Category: Law
The Economic Consequences of the French Wealth Tax
By Eric Pichet, here is the abstract:
Despite attempts to ‘unwind’ the Impôt de Solidarité sur la Fortune (‘Solidarity Wealth Tax,’ the French wealth tax) during the last legislature (2002-2007), ISF yields had soared by 2006, jumping from €2.5 billion in 2002 to €3.6 billion. Analysis of the economic consequences of this ISF wealth tax has raised the following conclusions: Tax collection costs remain low (around 1.6% of proceeds); Not raising the threshold in line with inflation between 1998 and 2004 created windfall revenues for the French State of €400 million in FY 2004 alone; ISF fraud mainly involving an under-assessment of property assets has stabilised over time at around 28% of total revenues, equivalent; (had the legal framework remained unchanged) to a shortfall for the State of €700 million in 2004; Capital flight since the ISF wealth tax’s creation in 1988 amounts to ca. €200 billion; The ISF causes an annual fiscal shortfall of €7 billion, or about twice what it yields; The ISF wealth tax has probably reduced GDP growth by 0.2% per annum, or around 3.5 billion (roughly the same as it yields); In an open world, the ISF wealth tax impoverishes France, shifting the tax burden from wealthy taxpayers leaving the country onto other taxpayers.
Via Fredrik. I would describe this work as a very loose estimate, nonetheless pointing in the proper direction.
Are “anchor babies” underrated?
Did you worry about the 2020 fall in U.S. fertility? Well, ponder this:
Birth rates in Canada and the USA declined sharply in March 2020 and deviated from historical trends. This decline was absent in similarly developed European countries. We argue that the selective decline was driven by incoming individuals, who would have travelled from abroad and given birth in Canada and the USA, had there been no travel restrictions during the COVID-19 pandemic. Furthermore, by leveraging data from periods before and during the COVID-19 travel restrictions, we quantified the extent of births by incoming individuals. In an interrupted time series analysis, the expected number of such births in Canada was 970 per month (95% CI: 710-1,200), which is 3.2% of all births in the country. The corresponding estimate for the USA was 6,700 per month (95% CI: 3,400-10,000), which is 2.2% of all births. A secondary difference-in-differences analysis gave similar estimates at 2.8% and 3.4% for Canada and the USA, respectively. Our study reveals the extent of births by recent international arrivals, which hitherto has been unknown and infeasible to study.
That is from a new paper by Amit N. Sawant and Mats J. Stensrud, via the excellent Kevin Lewis.
Equality Act 2010
The UK’s Orwellian sounding Equality Act 2010 is strikingly Marxist. It demands equal pay for work of equal value where these are defined as follows:
A’s work is equal to that of B if it is like B’s work, rated as equivalent to B’s work, or of equal value to B’s work.
A’s work is like B’s work if A’s work and B’s work are the same or broadly similar, and such differences as there are between their work are not of practical importance in relation to the terms of their work.
…A’s work is rated as equivalent to B’s work if a job evaluation study— gives an equal value to A’s job and B’s job in terms of the demands made on a worker
…A’s work is of equal value to B’s work if it is neither like B’s work nor rated as equivalent to B’s work, but nevertheless equal to B’s work in terms of the demands made on A by reference to factors such as effort, skill and decision-making.
In short, supply and demand have been replaced by judges and labor boards with the authority to deem which jobs are “equal” and therefore should be paid equally. And the labor boards do so based on vague and subjective considerations that do not change with changing circumstances. Imagine replacing “jobs” with “condiments” and having judges decide whether ketchup and mustard should be priced equally because they are similar, broadly comparable, or rated equivalent in terms of the effort, skill, and decision-making that went into their production.
You think I am joking. I am not. Here’s an example of a case just decided in the UK.
More than 3,500 current and former workers at Next have won the final stage of a six-year legal battle for equal pay.
An employment tribunal said store staff, who are predominantly women, should not have been paid at lower rates than employees in warehouses, where just over half the staff are male.
The tribunal ruled that retail workers and warehouse workers were “equal” and thus had to be paid equally. Next replied that they paid everyone market wages. Verboten!
Next argued that pay rates for warehouse workers were higher than for retail workers in the wider labour market, justifying the different rates at the company.
But the employment tribunal rejected that argument as a justification for the pay difference.
