The Puzzle
It’s a puzzle, to be honest.
The same people who believe human behavior responds powerfully to social incentives - peer pressure, nudges, default settings, social norms, laws that shape expectations - will, in the next breath, deny that human behavior responds to economic incentives like taxation and regulation.
The same people.
A default setting changes your pension choices. Responsiveness: celebrated. Proof that people can be steered toward what is good for them, gently, without coercion, and they will cooperate.
A wealth tax changes where capital goes. Responsiveness: denied. The money will stay. The rich will pay. The revenue will arrive exactly as forecast.
Both claims are about the same mechanism. Humans responding to the costs and benefits in front of them. One is celebrated. The other is dismissed.
What on earth in going on here?
The Sharpening
Here is the honest version, because the cheap version is false.
The claim is not that the people who design social policy deny that incentives work. They do not. The carbon-pricing/carbon credits movement rests entirely on the claim that taxes change behavior. Elasticity is not a footnote to a carbon tax. It is the whole point of the carbon tax. Same with a sugar tax. Same with a tobacco duty. Raise the price, people buy less. The behavior change is not a side effect of these policies. It is the aim of the policy.
So the puzzle is narrower, and more damning.
Incentive responsiveness is invoked selectively. Credited when it serves the policy goal. Denied when it threatens it.
Credited: a nudge that moves your pension contributions. A social norm that changes your energy habits. A carbon price that makes you drive less. People respond to price - when we want them to.
Denied: a wealth tax will not drive capital abroad. A windfall tax will not cut investment. A new layer of regulation will not move jobs. A tariff will not raise prices. People do not respond to price - when we do not want them to.
Same human beings. Same mechanism. Two contradictory models of human nature, selected by convenience.
And notice the second tell, the one that completes the picture. When the credited policies fail - when a carbon tax provokes a revolt and the emissions barely move - the response is never “people do not respond to price.” It is “the price was not high enough.” The belief in responsiveness is abandoned only when responsiveness threatens the policy. When responsiveness fails the policy, the belief is kept and the price is raised.
That is not a theory of human nature. That is a policy goal wearing a theory of human nature as a costume.
The Direction of the Arrow
Why the selection? Start with the simplest reason: whose behavior is being changed.
A nudge moves your behavior toward what the designer wants. Responsiveness is the virtue that makes the policy work. Without it, the nudge is nothing - a default setting nobody follows, a norm nobody feels. The entire edifice of behavioral public policy is a bet that people are responsive. Every pension auto-enrollment scheme, every opt-out organ donation regime, every energy bill that tells you what your neighbors use - all of it is a wager on elasticity.
A tax also moves behavior. But the movement is inconvenient.
If a sugar tax works, that is the policy working. The behavior moved the way the policy wanted it to move. Triumph.
If a wealth tax works - if capital actually relocates, if investment actually shrinks, if fortunes actually restructure themselves around the tax - the policy has failed. The revenue estimate collapses. The jobs claim collapses. The mandate collapses.
Same responsiveness. Opposite evaluation.
The difference is not in the humans. It is in the direction of the arrow. In one case, the designer sits in the audience and watches someone else’s behavior change, and calls it a success. In the other, the designer is on the stage - and the behavior that changes is the behavior the policy depends on.
A nudge is aimed at you. A tax is aimed at the policy. When the response serves the aim, it is real. When it threatens the aim, it does not exist. The same movement of human behavior is a triumph in the first case and an impossibility in the second.
The Revenue Machine
Now follow the money, because the denial is not a mood. It is structure.
The revenue estimate for a wealth tax is built on a static base. Multiply the rate by the pile of wealth, and the number appears. The estimate stands only if behavior does not change.
If wealth taxes do not change behavior, you can tax the rich freely and the forecast holds. The revenue arrives. The programs are funded. The promise is kept.
If they do change behavior - if capital relocates, if fortunes are restructured, if the taxable base flows to a friendlier jurisdiction - the estimate collapses. The money does not arrive. The promise is not kept.
So the denial is not an empirical claim about the world. It is a load-bearing wall of the budget. Tear it down and the whole structure comes with it.
Who benefits from denying elasticity? The imposers. The same people who benefit from every repeated stupid decision documented in Incentives Matter: The Problem That Can’t Be Solved - the politicians who get the credit for the gesture, the bureaucrats who get the budget for the crisis, the advocates who get the grants for the cause. This is the same coalition mapped in The Grievance Machine, Part II: Who Profits from Panic: politicians needing issues, officials needing problems to regulate, journalists needing crises to cover, activists needing causes to fundraise for. The revenue machine does not care whether the revenue arrives. It cares that the promise of revenue keeps the machine funded and its authors in office.
Look at the shape of it. A revenue claim that depends on zero behavioral response is a claim that the people being taxed are the one group of humans on earth who do not respond to incentives. Everyone else responds. The poor respond to a sugar tax. The middle class responds to a nudge. The motorist responds to a fuel duty. Only the rich are immune - immune, that is, until the subject changes to a carbon tax, at which point they respond like everyone else, and their responsiveness becomes the entire basis of the policy.
Two Models of Human Behavior in One Head
Hold the two models side by side. They cannot both be true.
