In this vein, randomized trials tend to have very small sample sizes compared to observational studies. When this is combined with high “leverage” of outlier observations when multiple treatment arms are evaluated, particularly for heterogeneous effects, randomized trials often predict poorly out of sample even when unbiased (see Alwyn Young in the QJE on this point). Observational studies allow larger sample sizes, and hence often predict better even when they are biased. The theoretical assumptions of a structural model permit parameters to be estimated even more tightly, as we use a priori theory to effectively restrict the nature of economic effects.
We have thus far assumed the randomized trial is unbiased, but that is often suspect as well. Even if I randomly assign treatment, I have not necessarily randomly assigned spillovers in a balanced way, nor have I restricted untreated agents from rebalancing their effort or resources. A PhD student of ours on the market this year, Carlos Inoue, examined the effect of random allocation of a new coronary intervention in Brazilian hospitals. Following the arrival of this technology, good doctors moved to hospitals with the “randomized” technology. The estimated effect is therefore nothing like what would have been found had all hospitals adopted the intervention. This issue can be stated simply: randomizing treatment does not in practice hold all relevant covariates constant, and if your response is just “control for the covariates you worry about”, then we are back to the old setting of observational studies where we need a priori arguments about what these covariates are if we are to talk about the effects of a policy.
There is much more of interest in the post, very high quality as you might expect given the source.
That is the topic of my latest Bloomberg column. Mostly I am pro-prediction market, but my last two paragraphs contain the cautionary note:
Prediction markets have another potential flaw: They focus attention on clearly demarcated events that are easy to bet on, such as who will win an election or whether Rudy Giuliani will face federal charges. Sometimes these are important matters. Other times they are not.
There are more meaningful trends that are more difficult to measure, such whether Americans are feeling more lonely. These things certainly have an impact on politics, but they are not easy to bet on. Political prediction markets are undeniably useful and very often enlightening, but maybe they should come with a warning: Feel free to check the odds as often as you like, but do not let your obsession blind you to the larger issues at stake.
There is much more in the earlier parts of the piece.
…there is no logical or physical reason that the work year of a machine should not actually increase, say. But it would seem more likely that increased leisure over the next century should be accompanied by a smaller stock of capital (per worker), smaller gross investment (per worker), and thus a larger share of consumption in GDP. Of course, this tendency will almost certainly be offset by an ongoing increase in capital intensity, even in the service sector. Obviously there are other, totally moot, considerations. Will leisure time activities be especially capital intensive (grandiose hotels, enormous cruise ships) or the opposite (growing marigolds, reading poetry)? Show me an economist with a strong opinion about these things, and I will show you that oxymoron: a daredevil economist.
Of course if you really do think the capital-labor ratio will be falling, investment behavior is going to disappoint for a long time to come. The shift to intangible capital will strengthen that tendency all the more.
p.s. Leisure will become especially capital-intensive, at least in the United States.
I am seeing more people argue for a wealth tax, but I have yet to see them address the core issues.
Let’s put aside all of the “big picture what do you think about bigger government issues,” where I do not expect agreement to be easy, and focus on two simple matters of exposition.
First, let’s say a proponent argues for a “two percent wealth tax.” In the United States, most of that tax is likely to fall on accumulated capital gains. I then would like to know what is the implied tax rate on capital gains under such a system. Hint: you do not just add “two” to the current capital gains rate, since a given capital gain is diminished by two percent each year, not just once. The final net tax rate will depend on the rate of discount, but since marginal funds seem to be going into negative nominal yield securities, arguably that discount rate should be pretty low, shall we say zero?
I played around with a bunch of numbers, and across 20-30 year periods came up with total net capital gains tax rates in the 50 to 70 percent range, noting that the current 20 percent long-term base rate for high earners is applied to nominal not real gains.
Has any wealthy country sustained such a high net real capital gains rate?
Of course, rhetorically a “2 percent tax on wealth” sounds much better than say “a 62 percent tax rate on long-term capital gains.” Don’t be fooled!
To be clear, I am not sure I have found the right numerical range. Nonetheless I view finding the right estimates to be the responsibility of the wealth tax advocates. I am simply pointing out that the correct numerical range might be quite high.
