That seems like a point in Warren's favor: from an economic standpoint, you do want to discourage the rich from excessive savings. In this example, the spendthrift CEO is driving a lot of economic...
The Yang proposal would not only be more workable than the Warren plan, but it would also target those who spend lavishly.
Consider two hypothetical C.E.O.s, each earning $10 million a year. Spendthrift Sam spends all his money living the high life. He drinks expensive wine, drives Ferraris and flies a private jet to extravagant vacations. Frugal Frank lives modestly, saving most of his earnings and accumulating a large nest egg. He plans to leave some of it to his children and grandchildren and the rest to charity.
Ask yourself: Who should pay higher taxes?
The Warren proposal hits the frugal executive hard but leaves the spendthrift without a scratch. The Yang proposal hits the spendthrift hard and takes a smaller bite from the frugal person who has saved his money. If you, like me, think that society could benefit from fewer spendthrifts and more savers, Mr. Yang’s proposal makes much more sense than Senator Warren’s.
That seems like a point in Warren's favor: from an economic standpoint, you do want to discourage the rich from excessive savings. In this example, the spendthrift CEO is driving a lot of economic activity from the demand side, whereas the frugal one is draining the economy of its lifeblood by socking that money away.
To expand on this idea, at some point it's impossible to outspend your income. While most people will tend to live at their means regardless of income level, once you become excessively wealthy...
To expand on this idea, at some point it's impossible to outspend your income. While most people will tend to live at their means regardless of income level, once you become excessively wealthy this just isn't possible anymore -- billionaires simply cannot spend the same fraction of their wealth as someone making $50,000/yr. Similarly, someone worth 100 millions dollars won't spend the same fraction of their wealth as someone worth 10 million dollars.
I'd be interested in knowing approximately where the cut-off is, as then we could calculate some hard numbers (and therefore also determine which plan might generate more revenue for the government). That said, if I had to hazard a guess, I would think that someone making 10 million dollars per year is not spending the majority of that income (but as a counterpoint, I offer some professionalathletes, whom I think are the exception that proves the rule).
Does the kind of saving matter? (Actual question for anyone to weigh in on, it's not like I really know.) "Frugal Frank" won't be filling his Scrooge McDuck vault with cash, he'll probably be...
Does the kind of saving matter? (Actual question for anyone to weigh in on, it's not like I really know.) "Frugal Frank" won't be filling his Scrooge McDuck vault with cash, he'll probably be investing most of his money in various businesses. This is basically how the economy is supposed to function under our current system: we mostly organize ourselves and do work through various enterprises and investor capital can help these to grow and do more. The spending habits of "Spendthrift Sam", on the other hand, push the economy towards luxury consumption for the benefit of a few. Instead of his spending being used to motivate something useful it encourages part of a limited pool of labour and resources to be used on super-yachts and other wasteful frivolities.
Of course, this specific question about a wealth-tax doesn't address whether or not people should be able to have that much money in the first place, or broader questions about what kind of economic system we should even have.
I'd say that's basically vulgar Keynesianism (the technical term). https://web.mit.edu/krugman/www/vulgar.html Basically, Keynesianism holds true in certain cases, but we aren't going to spend our...
Basically, Keynesianism holds true in certain cases, but we aren't going to spend our way to economic growth. It is saving, not spending, that increases capital and the means to produce.
Of course, the paradox of thrift is real. If everyone saved, it would be bad for the economy.
I know it's conventional economic wisdom, but I have trouble understanding how increased savings would lead to increased useful production. I guess I'm too used to thinking like a Keynesian, but...
It is saving, not spending, that increases capital and the means to produce.
I know it's conventional economic wisdom, but I have trouble understanding how increased savings would lead to increased useful production. I guess I'm too used to thinking like a Keynesian, but why would anyone invest in a new factory unless it's in response to increased demand for its output, or at least a plausible theory for why people will buy it. Why isn't demand the bottleneck?
Also, it doesn't seem like we're in a situation where there's any shortage of investment funds? Lots of dodgy unicorns get funding and Softbank put billions into WeWork in pursuit of profits on the sketchiest of premises, I guess because the Saudis couldn't figure out anything better to do? Investors are seeing very low interest rates and stocks are at an all time high. And there's sometimes talk of a "global savings glut" by respected economists.
