Posts
It was claimed that a single observation was all that was necessary to invalidate a hypothesis. However, this is not strictly the case. Karl Popper noted that the theory of quantum mechanics is statistical, that is does not state that an event will always take place under given conditions, but only gives a probability of that happening. Thus quantum mechanics is not strictly falsifiable. In practice, however, this doesn't present physicists with much of a problem since they rule out the possibility of extremely low probability events. For example if there were an event that according to theory would happen half of the time, and repeating the experiment several times reveals that it happens all of the time then most physicists would be inclined to believe that there was something wrong with the theory, even though there is a non-zero probability that the theory is correct and that it so happens that all of the experiment just happened to have the same result by chance.
Now with supply side economics the hypothesis is that for every tax rate there is some other tax rate that yields the same amount of revenue. It is difficult to see how Karl Popper's philosophy could be used to classify this statement as being anything other than metaphysical and hence outside of the empirical sciences. Empirical science, by Karl Popper's definition deals with falsifiable statements. The only way of falsifying this statement is to impose every tax rate between 0% and 100% inclusive under the exact same conditions, which is of course impossible. In fact we can only impose one tax rate at any one time, and the same conditions will not be repeated or occur in any different place. In order to conduct an experiment to shed light on any of this, we would have to take reasonably similar societies, isolate them from each other and then impose different tax rates on them. There are serious problems in all of these areas.
First we must produce identical societies or some reasonable facsimile thereof. No two societies are exactly alike. In addition to the impracticality of creating such societies we have the moral problem of whether it would be just to create identical societies even if we could. There is a certain value that we place on freedom. Forcing people to live in societies that are different from those that actually exist would interfere with this freedom. We would have to apply a large amount of unjust coercion in order to force people to live according to rules that would serve no other purpose than enabling us to conduct our experiment.
Isolating the societies would also present a moral problem. For instance technological advances in one society could not be used in another as this would wipe out any information about what impact different tax rates might have on technological progress. Of course once there is an advance in technology we would want as many people as possible to benefit from it. The result of isolating these various communities would be to make everyone worse off. That can hardly be seen as moral. People would not want to be so isolated. In addition to technology there is also the law of comparative advantage to consider. Different societies might be better at doing certain things. Even identical societies might benefit from developing differing expertise.
Next we must consider the question of implementing different tax rates on identical societies. Given that the societies are identical, they will want identical tax rates. To force them to accept different ones is inherently unjust. By whose authority do you insist that some people be governed by principles that they do not consent to? In addition to this we must single one group out for adverse treatment. The tax rate that some of our identical societies will experience will be closer to the optimum. Suppose you happen to live in the society that has a 100% tax rate. No one suggests that such a rate is desirable. They only want to do this to see what effect it will have. How would that make you feel?
Karl Popper classified statements that could neither be confirmed nor falsified by evidence as metaphysical. He pointed out that existential statements could be confirmed by a single observation, but could not be falsified. Universal statements could be falsified but not confirmed. Tautologies can be confirmed without any empirical evidence. A contradiction can be falsified without evidence. The negation of a tautology is a contradiction. The negation of an existential statement is a universal one.
Now if it true that the hypothesis of supply side economics is a metaphysical statement in the sense that Karl Popper used the term, this is also true of competing doctrines in economics. In fact the Austrian school of economics takes the position that economics is not an empirical science. They believe that the way to proceed in this field is to take self evidently true axioms and to extend our knowledge beyond these by logical argument, much as we do in mathematics.
Some will object that seemingly self evident axioms might nevertheless be false. Further, simply because we are not capable of finding as much evidence for economic hypotheses as we can in the physical sciences is no reason to abandon the project altogether. Perhaps a better approach would be to look at the evidence such as it is and see what light it sheds on the subject.
As a practical matter, supply side economics has been used to argue that a reduction in the tax rate is likely to result in an increase in tax revenue in the long term. A careful examination of the theory tells us that this is more likely to be the case the higher the tax rate is to begin with. Thus the best way of testing the theory would be a reduction in the top marginal income tax rate implemented in isolation. That is we should hold all other tax rates constant. This is something that is quite unpopular politically. In practice all reductions in tax rates have been across the board. Some have argued that the tax cuts disproportionately favored the rich. However, in order to use information about what actually happened to directly shed light on this question we would need to implement tax cuts that only directly benefit the rich. Lowering other tax rates will involve cutting taxes that are less likely to be counter-productive as far as raising revenue.
Another problem with the historical evidence is that the government also changes policy on things other than the tax rate. Differences in other things will produce their own effects. For example, suppose lowering the top marginal tax rate enables rich investors to keep more of their money and invest it. Suppose further that this investment will lead to faster economic growth, which will increase tax revenue in the long run. Now suppose that the government decreases the top marginal tax rate, holds all others constant and increases government spending. Now the rich will have more money to invest, but much of this additional money will go into financing the increased national debt. Now the reason why the lower taxes led to faster growth was that the money that the rich could keep would be invested in the private sector in order to provide capital for businesses. Now instead it will go into government debt. The growth will not take place, and it will seem that the theory will have been falsified.
Another approach to this problem is to use sophisticated statistical techniques in order to attempt to tease out the effects of raising the top marginal income tax rate from the effects of all other changes in taxation, government spending and so on. This approach produces much less certainty because different people will use different ways to try to compensate for the effects of various different aspects of government policy.
No comments:
Post a Comment