The wisdom of Scott Sumner

Some on the left argue that consumption taxes will favor the ultra-rich because they consume a very small share of their income.  But if that’s so, then no tax regime will put much of a tax burden on the ultra-rich.  Just as you can’t squeeze blood from a stone, you can’t put a tax burden on misers.  As Steven Landsburg pointed out in one of my all time favorite posts, society views misers like Scrooge as being selfish individuals, when actually it’s people who consume a lot who are selfish. Misers leave more for others to consume.

In my only slightly cynical view, a lot of the debate about taxation is more about showing the wealthy that they need to lose (or win, on the other side of the debate) a few political battles than it is about actual canons of efficiency or for that matter even well-specified theories of egalitarian justice.  For instance I find that few proponents of a higher inheritance tax realize it will increase current consumption inequality, by encouraging the wealthy to consume more rather than paying the tax.  Nor do they seem to care, once this is pointed out.  I call this “the comeuppance” theory” and it is another example of Robin Hanson’s motto that “politics isn’t about policy,” but rather is a spat about which monkeys should have a higher or lower status.

Scott’s post is here, and it contains other points of interest.

Comments

An annual wealth tax would be better than a once-in-a-lifetime inheritance tax. In any case, while an inheritance tax would increase consumption inequality in the short-term, it would decrease it in the long-term, as presumably the incentive to acquire obscene levels of wealth would decrease.

Are you suggesting, then, that a high inheritance tax would be a good thing because it would make entrepreneurs stop working so hard? That is what it seems, but that would be a strong argument to eliminate an inheritance tax. What I derive from your comment is that the world will be a better place when the best and brightest stop innovating and creating and just become janitors like the rest of us, because then they won't be obscenely rich anymore.

Only a small fraction of the people who become obscenely rich are entrepreneurs, majority are CEOs of large companies or work in finance. http://www.pinterest.com/pin/87890630200292852/

That isn't even wrong. I guess I should expect that from a pinterest link.

You make "obscenely rich" be the people in the top 0.1% of wage earners. Obviously "obscenely rich" is going to be opinion, but no justification at all is given for this.

The graphic uses different sized people in different parts of the graphic, making it very hard to visually compare groups. Possibly on purpose.

The graphic explicitly excludes capital gains, for no good reason. If you supposedly want to talk about inequality of wealth, excluding capital gains is bonkers. And many entrepreneurs claim all the gains as long-term capital gains, not as wages. This is a completely crazy way to respond to someone claiming that taxes discourage entrepreneurs. (I'm not saying grand-parent comment is right. I'm saying this is a complete non sequitur of an attempt to refute him.)

I would expect this to be submitted by a first semester college student who suddenly had a conversion experience from a charismatic professor.

If you don´t like the graphic you can read this instead.http://marginalrevolution.com/marginalrevolution/2010/12/the-newest-and-best-data-on-income-inequality.html or the link to the paper that it came from

And that would seem to be a situation the Piketty-ish could get behind...moving wealth from the capitalists to the workers.

Uh... you mean destroying wealth of the capitalists and thereby also reducing the wealth of the workers?

Exactly my point. The leaders of business and finance make up the very rich. The economy would be better off if the top management of the Fortune 500, and the bankers who finance new start-ups, etc, all quit working because they don't want to accumulate too much? That's what the original poster seemed to imply.

If people went from careers in finance to careers in research, it could make the world a better place.

What makes you think that people who do well in finance would be any good at generic-unspecified research?

It seems as unlikely as the converse, that brilliant researchers would make great financiers or executives. The skills are totally different, as I understand it, and I see little reason to believe the mindsets are similar.

(For that matter, try doing research without capital and cash, and a surplus of wealth created by non-research labor and capital. It's rich people and societies that can devote leisure or capital and labor to research.)

Of course, we are all very serious people who don't care at all which monkeys have higher status--we're true egalitarians, which is why we believe income inequality is not a problem at all, and consumption taxes are much better than income taxes because, well, you earned your income, no matter how you got it.

For some, seeing the words Very Serious People or crazy right-wingers bypasses normal rhetoric and argumentation and assures one of one's correctness, as effectively as a political Queen of Diamonds.

I don't care much about status, but that's not why I don't care about income inequality.

I don't care about it because people keep not being able to tell me why I should other than "it's not equal". If they were able to tell me with a straight face that income inequality was making poor people worse off in real terms, that'd be a telling point. But that one never works and people don't seem to even bother with it anymore - the telltale there being that they're talking about "income inequality" in the first place, rather than "look at how immiserated the poor are compared to just recently [or earlier than that]".

I do try to be a serious person [around economics and policy, at least], which is exactly why I don't care about income inequality in-and-of-itself.

(No, "earned" is the wrong word, especially with "no matter how". I've never seen anyone suggest that fraud, for instance, was "earned" income. Now, inheritance and trusts are not earned either, nor wickedly acquired ... but they don't need to be "earned" to be "rightfully yours", because property rights are not derived from someone else thinking you're "worthy". The idea that only those who Really Earned Income [The Right Ways] "deserve" to keep it is the core problem, right there.

