Saturday, January 11, 2020

Wealth and taxes -- Overview

I thought that "wealth and taxes" would be a short blog post. It turned in to a 5 part series. Here's an overview, or table of contents in case the whole thing looks a bit indimidating. The most important one, really I think is Part V, "it's all political." The others build bit by bit, well, this can't be the answer and that can't be the answer, so what is the answer, and Part V finds it.

In Part I we met the fact that "wealth" is measured as "capitalized income," Y/r. But only some kinds of income Y and with discount rate choices r that blew up measured wealth inequality. I review the  Smith, Zidar and Zwick paper that finds huge overstatements of inequality because wealthy people have a higher r than you and me.

In Part II we learned that a big reason wealth inequality widened is that interest rates fell and asset prices rose.  If r falls, Y/r rises, but it's the same Y.

In Part III  we noted the distinction between consumption, income and wealth inequality. Wealth is beyond badly measured as a measure of lifestyle. The computations ignore taxes and transfers, wildly blowing up measured inequality and rendering it a "problem" that ipso facto cannot be solved. Why concern ourselves with pre-tax wealth inequality, especially given that most wealth is reinvested in businesses that produce things and employ people?

In Part IV, we met the wealth tax. If the question is, how do we raise revenue for the government, either to spend or to transfer it, the wealth tax is a terrible idea, as it distorts the economy and leads to an evasion industry. A consumption tax is a much better idea.

In  Part V I read Saez and Zucman's opeds, which finally tell us what the question is to which the wealth tax is the answer. Saez and Zucman want to confiscate billionaires' wealth, because they think billionaires have too much political power, billionaires all got their money unjustly, and somehow though big government cronyism is the problem, bigger government is the answer.  The wealth tax is not designed to raise revenue -- it succeeds if it raises no revenue (after perhaps a one-time wealth grab) because the wealth it taxes has vanished. Well, at least it is a consistent view, decide if you buy the premises.

Update  

CATO put out a much-improved version of this series. Html here and pdf here

15 comments:

  1. typo: indimidating
    Not following this: The wealth tax is not designed to raise revenue -- it succeeds if it raises no revenue because the wealth it taxes has vanished.

    It does raise rev. for Fed gov, one time, does it not?

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  2. I probably agree with the bulk of this excellent five-part series.

    I certainly agree that consumption taxes are preferred, along with (IMHO) property, pollution, Pigou, and import taxes.

    But for better or worse, the US tax code is constructed to tax income.

    The world has global capital gluts, and in the US many are complaining about "labor shortages." Employees in the US, in addition to paying an income tax, also pay an onerous payroll tax.

    So in present context, does it make sense to raise or lower taxes on wages, or on capital?

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    1. Agree (except for import taxation -- why?) on the understanding that consumption taxation would be for raising revenue and offsetting the distribution effects of pigou and pollution taxes. Pigou and pollution taxes are for incentivizing less harmful behavior and property taxes are mainly for cost of local pubic services that cannot be priced. (Technology may permit pricing more services (road user charges?) in the future than now.)

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    2. Taxes on labor instantly turn into wages. SS benefits are so low, they are 100% spent quickly on consumption of goods and services requiring paying workers. Gas taxes are spent before paid paying worker to mostly fix plus some new construction.

      On the other hand, high income worker retirement savings are mostly inflating asset prices as the stock issues to build factories, or bond issues to build factories or real estate are rare in the US, thus these savings don't pay workers to work directly.

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  3. Wealth taxes aren't about raising revenue, they're about charging for a government service. Most wealth is in the form of government issued money, shares of government chartered collectives, government protected intellectual property or government managed real estate. The government is expected to protect and subsidize this type of wealth through a court system, police system, military, education, research and so on. Perhaps the government should just provide services for the first million dollars or so and get out of the wealth subsidization business. If you get robbed and still have a million dollars worth ofo assets left, it's your problem. Either that or charge properly for its services.

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    1. You seem to be suggesting that public services are largely used by the rich at the expense of the poor. I find that hard to believe. For example, the 99th percentile of income is $300,000 in the US. Someone making that much is quite likely to meet your million dollar threshold. The top 1% pays 37% of all federal income tax. It seems rather implausible that the top 1% receive more than 37% of the value of all federal government services. 60% of the federal budget this year is just for transfer programs such as Social Security, Medicare, Medicaid, and unemployment insurance, of which the top 1% almost certainly receive less than 1%. That leaves 40% of the budget. Unless nearly every dollar of that goes exclusively to the rich, then they paying at least proportionally to the services they receive.

