The Case for Centripetal Taxation

If you are not interested in economic philosophy you can skip this explanation and see Centripetal Taxation in action.

Centripetal Taxation is any tax system that pushes incomes toward the middle; centrifugal taxation is any tax system that pushes incomes away toward the extremes, where “the rich get richer and the poor get poorer.” Setting aside compelling moral arguments for helping the less fortunate, there are strong economic and political reasons to favor the former over the latter. I shall attempt to make the case for Centripetal Taxation with—except for the occasional internal reference—references only to Wikipedia, and using no mathematical equations. I love a beautiful equation as much as the next guy (see the math), but the problem with economic modeling equations is that many of them are quite silly models of the underlying systems, and modeling equations once stated have a tendency to take on a life of their own. Also, I've been told that lots of people don't like equations as much as I do.

It is not a coincidence that experiments with centrifugal taxation, like those in the 1920s and 1980s, are immediately followed by extreme boom-and-bust economic fluctuations, and periods of Centripetal Taxation, such as that of the United States in the 1950s and 1960s, lead to relatively healthy and stable economies—although I think we can do much better.

Let's imagine an economy as a complete graph. Each node in the graph is an economic actor. Each node contains two silos. Silo One contains the node's valuable stuff: land, clocks, rights of extraction, skills, labor capacity, etc. Silo Two contains money, which is not valuable in its own right, but constitutes claims (subject to negotiations) on the stuff of others.

Can wealth be created? If so, how is it created? To answer these questions, let's first start with an awkwardly absolute abstract analysis of what wealth is. All the stuff, all tangible wealth, comes from the Earth and the Sun. This is not some fuzzy hippie sentiment. It is a concrete fact (OK, sure, maybe asteroid mining, but you get the point). Wealth from the Earth is finite; wealth from the Sun is renewable but finite in a given time period. If we naïvely define wealth as just this physical stuff, economies would appear to be a zero-sum game, and creating wealth would be impossible. But wait! What did we mean when we referred to “valuable” stuff? We meant it had the real or expected ability to produce well-being, or happiness, (for Epicurus it was ἀταραξία). Call it what you will, it is in fact the only true measure of value and thus of wealth. It is Real Wealth. All of what we conventionally think of as wealth is just a means to it. It has the amazing property, furthermore, that it can spontaneously increase without proportional limited-resource input, and can just as easily decrease. This opens up the possibility of large net increases or decreases in the wealth of a nation, independent of the Earth or Sun. Let's represent this sense of well-being in our graph as the brightness of a node. The brightness of a node is only loosely correlated with the contents of that node's two silos, but the exact same physical object, introduced into two different nodes, can produce radically different brightness responses, largely (inversely) correlated with what is already in the nodes' silos (see marginal utility). The real wealth of a nation is the aggregate brightness of its nodes, and here then is how wealth is created: from the Earth by extraction, from the Sun as a collectible gift, from transformations of existing matter or energy into more valuable forms, from moving stuff to nodes where it has higher marginal utility, and finally…spontaneously, from nowhere.

Utilitarianism is doomed as a guide to individual action because judging outcomes of small actions in a system unbounded in space and time is humanly impossible. Our quasi-utilitarian graph-brightness maximization is not doomed because judging outcomes in macroeconomics is far easier. We need not be worried—as the individual must be—that, for example, the person we just saved from drowning might some day murder a child, who, if they had grown up, would have become a suicide bomber, one of whose victims…you get the idea. We need concern ourselves only with aggregates of approximate measures of individual well-being in a reasonably well-bounded measurement domain. We have some good rough empirical measures of success. We could certainly devise better ones, and mass demonstrations or revolutions are usually a pretty good sign of failure.

A quick aside about monetary policy: good monetary policy should aim at making the sum of all the money in all the Silo Twos accurately reflect the value of all the stuff in all the Silo Ones in accordance with the prevailing preference for liquidity. In the short run, a wave of unreasonable nervousness can be offset by increasing the money supply, and unreasonable ebullience can be offset by decreasing it. A good measure of inflation is essential to this task since the inflation rate is the most important metric for gauging the accuracy of the money supply's “shadowing” of real wealth (see the CPI for an index made sub-optimal by bizarre notions like “owner's equivalent rent”). No amount of monetary manipulation can offset the effects of an unproductive economy in the long run though, so when you see a low employment rate, be very afraid of the real system-wide loss it represents, and never send to know for whom the bell tolls…

Let's think for a minute about the problem of demand. We normally think of demand as a pulling, but in our graph model it is more of a pushing. One node initiates a transaction by pushing something to another node. That node responds by pushing something back. As an example let's imagine a woodworker. A buyer pays him some money for a table. The Sun and Earth have interacted to produce a tree to which he has some extractive right. He cuts down the tree and employs his tools, skill and energy to produce a table, which he conveys to the buyer. He has transformed matter and energy into a more valuable form. If he also is proud of making a beautiful table, and has the added satisfaction that he negotiated a fair price for it or that the buyer will enjoy it, the value of those intangibles might equal or exceed that of being able to pay for something he desires with the money he earned (although the joy of that anticipation should not be underestimated). The transaction has created wealth.