According to the tribunal’s ruling, between 2012 and 2023, 77.5% of Next’s retail consultants were female, while 52.75% of warehouse operators were male.
The tribunal accepted that the difference in pay rates between the jobs was not down to “direct discrimination”, including the “conscious or subconscious influence of gender” on pay decisions, but was caused by efforts to “reduce cost and enhance profit”.
It ruled that the “business need was not sufficiently great as to overcome the discriminatory effect of lower basic pay”.
No one is alleging that male and female warehouse workers were paid unequally or that male and female retail workers were paid unequally or that there was any direct or indirect discrimination. The only claim is that warehouse workers, who are less likely to be female than retail workers, earn more than retail workers. And since these jobs have been judged “equal,” the company has violated Equality Act 2010.
Who could have predicted that jobs as disparate as warehouse and retail jobs might one day be deemed “equal.” Yet because Next failed to foresee such lunacy they are now required to pay millions in back wages to their retail employees. Software engineers, particularly in AI, are currently in high demand. A British firm looking to hire them may hesitate to raise wages, fearing that a future ruling could classify software engineers as “equal” to a larger, lower-paid group like HR administrators. Such a decision could easily push the firm into bankruptcy.
The warehouse workers were almost 50% female (47.25%). So females were not barred from the higher paying jobs. The fact that 77.5% of the retail workers were female suggests that retail work has special appeal to females relative to males and thus that there are compensating differentials. Any of the three female plaintiffs could have taken jobs in the warehouse. If the jobs are equal and the warehouse jobs pay more this is, on the plaintiffs’ theory, “puzzling”. [Or, as Ayn Rand would say, blank out.]
In fact, the court case reveals that Next was struggling to fill the warehouse positions and offered any retail employee—including the plaintiffs—the opportunity to switch to warehouse work. On cross-examination, one of the plaintiffs admitted that, given the unpleasant conditions in the warehouse—described by the court as “the drone of machinery,…vibration, alarm sirens and the screeching of machinery, wheels and rollers, continuously present in all areas”—the warehouse job “did not seem particularly attractive” compared to the greater autonomy and more appealing environment of the retail job. The plaintiff added that she would only have considered the warehouse job if it paid “a lot more money.”
Thank goodness for the men and women who were willing to take such jobs for only a little more money! It should not shock that different people have different preferences over jobs, just as they have different preferences over ice cream. In particular, it will perhaps surprise only the judges to learn that men tend to be more wage-focused and “women are relatively more attracted to employers with low pay but high values of nonpay characteristics (NBER 32408).” The court, however, recoiled from this idea, noting that if they were to take demonstrated preferences seriously this would be tantamount to applying “an unfettered free market model of supply and demand.” The horror.
Now consider how the jobs were deemed “equal”. On the left is the job evaluation report for claimant Amanda Cox. The specific categories and numbers are not important; what is important is that the jobs are rated across 11 categories, and the point-scores are then added to get a total score at the bottom.
Amusingly, the evaluators emphasize that they use equal weighting across the categories. Of course, they did—because “equal” is synonymous with fair, right? An unequal weighting would surely be discriminatory!
I am not making this up:
Any scheme which has as its starting point – “This qualification is paramount” or that “This skill is vital” is nearly always going to be biased or at least open to charges of bias or discrimination.
Thus, if you think that a skill is vital for a job, that’s discrimination!
(Notice also that equal weighting is just another form of weighting. Given the subjective nature of both the categories and the points assigned, equal weighting holds no inherent superiority or objectivity.)
But no matter—we have yet to get to the best part. The evaluators selected three warehouse workers and assessed them using the same metric. For example, Amanda Cox was compared to warehouse worker Calvin Hazelhurst, resulting in the table on the right.
Can you spot something surprising in this table? I’ll give you a moment.
The obvious conclusion any reasonable person would draw from this table is that the jobs are clearly not equal. Amanda’s total score is 440, while Calvin’s is 340. 440 ≠ 340. Not even close! In nearly every category—except (no surprise!) physical demands and working conditions—the retail job requires more points, aka “skill and responsibility”.