      It's true that many of the things you mentioned (courts, schools, police) are operated at a sub-federal level. But I don't think the plausibility test is passed their either. Do you think the police spend more of their time investigating theft from the super-rich, or gang and drug-related crime in poor areas (not that I endorse this state of affairs)? How about the courts? The schools? Many, if not most, children of the top 1% don't even attend public schools, though their parents pay taxes to support them.

      So while I agree that it's reasonable for the wealthy to pay taxes proportionate to their consumption of government services, we disagree about whether that would result in higher or lower taxes.

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    2. The US government runs a global guard service for multinationals, that is the US military establishment. No one even pretends it is to protect US shores from invasion. So who should pay for the US military?

      US based exporters already pay onerous taxes. But importers do not, and often operate tax-free or subsidized in their home countries. Ergo, import fees to help pay for the US military establishment strike me as a good idea.

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    3. Lindahl Taxes, anyone? ;) But, it's very difficult to get people to reveal their true preferences and their willingness to pay for public goods.

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    4. Joel expresses a myopic view of how individuals benefit from public services. A wealthy industrialist's personal use of such services is irrelevant. They benefit far more from their indirect use -- for example, a healthy and educated workforce and customer base, a transportation network to move their goods, a communications network to advertise, a legal and financial system in which to transact -- than they would from the personal consumption of those services over a million lifetimes. Jeff Bezos can make every journey by helicopter and still benefit from the building and maintenance of American roads, at public expense, than any other American.

      Clearly, one need not use services to gain from their existence. Nobody has ever accrued enormous wealth outside a social structure. The simple question, perfectly put by Kaleberg, is who should pay for the structures from which we all benefit. Joel's answer, essentially in proportion to direct use, reveals a deep naivety about how we humans live together.

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  4. It all comes down to part 4; the problem with the tax system is that it is based on taxing income (with some gestures -- preferential taxation for dividends and retained earnings and capital gains -- toward taxing only consumption) rather than progressively taxing consumption.

    Perhaps the pubic discussion of wealth taxes in particular and inequality in general will get conservatives to get on board with progressive consumption taxes.

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    1. I doubt conservatives will be the ones who object to consumption taxes. For the most part, they are the only ones pushing it. Most liberals I know object to large consumption taxes at the federal level since they erroneously think that consumption taxes must be regressive.

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  5. Wonderfully laid. Zucman/Saez are openly Marxists, aren't they? (I'm not 100% sure)

    Can openly gay people advice society about hetero marriages (and vice versa)?

    And I am afraid that Zucman was caught with too much of factual "inaccuracies"...... Which might or might not be related to ideological zeal.

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  6. At no point in the argument is there consideration of the challenges of implementing a tax on wealth. To implement a tax on wealth, a declaration of wealth must be made by each citizen to the IRS. All citizens would have to declare their assets and liabilities each and every year. The wealth tax would apply to all citizens equally before exemptions are granted to those citizens whose net wealth falls below the net wealth threshold set by the legislation. The IRS would have to perform audits to ensure compliance. If the legislation specifies that family units and not individuals are the reporting entities for purposes of the wealth tax levy, then the practical problems of implemention increase significantly and compliance becomes more challenging. I know what I own and owe, but haven't the faintest idea what my brother owns and owes. If he cheats, am I on the hook for his perjury? The income tax is practical because income can be monitored through the payors' accounting and control systems. Wealth monitoring is only possible for real estate using the property tax rolls at the state or municipal levels. That Picasso in the safety deposit vault has a provenance certificate held in another safe, but there is no public record of either, and no tax system can get to it unless voluntarily disclosed by the owner. Stocks and bonds are traceable, but cash is not. And so on. It'll never fly if it passes Congress and it will never pass Congress. Saez and Zucman, academics, make a lot of noise, but it's just that, noise.

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  7. The tax on consumption, investments, and wealth, may be misleading. What seems to matter is whether the economy as a whole consumes more than it saves...for maintenance, or growth. If you think about it, the very rich can't consume all their income. By default, they save which is used by them, or others through the financial system, to invest....as well as consumption by others. If the do the latter, the economy trades away growth for present consumption. If they do too much of this, they tend to trigger inflation (false increases in wealth/income, etc.) as well as increases in the national debt, e.g., future growth or investment. Policy ought to consider tittering use of national income to favor consumption, or investment to balance present/future national well-being.

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