Recent links

Here are some recent links that might be of interest:

1.  James Pethokoukis has a piece in Commentary on NGDP targeting.  David Beckworth provides a good analysis.

2.  Bob Murphy has a very amusing post showing a previous example of Paul Krugman throwing insults at a Chicago economist for saying something that was true.  Only in this case a few months later Krugman himself made the same claim, seeming to forget his earlier comment that only the truly uninformed could believe such rubbish.  Someone should send Murphy’s post to Mulligan.

3.  Russ Abbott, who is a computer science professor at Cal State LA, sent me an ingenious plan for having the Fed use fiscal policy to stabilize the economy.  It involves sales tax rebates when times are bad and tax surcharges when times are good.  It would be easiest to implement in an economy that already had a VAT, and/or state sales taxes.  I see it as analogous to my proposal to makes cyclical adjustments to the employer-side payroll tax rate.  These plans tend to work best when the central bank is targeting inflation.  Of course an even better policy is to directly target NGDP expectations.

The entire paper is only 2 pages, a model of clarity and concision.

4.  Here’s Paul Krugman making a case for tax simplification:

But in the real world, governments must collect taxes, and given that necessity, making that tax collection as simple and efficient as possible can easily trump more rarefied notions of efficiency.

The best way to do this is to abolish the highly complex personal and corporate income taxes, and replace them with a VAT, a progressive payroll tax, a subsidy for low wage workers, and some taxes on negative externalities.  No more confusing 1040 forms to fill out.  But Paul Krugman wants to increase tax rates on capital.  Interestingly, he does understand that the standard argument for doing so (i.e. the claim that all income should be taxed equally) is completely bogus.  Krugman may be wrong on occasion, but he’s not stupid:

So, the case for low rates on capital gains is that by taxing investment income as ordinary income, we effectively discourage saving: if you spend your income now, you pay taxes only once, while if you invest for the future, you pay taxes twice, so eat, drink, and be merry.

There is, however, no evidence that this effect is at all important.

Of course 99% of his readers would skim right over that point.  He’s saying that if you have twin brothers, each making $100,000 a year for life, and one spends it all on eating, drinking, and being merry, while the other saves and invests to boost the capital stock, which boosts worker productivity and real wages, then he’d like the thrifty guy to not just pay more taxes, but pay a higher rate as a fraction of lifetime consumption.

4.  Rather than the Keynesian cross, Paul Krugman should have argued that I was clueless about how research works in my own field:

So, the starting point for me, when thinking about how economics works as a discipline, is to realize that the traditional model of submit, get refereed, publish, and then people will read your work broke down a long time ago. In fact, it had more or less fallen apart by the early 80s. Even then, nobody at a top school learned stuff by reading the journals; it was all working papers, with the journals serving as tombstones.

And how did you know which working papers to read? In the fields I worked in, NBER Working Papers “” yellowjackets “” became the principal outlet for new research. If you were an associate, you got those papers in the mail, and at least checked out the abstracts “” and if you were in the loop, you got to put out your own work the same way.

And who was in the loop? Well, there were groups of people in each subfield that were the real centers of information and reputation. I was part of two such groups, one in real trade, one in international money. I referred at the time to the “floating crap game”, hence the video above “” there would be various conferences around the world, but the same 30 or so people would show up at each conference, like Nathan Detroit’s gamblers finding different hideouts each night.

I started out in the early 1980s, and for 25 years submitted papers to journals, and then patiently twiddled my thumbs and waited for referee reports.  Since my papers came from a small school, made bold claims, were very counterintuitive, and were poorly explained, you can imagine what happened.  Indeed it kind of reminds me of my recent dispute with Krugman and Wren-Lewis.  At first I’d be rejected, then I’d write the editor explaining why the referee was wrong.  On three occasions (including one at the JPE) the decision was overturned.  That generally doesn’t happen, but I was an unusual case of someone making a rather poor first argument, but being able to strongly defend my position when attacked.  And I’d guess that’s carried over into blogging.  The difference is that blogging is a pure meritocracy and doesn’t require any connections, so I’m more successful in this field.  Also my writing style is less bad than it used to be.

Update: W. Peden just sent me this link from the Guardian:

The British government, along with other western governments, must replace its redundant inflation target with a target for the growth of the value of the goods and services we produce – the growth of GDP in cash terms.

NGDP targeting continues to gain in popularity.



84 Responses to “Recent links”

  1. Gravatar of JL JL
    22. January 2012 at 08:14

    Ah, the story of the two brothers, yet again.

    But you forget: the brother who saves/invests also gets a ROI, so society does reward him.

    Therefore I see no moral or pragmatic reason with taxing capital gains: On net, the investor still comes out ahead.
    And if you do not tax capital gains, then you must tax labor or consumption even more which leads to higher dead weight losses.

    IMHO it is best to have a simple tax on wealth. In the Netherlands there is a 1.2% flat tax on wealth. It is simple to collect and it encourages investors to seek high returns, while penalizing unproductive investments.

  2. Gravatar of ssumner ssumner
    22. January 2012 at 08:25

    JL, I’m afraid you still don’t understand the example. Both have the same lifetime resources to work with. After taxes, the thrifty brother has a lower present value of lifetime consumption. He pays a higher rate despite not being “richer” in any meaningful sense. It’s just a question of when people choose to consume.

    You said;

    “And if you do not tax capital gains, then you must tax labor or consumption even more which leads to higher dead weight losses.”

    Not true, the smallest deadweight loss is with a pure consumption tax, no tax on capital.

    You said;

    “IMHO it is best to have a simple tax on wealth.”

    Wealth is equal to the present value of your future consumption, (as well as that of your heirs.) Thus if you actually taxed wealth correctly, it would be a consumption tax. Of course most wealth taxes aren’t done correctly, as you probably know.

  3. Gravatar of Lulu Lulu
    22. January 2012 at 10:12

    Scott, I’ve been reading your blog for a long time now, and I had a weirder theoretical question regarding nominal gdp targeting.

    What if the Federal Reserve announced a future path for NGDP according to some arbitrary function f(t)? So that it wouldn’t be say, 4.5% per year, but rather 6% one year, 2% the next, etc. in a predictable manner. Given rational expectations, how would this policy affect money balances and markets? Would it be associated with increased unemployment in times of tight money? Or would there just be no effect because people are forward looking and can therefore adapt?

  4. Gravatar of Robe Robe
    22. January 2012 at 10:22

    Question for you on #4. One way of reading your response to Krugman is that what you object to about higher capital gains taxes is the moral implication of imposing a higher tax burden on the thrifty brother. This is interesting to me because recently Greg Mankiw wrote an article which I’m sure you’ve seen where he suggests that his beliefs on taxation are largely shaped by the moral principle of giving people their “just deserts.” ( means that one could agree with Krugman’s statement that capital gains taxes discourage investment and still be against increased capital gains taxes.

    Until I read Mankiw’s paper, I thought most mainstream economists’ perspective on issues of taxation was predicated on the utilitarian framework. At the very least, I’ve seen things written by Lucas, Becker, Boskin, etc. that suggest that they (1) assume the utilitarian framework and (2) disagree with Krugman’s assertion about capital accumulation.

    What is your perspective on the capital accumulation argument and how did you intend for us to understand your example? Also, I’ve seen you describe your perspective as utilitarian in other posts. How do you feel about Mankiw’s argument in general?



  5. Gravatar of Mike Sax Mike Sax
    22. January 2012 at 10:35

    Scott you’re being snarky about Krugman what else is new? Wow I bet you have him really worried.

    I really don’t know what is so complicated about the 1040 per se. If you have the 1040 EZ-you wouldn’t know about this it’s for the dirty hippies with low income-it’s not at all complicated.

    Herman Cain proved that you can have a tax plan that is simple in prinicple yet anything but fair-it cut taxes on the rich and raised them for everybody else-not just the undeserving poor.

    Of course in reality once you got into the details Cain’s plan was not so simple either.

    Some very simple ideas would be to cut consumption taxes-yes I believe that would be stimulative though I know you claim that fiscal multiplier is roughly 0(trick is you haven’t come close to convincing me)- as well as the payroll tax.

