Summers on the Wealth Tax

Larry Summers is my favorite liberal economist because even while maintaining his liberal values he never stops thinking like an economist. That makes him suspect among the left but it means that he is always worth listening to. The video below with Saez, Summers and Mankiw (with Rampell moderating) is excellent throughout. I cribbed a number of points from Summers:

“I have studied last week’s twitter war very carefully and I have to say that I am 98.5% convinced by the critics that the Zucman-Saez data are substantially inaccurate and misleading.”

The arguments around political power are not persuasive. Most of what is wrong with politics is because that is what the people want (I’m filling in a bit here from comments throughout). A wealth tax does nothing about corporate lobbying and would increase the incentive to give to political organizations. If you cut wealth at the top by 30% that wouldn’t change relative political power in the slightest.

Wealth is up in large part because interest rates are down which means that permanent income hasn’t increased.

Forced savings programs like social security and unemployment insurance mean that people at the bottom need to save less and thus their wealth falls even as their welfare increases.

A wealth tax increases the incentive to consume instead of save and invest.

On employee stock ownership plans: “When you put workers in control of firms and you give them substantial control–see Israeli kibbutz’s, see Yugoslav cooperatives, see universities where faculties have a powerful voice–the one thing you do not get is expansion. You get more for the people who are already there. That does not seem to be an attractive position for progressives.”

In the Q&A Summers just goes to town on Saez when Saez claims 90% tax rates are a great American invention. “The people who were around in the Kennedy administration who were at least as progressive as you are were united in the belief that 90% tax rates were a bad idea….The number of people who paid those 90% tax rates was trivial and it wasn’t because there weren’t a lot of rich people.”  Greg Mankiw, who gives a nice parable in his remarks, has to stifle a laugh as Summers lets rip.

The body language in the Q&A is very interesting.


A wealth tax is a bad idea that has no chance of being adopted. By the way, it was Summers who described asset bubbles as "inflation lurking in the background" in a speech given as the financial crisis was unfolding. I was watching the speech live and didn't know "inflation lurking in the background" was a euphemism for asset bubbles, the term asset bubbles being off limits to a respected economist like Summers. He used the phrase in criticism of the Fed for failing to see the "inflation lurking in the background". Duly chastised for saying "inflation lurking in the background", he never again repeated the phrase that I am aware of. I'll ask this question: would a wealth tax discourage asset bubbles, or would we continue to rely on rising asset prices for prosperity even with a wealth tax? To state the obvious, we are experiencing a high level of wealth inequality in large part because of the reliance on rising asset prices for prosperity (the wealthy own most of the assets, so rising asset prices disproportionately benefit the wealthy).

Asset prices rise because we rely on them for prosperity? Are you sure that you haven't reversed the causality there?

There are a couple of interesting points over time in this posting but I do not know if they all center to heart. There may be some validity but I’ll take hold opinion until I investigate it further. Great write-up , thanks and we want a lot more! Included in FeedBurner also

Remember when he was supporting the failed Menem's policies and trying to force the Brazilian people to implement them and follow Argentina in the path to chaos that made Cristina Kirchner a household name and ressurected radical Peronism. How many lives have his policies cost? How many more will have to die?

Good point. It is hard to see any moral difference between Summers and Pol Pot. The only difference is, he was never given as much power as his Cambodian counterpart.

Remember when Brazil instead went its own, more socialist way in the early 2000s and it looked good for awhile but now they haven't had any economic growth for years on end?

It is not that simple.

1) In the 90's, while Summer and his ilk were praising the Argentinian regime, Brazil was implementing important reforms, such selling the old state monopolies and crushing inflation. As a result, Brazil's banking system were barely inconvenienced by the 2008 crisis. No Bear Stearns, no bailouts.

2) Evidently, in Brazil, mistakes have been made by the relevant parts, but it is hard to argue that Brazil needs to be more like Argentina, i.e. go bankrupt twice since 2001 (each time with enthusiastic American support) and be dominated by radical populists as a predictable consequence of the Washington-backed debacles.

