You can’t redistribute income . . .

 . . . but you can and should redistribute consumption.  Here’s Matt Yglesias discussing a recent post by John Quiggen:

John Quiggin makes the case that redistribution of income away from the top 1 percent is essentially the only thing that matters in American politics. After all, as Willie Sutton said, “that’s where the money is.”

I’m all for that, but I really do think it’s an unduly limited view of political life.

Income really is the Achilles heel of the progressive movement.  The income statistics simply don’t mean what progressives think they mean–something like “resources available for redistribution.”  If you want something closer to resources available, you’d use consumption, or wage income.  If you combine wage and capital income in the same aggregate, you are counting the same resources twice.  This is deeply counter-intuitive, yet all public finance economists understand this.  The policymakers in Nordic countries understand this.  But progressives don’t seem to understand this.  Even Paul Krugman, who must know better, keeps citing income distribution data, which is about as informative as examining the entrails of a chicken.

A rich guy with lots of income has three choices, consumption, savings/investment, and charity.  Let’s dispose of charity quickly.  Yes, we could redistribute the money Gates in spending on malaria in Africa, and give it to other Americans.  Would that be a gain?  I think everyone would say no.  On the other hand if a rich guy gives a lot of money to Princeton, to have his name on a building, perhaps that’s really a form of consumption.  I’m fine with treating it that way, if the tax authorities decide that’s the way to go. 

But the real money here is obviously in the consumption/investment categories.  You can redistribute consumption from the top 1% and give it to average Americans working in a car factory, or a Walmart.  But it’s an illusion to think you can redistribute investment from the top 1%, so that average Americans can have a higher living standard.  Where do people think the car factory comes from?  Or the Walmart building?  BTW, this has nothing to do with trickle-down economics, a theory I reject.  This is simple accounting.  Money put into investment projects isn’t available to boost living standards for the lower classes, unless you don’t do those investment projects.

So what’s available to be redistributed?  Basically consumption (including a modest amount of vanity charity.)  And that’s it.  Now come back to me with the consumption distribution data, and let’s see what that looks like.  I predict that consumption inequality is far lower than income inequality.  And that consumption inequality is rising at a far slower rate than income inequality.  I’m not saying there’s no problem, but it’s way smaller than the progressives imagine, as the data they use is pure nonsense.  Consumption inequality is economic inequality.  Income inequality is . . . well it’s meaningless gobbletygoop.

This Will Wilkinson posts cites study after study supporting my consumption inequality claim.

I’m not trying to make an Ayn Randian argument here.  I favor 4 types of income redistribution, on utilitarian grounds:

1.  Education vouchers

2.  Catastrophic health insurance

3.  Government subsidy of HSAs for low income workers.

4.  Wage subsidies for low income workers, combined with abolition of minimum wages and occupational licensing.  Thus a single mom with two kids making $8 hour, might get a government subsidy of another $8 hour.  And someone making $16/hour might get a $4 hour subsidy.  But they have to be employed.  Have government jobs paying 1 cent per hour as a residual, for those claiming they can’t find a job.  Give them a $12/hour subsidy.  

They would also get the other three subsidies discussed above.  As one’s income rose, one would get less and less of a HSA subsidy, but I’d probably make the education voucher and catastrophic insurance universal.  Importantly, I’d try to spend less on education than we do now.

You do all this redistribution with two consumption taxes; a VAT and a progressive payroll tax.  Plus perhaps some other taxes on efficiency grounds (carbon, land, etc.)  No personal or corporate income taxes, no forms to fill out.  K.I.S.S.

BTW, other than my quibble over “income,” I basically agree with the thrust of Yglesias’s post.

PS.  Oh, and get rid of the debt ceiling, for God’s sake.


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113 Responses to “You can’t redistribute income . . .”

  1. Gravatar of Joe Joe
    26. July 2011 at 16:05

    What percentage of the savings of the rich is residential real estate? Thats technically “savings,” but I don’t think its the kind that Robert Solow had in mind.

  2. Gravatar of Benjamin Cole Benjamin Cole
    26. July 2011 at 16:36

    I like this post. I like gasoline taxes, and PIGOU taxes.

    However, lately I have been wondering: If we have global capital gluts, should we actually tax investment and not consumption?

  3. Gravatar of Morgan Warstler Morgan Warstler
    26. July 2011 at 16:38

    THERE CAN BE NO GOVERNMENT NEW JOBS for .01 cent.

    Auction them to the highest bidder in the private sector. Let government contract private sector profit making entrepreneurs.

    Please update post!

  4. Gravatar of johnleemk johnleemk
    26. July 2011 at 16:41

    Benjamin,

    Is there a global capital glut? What does that even mean? That we’ve run out of productive investments (as in activities that might transform things we have into even more useful things) to make? Really? Even if so, how do we measure that?

  5. Gravatar of RobF RobF
    26. July 2011 at 16:44

    Scott,

    I’m on-board with the notion that some amount of affluent “income” should rightfully be re-categorized as propserity-producing “investment”. Draining venture capital from Silicon Valley and re-distributing it as basic health care to seniors probably doesn’t improve the aggregate welfare of the nation. But the money invested in Enron, WorldCom, and Las Vegas real estate was also investment money and I can imagine that a good portion of that money could have better served the national welfare had it instead been allocated as healthcare subsides for kids in low-income families. Does a blanket tax-exclusion of non-consumption dollars hinge on the assumption that every potential investment better serves the national interest than every potential re-distribution?

  6. Gravatar of Morgan Warstler Morgan Warstler
    26. July 2011 at 16:49

    Without Enron, without Worldcom, there is no Google.

    Private investment makes better judgements. There will be mistakes. As long as the losers lose everything is fine.

    The problem is Obama buying GM for the UAW. The problem is TARP.

    They are disgusting. If Obama said, I’m going to shut down GM, and spend this money on kids – you’d have a point.

  7. Gravatar of Scott Sumner Scott Sumner
    26. July 2011 at 16:51

    Joe, I’m not sure if you’re asking about stocks or flows. And I’m not sure what sort of savings (I think you mean investment) Solow had in mind, (nor do I see why the investment he had in mind is important.) I presume people invest where they think they can get the highest rate of return. But your question does raise an important point, our tax code is now biased toward residential real estate. The tax plan I propose would end that bias. In that case the investment in real estate would be closer to the socially optimal level.

    Benjamin, I think it just looks like we have too much capital because of the recession. We also need to do something about that problem.

    Morgan, In the original version I said I’d hire all the rest for 1 cent an hour. But I thought that sounded too sarcastic, so I deleted it. I’m trying to bring the progressives over to our side.

  8. Gravatar of Scott Sumner Scott Sumner
    26. July 2011 at 16:54

    RobF, You don’t seriously think the government is going to be able to spot the bad investments that the wealthy investors don’t see? There’s no plausible government policy to implement your idea, unless God starts giving advice to bureaucrats. See my answer to Joe about the real estate sector, however.

    You asked;

    Does a blanket tax-exclusion of non-consumption dollars hinge on the assumption that every potential investment better serves the national interest than every potential re-distribution?

    Absolutely not.

  9. Gravatar of Benjamin Cole Benjamin Cole
    26. July 2011 at 17:04

    John Leemk and Scott Sumner:

    What if in some large nations people have very high savings rates, as they have no social net, they are saving for retirement, college, security etc. Or the government compels “saving” ala mainland China.

    Okay, so you get more capital than can be deployed–and it starts to seek yield, such as in CMBS or RMBS. A recession makes people save even more, that depressing the need for capital, meaning the glut get worse….

    Remember, zero bound. You can’t get interest low enough to discourage savings. Also this problem of too much savings get worse as countries climb higher on the income totem pole, and have higher incomes that allow savings…

    My guess is that higher savings rates should lead to low interest rates and high equity and real estate prices…but busts get in the way, destroying capital.

  10. Gravatar of Mike Sandifer Mike Sandifer
    26. July 2011 at 17:21

    Scott, this very much mirrors my thinking, except I hadn’t thought about the income/consumption distinction that way, despite you having done a post or two on it before.

    Obviously this would vastly improve the lives of millions of Americans.

  11. Gravatar of q q
    26. July 2011 at 17:30

    1) i wonder if there is a way of measuring whether better *investments* are made, in aggregate, with more or less lopsided income distributions.

    2) so wouldn’t it would improve overall utility to distribute money from the top 1% down if that money is being hoarded?

  12. Gravatar of Jameson Jameson
    26. July 2011 at 17:50

    So is the FairTax a good idea?

  13. Gravatar of RobF RobF
    26. July 2011 at 17:54

    Scott,

    Agreed — there is absolutely no plausible government policy to distinguish “good” investments from “bad” investments. But if we agree that there exists such a continuum, and all investments are not, by definition, welfare-enhancing, then I don’t see what justification remains for privileging investment income over payroll income and consumption dollars. What makes a payroll check from Walmart a preferable target for taxation than an arbitrary dividend check or capital gain?

  14. Gravatar of Morgan Warstler Morgan Warstler
    26. July 2011 at 17:58

    Scott,

    I think this is a personal issue you need to fix.

    To normal day-to-day SMB conservatives, being told we’re going to make people work AND auction them off to the private sector for .1 cent…

    That’s very much like telling bankers we’ll raise the debt ceiling.

    If you don’t say it, then they will go ape shit. To them, you just created MORE DEM VOTERS seeking union wages.

    Making profits off cheap labor is the only upside that will win SMB conservatives over.

    Better to just say no if you don’t deliver it for them.

    What you STILL don’t get is my people matter more than the guys you bend over for with QE. I think it is because you are a professor.

    But the evidence is clear – the Tea Party runs the show. You should internalize this.

    Progressives are technically disposable. And THEY WILL HATE YOU so much after pointing out that “investment capital” is what they are taxing when they talk about making “investments,” you will never win them over.

    Suddenly they have to make like RobF, and say VEGAS IS BAD!!!

    They will hate you for this meme.

  15. Gravatar of Nick Bradley Nick Bradley
    26. July 2011 at 18:51

    Great post Scott. A couple questions/comments:

    - Your policy prescriptions are a sort of Friedman-Hayek synthesis. We all know Milton Friedman was an advocate for Education Vouchers, and he was also an advocate for a negative income tax, which is what point #4 advocates. On the Hayekian side, however, few know that he advocated social insurance programs that covered “genuinely insurable risks”; this has basically been interpreted as catastrophic health insurance/HSAs because “as in the case of sickness and accident, neither the desire to avoid such calamities nor the efforts to overcome their consequences are as a rule weakened by the provision of assistance”.

