[Imagine] a local and successful bottled water company located in the Dominican Republic has been serving Haiti, its neighbor, for many years. Although it was unaffected by the recent earthquake, it decided to double the price of its water following the earthquake in order to capitalize on the tremendous emergency demand for bottled water in the absence of safe municipal water and the fact that its overseas competitors all had trouble getting their water to the area.
The ethics of the company's decision the company would have to have applied in making its decision...
Utilitarianism assesses the consequences of actions and the effect they have on all parties involved. The ethical way to behave in a given situation is to maximize social welfare by producing the greatest overall good after calculating the costs and benefits of the action. The Haitians receiving overpriced water will suffer more from the lack of free choice than the bottled water company will benefit from the extra money. The company, doubling the price of water, acted unethically.
Deontology assesses the action itself without considering its consequences. Ethics are marked by universal principles that set absolute rules for right behavior. By means of categorical imperatives, moral behavior is guided by overriding rights and duties that exhibit people’s respect for the intrinsic value of others. It is ethical for people to use each other as a means to achieve their own purpose only if the actions done are mutually beneficial to all parties involved. It is unethical, however, to use others only as a means to accomplishing their own purposes with no mutual benefit attached. The company, doubling the price of water being sold to earthquake survivors, removed the free will, an ethical value, of one of the parties, thereby acting unethically.
Virtue ethics assesses the potential of human beings and how they can cultivate their good habits. People develop their virtues by being exposed to valued moral behavior in their communities. As virtue ethics is a matter of moral characteristics ingrained within a community, and the maximization of profit is a virtue encouraged by all enterprises, a group that forms a community, doubling the price of water sold to victims of the earthquake is an ethical way to act.
The company, making the decision to increase the price of water sold to the Haitian victims, must have applied the theory of virtue ethics. Doubling the price would be considered unethical according to the theories of utilitarianism, as it causes more harm than good. It would be unethical according to the theory of deontology, as it is never acceptable to use people in ways that are not mutually beneficial. According to the theory of virtue ethics, however, the company would be acting ethically, as doubling the price to increase profit when demand is so inelastic is a moral characteristic ingrained within the community.
Friday, February 19, 2010
Sunday, January 10, 2010
The Laffer Curve
This post is a response to the comment on the last post.
First of all: thank you for posting. I love reading comments and learning new things!
It is important to objectively analyze whether the source quoted is reliable or whether it is biased in any way.
The CATO Institute’s mission, according to its own website, is “to increase the understanding of public policies based on the principles of limited government, free markets, individual liberty, and peace.” Keep in mind that the institute has chosen the principles before analyzing the data.
Notice how the institute is funded and ask yourself if they may have a bias or a conflict of interest. CATO, once again according to its own website, “receives approximately 75 percent of its funding from individuals, with lesser amounts coming from foundations, corporations, and the sale of publications.” Ask yourself, does the institution truly have a purely objective view when stating assumptions?
Last comment about the source itself: CATO labels itself as a libertarian group. Keep in mind that the members of this group are strong believers of the famous phrase “starve the beast,” referring to the government.
Now, on to explaining the Laffer curve:
A government that taxes its citizens at 0 percent will have revenue of 0. People work hard to make money when they receive the full fruit of their labor. As the tax rate increases, people will work harder in order to achieve the same level of income, despite giving some of it away to the government to be used to supply public goods. If that government, however, taxes the citizens at 100 percent, its revenue would once again be 0, as nobody would work. The mystery of the Laffer curve is: what is the inflection point on the graph at which taxing cuts into the people’s incentive to work?
(There was a picture of the graph here. I am having difficulties uploading it, but you might want to look it up on google images)
Hang on through this complicated part; it gets simpler.
Here is what advocates of the Laffer curve believe:
The budget deficit is a function of government spending and taxes. An increase in the budget deficit will increase output. Thus, to reduce the deficit, government spending can be increased or taxes can be cut, increasing output. A tax cut can, according to the Laffer curve, stimulate output and raise revenues. An increase in government spending can increase output, causing taxes to increase. An increase in government spending will thus raise taxes and pay for itself. Spending may actually increase output so much that it increases revenue by more than the increase in government spending.
Now, it is important to assess whether this theory is supported by real world evidence.
Economists argue about the location of the inflection point on the Laffer curve. Conservatives typically (not all, of course) believe that incentives to work less are already being created at a very low tax rate. Liberals typically (also, not all) believe that a much higher tax rate is necessary in order to cut incentives of people to work.
Interestingly enough, Daniel Mitchell cites two tax reductions - one in the 1960s and one in the 1980s. Although his analogy is not apt, it is interesting to note one point. In the 1960s, when the tax rate was 91%, there was still high economic growth! For some reason, possibly war and post war efforts and therefore the Laffer curve may possibly have been inapplicable, people worked hard despite the overwhelmingly high taxes in light of this specific environment. In the 1980s, tax rates were lower, but still at 71%. Once again, it seems as though this did not work against the incentive to work hard. Now, the United States worries whether a higher rate than 30% will cut into people’s incentives to work hard. It is, of course, possible that it will; but it seems unlikely.
One point that we should remember when looking at the data is that economics does not happen in a lab “ceteris paribus,” with all else equal. We do not have a control group and we cannot control other factors. We may, therefore, not know which bad policy is responsible for an economic slump - it could be tax cuts or it could be protectionist measures. According to Charles P. Kindleberger, the prominent developer of the Hegemonic Stability Theory and the author of The World in Depression, the United States adopted protectionist measures in the 1920s, leading the world into the Great Depression.
