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All taxing and subsidization is distortionary; but some methods are less distortionary than others. Imposing a tax on "everybody" and using it to pay for a public service dampens economic activity, but at least doesn't distort one industry relative to another. Imposing special, industry-specific taxes, however, dampens demand and investment in that industry relative to the rest of the economy.

Take tobacco taxes, for example. We put special taxes on tobacco because we don't want people to smoke, and we want to discourage people from smoking. Taxing tobacco effectively raises prices, which reduces demand. Various governments employ similar taxes to discourage things like soda, sugary foods, etc. This is a well-understood concept: you put extra taxes on things you want to discourage (relative to the rest of the economy).

Paying for rural telecom by putting a special tax on telecom service achieves exactly the same effect. It increases the price of service, reducing demand and reducing investment (relative to the rest of the economy, which does not bear that tax). But in theory, telecom infrastructure is something we want to encourage, not discourage.

It's even worse when you impose a general public obligation on individual service providers. For example, instead of paying for universal healthcare with general tax dollars, you could simply direct hospitals to treat poor people for free. Nobody does that--they pay for the broad public benefit with equally broad public taxes. But we do it for telecom--we tell companies that in order to be allowed to offer any service in a city, they must shoulder the burden of building out infrastructure even to neighborhoods where few people could afford to subscribe (i.e., neighborhoods that can only be served at a loss). That essentially makes it impossible to have a "minimally viable ISP." You can't compete with an incumbent by stealing away customers neighborhood-by-neighborhood. If the government simply let companies build infrastructure where it was profitable, and built subsidized infrastructure itself using general tax dollars where it was not, you could have that sort of competition.




> you could simply direct hospitals to treat poor people for free. Nobody does that

Actually, I believe that's exactly what happens in the US with emergency departments. Although it supports your point about such a practice being distortionary, it also draws attention to the fact of the sheer complexity of all this.

That's mostly what bothers me about seemingly-simple statement or analogies about economics (or, really, economic theorizing in general), that the reality is far more complex and interconnected.


It's not just emergency departments. I worked for a hospital system in Maine. We provided a significant amount of free care (emergency and otherwise) to those with a qualifying income level as part of a state program.


That sounds very much like Medicaid, or are you saying that the state mandates that the cost of the care come out of the "pocket" of the hospital?


>Imposing a tax on "everybody" and using it to pay for a public service dampens economic activity

Yes. That's why we have no interstate highways to move goods around, spurring commerce.

Oh, wait...


And what is your point?

Yes, taxes to pay for roads do indeed discourage economic activity.

This is a cost.

And the benefit that we get is the roads.

And in this case the benefits outweigh the costs.

But just because the benefits outweigh the cost doesn't mean that the cost doesn't exist.


And even people who don't drive consume goods that are distributed by trucks.


Correct. And?

Yes roads have benefits. They also have costs.

The benefits are greater than the costs, but we should be aware that the costs still exist.


If the benefits exceed the costs, it’s hardly fair to argue that the program slows economic activity.


Slowing economic activity IS the cost.

And the benefits outweigh the cost.


Yes. And when a program's benefits outweigh its costs, it seems weird to say that the program is a damper on economic activity.

In other words, if Option A is "get zero dollars", and Option B is "spend $1 to get $2", it is unfair to complain about B's "cost" (spending $1) in isolation.




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