    - Can a VAT 100% replace corporate income taxes, personal income taxes, and capital gains taxes? I’m skeptical — it may be easier to (1) allow for the 100% deduction of all savings and investment while adjusting marginal rates/deductions to be revenue-neutral, and (2) replacing corporate taxes and capital gains taxes with a progressive VAT.

    - I would go one step further and replace part of the employee portion of the payroll tax with a carbon tax. Australia’s new carbon tax would raise about $140bn in the US.

    Nor is there any reason why the state should not assist the individuals in providing for those common hazards of life against which, because of their uncertainty, few individuals can make adequate provision.

    - And to Morgan Warstler — I’m not sure why you keep pitching this auction idea. Just expand the earned income tax credit.

  16. Gravatar of Michael Michael
    26. July 2011 at 19:13

    Basically, although the public is clueless on this issue… the rich can NOT be “taxed” at all…. see

    http://www.thebigquestions.com/2011/04/18/the-man-who-cant-be-taxed/

    As Scott knows, generally higher taxes on the rich are just taken from the nation’s savings, reducing prosperity for all.

  17. Gravatar of happyjuggler0 happyjuggler0
    26. July 2011 at 19:47

    Scott,

    Please explain to me how government can tax Bill Gates’ consumption.

    He has three choices with his money, as you state. Consumption, investment, and philanthropy.

    Seeing as how he is a multibillionaire, no matter how much the government taxes his consumption, it seems to me that he would simply consume as much as he did before (post-tax). Therefore the incidence of his “consumption” tax actually falls on some combination of his investment and philanthropy.

    I don’t want government to be taxing either his investment or his philanthropy, and I am guessing you see things the same way. Therefore my question is this: who is wrong in his thinking about taxing the consumption of the rich, you or me?

  18. Gravatar of Mike Sandifer Mike Sandifer
    26. July 2011 at 19:51

    Morgan,

    I’m a liberal and this makes sense to me. Sure, I expect some liberals will be too close-minded to think about something like this, but the real problem would be from conservatives. That is, the kind who like Sarah Palin.

  19. Gravatar of happyjuggler0 happyjuggler0
    26. July 2011 at 19:53

    “post tax” was intended to mean “after taking into account for taxes”. However it occurs to me that my framing might be off.

    Put it this way, if he was consuming $100 million a year with zero consumption taxes, and government somehow imposed a 100% consumption tax on the rich, my hypothesis is that he would spend $200 million on consumption as a result, with half going to taxation and the other half to not changing his behavior. That $100 million tax is coming out of some combination of investment or philanthropy, not out of consumption by the rich Bill Gates.

    The rich really are different than you and me….

  20. Gravatar of John John
    26. July 2011 at 20:09

    I think the best way, in terms of economic growth and fairness (whatever that means) would be a progressive consumption tax. Not only would it encourage saving, which would increase capital investment and the marginal productivity of labor, which would benefit the average worker. It would appear fair by slapping high taxes on items like yachts that encourage resentment among the lower classes. So you’d get increased growth, rising living standards for average workers, and a greater sense of fairness.

    But the most important government tax agenda should be to simply take less from the people and let them consume based on their own personal preferences rather than the preferences of politicians who want to spend money on wasteful projects that help them get reelected.

  21. Gravatar of Ben Crain Ben Crain
    26. July 2011 at 20:41

    Get rid of the debt ceiling?? GodAlmighty, what a wonderful thing it is, in terms of clarifying the politics of this Greatest Nation Ever! It forces our rulers to make choices, show themselves. Well, at least it does when the damn thing matters. Sure, it’s artificial, in a strictly rational sense. A solely economic rationalist might well argue: by passing a budget, the political system deems, certifies, a certain amount of debt. This second constraint, a debt ceiling, is some kind of irrational, archaic sop to fiscal neanderthals. But wait just a minute. When we face a catastrophic level of spending, it gives those who oppose same a rallying point, and, more importantly, a powerful fulcrum to force fiscal cutbacks. But you’ll say, the budget itself gives them that. Yeah, but what budget, and when? When did the Senate last adopt a budget? And once spending appropriations are in place for a year, the next shot you get at them is next year. Unless you have a debt ceiling crisis. Which focuses lots of minds, garners public attention, makes spending and deficits a major issue. What, I ask, could be a better tonic for a healthy democracy?

    And another point. When those gigantic budgets were passed, it was quite feasible to estimate the impact they would have on public debt. The Congress/Press knew a debt ceiling was in place. So they knew that their budget would bust that debt ceiling. Oh, they couldn’t predict exactly when, but could surely knew it would be sometime before the next budget was authorized. So why didn’t that budget, as part of its language, raise the debt ceiling to accommodate the anticipated extra debt? Because the goddamn Congress didn’t want to call attention to what they were goddamn legislating, and because they assumed the debt-ceiling was this silly thing that would be fixed when the time came. So they are guilty on two accounts: hiding from what they were doing, and hypocrisy/cynicism about the LAW. Because the debt ceiling is LAW — as valid and binding as their gdamn appropriations, or anything else. So the debt ceiling serves very useful political purposes: focusing public attention on what their legislators are actually doing, beziehungsweise not doing. (Pardon that beziehungsweise: it’s an incredibly useful German word defying exact translation, but in this case meaning something like “or, in relation to this subject”.)

    It’s a total mistake to look upon the debt ceiling as some archaic economic legislation inconsistent with economic policy. It’s proving it’s worth here and now, as a hammer with which economic policy “can” be changed, for the better. I say “can” because it’s not, as I write, clear what the outcome will be. But whatever the outcome, it will do much to fertilize the political landscape with clarity and transparency.
    Well, of course it won’t for those whose opinions are dominated by the spin of the MSM. But they’re hopeless anywho. And dwindling in number. There’s a vast audience out there not so enslaved. For them, the debt crisis is, at a minimum, informational gold. And might even turn out to be economic policy gold. Well, probably not gold, but possibly bronze or silver. Which is a damn sight better than nothing!

  22. Gravatar of Donald Pretari Donald Pretari
    26. July 2011 at 21:34

    It’s a Good Plan.

  23. Gravatar of cassander cassander
    26. July 2011 at 22:56

    While few will state it as boldly as Quiggin has, I have met a lot of people who seem to think like this, and literally I cannot comprehend how otherwise intelligent people reach these conclusions. Taxes have been rock steady at ~17-19% of GDP for more than 50 years, despite wildly varying tax rates, and yet people like Quiggin are utterly convinced that nefarious right wingers have been cheating them out of tax money that is rightfully theirs to redistribute. The combination of entitlement, willful ignorance and smug moral superiority boggles my mind.

  24. Gravatar of JL JL
    27. July 2011 at 00:23

    Scott,

    I agree with you on consumption, but I, for one, also want to redistribute capital.

    Money is power and in an egalitarian democracy, power should *also* be distributed as best we can.

    That is, I want the government to subsidize (through tax deductions) the bottom 99.5% [single digit millionaires] when they buy stocks, bonds, etc.
    And to tax the upper 0.5% [10+ millionaires] on their wealth.

    I know that you too favor this somewhat. Health savings accounts such as those in Singapore are exactly what I envision.

    The only thing I would add is a wealth and estate tax on assets above, say, $1 million. Perhaps also Tobin taxes.

    Like Keynes, I look forward to the euthanasia of the rentier class.

    I much prefer a society with a million millionaires than one with a thousand billionaires.

  25. Gravatar of Alex Godofsky Alex Godofsky
    27. July 2011 at 01:23

    JL: money is only power because money gives you the ability to command scarce resources (i.e. consume). So a tax on wealth is redundant.

  26. Gravatar of Doc Merlin Doc Merlin
    27. July 2011 at 01:32

    Interesting post.
    I hadn’t thought of it that way.
    I am against initiating violence which means I am also against forced redistribution (of income or consumption), but this is an interesting way to look at the issue.

  27. Gravatar of Vivian Darkbloom Vivian Darkbloom
    27. July 2011 at 01:46

    The title of this piece is “You can’t redistribute income”. But, the body of this piece shifts and deals with a slightly different issue—the redistribution of “investment” (or the redistribution of “consumption”). Are investment and income (or income and consumption) one and the same thing? I don’t think so.

    The primary tool by which this re-distribution takes place is the income tax (followed by government re-direction via spending). Strictly speaking, an income tax taxes “income”. This can be the product of investment, but that income it is not itself investment–not yet, anyway.( Sumner: “A rich guy with lots of income has three choices, consumption, savings/investment, and charity.”–Query, where did that rich guy get his “income”)? I suppose when progressives argue for higher income taxes on (income from) capital in order to “redistribute income”, they indeed are, in a sense, shifting current income from one group of persons to another. True, if the first group’s income were not taken away via taxes they would likely re-invest a disproportionate amount of their income in further investment and the second group would likely consume most of that income re-directed to them via government spending. JL would have us skip this intermediate step and do it more directly by simply taxing wealth, which is another, albeit worse, way of taxing investment.

    Ultimately, I don’t see this as a redistribution of income— or of consumption, as Sumner suggests. (There can be no “redistribution” of consumption” if the group we are allegedly taking it away from doesn’t consume in the first place). Rather, in the broadest sense, it is a national conversion of investment to current consumption. In this sense, the progressives are right–it *is* a redistribution of available resources, but not necessarily in a economically productive way. Perhaps this is just about semantics and we should abandon the term “redistribution” for “redirection”. Although Sumner is quite right in his policy prescriptions, I don’t think it is precisely for the reasons he articulates.

  28. Gravatar of david david
    27. July 2011 at 02:17

    There’s a certain kind of progressive that sees investment as consumption – railing against company cars and planes and so on. Perhaps it is the inegalitarian control over such resources that makes progressives itch.

  29. Gravatar of Rien Huizer Rien Huizer
    27. July 2011 at 02:30

    Scott,

    I always wondered how the US “1%” have been able to keep the “$0.01s” off their backs politically (I think that by comparison to other countries, including Japan, the relative contraction of the rich’s share in the US has been moderate.

    Maybe it is useful to consider that the comparative statistics are pretty meaningless. The sort of people that populate the top segment in the US would probably not reside in their own country. US citizens are taxed on their worldwide income, regardless of country of residence, citizens of most other countries not. So it is plausible that statistics that compare European and US populations are biased: many very wealthy Europeans reside in their own country only temporarily, or have other arrangements that mimic that. The UK , for instance has a wonderful system that has attracted lots of wealthy foreigners (incl ones from Greece..) and of course there are places like Monaco where many sports stars have their residence. Or special deals in Ireland for artists. All of this makes tax progression mainly a middle class problem in Europe. Few governments expect to collect many millions from a single taxpayer.

