I say this with all the love in the world: economists have a special talent for taking certain economic ideas or concepts and finding the most counter-intuitive or confusing ways to describe them. For anyone other than an economist, the expression “good audiencesounds like “a good provided by the public sector”. Try stepping in and explaining that, no, to be a public good something has to be both non-rival and non-excludable, and you might get glassy-eyed.
This is one of the reasons why I like to find the ideas of economics clearly described or illustrated in works of fiction. When done right, it can help bring that “aha!” moment that makes an idea clear to someone in a way that charts, graphs, and technical verbiage simply cannot. But fiction is not the only avenue for this – we can also find it in everyday life. An important idea in economics which is, in my opinion, terribly described is this:
“The legal incidence of a tax is not the same as its economic incidence.”
It is an important idea. And for those whose goal is to improve the welfare of the poor by raising taxes on the rich, it is crucial to understand this. The fact that the law says the rich will have to foot the bill for a tax does not mean that the rich will really pay the cost.
To understand why, consider a service I’ve used many times – an online sales platform called Swappa. As a shameless tech nerd, I’ve bought a ton of gadgets over the years. (Probably too many, but that’s a story for a separate article.) And when a shiny new toy came out that I decided I wanted, I’d use Swappa to sell my current gadget to offset the cost of the new one. Swappa, of course, collects a fee for every sale it facilitates. But they also tell you, as the seller, not to worry about it – the costs will be paid by the buyer, not the seller. They accomplish this by adding their fees to the list price when you list an item for sale. So if I list an item for $500, they list it at $525, and when it’s purchased, the buyer pays $525, Swappa keeps $25, and I get $500.
This is fine in theory, but in practice it doesn’t work that way. I know the buyer will have to pay these additional costs, and the buyer doesn’t care at all which part goes to me or Swappa. So I have to take that into account when I list an item. If I think something I’m listing will sell for $500, I don’t list it for $500 because I know the final price will be too high to buy. So instead I list it at $475, Swappa adds his fees, and the price the buyer sees is now $500. According to Swappa, this $25 fee is paid by the buyer, but in reality it is paid by me, the seller. Presented like this, it seems obvious.
What’s less obvious to many is how the same idea plays out with taxes and other costs associated with all sorts of economic factors. regulation. Saying “We will force employers to provide more benefits to their employees” simply means “We will demand that employees receive less pay from their employers to buy more benefits”. In his excellent book Catastrophic Care: Why Everything We Think We Know About Healthcare Is WrongDavid Goldhill describes this from his perspective as an employer:
Since [newly hired employee] Becky is single with no dependents, my company will pay $5,679 this year for her health insurance; she will pay $2,112. Or so she thinks. In reality, Becky pays all $7,791 of her insurance premium… To understand this seeming paradox, put yourself in my company’s shoes when we originally decided to create this job for Becky. We weigh two factors: the value of Becky’s work to our company and the cost to us of hiring Becky. Notice that the issue is the “cost to us”, not the salary or wages, because an employee always costs an employer more than their salary…Whether they know it or not, their compensation bears the burden of our contribution of 5 $679 to his insurance premiums.
Many activists will, on the one hand, insist on laws to push for more health insurance coverage, longer paid parental leave and/or a litany of other benefits, while worrying about stagnating wages. What they lack is the connection between the two. You might think the goal should be to find the “right” or “best” combination of salaries and benefits, but there is no single right answer to this question. Nor is there any reason for any of them to be arbitrarily mentioned by political decision-makers. Different people will have different preferences about how their compensation is split between cash and benefits. So why not let people choose the combination that suits them best?
Kevin Corcoran is a Marine Corps veteran and health economics and analytics consultant. He holds a Bachelor of Science in Economics from George Mason University.