So, what good could more investment funds do? I'm not seeing how saving gets converted into useful investment. (Of course, financial firms will satisfy this demand somehow, but probably in some financially innovative but dodgy way, like subprime loans or something like that.)
There are, of course, plenty of urgent problems someone could spend money on, but they don't attract investors because they don't look profitable. Somehow, the people who have the problems aren't spending the money. Perhaps because they don't have money to spend?
So it seems like someone needs to somehow convert important problems into economic demand as a prerequisite for savings to do any good?
Investment is weird, because lots of companies fail, and few do well, but some do really well. Ultimately, we think of demand as a thing you can quantify. People want a pair of shoes, 3 meals a...
Investment is weird, because lots of companies fail, and few do well, but some do really well.
Ultimately, we think of demand as a thing you can quantify. People want a pair of shoes, 3 meals a day, etc. But demand is more than that. For example, a side effect of investing is that we make better computers, for example. Then people buy those computers. Those computers then increase productivity, increasing our ability to produce. That's an instance where investment creates growth.
Now, there are valid critiques. You can't throw money at something and expect innovation to come. Furthermore, if we were to use investment to build a ton of sailboat making machines, even though our capacity to produce would increase, nobody would really want those sailboats. Capital is so saturated nowadays that really creating more of it doesn't cause growth, except in certain situations (Ie Tesla factories, as it seems our market needs more of them). So it's mostly technology improvements - making "better" capital, not more, which drives growth. And investment, not spending, tends to create technological improvements.
It seems like to some extent, it's a matter of leadership? Moore's law was a self-fulfilling prophesy. While people believed it, the whole industry knew that they had better be investing in making...
It seems like to some extent, it's a matter of leadership? Moore's law was a self-fulfilling prophesy. While people believed it, the whole industry knew that they had better be investing in making circuits smaller and faster, or be left behind. And it seemed likely that, if they do invest, they will be rewarded. And the customers kept buying.
We might also point to the rise of alternative energy as being lead by certain governments via extensive subsidies. A lot of solar energy companies lost their shirts, but we do have quite an industry now.
In one case it was an influential industry prediction and in the other it was government-led, but the point seems to be that investment needs direction and a lot turns on that direction being right.
Totally. And that's why, somewhat controversially, some people consider "entrepreneurship" to be a component in growth, and a reason command economies fail. But even with the best leaders, you...
Totally. And that's why, somewhat controversially, some people consider "entrepreneurship" to be a component in growth, and a reason command economies fail.
But even with the best leaders, you still need funding.
I think they ended up picking a more-or-less irrelevant side of Yang's proposal. It's not so much how much wealth you already accumulated. It's more about the rate at which wealth continues to...
I think they ended up picking a more-or-less irrelevant side of Yang's proposal. It's not so much how much wealth you already accumulated. It's more about the rate at which wealth continues to concentrate disproportionately in the hands of the few and how much this will accelerate as automation puts even more and more productivity in the hands of even fewer.
i.e. Yang's not trying to re-litigate the past, but rather prevent the easy production of future billionaires for who owns options in companies, never 'spends' that money and those companies never pay taxes.
the Warren tax may provide an incentive for high-wealth couples to divorce. [...] Giving money to adult children would also reduce a family’s tax liability. [...] rich folk planning to bequeath much of their wealth to charity would have an incentive to accelerate that giving during their lives [...] And I could go on: There are countless ways for people with vast resources to avoid a complex tax like this one.
[....]
Consider two hypothetical C.E.O.s, each earning $10 million a year. Spendthrift Sam spends all his money living the high life. He drinks expensive wine, drives Ferraris and flies a private jet to extravagant vacations. Frugal Frank lives modestly, saving most of his earnings and accumulating a large nest egg. He plans to leave some of it to his children and grandchildren and the rest to charity.
Ask yourself: Who should pay higher taxes?
The Warren proposal hits the frugal executive hard but leaves the spendthrift without a scratch. The Yang proposal hits the spendthrift hard and takes a smaller bite from the frugal person who has saved his money.
I'll add that this depends on your priorities. If you want rich people to do things that results in them having less control over their money (and associated power) maybe you want to encourage...
I'll add that this depends on your priorities. If you want rich people to do things that results in them having less control over their money (and associated power) maybe you want to encourage them to spend or give it away? Being frugal means keeping more direct control over it.
