What is the right rate of capital gains taxation for art?
Sens. Pete Domenici (R., N.M.) and Charles Schumer (D., N.Y.) have been complaining for the past few years that the capital-gains tax rate of 28% for the sale of art and other collectibles, compared with only 15% for the sale of real estate and securities, unfairly puts art collectors at a disadvantage.
Here is the story. Here are some fallacious views:
Reducing capital-gains taxes on art to the same 15% as real estate and securities makes sense only if one believes that art is just one more and equally important investment realm. "The government is interested in encouraging people to invest in businesses and the housing market and other areas of risk-taking that stimulate job growth and generate tax revenues, and art doesn’t really do that," said Joseph Cordes…
That view was seconded by Leonard Burman, director of the Tax Policy Center of the Urban Institute, who noted that lowering the tax on art sales could result in "shifting into art and collectibles money that should go to more productive things, which would be taxed as ordinary income. To some extent, people would do that." As an example of more productive use of capital, he suggested investing in a factory or apartment house.
That’s the well-known Junker Fallacy. Buying art shifts money from one set of hands to another and it doesn’t discourage investment in factories or elsewhere. (And if it did, investing in houses would involve the same problem, I might add.) The recipient of the money, the art seller, can invest the money just as well as the spender might have. Or in other words, the transfer of the arts doesn’t consume much in the way of real resources. Admittedly there is a second-order effect: higher prices diverts more labor energy into the arts, although for Old Masters this effect is very small. Or you might cite shipping and transfer costs for the art, noting that on that logic we should tax shopping carts at higher rates as well.
There is a good argument for the higher tax rate on art, namely that art yields otherwise non-taxable pleasures — the pleasure of hanging it on your wall — unlike say holding Chrysler stock. Or you might think taxing art is another way to hike the tax burden on the rich. But the cited argument just doesn’t fly.
Thanks to Donn Zaretsky for the pointer.
Prophets of the Marginal Revolution, a continuing series
Guest blogger Fabio Rojas on Barack Obama, circa 2004. I remember reading that post and thinking: "Fabio is a great guest blogger, but who cares about that guy?"
Markets in everything?, self-constraint edition
An alarm clock to get you out of bed in the morning:
Connects via WiFi to your online bank account, and donates YOUR real money to an organization you HATE when you decide to snooze!
Hat tips to Kottke and Magnetbox, apparently there is doubt as to whether this is real. The wise guy also may wonder why you just don’t disable the snooze function on your alarm clock. But of course that is precisely the sort of non-convexity that markets seek to avoid. At times you will wish to sleep past your limit, even at your prespecified price, but perhaps you cannot always know in advance.
UK science is becoming “normal”
People sometime say that UK science is thriving, at other times that it has declined. But both assertions are true, because the UK is thriving with respect to the volume of ‘normal’ science production but at the same time declining in the highest level of ‘revolutionary’ science.
Here is much more, from loyal MR commentator Bruce Charlton. Note that the data set includes economists. I have noticed this pattern in UK economics; it no longer feels like UK and US economics are fundamentally different, unlike for instance in the 1980s.
Prediction markets at Google
According to the report, “Using Prediction Markets to Track Information Flows: Evidence From Google,”
which was presented Friday at the American Economic Association meeting
in New Orleans, the strongest correlation in betting was found among
people who sat very close to one another, trumping even friendship or
other close social ties.This is tangible evidence, the authors
argue, that information is shared most easily and effectively among
office neighbors, even at an Internet company where instant messaging
and e-mail are generally preferred to face-to-face discussion.It is an argument, the authors say, for giving greater importance to
“microgeography,” or how people interact in the workplace. The finding
that information moved fastest among people who were the closest
together is also an endorsement of the company’s “third rule for
managing knowledge workers: Pack Them In,” the authors say.
And Adam Smith is validated once again:
The other crucial finding of the report was that there was a
detectible “optimism bias” among Google employees. That is, results
that were good for the company tended to be overpriced, particularly
for “subjects under the control of Google employees, such as, would a
project be completed on time or would a particular office be opened.”This
optimism was most evident among new employees, the report found, and it
was bound to show up on days when Google stock had climbed.
Here is the story. Of course this is very important work. Thanks to Chris Masse for the pointer. Elsewhere in prediction markets land, InTrade has now started conditional prediction markets, which consider oil prices, interest rates, and U.S. troops in Iraq, conditional on who becomes President.
Museo Interactivo de Economia
Located at Tacuba 17 in Mexico City, here is their website. The building is splendid, the exhibits are insipid. There is lots on how money is coined (the museum is an initiative of the Bank of Mexico), the circular flow of economic activity, gdp, and social indicators. There are many buttons to press, although to what end is not clear. Opportunity cost gets one computer display and division of labor is mentioned. Taxonomy and description are favored above all. Overhead videos hang from the ceiling and a pulley system drags plastic copies of Mexican products through the room above your head.
