Tuesday, June 24, 2008

Time Preference and Political Ideology

Government has a short time preference. Budgets are annual. Current political reality drives decisions. Neither history nor future projections determine choices. In this way the state is different from corporations. Stock prices reflect anticipated earnings. Corporate executives may think short term, but decisions that might impair long term performance will reduce current price if the market is able to grasp the long term effects. Citizens vary as to their time preferences. Some prefer to defer gratification and so earn greater rewards in the future, while others prefer instant gratification. In general, short time preferences are more common than long ones among the general population, but if you weight population by individual wealth, since wealthier individuals have longer time preferences than the average person, the economic return that the market demands for investment is well below the return the average person demands to save. Therefore, in a free society, wealth tends to concentrate in the hands of those who have longer time preference. However, the reaction of short time preference citizens to wealth disparity is often resentment or a sense that there is inequity because of the wealth disparity. In turn, there is demand for taxation of property, inheritance and capital gains.

Skeptics argue that there is no way to prove that one view is fair and another unfair. Is it right that someone who saves for many years and deprives themselves of luxuries should be taxed on gains from the savings? Is that more right than someone who borrows heavily to enjoy themselves should benefit from the saver's wealth through tax transfers? Should the minority that saves support the majority that does not save?

Perhaps the answer is yes, perhaps it is no. Why can't there be room for choice? Why not permit states to determine levels of property, inheritance and capital gains taxes rather than the federal government. Then, Americans could choose what state to live in based in part on preferences for taxation.

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