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ECONOMIC ANALYSIS: What Halloween can teach us about economics

October 27, 2008

The week of Halloween at the Hicks household is also the week we learn about taxes. It is a natural combination-they are both kind of scary and involve giving up something you've worked for to someone else.

Having three kids of different ages and interests is especially instructive. My fourth-grader is all about the experience of trick or treating with friends. She is likely to savor every minute chatting, holding hands and skipping along. She is not trying to maximize her candy collections.

My second-grader is different. He is apt to emulate the great Jesse Owens between the victimized houses. His experience will be about achievement (he doesn't even care about candy that much). My preschooler will enjoy each house, each slow walk up to the scary front door and each piece of candy. He is living for the moment.

Each of their attitudes toward collecting candy provides a nice model of incomeearners in our economy and begs for an economics lesson.

I explain to the kids that I (the government) will levy taxes. I also tell them they can donate part of what they get to their mother (the not-for-profit) and that will reduce their taxes. They are surprisingly sanguine about donation, since Mom will dole out the donated candy to the kid who gets the least. This raises a degree of beneficence and mutual affection not otherwise apparent during long trips. Perhaps the deduction helps?

My kids are far less happy about the pure taxes. When I explain that the candy taxes will be combined to make a chocolate cake (which they all then can consume), they are remarkably upbeat. Or if I offer to drive them around in return for a share of candy, they also are pleased to submit to the tax. My subsidized transportation makes them more productive, and able to get more candy. When they get something useful for the taxes, they don't complain as much.

However, if I tell them I am going to redistribute the candy I get from the tax to other families, or just eat it myself, the smiles disappear. One tells me, "That's not fair! I am working harder, and should keep more." The other says, "Now I can't play with my friends as much, to get the same candy." They really get mad if I impose a progressive tax on them, taking four or five pieces of candy out of every 10 in the heavy bags.

When I ask them what will happen if I do this, they predict two effects (which economists have known for a long time). First, the incentives to work are dampened, so overall candy collections will be down. This means a smaller cake and less of Daddy driving them around. Second, the incentive to donate to Mom drops.

The lesson from the Hicks household is clear: If the United States is going to use taxes to redistribute wealth, we'd better expect less wealth, and less charitable giving. Now that is truly chilling.



Hicks is director of the Bureau of Business Research at Ball State University. His column appears weekly. He can be reached at bbr@bsu.edu.
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