You can’t please anybody

If you advocate the complete abolition of all personal income taxes, corporate income taxes, and inheritance taxes, the left will think you are beyond the pale.  If you then suggest that 80% MTRs on the consumption of the ultra-rich might be appropriate, the right won’t be happy.  Let me just offer a few observations:

1.  Some on the left argue that consumption taxes will favor the ultra-rich because they consume a very small share of their income.  But if that’s so, then no tax regime will put much of a tax burden on the ultra-rich.  Just as you can’t squeeze blood from a stone, you can’t put a tax burden on misers.  As Steven Landsburg pointed out in one of my all time favorite posts, society views misers like Scrooge as being selfish individuals, when actually it’s people who consume a lot who are selfish. Misers leave more for others to consume.

2.  Some conservatives questioned my assumption of very low marginal utility of consumption at very high levels of consumption.  I find it completely implausible that ultra-rich get significant marginal utility from extra consumption, apart from the satisfaction of doing better than other billionaires.  But note that this sort of “nah-nah, I have a bigger boat than you do” utility would not be at all affected by a tax regime that applied to all billionaires.

Here’s an example.  A billionaire might get a great deal of satisfaction from a 400-foot yacht if his rival billionaire has a 300-foot yacht.  There is data that shows happiness increases all the way up the income scale.  So I do buy that argument.  But I would insist that roughly the same enjoyment would be gained from a 300-foot yacht if his rival had a 200-foot yacht.  If an 80% consumption tax reduces each billionaire’s consumption proportionately, then could it really impact their happiness? Perhaps I’m missing something, but that claim seems preposterous.  That doesn’t mean you necessarily want to go to the very top of the Laffer curve, as there are deadweight losses associated with high MTRs.  But unless I see good empirical evidence that those losses are important in the very, very, very tiny labor market for the ultra-rich, I’ll continue to assume that standard public finance theory plus utilitarian values implies that the MTRs on the consumption of the ultra-rich ought to be fairly high.

Tax burdens occur when people consume less.  That means approximately 100% of all the articles you have ever read in your life on tax progressivity are utter nonsense.   They look at the legal incidence as a share of income, whereas they should look at the economic incidence as a share of consumption.  That’s not one but two huge errors.  I’d encourage people to block out all the noise, and focus on how much the consumption of people will change under different tax regimes.  That’s tax incidence.

3.  The left seems very unhappy with proposals to eliminate all capital taxation, including inheritance taxes.  They seem to view the heirs of the wealthy as being “undeserving.”  I agree about that, but I also think yachts are undeserving, and thus I believe the billionaire who spends a fortune on yachts should be taxed just as highly as a billionaire who gives his fortune to his children.  But that’s just me.

In any case, I sometimes wonder whether the left has a hidden agenda here.  As an analogy, suppose I were crusading for the legalization of pot in Massachusetts.  And suppose that day after day I got hammered by drug warriors, who insisted that pot was a threat to western civilization. Would they be sincere?  Perhaps.  But now suppose that while this was going on all of the countries in Europe did not just allow the smoking of marijuana, they mandated it!!  Residents were forced at gunpoint to smoke pot.  And now let’s suppose that the drug warriors who strongly objected to my “pro-choice” views were completely silent about that outrageous European policy.  Then I might suspect something else is going on.

What does this have to do with taxes, inheritance, and meritocracy?  Consider this article from the Economist:

TO UNDERSTAND one of the gulfs separating the Anglo-Saxon world from continental Europe, consider Warren Buffett’s children. Omaha’s sage investor long ago said he would leave most of his fortune to charity, with more modest sums to his offspring. For Mr Buffett, leaving vast wealth to his children would be “anti-social” in a society that “aspires to be a meritocracy.”

In 26 out of 27 European Union countries, Mr Buffett’s plans would not just be shocking, but illegal. The exception is Britain, or rather England and Wales (Scotland has its own, centuries-old legal system, with a strong continental flavour). In continental Europe a big part of an estate (often around half) is reserved for the surviving children of the deceased and must be equally divided between them. This “forced heirship” makes it impossible to disinherit feckless children (though several countries exclude bequests to “unworthy” children, who have for example murdered a parent or two). Such rules also make it hard to reward the deserving by, say, leaving more to a daughter who gave up a career to care for her ailing parents. Finally, “clawback” laws in many countries stop parents from dodging forced heirship by giving assets away while they are still alive. This applies to gifts made in the last years of life (two years in Austria, ten in Germany), or much longer: in some countries, no time limit applies.

So it’s illegal for a European billionaire to give 70% of his fortune to starving kids in low income countries, because his children “deserve” the money.  And these policies exist in the most “progressive” welfare states on the planet. Now ask yourself how often you’ve heard complaints about these laws from progressives who are terrified by the prospect of wealthy dynasties.  I can hear crickets chirping.

I would love to see an old German billionaire give his entire fortune to the Gates Foundation, and then see the German government have to go to court to try to claw back the money to redirect it to some spoiled kids who spend all their time partying in Ibiza.

What is the real agenda here, if not preventing dynasties?  I’m not sure.  Perhaps the European welfare states fear that altruism to the poorest of the world’s poor would leave less money to tax; less revenue for the world’s most lavish welfare states.  What do you think?  What is the hidden agenda?  Whatever it is, it must be morally repulsive.

PS.  I’d like to congratulate Mark Sadowski on his NGDP forecast of only 0.5% (and minus 1.4% for RGDP).  Yes, the actual number for NGDP was 1.4%, and 0.1% for RGDP.  But the consensus was well over 3%, and around 1.5% for RGDP.   You should have taken a long position in bonds right before the report, as this was the market reaction:

  • Treasuries are seeing a sharp reversal following the soft Q1 GDP (0.1% actual v. 1.0% expected) print.