    How is it not suprising that you only support the payroll tax cut for employers? Maybe you’ve mentioned it before but what is it that you have against cutting employee payroll taxes? Does the idea of ever doing anything directly to help anyone not rich bother you that much? I suspect some on the Right get hives at the thought that someone who is not rich can be helped by a government policy.

    At this point Scott I think taxes on capital are already very low. Romney has an effective tax rate of 15%-or so he says. Probably after deductions it’s much lower even than that.

    The truth is that the wealthy have very low taxes already; most Americans-the nonrich-are the ones who are overtaxes.

    I know you guys have all these impressive sounding opposition research like that “50 percent of Americans pay no tax” but that’s only because the people who say that perversely ignore the fact that most Americans-the bottom 80%-pay most of their taxes via payroll and also stuff like consumption taxes.

  6. Gravatar of Mattias Mattias
    22. January 2012 at 10:56


    I understand Newt Gingrich has started promoting a gold standard. Maybe he’s just after Ron Paul’s voters, but who knows.

    Is it likely, if Newt turned out to be the nominee and were leading in the polls against Obama, that the mere expectations of a Newt presidency could send the economy into a recession?

  7. Gravatar of RueTheDay RueTheDay
    22. January 2012 at 11:06

    In the example of the twin brothers, each making $100k/year for life, where one consumes his entire income and the other invests part of it, please explain how the argument that capital gains should be taxed at the same rate as ordinary income leads to the thrifty brother being doubly taxed.

    Assume a 20% effective tax rate on both ordinary income and capital gains. Assume income is received as a lump sum at the beginning of the year and the individual is free to do as he pleases with it. Assume the thrifty brother saves 10% of his income and earns a 10% return annually on it (he buys non-dividend paying growth stock). Assume they each live 3 years.

    Brother 1:
    Year 1: Earns $100k, pays $20k in taxes, consumes the remaining $80k.
    Year 2: Earns $100k, pays $20k in taxes, consumes the remaining $80k.
    Year 3: Earns $100k, pays $20k in taxes, consumes the remaining $80k.

    Lifetime earnings: $300k, lifetime taxes: $60k, lifetime effective tax rate: 20%. Lifetime consumption: $300k.

    Brother 2:

    Year 1: Earns $100k, pays $20k in taxes, consumes $70k, saves/invests $10k, cashes out his investment at year end $11k, consumes the additional $11k for total consumption of $81k.

    Year 2: Earns $100k, pays $20k in taxes, consumes $70k, saves/invests $10k, cashes out his investment at year end $11k, consumes the additional $11k for total consumption of $81k.

    Year 3: Earns $100k, pays $20k in taxes, consumes $70k, saves/invests $10k, cashes out his investment at year end $11k, consumes the additional $11k for total consumption of $81k.

    Lifetime earnings: $303k, lifetime taxes: $60.6k, lifetime effective tax rate: 20%. Lifetime consumption: $303k.

    If you meant to assume that the original investment and any capital gain simply gets rolled over forever and never realized, then make that assumption explicit. Of course, in that case, why are we talking about capital gains rates, since the both the realized gain and effective tax will always be zero regardless of rate?

    In reality, people view realized capital gains as another form of income (like wages, profits, or interest) to be either consumed or saved or both. They should be taxed as such.

  8. Gravatar of Manny C Manny C
    22. January 2012 at 11:28

    Hi Scott,

    I work as a quant at a bank in the financial markets space and did a bit of eco during high school and uni. Given I draw my pay check from modelling, it might be surprising that I like the intuitiveness of the theory and policy implications you espouse (i.e. model free). I’ve read some eco papers and looked at structure of some of their macro models. God help them. They might be useful in some way, but it smells too much like overfitting (calibrating multiparameter models to highly correlated, few, data points). So policy implications of this should be always be considered with a grain of salt.

    In a previous comment, I said I would summarise how I understood your NGDP futures market to work. I’ve based this summary from your paper “Let a Thousand Models Bloom” plus some of your blog posts & comments thereto. I have the sense that the explanation you provide isn’t complete. Given the importance of this to your argument (i.e. a functioning NGDP futures market), I’d appreciate if you could fill the gaps:

    1. The futures market is set up by the Fed, whereby the Fed is the clearer. It takes the initial margin and pays out the variation margins and settles up accounts.
    2. Say futures contracts are set up with maturities 12 and 24 months out with a par (or notional) value equal to level target. Suppose that the current NGDP is 14tr. Then par value for 12 months is 14.7tr and 15.4tr for 24 months. Without loss of generality divide by 1tr. Each 12m contract is worth $14.70 and 24m contract worth $15.40.
    3. Before trading starts, the Fed does enough OMO to meet what it expects should be enough base money to hit the NGDP level target.
    3. Once market is open, the Fed declares that each $X of bought / sold contract will trigger the some $Y OM sale / purchases (respectively) of T-bills (I think I got that the right way around). Question: does this $Y change? Or does it stay constant? If so, over what period can the Fed change this $Y?
    4. Now suppose after trading starts, someone reckons NGDP is going to exceed target. They go to the Fed to buy $X1 of the contract (i.e. they get X1/14.7 lots). They pay their initial margin to cover credit risk. This triggers $Y1 worth of OMO sales. Someone else reckons they will NGDP is going to miss target. They go to Fed to sell $X2 of the contract. They pay their initial margin to cover credit risk. This triggers $Y2 worth of OMO purchases. [These $Y1 and $Y2 depend on your answer to step 3)
    5. Between now and the maturity of the contract, the Fed pays variation margins that reflect quarterly NGDP estimates. Margins earn sufficient rate of interest to get enough liquidity in market. You want monthly estimates and propose some averaging method that gives daily estimates but I didn’t really follow that (see Let a Thousand Models bloom). Could you elaborate?
    6. Futures contract matures 14 months after first changing hands. Suppose that the NGDP prints at 15 tr – 0.3 tr higher than the target. At this point the Fed would settle up the open trades. The guy that went long is owed $0.30 * $X1 / $14.7 . The guy that went short owes $0.30 * $X2 / $14.7.
    7. The original 2nd nearby contract (original maturity of 24months) becomes the nearest contract. The face value doesn’t change. But the next 2nd nearby contract (would have been 36 month contract when market started) has par value reflecting printed NGDP estimate of 15tr to keep target level.
    8. GDP revisions don’t matter because the errors are unbiased (see a Mankiw’s paper).

    Anything else?


  9. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    22. January 2012 at 11:56

    Rue the Day, you might want to recheck your math. For a start, 3×80=240. Not 300.

  10. Gravatar of Jon Jon
    22. January 2012 at 11:57

    Mattias: the real question is whether the gold peg sticks or moves in response to shocks so as to keep ngdp on trend.

    Second, a CB that does OMO in gold rather than debt would have a more robust transmission mechanism. By all means avoid Unlimited redemption; unlimited redemption is a tool that threatens the banking system with bankruptcy for errors in setting the gold peg; there is no need for that!

  11. Gravatar of Benjamin Cole Benjamin Cole
    22. January 2012 at 12:08

    The story of Scott Sumner, his blog and the Internet is one of the wonders of our age. (I have movie rights.)

    Let’s make 2012 the Year of Market Monetarism.

  12. Gravatar of Morgan Warstler Morgan Warstler
    22. January 2012 at 12:28

    We should tax gains from investment, the same way we tax labor.

    If you invest $100K and cash-out for $1.1M – your $100K earned, just like your muscles earned $1M.

    You should pay the same tax rate on that $1M as anything your muscles did.


    Companies should pay no tax, so there is no “double taxation” there.

    There is no incentive to invest with a lower capital gains tax – when people stop taking risks the payoff for risks goes up until people take more risks.

  13. Gravatar of Morgan Warstler Morgan Warstler
    22. January 2012 at 12:33


    I just want to make sure:

    the Fed burns the bettors money when things come in hot, to reduce money supply.

    the Fed prints money and gives it to the bettors when the economy comes in too cold.

    is this right?