That way lies banditry and expropriation, and thus universal immiseration.)

(If it helps, I don't like consumption taxes any more than income taxes. Not that there's a huge difference, since eventually all general taxes are taken out of incomes, one way or another. Where else can they really come from?)

Wait - are you really making the claim that we should be against an inheritance tax because it will increase short term consumption inequality? Is this some uber-Pareto criterion, that we can't consider a progressive policy measure unless it reduces inequality in every possible way that you measure it? Tyler, you're being absurd. The inheritance tax is about decreasing inequality across generations - short term effects on consumption inequality are no more relevant than the fact that an inheritance tax will also encourage the wealthy to give a lot more to charity.

You have had many intelligent things to say about inequality, but I also observe a lot of cases where if an argument reaches the same conclusion as you (i.e. inequality is fine), you just throw it out there whether it is a good argument or not. Am I asking too much of a blog that it be as intelligent as its owner?

Paul is exactly right.

I think you misunderstand Tyler's job. It isn't to debate economics--it's to muddy the waters and move people's attitudes towards policies that favor and enrichen the Koch brothers, who fund his department and probably this blog. I wouldn't take him seriously (few do).

Could you help us out by coming up with a term for using "Koch brothers" to puff up oneself in self righteousness, morally preen, and end all discussion because SQUIRREL!

Like Godwin's Law, but cooler.

Sheesh.

I'm not self-righteous at all--but I'm not the one with a blog that has "revolution" in the title. Who am I? Just a guy working to save money for retirement and feed his family. I'm not spouting off Grand Ideas to help the world (and maybe some people a little more than others).

Don't think I'm self-righteous because I can see rampant corruption when it's obvious. That just makes me someone of average intelligence.

Your humility is justified.

See here.

It's a historical economics reference, not a call for political change at gunpoint.

Saving for your retirement? Goody! I can't wait to get my paws on that excess money!

"The inheritance tax is about decreasing inequality across generations"

Maybe you could make the case that you or somebody else has a right or responsibility to determine what's going to happen to future generations but it wouldn't be easy. You can't predict the future and it's the height of hubris to attempt to set the agenda for the unborn, who will be perfectly capable of taking care of themselves, or at least as capable as you are. This never-ending concern for "the future" is a shallow attempt at little more than self-aggrandizement in double speak. Manage your own affairs and don't mess with the future.

The theory that the optimal tax on capital is very low is based on promoting long run growth, in fact the strongest results in that facor are from models where time approaches infinity. If we were to only think about now, then it would very obvious that we should begin soaking capital hard.

Yep, eat your seed corn.

Because in the end the politics of inequality is not about thinking, it's about feeling. The feeling is stoked when a politician claims it's not "fair" that some have so much when others have nothing.

I've been unable to understand Tyler for a while now. The way I understand it, his views go something like the following. Technology is going to drive inequality to really high levels (Average is Over), and it won't be terrible, but it also could stand to be mitigated. We currently arent doing much on that front. Tyler espouses a sovereign wealth fund, zoning deregulation, education reform, among other things to justifiably combat inequality. However, ever since Piketty got the attention, Tyler has spent nearly all of his time shooting down ideas on fighting inequality or even going so far as to say it isn't an issue. Social security reform would be terrible. Raising taxes is about a monkey fight. Etc.

The only way I can make sense of this change of heart is that when Tyler says politics is about monkeys fighting for status, it's a sort of confession. He's the monkey that wanted to have explained the future and get invited to the white house to hob knob and pontificate about policy. Instead he and his idiosyncratic view of inequality are stuck at some middling Freakonomics level of fame, where well to do nerds recognize you and you have an NYT column, but history probably won't remember you.

As for Sumner, he has his points, but the whole act about being a selfless internationalist is hollow. If Scott really cared mostly about international inequality he would be favor of driving the virtuous capitalist misers away from the already rich to the rest of the world into the arms of the developing. The surest way to do that is encourage capital flight through a wealth tax. Outsourcing labor raised standards all over the developing world, why not outsource capital too? Presumably, Scott know his act is absurd, but would rather not have to defend his own view of the nationalist project when it's so much easier to be churlish toward "the left", aka the only real constituency for AD management. Status man. I'm starting to get it.

Piketty is a communist/socialist/statist. Inequality is a stupid issue and it's been trumped up to appease idiots for political gain. The real cause of inequality is differential personal abilities and temperaments and the government can't do anything to fix that (because we're all special and valuable in our own unique way). See the current state of Venezuela for reference as to how that goes.

"We have inequality so we must international communism." Piketty

Maybe you've identified the real problem, why the hell is Tyler even taking Piketty seriously? Is he afraid of discrediting his entire profession?

My views fall somewhere between Piketty's and Tyler's, but to assert that a global tax on wealth is international communism is intellectually dishonest.