    As had become clear during the Reagan era, it is impossible to do Robin Hood economics, unless you are trying to collect membership fees from the have-nots. Which is another way for a have not to become rich.

    As to your types of redistribution: “catastrophic health insurance” sounds reasonable but harbours quite a few problems. For instance, suppose we create an insurance system where people , for instance those who have become suddenly, terminally ill (and fit the selection criteria of your residual health care fund) get offered the choice between a portion (say half) of their estimated remaining treatment cost (for the best available form of treatment, no caps) in cash and use that for less expensive treatment, palliative care, or leave it to their children. Apart from moral impossibilities (the US looks like the wrong place to try this out)

    I suspect that this would lead to important savings, because few people would prefer two more months of pain and misery to say $40K(minus a couple for palliative care) for their children.

    But in a couple of years there will be treatments that will be very expensive, technically available and objectively superior in prolonging life and thus mandatory from a medical ethics point of view. How would my little scheme look if those two months prolongation would cost a million or more. How many people would select the treatment? How efficient would such an outcome be vs the “mandatory treatment at any cost” approach.

    Just to illustrate the difficulties of partial approaches to health care..

  30. Gravatar of John Quiggin John Quiggin
    27. July 2011 at 02:55

    If you look at the papers Will Wilkinson cites, even there you see the growing share of the top 1 per cent noted as a major factor. And we’re not just talking about Bill Gates here. The ordinary rich save more than the poor, but they also spend a lot, as witness the heartwrenching stories about how hard it is to live on $250 000 a year we were getting when the Bush tax cuts were extended.

  31. Gravatar of Alex R Alex R
    27. July 2011 at 03:48

    Scott –
    I get the distinction you are trying to make between consumption and investment, and in a full-employment (NAIRU) economy I would agree with must everything you say. But as you have reminded us again and again, right now we have high unemployment, and an excess of AS (= investment) over AD (= consumption). In the current situation, wouldn’t a redistribution from investment to consumption increase AD and therefore be justified on overall utilitarian grounds?

  32. Gravatar of DayOwl DayOwl
    27. July 2011 at 04:07

    Your idea of wage subsidies for low income workers looks good on the surface, but too often it ends up being a back door subsidy for cheap employers. Also, my own experiences with low income assistance were that every extra cent you made was absorbed by the system. By the time all the players (daycare, employer, landlord, health care providers, etc.) are done jiggering the system, the last person to realize any benefit is the original intended recipient.

    Why is it that the only references to income redistribution are about money going FROM the wealthy TO the poor but never the other way around? When CEO’s are making ten to one hundred times more than they were thirty years ago, and their workers are making less (both figures inflation adjusted), why is that just fine? No redistribution here, nothing to see here, move along? Pay no attention to the vast transfer of wealth from the middle and lower classes to the ultra wealthy. It’s all an illusion…

    Numbers don’t lie.

    Income inequality is real and it’s here. However, the question should not be “is it fair?” but rather “how does it effect the economy as a whole?” History shows that income inequality like we have in the US right now is highly unstable and usually culminates in a financial crisis.

    We are witnessing greed and theft on a scale never seen before in the history of man, and it will bring us all down. You included.

  33. Gravatar of Nick Nick
    27. July 2011 at 04:12

    I really like this post; I always thought that large disparities in wealth were worse than large disparities in income, and so focusing on progressive taxation of ordinary income was misguided. But this post makes me think that it is consumption, not wealth, that needs to be “fair” – with one minor adjustment.

    And that adjustment would be for the peace of mind that the insurance that great wealth allows one to consume by simply self-insuring but that would need to be purchased by someone with lesser means. Even worse, insurance against really bad life event outcomes, like insurance against losing your job and needing to find a new one, or replacing health insurance in such an event, or insuring against adverse life events for your children, is not even really available to someone without wealth, but the wealthy readily consume this (very expensive) insurance.

    I’m not sure how you would equalize this; a social insurance system that covered everybody against every really bad life event would have difficulty avoiding severe moral hazard. But the focus on equalizing consumption (e.g., large luxury taxes to discourage consumption by the wealthy) seems like a good idea.

  34. Gravatar of Michael Michael
    27. July 2011 at 04:19

    Both this post and Wilkninson’s seem to lack a foundation, a clear statement of why we are in the discussion, and it matters greatly here. We are arguing about the appropriate measure without really being specifying, appropriate for what?

    Why care about inequality at all?. Personally, I don’t. I care about the consumption level at the bottom much more than elsewhere, but not how it compares to other quantiles. The right amount of inequality, whether in consumption or income or house size, is whatever emerges from policies that also promote healthy labor markets and such. I have barely any clue how much inequality that is, but a much better idea what the policies are. Gini coefficients and such are a distraction.

    The only counterarguments that seem to me to have any merit are based on a fear that high inequality threatens political democracy — a small enough super-oligarchy could buy all the TV time, for example. And this argument is all about income, not consumption. Indeed, it’s all about savings.

  35. Gravatar of bjk bjk
    27. July 2011 at 04:29

    Warren Buffett said the same thing in the 1970s, with a slightly different emphasis:

    http://www.valueinvesting.de/en/inflation-equity-investor-by-warren-buffett.htm

    “But the potential for real improvement in the welfare of workers at the expense of affluent stockholders is not significant. Employee compensation already totals twenty-eight times the amount paid out in dividends, and a lot of those dividends now go to pension funds, nonprofit institutions such as universities, and individual stockholders who are not affluent. Under these circumstances, if we now shifted all dividends of wealthy stockholders into wages – something we could do only once, like killing a cow (or, if you prefer, a pig) – we would increase real wages by less than we used to obtain from one year’s growth of the economy.”

  36. Gravatar of Morgan Warstler Morgan Warstler
    27. July 2011 at 05:14

    Sandifer, I tried earlier to point you here:

    thelastpsychiatrist dot com

    but Scott’s got his comments screwed up and it punting linked comments into limbo.

    Check out the blog, he’s one of the best writers online. Give it a bit to wash over you. RSS it.

    His analysis of “why” in most regards mirrors mine.

    I come to your table, to any table full of eggheads (who I’ve spent my whole around) curious about the arguments, but far more interested in why an “intellectual” says what he says.

    Arguments aren’t hard, changing people is.

    I say this to explain: as crazy as it sounds, I’m concerned with ending MMT, not debating it. Those aren’t exactly the same thing.

    I view it like racism. I view DeKrugman similarly. Eventually it will be gone. To me there is a REASON they think what they think. The riddle is how to hack the brain that hosts the meme, end it, and speed up human history. And the answer lies in “why,” not “what.”

  37. Gravatar of Morgan Warstler Morgan Warstler
    27. July 2011 at 05:21

    everyone should look thru this PPT at Cafe Hayek:

    http://cafehayek.com/2011/07/stagnating-middle-class.html

    Quiggin seems unwilling to answer this argument in his comments. Why?

  38. Gravatar of Artturi Björk Artturi Björk
    27. July 2011 at 05:28

    At the margin why would you think that the welfare improvement from investment is greater than if the resources that this investment consumed would be redistributed to the poor?

    Let’s say at the margin there is a risk free investment opportunity that would produce the risk free rate of return. This rate of return is equal of the time preference of the marginal investor.

    If the poor are more impatient and poorer then the marginal investor, then isn’t it possible to redistribute the investment away from the marginal investor as the consumption of the poor to realize a welfare gain?

  39. Gravatar of Scott Sumner Scott Sumner
    27. July 2011 at 06:00

    Everyone, I see some commenters are confused about why income from capital should not be taxed. The link below explains that it has already been taxed once as labor income, and a tax on capital income is essentially double taxation. This isn’t a controversial theory. All public finance economists basically accept it.

    http://www.themoneyillusion.com/?p=7091

    Benjamin, If the Fed can’t handle monetary policy at the zero bound, they should all be taken out and shot. Bernanke insists that the zero bound is not stopping the Fed from stimulating, and I take him at his word. But you raise a good point, as the Fed clearly screwed-up in 2008–they need to move toward a different policy regime, such as level targeting.

    Thanks Mike.

    Q, You said;

    “2) so wouldn’t it would improve overall utility to distribute money from the top 1% down if that money is being hoarded?”

    When people hoard cash they are essentially paying a tax to the Treasury. So hoarded money already is redistributed to the government, via the tax system. It’s up to the government to decide what to do with it.

    I doubt whether income distribution has a significant affect on investment efficiency.

    Jameson, Better than our current system, but I like my proposal better.

    RobF, You asked;

    “What makes a payroll check from Walmart a preferable target for taxation than an arbitrary dividend check or capital gain?”

    We aren’t privileging anything. See the link at the top of this comment.

    Morgan, No one will take the 1 cent jobs anyway.

    Nick;

    “Can a VAT 100% replace corporate income taxes, personal income taxes, and capital gains taxes? I’m skeptical — it may be easier to (1) allow for the 100% deduction of all savings and investment while adjusting marginal rates/deductions to be revenue-neutral, and (2) replacing corporate taxes and capital gains taxes with a progressive VAT.”

    No it can’t replace these taxes by itself, hence I favor a progressive payroll tax. The progressive payroll tax might collect 14% of GDP, and the VAT another 7%. As you suggested, I also favor carbon taxes, which would allow a lower VAT rate.

    Morgan’s idea (which I’ve favored since before he was born) is better than the EITC.

    Michael, Rich misers can’t be taxed, rich consumers can be.

    happyjuggler0, You said;

    “Therefore my question is this: who is wrong in his thinking about taxing the consumption of the rich, you or me?”

    The point is that when you tax his consumption, he faces a marginal tax rate of x% on each extra dollar he puts into consumption, but not each extra dollar he puts into investment. Gate’s so rich that it might not shift his behavior, but it will shift the behavior of many somewhat less rich people–encourage more investments less yachts.

    John, I agree with your first paragraph. And I think that’s also the most pressing need right now–hence I’m not sure I agree with the second.

    Ben, If I was Obama I’d treat the debt ceiling with all the respect that presidents of both parties show the War Powers Act. In other words I’d ignore it.

    Thanks Donald.

