prices. Some landowners have seen their property values jump 50 percent.

Bloomberg reports on downtown Portland, Oregon, which is a big O‑Zone:

On a wet December evening, Mark Goodman steers a black Mercedes SUV into an open-air parking lot, one of dozens of development sites his family owns across downtown Portland, Ore. This one, he says, will be a $206 million tower with ground-floor retail, six floors of offices, and more than 200 luxury apartments. Amenities will include a yoga studio and roof deck. But the centerpiece will be a swimming pool that cantilevers out of the eighth floor. “The one thing I can say absolutely with certainty—it’ll be the finest for-rent product in the city,” Goodman says. It’s also eligible for a U.S. tax break meant to help the poor.

… Oregon did an audacious thing: It selected the entire downtown of its largest city to be eligible for the law’s suite of benefits, as well as neighborhoods such as the Pearl District, where new high-rises loom over old industrial spaces converted into “creative” offices and boutique furniture stores sit near juice bars serving açai bowls. The Central Eastside, an area that Portland’s alt weekly crowned the city’s “best food neighborhood,” is also included.

Oops! That doesn’t sound like a disadvantaged area. The Portland O‑Zone was designated by Oregon Governor Kate Brown, who is a left winger favoring “economic and business equity.” I don’t know how açai bowls fit into the governor’s vision of equity, but I do know that O‑Zones are the opposite of equality and fairness under the tax law.

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Here are other commentaries on O‑Zones:

www​.down​siz​ing​gov​ern​ment​.org/​o​p​p​o​r​t​u​n​i​t​y​-​z​o​n​e​s​-​w​i​l​l​-​h​e​l​p​-​c​o​n​n​e​c​t​e​d​-​d​e​v​e​l​o​p​e​r​s​-​n​o​t​-poor

www​.cato​.org/​b​l​o​g​/​o​p​p​o​r​t​u​n​i​t​y​-​z​o​n​e​s​-whom

www​.cato​.org/​b​l​o​g​/​o​p​p​o​r​t​u​n​i​t​y​-​z​o​n​e​s​-​e​n​r​i​c​h​-​l​u​c​k​y​-​l​a​n​d​o​wners

www​.down​siz​ing​gov​ern​ment​.org/​o​p​p​o​r​t​u​n​i​t​y​-​z​o​n​e​s​-​f​u​e​l​-​c​o​r​r​u​ption

www.downsizinggovernment.org/o‑zones-fragment-america

Ninety years ago, two-thirds of government spending in America was state-local and one-third was federal. Today, it is the reverse with about two-thirds federal and one-third state-local. American government has become larger and much more centralized. That centralization has made winners and losers among the states as vast flows of taxpayer cash pour into Washington and are then dispersed through more than 2,200 federal spending programs.

In 2019, the federal government will vacuum $3.5 trillion from taxpayer pockets in the 50 states, borrow $1 trillion from global capital markets, and then turn on the leaf blower to scatter $4.5 trillion back out across the 50 states. Many billions of dollars will stay in and around Washington to pay for the leaf-blowing operations.

The Rockefeller Institute of Government has released a very useful report detailing these cash flows. The report calculates a “balance of payments” for each state in 2017, which is federal spending in each state less taxes paid to the federal government by individuals and businesses in each state. The winner states have a positive balance and the loser states a negative one. Federal spending includes four items: benefits (such as Social Security), state-local grants (such as Medicaid), procurement (such as fighter jets), and compensation paid to federal workers.

On a per capita basis, the biggest winner states are Virginia, Kentucky, and New Mexico. Virginia has a lot of federal employees, contractors, and the world’s largest naval base. Kentucky receives a lot in benefits, contracts, and grants, and has Senator Mitch McConnell. New Mexico has a lot of federal employees, contractors, and Los Alamos.

The biggest loser states are Connecticut, New Jersey, and Massachusetts. Those states have a large number of high-earning individuals who get hit hard under the “progressive” federal income tax.

Figure 1 below shows data from the Institute’s report. Taxes per capita are on the horizontal axis and spending per capita on the vertical axis. Each dot is a state. The totals allocated for 2017 were $3.1 trillion in taxes and $3.8 trillion in spending, leaving out five percent of taxing and spending that could not be allocated by state.

Generally, states on the bottom right are the losers and those on the top left are winners.

Connecticut is on the far right paying $15,462 in federal taxes per capita but receiving only $11,462 in federal spending. Connecticut would be better off in a decentralized United States with citizens paying most of their taxes to state and local governments rather than the federal government.