Mark was too low, but the consensus was too high.  And we didn’t know that Mark nailed the 2013:4 numbers until the revisions came in.  My comment section consistently offers good investment tips.  If Goldman Sachs hired this guy they could recoup his entire salary trading on a single GDP number.

In the blogosphere, Mark is the undisputed King of Data.


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102 Responses to “You can’t please anybody”

  1. Gravatar of foosion foosion
    30. April 2014 at 06:18

    >>you can’t put a tax burden on misers.>>

    Why not? For example, a wealth tax.

    >>Misers leave more for others to consume.>>

    You appear to be assuming production is fixed. For example, there might be a greater than one multiplier on relevant spending.

    >>They seem to view the heirs of the wealthy as being “undeserving.”>>

    Larger issues include concerns about concentrations of political power, moving further towards an aristocracy rather than a meritocracy, that inequality hurts growth, destruction of the middle class, etc.

  2. Gravatar of honeyoak honeyoak
    30. April 2014 at 06:29

    Scott,
    I think that European welfare states (and I include the Scandinavian countries in this) are seeking to maintain social stability rather than limit inequality per se. Extreme income taxes, centralized wage bargaining, kafkazian zoning codes, strong political parties, low immigration and mediocre higher education all serve to make sure that each person is kept in his “place”. The only region that I have been to that escapes the paradigm is Berlin. As far as causes, I suspect that it has something to do with WW2.

  3. Gravatar of benjamin cole benjamin cole
    30. April 2014 at 06:30

    Excellent blogging.
    Tax consumption, pollution, gasoline, and maybe some Pigou. And tax rap music.
    Goldman Sachs should hire Mark Sadowski, or they can hire me and I will talk to Mark and tell them what he said. I need some work too.

  4. Gravatar of Chase Chase
    30. April 2014 at 06:34

    I would agree you are never going to have a tax system that meets everyone’s expectations. I am left of center and would not be entirely opposed to a consumption tax, even if it weren’t logistically challenging. However, I still think a very high inheritance tax is necessary. Also, I have not looked up the forced inheritance policies you cite, but it would be good to confirm that it was the progressive portion of the country that enacted that before blaming the progressives. To many other countries we may have a progressive appearance, but they would be inaccurate to suggest that it is the progressives within our country responsible for the lower than desired (to the left) inheritance tax.

    One of my hesitations about a substantially progressive consumption tax is one of product substitution. It will be argued that lower income due to any type of tax will cause a consumer to choose the lowest cost product that meets their needs when considering daily consumption purchases. However, I fear the effect will be amplified if a similar product of higher quality or higher purposeful cost inputs (i.e. sustainable farming) are now even more relatively expensive simply because they cost more to make. Possibly getting rid of capital taxes or whatever proposal you would make might alleviate some of this, but I suspect it wouldn’t mask all of it. Obviously this effect might be small when thinking of purchasing organic apples, but consider the purchase of a Tesla relative to a comparable combustion vehicle. Again, without working through it completely I don’t know for sure but that is one hesitation I would have.

  5. Gravatar of Ryan P Ryan P
    30. April 2014 at 06:37

    I don’t follow a couple of the steps you make here: “I’ll continue to assume that standard public finance theory plus utilitarian values implies that the MTRs on the consumption of the ultra-rich ought to be fairly high.” For starters, modern public finance theory, which starts with utilitarian values plus maybe some extra egalitarianism, often gets the (admittedly very local) result of a zero MTR at the very tippy-top. For that matter, look at Mirrlees’s seminal 1971 paper on the optimal income tax (no saving in the model so that’s the same as a consumption tax): asymptotically, he puts zero weight on the utility of the richest person but he still often gets essentialy a linear tax schedule with a slightly negative slope. Saez (2001) famously got a strongly U-shaped schedule, but (a) that’s mainly generated by his assuming a much fatter right tail of income than did Mirrlees, and (b) he still imposes the highest rates at the very bottom of the distribution.

    So I’m not really following. I get why you’d think a high redistributive or utilitarian preference would get you high MTRs, but it doesn’t follow they’re strongly progressive. And certainly it would take an unusual model to get MTRs that are optimally progressive for the entire distribution — U-shapes, sure, but not ever-increasing.

  6. Gravatar of Luis Enrique Luis Enrique
    30. April 2014 at 06:52

    You raise some interesting questions. Is there another reason to object to inheritance?

    Suppose we live in a zero sum world with fixed output. Some people have managed to get their hands on enough money to purchase a large share of annual output for a large number of years through luck and skulduggery. We the people object to the injustice! However in practise there’s a limit to how much stuff anybody can consume in one life time. So if we prevent inheritances, we limit the quantity of output that is (unfairly) consumed by a few at the expense of the masses.

    If returns on wealth are sufficiently high, suppose an individual has amassed enough money to purchase 10% of annual output in perpetuity. If they can simply pass this on to their heirs, then only 90% of output is available to everybody else, in perpetuity.

    of course for the sake of argument I have assumed a lot of things that are not true, but the important elements could well be important enough in reality to provide a reasonable basis for objecting to inherited wealth.

  7. Gravatar of Jason Jason
    30. April 2014 at 07:04

    As a side note: the reason the Carolingian Renaissance collapsed was because Charlemagne’s empire was split equally among his three sons (France, Germany and the part in between). There is a theory that essentially France and Germany have been at war off and on for the next thousand years plus because of that.

