Response to JJ Jackson's the Spiraling Cost of "Free"

This article is response to JJ Jackson's The Spiraling Cost of "Free"

Jackson begins with a simple enough premise. Nothing is free. And this is true. Most freebie web sites sell your e-mail address to marketers. You pay for the freebie with spam mail. Google seems free, but you pay for it by looking at paid advertisements (all those links on the right hand side of the page). Agreed, nothing really is free (although Google feels pretty close to free).

Jackson then uses this "nothing is free" premise to argue against redistributive tax policies - in oversimplified terms, that we shouldn't tax the rich to help the poor. The logical transition is actually quite compelling. The problem is that, while Jackson uses some theory and logic, these only thinly disguise Jackson's pure opinion.

For the most part, Jackson relies on the "trickle down" theory. The idea is that the rich should have lots of money since they will spend this money, which eventually even trickles down to the lowly peons. This idea appears similar to an economic concept called the money multiplier. The idea is that a theoretical tax cut that costs the government $1,000 in lost revenue will be used to purchase something. So Adam pays $100 less in taxes, saving $10 and spending $90 buying something from Bob. Bob saves $9 of his $90 and spends the other $81 buying something from Colin. This continues, and everybody essentially has more money as a result of the tax cut. Depending on how much people save, the $1,000 tax cut ends up injecting over $2,000 in benefits to the taxpayers. These concepts have been studied empirically (in the real world), and are generally true. Jackson probably even knows a thing or two about Keynesian economics.

Sound confusing? Don't worry. Here's a quick recap:

Money multiplier theory - $1 of tax cut leads to more than $1 of benefit for taxpayers, since part of the original $1 passes to others.
Trickle down theory - If the rich are given $1, everybody will benefit by more than $1, since part of the original $1 "trickles down" to the poor.

Really, the theories aren't that different.

It's reasonable so far, but then Jackson warps the two theories together to fit his/her beliefs, creating a sort of trickle down money multiplier conglomerate. Jackson argues that redistributive taxes are bad because they kill the trickle down multiplier effect. In other words, money would have been in the hands of the rich, which would then trickle down to the poor and multiply. But if you tax the rich and give it to the poor, you lose the multiplier, essentially wasting money. Again, nothing is free.

Sadly, this terribly warps reality. Alone, the theories are true. Money given to the rich does trickle down to the poor. Also, tax cuts do multiply through an economy. However, taxing the rich and giving to the poor does not cut the multiplier. There is no trickle down money multiplier.

Here's why. You tax the rich and give to the poor. The rich now cannot spend their trickle down money, but the poor now spend more. $1 is taken from the rich person, and $1 is given to the poor person. The poor person than saves a little bit, but spends most of the $1 to purchase goods from another person. In an unfair tirade against the poor, Jackson forgets that the poor are entitled to the same multiplier that the rich receive. Based on this logic, Jackson's conclusion is flat out wrong.

But it gets worse. Jackson's logic actually supports the opposite conclusion. If I am given a $100 tax and I save all $100, is there any multiplier? No, my $100 doesn't pass to anybody. However, if nobody saves any of their money, the multiplier becomes as large as can be. The more people save, the lower the multiplier. So to maximize things, you want the money in the hands of the people who aren't going to save it. Who do you think saves more, the rich or the poor?

The rich clearly save more than the poor, which means we should give more money to the poor to get the most out of the multiplier effect. We actually waste money by not taxing the rich to give to the poor, since the rich are more likely to stash money away while the poor will go out and spend the money.

Jackson simply does not want to tax the rich to provide for the poor, and uses faulty logic to justify that opinion. Hopefully we will not confuse fact and opinion again.