Every state is actually worse off than indicated in Figure 1 because federal borrowing in 2017 allowed spending to be 20 percent larger than taxes. But borrowing is not a free lunch. It creates a cost that will hit residents of every state down the road—borrowing is just deferred taxes.

For Figure 2 below, I scaled up federal taxes to include both current and deferred. That is, I scaled up taxes for each state the same percent so that total federal taxes for the nation equals total federal spending. With that adjustment, Connecticut residents paid $18,586 in current and deferred taxes per capita and received only $11,462 in spending. Connecticut residents are only getting back 62 cents for every dollar owed to Washington.

The patterns exhibited in the figures have persisted for decades. High-income states such as Connecticut have been penalized by the overly progressive federal income tax for a very long time. The interesting political question is why do they stand for it? Why do members of Congress from high-income states support a highly progressive federal income tax that particularly harms their own states?

“It’s time to raise the alcohol tax,” declared Vox author German Lopez back in December.

Now let me state upfront that I am not confident I know what the correct tax rate on alcohol should be. Lopez may well be right about their being a rational case on economic grounds for an increase based on high-quality, robust analysis. But his article does not make a reasoned case satisfactorily, nor does it link to such analysis.

In fact, it came to my attention as I was finalizing my new paper “How Market Failure Arguments Lead to Misguided Policy” (released today). And I’m convinced his piece is a classic of the genre. This article aims to highlight some of the key objections I have to his approach, which is increasingly common in public debate.

The traditional economic case for alcohol taxation

Libertarian theory aside, the classic case for taxing alcohol will be familiar to those with basic economic knowledge. Alcohol consumption is believed to impose, on net, external costs on people other than drinkers themselves.

When deciding whether to drink, individuals are thought to only consider the balance of private costs (the money it costs to drink, the hangover, the risk of disease or accidents for them etc) and the private benefits of consumption (the confidence, the enjoyment of the taste, the benefits to them of socializing etc).

But clearly, alcohol consumption can have external effects. The costs of alcohol-related crime and driving under the influence are borne by others. There may be net external costs relating to health care, too, given alcohol-related diseases and incidents could necessitate higher taxpayer subsidies or insurance premiums (though, applying such logic consistently, one would have to net off any “savings” that alcohol consumption might deliver in terms of lower Social Security and Medicare payments from reduced longevity).

The economic case for a tax then is this: if we observe net external costs associated with alcohol consumption, then allowing a free market would lead to higher levels of consumption than optimal. If a tax can be imposed that equates roughly to the marginal external costs of consumption, then drinkers are faced with a price reflective of the true costs of their actions.

Due to the “Law of Demand,” the amount of alcohol consumption will fall to the level at which marginal social costs equate to marginal benefits as this tax is imposed. Some of the negative external costs will occur less often, as will some of the private costs. Society as a whole will be better off because the tax means prices now reflect the true cost to society of the product’s consumption.

In order to make the case for a hike in alcohol taxes then, Lopez simply needed to present clear evidence that current tax rates on alcohol are too low to account fully for the external costs of consumption we see. His line of reasoning does not make this case.

1. Ignoring the benefits and costs framework

Lopez presents good evidence that higher alcohol prices reduce demand for alcohol (as one would expect). It stands to reason then that reduced alcohol consumption will mean fewer alcohol-related deaths and the other negative consequences outlined above.

But he does not seem to acknowledge that alcohol consumption has benefits too. He highlights how excessive drinking causes anywhere between 88,000 and 100,000 deaths per year as a reason to increase taxation, for example. Yet he never acknowledges that alcohol consumption (at least for most drinkers) brings satisfaction, hence why we drink.

Looking purely at the number of alcohol related deaths tells us little about the desirability of taxation on alcohol per se, because it is not clear how many deaths are rational decisions by well-informed individuals to “live for today,” as opposed to deaths resulting from “external costs” of alcohol consumption.

A newer literature embedded in behavioral economics squares this circle by arguing that heavy drinkers are not truly fulfilling their true lifetime preferences when they consume (because of hyperbolic discounting or other irrationalities). But that is not the argument Lopez makes, and nor would we expect this to be the case for all heavy alcohol consumers.

The traditional market failure framework recognizes that allowing people to decide what to consume enhances their welfare, provided that any third-party costs are accounted for. Lopez, on the other hand, sets out reducing deaths from alcohol as an aim in itself – unlinked to any acknowledgement of benefits. He assures us that significantly reducing alcohol-related deaths “doesn’t require prohibition.” But the logic of focusing on just deaths and ignoring pleasure is that we should indeed aim for zero consumption.