  14. Gravatar of RueTheDay RueTheDay
    22. January 2012 at 14:21

    @Patrick – Yes, you are correct, silly typo on my part that I compounded by copying and pasting to the second example. Should be $240k and $242.4k of consumption in the first and second example respectively. Doesn’t in any way change the point I made.

  15. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    22. January 2012 at 15:28

    RTD, that isn’t your only mistake. It’s cheating to assume the income is received on Jan 1 for the ensuing year. That allows you to add $10K to the thrifty brother’s consumption in year 1.

    His consumption should be 1. $70K, 2. $81K, 3. $81K. No?

  16. Gravatar of RueTheDay RueTheDay
    22. January 2012 at 17:43

    @Patrick – I stated in my assumptions that income is received as a lump sum at the beginning of the year. That was just for simplification.

    In any event, it’s irrelevant. In fact, it’s not even necessary to consume the invested funds plus the capital gains each year – you can do it at the end of year 3 and still get a similar result.

    The point is, by taxing capital gains at the same rate as ordinary income, you are in no way taxing the saver at a higher rate, so long as he eventually realizes the gain and consumes the savings and the gain, regardless of when that happens.

    The double taxation argument is completely bogus.

  17. Gravatar of anon anon
    22. January 2012 at 18:45

    The simplest argument for not taxing capital is that future, risky consumption is less valuable than present, safe consumption, so the “income” from interest/capital gains is illusory; it is largely a measure of how far your consumption should have dropped in value due to risk and abstinence. The tax system should be neutral wrt. this choice, and the best way of doing this is taxing consumption directly.

    Scott is quite right about what the “simplest” tax system would look like. He did neglect some additional sources of revenue, such as funding local governments by taxing the unimproved value of land, and levying taxes on other sources of rent such as EM spectrum allocations and emission rights (although auctioning off long-term leases is a viable alternative here, and it has been used in some cases).

  18. Gravatar of Floccina Floccina
    22. January 2012 at 18:45

    I see it as analogous to my proposal to makes cyclical adjustments to the employer-side payroll tax rate.

    Lately I have begun to think that we should, after unemployment falls, slowly migrate all of SS tax to the employer. In the long run the employee pays the whole tax but many/most Democrats refuse to believe that. If it was all paid by the employer it would give more room to effect unemployment in the short run. It would end the fraud that FICA is a contribution to a retirement account that one is entitled to and so perhaps we can make the payout more sensible. It would reduce democrats using FICA to show that the rich do not pay enough taxes. It would make any/most Democrats think that Corporations pay higher taxes.

  19. Gravatar of ssumner ssumner
    22. January 2012 at 19:07

    Lulu, I don’t know, but here’s my best guess. Initially there would be a cycle. Over time it would go away as wages and prices adjusted to the cycle. But I’m not at all confident about that, it’s just a hunch.

    robe, I’m a utilitarian in my policy views. I do think that if you start with two people with identical resources, and transfer money from one to the other it will usually lower total utility. But my bigger complaint about taxes on saving is in other areas. I do think it discourages risk taking and investment. I also think our society devotes a massive amount of resources complying with the income tax codes. That’s a deadweight loss. It’s a big source of frustration in my life. I’d much prefer a payroll tax with equal progressivity.

    I don’t really agree with Mankiw’s just deserts argument. I think people who make lots of money are lucky to be born in the body of someone skilled at making lots of money. Ex ante, it was much more likely that Mankiw would have been born in the body of a peasant farmer in Bangladesh. So in that sense he’s lucky. He’s also hard-working, which is why I oppose punitive taxes on the rich. They would discourage lucky people like Mankiw from fulfilling their potential. But I think it’s reasonable to ask the rich to pay a somewhat higher percentage.

    Mike Sax, You said:

    “Scott you’re being snarky about Krugman what else is new? Wow I bet you have him really worried.”

    A few weeks ago you asked me why I didn’t read your blog more often. How can I put this politely . . .

    BTW, How old are you Mike?

    Mattias, I doubt it, as the markets would understand that he has no intention of restoring the gold standard.

    Ruetheday, I think your numbers are wrong. If he has to pay taxes on capital income, how can he consume the full 11K at year end? Wouldn’t he just consume the after tax income plus principal?

    It’s generally agreed that taxes on capital are a sort of double tax on earnings.

    Manny, Thanks, but I actually do rely on “models,” it’s just that they aren’t always formal mathematical models.

    I favor the Milton Friedman partial equilibrium approach.

    Most of your example looks good, but the daily estimates are for daily NGDP, which is assumed to be a weighted average of consecutive quarterly announcements. It has nothing to do with the interest rate on margin requirements (which might be the fed funds rate plus X%.

    Morgan, No, even taxing investment income at the personal level is double taxing the same income twice.

    RuetheDay, You said;

    “The double taxation argument is completely bogus.”

    I’m always amazed at the confidence of commenters. So 100s of brilliant public finance economists have studied this issue in depth, and they all agree, and you’re sure from a quick example that the standard model is “bogus?” Even though you forget that the tax on capital income will reduce consumption below 11K?

  20. Gravatar of ssumner ssumner
    22. January 2012 at 19:10

    anon, Good comment, I completely agree.

    floccina, Maybe, but some argue for putting it all on the employee, so the average voter can see just how much tax they are really paying. Both views are very defensible.

  21. Gravatar of Floccina Floccina
    22. January 2012 at 19:17

    So one way to achieve a progressive consumption tax might be to make it so a person can put as much money as they want, pre-tax, into an IRA. Then allow people to take as much as they want out of their IRA at any time but tax all withdrawals. Tax income not put in the IRA and the withdrawals at a same progressive rate. You could also allow people to buy a car or home in their IRA and rent them at market rates. The result would be a progressive consumption tax.

  22. Gravatar of RGV RGV
    22. January 2012 at 19:17

    “Of course 99% of his readers would skim right over that point”
    Huh? The while post is about the fact that yes, its idiotic to tax double tax capital in an ideal world. But, on planet earth, more time is spent on rent seeking. So, lets fix that first and leave double taxation alone for now. You have to assume that the average person is very stupid to miss that on reading that post.

  23. Gravatar of Justin Justin
    22. January 2012 at 19:22

    I’ve been wondering this for a while but haven’t found a good post to ask in, so hopefully it’s okay to ask here.

    Would you change the NGDP target if you had a considerable population shock? For example if the Fed is targeting a 5% growth level and suddenly there’s only 50 people left in America (an extreme example just to make the point), should they change the 5% target?

    I know this probably has little practical importance, but I could see it being relevant in a few situations, like a horrible natural disaster or if America suddenly opened it’s borders and the population doubled.

  24. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    22. January 2012 at 19:47

    ‘…it’s not even necessary to consume the invested funds plus the capital gains each year – you can do it at the end of year 3 and still get a similar result.’

    Which is, that the thrifty brother only consumed about $230K while his brother consumed $240K. Since they’ve both paid $60K in income taxes the thrifty brother paid a higher rate on his consumption.

    ‘Simplifying’ doesn’t change that fact.

  25. Gravatar of Major_Freedom Major_Freedom
    22. January 2012 at 21:37

    “James Pethokoukis has a piece in Commentary on NGDP targeting. David Beckworth provides a good analysis.”

    I never understood the mechanistic, non-human, self-fulfilling prophecy, “stability” fetishism of “NGDP level targeting.”

    Beckworth writes:

    “Under a NGDP level target a central bank would commit to reigning in aggregate nominal spending if it overshot and vice versa. Such a rule would therefore actually anchor long-run inflation expectations while allowing for aggressive catch-up growth (or contraction) in aggregate nominal spending so that NGDP returned to its trend path.”

    If the whole point of this non-human, nay, anti-human, fiddling on paper and drawing nice straight lines on graphs pedantry, is for the Fed to purposefully bring about a long term 5% growth trend in aggregate spending, as if humans are robots who don’t learn, and must be subjected to some external entity that will buy up everything in sight with unearned money, then what difference does it make if instead of people expecting the Fed to target a rate of growth, they instead target a level growth? There is no significant difference between rate and level targeting. The only difference is that one line is straight and the other is kinked. Well so what? If people are smart enough to anchor their inflation expectations to a level target, then why not a rate target as well? Because rate targeting clearly didn’t work, right? Well neither will level targeting, because it suffers from the same fundamental flaw.