It might be a bit hyperbolic :P. Not dishonest

Its going in the wrong direction and something tells me saudi princes, african kleptocrats and russian oligarchs might not be too keen on the idea.

"but to assert that a global tax on wealth is international communism is intellectually dishonest. "

It's not international communism, but it is an unrealistic idea that will never gain any traction in the real world. You might as well advocate for Esperanto.

Tyler has spent nearly all of his time shooting down ideas on fighting inequality or even going so far as to say it isn’t an issue. Social security reform would be terrible. Raising taxes is about a monkey fight.

Cowen has been shooting down the ideas on fighting inequality that he thinks are destructive and pernicious. Until commentators like you are willing to at least grant him this much, I suppose you will continue to be confused.

I'm all for hearing ideas. I actually the idea of a consumption tax with high marginal rates, a la Sumner. There's a nice debate to be had about some combination of social security reform, soveriegn wealth funds, or other mandatory savings to give everyone access to the joys of capital.

Instead, all we hear about is the obsession right of center pundits have about "the left." I mean Elizabeth freaking Warren isn't even on board with Piketty's wealth tax and we are supposed to feel under threat by it. The problem isn't the bobos or authoritarian leftists; it's contrarian pundits who insist on dominating the debate rather than making the humble realization that someone from the other team made a poaitive contribution to changing the political focus.

I don't disagree with Jared's posts, but I will point out that Piketty, in the final chapter of his book, is highly critical of micro-foundation types. I'm not sure why Piketty felt it necessary, as it doesn't exactly make Cowen, Sumner, and the rest sympathetic to his argument. But Piketty did get their attention. My observation is that Piketty's critics have mostly engaged in hand-waving and diversions ("nothing there, so let's move on").

Really? My observation is that Piketty's critics have completely eviscerated his conclusions, and the left has responded with hand-waving and "great data" and "well the details aren't really important R>G!!"

Jared,

Do you hear about an obsession with "the left" from Tyler??? If not, why even bring it up?

Your thoughts regarding Sumner could not be more wrong. Why don't you ask him your questions in his comments- he actually responds to commenters. I guarantee you he is not taking a position that he thinks is absurd.

And if there is a global wealth tax, how is that going to drive capital to developing countries?

If they are developing, does that not imply capital is already going to these places? If that is not the case, can we discover how these places have developed zero-point economy machines?

On a complete tangent. Global wealth tax....lulz.This is about as likely as a peaceful resolution in Ukraine.

The real problem with foxes is they just want to be bonobos.

Somewhat related - the Labour Party in NZ is proposing pro-cyclical compulsory savings rates:

http://www.nzherald.co.nz/personal-finance/news/article.cfm?c_id=12&objectid=11246276

Obviously the institutional details matter - as far as I understand the central bank would control both the savings and the interest rate...

"Some on the left argue ...," I have not seen an argument against a progressive consumption tax as a replacement, for example of the corporate and personnal income taxes. I suppose one could be made, but who has actually made it?

From another Sumner blog post: "The only thing standing between us as a radically simplified, radically more efficient, progressive consumption tax is a corrupt and/or ignorant Congress."

http://www.themoneyillusion.com/?p=20382

How would a progressive consumption tax even work? The name itself hints at boondogglery. Is someone going to have to carry around a tax-bracket identifier, or are the progressively higher figures automatically charged as the expense increases?

Ryan you could start by raising the cap on IRA contributions and taxing money not put in the IRA plus withdrawals for the IRA.

Billionaires who consume at even one-tenth the rate of the median household are not misers.

In my only slightly cynical view, a lot of the debate about taxation is more about creating myths to justify keeping the wealthy in place and the unwashed masses in their place than it is about actual canons of efficiency and they don't care a whit about justice of any kind.

That's an intense misreading of your opponents, and some really lazy assumptions about places and justice.

You were speaking to Tyler right?

You obviously do not know the definition of miser

Wow you guys need to go back and read Dickens again if you think not consuming a lot was why Scrooge was a miser. And don't just skim a few chapters like usual.

Well MSNBC thinks that Orwell's Animal Farm was about the excesses of capitalism, so I guess that these days literature means whatever you want it to mean.

So Postmodernism did win!

But 1984 was a how-to book, right?

It's a pro-Trotsky allegory of the rise of communist Russia. Those awful, terrible pigs at the end are portrayed as awful because they're sitting down with the humans, who are the Western capitalist countries in the allegory. It's not focused on the excesses of capitalism, but it doesn't exactly paint it in a good light, either.

??? miser: a person who hoards wealth and spends as little money as possible.

There's an interesting question - if the money goes into big vaults, only to be used for swimming, or into mattresses, it might as well go into a furnace. It ceases to become effective wealth. Only when it is available for 'consumption' is it real.

