Why Matt Yglesias should be a conservative

“Conservative” isn’t exactly the word I would use, but he chose it, so for now let’s just run with that.  Here is an excerpt from Matt’s Substack (do subscribe!):

In terms of Tyler’s take, while I accept the logic of the view that it’s better to tax consumption than to tax investment, I just don’t buy into the idea that taxing investment is really bad. If I did, I would be a conservative like he is. But I don’t. I also think that, frankly, he always holds Democratic bills to a super-high standard of technocratic rigor while setting a much lower bar for Republican ones — to be generous, he maybe does that to counteract what he sees as a prevailing left bias of econ Twitter.

But to me, taxing investment with one hand while subsidizing investment with another is pretty good, especially paired with deficit reduction and permitting reforms.

Whether taxing investment at high rates is “bad,” or “really bad,” I am not sure.  But it is at least one of those.  Let me lay out a core, simple case for relatively low rates of taxation on capital income.  One can slug it out with the models, but much of the case comes down to two core intuitions:

1. A lot of people are myopic.  That encourages too much consumption relative to investment.  Matt himself frequently cites examples of myopia, in this Substack post it is Doritos chips and also Instagram.

2. A lot of institutions, including corporations, are too risk-averse relative to social returns.  This is the old Arrow-Lind argument.  They won’t take enough chances, and that too stifles some investment.  After all, consumption usually is safer than investment, at least if you know where to take your dinners.  Furthermore, the bureaucratization of society, including much of the private sector, is proceeding apace, so the thrust of the Arrow argument is stronger than it used to be, even though it may be relying increasingly on non-Arrovian mechanisms.

If you favored Operation Warp Speed, chances are you buy into this argument for at least some kinds of investment.

We simply don’t want the tax system to make these biases worse.  And those biases are pretty strong, close to ever present, and fairly universal.

You might add a third argument from time inconsistency:

3. Governments are often not credible, and short-sighted, so they have an excess tendency to tax or confiscate fixed capital investments, even when this is bad in the longer run.

To refer back to Matt’s post,  I am not so keen on the general concept “raise the taxes on capital and make the subsidies for investment even bigger” as an approach  If you wish to subsidize some kinds of investment, do so at the lowest (optimal) rate possible.-  It is simpler, cheaper, involves less deadweight loss, and places less burden on the government to find and implement all of the right tax and subsidy offsets.

I used to favor a zero tax rate of capital, but I no longer hold that view.  There are too many options for reclassifying labor income into capital income and thwarting the purposes of the tax system altogether.  Nonetheless, subject to this constraint, I think taxes on capital should be as low as possible.

John Stuart Mill was considered a “socialist” in his time, but even he thought the tax rate on capital should be zero and governments should tax land and consumption, still a good formula.

I would make a few additional points:

a. You can favor a low rate of capital taxation without thinking the elasticity of savings is very high.  If you tax Amazon less, they will have more money to invest, no matter how savings respond.  Furthermore, capital can flow in from abroad, all the more as the world becomes wealthier (and less politically safe?).

b. Capital investment boosts wages, and the quantity/quality of capital invested per worker is a major long-run determinant of wages.

c. Capital investments produce goods and services, which create consumer surplus for everyone.  If you are tempted to use the words “trickle down” in this discussion, you are not understanding #b or #c.  You really do want to live in the economies with more capital investment per worker.

d. Plenty of Western European governments have relatively favorable taxation for capital income, and still achieve relatively egalitarian outcomes.  I don’t myself put much stock in this point, but if it matters to you fine by me.  A low tax rate on capital income is hardly “giving away the store.”

So Matt should be a conservative.  It is fine if he in turn thinks the alternate views are “bad,” rather than “really bad.”


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