Daily Archives: October 12, 2012

Federalist No. 12

In Federalist No. 12, Hamilton writes on the utility of the union in respect to revenue as a follow up to his piece on the utility of the union in respect to commercial relations and a navy. Given that all organizations require revenue to function, this is an important topic, especially since everyone disdains taxes and wants to know that their tax dollars will not be wasted.

Hamilton is right when he notes that The ability of a country to pay taxes must always be proportioned, in a great degree, to the quantity of money in circulation, and to the celerity with which it circulates. If taxes are too high, it will create too high a burden on the population, but if they are too low, the government may not have enough revenue to effectively function and provide needed services. In addition, commerce, contributing to both these objects, must of necessity render the payment of taxes easier. Taxes are a necessary burden, but paying them shouldn’t be burdensome. Too bad we’ve forgotten this with tax codes so convoluted that five accountants can do the same return and arrive at a different conclusion for the same household!

Hamilton said a great thing when he said that it is evident from the state of the country, from the habits of the people, from the experience we have had on the point itself, that it is impracticable to raise any very considerable sums by direct taxation. Tax laws have in vain been multiplied; new methods to enforce the collection have in
vain been tried; the public expectation has been uniformly disappointed, and the treasuries of the States have remained
empty — as this is another point that needs to be remembered. The more convoluted the tax code, the more ineffective and inefficient it gets. For example, in Return to Prosperity, Arthur B. Laffer, a noted economist, argues for a flat tax. He notes that if we implemented such a tax across individuals and businesses, not only could we simplify the tax return to a single page, but we could reduce the tax rate to about 13% and collect about the same amount of taxes as we do now! 13%! Given that, in some states, some residents pay over 30% in sate and federal income taxes, many people could see their taxes halved and the government could still collect the additional dollars it needs to operate effectively. If that’s not a win-win, I don’t know what is!

The primary argument he puts forth as to how a Union would be better, and fairer, than a collection of states with respect to the collection of revenue is the following:

The relative situation of these States; the number of rivers with which they are intersected, and of bays that wash there
shores; the facility of communication in every direction; the affinity of language and manners; the familiar habits of
intercourse; – all these are circumstances that would conspire to render an illicit trade between them a matter of little
difficulty, and would insure frequent evasions of the commercial regulations of each other.

But if, on the contrary, there be but one government pervading all the States, there will be, as to the principal part of our
commerce, but ONE SIDE to guard—the ATLANTIC COAST.

In other words, there would be no illicit trade between the states, and the only worries with respect to duty and tax evasion would be in global trade, with respect to goods originating from Europe or India. With only one border to patrol (with the unified navy that would be obtained as per the previous argument for a Union), we would be able to stop the smugglers and impose fair taxes across the board. Because ocean going vessels would have to dread both the dangers of the coast, and of detection, as well after as before their arrival at the places of their final destination if they attempted to unlade prior to entering port, an ordinary degree of vigilance would be
competent to the prevention of any material infractions upon the rights of the revenue.

It is therefore evident, that one national government would be able, at much less expense, to extend the duties on imports,
beyond comparison, further than would be practicable to the States separately, or to any partial confederacies.

Data Good. Brains Better.

Brains aren’t just for Zombies. They’re for people too, although, sometimes, it seems that some people forge this. đŸ˜‰

But, anyway, I have to applaud the HBR Blog Network for this recent post on Why Data Will Never Replace Thinking because it’s not all about big data. There’s a reason that we have been arguing for centuries about whether deduction from first principles or induction from observed reality is the best way to get at truth.

I tend to side with Popper’s synthesis in that the only scientific approach is to formulate hypotheses that are falsifiable. Sure, with big data, you can look at information in real time, and you can make minute adjustments, and you can build a closed-loop system, where you continuously change and adjust but I do not believe that you make no mistakes, because you’re picking up signals all the time because you never get all the signals. And even if you captured every monetary transaction, you still wouldn’t be capturing the drivers behind every transaction, which are fundamentally human in nature, and often emotional, and not captured.

As the article says, the element of hypothesis/prediction remains important, not just to science but to the pursuit of knowledge in general. We humans are quite capable of coming up with stories to explain just about anything after the fact but it’s by trying to come up with our stories beforehand, then testing them, that we can reliably learn the lessons of our experiences -— and our data. No matter how big the data gets, we still need hypothesis, and the more data, the more important the hypothesis gets — otherwise, what is all the data for?

And the quote for Nate Silver is great: data-driven predictions can succeed -— and they can fail. It is when we deny our role in the process that the odds of failure rise. Before we demand more of our data, we need to demand more of ourselves.