So what does hoarded wealth yield? Well, it yields three things:
1. Deflation. The supply of money goes down, the value of circulating money goes up.
2. Potential energy. There is a threat or an opportunity there, that someone will gain access to it. This can create motivations, in so much as people judge the possibility of shaking some of the money loose. This can actually 'use' money without spending it - but probably people get wise to it over time, that is, their assumptions about the chances of getting the money change.
3. Buffer against negative income shocks. The money tends to emerge when times are tough, so that other peoples' money gets diluted just when things are scarce - but it also comes out when it is least valuable, in this sense, unless major assumptions are made about sticky prices.

In short, there is no reason to tax 'money in the bank.' The debate should be entirely about taxing income vs taxing expenditures - and the most progressive option is almost certainly to tax expenditures, with the taxation tailored (to a degree) to the market basket. It should spare the market basket of essentials and investments, in so much as is possible, and tax vices (that is, consumption that creates negative externalities in society - smoking, drugs, etc) and luxuries.

There’s an interesting question – if the money goes into big vaults, only to be used for swimming, or into mattresses, it might as well go into a furnace. It ceases to become effective wealth. Only when it is available for ‘consumption’ is it real.

I own stock in my brokerage account. How much money do I have in my brokerage account?

I'd love a sales tax-only system. I'd do my best to save even more money for early retirement, and then move to a nice Mediterranean country to spend it. I am sure immigrants who send a lot of their income back home would love this too.

You can say the same thing in reverse if the system were income-based.

Robert Franklin above is largely correct.

The answer is in one or more of the four or five post-modern answers to everything.

The answer does not involve raising necessary money for government to use to benefit of all the people, i.e., the public good: res public meaning the public thing. The issue is class. The recent effects of government takings from one class and giving trillions to among others are vastly enriched Wall Street (QEternities: skyrocketing bond/stock prices and zero borrowing costs since 2009) moguls and crony-capitalists in the "green space" who have enjoyed $500 billion in US boondoggle dollars.

You would not be debating this if you lived in a repuiblic.

But that isn't inequality. That is the direct result of a policy, an entirely predictable result of the central bank policies worldwide. To shovel this money out the door then go on about how we have to get it back is plain silly.

And illustrates Cowen's point above; The desire to get at these people who place themselves in the money stream of the vast government financing and economy manipulation policies is a great idea. The problem is that the largest negative effects will be felt in the productive economy. The dynamism that allowed for example the tech giants over the last few decades will not happen. Smart people will go elsewhere to do their great things. The US has been that elsewhere for a long long time and has benefited enormously as a result.

All you wanting equality so much, please model the US economy over the last three decades without the innovations and technologies that created the tech sector, and many rich people. They would not have happened in the US if all these equalizing policies had been in place.

Have we benefited enormously compared the rest of the world in the past 2-3 decades?

Has the rest of the world been free-riding on our innovation?

Look at the curve of government expenditures as a percentage of gdp. The movement of jobs elsewhere are the result of high costs, and in response our fearless leaders add more costs. Why would anyone invest in the US? There are a couple of bright spots, and they attract investment, but otherwise you can do far better elsewhere. Peter Thiel said that the biotech investment funds have all stopped because of the ridiculous cost of regulation.

Taxing and spending is the problem, not the solution.

OK, I'll buy your argument that a higher inheritance tax would increase consumption and cut savings.

But I would like to see a reasonable estimate of how large this impact would be and whether it is more of a distortion than other forms of taxation.

I suspect the distortions would be much smaller than the distortions from alternative taxes.

If you believe this, then you should be supporting a progressive consumption tax, not an inheritance tax. Or, alternatively, you should be supporting policies that give incentives to the lower classes to accumulate capital assets.

Why not have both?

Bob: Interesting, a tax evasion plan that decouples the location/time of earning and the location/time of spending. I think it's been done, but then, this raises a bunch of interesting questions. For example, how to tax the purchase/exchange of currencies. The larger question, about finances are shaped over the course of a lifetime, is another good question.

As for people discussing misers, yes, a miser doesn't spend on himself, or others. The definition of the miser is partly low consumption and partly low charity. The ultimate answer to the miser is that while he may increase the suffering of others during the process of his grasping acquisition, he does so no more than the conspicuous consumer who also squeezes fellow man during the process of acquisition, and in the end, the miser leaves it all behind him at the grave, doing no additional harm in the process. As for the person who is not truly a miser, but consumes little himself...
Nobody complains too much about someone who is thrifty at home and charitable towards others, but that person should end up paying (under my proposal) a very low tax rate because all the consumption ends up being funneled through the basic needs market basket. And why should such a person pay high taxes? Because of some perverse desire on the part of politicians to lay hold of anything that might present an alternative power center and source of influence?

It seems like tax discussions always talk about taxes as if they were the end and not the means. A higher inheritance tax is only partially about decreasing inequality across generations - more significantly it could raise real money to spend on real programs that benefit the greater society.

And here is the barking mad comment of the thread. Seriously.