(As a side note, what would happen to the value of a $1 million painting that is supposed to last 100 years, as indeed most paintings with that value do? Are so many arts institutions — say the auction houses — to be bankrupted overnight? Which other long-term asset values would take huge spills and what would be the social consequences of that?)
Second, do you have any argument why a higher wealth tax would be better than a higher tax on consumption? The latter also could fund the government programs you have in mind. And please make sure this discussion focuses on tax incidence, incidence, and then incidence, rather than just citing the immediate application of the tax burden.
If you see a case for a wealth tax that does not directly address those questions, ask for more! Because the case for a wealth tax has in fact not yet been attempted, much less made.
Unusually for Africa, Ethiopia has sustained a high investment rate: currently 38 per cent of gross domestic product.
Here is more from Paul Collier at the FT.
6. CCP vs. KMT.
Diane Reynolds had been racing for a few months when she won her first amateur cycling event, the Farm to Fork Fondo near upstate New York’s Finger Lakes in August. She left more than 500 riders in the dust, including all the men.
The win earned the 49-year-old novice a jersey decorated with polka-dot chickens, but it didn’t come cheap: She paid about $1,000 for former pro cyclist Hunter Allen to ride all 84 miles with her as a private coach.
Mr. Allen, 50, gave her real-time pointers on pacing, technical skills and race strategy. He also ran interference for her. “Early on, there were about 10 guys riding hard taking turns up front—I was one of them—and I knew we were going to break away from the peloton,” or main group of riders, he says. “I made sure Diane stayed with us, sheltered in the middle and conserved her energy as we widened the gap.”
That is from Hilary Potkewitz at the WSJ.
Emmanuel Saez and Gabriel Zucman seem to think the correct answer is to assume that there is no substitution away from capital or from the corporate sector:
This paper proposes a new way to do distributional tax incidence better connected with tax theory. It is crucial to distinguish current distributional analysis from tax reform distributional analysis. Current distributional analysis shows the current tax burden by income groups and should assign taxes on each economic factor without including behavioral responses: taxes on labor should fall on labor earners, taxes on capital on the corresponding asset owners, and taxes on consumption on consumers. This allows to distribute both pre-tax and post-tax current incomes and measure the economically relevant tax wedges on each factor without having to specify behavioral responses. Tax reform distributional analysis shows the impact of a tax reform and should describe the effect on pre-tax incomes, post-tax incomes, and taxes paid by income group separately and factoring in potential behavioral responses. Various scenarios can be considered given the uncertainty in behavioral responses. We illustrate our methodology using a simple neo-classical model of labor and capital taxation.
No Western fiscal authority I have heard of thinks of tax incidence in these terms.
There is an argument that you first write down the “no-response” burden in order to arrive at the actual estimated burden, as the authors seem to note. That is not an argument for coming up with a “no adjustment” estimate and marketing it to The New York Times (and others?) as correct and based on normal assumptions, without first adjusting for incentives and capital responses and shifts in the ultimate tax burden. Would we have known about these underlying assumptions — which lie behind their subsequent calculation of wealth inequality — at all, if not for the tireless work of Phil Magness and Wojtek Kopczuk on Twitter?
Returning to the paper, it has some quite weak sentences, such as: “But it [no adjustment] also has the advantage of not being dependent on assumptions on behavioral responses.”
You might as well argue that assuming zero price elasticity of demand “has the advantage of not being dependent on assumptions on behavioral responses.” In reality, one is assuming about the least plausible behavioral response possible.
Here is some background material from Wojtek Kopczuk, which works through how the proffered inequality measures and corporate tax assumptions are related. And from Steven Hamilton. Here is also the recent David Splinter summary analysis on tax progressivity. Wojtek notes in his Twitter thread:
The bottom line: corporate tax should be felt by other forms of capital. That’s the standard assumption. CBO makes it, Auten-Splinter make it, Piketty-Saez-Zucman make it. Who does not? Saez-Zucman (2019) do not.
Here is the semantic innovation from the Saez-Zucman paper:
We think it is more useful to say that cutting corporate taxes could increase workers’ wages rather than say
that the tax burden on workers would fall.
Say both! Here are two well-known and also generally accepted AER papers suggesting that the corporate income tax places a burden on real wages.
Michael Smart agrees with me on the new Saez-Zucman piece:
Zucman has now kindly posted an early working paper to support the SZ assumption. I do not find this WP convincing. We’re simply told that the “natural description” of tax incidence is its legal incidence, i.e. 100% shareholder incidence of CIT.