At this point, most people would stop and ask some critical questions. If the jobs differ so much across multiple dimensions, isn’t it clear that they are not equal? And why do jobs that seemingly require less “skill” pay more? Could it be that our point-score rating system is oversimplified? Maybe the market is telling us something that this crude scoring system isn’t capturing? Is it time to check our premises?
But not the evaluators! Oh, no. The evaluators are thrilled–because the fact that the jobs are unequal proves that they are equal!
War is peace, freedom is slavery, ignorance is strength. UNEQUAL IS EQUAL.
Adam Smith had a much better understanding of wages in 1776 than UK judges have today.
The wages of labour vary with the ease or hardship, the cleanliness or dirtiness, the honourableness or dishonourableness, of the employment. Thus in most places, take the year round, a journeyman tailor earns less than a journeyman weaver. His work is much easier. A journeyman weaver earns less than a journeyman smith. His work is not always easier, but it is much cleanlier. A journeyman blacksmith, though an artificer, seldom earns so much in twelve hours, as a collier, who is only a labourer, does in eight. His work is not quite so dirty, is less dangerous, and is carried on in day-light, and above ground. Honour makes a great part of the reward of all honourable professions. In point of pecuniary gain, all things considered, they are generally under-recompensed, as I shall endeavour to shew by and by. Disgrace has the contrary effect. The trade of a butcher is a brutal and an odious business; but it is in most places more profitable than the greater part of common trades. The most detestable of all employments, that of public executioner, is, in proportion to the quantity of work done, better paid than any common trade whatever.
Today, the UK would convene a labor board to rule that the tailor and the weaver must be paid equally because they DO WORK OF EQUAL VALUE. Case closed.
Labor boards will inevitably lead to the misallocation of labor, diminishing both wealth and fairness. Severe misallocation may lead to further intervention, in the worst scenario, even to the allocation of labor by fiat. Politicization breeds division, rent-seeking, and a stagnant, unpleasant society.
More generally, it pains me that there is no recognition that the market is a discovery procedure, including the discovery of the value of different skills and people’s preferences over different jobs. No recognition that the market harnesses tacit knowledge and knowledge of particular circumstances of time and place–knowledge that is difficult to quantify, communicate, or communicate in a timely manner–and that “society’s economic problems are primarily related to adapting quickly to changes in these circumstances.” No recognition that a price is a signal wrapped up in an incentive.
I despair when I consider that these fundamental ideas are the foundation of our liberal, global, and prosperous civilization. On economics, as on free speech, the UK has entered the great forgetting.
Addendum: A special hat tip to Bruce Greig who brought this to my attention and had the receipts.
Should we keep the wealthy non-diversified? (from my email)
Byrne Hobart writes to me:
One of the purposes of inheritance taxes is to avoid compounding intergenerational wealth. But The Missing Billionaires points out that if all of America’s millionaires had put their money in broad market indices in 1900, their heirs would number 16,000 billionaires, even accounting for taxes, splitting estates among multiple children, etc.
So one of the forces that prevents compounding inequality is that rich people tend to have less diversified portfolios than the rest of us—they own a lot of whatever it is that made them rich! If we give them an incentive to stay undiversified, and to do so even when they’re quite old and thus not in a great position to monitor or manage their assets well, they’ll end up with suboptimal portfolios that are much more likely to lose most/all of their value than the average retirement account is. Given how much volatility can cut into returns (witness the 3x levered Microstrategy ETF that has lost 82% of its value in a year when Microstrategy itself doubled), it’s possible that the cost basis step-up actually contributes more to intergenerational economic mobility than the money collected by the estate tax itself, by encouraging them to white-knuckle their way through the last years of their life with all their eggs in one basket.
I’m not personally a fan of the estate tax or the step-up, for various reasons, but I found this argument fun nonetheless.
Speculative but interesting…
Why Indian firms don’t scale
Surveying the literature on the impact of labor regulation, we find that India’s firm-level labor regulations punish businesses in two ways. First, the regulations are too onerous, preventing firms from remaining competitive. While some sectors and large-scale industries might be able to comply with this regulatory overload, most regulations are imposed on firms with as few as 10 employees, disincentivizing firm growth and large-scale employment. Second, labor-related regulations tend to micromanage factory operations through uncertain enforcement by a labor inspection system, further discouraging firms from expanding. India’s labor laws do too much, too soon in a firm’s life cycle.