There won't be anything to seize. People will respond rationally; they will dispose of the wealth, they won't work their asses off to accumulate it, or they will do it elsewhere. And these precious government programs will be cut because economic activity is curtailed.

This is old old old. All these things have been done and the results are out there to look at. If you want government programs 'that benefit the greater society' you need a vigorous economy to pay for it. If you want a vigorous economy you need investment, lots of it at all levels. You need less government regulation, and when necessary, less costly. You need to welcome the smart, the rich, the innovative to your country where they can look forward to the rewards of the endeavors. Then there will be activity to tax, and the tax money can be used to do the great things that you want.

Yes, it is barking mad, but it is like most of the comments above that criticize Cowen's stance.

This is why, prior to the recent drops in the estate tax, we saw virtually no buildup of wealth in this country.

Yes, real programs like new drones and NSA server farms or the affordable care act or federal drug law enforcement or universal pre-schools that would make american kids so much smarter! Please seize capital and spend it on all these things that make society so much better!

"...it could raise real money to spend on real programs that benefit the greater society."

It seems to me that the discussions about taxes ARE about the best way to raise money to benefit society. It is just that some believe that objective is realized by making more capital available to the free market...e.g., a consumption tax system that does not tax capital accumulation...and some believe it is by directing more money to government "programs".

I think the point about making the rich lose a few political battles is a good one, but what would be wrong with that? The larger issue here is that the economics commentariat has never come to grips with the unfairness of the Wall Street bailouts. There was near unanimity at the time that the bailouts were excellent policy and that reform and fairness would have to wait for the crisis to pass. Now the crisis is over, there is still virtually zero interest in reform or fairness, and Tyler Cowen's position seems to be the fairness concerns aren't even legitimate.

The beneficiaries of the Capital Purchase Program paid dividends on the preferred stock they issued and have repurchased about 95% of the face value as we speak. It has been more than three years since Citigroup and Bank of America voluntarily terminated the special loan guarantees they were issued.

There were three sets of clients of the TARP program, the Maiden Lane deals, and the conservatorships on the mortgage maws which have yet to make the public whole and likely will not. They are (in ascending order of consequence): the American International Group (~ $23 bn in losses to the Treasury), the components of the auto industry (~$40 bn, last time I checked), and Fannie Mae and Freddie Mac (north of $170 bn, I believe). Only AIG is a Wall Street firm. The rescue of the auto industry (complete with stiffing the bondholders) was at the behest of the United Auto Workers. Fannie Mae and Freddie Mac are denizens of K Street, not Wall Street, and are Democratic Party clients like the Auto Workers (Kindly recall the number of Democratic big wigs in senior positions there, among them James Johnson, Jamie Gorelick, Franklin Raines, and Barney Frank boy toy Herb Moses).

--

While we are at it, your contention that the advocacy of the rescues was unanimous among politicians, opinion journalists, or economists is tommyrot.

Remind me which prominent economists came out against TARP. The official consensus now is that TARP did not go far enough (if only we could have saved Lehman too!) The fact that most of the TARP recipients paid back their below-market loans, with the assistance of policies like zero interest rates that punished savers so the banks could recapitalize on the cheap, was a happy accident that only partially mitigates the unfairness of having the government insure Wall Street bonuses 100 cents on the dollar.

Remind me which prominent economists came out against TARP.

1. John Seater;
2. Anna J. Schwartz

That's off the top of my head. There would be others who complained about the initial or final form, e.g. Nouriel Roubini.

The fact that most of the TARP recipients paid back their below-market loans,

I believe the dividend on the preferred stock was 5%. Rates on commercial and industrial loans for prime customers in the summer of 2008 were about 5%; rates on corporate bonds were between 5.6% and 7.3% depending on rating.

Good for Seater and Schwarz, but I stand by my claim they were very much in the minority. The whole point of TARP was to lend to banks at below market rates, otherwise the banks would have borrowed from the market. The arms-length rate that Warren Buffet got from Goldman Sachs was 10%, and Goldman was the best of the bunch.

In other words, your dead wrong, but you've your story and your sticking to it.

The point of TARP was to contain a financial panic, which did affect spot rates available at the time.

No-one 'insured Wall Street bonuses 100 c on the dollar'. There were compensation limits in effect for as long as banks remained TARP participants.

In many instances bonuses and, relatedly, golden parachutes were paid by the government at 100 cents on the dollar. The TARP bonus restrictions only applied to the five most highly compensated employees. The AIG bonuses were paid at 100 cents on the dollar. The most egregious case was National City, where the government allowed PNC to structure the TARP-funded takeover to leave the golden parachutes intact - the most widely reported figure is $41 million to the top executives of the failing bank. Of course, thousands of employees were laid off, so the impact on income inequality in the National City's hometown of Cleveland was pretty drastic.

AIG bonuses were paid to the crew Edward Liddy brought in to rescue the company, not the crew who had presided over its ruin.

Oops that last comment was mine too - misspelled my name

"You can’t put a tax burden on misers..."

