The Economics of Star Trek 2: Ferenginomics!

A piece back I reviewed the book Freakonomics, which is quite an enjoyable read. Today I’d like to talk about Ferengi-nomics, though–the economics that exist (or could exist) on the world of Ferenginar.

There’s an episode very late in DS9 (in fact, it’s the next to last episode, if memory serves) in which taxes have been introduced on Feriginar as part of Grand Nagus Zek’s left-leaning societal reforms.

Quark is horrified when he learns of this, saying that taxes run contrary to the spirit of the free market. “That’s why it’s called free,” he says.

Actually, that’s not why it’s called “free,” at least not on Earth, but it’s a good line, and you can’t expect the Hollywood lefties who write the show to understand economics.

What’s worse (from Quark’s perspective) is that not only have taxes been introduced, a progressive income tax has been created.

For those who may not be aware, a progressive income tax is one in which people who make more money are charged a higher tax rate. They not only pay more tax total, they pay taxes at a higher rate. Thus if a person in a lower income bracket pays 20% of his income in income tax, a person in a higher income range might pay 40% of his income.

The theory behind progressive income taxes is that the more money you have, the more you can afford to pay a higher percentage of your income in taxes.

The problem with progressive income taxes is that they serve as a dis-incentive to make more money. If you have to work harder for each new dollar of (after tax) take-home pay then that unmotivates you to do the work needed to get that dollar, and so at some point you say, “Eh. I’ve got enough. Why should I work harder to get more when the government will only take more of it.”

And thus economic development caps out. That means that there are fewer jobs that exist than would exist if the income tax rate weren’t progressive. The progressiveness of the tax rate serves as a drag on the economy that ends up keeping people jobless and harms them in bunches of different ways related to an absence of money in the economy that would otherwise be there.

What happens if you make the tax rate less progressive? People in the top tax bracket (i.e., the ones with the money) get more motivated to make money since they can now keep more of it. Economic growth is stimulated. Jobs are created. And, in many circumstances, the tax revenue that the government collects actually goes up since the economic stimulus provided by the lower rate more than offsets the fact that the rate has itself gone down.

Which raises a question.

Think for a minute about Ferenginar.

Assuming that they did have taxes there, and assuming that we set aside the Hollywood writers’ progressive income tax on Ferenginar idea, what kind of tax rate would they have there?

Ferengi place a value on economic development above all else. If having a highly progressive tax rate highly hampers the economy, and if a less progressive tax rate hampers the economy less, then I bet on Ferenginar they’d have a negatively progressive tax rate.

In other words, they wouldn’t have a progressive tax rate, they’d have a regressive one.

On this scheme, your tax rate would be higher if you make less money and lower if you make more money. Someone in a lower income range would be paying the 40% (or whatever) and someone in the higher range would be paying 20% (or whatever).

You can just imagine how they’d justify it, too. I can see Quark giving a speech in which he says, “This way it gives the poor an incentive to not be poor any more, to work hard and look for economic opportunities that will let them make enough money that they can get into that next tax bracket. That makes them richer. It makes society richer. It stimulates economic development. It’s better for everybody. Don’t give me your silly Federation ‘morality.’ A progressive income tax rate is positively immoral! How can you be so cruel to your poor as to subsidize their poverty and keep them trapped in it?”

It’s too bad that there aren’t any Trek TV-writing jobs available at the moment. I could probably work a pretty good episode out of that idea, or at least the B story of an episode.

SURPRISINGLY, SOME HU-MONS HAVE EXPERIMENTED WITH REGRESSIVE INCOME TAXES.

They apparently have one in Taiwan.

Author: Jimmy Akin

Jimmy was born in Texas, grew up nominally Protestant, but at age 20 experienced a profound conversion to Christ. Planning on becoming a Protestant seminary professor, he started an intensive study of the Bible. But the more he immersed himself in Scripture the more he found to support the Catholic faith, and in 1992 he entered the Catholic Church. His conversion story, "A Triumph and a Tragedy," is published in Surprised by Truth. Besides being an author, Jimmy is the Senior Apologist at Catholic Answers, a contributing editor to Catholic Answers Magazine, and a weekly guest on "Catholic Answers Live."

16 thoughts on “The Economics of Star Trek 2: Ferenginomics!”