I find this episode appalling, and I hope The New York Times is properly upset at having been “had.”
Starting with Lebron James, that is the topic of my latest Bloomberg column. Here is one bit:
Third: Preface your “no comment” remarks with a patriotic platitude.
If someone asks James about the situation in China, it seems a little abrupt and dismissive for him to simply utter, “No comment.” Instead, it would be better for him to say something like this: “I am an American and I love my country. I do not have any comment on matters related to Chinese politics.”
At least then he or any other celebrity would be standing for something, albeit in a pretty empty way. They will sound less like vacuous money-grabbers and will provide some weak support for patriotic norms.
Granted, this may not be the most preferred response for the Chinese Communist Party. But the party won’t limit your shoe sales simply for saying you are an American patriot. It may even like the general idea of a celebrity promoting patriotism.
This is much more at the link, at least one part of the piece being tongue in cheek (though good advice nonetheless). This part is fully serious:
I do not think that corporations, or for that matter athletes, should be motivated by dollars alone.
In the meantime, I do not expect the Lakers to be a formidable force in the NBA this year.
Oops, this blog post isn’t about Facebook at all! Here goes:
Records and interviews show that colleges are building vast repositories of data on prospective students — scanning test scores, Zip codes, high school transcripts, academic interests, Web browsing histories, ethnic backgrounds and household incomes for clues about which students would make the best candidates for admission. At many schools, this data is used to give students a score from 1 to 100, which determines how much attention colleges pay them in the recruiting process.
It is always difficult to figure out what influenced you as a child, but I commonly think back on this saying of baseball great Ernie Banks. When a doubleheader was coming up, he said “It’s a great day for a ball game — let’s play two!” This became a very well known phrase in baseball lingo.
It always seemed to me like a very good attitude.
If, ever in life, there was a chance to do more, or take on a new project, I would always think “Let’s Play Two!”
France among other nations has been calling for a three percent digital tax, for instance as might apply to Facebook revenue connected to France but booked say to Ireland, which has a lower corporate tax rate. (The exact meaning of “connected to France” is indeed murky here, if you are wondering, but proponents might have in mind a simple France-to-France transaction, such as selling an ad to a French buyer for a French product; there are more complicated grey areas.)
As is so often the case, the debate is focusing on how little tax some of the major tech companies pay directly to the French treasury, rather than on tax incidence. In reality, the major tech companies may already be bearing a quite significant tax burden.
Let’s say you believe that Facebook has significant market power over the advertising market in France. That is not exactly my view, but let’s run with it — a competitiveness assumption will hardly boost the case for taxing Facebook.
At this point your mind already may be thinking that the monopolist in the supply chain will bear some significant portion of a tax, just as land bears tax burdens in a Georgian land monopolist model.
Let’s now say that France boosts its VAT — how will that impact Facebook? Well, the short-run effect is that directly taxed good and services will tend to cost more. That in turn will create pressures for them to advertise less, because their potential market size and potential profits are smaller. If they advertise less, they are spending less money on Facebook ads. Facebook profits go down (remember, Facebook is selling those ads above marginal cost), and thus Facebook bears some of the burden of the tax.
Do the same analysis in terms of levels rather than changes, and you will see that Facebook bears some of the burden of the current French VAT.
So the French VAT brings money into the French treasury, and some of that money comes from Facebook in an indirect form, in addition to whatever direct tax liabilities Facebook may bear under the current French VAT structure. Furthermore, the net tax burden on Facebook is higher, the more monopolistic is Facebook in the ad market.
I should note that there are other ways you can play around with the assumptions.
A good rule of thumb is that you should place less weight on tax discussions that do not focus obsessively on tax incidence.
By contrast, liberal women — defined in my research as those in traditions like Episcopalianism and (most) Lutheranism that officially affirmed female leadership — fought for denominational policies that gave them standing in the pulpit. And yet there are few progressive female celebrities. Ordained progressive women secure a measure of institutional sway, but they lack the cultural capital of their conservative counterparts. My research shows that conservative women gain considerable influence without institutional power, and liberal women gain institutional power without considerable influence.
That is from Kate Bowler, interesting throughout. Via Greg R.