We argue that to scale manufacturing across industries and foster job creation, India needs to revise its stringent labor regulations. This paper begins by describing the predominance of small-scale firms, indicating the extent of informality in India’s manufacturing sector, which is well established in the literature. It then shows that India’s labor law tries to do too much; instead of merely setting standards, the statutes micromanage workplaces, colors, fonts, uniforms, and more by requiring permissions for a host of workplace activities such as changing the tasks of a worker. It argues that the laws apply too soon in firms’ life cycle—namely, at low employee thresholds (typically as low as 10 workers). Both these aspects increase labor and compliance costs and discourage firms from scaling. Next, the paper offers recommendations for reforms to stop disincentivizing firms from scaling—including streamlining labor laws, raising employee thresholds, optimizing inspections, and avoiding excessive reliance on criminal penalties to ensure compliance.
Kalshi wins
From an announcement, slightly edited by me:
Kalshi has defeated the CFTC, legalizing election markets in the US for the first time in 100 years. After years of battling with the US government, we won in court: the District Court of Columbia just ruled in our favor, legalizing trading on U.S. elections and overthrowing a long-time ban that has been standing since the Great Depression.
Honduras and its disputes
More importantly, Honduras is not just locked in a dispute with Silicon Valley billionaires, as the authors would lead you to believe. Other claimants against Honduras at the International Center for the Settlement of Investment Disputes (ICSID) include the Paiz family, one of the wealthiest in Guatemala, the U.S. bank JPMorgan Chase, and others from Honduras, Panama, Mexico, Chile, Norway, and the Caymans. More claims were brought by private energy companies after Castro’s 2022 reforms pushed out private investment to expand the state’s role in electricity production. Predictably, there are no signs of progress for Honduras’ crippled energy grid. The state-run National Electric Energy Company loses over $30 million every month, with debts amounting to more than 10 percent of Honduran GDP.
This is to say that Honduras’ current feud with Próspera is part of a pattern of reneging on obligations to investors and expanding state influence, not a one-time rectification of a coup by Silicon Valley billionaires.
Equally absent the article is any mention that the supposedly “center-left” Castro is a self-proclaimed socialist strongly aligned with Venezuela and, in shirking foreign investors and the US, following in its footsteps quite neatly. Castro has indeed gone so far as to remove Honduras from the ICSID over the massive list of outstanding claims against it—a move familiar to Venezuela, which left in 2012. The Honduran government’s rationale—that the ICSID favors corporations instead of states—is the same that Venezuela used. The practical effects of this move are limited, but the symbolic ones are meaningful. Honduras is branding itself as a bad place to do business.
Here is more from Snowden Todd.
Peer Approval to Address Drug Shortages
Reuters: Mark Cuban’s Cost Plus Drug Company said…that it is working with the U.S. Food and Drug Administration to import and distribute penicillin in the country temporarily….Cuban’s Cost Plus will import Lentocilin brand penicillin powder marketed by Portugal-based Laboratórios Atral S.A.
There are two remarkable items in the above passage. First, there is a shortage of penicillin in the United States! Crazy. The second remarkable item is that the FDA has authorized the temporary importation of penicillin from Portugal. In other words, the FDA will accept the EMA’s authorization of penicillin as equivalent to its own, at least for the purposes of alleviating the shortage. That’s good. What is needed, however, is a more permanent form of peer-approval.
I have long advocated for peer approval or reciprocity for any drug or device approved in a peer country but notice that this form of peer approval is only for drugs already approved in the United States. Thus, the approval is really only for labeling and manufacturing, a pretty small ask.
Peer approval for imports would also help to discipline domestic firms who sometimes take advantage of monopoly power to jack up prices. Indeed, you may recall Martin Shkreli and the massive price increases for Daraprim (Pyrimethamine) to $750 a pill when the same pill was available in Europe for $1 or less and in India for 10 cents. Importation would have solved that problem entirely.
Banning Airbnb in NYC
- NYC is now a more expensive destination for visitors:
- The average hotel prices in New York City rose 7.4 percent over the past year (July 2023 to July 2024), compared with an only 2.1 percent increase nationally, according to data from CoStar.
- Despite the law’s promise, rent hits an all-time high and vacancy rates stay stagnant:
- Legislators claimed the law would protect affordable housing, yet rent climbed 3.4 percent during the first 11 months the law was enacted, according to StreetEasy, suggesting that other factors are driving up rent prices.