    Both level and rate NGDP targeting are equally ignorant of the fact that humans aren’t robots, and that humans learn and change over time. There should not be any constant long term rise in NGDP level or rate in money any more than there should not be any constant long term rise of any other commodity in the economy. What “should” occur is that the economy’s money supply, spending, prices, production, employment, and all other economic statistics, “should” be matched to individual utilities and preferences, not some adult video game equation that violates individual preferences.

    If people want to reduce their consumption spending and hold more cash, then shouldn’t the “reaction” be for economists to say that investors and entrepreneurs “should” be free to act to earn gains by accommodating to the new preferences? If consumers reduce their consumption spending and hold more cash, what they obviously want is less consumption in the present, and more consumption in the future. They want more consumption in the future because they are holding their cash instead of burning it. No, this fact is not refuted by the idea that people hold more cash not to consume more in the future, but to guard against uncertainty, hedging, etc. All this verbiage is just another way of saying that people want to be able to consume our of their cash in the face of a possible future income drop. In other words, they want to be able to increase their future consumption by holding cash, than what they otherwise would have been able to consume if they didn’t hold more cash. So instead of losing their $50,000 a year job and having no cash and without any money to consume, they instead lose their jobs and have $50,000 in cash and thus $50,000 of which to consume.

    If consumers want to hold more cash, then the frothing at the mouth Keynesians and pseudo-monetarists should refrain from advocating that government guns be pointed at innocent people, refrain from advocating that debtors and cash holders be soaked of their wealth and purchasing power through funny money inflation, and start advising INVESTORS, MEANS OWNERS, and WORKERS on what they should do. Economists should be advising civilians, not governments. The only thing economists should be telling governments is to put their damn guns down and start protecting people’s economic freedom, instead of being their number one enemy.

    If the government just put their guns at innocent people down, you’d be amazed on what people could do. With consumers reducing their consumer spending and holding more money, what happens? Well, economists should be advising investors that consumers want less current consumption and more future consumption. That’s what exchanging consumption spending for cash balances is all about. And wouldn’t you know it? That’s OK with investors too, because the relative rate of profit in consumer goods just decreased, which means the relative rate of profit in the capital goods sector just increased. Wow, a new set of investment opportunities have presented themselves! Labor and resources can be released from the consumer goods sector by investors and employers, and absorbed into the capital goods sector by investors and employers.

    So there we have it. Less production of consumer goods (current consumption), and more production of capital goods (future consumption). Exactly what the consumers want!

    NGDP aggregate fetishists don’t understand this process. They don’t understand relative prices and economic calculation because they’re too busy advising the government on how to make fancy linear graphs appear in economic data.

    Let wage rates and prices fall. Don’t fear price deflation like it’s the end of the world. Yes, NGDP is going to fall. LET IT FALL. Yes wage rates will fall. LET THEM FALL. Yes, prices will fall. LET THEM FALL. This is a part of the process of the capital structure of the economy changing to be more in line with the new consumer preferences of higher cash balances and lower present consumption.

    Workers are not going to be so stupid so as to refuse taking a lower paying job until they starve. They will only refuse if they have a good reason to refuse. Economists should be telling the government to get out of the way. To stop enforcing minimum wage laws. To stop rewarding unemployment by giving laid off workers free money at taxpayer expense. To stop taxing employers and profits, from multinational corporations, to mom and pop shops. To stop imposing higher costs for hiring workers.

    It is silly to believe that if consumers reduce their consumer spending and accumulate cash, that the government should step in and start buying iPods and Ford F-150s just because consumers are not. I mean are we working hard to produce what consumers want, or are we working hard just for the sake of working? Do you really want the US to be even less competitive internationally by the government constantly rewarding bad business decisions in the US that would have otherwise resulted in a decline in US NGDP? Do we want a nation of consumer driven, foresighted entrepreneurs and innovators who produce what the consumers actually want? Or do we want a bunch of dopamine saddled children whose only purpose in life is to be but a means to some NGDP level targeting end, and be permanently drugged with easy money, where the worse they perform, the more dopamine they should come to expect? “What’s that? You mean the consumers don’t want my miracle fake dog poop? I’m not worried, the government will ensure there is enough spending for it! In fact, I don’t even need to produce for the consumers any more. I can just produce what the money printers want!

    Can anyone say Greenspan Put on economy wide steroids? Instead of the banking sector expecting easy money whenever times get rough, we’ll have a whole nation of entrepreneurs expecting easy money when times get rough. And the rougher it gets, the easier the money will be! Goodness, it’s like the crash of 2008 is being interpreted as the Fed not being psychotic enough.

    If the Fed should ever adopt NGDP level targeting, and the economy implodes once more, can we finally stop being subjected to this newest Fed “strategy” dogma? When will you learn the truth that the market simply cannot be improved by central economic planning? Do you honestly believe that the concept of economic calculation was nothing but arm chair philosophizing of the 1930s? Do you have any idea how profound the discovery of it was? It is THE refutation of central economic planning, to any degree, totalitarian exploitation all the way down to Keynesian/monetarist style pickpocketing.

  26. Gravatar of RueTheDay RueTheDay
    23. January 2012 at 04:12

    @anon – The return of the investment should compensate the investor for the risk he undertakes. I don’t ever recall in any of my finance classes hearing that “market returns never adequately compensate investors for risk, therefore the government must subsidize them through the tax code to make up the difference”.

    @ssumner – Let’s make it real simple. One period model.

    Brother A earns $100k, pays $20k in taxes, consumes $80k.

    Brother B earns $100k, invests $10k, realizes a capital gain of $1k, pays $20.2k in taxes, consumes $80.8k.

    Where is the double taxation? Please point it out.

    I also find it odd that you’d resort to an appeal to authority on this one given how often you’ve criticized authorities like Krugman (rightly so in some cases). “But Krugman has a Nobel Prize, what do you have Sott” would hardly be an appropriate response to your finding a mistake in something Krugman said.

  27. Gravatar of anon anon
    23. January 2012 at 05:01

    RueTheDay, measured in PV terms, the return on investment exactly compensates for abstinence and risk, as judged by the marginal investor. So why tax it at all? We tax consumption, or labor income, because folks with higher realized consumption/labor income are better off, and can bear higher taxes on utilitarian grounds. Some of this also applies to investment–wealthier folks tend to invest more, and choose riskier assets–but the effect is negligible, and surely does not justify taxes on capital income in their current form.

  28. Gravatar of JL JL
    23. January 2012 at 05:36

    Scott, anon,

    Wealth isn’t *just* the present value of lifetime consumption.

    Wealth is also about ownership, dominance, power, social status and safety.
    An equal distribution of wealth is good in and of itself.
    There was an interesting TED talk about this: less inequality leads to happier people.

    Extreme wealth inequality brings strife and it makes some men less equal than other men. It’s a negative feature of our modern capitalist societies that hunter-gatherers do not have.

    To reduce wealth inequality we need to tax wealth, or else things will deteriorate until the wealthy get their heads chopped off.

  29. Gravatar of RueTheDay RueTheDay
    23. January 2012 at 05:47

    @anon – “Return” on an investment consists of both periodic cash inflows (dividends, interest, rent) plus capital gains, over the holding period.

    That is one of the reasons I find the argument that we should tax the “income” (e.g., dividends or interest) but not the capital gain to be specious. Suppose the investment class is a commodity fund, or to make it even simpler, a physical commodity like gold. No dividends, interest, or rent is received, the entire return consists of a capital gain. A capital gains rate of zero means all of this income would be excluded from taxation.

  30. Gravatar of JL JL
    23. January 2012 at 05:52


    I would also like to see a calculation that shows the double taxation in RueTheDay’s example.

    However, I would add the condition that the $10K invested is never at risk of being lost, i.e. assume government bonds or hedged investments.