3) Brazil's reforms are being implemented at neck-breaking speed. Brazil is reforming its pensions system, its labor laws and its tax system. Crime rates are way down. Brazil's President Captain Bolsonaro intends to build a Brazilian Cancún in Rio de Janeiro State to attract hard currency. Brazil intends to launch a satellite before next decades ends. Brazil is building a nuclear submarine to patrol its waters. Accordinfg to experts, Brazil is expect to grow in 2020 twice as much as it frows this year. All things considered, it is morning in Brazil again.

4) Being ruined in the early 90' wouldn't have made Brazil's life easier. Quite the opposite. It probably would have propelled even more radical socialists to power. All things considered, disregarding Summer's stupid ideas was one of the wisest decisions the Brazilian people has ever taken.

Thiago is coming up with more creative aliases

And no I'm not mistaken and yes it is you, Thiago.

I am Mr. Grotz, an American Jew.

Like hell you are. Next time try "Goldman" or "Weiss" or "Kushner"

Here's the other side of this story: Of course, questioning the accuracy of the data in the Saez/Zucman book is a diversion from the larger, more significant issue of wealth inequality, tax evasion by the wealthy, and global financial instability that results.

Almost all overly great wealth inequality is a result of problems with PSZ data though.

Same with tax evasion from PSZ in a great part. They are assuming that the difference between their exploded estate multiplier estimates or Forbes 400 is about tax evasion, but there is no reason to think that Forbes 400 is accurate and they calibrated the current version of the estate multipliers to Forbes 400 (ie it's actually the same measurement).

The talk about their data is about wealth inequality, tax evasion in the end. Like if you use semi-fake and weirdly defined data to make arguments about wealth inequality, it's not a diversion from talking about wealth inequality.

The take about "global financial instability" is very tenuous.

Charts with garbage data get headlines and corrections with correct data are distractions from the underlying my-truths of the garbage charts.

What is the purpose of taxation? It seems as if many people think there is nothing taxes cannot do, i.e., redistribute wealth, affect political power dynamics, affect individuals' economic decision-making, fight the class war, etc.

The purpose of taxes should be to raise necessary funds to pay for necessary government activities PERIOD.

Finally, which one(s) on the panel is(are) Russian asset(s)?

Taxation does all those things whether you want it or not. You can try to minimize those effects (but not eliminate them). Or you can try to leverage them. Pigovian taxes are accepted by all economists to be a good idea. Other uses are more debatable. But pretending you can levy taxes without affecting decision-making, power dynamics and wealth/income distribution is just burying the head under the sand.

Dick, you left out "improve the weather, end hurricanes, and cause the seas to recede to a level of our choosing -- never to move again."

Ruml 1946 Taxes for revenue are obsolete:

You don't understand. The wealth tax is going to happen because people want guillotines for the rich and our ruling elites hope to placate them with a wealth tax instead. Whether or not any of this makes economic sense is completely besides the point.

Indeed. Most supporters of the idea have their minds made up and will embrace arguments after the fact to minimize cognitive dissonance, not to potentially change their minds.

"even while maintaining his liberal values": is that a sly way of implying that liberal economists tend to be boors and crooks?

the Economics Profession has a million different nuanced opinion about Taxation, with no agreement on the basic economic principles involved. Laymen are left to figure it out for themselves.

"I am 98.5% convinced ...": does this tell me that he has a dry sense of humour or that he is an arse?

Perhaps the better question is this: Let's assume the electorate is 100% determined to bring US wealth inequality back down to 1960s levels over the next 20 years. What is the best way to accomplish that from an economist's perspective?

I think part of why mediocre ideas bubble up (wealth tax), is because there are no "good ideas" being proposed.

Make the client/customer/patient one and the same, by outlawing health insurance.

Personally, I'd argue for a consumption tax, offset with a UBI. The one constant about people-of-means is that they behave like people-of-means.

