The Border Patrol

The best economists keep an eye out for borders—lines in time or space dividing sharply different levels of economic activity. In all likelihood, such borders reflect a discontinuity in incentives: On one side of the line work is encouraged, on the other side leisure makes relatively better sense. Taxes are by far the most important cause of such discontinuities in incentives. Thus, if we know that taxes will be higher in 1985, then December 31, 1984, becomes a border. Economic activity will increase before that date, for the same reason that farmers make hay while the sun shines.

Jude Wanniski has drawn attention to the literal border dividing high-taxed, impoverished Ghana and low-taxed, prosperous Ivory Coast. David Ranson of H. C. Wainwright Economics points to the June 12, 1979, “border” in the British economy. On that day the value-added tax was increased from 8 to 15 per cent. Since this tax increase was announced a few weeks before it took effect, economic activity boomed in those weeks and collapsed after June 12. Customers simply pre-empted the tax increase. Government economists typically did not foresee this flip-flop in the British economy.

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Tom Bethell

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The best economists keep an eye out for borders—lines in time or space dividing sharply different levels of economic activity. In all likelihood, such borders reflect a discontinuity in incentives: On one side of the line work is encouraged, on the other side leisure makes relatively better sense. Taxes are by far the most important cause of such discontinuities in incentives. Thus, if we know that taxes will be higher in 1985, then December 31, 1984, becomes a border. Economic activity will increase before that date, for the same reason that farmers make hay while the sun shines.

Jude Wanniski has drawn attention to the literal border dividing high-taxed, impoverished Ghana and low-taxed, prosperous Ivory Coast. David Ranson of H. C. Wainwright Economics points to the June 12, 1979, “border” in the British economy. On that day the value-added tax was increased from 8 to 15 per cent. Since this tax increase was announced a few weeks before it took effect, economic activity boomed in those weeks and collapsed after June 12. Customers simply pre-empted the tax increase. Government economists typically did not foresee this flip-flop in the British economy.