Wait, isn't that exactly what wealth taxes, property taxes, and in the long run estate taxes, are for? The fact that we presently chose to use income, sales, and excise taxes instead, doesn't mean we can't do it any other way. Seems to me that, in terms of avoiding perverse incentives, taxing people for parking wealth in non-productive holdings would be worth considering.

Who's deciding what is non-productive?

If we are talking about tax policy, that would be the legislature.

But it doesn't have to be micromanaged. If I replace an X% annual tax on income with a Y% annual tax on net worth, with X and Y chosen to be revenue-neutral, then anyone who puts their wealth to use in a way that generates more income than average will benefit compared to the status quo, and those who generate less than average returns per unit invested wealth (or don't invest it at all), suffer compared to the status quo. To the extent that income comes from selling valuable goods and services in the marketplace, this results in a net transfer of wealth from those who don't use it productively to those who do. As determined by market valuation.

I'm confused, can you give an example of a non-productive (by your definition) use of wealth that would be taxed and one that is productive by your definition?

Also, you make it sound like calculating X and Y is trivial and not likely to be screwed up royally.

Non-productive use of wealth: I have a hundred acres of suburban real estate (valued $1 million/acre) and a hundred million dollars in cash, which I use to build a private amusement park that my niece and nephew use when they visit, maybe once a year. Arguably there is some value "produced" by this activity in the joy of two children and of myself when I see their smiling faces, but presumably negligible compared to the $200 million cost.

Productive use of wealth: Same starting conditions, but I instead build a thousand houses which I rent for $10K/year each for a 5% ROI. This is productive by the most basic free-market definition possible - people are going out of their way to pay me for it. And even a hard-line Marxist ought to recognize the value in putting roofs over the heads of a thousand families.

Simplistically speaking, if we assume that all of a society's wealth is held by Arbitrary Rich People who do one of the two above things with equal probability, and that society has a 20% net income tax, then A: the state gets $1 million per year per ARP to provide for the less fortunate, and B: an ARP who choses to build houses pays $2 million a year for the privilege and the guy who builds a private amusement park pays no taxes. If instead we adopt a 0.5%/year wealth tax then the state gets the same $1 million/ARP-year. The ARP who choses to build houses now pays $500K/year, which is $500K less than he pays under the current scheme and which still leaves him with $9.5 million in net earnings. And the guy who builds an amusement park and locks out the masses also pays $500K/year, which is in his case $500K/year more than he pays in the current scheme and comes directly out of his pocket.

One of these schemes seems to me intuitively better than the other. And it does not require any government bureaucrat to arbitrarily define certain uses of wealth to be "productive" or "non-productive". The economic calculations it does require are simple property-value and income determinations, which are relatively simple and robust. Is this really that difficult to understand?

Can you please come up with a non-productive example that actually occurs in the real world. Most will not be cut and dry as you make it sound. What I'm saying is it WILL boil down to a bureaucrat "approving" some forms of wealth-use and deciding who to tax. Such systems will be rife with corruption, bribing, lobbying, etc.

Doesn't anyone think that increased consumption will often take the form of more charitable giving, especially for the very wealthy?

Just as you can’t squeeze blood from a stone, you can’t put a tax burden on misers. As Steven Landsburg pointed out in one of my all time favorite posts, society views misers like Scrooge as being selfish individuals, when actually it’s people who consume a lot who are selfish. Misers leave more for others to consume.

I sometimes think economists get lost in their models. A hoard of cash is of value to some people, as the biography of Joe Dimaggio makes clear. That aside, it is a source of finance.

Sumner's contention that we should be sending welfare payments to the poor of Burkina Faso persuades me to stop paying much attention to him.

Sumner’s contention that we should be sending welfare payments to the poor of Burkina Faso persuades me to stop paying much attention to him.

Well, Sumner's contention takes the idea of a true concern about the poor to its logical and ethical conclusion.

No, it does not.

1. People's loyalties are concentric. Bryan Caplan or Scott Sumner may fancy that's "irrational". However, they are not embracing all of humanity. They are embracing the social guild of which they are a part and nothing else. When everyone's your brother, no one is.

2. Burkina Faso's condition reflects the general state of technology there and the sophistication of human organization and know-how; that depresses the living standards of every component of society and sending transfer payments from Fairfax County does not induce them to improve their agriculture and animal husbandry and handicrafts as they need to do.

3. The earned income stream of my great-grandfather in 1949 reflected the fact that he was old. All of us come into this world in a dependent state and most of us leave in the same circumstances. How to care for dependent people is a problem as old as humanity. No, my grandfather and my great-uncle were not going to send their 86 year old mother and their 92 year old father out to apply for work in retail trade.

4. Social Security is a response to problems of a character which my grandfather and his brother faced in 1949, even though it is impersonal and bureaucratic.

