Action, Reaction

Sir Isaac Newton published his Three Laws Of Motion back in 1687, in his book Mathematical Principles of Natural Philosophy. They are beautifully simple in form, but that hasn’t stopped many learned individuals from misunderstanding and misapplying them. One of my favorite examples of the latter was the now infamous (in some circles) 1920 New York Times editorial that asserted rockets could not work in a vacuum, since they needed something to push against. It took the paper nearly half a century (July 17th, 1969) to publish a retraction its fundamental misunderstanding of Newton’s Third Law, which states,

For every action, there is an equal and opposite reaction.

By then, Sputnik was twelve year old news, America had put hundreds of satellites into Earth Orbit, three Mercury and a dozen Gemini missions had orbited humans around the Earth, and six astronauts (Apollo 8 and 10) had orbited the moon. Apollo 11 would land at Tranquility Base three days later.

Way to be on top of things, Times-dudes. This goes down in history as an “epic fail.”

Newton’s third law extends, qualitatively if not quantitatively, to human behavior. Actions beget reactions. In the context of governance, rules affect behavior, and altering rules alters behaviors.

This is simple and irrefutable from both theoretical and empirical perspectives. Not only does it emerge from everything we know about biology, but there are millennia of evidence to back it up.

Unfortunately, none of this suffices to override human hubris. Or, in many cases, willful blindness. This is especially true when it comes to taxation. The evidence is quite clear that humans alter their behaviors when taxes are imposed on those behaviors.

In the macro sense, we have Hauser’s Law, which tells us that income tax revenue has stood at a steady long-term average of about 19% of GDP since WWII, no matter whether the top tax rate was 28% or 91%, and no matter how the tax code has been structured. We also have the Laffer Curve, which is about as obvious as the sunrise.

In a more specific instance, we have the evidence offered by cigarette taxes. I haven’t blogged about this since moving to Substack, but was prompted by a story noting that California has displaced New York as the king of smuggled cigarettes.

Last I looked at this, about 60% of cigarettes sold in NY were either smuggled from other states, where the per-pack tax was significantly lower, or counterfeits smuggled in from China and other places, with no tax paid to anyone. This smuggling is a direct result of taxes that are so high that the costs and risks are more than offset by the profit opportunity.

In New York’s case, the state collects $5.35 per pack and the city collects an additional $1.50 per pack.

Contrast that with Virginia, which charges $0.60 per pack in taxes.

Even discounting the difference in the untaxed cost per pack, you can see how big an incentive there is for people to drive down to Virginia, load up the trunk of a car with Marlboros, and bring them back to NYC to sell to bodegas. Even if the smuggler only nets half the tax differential, that’s over $30 a carton. Factoring in the total price difference per pack ($18 vs $9), a Chevy Suburban, which can hold 25 cases (1500 cartons, or 15,000 packs), can for about $120 in gas, about as much in tolls, and about 14 hours of driving bring a theoretical profit of well over $100,000, split between smuggler and vendors.

Action: tax. Reaction: black market.

Demonstrating the natural conclusion of both Hauser’s Law and the Laffer curve, increased tax rates don’t produce proportional increases in tax revenues.

Yet people still demand those increases, politicians still seek to impose those increases, and forecasters still predict revenues without properly factoring in reality.

The same goes with attempts to legislate behavior. Prohibitions spawn workarounds, and black markets flourish. Alcohol, recreational drugs, prostitution, and gambling - i.e. the various “sins” that do-gooders try to tax or ban away - all create and perpetuate black market behaviors.

And, when the do-gooders become coveters, when they see the illicit profits created by their interventions and say “we want that,” then suddenly and by some miracle the sin becomes a revenue source. This is why sports gambling was widely illegal - and widely popular - until the government decided it wanted its taste, and why states monopolize lotteries. The immorality of banning consensual behavior never entered into the conversation. All that mattered was “we want the Benjamins.” So it goes with cigarette taxes, no matter the do-gooders claims that those taxes are about discouraging smoking. And, so it goes with marijuana legalization, no matter that it’s a weed that anyone can grow. Which is why pot black markets still thrive in many places it has been legalized - the tax vig is so high that the costs and risks of evasion still allow for profit.

No action-reaction discussion of this sort would be complete without a swipe at socialism. It has never worked, because as E.O. Wilson aptly noted, “wrong species.” Human behavior is fundamentally incompatible with socialism. On the other hand, capitalism is rooted in human behavior, and erects some guide rails (i.e. property rights) to more effectively channel those natural tendencies into societal benefit.

I’ll close out with a quote from another towering intellect, Adam Smith, who observed back in 1776 that:

It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.

In all markets, whether free, encumbered by regulations, or centrally managed, actions beget reactions. Self-interest means that attempts to further pluck a goose will beget more hissing and more evasive behavior. We as individuals tolerate a certain level of taxation, but many of us have far greater tolerance for the taxation of others than of ourselves. That disconnect and dissonance is at the heart of the willful blindness that leads people to trying, time and again, that which doesn’t work.