Treat capital income like labor income subject to an inflation deflator.

That would tax the day traders and short term speculators while rewarding investors who buy and hold over the long term.

is a property tax a wealth tax?
should one prefer taxes on (a) income, (b) estates, (c) purchases, (d) carbon, (e) employment, (f) nothing at all....have to choose

Yes it is. State and local level, though. It would obviously be taxed again. Leviathan grows as the thumbs twiddle on.

A property tax is NOT a wealth tax. It is an asset tax based on a historical assessed value (rather than a current market value). Wealth is equity, which means it is a net number (assets minus liabilities, what you own minus what you owe). The same property tax is owed whether your mortgage is fully paid (100% equity), or underwater (no equity) therefore it cannot be a wealth tax.

>is a property tax a wealth tax?

In general, I'd say no. It's closer to an insurance premium e.g., you pay for local fire/police in rough proportion to how much you have at risk.

A 'wealth tax' should be based on net-worth. Or as close as we can realistically get it.

The purported reason for the wealth tax is to pay for education and health care. In the 1960's I was making $3.00 per hour and paying for college and medical out of that income. The real question is why are they proportionately so much more expensive today. Not how do we extort resources from someone else to pay for them

1. Technological advancement. Gobs of what we call 'medical care' were unavailable in 1965. It's not the same stuff.

2. Cost disease

3. Inefficiencies borne of the hopelessly opaque pricing system.

@Dave Gerwin

... but "education and health care" is not a proper or necessary function of the Federal Government (it's not even mentioned in Constitution).
nevertheless, the Feds now define their own powers and have assumed authority to impose any level of taxation desired, for any purpose.
The "nominal" types of taxes and their "nominal" purposes are irrelevant to the actual daily functioning of government spending.

Correct. It's all and only about control and power; and power, control, and money. It's tangentially how useless POS's, like the Clintons and Obamas, become multi-millionaires and secular saints.

The rest is advertising and propaganda.

That's why the Framers severely limited government authority and denied nearly all forms of taxation in the Constitution. The US fiscally did quite well solely on tariffs and public land sales until the Civil War.

Dr. Sean Gabb, “These people are not our servants. They are a hostile elite. Their interests are not ours. They despise us. They fear us. They are determined not to give us even the shadow of what we were – perhaps unwisely – promised.” See Trump 2016 and 2020.

I'd hate to say a stupid wrong thing within earshot of Larry Summers.

These are good:

"Wealth is up in large part because interest rates are down which means that permanent income hasn’t increased.

Forced savings programs like social security and unemployment insurance mean that people at the bottom need to save less and thus their wealth falls even as their welfare increases."

I saw this over the weekend, the panel attracted quite a bit of attention among Andrew Yang supporters online. I almost felt bad for Saez, but then it's nice to see it happen to established professors rather than just junior faculty or grad students during seminars.

There was a lot more to take away than the summary above. Mankiw's presentation on the different tax and spending plans was also great. That example from the clip should and will be in any course I teach on progressive taxation from now on.

But it all got overshadowed by Summers all-out, guns blazing attack first during his remarks and then during the panel. Just wow.

The U shape of wealth to national income is due to inflated asset prices caused by financial repression.

Next time you run into Larry please ask him about his relationship with Jeffrey Epstein

Certainly a former president of Harvard can be counted on to oppose a wealth tax.

He got kicked out. Plus they are all from Harvard.

By liberal you meant fabian socialist.

One of the things that Zucman observed about the trillions in hidden accounts (hidden from those who refuse to look) is that the funds are invested in plain vanilla type investments like index funds. That was reassuring; it's the reach for yield that creates financial instability. But wait. Yes, wait until asset prices stop rising. Then what happens to the trillions in hidden accounts. Oh my! The stakes for the Fed and other central banks are far greater than I had realized. Markets are much more fragile than I had realized (and I believed markets to be fragile). Cowen's friend Scott Sumner seems to believe financial stability is just a matter of competent monetary management by central bankers, a timely expansion here, a timely contraction there. Is that reasonable or pollyannaish?

