Consistency about elasticities, revisited

From Ross Rheingans-Yoo, the content is all his, I will not do a double indent:

  • If marginal wealth is taxed an additional 0.5%/yr at the high end, then fewer people will amass and invest that much wealth—some will instead disperse it among a wider number of family members, donate it to charitable or political causes, or spend it on expensive consumption. (Saez and Zucman, in their potential-revenue analyses, assume that this effect is quite small, and that the wealthy will mostly accept lower returns on wealth.)
  • Similarly, if the marginal opportunities to invest became worse by 0.5%/yr, fewer people would chose to invest, by the same token. Additionally,the effects should be the same size, as it’s the same decision-makers facing the same incentives!
  • But if pushing on the price (read: rate of return) has little effect on the quantity of investment, then pushing on the quantity of investment should have a large​ effect on the price! (Unless we’re at some magic kink in the supply curve for unspecified reasons…)
  • So a small amount of additional capital competing for investment opportunities should quickly reduce the competitive rate of return.

What’s the practical upshot? Well, if the authors’ assumptions about revenues are right, then Piketty’s r>gr>g “wealth spiral” can’t proceed unchecked, since capital simply can’t accumulate without competition quickly reducing the average rate of return back below gg.

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No, this is not elasticity consistency. It is elasticity confusion, mixing up supply and demand.

The revenue calculations hinge on the elasticity of capital *supply*, i.e how fast capital supply rise with the interest rate.

The Piketty spiral, in contrast, hinges on the elasticity of capital *demand*, i.e. how fast the interest rate fall with increasing capital.

There is nothing theoretically preventing us from having a horizontal capital demand curve, and a vertical capital supply curve. In such a world, a capital tax raises a lot of revenue, but increasing the savings propensity increase the capital stock without reducing the interest rate.

The author could have discovered the confusion by being careful with the signs. The capital tax *reduces* returns and *reduces* investment. The Piketty spiral is about *increasing* investment *reducing* the rate of returns.

They have different signs since the capital supply elasticity is positive, and the capital demand elasticity is negative.

Since one person's supply is another person's demand, it's not clear that your analysis is any better than the original. The Walsurian scissors flipped 90 degrees yields the same intersecting curves. And since AD, AS cannot be measured, it's all metaphysics, like monetarism, at best only an identity truism.

The empirical research shows what is suggested above ("Saez and Zucman, in their potential-revenue analyses, assume that this effect is quite small, and that the wealthy will mostly accept lower returns on wealth") and that is the wealthy don't really change their habits. A higher tax on income empirically showed the wealthy don't adjust their hours, if anything, they might even work harder. Further, a study once concluded the most efficient tax is zero marginal rates on the wealthy and a high tax on the middle class, the theory being the middle class will work harder to escape the 'middle income' trap. Logically then the best tax is a regressive one, but only a non-RINO will go for that. Nuff said.

Distortions are distortions. If middle-class taxes cause people to change their behavior and taxes on the wealthy don't, that's a prima facie case against taxing middle-class people and for taxing the wealthy.

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This isn't about investment in productive capital to promote productivity and wage increases, this is about rising asst prices to increase wealth. But it's an illusion of wealth and prosperity. That a small tax on wealth might discourage reliance on rising asset prices as the path to wealth scares some because they know that it's not wealth but an illusion of wealth, but they have no ideas to encourage investment in productive capital other than the same old tax cuts for the wealthy that fails and fails and fails. Even Robert Samuelson, not exactly someone on the left, acknowledges the illusion: https://www.washingtonpost.com/opinions/why-new-trump-tax-cuts-would-be-bad-economic-policy/2019/11/03/44b94d92-fcd0-11e9-ac8c-8eced29ca6ef_story.html Even Cowen's friend, Scott Sumner, (unwittingly) acknowledges this: https://www.themoneyillusion.com/if-you-arent-confused-by-the-lack-of-mini-recessions-then-you-dont-understand-the-issue/ No, I don't favor a tax on wealth, but the hysteria over it tells one all one needs to know.

Here's the Samuelson piece outside the WaPo wall:

https://www.app.com/story/opinion/columnists/2017/04/30/samuelson-trump-tax-plan-taxes-will-rise/101045726/

He offers a model of clarity for the training of AI.

of course the question is always about marginal corporate tax rates. Individual tax rates just don't matter. And if they did, it's not at the institutional level but at a social one. Take the demographic shifts and compare them to the trade deficit. Marginal rates are also always about supply no matter how evolutionary you view it.

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The last forty years show tds (trickle down scam) consistently inelastic.

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Look at the property tax fights that are being renewed in California. The rewriting of prop 13 battle will test the theories.

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A wealth tax may be unconstitutional (it's complicated and involves Alexander Hamilton). I hadn't considered this issue (because there's not going to be a wealth tax), but these two tax experts make a persuasive case that a wealth tax is unconstitutional: https://www.nytimes.com/2019/11/07/opinion/wealth-tax-constitution.html

However, since we don't live forever, estate and inheritance taxes could be a vehicle for capture of a faux wealth tax...you have an index based 1% per year of wealth, , until you die and the estate tax is based on the index of accumulated indices of prior years. Estate taxes have been around for years. Also, you could do a lot with stepped up bases.

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Ray, You might want to look at this piece on the estate tax and closing loopholes as an alternative well within any perceived constitutional limitations: https://americansfortaxfairness.org/tax-fairness-briefing-booklet/fact-sheet-the-estate-inheritance-tax/

I would finance things differently. To cover Medicare (freeing up money for other healthcare initiatives): deduct, as an estate tax, medicare reimbursements for the last six months of a persons life, from the estate, with an exclusion and carryover to the surviving spouse. Wealthy people could buy tail insurance for last six months of life if they wanted to pass this sized estate to their kids, but probably wouldn't;t. So, if a billionaire's medicare payments account for $60k in last six months of life, deduct the $60k medicare payment from the estate as an estate tax.

This is a pretty good idea.

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Out of curiosity, do the various wealth tax plans consider deferred income (e.g., a 401(k) plan) to be "wealth"?

I know public wealth management funds don't. Roth IRA's probably but it depends on your definition of deferred.

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Since 1979, nominal gdp has increased ~670%, but the S&P500 has increased by ~2900%.

Cowen's idea of "quickly reducing the average rate of return back below gg" seems to rely on a very, very lax definition of "quickly."

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The wealth tax isn't a real tax because it wouldn't have a large effect on consumption. Buffet doesn't consume anything therefore as a society a tax on his wealth would go thru the financial system and tax other things.

It would potentially cause less investment which is a tax on future consumption.

I would also guess lower wealth would eventually equal higher interest rates. Which would mostly be a middle class tax hike as their mortgage interest goes higher. The wealth tax could even potentially be neutral to the wealthy if it increased real rates of return to a greater extent than the tax.

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the federal reserve is not just some psycho branch of the government. They represent the public grace. When they increase interest rates they are signaling there is abuse in the ecosystem. It is fiscal authority. Against whom? Well, primarily the Media.

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"So a small amount of additional capital competing for investment opportunities should quickly reduce the competitive rate of return."

That's QE, in a nutshell. The Fed has said it doesn't know how it works. Ross just explained it. Of course, 'small' is relative. There are over $100T in financial assets. Adding a 2 or 3 $T in demand makes a difference.

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