- The median asking price of rent downtown Manhattan over the past year reached a peak of $5,000 USD for the first time in history.
- The rent increase in New York City since the law took effect continues to outpace nearby cities like Boston, Chicago and Washington, D.C.
- Vacancy rates for apartments in New York City have remained virtually unchanged at 3.4 percent since the law took effect, according to Apartment List.
- New York City’s vacancy rates also continue to significantly lag behind Chicago, Boston and Washington, D.C.
Here is the full Airbnb blog post.
How much did land reform help Taiwan?
We study Taiwan’s landmark 1950s land reform, long seen as central to its growth miracle. Phase II of reform—which redistributed formerly Japanese public lands—reduced tenancy, boosted rice yields, and increased the share of labor in agriculture. By contrast, phase III— which reduced tenancy by breaking up larger estates—did not increase agricultural productivity and pushed labor (in particular, female labor) out of agriculture into manufacturing. Phase II likely increased yields by lifting crop choice constraints, while phase III may have created farms too small to be economically viable. However, phase II can still explain at most one-sixth of observed 1950s rice yield growth. These results challenge the longstanding view that land reform was a major factor behind Taiwan’s economic takeoff, and highlight the varying effects of different forms of land redistribution.
Here is the full paper by Oliver Kim and Jen-Kuan Wang. Here is Oliver’s very useful Twitter thread.
Taxing unrealized capital gains is a terrible idea
Sadly, Jason Furman has been endorsing one of the very worst economic ideas of our generation. Here is Jason’s Twitter take, here is his earlier WSJ piece.
Let me start with his quick summary:
I like the Biden-Harris proposal to tax unrealized capital gains. For any given level of capital taxation it’s more efficient & fair to tax unrealized gains, reduces lock in & tax planning.
Read through Jason’s own words in the WSJ — do you really think a system that complicated is going to reduce tax planning? How about figuring out what percentage of liquid vs. illiquid assets to hold? Whether to finance ventures through private equity vs. public markets? Which risky assets to buy and sell before December 31? How much to put into your foundation, so as to adjust your net wealth status? Might there not be other “tricks” to adjust your tax eligibility as well? What about those “live in Puerto Rico” decisions?
When it comes to your assets, how is “tradeable” defined? (Narrator: It isn’t)
How about the “…rules to prevent taxpayers from inappropriately [sic] converting tradeable assets to non-tradeable assets”? Those are going to go down nice and smooth, right? And imagine the legal squabbles over what “tradeable” and “non-tradeable” mean. How about bundling assets and deliberately making them less tradeable? How does that count? Chopping up assets to make them less tradeable? Do we have to measure the intent of the investor? And doesn’t this make it much harder to invest in your own start-up? (As we will see below, Jason and others cite “capital flowing freely” as a supposed benefit of this plan — but their plan harms capital flows a great deal.)
How does this paragraph, with multiple points of tax planning ouch, make you feel?:
Taxpayers with wealth greater than the threshold would be required to report to the Internal Revenue Service (IRS) on an annual basis, separately by asset class, the total basis and total estimated value (as of December 31 of the taxable year) of their assets in each specified asset class, and the total amount of their liabilities. Tradable assets (for example, publicly traded stock) would be valued using end-of-year market prices. Taxpayers would not have to obtain annual, market valuations of non-tradable assets. Instead, non-tradable assets would be valued using the greater of the original or adjusted cost basis, the last valuation event from investment, borrowing, or financial statements, or other methods approved by the Secretary. Valuations of non-tradable assets would not be required annually and would instead increase by a conservative floating annual return (the five-year Treasury rate plus two percentage points) in between valuations. The IRS may offer avenues for taxpayers to appeal valuations, such as through appraisal.
Or if you wish to consider another random complication, and I am quite sure there are many others I have not thought of, how about this one? — what about restricted stock or stock grants that vest over time? Are you only paying taxes on the unrestricted/vested part, or the whole thing? Is this going to be so simple?
I have great respect for Jason, whom I consider to be one of the very smartest policy economists, but I genuinely do not see how he can believe tax planning will become easier and less costly under this proposal. Furthermore, one has to consider the tax complications of the act Congress actually will pass, after lots of political horse-trading, rather than the ideal Jason Furman plan. We all know how previous tax plans have fared when they go through the legislative process.