Occasionally there is a propagandistic tinge: "Of all the services our government doles out to you, which do you value the most?"
The shop sells lovely 19th century ex votos for excellent prices.
The interesting question is what museums can teach well. Paintings and sculptures, for sure, and perhaps history. But can museums teach abstract concepts, modes of reasoning, and ways of thinking? Here is a science, economics, and technology museum in Milwaukee, is it any good?
At the Museo the bathrooms are clean, lavish, and architecturally superb, the nicest I have seen in downtown Mexico City.
Department of hmm….
People who suffer a life-threatening alteration
in heart rhythms are more likely to survive if they are in a casino or
airport than if they are in a hospital, researchers have reported.
Doctors
already knew that more than half of those who suffer such attacks in
airports and casinos survive. But a new study in hospitals shows that
only a third of victims there survive, primarily because patients do
not receive life-saving defibrillation within the recommended two
minutes.
Critique of Marty Weitzman on uncertainty
Here is a long post, criticizing Marty Weitzman’s view that we should regard a small chance of a catastrophic event as reason to buy "insurance protection" against that event.
I am not persuaded by Jim Manzi’s major point of rebuttal, namely: "the heart of Weitzman’€™s paper revolves around the first point: the
probability of extreme disaster is larger than current models assume." My reading of Weitzman (which may not exactly be Weitzman’s own view) is the following: raising the discount rate doesn’t choke off our worries of future dangers. In many plausible models, a higher discount rate means a higher degree of risk aversion as well, and thus we are back to worrying.
(For one simple version of this intuition, imagine a person near starvation. That person has both a high discount rate — he wants to eat more now — and he is very risk averse, for fear of losing his remaining food and dying. A billionaire in contrast can be more patient and bear risk more readily. The discount rate and the degree of risk aversion thus often move together, admittedly there are great complications here.)
Manzi also argues that: "There is No Good Reason to Think That the Probability Distribution for Estimates of Climate Sensitivity Fits Any Functional Form." Fair enough, there is only one world and ultimately the meaning of probability is murky, Bayesian or not. But we still have to act on probability estimates in an "as if" way and indeed we all do in a personal context.
If you want to know where Manzi is coming from, here is his critique of the Pigou tax on carbon.
The most serious critique of Weitzman, in my view, is simply that governments are bad at getting people to bear large costs to insure against low probability events, especially when the costs accumulate each year and there is little positive feedback in the interim. ("Reelect me, our costly tax held back global warming for yet another four years! Things didn’t get worse!" does not thrill.) Our government does persuade its voters to support a large defense budget, but this is done in part by a) periodic conflict and invasions, and b) people holding deeply irrational views of America’s proper place in the world (e.g., "my country, right or wrong"). On other foreign policy issues these irrational attitudes sometimes become very costly. So we might get people to support a Weitzmanesque insurance policy, but to do so they probably would have to be overworried about the relevant problems, and those overworries would lead to other policy mistakes. As a general rule of thumb, when it comes to risk the alternative is public overworry or public underworry, don’t ever expect to hit that sweet spot in between or even get close.
Thanks to Reihan for the pointer.
A Few Thoughts on the Democratic Debate
I watched the Democratic debate last night. I thought all the candidates did well on foreign policy but Senator Clinton’s answers were more specific and informed.
When asked whether, if they had "actionable intelligence" on Bin Laden’s location in Pakistan, they would strike even without the Pakistani government’s approval, Edwards and Obama jumped at the chance to show how tough and determined they were. Clinton was tough also but she said she would sure let the Pakistani government know what was happening before the missiles hit otherwise the Pakistani’s might think it was an attack from India. I think she could have jumped on Edwards and Obama for perhaps starting a nuclear war due to their inexperience but she didn’t and I suspect that the point may have been lost on the audience. In answering questions about troop withdrawal, Senator Clinton was also thinking through the details at a greater level than the other candidates mentioning, for example, that it was important to make plans for the Iraqi’s who have worked with US troops.
On economics, Obama was by far the best. Former Secretary of Energy, Bill Richardson, who performed poorly throughout the debate, said a carbon tax was a bad idea because it would raise prices to consumers which is why he supported cap and trade! Obama pointed our correctly that cap and trade would also raise prices but he nevertheless supported cap and trade because some sacrifices were necessary.
On energy and economics, Clinton was very poor. She made some crazy argument that mandating energy efficiency was the way to get us out of the looming recession – as if wishing for greater efficiency would make it so.
Edwards didn’t say much specific on economics and so didn’t make too many pure gaffes but he scared me with all of his talk about how going after corporations was personal.
Huckabee’s “Fair Tax”
Tom Redburn nails it:
Whatever the rate, critics say, a steep federal retail tax, piled on
top of existing state sales taxes, would encourage widespread illegal
tax evasion, black market transactions and other forms of cheating,
creating a cycle that would require even higher tax rates.“The main weakness of the FairTax is its comprehensiveness,” said Dale W. Jorgenson,
an economist at Harvard who opposes the plan but whose research into
problems with the current system is sometimes cited by supporters. “It
tries to roll everything into one tax, which simply can’t carry all
that weight.”