    Cassander, Yes, the stable percent of GDP is interesting, given tax rates have moved between 90% and 28%, Indeed in 1980-87 they moved from 70% to 28% in a short time, and there was little effect on revenue. Admittedly there were some other changes, like modest payroll tax increases, but the fact that they were modest suggests that there simply isn’t that much money out their, it’s a mirage. Germany has much higher tax rates than America, but as of 2007 collected about the same amount of revenue per capita.

    JL, You said;

    “I much prefer a society with a million millionaires than one with a thousand billionaires.”

    As Singapore showed, the best way to get there is with low tax rates, and no taxes on capital. I’d actually favor a more progressive regime than Singapore has, and yet my ideas are viewed as right wing.

    Doc merlin, How would you fund the government

    Vivian, You said;

    “I suppose when progressives argue for higher income taxes on (income from) capital in order to “redistribute income”, they indeed are, in a sense, shifting current income from one group of persons to another.”

    Actually, any progressive with half a brain is against income taxes, and favors a progressive consumption tax. Read Matt Yglesias, for example. I don’t think you actually understood my argument. You might want to look at the link at the top of this comment, which gives a more detailed explanation of why taxing capital income is both inefficient and unfair.

    David, You said;

    “There’s a certain kind of progressive that sees investment as consumption – railing against company cars and planes and so on. Perhaps it is the inegalitarian control over such resources that makes progressives itch.”

    Yes, but that’s an entirely different issue. The tax system already has to distinguish between those two categories. I have no objection to treating corporate perks as consumption. Indeed I think it’s a good idea.

    Rien, Yes, tax competition is a big factor in Europe, especially for capital income (which shouldn’t be taxed.)
    Health care has no easy solutions, as you point out.

    more to come . . .

  40. Gravatar of Scott Sumner Scott Sumner
    27. July 2011 at 06:09

    John, Thanks for commenting. You said;

    “If you look at the papers Will Wilkinson cites, even there you see the growing share of the top 1 per cent noted as a major factor.”

    That may depend on which price index you use. Some studies suggest prices for the rich have risen much faster.

    My claim is that progressives don’t cite the consumption data they should, because it severely weakens their argument. If anyone has consumption vs income data for the top 1%, I’d be glad to compare them. Here are some quotations from five different studies cited by Will, which suggests that either consumption inequality is not worsening, or its worsening far more slowly than income inequality.

    “The widely reported U-turn in inequality in the United States is an artifact of inappropriate use of family income as a measure of welfare. When well-being is defined to be a function of per equivalent consumption, inequality either decreased over the sample period [the 1990s] or remained unchanged.”

    “[T]he increase in income inequality in the U.S. has been much more pronounced than the corresponding increase in consumption inequality. … Consumption inequality … has remained substantially stable.”

    “First, consistent with basic economic theory, consumption inequality is substantially lower than income inequality. Second, the rise in consumption inequality is much smaller than the rise in disposable income inequality.”

    “the relative prices of low-quality products that are consumed disproportionately by low-income consumers have been falling over this period. This fact implies that measured against the prices of products that poorer consumers actually buy, their “real” incomes have been rising steadily. As a consequence, we find that around half of the increase in conventional inequality measures during 1994 – 2005 is the result of using the same price index for non-durable goods across different income groups.”

    “the real wages at the 10th percentile increased by 30 percent from 1979 to 2005. In other words, the real wages of low earners have not remained stagnant, as suggested by conventional measures, but actually have been rising on average by around 1 percent per year.”

    more to come . . .

  41. Gravatar of Scott Sumner Scott Sumner
    27. July 2011 at 06:25

    Alex, No, because as I’ve also reminded people again and again, the Keynesian model is wrong, monetary policy drives AD.

    DayOwl, You have it exactly backward. I’m trying to eliminate those programs you criticize, like housing subsidies. No one claims the poor don’t get EITC, and what I’m proposing is similar.

    You said;

    Income inequality is real and it’s here.

    No it isn’t, because income isn’t real, it’s a mythical concept created by the IRS. It doesn’t measure any coherent economic concept. See the link at the top of my first, longer comment. That explains why income is meaningless, and consumption is what matters.

    Thanks Nick, There is no perfect social insurance system, because of the moral hazard problem you mention. Right now our disability system is struggling with that issue. Precisely who is disabled? I don’t have the answer.

    Michael, I actually agree with you. I care about poverty and hardship, but not inequality per se, I don’t favor shifting money from the rich to the middle class, but rather from the rich and middle class to the poor.

    bjk, Good quotation.

    Morgan, Thanks for the Cafe Hayek link.

    Artturi, You are confusing two totally separate issues; what is the optimal amount of investment, and how should consumption be allocated.

    You can’t eat machines. You can produce less of them, but right now our society is way too biased against investment. With more investment real wages would rise, and workers would be better off. That’s why workers in countries like India are so poor, they have very little capital to work with.

  42. Gravatar of Floccina Floccina
    27. July 2011 at 06:31

    Great post. Along this line I like to tell people we all pay some part of all taxes.

    ..and..

    You cannot subsidize everyone or no one is subsidized. Which they understand.

    ..and..

    You cannot therefore subsidize the middle class. Which they do not understand.

    On education vouchers, I would rather see the middle class and rich charged directly and full cost for each child that they have in Government schools. Below middle class would pay based on income so there would not be a high marginal tax.

  43. Gravatar of Fred Fred
    27. July 2011 at 06:31

    I’m too dumb and uninformed to phrase this question properly, but like Benjamin Cole I’m curious about the possibility of too much investment. Is that a thing, or not? James Livingston says that too much investment (and not enough consumption) caused both The Great Depression and our current Recession in an essay at HNN called “Their Great Depression and Ours.” Is he just a crackpot?

  44. Gravatar of Ken Ken
    27. July 2011 at 06:35

    Scott,

    I agree with your tax ideas, except I would have a very progressive income tax to pay for military expenditures. Those with the most have the most to lose.

  45. Gravatar of Scott Sumner Scott Sumner
    27. July 2011 at 06:40

    Floccina, I suppose I could go along with your voucher idea.

    Fred, Neither recession was caused by too much investment. The cause was too little AD.

    Ken, If you agree with my tax ideas, why propose something as insane as an income tax? Why not a progressive payroll tax?

  46. Gravatar of Citizen AllenM Citizen AllenM
    27. July 2011 at 06:44

    “You can’t eat machines. You can produce less of them, but right now our society is way too biased against investment. With more investment real wages would rise, and workers would be better off. That’s why workers in countries like India are so poor, they have very little capital to work with.”

    Scott, it is manifest India suffers from poverty and lack of all the appropriate capital, social, physical, and human in the right ways.

    However, in a country where the value of the exchange rate dictates that much of the production will be in places where it is much cheaper (gee, China or Mexico?), one begins to question how high unemployment can be modified if free access to the market implies allowing the bottom 25% of the population to starve, while the rentiers at the top enjoy the returns on capital deployed outside of the country to supply the folks still employed or enjoying their returns on capital.

    Redistribution can and will occur when the voters decide that capital will bear the costs of supporting the economy along side of labor. You might want to look at the long run share of corporate taxation supporting the Federal Government versus the individual taxpayer, and you will plainly see that capital has the free ride, and now is trying to leave the building.

    I watched CNBC this morning, and earnings are great, so where are the jobs?

    Job creation philosophy has utterly failed in an open economy, and as long as you fail to understand that the bottom half will eventually overthrow the system if they are too abused, you willfully close your eyes to the reality of the political part of political economy.

    I am sorry, but touting the creation of a paltry half million jobs net over the entire economy ignores the reality of 44 million people on SNAP fighting starvation.

  47. Gravatar of Floccina Floccina
    27. July 2011 at 06:51

    A plan for the catastrophic health insurance:

    The state would provide insurance to all Americans but the annual deductible would be equal to the family’s trailing year adjusted income minus the poverty line income (say $25,000 for a family of 4) + $300. So a family of 4 with a trailing year adjusted income of $30,000 would have a deductible of $5,300. A family of 4 with a trailing year adjusted income of $80,000 would have a deductible of $55,300. Middle class and rich people could fill the gap with private supplemental insurance but this should be full taxed. This would encourage the middle class and rich, who are generally capable people, to demand prices from medical providers and might force down costs. They could opt to pay for most health-care out of pocket while the poor often less capable would be protected.

    http://un-thought.blogspot.com/2009/09/healthcare-compromise.html

  48. Gravatar of BintheD BintheD
    27. July 2011 at 07:09

    Scott,

    I am not sure why you distinguish charitable giving to Princeton, even if it is to get one’s name on a building?

    Presumably, the individual is making a donation for something the university needs: scholarship money, new equipment or buildings, etc. Getting one’s name on the building is only a sweetner to the transaction, mostly done to differentiate the donation from any other charity.

  49. Gravatar of Jeremy Goodridge Jeremy Goodridge
    27. July 2011 at 07:55

    Great post, but I have an important disagreement with you. You seem to equate wages with consumption, which I believe is a mistake. You say, “You do all this redistribution with two consumption taxes; a VAT and a progressive payroll tax.”

    How is a payroll tax a consumption tax? People can INVEST in their own education and the value that they create is expressed as extra wages. Is this really any different from dividend income (or other business income), whihc you don’t want to tax. The difference is just that one is an investment in human capital (an increasingly large proportion of our capital) and one is an investment in physical capital. To tax consumption you have to tax what people consume not what people make — payroll is NOT consumption unless it is used for consumption.

    Jeremy

  50. Gravatar of Adam Adam
    27. July 2011 at 07:59

    Isn’t there an implicit assumption here of a closed system? All three options (consumption, investment and charity) can be done outside the U.S., and thus taxing income of the wealthy can capture some resources that would have been deployed elsewhere? I’m not sure that’s really an argument for redistribution, but it could make it not a total wash.

  51. Gravatar of neil neil
    27. July 2011 at 08:15

    If you favor a society that seeks equality of outcomes over equality of opportunities, it makes sense to redistribute consumption. But by the same token, any society that favors equality of opportunities would probably oppose any sort of redistributive policy.

  52. Gravatar of Lord Lord
    27. July 2011 at 09:33

    You can redistribute investment though, to employee owned companies and pension plans for instance. It needn’t turn into consumption. The top 1% needn’t own more than half of assets.

  53. Gravatar of StatsGuy StatsGuy
    27. July 2011 at 09:41

    The income(wealth)/consumption dichotomy you draw is narrowly focused on the present. The presumption is that income/wealth represents present and future consumption.

