New Study Shows Why ‘Taxing the Rich’ Isn’t So Straightforward

 A common rallying cry on the left is that we can fund our social programs if we just “tax the rich.” While popular, this slogan is far from a real solution for the country. As has been pointed out elsewhere, if you confiscated all the wealth of every billionaire in the US, you wouldn’t even have enough money to run the government for a year. Our fiscal problem is a spending issue, not a revenue issue.

However, this isn’t the only problem with the proposal. It turns out that “tax the rich” is easier said than done.

A new working paper put out by the National Bureau of Economic Research (NBER) examines the impact of a tax system targeted at the rich. Researchers Nicolas Ajzenman, Guillermo Cruces, Ricardo Perez-Truglia, Darío Tortarolo, and Gonzalo Vazquez-Bare examine a new progressive property tax in Tres de Febrero (a city in Argentina), a system that effectively increased taxes on the rich while decreasing taxes on the poor.

How does this study show an issue with tax-the-rich sloganeering? To understand, we’ll have to consider the work of economist Art Laffer.

The Real Political Economy of Taxes

It’s simple to say, “I want to increase taxes on the rich.” Art Laffer’s work highlights how that desire may be easy to hold but hard to implement.

Laffer was famous for plotting a curve (famously called the Laffer curve) that showed the relationship between tax rates and tax revenues. Laffer’s insight was simple: as tax rates increase, tax revenues increase—at first. However, once tax rates go high enough, people are increasingly incentivized to avoid paying them, with the result being that tax revenues might actually start going down as rates go up. In other words, a tax rate of, say, 40 percent, might bring in more money to the government than a rate of 60 percent.

The Laffer Curve | Image Credit: Bastianowa via Wikimedia | CC BY SA 2.5

Avoiding taxes comes in many forms. One way is simply to earn less income. If you get taxed at an extremely high rate, such as losing 80 cents of every dollar you earn, you’re unlikely to work as much as if you only lose 20 cents for every dollar. If tax rates are pushed high enough, tax revenues will fall because people will engage in less income-generating activity.

Economic laws are simple. If you tax something, you get less of it. If you tax work, people will work less.

Another way to avoid taxes is to minimize your taxable income. This can happen legitimately or illegitimately. A legitimate way to lower your taxable income is to take advantage of accounting maneuvers like deductions. An illegitimate way to lower your taxable income is by not reporting income to the government. We can think of this as “non-compliance” with tax laws.

As tax rates increase, people will invest more resources into avoiding their taxes both legally and via non-compliance. Thus, when tax rates go high enough, this leads to lower tax revenue. This is the fundamental insight of the Laffer curve.

Non-compliance and Fairness

With this in mind, we can understand the results of the study of the Argentinian city. The authors report, “We find that reducing taxes for poorer households increases their compliance while increasing taxes for richer households decreases their compliance.” The logic behind the Laffer curve holds up. Higher taxes means lower compliance.

Specifically, they find that “a 1% reduction in the tax rate for the poor increases their compliance by 0.17% … Conversely, a 1% increase in the tax rate for the rich reduces their compliance by 0.36%.”

Interestingly, in the conclusion of the paper, the authors refer to this as an asymmetric response between the rich and the poor:

Our analysis reveals asymmetric responses to tax rate changes across income groups: tax reductions for lower-income households significantly increase their compliance rates, while tax increases for high-income households lead to decreased compliance.

However, there is nothing asymmetric about this from the perspective of economic theory. Both the rich and the poor households’ behaviors are perfectly consistent with the economic logic that underlies the Laffer curve. As you increase the tax burden on people, they have a larger incentive to avoid taxes. As you decrease tax burdens, the risk of non-compliance becomes larger relative to the benefits.

The authors go beyond examining compliance alone. Another part of the working paper is what people do when they are informed about the effect of the tax change.

As you’d expect, not all taxpayers in the study are politically informed enough to know that there has been a change. So the researchers examine the effect of informing voters that the new tax system is progressive. The results are interesting.

