Laffer and Moore on state income taxes . . .

Art Laffer, of Laffer Curve-fame and president of Laffer Associates, and James Moore, a member of the WSJ's editorial board, take a sharp tone in their discussion of the impacts of state income taxes on economic growth. Check it out here.

They cite some figures and employ quotable phrases about how states have suffered from passing “soak-the-rich” laws like the Buffett Rule.

The authors judiciously wait until the end of their piece to acknowledge that low-tax states don't always outperform high-tax ones and that there is a possibility that factors other than taxes drive their analysis.

It’s impossible to comment on their analysis without knowing what data the authors used, but it seems clear they avoided complicating the discussion by introducing pesky economic concepts like Game Theory, diffusion and long-run equilibrium.

Interestingly, the authors use an example of smokers to make their point, saying, “Often people who smoke don't get cancer, and sometimes people who don't smoke do get cancer, but that doesn't mean it's smart to smoke. It's a dangerous gamble to raise taxes on capital and businesses to nearly the highest rates in the world and hope that nothing bad will happen”.

This example reminds me of one of Luke Froeb’s lectures about adverse selection and the economic logic of insuring smokers, or people who engage in risky behavior. Individuals moving to low-tax states may engage in riskier behavior, for example, by taking chances and starting more businesses. The really interesting discussion may be whether low-tax states encourage moral hazard because they know high-tax states actually insulate the nation from the full scale of their risky behavior.

What do you think?

The Power of Signaling

Having never seen the British game show "Golden Balls" myself, my understanding of the game play is limited to what I have garnered from the modern day fount of knowledge, Wikipedia.

On the show, 4 players compete in a round-by-round elimination game, accumulating money as they go through a mixture of cooperation and trickery (deceiptfulness?), with a player 'voted out' at the end of each round, while the Jackpot continues to grow.

In the final round, the two remaining players square off in a classic prisoners dilemma, each having to make a decision of 'Split' or 'Steal' with the possible payouts of 100%, 50%, or 0%.

Int his episode, the signalling of one player is rather unorthodox and  significantly influences the final result.

Check out the video (apologies for the poor sound level)

By signaling so forcefully his intention to 'Steal', he removed half of the other player's decision tree.  On the surface, the resulting options appear to be equally poor for the other player, a payout of 0 regardless of his decision, but the signaler then creates another option by offering to split the payout 'off-set' after the show is completed.  This creates a potential new result of [Split / Steal → 50% / 50%], now the only favorable option, thus forcing his opponent to choose 'Split'.  By pidgeon-holing his oppponent, he changed the game.

The real beauty of this ploy, is that the signaler was resolute in his position, never wavering in his 'Steal' position.  By not allowing any doubt to enter into the equation, the prisoners delimma is reduced to a simpler decision.

The final 'trickery' of switching up and playing the 'Split' was an easy choice for the signaler.  Having removed the option of 'Steal' from his opponent's plays, the signaler was able to guarantee the overall preferred settlement of an equal 'Split' of the Jackpot.

How would you have reacted if your opponent announced vehemently that he was going to play the 'Steal'?