Greedy Goblin

Thursday, May 26, 2016

Taxes, beer, tea and housewives

In video games, there are typically have low taxes on in-game transactions, since there is no government to support. But Black Desert Online uses market taxes as gold sink. Actually I don't even see any other significant gold sinks in the game. This can serve as a perfect example how damaging high taxes to the economy. First thing first, cooking awful lot of beer and doing the cooking quests pushed me quite high on the cooking toplist:

High cooking skill means good chance of getting more than one product. I just did a test, from 100 units of materials, I got 266 products and 29 bonus products. This obviously means that I should use this multiplication on something profitable. Beer can be produced from 900 silver worth of materials and sell for 1500 (bonus bear for 2300). Tea with fine scent can be produced from 5000 worth of materials and sell for 4000 (bonus tea for 5000). This means that if I make beer (from purchased materials), I make 2.66*1500+0.29*2300-900 = 3757 silvers. If I make tea, I make 2.66*4000+0.29*5000-5000 = 7090 silvers. No brainer. The fact that I need beer is irrelevant: I shall buy beer and use my energy to make tea. (Note: tea is the highest price food that sells in large numbers and need no milk or other limited material).

But here comes 35% sales tax with a twist: I need beer for myself. So if I make beer, I still save the 3757 silvers for not buying beers. But my tea income will change to 0.65*2.66*4000+0.65*0.29*5000-5000 = 2858. Ouch! Beer becomes the profitable choice. If I consider that my workers produce the materials for beer, which I can use or sell taxed, while I must buy materials for tea, the choice is even worse. The end result: despite producing tea generates 2.7x more GDP than producing beer, it's more profitable for me to produce beer.

With taxes suppressing high value production, it's a miracle that tea is made at all. Since beer prices are constantly rising, I guess much of it comes from people who are bad at math, buying beer and producing tea, not noticing that their profit is eaten by taxes. It's only profitable if you don't sell it, but either drink it or rather use it to produce Milk Tea or Sute Tea. You probably ask why producing them is any less tax-blocked than the first one. The solution is another market messup: fixed price ranges. These specialties contain milk, which is a valuable reagent in BDO, but its price is fixed in a hilariously low range. So if you have it, you must do something with it other than selling.

What we saw today isn't limited to video games. Most women in couples and most single people do their own housework (like making the beer for themselves) instead of spending this time doing something more productive and hiring someone to do this low-skill work for them (like making tea and buying beer). Simply if the "something more productive" isn't much more productive, the taxes eat the difference and you are better off doing housework for yourself, even if you'd never think of doing such work as a career. As a result, in bigger households many women become full-time housewifes, despite capable of doing something better, while a bunch of low-skilled people are unemployed. Taxes are bad things kids!


Anonymous said...

Nice analogy. Long time since your last "real life" philosophy post.

Tithian said...

Interesting analogy, and also very true. This is what is happening in Greece right now, with the recent taxation and social security bills that have been passed.

For freelancers and working professionals beyond a (fairly low) income threshold, the taxes rose to such a degree that it's much better to reduce your income because any production beyond a certain point gets eaten by the taxes. For instance, there is no point for me working extra projects beyond my typical 8-hour work day because the net profits are so abysmally low that I might as well go home and do my chores/watch TV/play an MMO. Or I could try and hide my income from the goverment (impossible, since everything is done by bank transactions, especially after the recent Capital Controls), or set up a personal company to a country with favorable taxation policies (i.e. Cyprus).

In the end, everyone is worse off; the state for promoting a 'less GDP' policy and receiving less taxes in the end, and the citizens for having less dispodable income.

Anonymous said...

@Gevlon and Tithian:

This is really interesting. Is there a country with a working, good low-taxation model? I am not that familiar with this topic but find it interesting. Do you guys have any interesting books,websites,blogs recommendation to read about these?

Anonymous said...

the analogy seems fine.

housekeeping isn't something I could let someone do. I live small don't own the world so it doesn't need much effort to keep my stuff tidy, neat and clean. I can't even add the time seriously up because a lot of it is like in a kitchen. you cleanup after tasks. very simple, don't let it addup. Everyone in a big kitchen needs to do this (parents are pro cooks, so I'm raised by that doctrine). The bigger chunks of tasks I do them at times where my brain is the least productive. I'm even happy to do these tasks because they help me to cool off and relax. So even if someone would do it all and I had maybe 2-4 hours throughout the week I couldn't increase my wealth or my happiness in that time at all.
So no, I don't benefit at all from letting someone else clean after me. maybe if I live in a 12 bed, 3 kitchen, 5 bathroom house ... but I don't and wont ever live in such stupidity.

Anonymous said...

You are missing out the "traditional roles" in your "As a result, in bigger households many women become full-time housewifes, despite capable of doing something better, while a bunch of low-skilled people are unemployed. Taxes are bad things kids!"

there are people who think that, once married, their wife should stay home and be a housewife, raising kids etc. There are women who also want to do this.

Women with high qualifications stop work and become full time mothers and housewives, this has nothing to do with taxes, or that they can "do something better". It is just that they feel that they wish to take on that role now. (Full time househusbands and fathers is now also becoming a thing)

Rodolphe Ortalo said...

Well, you go pretty fast from "very high taxes are bad" to "taxes are bad"...
The former is much more easily demonstrated than the latter. As usual, the Goblin takes the laziest route... that's why we read him (for its ingame remarks)!

Gevlon said...

@Anonymous: and there are lot of people who just wish to stay at home playing video games. But they can't afford it. Housewives are much more common because their dreams are economically supported.

@Rodolphe: the described effect is true for every level of tax. With higher taxes, the margin between "it's profitable to do it for myself" and "it's profitable to do for other people" is larger, but it's always there. With simple example:
- at 90% tax even a CEO is better off doing his housework
- at 5% only a "10% over minimal wage" guy is better off doing his housework. But even there there is a small GDP loss, it would be better if he'd do his near-minimal wage job and create a job for a minimal-wage earner housekeeper.

Rodolphe Ortalo said...

Yep, your calculus works of course. But your analogy between a video game simulation and the real world is only relevant for high taxes (which discourage overall activity).
Real world taxes are also justified by other things you do not really need in a video game (such as healthcare, justice, etc.) but that even a Goblin will desire there.

Debating whether healthcare, pensions or justice could be done via market mechanisms as opposed to government controlled regulation is another topic in my opinion (not related to the adequate *level* of taxes). IMO, there are many examples it cannot, but not in video games (where you do not need them in the first place).