On the other hand, spending power is also power, and more people directly serving rich people's whims doesn't seem like a win? Generally we prefer to see money spent wisely.
I'm not sure we should be picking whether people who spend or save should get taxed harder. That doesn't seem like a good value judgement to make. Sure - if they're buying cigarettes and maseratis...
I'm not sure we should be picking whether people who spend or save should get taxed harder. That doesn't seem like a good value judgement to make. Sure - if they're buying cigarettes and maseratis we can tax them for the negative externalities, but IMO we shouldn't punish people for our perceived notion of whether they should be spending or saving*
*Note: I do support tax rules such as IRA and 401(k) which incentivize tax-reduced retirement savings up to a reasonable amount.
That would be ideal, but the problem is, sometimes you're providing incentives either way, whether you intended to or not. Like, either there is an incentive to get married, or there is an...
That would be ideal, but the problem is, sometimes you're providing incentives either way, whether you intended to or not. Like, either there is an incentive to get married, or there is an incentive to get divorced. Either there is incentive to save, or incentive to spend.
This is like "game balance" in video games. There may be a way to balance things so that one strategy isn't the winner, but it can be hard to figure out in advance, and the players can discover an "exploit" later so that the game isn't really balanced after all. Ideally some federal agency would be watching for exploits and patching them regularly, but often it takes years or decades for Congress to pass a new law, and every patch makes the game more complicated.
Also, a lot of incentives are invisible to us because we're just used to them (we know how the game is usually played), so it's the new ones that stand out. But the incentives we're used to can be pretty bad too.
To be fair, UBI also has plenty of unknowns when it comes to how people will respond to incentives. But, I like it anyway because most laws end up gamed by the rich, and it's one of the few policies that looks fair on the surface (everyone gets the same amount) but actually should be most helpful to the poor. (I don't doubt that some merchants and landlords will profit from it, though.)
Every tax provides incentives, but a wealth tax very clearly penalizes savings. I think it's easy to not do that. An income tax provides no incentives beyond decreasing the marginal return of...
Every tax provides incentives, but a wealth tax very clearly penalizes savings. I think it's easy to not do that. An income tax provides no incentives beyond decreasing the marginal return of getting more income, but we've seen how much that dissuades people.
There are a lot of unknowns, but I don't think it's as complicated as you assert. Sure, some deductions cause distortion, like the child tax credit, but we have that precisely because we've decided that we want to encourage higher birth rate (through tax deductions). We've also decided smoking is bad, so therefore cigarette taxes.
Well, I agree that an income tax seems better than a wealth tax based on primary effects. But I think there's a whole different level of secondary tax effects people don't know about unless...
Well, I agree that an income tax seems better than a wealth tax based on primary effects.
But I think there's a whole different level of secondary tax effects people don't know about unless they're either rich or an accountant for rich people and are actively looking for ways to save money.
Here's one for income tax that I recently learned about: did you know that if you inherit commercial property, you can deduct its market value as depreciation expense from your taxes? Basically you got something for free and yet, somehow it's an expense, and magically your income for tax reasons is much lower than your real income. Each generation can deduct the same property all over again. (Explained here.)
I can imagine there was a reason for that, something about not needing your parents' tax records to figure out what to do. But still.
And for businesses it's worse. It's plausible to me that a VAT would be harder to game than income tax.
That's fair, but I feel we could also just eliminate income tax deductions. If we had a consumption tax with as many deductions as we do for income it wouldn't be much better.
That's fair, but I feel we could also just eliminate income tax deductions. If we had a consumption tax with as many deductions as we do for income it wouldn't be much better.
For employees earning a paycheck this may seem simple, but for businesses (or people in business), income is revenue minus expenses. If you don't let people subtract expenses then it's effectively...
For employees earning a paycheck this may seem simple, but for businesses (or people in business), income is revenue minus expenses. If you don't let people subtract expenses then it's effectively a sales tax, not an income tax.
The problem I pointed out seems to be that deducting a fake expense somehow became legal and I agree that could be fixed. But defining expenses can be trickier than that.
That seems like a point in Warren's favor: from an economic standpoint, you do want to discourage the rich from excessive savings. In this example, the spendthrift CEO is driving a lot of economic activity from the demand side, whereas the frugal one is draining the economy of its lifeblood by socking that money away.