As for lock in, here is Jason from the WSJ:
…linking taxation to realization encourages people to hold on to assets. These gains escape taxation at death, which turbocharges the incentive not to sell and prevents capital from flowing freely to those who can make the best use of it.
I don’t understand the worry here, much less why it is a significant worry. I don’t hear Democratic economists complain about the insufficient liquidity of the wealthy in any other contexts. To put this point in an example, let’s say someone founds a company, and years later that company is worth $200 billion. Under current tax law, Mr. Billionaire arguably will be too late in selling his shares and too late in becoming more liquid, relative to an optimum. Just how big of a distortion is that? Who, on the left side of the politcal spectrum, ever said: “My goodness, I’m worried, Mark Zuckerberg isn’t liquid enough!” And then…we are supposed to help make him more optimally liquid by taking away a decent share of his wealth? In a world with reasonable capital markets, the best way to protect the liquidity of the wealthy is to maintain or boost their net wealth.
Given the ability of private equity to “think about” valuations creatively, the plan offers a huge relative subsidy to that way of doing business. I think that sector is on average more Democratic-friendly than would be public equity holdings? And why introduce this additional distortion? Weren’t we supposed to be worried about the growth of private equity? (What was it they said about Mitt Romney, way back when?)
Alex T., in an email to me, makes a general point very effectively:
What’s really going on is that you are divorcing the entrepreneur from their capital at precisely the moment that the team is likely most productive. Separation of capital from entrepreneur could negatively impact the company’s growth or the entrepreneur’s ability to manage effectively. The entrepreneur could lose control, for example. If you wait until the entrepreneur realizes the gain that’s the time that the entrepreneur wants out and is ready to consume so it’s closer to taxing consumption and better timed in the entrepreneurial growth process.
I agree with Jason (and many others) that revaluing the capital gains step-up basis at death is a bad idea. We all know that is easy enough to fix by other means, as public finance economists have long proposed. And if need be, we could tax the ability of wealthy people to borrow, using their stock as collateral. I don’t favor this, but it would be way better than the proposal under consideration.
Let’s consider another Jason point:
…taxing gains when they are realized is unfair because it allows two people with similar income or wealth to be taxed at different rates for arbitrary reasons. For example, if you hold stocks that appreciate, they will be taxed less than similar stocks that do not appreciate but do pay a dividend.
Keep in mind the Biden-Harris plan is supposed to apply only to the very wealthy (and let us hope it stays that way over time, just like…um…the AMT did). I should be worried about fairness issues because two different individuals with say $300 million in net wealth are paying different tax rates based on their capital gains vs. dividend profiles? I just don’t get it. Is it such a big problem that we don’t end up with “enough dividends”? And this worry of Jason’s comes very early in his piece, with prominence, it is not an aside buried on p.137 of a long proposal. From my point of view, it is simply an idle search for not very relevant distortions.
Here is one very simple way to see the distortions embodied in the new plan. The plan attempts to enforce a minimum tax rate of twenty-five percent. Say you have a start-up, and it becomes valued at $10 billion after a quick growth spurt. But still you aren’t making money yet, but nonetheless your overall portfolio is reasonably liquid because your last company did well and you sold it. So, if I follow Jason and the plan document correctly, in the year after that valuation you have to pay one-fifth of the tax liability on that gain, or say one-fifth of one-fourth of the $10 billion, or $500 million (you don’t have to pay the whole gain, because that would be “too much” a penalty, since the start-up may not in fact pan out. So it is just one-fifth of the 25% rate you pay up front. Obviously you can vary these exact numbers, but the general point remains. Do note that in varying expositions you can see the core rate reported as either 25% or 20%).
That just seems like a bad investment to me! And let’s say the next year the company valuation goes up to $20 billion. You have to pay another $500 million on the new gains, and also (on this point I am not sure I grasp the plan), you have to pay yet another fifth on the gains that have persisted for yet another year, or in other words yet another $500 million (and please do correct me if I am misunderstanding that). Then suppose that, the year after, the start-up crashes and has to be liquidated at a very low value. There isn’t any refund from the tax man. So you have lost not only your investment but also at least $1 billion more, again noting the exact numbers can vary a bit here.