    I add this condition because I advocate the Dutch scheme where direct investments in high-risk enterprises, such as web start-ups or medical research, are exempted from the wealth tax.
    (The Dutch realize that most other investments are actually plain old rent-seeking.)

  31. Gravatar of W. Peden W. Peden
    23. January 2012 at 05:52


    It saddens me that people insist on talking about wealth redistribution without paying attention to empirical work in consumption theory, even when they realise that wealth is frozen consumption-

    – but then again most of the literature on equality seems to be a shambles in terms of its lack of statistical rigour. When people have strong feelings either way, they’ll accept very weak statistical studies as profound because they confirm what they want to believe.

  32. Gravatar of Major_Freedom Major_Freedom
    23. January 2012 at 05:58


    “Wealth is also about ownership, dominance, power, social status and safety.”

    It’s also about sense of accomplishment, and the reward sought for working hard for others.

    “An equal distribution of wealth is good in and of itself.”

    Only if you adhere to the illogical and destructive philosophy of egalitarianism. Egalitarianism is antithetical to the facts that humans value goods services differently, and that different humans produce goods and services of different value to others. With different people producing goods and services of different value, there are different rewards given by freely valuing individuals, i.e. economic inequality.

    “There was an interesting TED talk about this: less inequality leads to happier people.”

    Only if people adhere to the illogical and destructive philosophy of egalitarianism! It doesn’t make me happier if everyone has the same income or wealth. It makes me happier knowing that people’s liberty are equally respected, which enables the most productive to earn more income, acquire more means of production, and produce even more. I don’t want wasteful and inefficient people in control over the means of production. It leads to lower real wages and profits and lower standards of living for everyone.

    I would rather see two people one of whom goes from poverty to wealthy class and the other goes from poverty to middle class, than both going to middle class, if one of them is productive and innovative and has a good idea that can only be implemented if he has economic freedom.

    The TED talk on “happiness” is not making any scientific discovery that all humans must be subjected to as if its a physical law of nature. I’m human, and I am decidedly unhappy if productive people are robbed and unproductive people are rewarded, just so that egalitarians can have their jealousy and resentment placated.

  33. Gravatar of JL JL
    23. January 2012 at 06:03

    @W. Peden

    That paper you linked to is theoretical, not empirical.

    The TED talk I alluded to is actually empirical:

    In any case, I’m a utilitarian. My utility function is human development and happiness, not lifetime consumption of resources.

    You may call it ‘strong feelings’, I prefer to call it my personal opinion, but whatever.

  34. Gravatar of dwb dwb
    23. January 2012 at 06:06

    to change the way the tax code works we have to wish for a different way of making laws in this country. name an industry, there is likely a tax subsidy for it, thanks to some lobbyist inserting language for it. Everyone, IMO, should take at least one of the two undergrad Federal income tax courses offered to accounting majors. omg is it an eye-opening experience on the compexities of the tax code. why do i need to get a cpa to help me minimize my taxes??? The tax code is complicated because accountants, lobbyists, and lawyers make money “interpreting it.” Until we figure out how to remove that incentive, we are all doomed.

  35. Gravatar of Major_Freedom Major_Freedom
    23. January 2012 at 06:11

    “That paper you linked to is theoretical, not empirical.

    The TED talk I alluded to is actually empirical”

    That doesn’t make it superior, if the propositions concerned are not empirical but logical/philosophical.

    “In any case, I’m a utilitarian. My utility function is human development and happiness, not lifetime consumption of resources.”

    Impossible. You can’t have human happiness in your utility function because you reject the happiness of those who aren’t egalitarians, and you positively advocate that productive non-egalitarians be forcefully deprived of their earnings because they are too productive relative to their peers.

    Human development and human happiness are not mutually exclusive to lifetime consumption of resources. They are intimately bound together. By consumption you are probably imagining “useless” knick-knacks. But in reality higher consumption includes higher quality and quantity of education, higher quality and quantity of medicine, schools, food, hospitals, shelter, clothing, and yes, the be all and end all of central economic planning: ROADS AND BRIDGES!!!.

    “You may call it ‘strong feelings’, I prefer to call it my personal opinion, but whatever.”

    One should call it your chosen philosophy.

  36. Gravatar of JL JL
    23. January 2012 at 06:13


    Funny how you knew that the TED talk was about before I posted the link.

    I am really angry that you uncovered my illogical and destructive philosophy.
    Rest assured, my jealousy shall not be satisfied until we are all as poor as Soviet Denmark!

  37. Gravatar of Mike Sax Mike Sax
    23. January 2012 at 06:14

    Scott that’s your usual cheap trick. To play the game of “you are a disrespectful youngster I am too important to respond.” Total copout. Please. There are plenty of people who do read my blog who do it much greater credit than you ever could. They are even more “mature” than you are. Your baiting of Krugman every day shows great maturity. As does your “hate for Keynesian talk.” That was a real mature title.

    I guess only someone with your elite education at Chicago can understand it’s subtlety.

    I think what you mean by “mature” is being an apologist for every reactionary economic argument known to man.

    Old wine, new bottles. If you ever get tired of The Money Illusion as a title that would be perfect.

  38. Gravatar of Mike Sax Mike Sax
    23. January 2012 at 06:19

    What I think your strategy comes down to is this Scott. Morgan Warstler expresses your true views in a way that is not made overly complex and conoluted.

    He admits that yeah he thinks poor people-and also non-Christians, he’s a bible thumper- are dirt and that only rich-Christian- people matter. I think it’s a crummy attitude but he doesn’t try to disguise it.

    Your game is to always feign that nobody understands the profound subtlety of your reactionary economic arguments. Even if that were true then it would still be your fault. In communication the responisbility is on you not the listener to make sense.

  39. Gravatar of dwb dwb
    23. January 2012 at 06:24

    … and by the way I found this post scary from an economist: “the improved ‘technology’ of tax collection arguably offsets the fact that we start from higher levels of taxes, and may well make it possible for us to handle higher levels of debt than our great-great grandfathers.”

    improved tax technology that allows us to support a bigger govt?? huh?? now if we were taking about more efficient taxes, sure, allowing the govt to collect but reducing the efficiency losses… but “improved tax technology” is just another way of saying the govt has found new ways to take the same old money. there is nothing “improved” about the modern tax code.

  40. Gravatar of anon anon
    23. January 2012 at 06:30

    JL, Richard Wilkinson’s results are statistical glitches; they have not been replicated by subsequent data. See [1] [2]. Even assuming them to be sound, they don’t show that wealth inequality is a significant problem, over and above inequality in income and current consumption. The latter can be addressed e.g. by progressive consumption taxes.

  41. Gravatar of JL JL
    23. January 2012 at 06:48


    But assume that Richard Wilkinson’s results are robust and that extreme wealth inequality does lead to human misery.

    What, then, is the case against a wealth tax?

    The French revolution and the communist revolutions prove that people are willing to chop off the heads of rich people if (perceived) wealth disparities become too large.

    And it seems most people in the USA aren’t very happy with the current state of affairs.
    Some are (still) blaming the welfare queens, but the blame seems to be shifting to the richest 0.1%.

    At which point is it more efficient to simply implement a wealth tax in order to avert revolution?

  42. Gravatar of johnleemk johnleemk
    23. January 2012 at 07:01

    For those (like myself, since I can’t recall this specific argument being covered in depth in any of my college econ classes) who are unfamiliar with the standard economic arguments for low capital gains tax rates, this is a good reference:

  43. Gravatar of W. Peden W. Peden
    23. January 2012 at 07:04

    J. L.

    It’s a paper that includes, amongst other things, overviews of the established facts in consumption theory.

    It’s going off topic a bit, but I don’t think much of happiness research, especially when it’s often based on self-reported happiness. “Call no man happy until he is dead”, as Aristotle put it. For the same reason, I don’t think much of (vulgar) utiltiarianism.

    Richard Wilkinson is an excellent example of someone who plays up basically worthless empirical studies (e.g. bivariate correlations) and uses them to make (policy-invariant) inferences that support what he knows in his heart to be true.