To expand on this idea, at some point it's impossible to outspend your income. While most people will tend to live at their means regardless of income level, once you become excessively wealthy this just isn't possible anymore -- billionaires simply cannot spend the same fraction of their wealth as someone making $50,000/yr. Similarly, someone worth 100 millions dollars won't spend the same fraction of their wealth as someone worth 10 million dollars.
I'd be interested in knowing approximately where the cut-off is, as then we could calculate some hard numbers (and therefore also determine which plan might generate more revenue for the government). That said, if I had to hazard a guess, I would think that someone making 10 million dollars per year is not spending the majority of that income (but as a counterpoint, I offer some professional athletes, whom I think are the exception that proves the rule).
Does the kind of saving matter? (Actual question for anyone to weigh in on, it's not like I really know.) "Frugal Frank" won't be filling his Scrooge McDuck vault with cash, he'll probably be investing most of his money in various businesses. This is basically how the economy is supposed to function under our current system: we mostly organize ourselves and do work through various enterprises and investor capital can help these to grow and do more. The spending habits of "Spendthrift Sam", on the other hand, push the economy towards luxury consumption for the benefit of a few. Instead of his spending being used to motivate something useful it encourages part of a limited pool of labour and resources to be used on super-yachts and other wasteful frivolities.
Of course, this specific question about a wealth-tax doesn't address whether or not people should be able to have that much money in the first place, or broader questions about what kind of economic system we should even have.
I'd say that's basically vulgar Keynesianism (the technical term). https://web.mit.edu/krugman/www/vulgar.html
Basically, Keynesianism holds true in certain cases, but we aren't going to spend our way to economic growth. It is saving, not spending, that increases capital and the means to produce.
Of course, the paradox of thrift is real. If everyone saved, it would be bad for the economy.
I know it's conventional economic wisdom, but I have trouble understanding how increased savings would lead to increased useful production. I guess I'm too used to thinking like a Keynesian, but why would anyone invest in a new factory unless it's in response to increased demand for its output, or at least a plausible theory for why people will buy it. Why isn't demand the bottleneck?
Also, it doesn't seem like we're in a situation where there's any shortage of investment funds? Lots of dodgy unicorns get funding and Softbank put billions into WeWork in pursuit of profits on the sketchiest of premises, I guess because the Saudis couldn't figure out anything better to do? Investors are seeing very low interest rates and stocks are at an all time high. And there's sometimes talk of a "global savings glut" by respected economists.
So, what good could more investment funds do? I'm not seeing how saving gets converted into useful investment. (Of course, financial firms will satisfy this demand somehow, but probably in some financially innovative but dodgy way, like subprime loans or something like that.)
There are, of course, plenty of urgent problems someone could spend money on, but they don't attract investors because they don't look profitable. Somehow, the people who have the problems aren't spending the money. Perhaps because they don't have money to spend?
So it seems like someone needs to somehow convert important problems into economic demand as a prerequisite for savings to do any good?
Investment is weird, because lots of companies fail, and few do well, but some do really well.
Ultimately, we think of demand as a thing you can quantify. People want a pair of shoes, 3 meals a day, etc. But demand is more than that. For example, a side effect of investing is that we make better computers, for example. Then people buy those computers. Those computers then increase productivity, increasing our ability to produce. That's an instance where investment creates growth.
Now, there are valid critiques. You can't throw money at something and expect innovation to come. Furthermore, if we were to use investment to build a ton of sailboat making machines, even though our capacity to produce would increase, nobody would really want those sailboats. Capital is so saturated nowadays that really creating more of it doesn't cause growth, except in certain situations (Ie Tesla factories, as it seems our market needs more of them). So it's mostly technology improvements - making "better" capital, not more, which drives growth. And investment, not spending, tends to create technological improvements.
It seems like to some extent, it's a matter of leadership? Moore's law was a self-fulfilling prophesy. While people believed it, the whole industry knew that they had better be investing in making circuits smaller and faster, or be left behind. And it seemed likely that, if they do invest, they will be rewarded. And the customers kept buying.
We might also point to the rise of alternative energy as being lead by certain governments via extensive subsidies. A lot of solar energy companies lost their shirts, but we do have quite an industry now.
In one case it was an influential industry prediction and in the other it was government-led, but the point seems to be that investment needs direction and a lot turns on that direction being right.
Totally. And that's why, somewhat controversially, some people consider "entrepreneurship" to be a component in growth, and a reason command economies fail.