1. Are you aware that people's loyalties have gradually extended for millennia up to today? It wasn't long ago that the concept of being "American", "German", or "Italian" didn't exist, for example. Why do you think it will stop, when it has gone from tiny groups to clans to tribes to nations and beyond already. (look at EU data on the increasing number of Europeans who see themselves as "European" rather than simply of their own nationality)

2. Obviously the incomes and productivity go up significantly for the people of Burkina Faso if they lived in a developed country. And of course transfer payments would in part be used for investment. People all over the world, rich and poor, at times invest their surplus cash.

Don't lower inheritance taxes reduce work incentives for heirs? No matter. We can lower their income taxes and recreate the incentives. Lather, rinse, and repeat, until they pay no taxes at all. (Of course they will never pay capital taxes because that would be inherently evil.)

Just think, in only a generation or two we can have a whole class of tax-exempt billionaires.

No, we only need to worry about the work incentives of the poor. Obviously, they have below-average ability and work ethics, because otherwise they wouldn't be poor. Heirs clearly have adequate work incentives, because they are rich.

The misers that people dislike are not those that spend little; but those who insist on taking from others but not giving. The hated person is not the one who goes out to eat once a year, but gives a generous tip--it is the one who stiffs the waitress for the slightest insult, regardless of how often he goes out.

Inequality in wealth evokes concerns of both lack of resources available for others to consume, but also the influence that the wealth enables one to have on social and political decisions that affect everyone. The latter is a concern, even if the wealthy don't consume in proportion to their wealth.

Someone who spends a lot but does not tip is not a miser, he's an asshole

So the paradigm is still class struggle.

Is "slightly cynical view" the proper term for "mood affiliation" when applied to oneself?

Why do we bother with an inheritance tax? If we taxed every estate above $5M at 100% it would accomplish nothing at the macro level. It's as ultimately ineffective as a marginal income tax of 100% above $1M.

There is one tax that would make a dent in wealth: a wealth tax. That is, tax according to a person's net worth.

I am not advocating the position. I am just saying that there is a way to do it (it might be destructive and impossibly complicated).

This would be the true "Robin Hood" tax.

Yeah, politics is a spat about which monkeys should have a higher or lower status, but so is policy.

1. Until we define "earn" we won't make headway into resolving the issues that surround wealth/income inequality. References to "earners" need to be clarified. If somebody has a dime in his/her pocket, what sort of investigation could determine whether or not that person earned that dime? Insofar as I have tried to pin down interlocutors on this point, it seems that if only legal conduct on the part of the dime possessor caused the dime to reside in the pocket, then the possessor earned the dime. Problem is, who decides what's legal and what isn't? (Who makes the laws?) Is it the wealthy or the poor? So, "earner," when we're talking about economic inequality, needs to be recognized as just a complimentary title that the wealthy bestow upon themselves. If we want to restrict the title "earner" to people whose legal conduct produces broader socioeconomic benefits, beyond the coins in their own pockets, then we need to make that distinction explicit. Otherwise, babies born rich are born earners. That ain't right.

2. Wall Street Sales Tax -- One Percent Tax on all purchases of financial instruments, to mitigate obscene economic inequality.

what sort of investigation could determine whether or not that person earned that dime?

Skin color.

Wall Street Sales Tax — One Percent Tax on all purchases of financial instruments, to mitigate obscene economic inequality.

The tax would be socialized and paid by shareholders, customers, vendors, etc. and nobody in Manhattan would bat an eye. And Bill Gates would still have greater net worth than you.

I'd wager there are over a billion people in the world who would consider you to be on the obscene side of economic inequality. It's interesting that people only seem to look up when throwing around such terms, never down.

From the point of view of Political Theory, I agree with James M. Buchanan's view of an Inheritance Tax. However, in terms of Political Economy, I understand the counterarguments, and favor a compromise. That's basically what we have. I do not get aroused by the idea of taxing the wealthy, but, even if I did, the heirs of the wealthy are still going to be wealthy after the inheritance tax is applied, so I don't see it producing an orgasmic effect on supporters of such a tax who are envious of the rich unless you take much, much, more away from the heirs. I don't see that happening.

I'll give you one shit for that, and not a single shit more.

All this angst about the estate tax is silly...the average annual collections from 2001 through 2009 are only about $23 billion. And the amount collected by gross estate are:
Under $10 million…$10.0 billion
$10 to $20 million…$4.5 billion
Over $20 million…$8.5 billion
The tax actually realized is paid on the amounts that go to the heirs, by those without heirs (that's why $10 billion is collected from estates under $10 million) and by those decedents who don't like their heirs. Really big estates don't pay estate taxes because they don't leave big bucks to the kids, they leave it to charity.

The purpose of the 2001 through 2010 reductions in estate tax was an attempt to wean the federal government off of that $23 billion a year in revenue...but the left isn't willing to give it up. That's why TC's "cynical view" about the debate about taxation is overthinking...the debate is merely about which special interest is going to pay for any proposed tax reform.