  8. Gravatar of Anand Anand
    30. April 2014 at 07:14

    1. I don’t see any hidden agenda. But perhaps that is just a blind spot.

    The paragraph from the Economist is the more plausible explanation for the law than any “hidden agenda”. How many people are really like Warren Buffet, giving all (or most) of their wealth to the poor? Should we be making laws to cover the most unrepresentative of cases? And I have 0 information about “clawback” rules, but are those gifts really to the poor or just a way to dodge taxes?

    2. There is another angle through which I see this issue, which I made in an earlier post. Regarding “charity”. Suppose, a high-income person is taxed and therefore reduces charity on a one-for-one basis. And suppose the extra revenue to the government is all spent.

    Then the private whim of the charity giver has been replaced by whatever the govt. wants to spend the money on.

    Is that a bad thing? Should the private whim of the charity giver be given more importance than the actions of a theoretically democratic govt.?

    Perhaps this is the “hidden agenda” you speak of in your post. To me the second principle is more compelling than the first.

  9. Gravatar of TallDave TallDave
    30. April 2014 at 07:16

    BTW note that economists largely blame the severe winter for the slowdown… and the raw data agrees, but NOAA is saying the winter was average (34th), because they subtract a couple degrees from older temperatures. In fact they claim 2009 was colder, which is somewhat bizarre.

    So it’s time to start asking who you believe, global warming activists or economists (and your lyin’ eyes).

  10. Gravatar of babar babar
    30. April 2014 at 07:22

    why, again, is giving money to my children not a form of consumption, in which case it should be taxed?

    ie why should gifts not be taxed, and specifically why should gifts to children not be taxed. if i give my money to someone in return for a service or good, you don’t have trouble with it being taxed. it’s a consumption tax. but if i give money for no service or good, why do you have a problem with that tax?

    unless you are saying that i shouldn’t have to pay tax on stuff i buy from my kids somehow.

  11. Gravatar of TallDave TallDave
    30. April 2014 at 07:23

    2. Some conservatives questioned my assumption of very low marginal utility of consumption at very high levels of consumption.

    I can’t believe anyone seriously argues this. Spend a couple weeks scrounging for food, shelter and heat in a Third World country, and then try to claim the first thousand dollars per annum of consumption doesn’t have more utility than the next billion. Don’t they teach Maslow anymore? This is basic psychology.

  12. Gravatar of Steve Steve
    30. April 2014 at 07:39

    “They look at the legal incidence as a share of income, whereas they should look at the economic incidence as a share of consumption.”

    My cash taxes are 500% of my consumption…

  13. Gravatar of TallDave TallDave
    30. April 2014 at 07:42

    Larger issues include concerns about concentrations of political power, moving further towards an aristocracy rather than a meritocracy, that inequality hurts growth, destruction of the middle class, etc.

    Political power is distributed by how people choose to vote, less flat income distributions result from greater meritocracy, coercing a flatter distribution leads to less growth, and the “destruction of the middle class” is a very tired meme.

  14. Gravatar of John Hall John Hall
    30. April 2014 at 08:12

    One nit-pick to an otherwise great post. On the yacht point, it might be better to compare dollar values, e.g. a $100mn yacht to a $50mn yacht versus a $50mn yacht to a $25mn yacht. There might be more to high-end yachts than can be expressed just by length.

  15. Gravatar of Morgan Warstler Morgan Warstler
    30. April 2014 at 08:23

    All such good stuff.

    Rich children are poodles. A piece of meat. A whore. They are luxuries. Objects bought and paid for another person’s joy. It always freaks me out when liberals talk about what children inherit as if conservatives think the children are owed it by divine right.

    Inheritance is a luxury for the giver. What the receiver gets out of it, is literally of no issue. It is NOT a payment for having your parents look at you like you owe them everything, for them feeling good about themselves while you get nannied or anything else.

    You and your prize are a side effect, nothing more. You happened because someone else paid the price because they want to see it happen.

    You hit the lottery. A lottery crafted by your parents. Everyone has an equal chance to hit the lottery. And the prize money has already been taxed.

    Scott, I’d suspect the morally repugnant issue of heirdom has to to with the incidence of large families historically & the notion of land estates as working corporations. Taxing the corporation out of existence, making the family sell all the land to pay the tax, must have had some provable inefficiencies.

  16. Gravatar of Peter K. Peter K.
    30. April 2014 at 08:24

    Sadowski is the king of data.

    I’d like to back to the tax regime we had in the post-war years of the 1940s-60s. And the tight financial regulations we had back then.

    There weren’t as many bubbles or epic financial crises. And the middle class was created. Of course other things were going on, like the baby boom, etc.

    The problem is of course global arbitrage and tax havens which is why Piketty proposes a global wealth tax.

  17. Gravatar of foosion foosion
    30. April 2014 at 08:33

    >>Political power is distributed by how people choose to vote>>

    You might want to look into the extensive political science research into the responsiveness of the political process varying according to income/wealth. Also structural issues such as distribution of representatives by geography, gerrymandering, the recent spate of targeted voting restrictions. For example, millions more voted for Democratic reps, yet a majority of the House is Republican.

    >>less flat income distributions result from greater meritocracy, >>

    With government heavily tilting the playing field, such as trade policy (competition for many low wage workers, insulation for doctors and lawyers), monetary policy which can favor creditors or debtors, intellectual property laws (duration and extent are policy choices, more restrictive favor holders over consumers), too big to fail guarantees.

    >>coercing a flatter distribution leads to less growth>>

    Certainly not clear under the present circumstances.

    Does coercing a steeper distribution lead to more growth? Policy has a tremendous impact of distribution.

    >>and the “destruction of the middle class” is a very tired meme.>>

    A video with Drew Carey? Seriously?