First, both rich and poor households claim to recognize the change as one that improves the fairness of the tax system. Furthermore, being informed of this change in and of itself appears to improve the tax compliance rates of poor households. However, the same is not true of rich households.

According to the paper, the authors found no significant increase or decrease in rich-household tax compliance upon receiving information about the progressive nature of the new tax system.

Taxing the Rich Is Harder than It Looks

The study’s findings are interesting for a few reasons. First, they highlight that talk is cheap when it comes to taxes, and this highlights one major issue with progressive tax policies. Many supporters of taxing the rich in theory will increase their non-compliance when the bill comes due. In fact, it may be the very richest of the group who are most able to do so.

This last point highlights a major issue with the plan to bring prosperity to the masses by taxing the most well-off. Ultimately, the government can decide the rate at which they want to tax rich households, but they can’t determine the revenue they collect from them.

Presented with these facts, it’s likely that the tax-the-rich crowd will just argue that we need to crack down on the rich to ensure compliance. But this is no silver bullet. Cracking down is expensive, so any attempt to increase revenues by increasing compliance is going to be offset (at least to some degree) by the associated expenses.

Furthermore, even if you eliminate some forms of non-compliance, others will arise. When you impose costs on people, there is a profit opportunity for those who find a way around the costs.

Finally, even if you could close off all avenues at low cost, the last method of tax avoidance is unstoppable. People can always stop working—and rigorous enforcement will push more people to take that option. As such, there will always be a tax rate beyond which you lose tax revenue. The Laffer curve lives.

Article by: Peter Jacobsen

Peter Jacobsen teaches economics and holds the position of Gwartney Professor of Economics. He received his graduate education George Mason University. His research interest is at the intersection of political economy, development economics, and population economics.

This article was originally published on FEE.org. Read the original article.

How Hobbies Can Save Us from Over-Specialization

 As we roll through the middle of February, we’re getting to the point of the year where most people start to abandon their New Year’s resolutions. According to research by Dr. Michelle Rozen, 94% of people fail their resolutions within two months. However, this doesn’t mean resolutions are a bad thing.

New Year’s resolutions make good economic sense. People want to improve, but monitoring whether you’ve actually improved in something is costly. As such, using the beginning (and end) of a year as a benchmark provides a low-cost way of ensuring self-monitoring. Maybe many fail, but New Year’s provides a good place to start either way.

For many, New Year’s resolutions involve reading more or losing weight. However, I’m noticing an increasing number of people centering their resolutions around hobbies.

New Year’s resolutions and hobbies often go hand in hand. Among my friend group, people are pursuing resolutions of improving woodworking skills, learning how to work with glass, and honing jiu-jitsu skills. Recent Pew Research data suggests that, of the people who make resolutions, 55% make resolutions about hobbies.

I see hobby-culture as an important part of our increasingly specialized society. While specialization has obvious upsides, we can also find clear downsides to the tendency. Hobbies act as a perfect hedge against the downsides of specialization.

The Benefits of Specialization and Why It Matters

Specialization as an idea comes at the very beginning of economics as a science. In Adam Smith’s book An Inquiry into the Nature and Causes of the Wealth of Nations, he introduces the idea of a factory that manufactures pins. He argues that if each person learns to make a small part (1/10th) of a pin, they will be much more productive:

Each person, therefore, making a tenth part of forty-eight thousand pins, might be considered as making four thousand eight hundred pins in a day. But if they had all wrought separately and independently, and without any of them having been educated to this peculiar business, they certainly could not each of them have made twenty, perhaps not one pin in a day.

Economists have recognized two reasons why specialization improves productivity. Armen Alchian and William Allen present these two arguments in their textbook Universal Economics. The first reason specialization improves productivity is that some producers naturally have a lower production cost. As such, specialization allows individuals to produce that which is the lowest cost for them.