A wealth tax increases the incentive to consume instead of save and invest.

The US economy is predicated on consumption. Without consumption everything goes to pot. The more consumption the better.

Summers stomps Saez.

The complaint that rich people's spending on charitable causes is not subject to adequate "democratic accountability" is ridiculous. As if the majority has the right to determine how people spend their own money. Would they demand "democratic accountability" if rich people used the money instead to increase their consumption? Why should "democratic accountability" of people's spending be limited to the rich (the middle class in aggregate spend far more)? And when people like that talk about "democratic accountability" they almost always have in mind fellow members of the intellectual chattering classes having a disproportionate influence on that "democratic" decision-making process. Why should we believe that they along with politicians and the public would make better decisions?

dear god, not another econ "manel"

[quote]A wealth tax increases the incentive to consume instead of save and invest.[/quote]

Just "saving" isn't investing, that's idle money/wealth not being productive use (think of gold or USD stuffed in mattress). If it "investing" only if it produces a tangible physical object or a service or an experience. All of that is again for consumption, you don't invest except for someone else to consume one's product/service/whatever. And one also consumes something else to produce that end product. So it is all consumption IMO. So this is seems a specious point!

It appears that nobody did their homework and read ""The Great Leveler" by Walter Scheidel, which demonstrates pretty conclusively that if history is any sort of guide, the only way you seriously reverse inequality is by destroying the wealth of those at the top--the Black Death and the Russian Revolution followed by World War 2 being the most notable examples. Even teh Napoleonic Wars and World War 1 sufficed only to slow or stop the accumulation of wealth at teh top, they were not enough to reverse it.

One may say, "History be damned, this time is different." Well, yeah, one can say that, but Scheidel's work certainly should have placed the burden of proof on those who propose painless ways to redistribute.

The "give me one example" bit was stunning. If even Bill Gates couldn't buy influence who can?

Guess what its Corporations and Unions who have employees and members who vote!

A very interesting discussion. Being older than the panel members allows the direct experience of the super high tax rates era. The accounting distortions of the era were immense as reportable income was avoided at all costs. Nobody paid 90+% (including Calif. taxes) and all the yachts, limo's, airplanes, vacation homes, etc were all "owned" by C corporations. Everything was deductible for those with good tax lawyers.

Summary: Dr. Summers was totally correct and Saez doesn't understand the historical reality of the US. Saez could not even give a real example of his real "concern" over the hypothetical wealth shifts he claims to have exposed, which makes me think that his real "concern" may be just the old sin of ENVY. The liberal elite can stand the observation that Google and have made the knowledge of the world available to all and even made a profit doing it while giving away the knowledge free.

Saez's curves on wealth over time seem to mainly reflect the accounting changes that have occurred over time and a say a lot less about real changes. For example, with the tax reform of the 80's allowing the creation of pass-through tax entities like subchapter S corporations, etc. much of new wealth shifted from corporations to individual tax forms creating the impression of a huge individual "wealth" increase that was pure accounting changes.

Remember "real wealth is control over the disposition of assets" and who has the pink slip (ownership documentation) just determines who pays the taxes. When you controlled the corporate jets usage or Airforce 1, you effectively "own it" without having to pay the taxes or the fuel. The generals probably still have their hunting lodges in Alaska and the planes to fly them, but the goodies for the political/military leaders are no longer in the news.

This whole push for "wealth taxes" seems to be driven more by envy from our new ruling political class. That doesn't mean that no changes in the tax system should be made to make it more just and fair.

Saez, et. al. seem it indicate that the harm of this wealth is the creation of dynasties, but his list of the big players are almost all people who created their wealth by improving humanity, not by the lucky sperm club. We don't see dynasties in businesses very often, but politics is all about dynasties and passing on political wealth to the next generation.

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