  1. Regressive taxes are completely immoral.
    It sounds attractive – those in low-paying jobs will be motivated to get better-paying jobs and pay less taxes.
    OK, so everybody gets a “better-paying” job. Guess what? They’re still the lowest-paying jobs, so the tax brackets just get readjusted and you’re still paying the higher rates.
    Policies like this sound good in a theoretical world where everyone can be rich, but in practice any capitalist society must be organized in a pyramid fashion, with a large number of lower-paid people and a small number of rich.
    The fundamental fact of economics is SCARCITY.
    There are always going to be people who cannot or will not work at the higher levels of society. Should they be punished? Who uses more of the infrastructure tax dollars pay for – a single mother working at Wal-Mart, or a shipping magnate whose entire business empire depends on the transportation system, government oversight of commerce, armed forces to deter theft, and so on?
    I think that most proponents of this kind of thinking are motivated by the sense that the poor are poor because they are lazy or disinclined to work, and could be millionaires if only they had the right work ethic. Total nonsense.
    There is certainly room to discuss readjusting the brackets for those making less than $100,000 a year, but the idea that the richer you get, the less you should contribute is fundamentally uncharitable.

  2. We have regressive taxes in America too. They’re called sales taxes. Any tax on consumption (except for those restricted to “luxury” items perhaps) would ultimately be regressive, since the rich spend a smaller percentage of their income on consumption than the err… not-so-rich. (Otherwise the rich would never get rich.) And there is a similar “tax” on consumption called inflation that will eventually hit hard if we don’t get profligate government spending (and profligate trade deficits) under control.
    I think progressive income taxes simply try to balance out the regressive ones. It is certainly true that progressive income taxes can discourage people from making that next dollar (because the incremental tax rate goes up), but I think it has a lot to do with what that incremental tax rate is. If the maximum tax rate is still relatively low (say 30%), it doesn’t seem that the progressivity per se would be too much of a disincentive to make that last dollar.
    $0.02

  3. Back when I was at university I had an argument with my Intro to Microeconomics prof in which I argued that a sales tax is not necessarily regressive.
    Basically it comes down to people who say that fall for the “all things being equal” fallacy when it comes to human purchasing psychology. The idea seems to be that both rich and poor spend the same amount on the same types of goods and services and therefore the tax unfairly burdens the poor.
    But in reality this is not the case. Rich folks tend to spend more and better on necessities and spend a lot more on luxuries, whereas those with less money to spend tend to spend it more thriftily.
    Granted this is a generalization. There are plenty of miserly rich people in the world and lots of spendthrift poor as well, but as a general rule it holds.
    And you know what? In the end the professor agreed with me.
    –arthur

  4. Sales taxes are NOT regressive. They are flat and the ultimate in egalitarian taxes because you choose how much tax you want to pay. Those who call flat taxes regressive are likely to be those who think forced confiscation of the wealth of people who make MORE than them is a good thing.
    That said, I don’t necessarily put that attitude on Steve. It’s just an observation made over time.
    I don’t think it’s necessarily a good thing that we have high sales taxes instead of an income tax. Especially the kind most talked about where people are exempt based on their income. That’s a paperwork nightmare waiting to happen if I ever saw one. I can’t see people signing up to get a Tax-Exempt card from the government to prove their poverty so they don’t have to pay sales taxes. Otherwise you have to have everyone save ALL their receipts they want to get taxes back on and report that with documentation to the IRS. So you get even more paperwork and possibility for government intrusion as they get direct access to your spending habits.
    It’s either one or the other. Personally, I liked Steve Forbes flat tax proposal where a family of 4 would see about $35K tax free and the rest taxed at 17% with only a mortgage interest deduction. Never happen though. Too many tax lawyers and accountants who would lose out on this. Too simple too.
    Jimmy’s main point is correct that high taxes are a DIS-incentive to economic growth. When the governemnt wants to discourage an activity, what does it do? It taxes and regulates it. When it wants to encourage something it deregulates and lowers taxes. So why do so many think that it can’t work with income taxes and taxes on growth encouraging activities?
    When the capital gains tax is lowered, it ALWAYS produces more economic growth in the relative long run, even immediately. Why? Because people sell things they have been holding on to. At one point in the late 80’s or early 90’s I remember reading about some $7 TRILLION locked up in investments that weren’t being cashed in or sold because of high taxes. How the number was arrived at, I do not know, nor do I remember where I read it. But the point is that this money was NOT in use. It wasn’t being put into new ventures.
    Punishing achievement is not the answer. Nor is the mindset that those with more money do not deserve it, nor should they be allowed to keep it. This sort of thinking and tax system is a legalized rob from the rich system. Yes, people with means should help those without. No doubt about it. I am however very uncomfortable with the government forcing this upon people, especially since the government is notoriously bad at the helping those without part.
    A system that balances legitimate government funding with economic growth should produce/re-introduce private charity and support as we used to have. The idea that it must be the government that takes care of poor has shoved private charities out of the way and often prevents good from happening. I tremble at the thought of that kind of power actualized in the real world.