    Look at real wage growth at the median over the past few decades compared to growth at the upper 0.1%.

  18. Gravatar of TravisV TravisV
    30. April 2014 at 08:39

    Prof. Sumner,

    Re: the latest Supreme Court Ruling on the environment, do you agree with Roberts’s ruling or Scalia’s ruling? Here’s Scalia:

    http://wallstcheatsheet.com/politics/obamas-coal-policy-gets-big-pat-on-the-back-from-supreme-court.html/?a=viewall

    “The ‘from each according to its ability’ approach requires the unwieldy field examination of many pollution-producing sources with many sorts of equipment,” said Scalia, stating that he had full confidence in the EPA’s experts ability to deal with the quantitative side of the statute.

  19. Gravatar of Neil Neil
    30. April 2014 at 08:42

    The bond market surprisingly seems to be focusing more on the weak GDP number instead of a stronger ADP and Chicago PMI, both of which are April data points. Industrial production grew 4.4% SAAR in Q1 while aggregate payrolls were 4.5%.

    Treasury bond bulls seem to want it both ways. First, we’re told to ignore the FOMC’s dots plot. But now they want us to pay attention to the central tendency forecasts. Why does one matter and not the other? The dots plot sent a hawkish signal that Yellen had to walk back and the FOMC is on pace to miss on their central tendency given this morning’s GDP data. If the dots are worthless, aren’t the forecasts worthless too?

  20. Gravatar of TallDave TallDave
    30. April 2014 at 08:45

    the responsiveness of the political process varying according to income/wealth.

    Billionaires still get one vote. Any studies dispute that?

    With government heavily tilting the playing field

    A trillion dollars a year in transfer payments.

    A video with Drew Carey? Seriously?

    I don’t think you watched the video, it totally destroys your claim with numerous statistical references.

    Look at real wage growth at the median over the past few decades compared to growth at the upper 0.1%.

    So what? Median living standards are rising. If the .1% is rising faster, that’s because the median economic actor is making that happen. Gee, why do people shop at WalMart? Maybe making the Walton’s rich has benefits to the median economic actor?

  21. Gravatar of Mark A. Sadowski Mark A. Sadowski
    30. April 2014 at 09:06

    “I’d like to congratulate Mark Sadowski on his NGDP forecast of only 0.5% (and minus 1.4% for RGDP). Yes, the actual number for NGDP was 1.4%, and 0.1% for RGDP.”

    Thanks!

    The interesting thing is the only two categories in my nowcast model that performed worse in nominal terms than the BEA’s preliminary estimate are personal consumption expenditures (PCE) and the “change in private inventories”.

    I projected inventories would increase by $47.7 billion when the BEA preliminary estimate shows an increase of $98.4 billion. This alone more than accounts for my NGDP projection coming in $39.8 billion below the BEA preliminary estimate. Inventories are notoriously hard to forecast and are usually subject to huge revisions.

    The only other reason my NGDP nowcast is lower than the BEA preliminary estimate is nominal PCE. According to the BEA preliminary estimate nominal PCE was $11,790.8 billion in 2014Q1 at an annual rate. Since the BEA’s current estimates show that nominal PCE was $11,711.9 billion in January and $11,742.7 billion in February, this implies either that March nominal PCE was $11,917.8 billion, which would represent an increase in nominal PCE of *19.4%* at an annual rate, or there will be *significant upward revisions* in January and February nominal PCE in the BEA’s Personal Income and Outlays Report *tomorrow morning*.

    My RGDP nowcast is derived from my NGDP nowcast and depends on the accuracy of my GDP implicit deflator nowcast. My GDP implicit deflator nowcast in turn depends on my PCEPI nowcast.

    My nowcast for PCEPI was right on the money at 1.4% inflation in 2014Q1 at an annual rate. So how come my GDP implicit price deflator nowcast is so much higher than the BEA preliminary estimate?

    According to the BEA preliminary estimate the deflator for Government Gross Investment and Consumption only rose by 0.6% at an annual rate. This in turn was almost entirely driven by the Government Consumption deflator (government consumption is four fifths of government investment and consumption) which only rose 0.4% at an annual rate.

    In the last ten years the Government Consumption deflator has risen at a 3.0% annual rate compared to about 2.0% for the GDP implicit price deflator. Thus it’s unusual for the Government Consumption deflator to underperform the other measures of inflation to such a large degree.

    (Incidentally, government employee compensation is the lion’s share of government consumption, so I imagine that the slow rate of increase in the government consumption deflator may be due to an unusually slow rate of increase in government employee wages.)

    So this, coupled with my underprojection of NGDP relative to the BEA preliminary estimate, explains why my RGDP nowcast was so much lower than the BEA preliminary estimate.

    “You should have taken a long position in bonds right before the report, as this was the market reaction:…”

    The real question is, what will the market reaction be to tomorrow’s BEA Personal Income and Outlays Report? If market participants are aware of what I’ve said in this comment about what is almost certain to be in that report, there should be absolutely none.

    How much do you want to bet there will nevertheless still be a market reaction tomorrow morning?

  22. Gravatar of Brett Brett
    30. April 2014 at 09:18

    @TallDave

    Billionaires still get one vote. Any studies dispute that?

    Most policymaking happens between elections, and that’s where the greater responsiveness to the concerns of the rich on the part of US politicians makes a difference. And of course, if you have to go begging them for donations every election, then at the very least you have to make promises they can later come after you for.

  23. Gravatar of Anthony Anthony
    30. April 2014 at 09:49

    “Hidden Agenda?”