But even with the best leaders, you still need funding.
I think they ended up picking a more-or-less irrelevant side of Yang's proposal. It's not so much how much wealth you already accumulated. It's more about the rate at which wealth continues to concentrate disproportionately in the hands of the few and how much this will accelerate as automation puts even more and more productivity in the hands of even fewer.
i.e. Yang's not trying to re-litigate the past, but rather prevent the easy production of future billionaires for who owns options in companies, never 'spends' that money and those companies never pay taxes.
From the opinion piece:
[....]
I'll add that this depends on your priorities. If you want rich people to do things that results in them having less control over their money (and associated power) maybe you want to encourage them to spend or give it away? Being frugal means keeping more direct control over it.
On the other hand, spending power is also power, and more people directly serving rich people's whims doesn't seem like a win? Generally we prefer to see money spent wisely.
From the same author: The Trophy Wife Tax Credit.
I'm not sure we should be picking whether people who spend or save should get taxed harder. That doesn't seem like a good value judgement to make. Sure - if they're buying cigarettes and maseratis we can tax them for the negative externalities, but IMO we shouldn't punish people for our perceived notion of whether they should be spending or saving*
*Note: I do support tax rules such as IRA and 401(k) which incentivize tax-reduced retirement savings up to a reasonable amount.
That would be ideal, but the problem is, sometimes you're providing incentives either way, whether you intended to or not. Like, either there is an incentive to get married, or there is an incentive to get divorced. Either there is incentive to save, or incentive to spend.
This is like "game balance" in video games. There may be a way to balance things so that one strategy isn't the winner, but it can be hard to figure out in advance, and the players can discover an "exploit" later so that the game isn't really balanced after all. Ideally some federal agency would be watching for exploits and patching them regularly, but often it takes years or decades for Congress to pass a new law, and every patch makes the game more complicated.
Also, a lot of incentives are invisible to us because we're just used to them (we know how the game is usually played), so it's the new ones that stand out. But the incentives we're used to can be pretty bad too.
To be fair, UBI also has plenty of unknowns when it comes to how people will respond to incentives. But, I like it anyway because most laws end up gamed by the rich, and it's one of the few policies that looks fair on the surface (everyone gets the same amount) but actually should be most helpful to the poor. (I don't doubt that some merchants and landlords will profit from it, though.)
Every tax provides incentives, but a wealth tax very clearly penalizes savings. I think it's easy to not do that. An income tax provides no incentives beyond decreasing the marginal return of getting more income, but we've seen how much that dissuades people.
There are a lot of unknowns, but I don't think it's as complicated as you assert. Sure, some deductions cause distortion, like the child tax credit, but we have that precisely because we've decided that we want to encourage higher birth rate (through tax deductions). We've also decided smoking is bad, so therefore cigarette taxes.
Well, I agree that an income tax seems better than a wealth tax based on primary effects.
But I think there's a whole different level of secondary tax effects people don't know about unless they're either rich or an accountant for rich people and are actively looking for ways to save money.
Here's one for income tax that I recently learned about: did you know that if you inherit commercial property, you can deduct its market value as depreciation expense from your taxes? Basically you got something for free and yet, somehow it's an expense, and magically your income for tax reasons is much lower than your real income. Each generation can deduct the same property all over again. (Explained here.)
I can imagine there was a reason for that, something about not needing your parents' tax records to figure out what to do. But still.
And for businesses it's worse. It's plausible to me that a VAT would be harder to game than income tax.
That's fair, but I feel we could also just eliminate income tax deductions. If we had a consumption tax with as many deductions as we do for income it wouldn't be much better.
For employees earning a paycheck this may seem simple, but for businesses (or people in business), income is revenue minus expenses. If you don't let people subtract expenses then it's effectively a sales tax, not an income tax.
The problem I pointed out seems to be that deducting a fake expense somehow became legal and I agree that could be fixed. But defining expenses can be trickier than that.
Indeed, there's already a perfect way to tax luxury: The value-added tax.
EU VAT rates on various categories of goods and services:
https://ec.europa.eu/taxation_customs/sites/taxation/files/resources/documents/taxation/vat/how_vat_works/rates/vat_rates_en.pdf
Greg Mankiw also talked about this in one of his recent lectures. Here's a clip of the relevant bit. (12m)