  5. Regressive taxes are completely immoral… It sounds attractive… but the idea that the richer you get, the less you should contribute is fundamentally uncharitable.

    Um, yeah — that’s why Jimmy dubbed it “Ferengi-nomics.” Charity is hardly a virtue in Ferengi society! (How this applies to Taiwanese society, those more knowledgeable will have to comment.)

  6. Arthur, I will help you and your microeconomics prof.
    There are two types of income, active and passive. Active income is the product of your work. Passive income is business and investment income. Amongst the poor, almost all income is active income because they tend to own few assets. Passive income on the other hand is either realized, at which point it is taxed, or it is retained which means it isn’t taxed.
    A quick example will show the regressive nature of the flat tax. Person A makes $50000 a year. Person B makes $25000 a year in income, and his business realizes a $100,000 profit. Person B accepts a $25,000 dividend and has his business retain the rest. So, Person A and Person B had taxable incomes of $50,000. Assume a 10% flat tax. This would mean Person A pays $5,000 on $50,000 in real income, and Person B pays $5,000 on $125,000 of real income. The net tax would be 10% and 4% respectively; hence, the tax is regressive.

  7. Proponents (like Steve Forbes) of a flat tax point out how simpler the flat tax is, but that simplification is usually accomplished by appealing to the elimination of exemptions. The same eliminations could equally apply to the progressive tax. So most of the “merits” of a flat tax over over a progressive tax have nothing to do with a flat tax, but something else entirely. It’s bait and switch and very dishonest.
    Incidentally, Adam Smith was in favor of progressive taxation.
    If people really don’t want to “punish achievement,” they should actually promote a poll tax – which has been universally reviled throughout history as a form of tyranny.
    There are many considerations in developing tax policy. How progressive the system is, is only one.

  8. Actually, M.Z., your example doesn’t take into account the taxation of business profits. If a sole proprietor, the owner cannot simply leave the profits in the business. All sole prop profit/loss is reported on Schedule C of the 1040. They cannot let the “business” retain it, because they ARE the business. The business income is their income.
    If a partnership, each partner is taxed according to the percentage they own. If a corporation of any type, the profit is taxed at the appropriate rate. There is no such thing as untaxed profit. The only time profits aren’t taxed is when you have special cases of previous year losses that the tax code lets one apply current year profits to. This is true at the individual level only I believe and goes back only 3 years. Thus, if I am $100K in the hole over 3 years and have a profit of $100K in the 4th year, I pay no taxes on that profit. There are rules and condidtions, etc. that must be met though.
    You can’t retain profit without taxing it. The Net Profit After Tax (NPAT) is retained as cash on hand or disbursed to the owners is they wish. The NPAT amount is not taxed again the following year. Only the new profit for the current year.
    And let’s be clear that profit is defined as sales/receipts less returns and allowances less expenses. So if a business has a $100K profit, they likely took in 5-10 times that much if a traditional brick and mortar business. If internet based the actual sales are likely closer to that $100K level.
    That being said, a 10% flat tax does not give the amounts listed above. If it’s truly a dividend the person receives, that money is coming from the AFTER TAX corporate net profit. Current corporate taxes rates are in the mid 30’s I think.
    Presume 30% to be lenient. $100K after tax yields a net before tax of $142,857.14 ($100,000/.7). That means Person A has already paid $42,857.14 in taxes. Since dividends are taxed a second time, he does pay the 10% on that for a total tax bill of $47,857.14 on income of $167,857.14 ($25K personal income plus the $142,857.14). That is a rate of 33.5% vs. the 10% paid by Person A.
    If we are talking about a sole proprietorship, then the entire $100K would presumed to be profit before tax. That $100K is recorded on his Schedule C as noted above. His total taxable income is $125K at 10% for a bill of $12,500. He pays the same rate as Person A but pays 2.5 TIMES the amount.

