Under standard, pretty flexible assumptions, it's impossible to tax capitalists, give the money to workers, and raise the total long-run income of workers. Not, hard, not inefficient, not socially wasteful, not immoral: Impossible.
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So if we make certain assumptions about the world, we get Chamley-Judd, but if we then subject those assumptions to empirical scrutiny, we get Piketty-Saez ?
ReplyDelete"But to tell people that if we care about the long run, the tax on capital income--on interest, profits, dividends--should be zero?"
ReplyDeleteHmmm....guys like Andrew Mellon thought differently:
From "Taxation: The People's Business"
"The fairness of taxing more lightly income from wages, salaries or from investments is beyond question. In the first case, the income is uncertain and limited in duration; sickness or death destroys it and old age diminishes it; in the other, the source of income continues; the income may be disposed of during a man’s life and it descends to his heirs. Surely we can afford to make a distinction between the people whose only capital is their mettle and physical energy and the people whose income is derived from investments."
The MMT people would also disagree but for different reasons. It comes down to this statement:
"If you tax capital income and hand all of the tax revenue to workers, then in the long run (or the "steady state") you'll wind up with a smaller capital stock."
If you tax capital income and hand all of the tax revenue to government bond holders (for instance the federal reserve) what the government is in fact doing is performing a monetary function - reducing the amount of money in circulation.
Question: Why does a government borrow?
Answer: To create a supply of its currency.
Question: Why does a government tax?
Answer: To create a demand for its currency.
And if it's a Brown tax? Does Norway's resource tax--government taking an equity stake in privately-run rent-creating projects--really reduce the long-run welfare/consumption of the Norwegians?
ReplyDeleteThis is a serious question. I don't think Jones's example holds.
When capitalists are taxed the tax money must come from profits. When workers are taxed, the tax money comes from wages/salaries which, in turn, comes from profits. Both scenarios are equivalent in the sense that the source of taxes is the same - profits. For Jones's argument to hold, the captalists would have to voluntarily give up bigger share of their profits for wages (no direct tax) than for wages + taxes combined, when taxed directly. Or the profits would have to be higher without direct taxes. I don't see the advantage of paying taxes indirectly through higher workers' wages.
ReplyDeleteThe result may just be an artifact of the assumptions including, in particular, that everyone has the same discount rate, everyone has perfect foresight and the tax on income from capital is a fraction of the income.
ReplyDeletemy calculus skills are rusty and I do not have time to work through the model but if there is some investor surplus at a zero tax rate (such that the marginal return to capital is equal to r, the universal discount rate, but the average return is higher) then it should be possible to impose a tax within this artificial model along the lines of:
capital income tax = (income - (r+eps) * capital invested ) * 0.9 where eps is a small number.
without a negative effect on the level of capital invested and without a negative impact on the wages of workers.
Interfluidity weighed in on the Jones piece:
ReplyDeletehttp://www.interfluidity.com/v2/4218.html
Interesting piece.
Delete"There is no clear relationship between financial asset purchases and the organization of useful resources into production."
"Empirically, the relationship between the outstanding stock of financial claims and anything recognizable as productive capital is very weak. Finance is not an inconsequential veil over real production."
Total stock of US financial claims versus real gross domestic product:
http://research.stlouisfed.org/fred2/graph/fredgraph.pdf?&chart_type=line&graph_id=&category_id=&recession_bars=On&width=630&height=378&bgcolor=%23b3cde7&graph_bgcolor=%23ffffff&txtcolor=%23000000&ts=8&preserve_ratio=true&fo=ve&id=MVEONWMVBSNNCB_TCMDO_GDPC1&transformation=lin_lin_lin&scale=Left&range=10yrs&cosd=2002-10-01&coed=2012-10-01&line_color=%230000ff&link_values=&mark_type=NONE&mw=4&line_style=Solid&lw=1&vintage_date=2013-03-18_2013-03-18_2013-03-18&revision_date=2013-03-18_2013-03-18_2013-03-18&mma=0&nd=__&ost=&oet=&fml=%28a%2Bb%29%2Fc&fq=Quarterly&fam=avg&fgst=lin
This chart is somewhat incomplete - it does not include the market value of financial sector equities (about $4.9 trillion).
Absalon,
ReplyDeleteOne thing in that article that caught my attention:
"Unfortunately, this sort of calculation does not seem to describe economy-wide savings behavior very well. Aggregate purchases of financial assets seem to be insensitive to returns. In the US, yields on debt, risk-free, corporate, and individual, have been falling since the 1980s, while the stock of financial assets held by households (as a share of GDP) has grown inexorably."
I think the answer to this lies in the liquidity of the financial assets more than anything. Prior to 1970, most US government debt was of the non-marketable variety, meaning people bought it and held on to it until it reached maturity. The same could be said for equities, mutual funds, etc. An overemphasis on liquidity has diminished productive capital enterprise. While increased liquidity "shares" risk through an economy, it also increases the temptation to turn ownership of financial assets into a leveraging means of funding consumption.
There were tax changes that made US government debt more appealing to foreigners - that drove down interest rates. Longer life expectancy would have driven down discount rates and, after a lag, interest rates.
DeleteThe Chamley paper says they assume that everyone has the same discount rate because otherwise the model does not have a stable solution. However, we know that people do not have the same discount rate. With different discount rates, over time the person with the lowest discount rate will wind up owning everything and the market clearing interest rate will fall to that lowest personal discount rate. That may be what is at work in the long period of post war stability - we are seeing the steady accumulation of a growing share of the wealth in the hands of those (who may be Chinese or Japanese) with the lowest discount rates.
If marginal personal discount rates fall with rising wealth then the economy may be inherently unstable in the long run without some form of redistributive tax on wealth (which could be in the form of an inheritance tax).
Absalon,
Delete"With different discount rates, over time the person with the lowest discount rate will wind up owning everything..."
This assumes that all goods / financial instruments are marketable aka liquid. That need not be the case.
"If marginal personal discount rates fall with rising wealth then the economy may be inherently unstable in the long run without some form of redistributive tax on wealth (which could be in the form of an inheritance tax)."
Do you believe there is a lower limit to how far personal discount rates can fall? As for a restributive tax on "wealth" be careful what you ask for - wealth takes many forms (financial assets, buildings, family and friends, capital goods / machinery).
Would it make sense for the federal government to take a farmer's tractor and give it to a taxi cab driver in the name of redistribution?