Model one: humans are responsive. Defaults shape retirement savings. Social norms shape energy use. Prices shape consumption. This model is assumed whenever a policy wants to change someone’s behavior. It is the foundation of the behavioral-policy edifice, from pension auto-enrollment to the carbon tax. Thaler and Sunstein built an entire field on this premise, and their founding document - Nudge - is, from first page to last, a book about the elasticity of behavior.
Model two: humans are not responsive. Capital stays where it is taxed. Investment continues at the same rate when the return is confiscated. Work continues unchanged when the reward is removed. This model is assumed whenever a policy wants to tax someone’s behavior without consequences.
The same species cannot be both. Not in the same decade. Not in the same country. Not in the same person. The banker who responds to a default setting on his pension form does not become a different animal when the conversation turns to the tax rate on his bonus. The company that responds to a sugar tax by reformulating its soda does not become a different company when the subject is a windfall tax on its investment.
But each model is convenient when needed. That is the tell. These models are not held because they are believed. They are deployed because they are useful. Call it the selective model of human nature: behavior is elastic when elasticity serves the policy, and rigid when rigidity serves the policy. The human being is whatever the budget needs them to be.
Elasticity Is a Sliding Scale, It’s Never Zero
The economics here is not complicated, which is exactly why the denial is so telling.
Every tax has an incidence and a response curve. The person who writes the check is not always the person who bears the cost. Taxes - Who Actually Pays walks through this in detail - the coffee shop tax passed on in the price of a cup, the American yacht tax that the rich dodged by buying different boats while the factory workers paid with their jobs.
The question is never whether people respond. It is how much. Elasticity is a magnitude. It is not an on/off switch. Nothing traded is perfectly elastic, and nothing traded is perfectly inelastic. A demand curve that is perfectly vertical - zero response to any change in price - is the one shape no economist believes exists in practice for anything that is bought, sold, or taxed. It is a textbook limiting case. It is not a description of the world.
And the denial is, in effect, a claim that elasticity is exactly zero. Not small. Not modest. Zero. The one number that is never true.
Here is the sharpest part. The people who build the models do not make the denial. The Laffer Curve, Alive and Well in Scotland documents a government raising its top rate while its own official forecaster quietly cut the static estimate by about 85 percent before the rate even took effect - the response was built into the number before the policy was enacted. The modelers believe in elasticity. That is why their forecasts are lower than the promise. The imposers deny it. That is why the promise survives even the changed forecast. The denial is not made by the people who do the arithmetic. It is made by the people who sell the result.
Where the response is small, the policy works and the revenue arrives. Where the response is real - capital relocating, investment deferred, work discouraged - the revenue does not arrive, and the cost lands somewhere else.
Scotland is the cleanest recent demonstration of the response itself. The money did not flee to Dubai. It did something cheaper and faster: it changed form at the stroke of a pen, out of the kind of income the tax could reach. No passports involved. No moving vans. Just human beings responding to the cost in front of them.
The windfall tax is the same story wearing a different coat. The 78% Tax on the North Sea - The Windfall Tax That Taxes Investment shows a rate so high that it stops taxing profits and starts taxing the decision to invest at all. The state demands most of the return. The firms, being run by the same species of human being as everyone else, respond - by not investing. The response is not a prediction. It is the entire point of the exercise, for everyone except the people who wrote the estimate.
The wealth tax follows the same path, and the history is already written. The Billionaire Tax Test: Why California’s Proposition 40 Will Fail Like Every Wealth Tax Before It catalogs the record: wealth taxes have been tried, in country after country, and abandoned, because capital is the most mobile thing a society produces. It moves across borders, across legal forms, across time. It responds. Everywhere.
And the regulation claim - the jobs will not leave - is the same denial again. The Regulation Tax: The Cost You Never See shows the mechanism: regulation is a tax paid in compliance costs, and like any tax it changes the behavior it falls on. Firms do not close factories out of spite. They close them because the cost of running them somewhere else fell below the cost of running them here.
Where the response lands, it lands on the people the policy claims to help. Capital that relocates takes jobs with it. Investment that is deferred takes wages with it. Work that is discouraged takes opportunity with it. The 2% Rule explains why this matters: the gains from productive activity do not stay with the people who organize it. Almost all of the value flows out to consumers, most of it to the people at the bottom. Tax the activity and you are not taxing the organizer. You are taxing the flow - and the flow is what the poor depend on.
The Free Market Is More Democratic Than Voting makes the companion point: the choices people make with their own money are the most responsive, most immediate form of consent a society has. Every trip to the grocery is a vote. Every job change is a vote. Every relocation is a vote. A policy that denies responsiveness is a policy that denies the evidence of every one of those votes - because to do otherwise would be to admit the policy is not going to succeed.
The Lens
So the lens is a question.
Next time someone tells you a default setting will change people’s behavior, ask them why a tax will not.
Same people. Same mechanism. Same response to the costs and benefits in front of them. The only difference is whose behavior is being changed - and who benefits from pretending it will not happen.
The nudge works because people respond. The tax does not, because the estimate needs them not to. Both cannot be true. One of them is a policy. The other is a hope dressed as arithmetic.
Ask which is which. Then ask who is counting on you not to ask that question.