  44. Gravatar of W. Peden W. Peden
    23. January 2012 at 07:09

    I agree with anon. Most of what I’ve read in consumption theory suggests that a progressive consumption tax would be the best approach. The primary cases for egalitarianism in taxation are moral (those with the broadest shoulders should carry the biggest weights) and balancing (inequality of consumption tends to lead to over-consumption and over-work).

    What is not needed is arguments that reducing INCOME equality is a panacea or even particularly desirable. However, the income-consumption and income-wealth distinctions are not things easily grasped, so those making primarily political arguments aren’t very interested and we end up talking about incomes from the start.

  45. Gravatar of W. Peden W. Peden
    23. January 2012 at 07:12

    (Though I’m not convinced we have data of sufficient quantity to confidently reject hypotheses like the income inequality-ill health link. Like so often in economics, we are dealing with numbers where appealing to probablistic inferences is fairly ridiculous.)

  46. Gravatar of Morgan Warstler Morgan Warstler
    23. January 2012 at 07:26

    I am a bible thumper?!? Good lord, no church would have me, I’d impregnate them all with bad ideas.

    Sax, you are a terrible reader. As I said before, you dog whistle on everything.


    “Morgan, No, even taxing investment income at the personal level is double taxing the same income twice.”

    Prove it: $100K invested sells for $1.1M, $1M capital gain.

    I say the $1M has not yet been taxed.

    Show me where it was taxed.

  47. Gravatar of anon anon
    23. January 2012 at 07:27

    JL, under your assumptions, there is no case against a wealth tax falling on the very wealthy. But that’s becaise you’ve chosen your assumptions accordingly.

    W. Peden, I broadly agree about happiness research, but I think it is important to figure out to what extent consumption (and, yes, wealth too) is positional. Aside from that, happiness research should mostly inform positive psychology and self-help advice

  48. Gravatar of Central banks should do some fiscal. « The Jefferson Tree Central banks should do some fiscal. « The Jefferson Tree
    23. January 2012 at 07:40

    […] suggests that the Fed should have to right to alter sales taxes and payroll taxes. H/t to Scott Sumner. To download, click on the “One click download” phrase top centre. The paper is less than 1,000 […]

  49. Gravatar of BW BW
    23. January 2012 at 07:42

    Come on. This isn’t really that hard.

    Krugman was making an empirical claim. The phrase “no evidence” should have made that clear. You can’t rebut an empirical claim with a farfetched hypothetical.

    That said, I think Krugman’s empirical claim was far more absolutist than it needed to be. I complained on his blog, and I made an earlier post here lamenting the stridency of that post. There’s not “no evidence” and I don’t know where he got that idea.

    But it is too much to ask that he be criticized for the right reasons?

  50. Gravatar of RueTheDay RueTheDay
    23. January 2012 at 07:51

    @ johnleemk – Thanks for the link.

    The double taxation argument, if you can call it that, is simply as follows:

    The current price of an investment asset is the PV of all future income streams yielded by that asset. Presumably, the value that the market is discounting is the after tax income stream. Any increase in the market price of the asset (i.e., a capital gain) is due to the market’s anticipation of an increase in those future (after-tax) income streams. Therefore, to tax that increase (capital gain) represents double taxation because we have already…..err…..umm……because we will…..err……..ummm……..because we MIGHT tax them in the future (IF and ONLY IF they actually come to pass, in line with current expectations).

    The problems with this line of thinking are many and obvious. The income streams (or rather the expected increase in income streams) may not actually come to pass. Take, for example, the case of dotcom stocks – enormous capitals gains were realized in many cases, but the future income streams that were supposed to be taxed never came to fruition. A zero capital gains rate, in this case, means no tax not double tax. Another issue is the fact that the person realizing the capital gain today is not the person who will realize the taxable income in the future. And of course, no one can know what the tax rate will be in the future – maybe the conservatives will gain power and exempt all investment income from taxation or move us away from income taxes and towards consumption taxes.

  51. Gravatar of JL JL
    23. January 2012 at 07:51


    Then I shall conclude that we are both reasonable humans. 🙂

    You (and Scott) are deluded or unconvinced about the negative externalities that result from an unequal distribution of wealth. But I suppose that from your point of views it is I that is deluded.

    Interestingly, I went back to this post:

    No surprise that I find myself in agreement with Jon Stokes and Warren Buffet.

    Surprisingly, I also find myself in agreement with Morgan Warstler (?!): I don’t see where the $1M has been taxed.

    One issue that has not really been discussed in this post or the “Buffet: 90% tax rate” post, is the problem of misrepresentation, or fraud.

    Suppose I hire a construction company to expand my mansion. Normally it would cost $1 million.
    The company bills me $500K and I pay consumption taxes on that.

    Coincidentally my business overpays $500K on some securities, while the son of the owner of the construction company, who lives in London, made $500K profit selling securities to a dumb American.

    Of course, nobody can prove I overpaid $500K on those securities and nobody can prove the construction company willingly charge too little.

  52. Gravatar of Mike Sax Mike Sax
    23. January 2012 at 07:53

    Morgan there’s no terrible reading gooing on I checked out your post and you certainly are very religious you even speak of a “Christian Economics” if you forgot check out your own blog.

    Morgan I was tyring to compliment you-unlike Soctt you admit that you are a hater who thinks only rich people count. I mean you do think that right?

    If you are poor drop dead right? I mean you think that and Scott thinks that but unlike him you are honest and don’t hide in a ton of aracne arguments.

  53. Gravatar of Morgan Warstler Morgan Warstler
    23. January 2012 at 08:00


    Dog whistle reader = terrible reader. I can’t do two links in a post, so….

  54. Gravatar of Morgan Warstler Morgan Warstler
    23. January 2012 at 08:05

    Ya see, Mike, I’m not the guy you imagine. I did a post completely tongue in cheek to a readership that knows me, a readership that is far more Christian than myself, and I was arguing for a “Guaranteed Income” which sounds pretty socialist on its face, so I made it in a way to show the Christian readership that my idea was still very much a tough love kind of Christian charity.

    Anyhoo, read more carefully.

  55. Gravatar of Morgan Warstler Morgan Warstler
    23. January 2012 at 08:15


    That’s because the $1M wasn’t taxed. The double taxation thing makes sense on corporate dividends, but not on personal income.

    The fact is money once you tax it, becomes a muscle.

    You can send it out in the field to do backbreaking labor, you can make it work year after year and never ever turn it into a night in Bangkok.

    It should never be taxed again.

    BUT, every other dollar earned off that muscle is a new dollar earned no differently than if your real muscle did it out in a field.

    Scott knows this though, I think he mis-spoke.

    Because MY GOAL is to treat the income of SMB owners (the pass through income guys) as most favored capital gains (like 1031 real estate transactions), and have them pay a smaller rate than everyone – actually just pay on their consumption.

  56. Gravatar of Silas Barta Silas Barta
    23. January 2012 at 09:04

    Article: “a target for the growth of the value of the goods and services we produce – the growth of GDP in cash terms.”

    scott_sumner reaction: “NGDP targeting continues to gain in popularity”

    Too bad that they’re desribing *real* GDP targeting rater than nominal. the “*value* of the goods/services we produce” is RGDP. In contrast, NGDP is the number of monetary units traded for those goods, completely orthogonal to their value.

  57. Gravatar of W. Peden W. Peden
    23. January 2012 at 09:05


    I agree fully on positional effects in consumption. That’s one of the reasons I like the relative permanent income hypothesis so much: it seems like it resolves the puzzle that Friedman recognised at the end of his time researching consumption, which is that there seems to be some truth in both Dusenberry’s relative income hypothesis AND the permanent income hypothesis.

  58. Gravatar of Cthorm Cthorm
    23. January 2012 at 09:07

    >Not true, the smallest deadweight loss is with a pure consumption tax, no tax on capital.

    I would disagree there. A Consumption tax certainly has lower DWL than income taxes or capital gains taxes, but it does not have the lowest DWL. The tax with the lowest DWL is a property/land-value tax. In a large country like the US there are probably significant implementation challenges that would make a consumption tax more realistic.