Here is Bruce Bartlett, here is Megan McArdle on same. You can put this in the "things I am nearly certain about category."
Response to comments: Note that a "fair tax," or a national sales tax, isn’t the same thing as a standard multi-stage VAT (a better idea); for a standard VAT the dual reporting requirements make it self-enforcing to a much higher degree.
Jesus Corpos Aliberto
Jesus Corpos, from Ameyaltepec, is a local legend. The story was that he went insane and was holed up in a hotel somewhere in Mexico City, painting brilliant amates, and otherwise sitting in a room talking to himself for the last twenty years. Supposedly he spent each day filling in notebooks with zeros to represent the millions he could have earned from selling his amates. But the people who related those details also told me that crocodiles inhabited the (desert-like) region not long ago, a rabbit lives on the moon, and most of the region’s animals are also sentient gods.
About a week ago, I heard word of Jesus Corpos. An amate merchant from the distant San Pablito (state of Puebla) had told Marcial Camilo that he had delivered some paper to Corpos in Mexico City. Hotel Buenos Aires.
I took a cab to this dingy locale and pushed my way past the locals congregating at the entrance and eating blue corn tortillas. It turns out that Corpos was there, living in a small closet with no light and room for no more than a bed; the stench was overpowering. The hotel owner was putting him up to help out. Upon request, Corpos stepped out of the room with a large roll of amates; from the sight of it the roll had not been opened for five to ten years. He was polite and soft-spoken.
They were in fact remarkable works, but I was unable to meet Corpos’s asking price of 7 million pesos per amate (about $700,000). He told me to return when I had the money. I thanked him profusely and left.
Costco chic
I finally crawled out from under the rock I was hiding and visited my first Costco last week, albeit in Veracruz, Mexico. Their business model seems to focus on stocking only profitable items that can be bought and stored in bulk. They do not relish the idea of the loss leader or the cross subsidy, but instead they evaluate items in stand-alone terms and look for high turnover. Inventory costs are low because what they have is right there in the store on pallets. They don’t seem to stock much in the way of competing brands and you see "Kirkland" — their house label — frequently; presumably buying from a single vendor lowers their costs further. As for the store I visited, two thirds of the stuff was hard to find and half of it was hard to reach. There was a surfeit of cranberry juice, which is otherwise uncommon in Mexico. There was lots of U.S. Grade A beef and canned goods. No one asked me to become a member. It would be a good place to stock up for a party but I can’t imagine shopping there regularly: too many of my favorite items are missing and they don’t have the hardcore best of Mexican foodstuffs, which are found in the traditional markets. Since they have over thirty stores in Mexico perhaps the formula is working.
Here is an NYT article about the U.S. phenomenon of Costco chic.
Sentences of Great Sadness
Andrew Olmsted, a blogger who posted at Obsidian Wings as G’Kar, was killed yesterday in Iraq. He gave one of his co-bloggers a final post in the event of his death. It’s very painful to read and also funny and sad. Here is one of the few sections that I can bear to post.
Believe it or not, one of the things I will miss most is not being able to blog
any longer. The ability to put my thoughts on (virtual) paper and put them where
people can read and respond to them has been marvelous, even if most people who
have read my writings haven’t agreed with them. If there is any hope for the
long term success of democracy, it will be if people agree to listen to and try
to understand their political opponents rather than simply seeking to crush
them.
What I’ve been reading
I’ve discarded lots of unfinished books on this trip, but two have stood out for their excellence:
1. The Past, by Alan Pauls. I don’t usually like drug-fueled tales of unhealthy sexual obsession, but I’ll make an exception for this one. This Argentine novel has received rave reviews across Europe, but still does not seem to have a U.S. publisher; the Amazon link is to a UK edition. It’s uneven, but it has a higher number of memorable scenes than almost any other contemporary novel.
2. The Adventures and Misadventures of Maqroll, by Alvaro Mutis. Imagine a Colombian version of 1001 Nights and Don Quixote, in novella form. This is 700 pp. of sheer delight, and it also indicates we are just starting to figure out which Latin American works of fiction will prove of lasting importance. This is one of them, and another superb translation from Edith Grossman.
If I read two works of fiction this good in 2008, I will be grateful.
The Candidate Doesn’t Matter
Despite large swings in the market for presidential nominees over the past few days, on the Democratic side Clinton has dropped and Obama risen by almost 15 points and on the Republican side McCain has surged to take the lead (!), there has been very little movement in the winner take all market which is predicting a Democrat win. Thus, the markets seem to be saying that the candidate doesn’t matter. In this election it’s party and the Republicans are losing.
Winner Take All Market from IEM (click to expand).
