It can be seen that T(y, 0) is above T(y, 1), or that average tax rates are lower under full employment. On the left section of the horizontal axis, X(0) < X(1). On the right section, since taxes in regime 0 are higher and levied on a smaller tax base, T(H, 0) > T(H, 1). Thus the effect on the average tax rate is clear. The effect on the marginal rate depends upon the numbers. The case depicted here, with a higher marginal rate in regime 1, is only one possibility; but it shows that a higher marginal rate can combine with actually lower taxes.
40. The possibility of co-ordination
Chapter 40 showed the technical possibility of full employment for a welfare state. Chapter 34 showed that social choice is feasible, in the sense that there are consistent and reasonable constitutions that society might deem attractive. In particular, there is the example of a constitution that uses the efficiency criterion (Pareto optimality, PO) to select its policy. There still remains one issue to settle. This is the issue of information. Society might have a consistent preference, and consistently prefer full employment above unemployment, but when people don’t know that it is possible, and instead even have theories that tell them that full employment is impossible, then society might still choose for unemployment as the best of all evils. The issue of information already featured in our discussion of Arrow’s Theorem, and now returns for our discussion of unemployment.
We again follow the procedure given by our methodology. We select stylized facts, develop our concepts, deduce results, and link back to reality. We will first construct a subsidiary lemma that is very general and concerns any suboptimality due to misinformation. Then we take our theorem on the possibility of full employment, recognise it as an item of information, insert it, and construct our theorem on the possibility of co-ordination. [116]
Stylized facts
Recorded full employment situations may have been caused by ‘chance’. Policy makers in 1950-1970 may have thought that functional finance was effective, while it also was the tax exemption level. A re-evaluation of the history may however also show that leading economic advisers in the 1950s may have been wiser than those of the 1960s.
It remains a stylized fact that much of the subject matter on employment is well-known. For example in Holland, CPB economists Van Schaaijk (1983), Bakhoven (1988) and Colignatus (1990) pointed the way to full employment. The state of knowledge turns out to be part of the model.
There is a Pareto Optimizing Change (POC) iff some advance and none suffer. A change from unemployment to employment need not be strictly POC. Note that we already have resolved that we don’t need high unemployment to keep inflation in check. So the CWIRU is no argument against a POC. There are other clear reasons that pose a problem. First these two:
· Some bureaucrats have plush jobs administrating the unemployed, and would lose their job and sense of power.
· The unemployed would lose their leisure. For some, the combination of low benefit B and leisure might be preferable to work at a higher income.