    I usually agree with you, but I think you’re getting much too technocratic on taxes. There is certainly virtue in favoring SMB owners, especially compared to the significant extra burdens they bare today, but tax policies are not a good place to do so.

    A good tax policy has a broad base, low rates, and minimizes distortions to behavior. If you provide an avenue to get a lower rate, people will spend a lot of effort to get that lower rate (My family is in real-estate development…I know this game), and that’s where you get dead-weight losses. You would be much better off keeping a single rate and stream-lining the regulatory system.

  59. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    23. January 2012 at 09:42

    ‘Brother B earns $100k, invests $10k, realizes a capital gain of $1k, pays $20.2k in taxes, consumes $80.8k.

    ‘Where is the double taxation? Please point it out.’

    The double counting is in your consumption of $80.8. You’re including the $10k twice to get there. Which is, again, why your ‘simplifying assumption’ of income received before it’s earned (which is actually a loan, not income) is nothing of the sort.

    But, how would you feel about the govt. taxing the investment income BEFORE it is received? Say, a tax on any non-consumed income of 20% of the T-bill rate.

    Then the thrifty brother’s situation would be that his consumption would be $70k – $200 (of to be earned interest), or $69.8k.

  60. Gravatar of Morgan Warstler Morgan Warstler
    23. January 2012 at 10:09


    I’m using logic.

    Big Business = Big Government. Always.

    Therefore, we must codify favored-status of small business into the system, to give us the best possible shot at long term capitalism.

    I know on its face it is counter-intuitive, but it makes a ton of sense, we want to reduce rent seeking, and size matters in that regard.

    1. This doesn’t have to be complicated.

    2. Taxes are exactly where we want to do it. We WANT the best and brightest going into entrepreneurial pursuits, tax policy that favors non-real estate, non-financial.

    Imagine a Harvard MBA class where tax policy makes all of them want to move back home, start lots of businesses, spend very little money on consumption, become big fish in their small ponds.

    3. Technocratic is the wrong word. It is a hack. And good hacks work. My Guaranteed Income plan is a hack, it isn’t pure libertarian anarcho-capitalism, it recognizes that we have to hack something out.

    4. Finally, don’t imagine that all rules are abused equally. Example: We could easily identify financial services people, actors, musicians, professors, and other folks likely to vote liberal and tax them more if we wanted. I’m being brash here, the point is that enforcement isn’t the complicated piece with favored tax policy, it is just that we KNOW there will be unintended consequences.

    This is TRUE.

    But we also KNOW big business = big government.

    And since we know two contradictory things, I’m prepared to side with the one that specifically AIMS to have smaller government.

    The actually theory here is called distributism.

    Any problem with capitalism can be solved with more capitalists.

  61. Gravatar of Cthorm Cthorm
    23. January 2012 at 10:55


    You had me until “Big Business = Big Government. Always.” I simply don’t think that’s true.

    >we must codify favored-status of small business into the system, to give us the best possible shot at long term capitalism.

    There was similar justification to anti-trust laws. Now, if you have much in common with libertarians your next thought will be about how important the role of big government is in creating big business monopolies. That seems to support the point that big business = big government, but ignores some possibilities that I’d think you would be sensitive to. Small companies can become big companies, and sometimes they even do so simply by out competing all of their rivals. Companies like Google in the US search space.

    It doesn’t make sense to demonize big business when it grows through the wholesome notion of competition and efficiency. Arbitrarily defining SMB as the paragons of capitalism will have the (predictable) unintended consequence of limiting benefits to economies of scale.

    There is nothing wrong with distributism, but it is definitely wrong to set exogenous rules about how big any node can get. The right way to go about it is to set clear rules that apply to everyone equally all of the time. In the best case scenario a tax policy that favors SMB nodes will result in BB nodes operating through several SMB nodes for tax purposes.

  62. Gravatar of RueTheDay RueTheDay
    23. January 2012 at 11:23

    @Patrick – The upfront payment is irrelevant. You could just as easily posit a situation where the funds are saved from January-February’s income, invested, and then the investment is sold and capital gain realized in November and consumed in December. The math works the same.

    The claim that a capital gains tax is double taxation is based on the fact that you’re taxing the gain now (first incidence) when that gain is the PV of future yields which will also be taxed (second incidence). IMO, this is silliness because the future yield may never materialize.

  63. Gravatar of Morgan Warstler Morgan Warstler
    23. January 2012 at 12:33


    Wait, I’m not demonizing big business, I’m just looking to legally put it at a disadvantage compared to small business with taxes.

    My first and favored solution is to allow SMB owners – the top 2% of SMB owners that earn 50% of SMB income – to pay themselves a taxable salary (basically what they consume), and move the rest of their profits tax-free around freely between other SMBs they are involved with.

    What we have right now is a horrible dis-incentive, when profits are passed-through on a given SMB, the owners are being encouraged to keep the money in the older slow growing companies, instead of doing something completely new.

    The reality is that serial entrepreneurs spin up the large swath of newcos of any real value, and from that pool come the ones that go gangbusters and create all the new job growth.

    We want them to have their incentives properly aligned, and INCOME created by these guys IS ALWAYS A CAPITAL GAIN.

    They invest in themselves. And that’s a better investment than any building, or any stock.

  64. Gravatar of Bob Murphy Bob Murphy
    23. January 2012 at 12:58

    That generally doesn’t happen, but I was an unusual case of someone making a rather poor first argument, but being able to strongly defend my position when attacked.

    Scott Sumner: He’s not nearly as dumb as he sounds.

  65. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    23. January 2012 at 13:09

    RTD, you can’t ignore time. But, you need to for your argument to work. Which is why you won’t reply specifically to my points, but instead change direction.

  66. Gravatar of Cthorm Cthorm
    23. January 2012 at 13:20


    Apologies for the apparent straw man then. I am in full agreement with you on the importance of serial entrepreneurs and the whole venture capital space. But I still don’t think your favored solution should be “THE favored solution.” Free movement of capital would certainly enhance new business development, but you have a hurdle to jump over: how is your plan better than a simple consumption tax?

    I confess, I’ve long been a fan of the FairTax, but I’ve always had two misgivings with it. 1) It’s not coupled to the repeal of the 16th Amendment 2) It’s revenue neutral, rather than revenue negative.

  67. Gravatar of Morgan Warstler Morgan Warstler
    23. January 2012 at 14:15


    Sure, if I could get a progressive consumption tax I would.

    But that’s not going to happen.

    BUT, I could use our love for SMBs to get their profits treated as 10% capital gains.

    And in order to get some more liberals to accept it… raise capital gains on traditional investor types to be kicked up to 25%.

  68. Gravatar of RueTheDay RueTheDay
    23. January 2012 at 14:16

    @Patrick – I’m not ignoring time at all. If someone makes an investment in March out of money they saved from their income in January and February and then sells the investment in November (realizing the capital gain) and consumes the initial investment plus the capital gain in December, how has time been ignored? It hasn’t.

    Also, johnleemk has specified exactly where the double taxation is purported to occur. It has nothing to do with income in advance or arrears. The argument is that the yield will eventually be taxed as ordinary income and the capital gain is simply the PV of the expected increase in (after-tax) future yield. In essence, the claim boils down to “we’re going to eventually tax the yield, so if we tax the capital gain now, the future tax on the yield will be a second incident of taxation”. This ignores the fact that A) the future increase in yield may never actually happen whereas the present capital gain is certain after it’s realized and B) the present capital gain and future yield accrue to two different taxpayers.

  69. Gravatar of Cthorm Cthorm
    23. January 2012 at 14:40

    >And in order to get some more liberals to accept it

    I thought the only ones that matter are the Tea Party, or so I’ve heard…

    Not sure how involved you are in the day-to-day at BigGovt, but I’m excited for the BigEducation launch. Now that’s an issue you can get some fusion between libs and tea party people.

  70. Gravatar of ssumner ssumner
    23. January 2012 at 18:40

    Floccina, Yes, that would work too. But the tax forms would be more complicated.

    RGV, You said;

    “You have to assume that the average person is very stupid to miss that on reading that post.”