The inflection point on the Laffer curve may also be different for groups with different economic standings and is, of course, affected by all available information. When I say “all available information,” I refer to the knowledge of what our taxes are paying for, how much we are each going to benefit from them, propagandas, and much more. Propaganda may come from political parties, religious leaders, or any group one may associates himself or herself with. Maybe, if conservatives convince the country that a tax that will pay for universal health care does cut into incentives, it actually will. Maybe, if the pope announced that we should be benevolent and consider this tax as charity, it will not dissuade people from working. Maybe, if liberals convince the people that they will all benefit from such a system, the inflection point would shift to a higher tax rate.
(I saw Paul Krugman, the Nobel Prize economist, several weeks ago at a conference in Baruch College. I asked him at the end of his speech the very same question. He answered: of course the Laffer curve exists, but we are nowhere near the point at which people will stop working.)
Here is a website that may interest you: http://www.cbpp.org/cms/?fa=view&id=692
Also, fun fact - It was in November 1974 that Dr. Laffer, then a young economist, drew a curve on a napkin during a conversation in a Washington bar, linking average tax rates to total tax revenue. That crude drawing soon came to be known as "The Laffer Curve," and it was quickly embraced by right-of-center economists and think tanks. For more information - http://www.pranaygupte.com/article.php?index=288
First of all: thank you for posting. I love reading comments and learning new things!
It is important to objectively analyze whether the source quoted is reliable or whether it is biased in any way.
The CATO Institute’s mission, according to its own website, is “to increase the understanding of public policies based on the principles of limited government, free markets, individual liberty, and peace.” Keep in mind that the institute has chosen the principles before analyzing the data.
Notice how the institute is funded and ask yourself if they may have a bias or a conflict of interest. CATO, once again according to its own website, “receives approximately 75 percent of its funding from individuals, with lesser amounts coming from foundations, corporations, and the sale of publications.” Ask yourself, does the institution truly have a purely objective view when stating assumptions?
Last comment about the source itself: CATO labels itself as a libertarian group. Keep in mind that the members of this group are strong believers of the famous phrase “starve the beast,” referring to the government.
Now, on to explaining the Laffer curve:
A government that taxes its citizens at 0 percent will have revenue of 0. People work hard to make money when they receive the full fruit of their labor. As the tax rate increases, people will work harder in order to achieve the same level of income, despite giving some of it away to the government to be used to supply public goods. If that government, however, taxes the citizens at 100 percent, its revenue would once again be 0, as nobody would work. The mystery of the Laffer curve is: what is the inflection point on the graph at which taxing cuts into the people’s incentive to work?
(There was a picture of the graph here. I am having difficulties uploading it, but you might want to look it up on google images)
Hang on through this complicated part; it gets simpler.
Here is what advocates of the Laffer curve believe:
The budget deficit is a function of government spending and taxes. An increase in the budget deficit will increase output. Thus, to reduce the deficit, government spending can be increased or taxes can be cut, increasing output. A tax cut can, according to the Laffer curve, stimulate output and raise revenues. An increase in government spending can increase output, causing taxes to increase. An increase in government spending will thus raise taxes and pay for itself. Spending may actually increase output so much that it increases revenue by more than the increase in government spending.
Now, it is important to assess whether this theory is supported by real world evidence.
Economists argue about the location of the inflection point on the Laffer curve. Conservatives typically (not all, of course) believe that incentives to work less are already being created at a very low tax rate. Liberals typically (also, not all) believe that a much higher tax rate is necessary in order to cut incentives of people to work.
Interestingly enough, Daniel Mitchell cites two tax reductions - one in the 1960s and one in the 1980s. Although his analogy is not apt, it is interesting to note one point. In the 1960s, when the tax rate was 91%, there was still high economic growth! For some reason, possibly war and post war efforts and therefore the Laffer curve may possibly have been inapplicable, people worked hard despite the overwhelmingly high taxes in light of this specific environment. In the 1980s, tax rates were lower, but still at 71%. Once again, it seems as though this did not work against the incentive to work hard. Now, the United States worries whether a higher rate than 30% will cut into people’s incentives to work hard. It is, of course, possible that it will; but it seems unlikely.
One point that we should remember when looking at the data is that economics does not happen in a lab “ceteris paribus,” with all else equal. We do not have a control group and we cannot control other factors. We may, therefore, not know which bad policy is responsible for an economic slump - it could be tax cuts or it could be protectionist measures. According to Charles P. Kindleberger, the prominent developer of the Hegemonic Stability Theory and the author of The World in Depression, the United States adopted protectionist measures in the 1920s, leading the world into the Great Depression.
The inflection point on the Laffer curve may also be different for groups with different economic standings and is, of course, affected by all available information. When I say “all available information,” I refer to the knowledge of what our taxes are paying for, how much we are each going to benefit from them, propagandas, and much more. Propaganda may come from political parties, religious leaders, or any group one may associates himself or herself with. Maybe, if conservatives convince the country that a tax that will pay for universal health care does cut into incentives, it actually will. Maybe, if the pope announced that we should be benevolent and consider this tax as charity, it will not dissuade people from working. Maybe, if liberals convince the people that they will all benefit from such a system, the inflection point would shift to a higher tax rate.
(I saw Paul Krugman, the Nobel Prize economist, several weeks ago at a conference in Baruch College. I asked him at the end of his speech the very same question. He answered: of course the Laffer curve exists, but we are nowhere near the point at which people will stop working.)
Here is a website that may interest you: http://www.cbpp.org/cms/?fa=view&id=692
Also, fun fact - It was in November 1974 that Dr. Laffer, then a young economist, drew a curve on a napkin during a conversation in a Washington bar, linking average tax rates to total tax revenue. That crude drawing soon came to be known as "The Laffer Curve," and it was quickly embraced by right-of-center economists and think tanks. For more information - http://www.pranaygupte.com/article.php?index=288
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