  9. Sales taxes are NOT regressive. They are flat and the ultimate in egalitarian taxes because you choose how much tax you want to pay.
    Well, perhaps strictly speaking, assuming infinitely elastic demand for sales taxable goods & services, then… again perhaps… they are not regressive, per se. But again, does anyone doubt that the net effect is regressive? For that matter, does anyone doubt that state lotteries are regressive? Rich people don’t get rich by going out and buying (taxable) Slim Jims and Licorice Ropes with every spare dollar they make. They get rich by saving… a lot. And a penny saved is actually more than a penny earned (because of taxes and ROI). It should therefore be obvious that, while the “rich” may be consuming more than someone making, say, half their income, they are not consuming twice as much. Sure, anecdotally, we can find high income people with negative net savings rates… but the long and the short of it is that “the rich” are rich by and large because of thrift.
    A person making twice the national average salary, for example, should be able to maintain a substantially higher savings (plus investment) rate than the average person. Some do not, but they’re fools (and not in the Motley Fool sense either). Most, I think, do.
    Cheers!

  10. Chris… It’s true that the Forbes style plans eliminate deductions. When you get an $8500 per person exemption off the bat plus your mortgage interest, you are already excluding a huge portion of the income from being taxed.
    I think that Forbes had it at 17%. Using the $50,000 person from the example above and presuming it is a family of 4, only $16,000 of that income is taxable for a bill of $2720 and a rate of 5.44%. A family of 4 making $100,000 would have a taxable income of $66,000. They would pay $11,220 for a rate of 11.22%.
    These examples assume no mortgage interest deducted, but even so, I doubt the second family pays enough in mortgage interest to bring their rate and amount down to the same level as the first one.
    So, the Forbes flat tax is actually a progressive tax itself. Additionally, think of how many people would be removed from the tax rolls that make less than the $8500 per person exemption. And it has the added benefit of promoting marriage and child rearing.

  11. Tim,
    I was making an academic argument. The presense of other taxes complicates the calculations and complicates definitions. My point was only to proved that a flat tax was regressive, not to show the effect in the current system.
    I should add that I don’t believe businesses pay taxes other than in an accounting sense. Businesses are simply a conduit for the taxes of the buyers and the owners. That my friend is for another day.

  12. OK, so everybody gets a “better-paying” job. Guess what? They’re still the lowest-paying jobs, so the tax brackets just get readjusted and you’re still paying the higher rates.
    You mean no one ever moves into the economy? Say, from his parents’ support? Or from immigration?