    I wish we could test this. In 2009 I talked to many ECONOMISTS who read Krugman, and they didn’t realize that he thought monetary policy could be effective at the zero bound. It was well hidden. You’d be surprised.

    Justin, Yes, in principle NGDP per worker is best.

    Major Freedom, Before you reject Beckworth’s proposal, you might want to investigate why he thinks it would produce these results.

    RueTheday, How about some humility. First you claim it was $81, and that proved the tax rates were exactly the same, and all the experts are wrong. Now you claim it’s only $80.8, but somehow the tax rates are still exactly the same. I didn’t think the same question could have two different answers, and since you clearly don’t know how to do this stuff, where does your supreme confidence come from? The $81 figure was wrong. Doesn’t that make you reconsider your entire analysis? You told me the first numbers showed the tax rates were exactly the same, are they still exactly the same? The appeal to authority was just to save you some time, doing you a favor, so you wouldn’t try to invent the economic equivalent of a perpetual motion machine.

    JL, You said;

    “There was an interesting TED talk about this: less inequality leads to happier people.”

    Happiness surveys put the US ahead of every country in the world with more than 35 million people, including all the big Western European countries that are admired by egalitarians. It’s true some small countries score higher than the US, but it’s not clear their systems are scalable up to 300 million. Why are the bigger Western European countries (and Asian countries) all less happy despite being much more equal?

    JL, Which RueTheDay example, the first one or the completely different second one? They can’t both be right. The second is more accurate by the way, and does show a higher tax rate.

    Mike Sax, I was just minding my business and you came over here with this comment:

    “Scott you’re being snarky about Krugman what else is new? Wow I bet you have him really worried.”

    After behaving like a 4th grader, you get upset because I pointed it out, and apparently were mean to you. I’m doing this for your own good. Grown-ups don’t take people seriously who make those sorts of comments, it’s in your own interest to shape up. And no, I’m not claiming I never act immature, but surely not in every single comment I make. You’ve been doing this from the very first day you started posting over here. I don’t ban people, but I am certainly not going to continue responding to this childish nonsense.

    As far as Morgan, at least his nonsense spiced up by his sense of humor.

    Silas, I assumed he meant “monetary” value.

    Cthorm, Good point about land taxes.

    Bob, You said;

    “Scott Sumner: He’s not nearly as dumb as he sounds”

    Didn’t Mark Twain say that Wagner’s music was better than it sounded?

  71. Gravatar of Morgan Warstler Morgan Warstler
    23. January 2012 at 21:14

    Scott, you still haven’t walked back your mistake on the un-taxed $1M from my above example.

  72. Gravatar of RueTheDay RueTheDay
    24. January 2012 at 03:58

    Scott – I made a simple arithmetic error in my first post. I admitted it and corrected it. It had no bearing whatsoever on the point I was making. Funny how you continue to harp on that and ignore everything else I posted.

  73. Gravatar of Major_Freedom Major_Freedom
    24. January 2012 at 06:36


    “Funny how you knew that the TED talk was about before I posted the link.”

    You said it was empirical. That is all I needed.

    “I am really angry that you uncovered my illogical and destructive philosophy.”

    “Rest assured, my jealousy shall not be satisfied until we are all as poor as Soviet Denmark!”

    It’s so easy to sniff out socialist apologists. Egalitarianism is just a smokescreen. You guys are always going on how terrible it is for people to own only 2 yachts while the richest people own 20 yachts. Oh the horror. Inequality is so incredibly evil.

    We should all adopt the wonderful Danish model where life is so fun hardly anybody wants to immigrate to Denmark.

  74. Gravatar of Major_Freedom Major_Freedom
    24. January 2012 at 06:40


    “Major Freedom, Before you reject Beckworth’s proposal, you might want to investigate why he thinks it would produce these results.”

    I did investigate it. It doesn’t make sense. Maybe we can pretend that I did investigate, if you don’t want to accept that I did investigate.

  75. Gravatar of Silas Barta Silas Barta
    24. January 2012 at 09:00

    @scott_sumner: Silas, I assumed he meant “monetary” value.

    So let’s review: an article advocates something that, from context, appears to be RGDP targeting. You ignore that and assume NGDP was meant. You then cite it as further evidence of the popularity of NGDP targeting.

    Typical scott_sumner. I’m now starting to see why you think NGDP has causal power!

  76. Gravatar of Automatic smoothing with VAT/GST? » TVHE Automatic smoothing with VAT/GST? » TVHE
    24. January 2012 at 11:03

    […] 25, 2012 Via the Money Illusion I see that there is a suggestion to make consumption taxes an automatic stabiliser for a given […]

  77. Gravatar of Cthorm Cthorm
    25. January 2012 at 07:58


    How exactly does a central bank do anything to target RGDP growth, without in-fact targeting NGDP growth?

  78. Gravatar of Silas Barta Silas Barta
    25. January 2012 at 11:11

    Cthom: Even if you’re correct that RGDP targetting has that effect (though that requires problematic assumptions to begin with), that still doesn’t change the fact that the author was advocating RGDP targeting, if we judge by the substance of what he wrote, and yet scott_sumner is both assuming the author said advocating that the author didn’t advocate, AND that this therefore counts as proof of someone agree

    Did somebody say “circular argument”? People generally make these when they are unable handle reasoning that use too long of a chain of logic. I’m sure scott_sumner isn’t anything like that though.

  79. Gravatar of Jason Odegaard Jason Odegaard
    25. January 2012 at 11:13

    Hi Scott – question for you then after reading your first item #4:

    In a world in which income is tax, would a zero-percent capital gains tax be best? Or does capital gains require some level of taxation in a system where income is taxed?

  80. Gravatar of Manny C Manny C
    25. January 2012 at 15:35


    1. When I mean models, I mean formal mathematical models (that’s my day-to-day job). I don’t mean the simplier and more intuitive constructs that you rely on.
    2. Re monthly NGDP estimates: I wasn’t trying to muddy that with the interest rate. Just that the interest earned on the variation margins would be sufficient to get enough liquidity into market.

    Yes that’s my understanding. However, at any given point in time, the market might be net long, net short or (very unlikely but possible) net neutral. So Fed burn those long NGDP if NGDP comes in lower than target (say receives $X) and pays out to those that short NGDP (say paying $Y). $X != $Y (mostly).

  81. Gravatar of ssumner ssumner
    26. January 2012 at 10:29

    RueTheDay, Once you correct the error the tax rate on saving is higher.

    Silas, How do you know it was real GDP? You presented no evidence.

    On the other hand I presented a quotation using “cash terms” which means NGDP.

    Or do you believe “cash terms” means real GDP? I’d be very interested in hearing you make that claim. I might even do a post discussing your “interpretation.” 🙂

    Jason, Investment income of all sorts should never be taxed under any system.

    Manny, I may have misunderstood your comment on interest. I should probably tell all commenters to keep their comments to one paragraph, otherwise it’s easy to misunderstand the point, as it forces me to read so much information that I often have trouble seeing the essence of the argument.

    I do understand that you followed the general practice of equating Model” with “mathematical model” but it’s a really bad practice. Still, I know I’ll lose that debate with my colleagues.

  82. Gravatar of Income and Consumption: It’s OK to Be Different Income and Consumption: It’s OK to Be Different
    27. January 2012 at 21:42

    […] one topic) have lately been hitting their familiar theme of the evils of income taxation. (1, 2, 3) Of course, I totally agree that the government shouldn’t be taxing people’s income, […]

  83. Gravatar of interfluidity » Haitao Zhang’s macro stabilization proposal interfluidity » Haitao Zhang’s macro stabilization proposal
    31. January 2012 at 18:40

    […] Scott Sumner, the Timothy Leary of NGDP targeting, seems to have endorsed the Abbott paper. If so, there is a lot less daylight than I thought between his views and my own. […]

  84. Gravatar of interfluidity » Because the stakes are so small? interfluidity » Because the stakes are so small?
    8. April 2012 at 15:19

    […] payroll taxes as a fiscal lever (albeit with different rationales). The monetarist Scott Sumner has endorsed a proposal to use sales-tax surcharges and rebates as a supplement to monetary policy. We might […]

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