    Krugman’s issue is this: while middle class consumption has remained stable even as wages fell in real terms, it has done so only through debt expansion, which represents declines in future consumption. Moreover, much preservation of middle class consumption is funded by government debt (especially the past few years), and this represents reduced future consumption by those paying surplus taxes.

    The macro contradiction is that in order for asset values to continue their 8% growth rates (and hence, the rich to maintain/grow their wealth), the future income streams need to be stabilized, and where does this come from if we are suddenly discovering that middle class consumption cannot be forever funded by exponentially expanding debt?

    Also, as much as I hate the debt ceiling, I have to wonder whether it might ultimately be instrumental.

  54. Gravatar of PrometheeFeu PrometheeFeu
    27. July 2011 at 13:26

    I like some of the ideas that you propose though I don’t like their progressiveness. I would prefer incentive-neutral programs such as universal income which would be fully recovered through the income tax for those above a certain income level.

  55. Gravatar of Lucas Lucas
    27. July 2011 at 14:55

    @JL,
    “Money is power and in an egalitarian democracy, power should *also* be distributed as best we can.

    That is, I want the government to subsidize (through tax deductions) the bottom 99.5% [single digit millionaires] when they buy stocks, bonds, etc.
    And to tax the upper 0.5% [10+ millionaires] on their wealth.”
    There’s a policy idea to solve this serious problem. It’s called asset-based egalitarianism [1]

    @Scott,
    I’m in general agreement with your policy views. The Economist has an article on the success of a carbon tax in British Columbia [2] Nonetheless, I seriously doubt that your policies can create true equality of opportunity. In other words, is it possible to create a meritocratic society (with egalitarian leanings) without descending into crude social Darwinism? Can you assure me that with education vouchers and universal health-care (universal catastrophic insurance + subsided HSAs) the outcome of a kid will be based in her hard work and risk-taking and not on the fact that she lived in a crappy house, her parents didn’t provide early stimulation [3] or was exposed to certain pollutants [4]?

    Off-topic: evidence that your macro-economic views are sound. Spending on services is weak [5]

    1- http://en.wikipedia.org/wiki/Asset-based_egalitarianism
    2- http://www.economist.com/node/18989175
    3- http://www.thecanadianfacts.org/
    4- http://www.sciencedaily.com/releases/2011/04/110412101332.htm
    5- http://modeledbehavior.com/2011/07/22/deconstructing-the-recovery-the-capital-surge/

  56. Gravatar of cassander cassander
    27. July 2011 at 15:06

    Scott> I’ve come to think that there isn’t so much a laffer peak as a laffer plateau, and we’re on it, which is one reason why I care much more about tax reform that tax cuts, and why democrats who think we can tax our way out of the whole we’re in scare the crap out of me.

  57. Gravatar of dtoh dtoh
    27. July 2011 at 15:21

    I’ve said this before but you don’t want the payroll tax because 1) it’s an extra set of paperwork (and bureaucracy) that employers have to deal with, and 2) politicians will always be tempted to modify the payroll so that it once again becomes a general income tax.

    What you want is just a progressive consumption tax which can be simply implemented by distributing cards which get the taxpayer a complete exemption on tax on their first $20,000 of purchases and a 50% reduction in tax on their next $20,000 in purchases.

  58. Gravatar of dtoh dtoh
    27. July 2011 at 15:22

    P.S. Scott, other than that your prescription is spot on.

  59. Gravatar of dtoh dtoh
    27. July 2011 at 15:29

    Scott, Sorry for the multiple posts, but the practical questions on a consumption tax are:

    How do you tax consumption of assets (house and car) owned by the taxpayer?

    How do you tax overseas consumption (which for the affluent is a very easy way of avoiding the tax).

  60. Gravatar of Mike Sandifer Mike Sandifer
    27. July 2011 at 16:38

    I guess I should point out that I think this income subsidy you mention, along with the HSA/high deductible health plan subsidy, should replace all existing programs.

    Why have separate medical coverage programs for seniors, veterans, the poor, and the rest? Why have public housing, food stamps, WIC, etc.? I wouldn’t be surprised if it’s very inefficient to administer all of these programs instead of going with your idea.

  61. Gravatar of Mike Sandifer Mike Sandifer
    27. July 2011 at 16:42

    And also, we need some kind of disability insurance as you’ve mentioned previously, but it should simply be to qualify one for the income subsidy at some level. Social Security should be replaced by this subsidy as well.

    Having everyone receive benefits through the same 2 or so program might help keep support for them.

  62. Gravatar of Scott Sumner Scott Sumner
    27. July 2011 at 18:30

    Citizen, The idea that international trade causes unemployment was disproved 200 years ago by Ricardo. Let me know if anyone refutes his argument.

    Floccina, I’d go with mandatory HSAs, and have the catastrophic cover what that couldn’t.

    BintheD, To be honest, I was reacting more to what others have said. I could have easily left that out, as I don’t have strong feelings either way. Sometimes I put things in to avoid people getting off topic in the comment section. I didn’t want to argue about what is charity.

    Jeremy, Economists agree that a 10% VAT and a 10% payroll tax are essentially equivalent, at least in the long run. Both only tax consumption. One does this by only taxing consumption goods, and the other by not taxing capital income.

    To avoid the education problem you mentioned, you’d have to make education tax deductible. But that’s a good point.

    Adam, I don’t think it’s any different in an open economy.

    Neil, I’m a utilitarian, so I don’t favor either type of equality. I want to maximize aggregate utility. To be honest, my plan is probably far from optimal, but I see it as simple, and way better than what we have now. Do this plan for a few decades, and then take the next step.

    Lord, I can’t imagine why employees would want to own their company. Remember the Enron 401ks? Lose you job and your life saving at the same time? No thanks. And if you redistribute investments, you are taxing investment income, which is immoral.

    Statsguy, You said;

    “Krugman’s issue is this: while middle class consumption has remained stable even as wages fell in real terms, it has done so only through debt expansion,”

    I don’t buy the argument that real incomes haven’t risen. I’ve seen them rise over my lifetime.

    I also don’t see how your comment relates to this post. If anything, it would strengthen my other policy recommendations–forced saving instead of taxes–as a way to turning America into a nation of millionaires, just like Singapore. Krugman wants Proud America to be a nation of people begging the government to take care of them. That’s defeatist. We don’t need to expand the welfare state, we need to replace it with the high saving state. Let people have more choices, more control over their lives. Look what they’ve done in places like Sweden.

    Promethefeu, You said;

    “I like some of the ideas that you propose though I don’t like their progressiveness. I would prefer incentive-neutral programs such as universal income which would be fully recovered through the income tax for those above a certain income level.”

    You are way too progressive for me. I oppose any income tax, and I oppose any “universal income” for people not working.

    Lucas, You said;

    “Can you assure me that with education vouchers and universal health-care (universal catastrophic insurance + subsided HSAs) the outcome of a kid will be based in her hard work and risk-taking and not on the fact that she lived in a crappy house, her parents didn’t provide early stimulation [3] or was exposed to certain pollutants [4]?”

    Let me assure you that I’ve been exposed to 10 times the level of dangerous chemicals (including lead) than most poor kids today. The environment is getting way cleaner (and BTW, I was exposed to much more stuff like lead than even the average kid back then.)

    But your broader point is well taken; no I can’t assure you that everyone will get an equal shot at life. There are also sorts of inequalities, health, family, schools, IQ, personality, environment, luck, pain tolerance, I could go on and on. And poor kids often get the worst break in life. This plan aims to reduce that problem, but I’d never claim it eliminates it.

    Thanks for the info on services, I saw that somewhere too.

    Cassander, That’s my view too.

    dtoh, Isn’t the paperwork for your plan much more onerous than a payroll tax?

    I haven’t thought about the tourism issue. One would hope it balances out–lots of foreigners spend money here and pay taxes, and vice versa. But I’d have to give it some thought.

    I’d tax cars at purchase, like a consumer good, and for homes I’d do a property tax. But a tax expert could probably come up with a better plan.

    I agree that we should simplify as you say. I have no good ideas on disability, as it’s hard to know exactly where to draw the line. Especially when you get into mental illness like depression. There are no easy answers for those issues. Other countries are also wrestling with this issue.

  63. Gravatar of Bonnie Bonnie
    27. July 2011 at 19:37

    I see this from a little different angle: If you want more investment and less consumption, move the tax to consumption and away from investment. That’s all well and good, with the exception that the goal isn’t to be like other countries where the government, rather unwise overlords see fit to order markets/economcis and thus society (perhaps to benefit their friends) rather than letting them all take care of themselves.

    But that is not what the idea of America was intended to be, in fact our forebearers fought a bloody war to rid themselves of exactly that. The behemoth of the centralized administrative state errodes property rights, crushes competition, and tosses massive amounts of potentially productive capital down a rat hole with programs both on budget and off; and it currently has subjected our economy to more government spending than the GDP of the entire planet x10 over the course of the next two decades. Why would I want to preserve this with anything ‘revenue neutral’? All this plan does is shift the burden of paying for it from one place to another when we cannot possibly pay for it all. It might make things a tad better than they are now, for a year or two, but it is doubtful because of the expansive nature of the beast in question and the Fed cannot just paper it over to infinity.

    At the end of the day, there has to be some limit to the size and scope of government or we will end up right back in this spot, with all types of taxes piled on top of another until there is just simply nothing left to confiscate, especially after their next central economic planning fiasco.

  64. Gravatar of Morgan Warstler Morgan Warstler
    27. July 2011 at 20:32

    Sandifer, the goal of Guaranteed Income is to establish a single ONLINE bank acct, where your $ is deposited, and your purchasing occurs.

    Where is better in a medicare voucher program, than at an single online site where you get your money, to show you CHEAPER doctors based on your current medical expenses.

    Part of me recognizes how little grasp of modern web tech most of you folks have, but that same part of me rightfully think that you people shouldn’t be ANYWHERE NEAR the solutions.

    There are a number of profitable, working companies that auto-ingest your billing and present it all back to you in super graspable ways.

    Beyond that, game mechanics are not a fun thing, they are based on 90% auto-human response… we can use games, points, rewards, to make even 85 year olds DANCE.

    How the hell do you think farmville tens of millions of housewives to grind all day long?

    OUR GOAL is to reduce the amount of $ spent on people who don’t pay for themselves.

    if you aren’t going to being in for profit tech geeks to make that happen…

    YOU DON’T GET TO HAVE GOVERNMENT. Your moral cause disappears.

    “beggars cannot be choosers”

    This needs to become the progressive mantra.