    This seems like a rather conspiratorial conclusion, really… Much more likely is that inequality fighters are focused on the overall goal of inequality reduction in the US, the context in which suggests that inheritance issues are relevant not because they are currently so significant but because they are anticipated to be significant.

    In contrast, one can examine the inequality situation in western European social democratic countries and conclude that aggregate inequality is tame relative to the US (both in magnitude and trend) and thus any specific institutional artifacts that tend to counter that tameness (e.g. forced inheritance) are of low priority because the overall problem is just smaller and not projected to be a major source of increased inequality in the foreseeable term.

    Thus, it seems completely consistent to decry issues that seem proximate and prominent in one context and largely ignore then in a context where they are not material.

    Further, if asked specifically about inheritance issues in these countries, one presumes that inequality fighters would voice a perfectly consistent attitude as in the US. It just doesn’t rise to the level of prominence necessary to generate an unprompted cry.

  24. Gravatar of John Becker John Becker
    30. April 2014 at 10:30

    What’s wrong with a simple head tax? People who know they might have trouble paying can sign up for charity and rich people who complain about not paying enough in taxes can pay other people’s taxes. In addition, everyone knows how much they have to save come tax day. Why make taxes complicated? All the talk about fairness and other stuff misses the point. There is no fair way to rob people so you might as well get it done with simply and quickly.

  25. Gravatar of John Becker John Becker
    30. April 2014 at 10:32

    The other benefit of a head tax is the everyone knows the exact burden of what the government spends. Tax policy should not try to shear the sheep with the least amount of bleating. The taxes have to get paid one way or another and a head tax simply makes this point obvious. Get rid of all other taxes.

  26. Gravatar of TallDave TallDave
    30. April 2014 at 10:45

    Brett,

    And if the voters don’t like anything they’re doing, they can vote for someone else. If the people elect crooks, you can’t really do much about it — ask anyone at the IMF about this and they’ll start yelling and waving their hands in the air.

    A political donation is some combination of an expression of political preference and of seeking favor (often rentseeking). Why do they seek favor? Because the government is very powerful. One should not look at this dynamic and say “we can improve this by making the government more powerful.” We need voters who will vote against rentseeking, whether corporate or personal or union.

    Very corrupt economies are generally very poor economies. Corruption very often takes the form of barriers to entry which prevent new wealth from accumulating. In that respect, increasingly diverse income distributions are a healthy sign — would we be better off without the voluntary transactions that made people Bill Gates, Jeff Bezos, Sam Walton, Jeff Zuckerberg, etc wealthy? Obviously not.

  27. Gravatar of Steven Kopits Steven Kopits
    30. April 2014 at 10:49

    “sharply decreasing marginal utility at high levels of consumption…”

    The function is asymptotic. The highest decrease in marginal utility occurs at the lowest levels of income. Your second dollar of income is worth much less than your first–although both have very high utility in absolute terms.

    On the other hand, the marginal utility of an extra $1 billion to Bill Gates is effectively zero.

    I think that’s what you were trying to say.

    The declining marginal utility of wealth and income is the entire basis of egalitarian theory, no? By definition, social utility is maximized when all members of the group have identical incomes or wealth. That’s an implication of the model, not an opinion.

    However, the model is weak in a number of respects:

    First, it assumes individual preferences are the same or can be adjusted to be materially the same by the redistributor of social resources (why men pay for women’s birth control in Obamacare).

    Second, it ignores incentive effects. (NPR had a touching story of a guy who was able to leave his 5.5 day a week job with $36k per year of pre-existing conditions–all thanks to Obamacare!)

    Third, and most importantly, it is a static analysis. If you start looking at whether welfare is increased by increasing incomes at the bottom (eg, from economic growth) or through redistribution, the growth story often comes out much better. But growth comes from competition, capital accumulation, etc., which are most certainly not egalitarian notions.

    Fourth, true egalitarian redistribution requires a lot of coercion (Obamacare) and it becomes very difficult to enter into a contract, which typically involves trading things of unequal value to the participants (as it is this inequality which serves as the motivation for the trade).

    Fifth, capital accumulation is problematic. If individuals can accumulate wealth, then they will be better off than those who didn’t. So in general, egalitarian societies oppose private capital accumulation. This leaves then state capital accumulation, ie, SOEs. On the other hand, SOEs have no real owners (ie, no profit maximizing incentive) and are used for political purposes. As a result, capital efficiency is poor and over time, the wealth erodes. Think Pemex.

    Sixth, people might decide to complain about the coercion of egalitarianism. This may require the suspension of freedom or the press and speech, and may require that opposition be treated as dissent. Secret police and informers are helpful in ferreting out such nefarious activity. Such a climate may cause people to want to leave the country, which then has to be prevented, or else the system falls apart. Hence the Berlin Wall or Cuba.

    If you want to see this in action, just take a look at Venezuela. You can see the impacts of trying to force egalitarianism in real time.

    To the best of my knowledge, declining marginal utility of wealth and income is not taught as the basis of socialism (but maybe it is, now). There is a reason for that, though. If you use decl. marg utility, you can actually put numbers to that curve, and you can trade off egalitarian policies versus growth policies. I don’t think egalitarians welcome that sort of analysis.

  28. Gravatar of Warren Buffett’s Will Would Be Illegal In Most Of Europe – Forbes | Everyday News Update Warren Buffett’s Will Would Be Illegal In Most Of Europe – Forbes | Everyday News Update
    30. April 2014 at 11:01

    […] Scott Sumner has the post here: […]

  29. Gravatar of TravisV TravisV
    30. April 2014 at 11:06

    Why is the stock market up? Is this tapering news not “surprising” (was fully expected by the market)?

