Risk Markets And Politics

Thursday, March 22, 2007

Tax futures and the libertarian paradox

The libertarian paradox whereby free markets spur wealth creation which in turn supports the growth of the state suggests a potential issue with tax futures. Tax futures are hedging markets that predict future tax rates and could trade alongside more specific policy event derivatives. Such markets are naturally attractive to libertarians but, as with liberal institutions, we have to be wary of unintended consequences. This specific issue echoes the broader libertarian paradox and is summed up in this brief exchange with Patri Friedman last year:
Me: Yes, this is one of the deepest worries with ideas like futarchy or legislation-linked markets. The latter have a libertarian slant insofar as they mitigate the state's ability to redistribute wealth, but if they were actually widely used, these effects might be canceled-out — or worse. Maybe the state and its taxing/spending would balloon as it would be more tolerable given the recourse of hedging against it.

Patri: Well, we've already seen taxing/spending balloon because its tolerable. I think that's the greatest cause of the difference in tax rates between the 19th and 20th centuries. We are so rich that the half our money the government takes isn't worth that much to us. In the old days, people rioted over tiny taxes that meant a lot more to their standard of living.

There is no easy way to ensure against this danger, but its existence might actually make tax futures more attractive to those on the economic left. It is a "package deal" as Tyler Cowen says, using one of Rand's favorite colloqualisms. Cowen's bottom line is that, "human beings have deeply rooted impulses to take newly acquired wealth and spend some of it on more government and especially on transfer payments. Let’s deal with that."

Yes, let's, literally.


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