  65. Gravatar of Morgan Warstler Morgan Warstler
    27. July 2011 at 20:33

    Sandifer, the goal of Guaranteed Income is to establish a single ONLINE bank acct, where your $ is deposited, and your purchasing occurs.

    Where is better in a medicare voucher program, than at an single online site where you get your money, to show you CHEAPER doctors based on your current medical expenses.

    Part of me recognizes how little grasp of modern web tech most of you folks have, but that same part of me rightfully think that you people shouldn’t be ANYWHERE NEAR the solutions.

    There are a number of profitable, working companies that auto-ingest your billing and present it all back to you in super graspable ways.

    Beyond that, game mechanics are not a fun thing, they are based on 90% auto-human response… we can use games, points, rewards, to make even 85 year olds DANCE.

    How the hell do you think farmville tens of millions of housewives to grind all day long?

    OUR GOAL is to reduce the amount of $ spent on people who don’t pay for themselves.

    if you aren’t going to bring in for profit tech geeks to make that happen…

    YOU DON’T GET TO HAVE GOVERNMENT. Your moral cause disappears.

    “beggars cannot be choosers”

    This needs to become the progressive mantra.

  66. Gravatar of Morgan Warstler Morgan Warstler
    27. July 2011 at 20:33

    Sandifer, the goal of Guaranteed Income is to establish a single ONLINE bank acct, where your $ is deposited, and your purchasing occurs.

    Where is better in a medicare voucher program, than at an single online site where you get your money, to show you CHEAPER doctors based on your current medical expenses.

    Part of me recognizes how little grasp of modern web tech most of you folks have, but that same part of me rightfully think that you people shouldn’t be ANYWHERE NEAR the solutions.

    There are a number of profitable, working companies that auto-ingest your billing and present it all back to you in super graspable ways.

    Beyond that, game mechanics are not a fun thing, they are based on 90% auto-human response… we can use games, points, rewards, to make even 85 year olds DANCE.

    How the hell do you think farmville tens of millions of housewives to grind all day long?

    OUR GOAL is to reduce the amount of $ spent on people who don’t pay for themselves.

    if you aren’t going to bring in for profit tech geeks to make that happen…

    YOU DON’T GET TO HAVE GOVERNMENT. Your moral cause disappears.

    “beggars cannot be choosers”

    This needs to become the progressive mantra.

  67. Gravatar of Morgan Warstler Morgan Warstler
    27. July 2011 at 22:31

    er….

  68. Gravatar of You can redistribute consumption from the top 1% and give it to average Americans working in a car factory. But it’s an illusion to think you can redistribute investment from the top 1%, so that average Americans can have a higher living standard. You can redistribute consumption from the top 1% and give it to average Americans working in a car factory. But it’s an illusion to think you can redistribute investment from the top 1%, so that average Americans can have a higher living standard.
    28. July 2011 at 00:01

    [...] Source [...]

  69. Gravatar of Prakash Prakash
    28. July 2011 at 01:14

    Scott, What percentage of government spending and what percentage of GDP approximately would you take from land value taxes?

  70. Gravatar of dtoh dtoh
    28. July 2011 at 01:26

    Scott,
    The paperwork is simple. There is a consumption tax on everything. If you have a social security number you get a card at the beginning of the year which exempts you from tax on the first $20,000 of purchases and a 50% break on the tax for the next $20,000 of purchases. Once you use up the exemption (i.e. over $40k of purchases), you pay the full rate.

    Let Visa or Amex run the program. They can easily keep track of how much you have bought during the year.

  71. Gravatar of Hondo69 Hondo69
    28. July 2011 at 02:59

    A consumption tax, or VAT, works in theory especially if you go back in time and use old statistics to calculate potential revenue for the government. One problem, the old numbers do not apply when you have a shrinking middle class.

  72. Gravatar of Larry Larry
    28. July 2011 at 04:50

    I’d rather see a personal consumption tax rather than a VAT. Look at European VAT regimes and all you see is complexity and the results of corporate lobbying.

    If we replaced the personal income tax with a personal consumption tax that worked the same (withholding, personal exemption, etc.) we could make a consumption-based tax system that is as progressive as we like. E.g., If you consumed (earned but did not invest) 1M we could charge you another 1M (or 2M!) in tax. The retiree who consumed 20K could pay no tax. Under VAT, both would pay 17% (or whatever.) Hat tip to Robert Frank…

  73. Gravatar of Scott Sumner Scott Sumner
    28. July 2011 at 05:31

    Bonnie, I agree, and this is just a first step. I’d also like to completely eliminate the Federal government, and create 50 independent countries.

    Prakesh, I’m not quite sure what would be optimal. The big problem in getting it enacted would be politics. Of course we already have a property tax that taxes land and consumption services from residential houses (as well as commercial property.) I’d guess that tax would be a good starting point for any estimates.

    dtoh, What about cash transactions? I still don’t see how’s there’s less paperwork than a payroll tax.

    I think it would be easier to just figure the tax on $20,000 (say if was a 15% tax–i.e. $3000) and then assume every adult spends at least that much–and give each family that lump sum. If a family is too poor to spend that much, assume the balance is welfare. Then just charge 15% VAT for everyone.

    Hondo69, I’m not sure I follow your comment–has the share of GDP in consumption changed much recently?

    Larry, You said;

    “If we replaced the personal income tax with a personal consumption tax that worked the same”

    The income tax is a monstrosity. Why replace one monstrosity with another. Do a progressive payroll tax instead. Payroll taxes are also consumption taxes.

  74. Gravatar of diz diz
    28. July 2011 at 05:42

    The great mistake in all of this is to assume the left has as its goal “income redistribution to the poor”.

    If we define poor as the lower 10% of households by income (leaving aside for the moment these people are generally more well off than a good part of the people in the world), given there are about 110 million households in the US, we are left with about 11 million poor households. If we simply wrote each of these households a check for enough money to bring them to the poverty line, how much would it cost?

    My estimate is about 100 billion per year. To avoid quibbling arguments, let’s double it. $200 billion per year.

    Our government spends 3.8 trillion per year now. How can one seriously sustain the belief that what our government is focused on is redistibuting income to the poor?

  75. Gravatar of KRG KRG
    28. July 2011 at 06:03

    I think there’s a bit of a mistake in not distinguishing between capital investments and financial investments, and just suggesting that they’re all indistinguishable as savings.

    I would actually call capital investments- venture capital and money spent on hiring people or expanding businesses as consumption, and only financial investments- stocks (aside from those offered directly by the company being invested in), bank deposits, financial products as savings in the breakdown that you give.

    With that distinction in place it would seem to become more clear that there is some need to move non-consumption income from savings to where it will be consumed, because while a certain amount of financial investment greases the wheels of the economy, too much ends up forcing aggressive loan policies in search of somewhere to use that money to get more money. The problem is compounded by the fact that, in the short term, financial investments can promise larger and faster returns than capital investments, so they’re more attractive without some effort to reflect the danger of bubbles created by too many people moving to them instead of capital investments.

    It’s not all that different from Adam Smith pointing to risk being the invisible hand that directs enough merchants to make safer domestic investments rather than go after higher return foreign investments, which benefits everyone by providing domestic growth. The problem is that, if too much of the risk or price of those non-growth investments is removed, the hand starts moving people in the wrong direction and we get huge private debt bubbles instead.

    The point of of income redistribution then isn’t so much to move consumption from the top to the bottom, but to deflect high incomes away from excessive financial investment and toward consumption by lowering the perceived reward it returns relative to risk. It can happen completely at the top level, as high earners put money into deductible business expenses instead of taking it as profits to save or, if that fails, by diminishing the returns of those profits and giving the low end, which almost exclusively consumes, more income to consume with. Redistribution is basically a tool to pick up where we’ve managed to game the normal levels of risk out of the system.

  76. Gravatar of Lee Kelly Lee Kelly
    28. July 2011 at 06:17

    I want MMTers to answer this question: why do banks lend base money rather than T-bills?

    For me, the answer is simply that one can spend money but not T-bills. (More accurately, T-bills only function as media of exchange in very particular markets, and most borrowers do not wish to buy on those markets.) Borrowers are demanding real goods and services rather than money, but they accept money anyway because it is a means to get those goods and services.

    The way MMTers talk about money, this is all inexplicable. When interest rates are near zero, borrowers should be indifferent to receiving T-bills rather than base money.

  77. Gravatar of Lee Kelly Lee Kelly
    28. July 2011 at 06:18

    Oops, wrong thread!

    Can you delete the above comment, please.

  78. Gravatar of KRG KRG
    28. July 2011 at 06:29

    “Wage subsidies for low income workers, combined with abolition of minimum wages and occupational licensing. Thus a single mom with two kids making $8 hour, might get a government subsidy of another $8 hour. And someone making $16/hour might get a $4 hour subsidy. But they have to be employed. Have government jobs paying 1 cent per hour as a residual, for those claiming they can’t find a job. Give them a $12/hour subsidy. ”

    Why do all of that variable mucking around? That just creates necessary bureaucracy and explicitly rewards hiding income twice- both for a better grand and for lower taxes.

    It’s much easier to simply make the grant flat, across the board, which removes any risk of creating a negative incentive to earn more income. (With only a few, negligible exceptions, people always desire better luxury and thus higher incomes), and the system can be almost completely automated, with the only need for administration needing to be watching for births, deaths, and address/account changes. What little overflows to the minority of people who have higher incomes can easily be accounted for in the taxes on those incomes.

    Use the poverty line as a peg, rather than any flat dollar amount, especially because one of the immediate effects of an across the board cut of the price of labor to businesses in a competitive market should be a general reduction in prices. The peg would help avoid having keep actively adjusting the grant as that deflation occurred.

    What’s more, doing it that way would not only let us drop the minimum wage, but also throw out the entire mess of welfare programs that try to approximate the same effect. Peg the grant at the poverty level for everyone, regardless of employment. Create the labor pool you suggest at an additional fraction of that, so that people who can’t find other work have some sort of fallback which also serves to set a base price for general labor, and, what’s more, cut that grant amount out of social security and roll social security and unemployment into one continuous system- if people out of work have earned enough credit that they want to effectively retire instead of going into the labor pool, and instead focus on other pursuits, including funding entrepreneurial ventures, then let them do that whenever they’re ready instead of keeping the labor pool artificially over-inflated.