Players: "He went to the smoking area, where he saw Frank McKechnie standing at the edge of a noisy group, biting skin from his thumb."
The Names (about Frank Volterra): "He wore dark glasses and kept biting skin from the edge of his thumb.”
http://postmoderndeconstructionmadhouse.blogspot.com/2014/03/biting-dead-skin-off-your-thumb-in.html#.Uzh86ahdXxA

"For instance I find that few proponents of a higher inheritance tax realize it will increase current consumption inequality, by encouraging the wealthy to consume more rather than paying the tax."

I'd love it if Mitt Romney were to increase his consumption of big macs in proportion to his wealth - say 200 big macs per day with supersized fries. Along with buying one of each model car every month. And building a garage large enough to store all his cars, a 40 story parking garage occupying a city block of Detroit.

Now imagine how much Bill Gates, Warren Buffett, and Carlos Slim would need to buy.

On the other hand, would the Walton's each spend a million dollars a day at WalMart? Shopping at Macy's wouldn't be very loyal. They would certainly demand Wal-Mart begin selling higher end products, maybe Sam's Affordable Houses, and Sam's No Gas Bill Cars.

Conservatives were sneaky in attacking high income tax rates by pointing out the low taxes the rich actually paid through tax dodges.

Consider the tax dodging of Howard Hughes. He did everything possible to not pay taxes, putting everything into a medical foundation doing research on how to keep him alive forever. Hughes thought he could escape death if section 403 of the IRS code let him escape taxes. But he died and now the IRS required HHMI to publish the research in the public interest Howard Hughes so generously funded.. I vaguely remember Hughes for the Spruce Goose but weekly thank him for his science as I watch credits roll on the programs HHMI funds and its other medical R&D.

Progressives fell victim to the conservative's arguments about tax dodges. But it seems conservatives have fallen victim to the conservatives attack on high tax rates and the tax dodging.

I laugh at the ignorance of Boehner when he talks of the higher cost of hiring a worker when taxes are higher - he's clearly bought into the idea that lower tax rates on businesses are offset by eliminating tax loopholes. Like deducting wages and benefits and other costs of new workers BEFORE calculating taxes. With higher tax rates, hiring a worker, in fact every worker, means a bigger reduction in taxes paid.

Republicans chanted drill baby drill, clearly forgetting that Milton Friedman railed against the drill baby drill tax dodging in the 50s and 60s when 100,000 oil and gas wells were drilled every year because the IRS paid 70-90% or more of the cost of drilling a well.

A tax dodge was writing off R&D as an expense instead of a capital investment until it was written off as a dead end, so hiring researchers and buying equipment for it was 50% paid for by the IRS. Friedman and others claimed the Bell Labs were doing too much research because the IRS paid for half the cost and then the Federal government bought the products taxes half paid for.

In other words, back in the 60s, Friedman was on a rampage because tthe high tax rates led to so much tax dodging that too many people were employed inefficiently dodging taxes drilling oil wells and doing scientific research and discovering the transistor and satellite communications and that drove up wages.

Republicans now call for tax credits for hiring workers to create jobs. In other words, with corporate and small business tax rates so low, hiring a worker is a 100% cut in profits, unlike the 60s when the IRS paid 50% of worker costs, so a tax credit of 50% of wages is needed to get a business to hire anyone.

"you can’t put a tax burden on misers."

That's ridiculous. Of course you can. The miser derives utility from his hoard. Reduce the hoard by taxation and you reduce his utility just as if you force me to reduce my consumption by taxation you reduce my utility.

Look at it this way. The claim that you can't tax misers is equivalent to saying you can't tax anyone who has sufficient savings to pay the tax, because they can pay without reducing consumption. But people like having savings, so even if the choose that course they are still being taxed.

Oh, and as for the benefits the miser conveys, I guess misers only live in full-employment economies. In other conditions would you say the miser leaves workers for the rest of us to hire?

IIRC, the economist in question in explicating his reasoning insisted the notion there was such a thing as 'income' was nonsense. Economists who talk like that are begging to be ignored.

> For instance I find that few proponents of a higher inheritance tax realize it will increase current consumption inequality, by encouraging the wealthy to consume more rather than paying the tax.

Ah, interesting! The wealthy are actually made more equal to the rest of us (in terms of consumption), because we've sort of conned them into wasting a lot of their potential consumption opportunities on savings and investments that don't directly increase happiness.

I like that approach, but I worry it would backfire on anyone who saw investments as another form of consumption. Someone could argue that investments (even into a fund reserved for future generations) is just buying security, peace of mind, hedging against the risks of life, or smoothing consumption.

This did make me rethink Buffett's argument, though, that passing capital down a generation is like letting people inherit positions on professional sports teams. I originally liked that, because it seemed more an argument about "dessert" rather than inequality. But now that I think of it, carrying his argument forward all the way, if we should entrust capital only to those who make good use of it, then the real Buffett rule should be a high inheritance tax where the proceeds are ultimately paid to whoever holds the most profitable portfolio.

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