Notice a certain artificiality to this example, though. It has a strange chronology. Usually a woodworker does not make a table in response to being paid. He normally builds a table which he does not need for his own use using materials he pays someone else for out of his savings. In order to do that he needs to believe that he will be able to sell the table or that he has sufficient stored wealth that he can survive not selling it, and that the probability of selling it multiplied by the expected reward is greater than the up-front investment he will need to make (sorry, that was almost an equation). Absent those conditions, he will not buy the wood, and the wood-seller will experience a similar lack of demand. Remember it was the transaction that created the wealth. An insufficiency of nodes in the graph pushing out value to other nodes, that is, an insufficiency of initiated transactions, of demand, slows the production of wealth. The entire graph grows dimmer. Our woodworker beats his children, or lies around depressed or getting drunk. He is a victim of that most pernicious of system dynamics: a positive feedback loop.

Here is the problem: positive feedback loops are built into certain systems, including market economies. In its correct form government is the indivisible us; it is the aggregate will of all its citizens together. The prime task of government is administration of what we all hold in common: providing for the common defense, caring for the air and water, and, since a healthy economy is a benefit we all share, tending the economy for the common good. It is the job of a responsible government to constrain fluctuations of aggregate demand, to act against the positive feedback loops that are built into market economies, to push back against the irrational exuberance of bubbles and against the demand shock of large numbers of nodes in the economy increasing their risk aversion after discovering—or even incorrectly believing—that they are facing dangerously weak demand from the other nodes or that their silos contain less than they thought. Continuous-function Centripetal Taxation achieves this automatically because it provides counter-pressure to the positive feedback of bubbles and busts, largely obviating the need for extensive social programs and policies, with their attendant central planning, bureaucracies, and potential unintended consequences.

In the traditional course of a bubble, taxes are cut near the bubble's peak, as revenues from the increase in apparent wealth start to generate a government surplus. The public almost always loves a tax cut, even when it is a bad idea, so mouthing demagogic phrases like “It's your money!” the government cuts taxes (see the Bush Tax Cuts). This of course further fuels the bubble, and leaves the government without a surplus when the inevitable bust arrives. It then has only two options, both of which are artificial and short-term: increase the money supply and/or finance the needed fiscal stimulus out of deficit spending. To be fair, there is a third option, a position much loved in certain quarters: declare the destroyed economy with all its attendant misery and unproductiveness—the catastrophic loss of real wealth—a Good Thing. Declare that the only pathology here is the bubble, not the bust. This arbitrary asymmetry is the position's fatal flaw, and even setting aside the general smug armchair meanness of the position, the flaw is truly fatal.

With Centripetal Taxation, the emergency government debt spike that is the normal unfolding of the boom-bust scenario need never occur, because a well-chosen set of taxation parameters would generate a surplus during the counter-bubble phase that would then automatically be brought to bear during the counter-bust phase, and a continuous S-curve taxation function provides tax relief exactly where it's needed most, to taxpayers “sliding down” the curve.

“Wait a minute!” you say, “It's fine that Centripetal Taxation pushes back against poverty and economic disaster, but doesn't it also make getting Obscenely Rich almost impossible?” Even though the parameters of the equation can be set such that it is turned into a flat tax, the result indeed would not qualify as Centripetal Taxation, and—at the other extreme—a top tax rate of 100% and an excessively generous basic income might have some socially unhealthy effects. At my current favorite settings: a $100,000 central income, an 80% top rate, 10% bottom rate, and $5,000 basic income, few people are likely to forego the pleasures of remunerative and otherwise-rewarding work if it is available, but yes: becoming Obscenely Rich would mostly disappear as a realistic dream. Is this a bad thing though? What we create is a concretization of why we create it. If we create something intending to make something beautiful, or to tell the truth, or to help the weak, or to right a wrong, we will tend to make something beautiful, or true, or kind, or just, increasing real wealth. If we create something intending to get Obscenely Rich, we will make something stinking of greed; we will viciously extract and exploit and cheat, often decreasing real wealth. A rich person is also a sinkhole for resources because of the radically reduced marginal utility of each input, so the presence of rich people in an economy destroys real wealth. And finally, money is power. It is the stored ability to affect the physical world. People who already have a surfeit of power cannot be relied upon to voluntarily restrain themselves, to refrain from using that power to get more. This is another built-in positive feedback loop, and it actually constitutes a threat to the very existence of democracy. It therefore is another responsibility of a skillful market-based democracy to gently but firmly exert pressure against the over-accumulation of money and of stuff. So I will answer my own question. Is this a bad thing? No, it is not a bad thing. It is, in fact, very very good.

See Centripetal Taxation in action.