  79. Gravatar of KRG KRG
    28. July 2011 at 06:36

    It’s impossible to, on it’s own, make any VAT or consumption tax progressive. (You could make them comparatively progressive if you replaced something exceptionally regressive, like FICA with them, but that doesn’t actually make them progressive on their own merit). A properly progressive tax would actually be a non-consumption tax; let people operate like little businesses and claim their spending and capital investments as expenses, then only tax their net profits- everything that _isn’t_ spent.

  80. Gravatar of StatsGuy StatsGuy
    28. July 2011 at 08:34

    ssumner:

    “forced saving instead of taxes”

    You know I agree with you on your recommendations most of the time, and this is no exception. I’m simply observing that redistribution of income IS the problem, not merely consumption, because unconsumed income is simply deferred consumption – that makes the WEALTH distribution more uneven despite the fact that consumption stays steady. Ultimately – and Krugman may or may not ever admit this openly – Krugman is after WEALTH, and the right knows this.

    Forced savings across the board, coupled with higher taxes at the very upper end, and enough monetary policy to keep AD on a steady trajectory, would more or less fix a lot of problems. That would leave policy and structural issues, which can largely be negotiated piecemeal.

    BTW, I also like the fact that forced savings helps the trade balance. I do think the Austrians have a point that excessive forced savings + monetary stimulus == tendency for bubbles.

  81. Gravatar of Morgan Warstler Morgan Warstler
    28. July 2011 at 08:41

    “With only a few, negligible exceptions, people always desire better luxury and thus higher incomes”

    Simply not true, this is why anyone receiving $ able to work must be given enough $ to live, and then auctioned off in the private market.

    Paypal / Ebay – that’s all we need.

    The gorgeous beauty of this plan is that it lets us easily extend the retirement age in a very gradual way.

    At 65, a low earning grandma in the GI system, starts to get more than her normal weekly benefit (SS), and has to have less of her time auctioned off.

    But there are STILL 25 HOURS per week where the neighbor lady can make her come over and clean, babysit, cook, garden, sew, tutor, etc. for whatever she wins during bidding at auction.

    Suddenly our own human greed for low cost around the house help keeps her working, earning more, freeing up others, and offsetting what the taxpayers have to pick up.

  82. Gravatar of Citizen AllenM Citizen AllenM
    28. July 2011 at 08:56

    Scott, The easiest way to show Ricardo was wrong is too look at the paper by Ellen McGrattan and Ed Prescott from the Spt 2010 AER, 1493-1522.

    You want the summary in a nutshell- returns to US corps have risen through overseas investment, while internal return to capital in this country is much less than overseas, while exports have dropped.

    Now, tell me that the drop in exports offset by increased returns to capital overseas is not also reflected in unemployment, and I will show you the ruins of our rustbelt.

    That unemployment and underemployment has contributed to the loss of real wages, and the growth of capital has essentially stripmined the American workforce, at the profit of overseas investment by American companies.

    The really telling part is the difference between the returns on capital for FDI into the US.

    Ricardo is mostly right, over the long run, but over the last four decades, he is wrong.

    Try to interpret it away as you may, but the emratio numbers also don’t lie.

    Trade on an equal basis should yield Ricardo’s world, but on a mercantile basis, it doesn’t.

  83. Gravatar of Scott Sumner Scott Sumner
    28. July 2011 at 10:29

    KRG, You said;

    “I think there’s a bit of a mistake in not distinguishing between capital investments and financial investments, and just suggesting that they’re all indistinguishable as savings.”

    I agree that people shouldn’t confuse the two. Just to be clear, when I say ‘investment,’ I mean capital investment. Capital investment is equal to saving.

    The grant equal to the poverty line would be very costly. Let’s say it would be $6000 to $7000 per capita. That would be about $2 trillion. Where does the government get the money?

    KRG, You said;

    “It’s impossible to, on it’s own, make any VAT or consumption tax progressive.”

    Not true at all, as lots of progressives support progressive consumption taxes. The easiest example is a progressive payroll tax, which taxes higher wage incomes at higher levels. A payroll tax is a consumption tax.

    Statsguy, Wealth is proportional to (the net present value of) consumption. So a wealth tax should be identical to a consumption tax. Of course wealth is hard to tax, as it is mostly human capital, so we tax consumption instead.

    As far as Krugman, you’ll never get rid of wealth inequality with progressive income taxes, you need forced saving. The Nordic countries have lots of wealth inequality, more than we do I believe.

    And you know what I think of bubble theories.

    Citizen, You said;

    “You want the summary in a nutshell- returns to US corps have risen through overseas investment, while internal return to capital in this country is much less than overseas, while exports have dropped.”

    The capital account deficit equals the current account surplus. Hence if we really were investing more overseas that foreigners were investing here, then we’d have a trade surplus. Ricardo is still undefeated, after 200 years.

  84. Gravatar of Mike Sandifer Mike Sandifer
    28. July 2011 at 11:52

    Morgan,

    Are you making money with your ideas? Have you launched a venture? If you have such great solutions, why not develop some technology and try to sell it to state and local governments that are trying to save money right now?

    I may have misunderstood you. I’m not even sure what you were saying.

  85. Gravatar of Keith Keith
    28. July 2011 at 12:05

    Scott,

    For practical purposes isn’t borrowing people’s savings (rich or not so rich) effectively the same thing as taxing savings/investment?

    Government borrowing, as well as taxing, shifts saved income away from investment and toward consumption, thereby slowing economic growth. The only practical difference is that buying treasuries is voluntary and must be paid back (well maybe) by future taxes.

    If the real objective is to increase capital investment, then both the taxing and borrowing of savings should be of concern. Isn’t the real issue simply how much of society’s income is consumed and how much is invested. And if this is the real issue, then government spending is of prime concern since the vast, vast majority of government spending is consumption oriented.

  86. Gravatar of 20110728 « meme Log 20110728 « meme Log
    28. July 2011 at 12:20

    [...] between wage income and investment income which is understood by the Nordic countries. Scott Sumner writesMoney put into investment projects isn’t available to boost living standards for the lower [...]

  87. Gravatar of Citizen AllenM Citizen AllenM
    28. July 2011 at 12:41

    “The capital account deficit equals the current account surplus. Hence if we really were investing more overseas that foreigners were investing here, then we’d have a trade surplus. Ricardo is still undefeated, after 200 years.”

    Epic fail.

    http://www.federalreserve.gov/pubs/ifdp/2008/947/ifdp947.pdf

    Very interesting and dry discussion pushing the question further about why there is a current account deficit.

    Does dismiss the exorbitant privilege, which I think is much more of a tautology given the continued accumulation of treasuries in Asia (up until this point in time, this may change as of next week).

    I would argue the Triffin dilemma is real before I would argue that Ricardo is always right. Further evidence in the changing components of trade not always showing full comparative advantage is from http://editorialexpress.com/cgi-bin/conference/download.cgi?db_name=ACE2005&paper_id=224

    Leontieff paradox waxes and wanes, showing that in the short run, factors definitely can preclude a useful Hecksher Ohlin model, and by implication, Ricardo on trade.

    Hence it is truly political economy in international trade.

    In short, over the long run, Ricardo is mostly right, but over the short run (and I mean less than 100 years), distortions definitely arise, and can lead to paradoxical outcomes.

  88. Gravatar of dtoh dtoh
    28. July 2011 at 12:47

    Scott,
    For cash transactions, the seller (retailer) has three choices.

    1) Cheat and don’t report the sale. No different than today.

    2) Collect the consumption and don’t offer the tax reduction to card holders. (Reduces your potential sales).

    3) Use your credit-card like terminal to type in the purchase amount, swipe the consumers card, and then add the amount of tax shown on the terminal to the purchase.

    It’s very simple for the retailer… just like tracking a state sales tax. Report total sales and pay the consumption tax rate on that amount less any tax reduction rung up by consumers using their consumption tax cards.

  89. Gravatar of Citizen AllenM Citizen AllenM
    28. July 2011 at 12:51

    Further, H-O, through factor equalization implies labor in the capital intensive country must suffer lower returns as import substitution destroys industries.

    Now, even if you accept full, HO, you implicitly accept lower returns to labor, and indeed dead industries, with sticky employment, and stranded labor.

    Hence, higher unemployment until you see wages fall to the levels of Vietnam, which would be pretty much unacceptable to the polity.

  90. Gravatar of dtoh dtoh
    28. July 2011 at 12:57

    Scott,
    And if you do it as a payroll tax, then for high wage earners who don’t spend all their wages, you have to figure out how much of their paycheck they saved. Not impossible, but cumbersome and likely to be subject to a lot of political meddling.

  91. Gravatar of KRG KRG
    28. July 2011 at 13:02

    I’m a bit confused there – you say that you equate capital investment to saving, then you say that you consider income (from the employer’s perspective, I expect) to consumption.

    That seems completely inside out- capital investments (things like salaries, facilities, machinery, resources) are much more like consumption than savings. You have to buy someone else’s product to make those investment, be it a physical thing or the output of their labor. The entire point of a capital purchase it to consume resources with the hope of selling the resulting product to another consumer.

    I that much, I’d agree that wages and salaries are consumption to the employer, so any tax that falls on them (FICA) is a consumption tax. But to the wage earner, that salary is revenue, so income taxes they pay are profit taxes,particularly when progressively allocated, since that effectively simulates estimating what their necessary costs are at any given level and only taxing them on the remaining balance of saved income. I think that’s a bit of a poor hack as compared to letting people actually deduct their expenses as per a business and then taxing them on the balance, but only now is technology getting to the point where that could be handled without being overly burdensome to the individual taxpayer.

  92. Gravatar of KRG KRG
    28. July 2011 at 13:09

    “The grant equal to the poverty line would be very costly. Let’s say it would be $6000 to $7000 per capita. That would be about $2 trillion. Where does the government get the money?”
    Where does it get any money? Make the up front investment to get it rolling and set taxes to absorb revenue as needed from the profits on growth cause by better realized demand.

  93. Gravatar of Larry Larry
    28. July 2011 at 13:47

    When capital gets converted to consumption, it should be taxed. PCT handles this easily. VAT alone produces a very small amount of revenue. And doesn’t Europe show us that VAT is anything but simple in administration and impact on the political system? The lobbying alone…

    PCT can (albeit not unchangeably so) be postcard simple…

  94. Gravatar of Citizen AllenM Citizen AllenM
    28. July 2011 at 16:00

    And one last paper, reaching back into the dark ages:
    http://pioneer.netserv.chula.ac.th/~kkornkar/inter%20trade%20course/DFS%20ricardian%20model%20with%20continuum%20of%20goods.pdf

    I would note the model predicts unemployment on page 836 given sticky wages, and they are using a classic gold style foreign exchange to alleviate any forex issues.