For example, a farmer in the US does not have an adequate climate to produce coffee for as low of a cost as a farmer in Honduras. Likewise, the Honduran farmers would have to sacrifice acres perfect for coffee growth in order to grow corn. To remedy these issues, the US farmer can specialize in corn while the Honduran farmer can specialize in coffee, and then the two can trade.

The second source of the gains from specialization comes from learning by doing. People improve at just about any action via repetition. The same is true of production. If a tailor is responsible for producing all kinds of clothes, he will have relatively limited time to learn how to produce suit jackets well. If, instead, he only produces suit jackets, it seems reasonable to think this specialization will improve his skills.

These benefits of specialization have made it commonplace in the modern world. Whereas historically everyone needed to know how to grow crops, mend clothes, chop down trees, and hunt for food, nowadays most people outsource these roles to experts who specialize in them. It’s unlikely that our society could have risen to its current heights of wealth without specialization.

Hobbies: The Antidote to Over-Specialization

Libertarian author Robert Heinlein provides a different perspective on specialization in his book Time Enough for Love:

A human being should be able to change a diaper, plan an invasion, butcher a hog, conn a ship, design a building, write a sonnet, balance accounts, build a wall, set a bone, comfort the dying, take orders, give orders, cooperate, act alone, solve equations, analyze a new problem, pitch manure, program a computer, cook a tasty meal, fight efficiently, die gallantly. Specialization is for insects.

What are we to make of Heinlein’s quote here—does this undermine the importance of specialization in society? I don’t think so.

Nowhere does this quote imply that specialized jobs are without benefits. Rather, Heinlein appears to be arguing that people should be well-rounded regardless of their careers. Heinlein is saying that every man should be a Renaissance Man.

So how can someone whose job it is to program computers learn how to design a building, write a sonnet, or build a wall? Put simply, many of the activities Heinlein lists above are hobbies. Admittedly, some of the things on the above list extend beyond the realm of hobbies (I don’t know any amateur bone-setters), but many people learn these things today through their own interests.

One of the benefits of hobbies, then, is that they insure us against the biggest downside of specialization: fragility. If everyone only knows how to do the work associated with his or her own station, what happens if someone doesn’t show up to his station? The whole production process gets stalled.

Imagine, for example, if delivery trucks stopped coming to your local grocery store. How would you get food? Likely, many people don’t have a good answer to this question. Those who have taken up hunting or forestry as a hobby likely do have a good answer because they’ve achieved diversification through hobbies.

This is an extreme example, to be sure, but it is representative of the downside of specialization and the attendant upside of hobbies.

We can imagine a milder example (one that is personally relatable). Let’s say a winter storm strikes and all your local auto repair shops are backed up. The snow causes something on the bottom of your car to become dislodged, and it occasionally scrapes on the pavement.

Maybe, once upon a time in history, car owners would know the necessary information to diagnose the problem themselves. However, in the era of specialization, you are used to taking your car to a specialist. What’s the remedy here? Well, you could wait several weeks for an auto repair shop, or you could call on a friend who is a car hobbyist.

Your friend might not be a professional, but his experience might be enough to make up for your ignorance. At least that’s how it worked out for me, and this example shows exactly how hobbies build resilience.

So if you’re not sure what to do for a resolution this year, get yourself a hobby. Heinlein’s list provides a pretty good idea of where to start.

Article by: Peter Jacobsen

Peter Jacobsen teaches economics and holds the position of Gwartney Professor of Economics. He received his graduate education George Mason University. His research interest is at the intersection of political economy, development economics, and population economics.

This article was originally published on FEE.org. Read the original article.

Game Over for Ownership?

A movement is growing in Europe about consumer protection in the video games industry. A citizen’s petition in the EU recently reached 1 million signatures, meaning that EU regulators will consider the issue. That petition has a simple message: stop killing games.

The issue at hand is that game studios have been selling games as “licenses” and then revoking those licenses without warning. While online multiplayer games have always had a problem with server shutdowns due to maintenance costs, developers are now tying even single-player games to online functionality.