By implicitly presuming we all really want to be life-expectancy maximizing, he goes far beyond the market failure framework of dealing with externalities.

2. Conflating private costs with external costs

Indeed, the traditional case for taxing alcohol is about pricing in external costs – costs imposed on others. Lopez cites a Centers for Disease Control and Prevention study that estimates the economic costs of excessive drinking in the U.S. as totaling $249 billion in 2010, or $2.05 a drink. Implicitly reaching for “externality” arguments, Lopez notes how this figure includes the costs of “crime, drunk driving, health problems, and more,” pitching this tax as a way of accounting for the externalities imposed on casual drinkers and teetotalers by heavy drinkers.

But an examination of the CDC reports shows the major cost to the economy comes not from these external costs, but from “a reduction in workplace productivity,” which accounts for a massive $179 billion of the total.

This, overwhelmingly, is a private cost and not an external cost. If individuals’ alcohol consumption affects their work performance, or their human capital accumulation, or the length of their working life, the vast proportion of that cost would ultimately be borne by the individual themselves through worse employment prospects and lower wages.

Some people may simply prefer a work-life balance where they stay out later to socialize and drink regularly, rather than maximizing at-work productivity. Using the CDC estimates as a proxy for the external costs of alcohol consumption would therefore lead to a tax rate far too high to deal with genuine external effects.

It is certainly true that some part of “worse productivity” would hurt the individual’s employer or the ultimate consumers of goods and services produced by heavy-drinking workers. Lost productivity could also be considered at least partially an external cost in that lower wages or worse employment prospects may reduce an individual’s net tax contribution. If this necessitates higher tax contributions from other taxpayers to maintain government revenues, there is a clear fiscal third-party effect.

But applying such reasoning consistently would profoundly change the scope of economic policymaking. Many decisions throughout our lives affect our measured productivity, pecuniary rewards, and net tax contributions. Implicitly assuming a baseline in which all individuals maximize measured productivity and net fiscal contributions, and considering deviations from this to be a market failure, would be an absurd principle.

Taking time off to have children or to care for a sick relative, staying up late to watch TV regularly and being tired at work, or choosing not to invest in one’s own human capital, might all have similar effects. This is to say nothing of career choices. Opting to become a French teacher or a public-interest lawyer, even when the opportunity exists for one to be a Wall Street trader, means people clearly do not always make decisions to maximize their net tax contributions.

Singling out the productivity effects of alcohol consumption as a unique externality in need of correction, when every day individuals make decisions that affect their productive potential and, indirectly, their net tax contributions, would be unworkable, arbitrary, and wrong.

3. Arbitrarily comparing alcohol taxes today with the past

One piece of evidence Lopez cites in support of raising the alcohol tax is that taxes on alcohol “were one-sixth to one-third of their inflation-adjusted value in the early 2010s compared to the 1950s.”

This may offer insight into affordability, but it is irrelevant for what alcohol tax rates should be as justified by economics. The economic rationale here is not to reduce consumption to some level or hit any other arbitrary target for outcomes. It is to price in the external costs associated with marginal alcohol consumption, and then allow consumers to decide how much to drink according to their own preferences when faced with the full social costs of their actions.

It’s perfectly plausible that these external costs change over time. And even if they do not, Lopez presents no evidence that the 1950s tax rates were levels which accurately reflected external costs.

4. Ignoring the implications of heterogeneity between consumers

Lopez rightly acknowledges that key opposition to increasing alcohol taxes arises because individuals who regard themselves as “responsible drinkers” will resent paying more because of the costs primarily imposed by heavy drinkers. He responds by reassuring us that most of the tax (in terms of revenue collected) would be borne by the higher-risk drinkers, simply because they drink more.

But this is in part because, as the academic literature suggests, heavy drinkers are far less responsive to price changes than non-heavy drinkers. A review of the literature by Jon P. Nelson of Pennsylvania State University found that only two 2 of 19 studies on the consumption behavior of heavy drinkers found “a significant and substantial negative price response.”

If we are to make the assumption that heavy drinkers are responsible for most of the external costs of alcohol consumption, then raising the tax on alcohol will deter consumption for exactly the wrong group. Pricing according to some aggregate calculation to find the “marginal” external costs across the whole population could actually worsen economic efficiency. The tax would be too low for heavy drinkers, but way too high for casual drinkers.

Conclusion

Standard economics, which considers the external costs of alcohol consumption, makes a strong a priori case for government action to “price in” these costs. But German Lopez’s article does not get us any closer to understanding what the correct way of accounting for these effects is. And if taxation, his analysis does not help us ascertain what the tax rate should be.