    BTW- it doesn’t get much more orthodox than Dornbusch, Fischer, and Samuelson.

  95. Gravatar of dtoh dtoh
    28. July 2011 at 20:21

    Scott,
    The other problem that occurs is that if you want to tax consumption, you really need to have a tax income less savings, which means you need to tax all forms of income not just wage income.

  96. Gravatar of John Papola John Papola
    29. July 2011 at 09:29

    Scott, how is a payroll tax not simply an income tax by another name? I’ve never understood your treatment of that.

  97. Gravatar of Scott Sumner Scott Sumner
    29. July 2011 at 10:18

    Keith, I totally agree that budget deficits are also a concern.

    Citizen, You said:

    “Epic fail.”

    How can a tautology be incorrect?

    dtoh, I’m not necessarily against your idea. My hunch is that we’d need both to raise sufficient revenue–unless we went to much smaller government.

    Citizen, You forget that our labor is much more productive than in Vietnam. Wages reflect productivity. People used to say the same about Japan, but when Japan finally got productive, their wages rose just as high as ours.

    If you put trade barriers into place, exports fall and jobs are lost at Boeing and Caterpiller. Is that what you want?

    dtoh, You said;

    “And if you do it as a payroll tax, then for high wage earners who don’t spend all their wages, you have to figure out how much of their paycheck they saved. Not impossible, but cumbersome and likely to be subject to a lot of political meddling.”

    No you don’t, the payroll tax is a consumption tax, there are no deductions. It doesn’t tax income from capital.

    KRG, You said;

    “I’m a bit confused there – you say that you equate capital investment to saving, then you say that you consider income (from the employer’s perspective, I expect) to consumption.”

    No, income is not equal to consumption. I said a wage tax is equivalent to a consumption tax. But income is usually defined to include both wage and capital income.

    The money to fund capital investment comes from saving. They are equal for the same reason that revenue (including taxes) equals expenditure. Two sides of the same coin.

    Larry, I still think a payroll tax is much simpler than a PCT.

    Citizen, Sticky wages are a short term problem that can be fixed with good monetary policy. If trade is a problem (it isn’t) it would be a long term problem. In any case, sticky wages don’t imply the need to trade barriers, as that would cause unemployment in export industries, where wages are also sticky.

    John, A payroll tax only taxes income from wages. It does not tax income from capital. Hence it is a consumption tax. Your FICA tax is a payroll tax. Which do you prefer calculating each April 15, your income tax or your payroll tax?

  98. Gravatar of Morgan Warstler Morgan Warstler
    29. July 2011 at 20:35

    Sandifer,

    yeah, that’s what I do. I found tech start ups. Sometime I do diligence on tech for investors.

    Do you not read the links I post? I’m a constant advocate for Guaranteed Income.

    Dump UI. Dump Minimum wage. And the government does a schedule like this:

    http://biggovernment.com/mwarstler/2011/01/31/guaranteed-income-part-ii-a-real-end-to-illegal-immigration/

    scroll down you will see it.

    It isn’t complicated. It copies Paypal and Ebay.

    But now we have a system that can force all forms of social aid into one debit card, one online account, and leave it to the greedy buyers looking for cheap labor to try and figure out how to make a buck off / get some cheap services off everyone on the dole.

    I don’t care if it’s a diabetic in wheelchair missing feet, if you think about them as handicapped, they suffer.

    Instead, give them enough $ to live, but then let them be hounded by a boss from across the company who won their 40 hours per week for $2 per hour, and wants them to make more outbound lead gen calls, so he can make more $ on them.

    They will be happier. That’s what normal life is about.

  99. Gravatar of KRG KRG
    29. July 2011 at 20:45

    “The money to fund capital investment comes from saving.”

    If I get my paycheck today (let’s say I get it pure cash, to avoid pedantic quibbling) and go right to the hardware store to buy a hammer, some nails, and some lumber to make a table I hope to sell, where does the savings enter into that capital that I acquired? I see that as more logically akin to consumption with the only difference being that I intend to put the finished product (after the investment of some time as well) back on the market.

    Now, if I can’t afford the investment all in one go, it is possible to use savings as a way to accumulate the money to make the investment, but I could also get a loan from the bank (drawing on someone else’s savings, certainly) or sell a promise for a portion of the proceeds to an investor (which is differentiated from getting a loan, because the investor is taking a more direct risk; a loan much be paid on its terms whether I sell the table or not, the investor only gets paid if the table sells, and even then only gets a share of what it sold for, even if that means taking a loss. Subsequent sales of that specific share to others, though, become financial purchases, because all you have is money chasing money with no new production as a result) The investor’s money here may have come from savings, but it could just as easily have come from his revenue without touching savings in any meaningful way.

    If we’re at odds on terms, hopefully that clarifies where I’m coming from. That’s the use of money that I’d say drives growth, while savings- using money to fund loans- can grease the economy in the short term, but overall provides a slight drag because the loans must be paid back with interest instead of being rolled over into further production.

  100. Gravatar of Scott Sumner Scott Sumner
    30. July 2011 at 11:12

    KRG, Economists universally assume that if you spend money on capital goods (like your table example) the money you spent was saving. Consumption is money spent on consumer goods. Admittedly, there can be a fine line between what is a capital good and what is a consumer good. But we all agree that money spent on capital goods is saving, it’s income that wasn’t spent on consumption goods.

  101. Gravatar of Pacemaker Pacemaker
    31. July 2011 at 09:55

    Scott, you said: “A payroll tax only taxes income from wages. It does not tax income from capital. Hence it is a consumption tax.”

    I get that income from capital isn’t taxed but it’s difficult to understand why that’s the point because I have a different conception of why income taxes are bad.

    I thought it was because higher income earners tend to put additional income into savings, so an income tax would redistribute income from high savers to low savers, which discourages savings and thus investment. Since they are a subset of high income earners, wouldn’t the same logic apply to high wage earners for a payroll tax?

    As long as you’re taxing non-capital sources of income, wouldn’t a high saver who earns little income from capital be disadvantaged compared to a low saver who earns more income from capital? Or is that the point?

  102. Gravatar of Scott Sumner Scott Sumner
    31. July 2011 at 13:00

    Pacemaker, No, the reason income taxes are bad is that they double-tax money put into saving, thus encouraging current consumption and discouraging future consumption.

  103. Gravatar of Payam Sharifi Payam Sharifi
    31. July 2011 at 13:52

    and how/why is current consumption a bad thing?

  104. Gravatar of ssumner ssumner
    1. August 2011 at 09:19

    Payam, It is not a bad thing, and should neither be favored over future consumption, nor penalized over future consumption.

  105. Gravatar of Keep the Debt Ceiling // Eli Dourado Keep the Debt Ceiling // Eli Dourado
    3. August 2011 at 12:46

    [...] are getting in on the action. “Get rid of the debt ceiling, for God’s sake,” says Scott Sumner. “Now more than ever the debt ceiling has to be permanently removed,” says Adam [...]

  106. Gravatar of Dtoh Dtoh
    4. August 2011 at 03:50

    Late comment – but it seems to me manifestly self-evident that if you want to savings/ investment and tax consumption.

    If you use and income based tax it can’t be payroll only because this will

    1) Tax wages that are saved, and
    2) Spare capital income that is consummed

    Thus you are much better off with a consumption rather than income based tax.

  107. Gravatar of Dtoh Dtoh
    4. August 2011 at 03:50

    Late comment – but it seems to me manifestly self-evident that if you want to encourage savings/ investment and tax consumption.

    If you use and income based tax it can’t be payroll only because this will

    1) Tax wages that are saved, and
    2) Spare capital income that is consummed

    Thus you are much better off with a consumption rather than income based tax.

  108. Gravatar of ssumner ssumner
    13. August 2011 at 11:46

    Dtoh, I don’t understand your comment. A payroll tax is a consumption tax, an income tax is a tax on consumption and capital.

  109. Gravatar of Handworn Handworn
    16. August 2011 at 12:22

    The American poor already live the life of Riley by any historical or global standard. I live among them in Philadelphia, and every trash day they throw out staggering quantities of perfectly good merchandise (some of which I take). The core meaning is this– all redistributive attempts wind up amounting to trying to save poor people from the consequences of their pet ideas about the world.

    I’m pretty disgusted by both sides of the political spectrum, but at least the Right knows it. I’ve about given up convincing the Left of the loathsomeness to me of wealth redistribution that isn’t connected to attempts at personal improvement by the beneficiaries. (Education vouchers, good. Food stamps, all right if they don’t set a precedent. Flat-out handouts…a million times, no.) Every time I try to explain it to liberals, though, we always wind up where we started. Wealth redistribution is like a religion to liberals: all intellectual roads lead to it.

  110. Gravatar of ssumner ssumner
    17. August 2011 at 14:35

    Handworn, The key is not to do redistribution in a way that re-inforces bad habits. I like wage subsidies for that reason–the more you work, the bigger the subsidy. If you don’t work, no subsidy. But we also need to get to full employment.

  111. Gravatar of Tax Policy: How should policymakers redesign America's income tax code? – Quora Tax Policy: How should policymakers redesign America's income tax code? - Quora
    9. November 2011 at 11:11

    [...] Walmart.  But it’s an illusion to think you can redistribute investment from the top 1%" – http://www.themoneyillusion.com/…This answer .Please specify the necessary improvements. Edit Link Text Show answer summary [...]

  112. Gravatar of Kurt Rightmyer Kurt Rightmyer
    16. September 2012 at 23:14

    Personally, I trust no one advocating a $40 billion monthly giveaway to big banks. To compound the stupidity, you actually write a blog titled “The Money Illusion.” Is another $16 trillion in debt just an illusion to you? Or are you advocating the hilarious delusion that somehow all of your government spending will somehow grow the economy so much that $32 trillion will become a drop in the bucket? You are ruining the lives of real Americans. That makes you exceedingly dangerous.

  113. Gravatar of John Anderson John Anderson
    22. September 2012 at 18:11

    Why let anyone keep ANYTHING? Why not take it all and distribute it to whomever you like? Why not just assign everyone an equal share of the GDP, subtract from that their equal share of the national debt, divide by 12 and send them their monthly check? Is it because redistribution has ALWAYS failed in the long run? Or is it because you would remove incentives to produce? Or is your redistributive theory the real “money illusion”?

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