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Comment on Preferred Tax Type: Reply to Tabarrok Jeffrey M. Herbener* Iappreciate the opportunity to respond to the criticisms made by Alexander Tabarrok of my preferred-tax-type article since it provides a forum to clarify and elaborate on what is wrong with this neoclassical "theorem," as he calls it. Before addressing the critique, I would like to make two historical clarifications. J. R. Hicks did not originate indifference curves as my critic claims (p. 107n). That "honor" goes to Francis Edgeworth, who gave a complete mathematical description of this technique in his Mathematical Psychics, published in 1881. 1 Vilfredo Pareto's extensive development and use of indifference-curve analysis also predates the work of Hicks in this area. 2 Hicks even gives credit to these two authors at various places in hisValue and Capital. 3 Second, I expended considerable effort at the beginning of the original article to establish the fact that I am an unabashed Misesian economist, and thus my major complaint against the neoclassical economists approach to the preferred-tax-type question is their failure to correctly employ the axiomatic-deductive method. Tabarrok seems to imply that my point about the government's inability to conduct the postulated experiment concerning equal tax revenues concerns the empirical problem of the testability of an hypothesis. But I wholeheartedly agree with him when he states, "For a theory to be correct it need not be experimentally testable. But it must have true premises and sound reasoning" (p. 109). The major argument of * Jeffrey M. Herbener is assistant professor of economics at Washington and Jefferson College. 1 See F. Y. Edgeworth, Mathematical Psychics (New York: Augustus M. Kelly Publishers, 1967 [1881]), pp. 35-36. 2 See V. Pareto, Manual of Political Economy (New York: Augustus M. Kelley Publishers, 1971 [1909]), pp. 118f. 3 See J. R. Hicks, Value and Capital, 2nd ed. (Oxford: Oxford University Press, 1946 [1939]), pp. 13and41f. The Review of Austrian Economics, Vol. 5, No. 2 (1991): 111-116 ISSN 0889-3047 111
112 The Review of Austrian Economics, Vol. 5, No. 2 my original article was precisely that the neoclassical theory had false premises and unsound reasoning and was therefore false. The problem of conducting the experiment that I referred to was the mental experiment necessary to the praxeological method. 4 Tabarrok makes two criticisms of my original article: indifference curves are not required to prove the "theorem" and the proof does not depend on a specific sequence. By dropping indifference curves, Tabarrok has dramatically changed the conditions of the analysis and thus, his criticisms do not affect my original results, derived assuming a well-behaved set of indifference curves. This is not much consolation, however, if his assertion is true that indifference curves are not necessary for the proof. Let me demonstrate the difficulty of proving the "theorem" without them, or at least some additional restrictions on preferences beyond Tabarrok's "more is preferred to less" assumption. 5 Consider figure 1, a reproduction of Tabarrok's figure 1. The individual begins by choosing point A with no taxation. Now the government imposes an excise tax on good X, at some fixed rate per unit (they do not fix the amount of the tax revenue, the individual's choice determines his tax payment), causing the budget constraint to rotate inward to MOXE. The individual chooses point B with an amount of tax extracted of MQM\. NOW he is offered another opportunity; pay the same amount of tax and choose any combination along M\X\. Given the expanded range of choice, he can assuredly find a preferable point, say C. But note carefully, he prefers C to B because, by assumption, it is his most preferred point on his entire income tax budget line. From a tax-payment standpoint, when he compares C to a point along MOXE, say D, he prefers it because it involves a lower tax payment. It has nothing to do with comparing equal tax revenues extracted in two different forms. By construction, his choice is between a fixed income tax payment and a fixed excise tax rate. With the latter, point B is the only point on MOXE that extracts the same amount of tax, MoMi, as the income tax. With the excise tax option, Ludwig von Mises calls such mental experiments imaginary constructions, Mises, Human Action , 3rd rev. ed. (New Haven: Yale University Press, 1966 [1949]), pp. 31-32, 64-69, and 236-237. There are two praxeological laws of utility: the law of diminishing marginal utility and the law of increasing total utility. The first states that with units of a given size the marginal utility of each unit declines as the stock of the good increases. The second states that the marginal utility of a larger-sized unit exceeds the marginal utility of a smaller-sized unit. Both laws derive from the same source, viz., the purposefulness of human action, and thus in praxeological analysis one cannot "assume" the latter without "assuming" the former. See Murray N. Rothbard, Man, Economy, and State (Los Angeles: Nash, 1962), pp. 17-28 and 270.
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