    “The Fed Tapers Again”

    http://www.crossingwallstreet.com/archives/2014/04/the-fed-tapers-again.html

  30. Gravatar of Tom Brown Tom Brown
    30. April 2014 at 11:42

    Mark A. Sadowski, congratulations on your forecast (that Sumner mentions above).

    O/T. Remember when you wrote
    this:

    “Every Econ 102 textbook I’ve ever seen teaches the money multiplier is a function of three variables. The currency ratio is always portrayed as the depositors’ choice, the reserve ratio (above required, if any) is always the lenders’ choice, and the total amount of currency and reserves (the monetary base) is the central bank’s choice (even if supplied through the discount window), and all are dependent on the conduct of monetary policy by the central bank.”

    Reading through Mishkin’s 7th edition, I notice he mentions a fourth party which determines the money stock: borrowers.
    This is not inconsistent with what you wrote, I just was happy to see that he did include them. At the time we had a discussion about that.

    Right at the beginning of Chapter 15 (page 357) in a section entitled:

    “Four Players in the Money Supply Process”
    He writes:

    “The “cast of characters” in the money supply story is as follows:

    1. The central bank—the government agency that oversees the banking system and is responsible for the conduct of monetary policy; in the United States, it is called the Federal Reserve System

    2. Banks (depository institutions)—the financial intermediaries that accept deposits from individuals and institutions and make loans: commercial banks, savings and loan associations, mutual savings banks, and credit unions

    3. Depositors—individuals and institutions that hold deposits in banks

    4. Borrowers from banks—individuals and institutions that borrow from the depository institutions and institutions that issue bonds that are
    purchased by the depository institutions”

    He mentions these four and each of their roles in determining the stock of money again in (at least) the following additional places:

    Chapter 15, page 371, Chapter 16, page 383, Chapter 16, page 391

  31. Gravatar of james in london james in london
    30. April 2014 at 11:42

    TravisV: The bond markets didn’t like the GDP numbers, and yields fell fearing a slowdown in growth. And now they don’t like the extended tapering either, especially in light of the earlier piece of news. It shows a bit of an insensitivity on the part of the Fed, at the margin.

    And, fascinatingly, Treasury prices have risen on a day the Fed announces less buying. One up for Scott as the liquidity affect gets trumped by the Fisher effect.

  32. Gravatar of Jim Glass Jim Glass
    30. April 2014 at 11:45

    “Billionaires still get one vote. Any studies dispute that?”
    ~
    … if you have to go begging them for donations every election, then at the very least you have to make promises they can later come after you for.

    When money passes to politicians, how does one tell of it is the result of “begging” by them, or the bribing of them, or extortion committed *by* them?

    In any event, empirical studies show again and again that all the “giving to politicians” is a lot less significant than so much by way of popular assumptions and class warrior claims would have us believe. E.g. …

    Why Is There So Little Money in US Politics?

    http://www.nber.org/papers/w9409.pdf

    Possibly because the influences of campaign contributions on legislative actions, and of campaign spending on election outcomes, are both a lot *smaller* than most people imagine.

    http://www.cfinst.org/pdf/papers/02_Powell_Influence.pdf

    http://www.realclearpolitics.com/articles/2013/11/14/is_the_value_of_campaign_spending_overstated_120667.html

    A visiting Martian looking at US politics would pretty clearly say “the upper middle class rules”, as it combines both the bulk of votes and of motivated voters and of money. Just as per Director’s Law and also the Median Voter Theorem.

    As factual evidence see Medicare, Social Security, etc, and their unfunded $100 trillion+ plus liability, and the list of all the biggest “tax expenditures” in the tax code — home mortgage deduction, tax favored treatment for employee medical benefits, tax favored treatment for retirement savings, etc etc — all of which are massively valuable economically (and as vote buyers) to the middle class, while of little to no value to “the rich” who often are explicitly means tested out of them entirely (much less to ‘billionaires’!) . Then add Pell Grants, low-rate student loans, and the rest of the list of middle class entitlements that runs down one’s arm.

    That shows who rules in US politics.

    (Though crying “We’re being raped by the super-rich rentiers and robbed by the lazy welfare-collecting poor, it’s finally time to give more to *us* as a fair shake!”, is of course among the political ploys they use to do so.)

  33. Gravatar of Morgan Warstler Morgan Warstler
    30. April 2014 at 12:20

    Jim, this is without a doubt the biggest hidden truth in politics:

    “A visiting Martian looking at US politics would pretty clearly say “the upper middle class rules”, as it combines both the bulk of votes and of motivated voters and of money. Just as per “Director’s Law and also the Median Voter Theorem.”

    The crazy thing is if everyone just admitted it, accepted it as fact, we could immediately get real policy changes that crushed the oligarchs.

    The burp in the system is the temporary agency of public sector labor unions who work in conjunction with Oligarchs, to craft a binary game narrative:

    https://medium.com/p/ff7e5e1c4f7

    Technology will solve this… by dramatically reducing the # of public sector employees.

    But it would be nice if someone on the left was truly populist and and spoke to the bottom 2/3 about how to truly beat the oligarchs.

  34. Gravatar of Kevin Erdmann Kevin Erdmann
    30. April 2014 at 12:35

    Holding forth against “the rich” is a positional good. I think it’s gotten quite a bit out of hand. The notion that income or wealth are overwhelmingly from rents, or that the Great Recession was some kind of boon to the finance industry, are wielded with an increasingly tenuous connection to any sort of reality.
    There are lots of reports of witchcraft sightings around Salem these days. How often do we hear calls for vaguely identified bankers to be tried and jailed because “The bankers did this to us.”? The “rich” are causing tribulations, but they are untouched because they got “bailouts”, and they’ve got powerful magic that keeps their capital from being impaired. The evidence is modernized. Instead of seeing apparitions, we see graphs that show that “95% of the gains since March of 2009 have gone to the top 1%” or some such.