  13. These comments all appear to be academic, but the hypothetical situation that the arguments are based on–Ferengi-style regressive taxation–seems to be nothing more than a bugaboo.
    Ferengis wouldn’t have regressive taxation; they wouldn’t have taxation at all! That’s why they’re called “Ferengi.” Remember?
    If you want to discuss the real world, there are proposals for revamping the tax system already out there. Two of the most prominent are The Flat Tax (which has been discussed in this thread above) and Replacing Income Tax With Consumption Tax (which has also been obliquely discussed in Steve Nicoloso’s comments about sales tax).
    Flat Tax has the virtue of taxing everyone on exactly the same standard.
    Replacing Income Tax With Consumption Tax has the virtue of “punishing” buying stuff you don’t need, as opposed to “punishing” people for achieving their dreams.
    Flat Tax has the vice of being a crushing burden on, say, a head of a household who earns $20K or so.
    Replacing Income Tax With Consumption Tax has the vices that Steve Nicoloso has already pointed out above–i.e., sales taxes hit the people who buy lottery tickets and Slim Jims. Rich people don’t buy lottery tickets and Slim Jims because they’re too busy figuing out how to write off the caviar-and-champagne party held onboard their private yacht as a tax-exempt business expense.
    Flat Tax, Consumption Tax, and Progressive Tax all have their strengths and weaknesses. (For that matter, so does Regressive Tax.) Any one that a society would choose to adopt would have to be adapted to the unique demands of its particular society, and from there, continually monitered and adjusted to maintain a practice of basic fairness in the face of ever-changing economic needs.
    In the case of modern-day America, I would propose that it is not taxation, but with government spending, that we must be primarily concerned with.
    So, the real question, I think, is not “Who is paying our tax-dollars,” but rather “Who is spending our tax-dollars?” The answer, and the end of this long web of hypothetical “fair” taxation proposals, can be summed up in a single word:
    Bureaucracies.
    Bureaucracies, by their very design, must overspend their budget just to survive. Overspending ensures that funding will increase in the following year. Thriftiness, to a bureaucracy, is essentially asking to have one’s funding cut and for one’s bureau to be phased out.
    Bureaucracies, by their very design, are accountable to no one. To get fired from a bureaucrat job, you have to do something that is Unmitigatingly Bad, that also results in an Unmitigated Disaster, which gets picked up by the Mainsream Media, and also builds to the point where resigning would provide one with a better book deal than staying on. At that point, the Powers That Be would finally have enough leverage to convince you that ghostwriting an NY Times Bestseller would be a more lucrative career move than staying on at a job you were too incompetent perform.
    Bureaucracies, by their very design, are inherently communistic. After over a decade and a half of Bureaucratic Communism being relegated to the Ashheap of History, it seems about time that we give up on this obviously misguided ideal.
    Once inefficiency, unaccountably, and adherence to empirically discredited economic theories are abandoned, we will see government transform; and from that transformation, a framework will appear.
    Once that framework is established, the amount and/or percentage of the wealth of the citizenry that government really needs in order to run will begin to clarify.
    Once this clarified framework begins to take form, and once the true monetary needs of government are ascertained by the citizenry who fund it, only then will we be in a position to talk about such concepts as “fair taxation.”

  14. Ry suggests:
    Flat Tax, Consumption Tax, and Progressive Tax all have their strengths and weaknesses. (For that matter, so does Regressive Tax.) Any one that a society would choose to adopt would have to be adapted to the unique demands of its particular society, and from there, continually monitered and adjusted to maintain a practice of basic fairness in the face of ever-changing economic needs.
    I absolutely agree that “basic fairness” should be the main focus… but what is basic fairness? The CCC has a fair amount to say. Some food for thought: Does basic fairness require a government to attempt to engineer a certain outcome by certain carrots and lashes within the tax code? A net regressive tax (like a poll (flat fee) tax or sales tax) may in fact promote “economic growth”, i.e., increasing GDP, all the while increasing economic disparity between the top 10% and bottom 10% of incomes. (Situation normal in the US for most of the last 25 years.) And a progressive (or increasingly progressive) income tax may reduce wealth disparities between rich and poor, even while it may promote economic stagnation. Is it obvious that one, “economic growth”, promotes greater justice than say, “economic leveling” (which is not far from distributism, btw)? I say it is far from obvious… If anything, I would think the Christian bias would be toward the latter (leveling) concept. Which all brings us back to basic fairness: What does it look like?
    Is it the “job” of governments to ensure economic “growth”? Is it the “job” of governments to promote economic “parity”? Perhaps it is neither… and we certainly do neither man nor our Faith nor God a favor by baldly assuming it is one, the other, or both. But it is, clearly by Scripture and Church teaching, governments’ job to promote justice (basic fairness if you will)… so this should be the primary focus, not on particular “outcomes” promoted or by tax law.
    Cheers!

  15. The episode HOUSE OF QUARK is one of my favorites. I think accounting should be mandatory in our schools and obviously the computers we have today should make household accounting a piece of cake. My 300 MHz laptop is more powerful than an IBM 3033 that cost $3,000,000 in 1978. Can there be any doubt that they were used for corporate accounting?
    The trouble is our current economic system defies the laws of physics. Somewhat like the transporter in Star Trek. Cars purchased by consumers wear out and therefore depreciate. When do economists tell us what we lose on that junk each year?
    Oh yeah! Consumers are supposed to be accounting dummies like Klingons and lose their houses like Grilka’s husband. I hear that’s happening in California now.
    GlobaLIES
    psik

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