Ex ante, why would you enter into deals like this? But of course a lot of start-up sectors have return structures very much like that, namely some high initial valuations but with reasonably high percentages of a later crash.
Venture capital drives so much of the most productive sectors of our economy, so why are we whacking it like this? When so many promising developments in biotech and green energy seem to be on the way? Why should we want to crush venture capital like this?
By the way, this plan doesn’t seem to be indexing gains for inflation, at least I could not find talk of that in the core document. That introduces a whole new set of distortions — why push more of our taxing capacity into a non-inflation-indexed system? (And please readers, if any advocates of this tax are calling for concomitant inflation indexation, please do leave those links in the comments. I haven’t seen that myself.)
As a result of the policy, doesn’t more asset ownership end up in the hands of foreigners? Once the policy is on the way, American capital owners will be selling at discounts. That is another distortion, and the resulting capital inflow likely would not help U.S. exports (it is a bit complicated because not all ceteris are paribus). Foreigners will end up “owning more of America,” and yes that includes Chinese. That alone seems like reason to reject this plan, yet you won’t find these issues discussed.
If this is supposed to be a major revenue source for our government, why make the budget so dependent on capital gains, realized or otherwise? How has that dependence worked out for the state of California? What happens to the broader budget during recessions and asset price crashes?
Or just try the very simplest of “small c conservative” questions — how many countries have ever made a system like this work? None, and yes I do know about the much smaller, more limited, and also abandoned French wealth tax.
Overall, this is a terrible policy, and we need the real Jason Furman back!
Addendum: Here is a Jason Furman Twitter response, and my response back to him at the end of that.
Taxing Unrealized Capital Gains and Interest Rate Policy
First read Tyler on the practical difficulties implementing a tax on unrealized capital gains!
I have a different argument that I rarely see discussed. A significant fraction of what we call capital gains is due to variation in the discount rate rather than variation in income. Take the simplest Gordon model of stocks P=D/r where D is the annual dividend and r is the discount rate. If D=100 and r=.1, for example, then the stock is worth 100/.1=$1000. Now suppose people become more patient and the discount rate falls to .05 then P=$100/.05=$2000. The stock price doubles, a massive capital gain. But notice that income hasn’t gone up at all. It’s still D per year. Income hasn’t gone up and lifetime consumption possibilities haven’t gone up for someone who doesn’t sell (but recall this is a tax on unrealized gains. If there is a sale then tax the realized gain.) Ultimately, we want to tax consumption so we should not be taxing “capital gains” which reflect changes in discount rates rather than changes in income or consumption possibilities.
Taxing unrealized capital gains also connects interest rate policy even more tightly with fiscal policy. Need a tax boost? Lower interest rates! Fed policy already influences taxes but this adds another lever for political business cycles. More generally, interest rate volatility now adds to fiscal volatility. When we exited zero interest rate policy, for example, banks had huge capital losses. As rates fall, capital gains increase. Do we really want to add the tax system to this?
If we generalize the Gordon model to P=D/(r-g) where g is the growth rate of dividends then we can see that another cause of increased capital gains, an increase in g. It’s not obvious that we should tax unrealized changes in asset values due to increases in the growth rate of dividends. On the one hand, this is more income-like but it’s expectational. It’s taxing the chickens before the eggs have hatched.
The one clear increase in income which should be taxed is increases in D. An unrealized capital gains tax would do that but at the expense of also taxing changes in asset values due to changes in r and g which should not be taxed.
Now add the point I mentioned to Tyler, which is that taxing unrealized gains divorces the entrepreneur from the firm at a time when the “marriage” is likely at its most productive. Not good. Taxing unrealized gains might not even be a good idea from the point of view of the tax collector. Does the IRS want to tax X now or a much larger figure later? If the IRS taxes entrepreneurship too early it can reduce total discounted tax revenues.
Bottom line: I don’t see how taxing unrealized capital gains is a well thought out policy. Eliminate the stepped up basis, declare victory and go home.
Addendum: Aguiar, Moll, and Scheuer make some similar points but embedded in a fully GE framework. Ben Moll also points me to earlier pieces by Frank Paish 1940, Nicholas Kaldor 1955 and John Whalley 1979.