    Public spending is somewhere around $50,000 per household. This isn’t about public funding. It’s about taking.
    http://www.overcomingbias.com/2007/02/unequal_inequal.html

    If the real target was rent-seeking, you’d think the proposed solutions would target rent-seeking. But, it’s about factionalism. Rent seeking is a source of power for political factions, and taking is a demonstration of power.

  35. Gravatar of Warren Buffett’s Will Would Be Illegal In Most Of Europe – Forbes | Trending News | Latest News | Online News | Reliable News| Fast News At Reliablenewsupdate.com Warren Buffett’s Will Would Be Illegal In Most Of Europe – Forbes | Trending News | Latest News | Online News | Reliable News| Fast News At Reliablenewsupdate.com
    30. April 2014 at 12:37

    […] Scott Sumner has the post here: […]

  36. Gravatar of o. nate o. nate
    30. April 2014 at 12:55

    Continuing on the thought-experiment about implementation of a progressive consumption tax as income minus savings: It seems that in this approach, it also be appropriate to count borrowing as income and repayment as saving. This is in contrast to the current treatment of borrowing (not taxed as income).

  37. Gravatar of SkepticalOfPsychics SkepticalOfPsychics
    30. April 2014 at 13:00

    I’m less confident in this case, but I think my concerns with utilitarian assumptions actually matter here too. Given two rich people (Spender and Miser) who only (and I mean only in the ceteris paribus sense) differ is tastes so that:

    – Spender spends his marginal million on a boat
    – Miser saves his marginal million

    How do we conclude that Spender is getting more marginal utility from his marginal million and thus needs to pay taxes as a result of buying that boat? Wouldn’t typical utility assumptions lead you to conclude that both are getting equal marginal utility out of their income, differing only in the mix of allocation? If both are getting equal marginal utility, shouldn’t they bear the same tax burden?

    ===

    Of course consumption taxes differ only trivially unless the Miser gives more away (either to family or non-profits), but this seems the obvious interpretation of the facts. And this case raises seemingly counter-intuitive conclusions:

    – The utilitarian approach is to tax the lowest marginal utility dollars.
    – In a consumption tax scheme, the receiver spends the gift and pays the tax at their marginal consumption tax rate. If the income were earned, this would be the only utility generated so the tax rate would be “properly calibrated”.
    – However, the Miser has also obtained utility from the gift (or he would have consumed that dollar) so the total utility is actually higher than the marginal utility for the consumer. It seems to follow that we would prefer a lower tax incidence on the marginal dollar… so we should actually subsidize gifts from rich (even if they’re family?).
    – Note that the subsidy is unrelated to the wealth of the recipient (assuming the consumption taxes are correctly calibrated). The utility that is not correctly accounted for is the utility of the miser so optimal policy is (strangely?) indifferent to the wealth of the recipient.

    Am I missing something? If not (and you’re purportedly committed to maximum utilitarian good), would you accept the conclusion that we should subsidize gifts (even if the gift is to a family member)?

  38. Gravatar of Tom Brown Tom Brown
    30. April 2014 at 13:40

    Scott, O/T, I found a link to this CATO senior fellow written article on Beckworth’s:

    http://news.investors.com/ibd-editorials-brain-trust/041614-697445-feds-powers-to-control-the-economy-are-overated.htm?ntt=fed%20can%20print%20mney%20but%20it%20can%27t%20print%20jobs

    reposted here:
    http://www.cato.org/publications/commentary/fed-can-print-money-it-cant-print-jobs

    I thought I’d find a lot of comments disputing Reynolds from MMists on the IBD version, but not really. Why’s that?

    Beckworth’s piece is here:
    http://macromarketmusings.blogspot.com/2014/04/the-cato-institute-and-ngdp-targeting.html

  39. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    30. April 2014 at 13:50

    From the country that put Sophia Loren in jail (Cads!);

    http://www.corriere.it/english/14_aprile_22/tax-assessment-mechanism-place-df66af02-ca17-11e3-8cc9-41ed99739e20.shtml

    ‘Jewellery, cars, luxury items and furniture purchases are about to come under scrutiny. Over the next few days, the tax authorities will find out whether you bought any luxury items last year. If your declared income is incompatible with the purchase, they will want to know why. Today marks the first of the deadlines for the spesometro, the mechanism used by tax offices to profile taxpayers’ actual income from purchases of €3,600 or more made during 2013.’

    Also the birthplace of fascism.

  40. Gravatar of Doug M Doug M
    30. April 2014 at 13:55

    o. nate,
    “It also be appropriate to count borrowing as income and repayment as saving. This is in contrast to the current treatment of borrowing (not taxed as income).”

    Certainly that would fit for “consumer debt” i.e. credit cards. I haven’t gotten my head around mortgage debt.

    Would a house be consumption or savings? Is a house a luxury or an investment? To the second question, I say to some degree it is both. Which makes me think that the same answer applies to the first question. Would that consumption tax be front loaded at the time of purchase? Or, would it be spread across 30+ years, because that is the life of the asset?

    Vacation property?

    How about home improvements? Is it consumption if you upgrade the kitchen of the house you live in? but, savings if it is your intention to sell the house, where it will be reflected in a higher home value and be the buyer’s consumption?

  41. Gravatar of ssumner ssumner
    30. April 2014 at 14:04

    Foosion, You said;

    “Why not? For example, a wealth tax.”