For example, Ubisoft shut down the servers for The Crew (which at one point logged 12 million players), leaving all forms of the game (including the solo campaign mode) unplayable. This problem reflects a larger trend of games shifting from physical discs owned by consumers to online-only software licensed to users.

The petitioners argue that studios should provide some sort of “offramp” for buyers to enjoy their games individually, even when online support ends. The petition and problems in the industry deal with both single-player and multiplayer games.

Are these demands a call for fair consumer protection or deleterious regulations?

Games and Intellectual Property

To unpack this issue, we need to consider the economics of property rights. Economist Armen Alchian argued that there were three core attributes of ownership:

1. The ability to use property.

2. The ability to sell property.

3. The ability to derive income from property.

When I was a kid, game owners had all three of these. If you bought a game, it came in a physical format. You could play it, sell it, or even rent it out (like Blockbuster or GameStop did). As games have transitioned away from physical discs, attributes 2 and 3 have disappeared.

What’s unique about the licensing model is that studios are now even limiting on attribute 1. Gamers were already upset by the slow death of the used-game market, but they’re even more unhappy with companies destroying their ability to play games they’ve paid for.

This is the fundamental difference between a product and a license. When you buy a product, you maintain a permanent ability to use the product. A license gives you limited or contingent access. The rallying cry of license opponents was recently echoed by Minecraft creator Markus Persson (also known as “Notch”):

Minecraft creator Notch responded to Pirate Software’s disapproval of the Stop Killing Games campaign

"If buying a game is not a purchase, then pirating them is not theft" pic.twitter.com/iVzAWSsFPK

— Dexerto (@Dexerto) July 9, 2025

Notch’s sentiment is not legally accurate. That is, you can still be charged for a crime for pirating games. But the deeper sentiment speaks to the fundamental issue. Game studios can treat products as mere licenses because governments have decided that the code belongs to the company, not the consumers.

Even though this movement is about games, the implications extend to the software industry in general. Increasingly, all kinds of programs are adopting license models. Products like Adobe’s Photoshop are no longer available for purchase, only through subscription. Stop paying, the software stops working. While Microsoft Office does still allow one-time purchases, they include license options, and one wonders how long before they make the transition to license-only.

Books are another example. When you buy a physical copy, you can generally do what you want with it, for as long as you like. You can read it hundreds of times, lend or give it to a friend, mark it up, fold the corners, copy down quotes, or even rip the pages out and use it for kindling. The book belongs to you, and you have use rights. But when you buy an ebook, you’re getting a license, and access may be revoked.

Likewise with games, where intellectual property law means the code to the game is not yours. You can’t just copy the code of a licensed game and modify it to play offline. Doing so, in general, violates the license agreement.

Intellectual property law gives software companies a greater ability to influence the entire lifecycle of their products than any company has ever had. If the government didn’t enforce these laws, companies would be unable to force consumers to lose games because consumers could copy and modify the code.

It’s not my intention in this article to argue whether intellectual property is illegitimate. FEE has published several articles on this over the years. I’m making a very modest point. Some might argue that the “Stop Killing Games” movement is about imposing unfair regulations. I disagree. Intellectual property law is inherently a regulation on consumers. Modifying it to impose responsibilities on companies is not adding new rules. Rather, this movement simply seeks to adjust current regulations such that they are less one-sided in protecting companies.

If you, like me, are a supporter of free markets, then it may be tempting to think this movement is just another EU regulatory overreach. But current intellectual property law already attenuates consumers’ ability to use the products they purchase, so modifying the law to restore some of their ownership rights could be a fair correction

Article by: Peter Jacobsen

Peter Jacobsen teaches economics and holds the position of Gwartney Professor of Economics. He received his graduate education George Mason University. His research interest is at the intersection of political economy, development economics, and population economics.

This article was originally published on FEE.org. Read the original article.