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Critical Analysis

Before we get to the critical analysis of principles, proposals and ideas, let's quickly review the creative process discussed in the last lesson. We used a three-step process to generate ideas:

1. Identify or "extract" a principle.
2. Test the validity of the principle.
3. Generate ideas based on the principle or its alternatives.

This creative process can be as free and open as you like. In fact, the less critical, the better. But then you have to choose the best of the ideas generated, and make them even better. This is where critical analysis enters the picture. There are many challenging questions you can ask about your ideas. Here are four to start with:

1. What other factors are involved?
2. Is the principle, proposal or idea even plausible in practice?
3. Does the way in which the principle is implemented affect the outcome?
4. If you had to argue against the principle, what could you say?

Critical analysis could be seen, at least in part, as attacking an idea. Why would we want to attack our own ideas? Well, first, because they may be bad ideas. Second, because they will become better ideas if we challenge them and refine them according to what we learn. Let's look at an example.

A principle: Governments can collect more revenue by raising tax rates. Test it by taking it to an extreme: Imagine a tax rate of 99%. Would you work much? If not, does the government collect more or less in taxes than if you worked far more and paid 20% of your income? This clearly shows a flaw in the principle. In addition, we can imagine that if high taxes either discourage business expansion, or drive them away to other countries, there will be less income to tax, and therefore perhaps lower revenues.

(Note: A real life example is Iceland, where as they systematically reduced the corporate tax rate from 60% down to 15% the government collected more in tax revenue every step of the way.)

Imagined the other extreme, a 1% tax rate. That would have to collect less revenue too. These two extremes suggest an alternative principle: There is a rate of taxation which is most efficient (collects the most revenue), and another principle that follows from this, namely that anything below or above this rate collects less revenue for a government.

The most obvious idea that comes from this is to have a more scientific approach to taxation. After all, it seems a tragedy to raise taxes, hurting the economy and taxpayers (and costing jobs), if there is no actual gain of revenue for the government. And even if we want every social program imaginable, we should want a tax rate that collects the most money to pay for them, right? Now let's apply the five questions, to see how we might refine this idea.

1. Other Factors

The most efficient tax rate might be 16% right now, which could be partially determined by testing. But what if more revenue was spent for things like new roads and bridges, instead of wars and welfare? In that case, because of the bigger positive economic impact of government expenditures, and the fact that there is then a bigger economy to tax, we might find that a tax rate of 20% is most efficient. So in designing a scientific tax system, we have to take into account the way in which the revenue is spent.

2. Plausibility Of The Idea

Could we have a scientific tax system, based on finding the most efficient rate of taxation? Currently the tax code is used not just to raise revenue, but to encourage or discourage certain choices, which is why there are deductions for kids and mortgages, and credits for investing in oil wells. It is also used to buy votes, as when politicians pay for votes of the struggling and envious masses by punishing the wealthy with higher taxes, even though they know those high tax rates hurt us all in the end. In addition, not 1-in-20 twenty people understand that raising tax rates doesn't automatically raise revenue.

To make this idea into a plausible proposal then, we would have to change the political atmosphere, and educate the public. There are ways to do this, of course, such as enlisting the help of politicians who are serving their last term. Without another election to worry about, they could risk using their positions to educate people and change the political climate.

3. Method Of Implementation

Is the most efficient tax rate affected by how we tax? For example, considering the incentives and disincentives involved, what would allow for a more revenue, a sales tax or an income tax? The former might discourage spending, while the latter would encourage working and investing more. It's difficult to say which would be best from a tax-revenue perspective, but it might be worth looking into.

Also, we have to consider the total tax burden when figuring what revenue a national government might take in at various rates. Should the federal government pass laws to limit the rates that states and localities tax us at, in order to keep the total tax burden at that efficient sweet-spot? Or should they leave it to the states and let them in that way compete for residents and businesses?

4. Arguments Against An Idea

We should always find arguments against our own ideas. This is an important part of critical analysis. We can start with the three questions above, and then look beyond those for any arguments someone might have against the idea. Of course, we might find answers to those arguments.

For example, someone might say that despite later effects, if we raise tax rates now, we'll immediately collect more revenue. This could be true for a year or so, because the damage done to the economy, and therefore to tax revenues, will come a little later. On the other hand, if it is shown that this is an argument to "dig our hole deeper now and worry about getting out tomorrow," not many will buy it.

One could argue that government shouldn't always look for the way to raise the most revenue. In that case, this system is just a way to show when we are going beyond the efficient rate and causing more harm than good. We would still be free to tax ourselves at any rate below this.

What about the argument that we need various taxes for various purposes? This is a strong one, I think. For example, the gasoline tax, when used to build and maintain roads and infrastructure, is a great way to fairly tax those who benefit most from it. On the other hand, the idea of finding the most efficient tax rate for a sales tax or income tax doesn't exclude the possibility of other taxes.

We should also look for arguments against an idea in real life examples where similar ideas have been tried. Looking at these real-life examples, we can see what didn't work and try to decipher why those failures or problems existed. In that way, we can further refine our own ideas to avoid similar failures or limitations.

Critical Analysis - An Exercise

We assume there is a deterrent effect from putting people in jail. This principle is easily demonstrated with an imagined extreme example. If we had no jail time for crimes, would some people commit more crimes? It seems certain, so this simple mental exercise shows us that the principle of a deterrent effect is valid.

Now, for this exercise, think about how to measure this effect, how to enhance it, or how to change it (The more general principle is that punishment deters, whether that is jail or something else.) Once you have generated a few interesting ideas, choose the best one, and apply some critical analysis to refine (or possibly reject) it. Use the four questions suggested above.

Until next time,

Steve

www.RadicalNewThoughts.com