Mpox Vaccines Stuck in Limbo: WHO is at Fault
In 2022, Mpox, a viral disease endemic to parts of Africa and primarily transmitted through close contact—especially sexual contact between men—spread to developed countries, including the United States. The U.S. saw over 30,000 cases and approximately 58 deaths. Despite two available vaccines there was not nearly enough supply to vaccinate even the high-risk populations. Fortunately, health authorities adopted vaccination strategies my colleagues and I had recommended for COVID such as first doses first and fractional dosing. For example, several small studies (e.g. here and here) suggested that 1/5 doses delivered intradermally could be effective and the FDA, EMA, and the UK all recommended this fractional dosing strategy. As result, the US was able to vaccinate around 800,000 people and the epidemic ended (natural immunity and other preventive measures also played a role).
Unfortunately, a new Mpox variant is now spreading in the Democratic Republic of the Congo and nearby countries. Here’s the crazy part: despite declaring Mpox a public health emergency on August 14, the WHO has not approved any Mpox vaccines. You might think, “Who cares what the WHO authorizes?” After all, the FDA, EMA, and the UK have all granted emergency approval. But here’s the catch: the WHO’s approval is crucial for GAVI, the vaccine alliance that donates vaccines to developing countries. Without WHO approval, GAVI is reluctant to provide vaccines to the Congo. To add insult to injury, the Congo itself has approved the Jynneos and LC16 vaccines. Yet, the WHO refuses to authorize and GAVI to donate these vaccines, citing vague concerns about safety and efficacy.
Stephanie Nolen at the NYTimes has a very good piece on this mess:
Three years after the last worldwide mpox outbreak, the W.H.O. still has neither officially approved the vaccines — although the United States and Europe have — nor has it issued an emergency use license that would speed access.
One of these two approvals is necessary for UNICEF and Gavi, the organization that helps facilitate immunizations in developing nations, to buy and distribute mpox vaccines in low-income countries like Congo.
While high-income nations rely on their own drug regulators, such as the Food and Drug Administration in the United States, many low- and middle-income countries depend on the W.H.O. to judge what vaccines and treatments are safe and effective, a process called prequalification.
But the organization is painfully risk-averse, concerned with a need to protect its trustworthiness and ill-prepared to act swiftly in emergencies, said Blair Hanewall…
In addition, no one has followed the other practice my colleagues and I recommended for COVID (which Operation Warp Speed did), namely advance market commitments. So the vaccine manufacturers have basically been twiddling their thumbs and not gearing up for greater production. (The Congo can also be faulted for not buying more on their own account.)
All of this means that when the WHO does authorize and the vaccines begin to flow, we will still desperately need strategies like fractional dosing.
Hat tip: Ben H. and special thanks to Witold Wiecek.
From the comments (on regulation)
Prescriptive versus Performance Codes
A great piece in the NYTimes on the history and future of factory produced buildings:
But the most remarkable difference between the United States and Sweden is regulatory. Building codes in the U.S. try to make buildings safe by prescribing exactly what materials must be used and how (a prescriptive code). In Sweden, the government does this by setting goals and letting builders come up with a way to achieve them (a performance code).
So, for instance, U.S. building codes dictate the thickness of drywall that must be used for fire resistance, how many layers are needed and how many nails are required to attach it. In Sweden, the code requires that a wall must resist burning for two hours, say, and lets engineers and manufacturers figure out how to accomplish that. The regulator’s job is to check the engineer’s work.
The result of both is fire resistance and structural safety, but in the United States, each residential building needs to be granted a permit. During construction, work often halts for inspectors to make periodic visual inspections. That contributes to a stop-and-go pace that frustrates pretty much everybody except lenders, who get interest on financing. Sweden’s codes require more work on the front end when builders have to demonstrate that their methods are up to snuff, but factory processes that comply with the performance code can be certified. This encourages innovative solutions and results in less waste.
As an example of how a performance code leads to innovation:
..Before Sweden adopted its performance-based code in 1995, wood buildings had been limited to two stories; almost overnight, wooden buildings could be as tall as engineers could prove safe.
Addendum: See the comments for useful argument that the US code is more performance based than the NYTimes article suggests. What would be very useful is to hear from someone with experience in both systems.
That is from Mike in VA.