    The burden doesn’t fall on the miser, it falls on the person or persons who would have consumed the miser’s wealth.

    Your other arguments are not really internally consistent. If you really want to encourage rich people to spend money on yachts so that their kids don’t get the money (aristocracy), then you slow growth, you don’t speed it up.

    And I’d say there is almost no prospect at all of the American middle class being “destroyed.”

    honeyoak. Maybe, but I’m not sure how preventing billionaires from giving money to charity does that.

    Chase, I strongly support environmental taxes where there are externalities. That would help Tesla (assuming the electicity costs are not too high.)

    Ryan, Good point, and I admit that I forgot the intuition behind the zero rate at the very top. Do you recall? I tend to favor a U-shaped pattern, with somewhat higher implicit MTRs at the bottom than middle, resulting from the phaseout of low wage subisidies. And then high rates at the top. But my claim was too sweeping, you are right that there are diverse models. I suppose it also depends on the assumptions about utility functions. I believe they drop off extremely sharply after middle class incomes. Indeed between a million and a billion per year, it’s hard for me to believe there is any significant difference in happiness. (Again, other than in terms of feeling good because you make more than the next guy, which isn’t an issue in taxation.)

    Luis, In the previous post I mentioned that we should not throw in the towel, and assume we can be no less corrupt than Russia, but rather try to reduce rent seeking.

    Jason, Interesting.

    Anand, You said;

    “Should the private whim of the charity giver be given more importance than the actions of a theoretically democratic govt.?”

    Absolutely. People who do give away most of their fortune (Gates Buffett, etc) tend to give it to the poorest of the poor. Governments tend to give money to military dictators to buy weapons. There are massive diseconomies of scale in spending money to help people. Individuals are far more effective than massive governments.

    babar, I’m saying it shouldn’t be taxed more heavily than buying a yacht.

    Everyone, Very busy now, I’ll do more responses later.

  42. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    30. April 2014 at 14:07

    Speaking of Landsburg, one of his more formidable commenters is trying to reduce HIS consumption;

    http://www.thebigquestions.com/2014/04/21/high-frequency-rentseeking/#comment-145444

    ‘So, I propose we settle it this way: If you think you’re so smart, I’m going to offer you the opportunity to get richer.
    I will make two separate bets totaling up to $150,000….’

  43. Gravatar of Warren Buffett’s Will Would Be Illegal In Most Of Europe – Forbes | News Station Online Warren Buffett’s Will Would Be Illegal In Most Of Europe – Forbes | News Station Online
    30. April 2014 at 15:54

    […] Scott Sumner has the post here: […]

  44. Gravatar of Michael Byrnes Michael Byrnes
    30. April 2014 at 16:35

    Kevin Erdmann wrote:

    “If the real target was rent-seeking, you’d think the proposed solutions would target rent-seeking. But, it’s about factionalism. Rent seeking is a source of power for political factions, and taking is a demonstration of power.”

    1. You are generalizing.

    2. The case for rent-seeking (as a problem) is this: it goes hand in hand with production! A crime (in this case, claiming a greater share of wealth than one has actually produced) requires motive and opportunity. The “opportunity” is wealth. There’s an obvious limit to how much wealth could be extracted from a society of subsistence farmers – that’s not a constraint in the US today. Real production and wealth are a necessary condition for rent-seeking. So the opportunity is there, what about the motive? That’s easy – people want to have wealth. The question is, is it easier to create wealth or extract it? I think the answer is that it varies, but people will generally tend to choose the shortest distance from point A to point B. As Steve Waldman said, “Incentives to produce are incentives to rig the game!” (http://www.interfluidity.com/v2/5031.html)

    We of course cannot say that it is “all” rent-seeking – it’s not possible to extract wealth that doesn’t exist.

  45. Gravatar of Don Don
    30. April 2014 at 19:21

    I am also a big fan of a wealth tax. I like that it exactly taxes the what people get out of government, capital preservation by rule of law. But the rates have to be trivially low (1%/year) or the system would rapidly be gutted with exclusions/exceptions/loopholes. The US inheritance taxes are completely broken. The rates are so high, that nobody pays at that rate. Did Sam Walton’s kids pay 50% taxes? Nope. Better to take 1% a year than nothing.

    This statement, “the burden doesn’t fall on the miser”, assumes that wealth is static and powerless. I assure you that the wealth represented by Comcast is not static and powerless.

  46. Gravatar of Vivian Darkbloom Vivian Darkbloom
    30. April 2014 at 23:02

    “What is the real agenda here, if not preventing dynasties? ”

    I would suspect that the effect would be to preserve dynasties rather than prevent them, but I also suspect that it what you meant to write.

  47. Gravatar of Luis Enrique Luis Enrique
    1. May 2014 at 00:49

    Scott,

    yes, trying to reduce rent seeking rather than attempt a clumsy partial fix via inheritance taxes is the first based. Although I suspect that you, I, and society at large, may not see eye-to-eye about what constitutes rent seeking. For example, I am inclined to see securing the job of CEO at GE as akin to being appointed Duke of Gloucester by King Henry VIII, as opposed to a reward for doing something that add to the economy pie a sum greater than your remuneration. I’d guess you’d disagree but I could very well be wrong about that. However I suspect we agree that the prospects of doing anything to reduce the titanic incomes enjoyed by top executives and the like are approximately zero, suggesting we need a second-best solution. Like inheritance tax.

  48. Gravatar of Luis Enrique Luis Enrique
    1. May 2014 at 00:49

    duh. first best not first based.

  49. Gravatar of Causk Causk
    1. May 2014 at 01:24

    Concerning the supposed inability of European Billionairs to give away their money:
    At least in the case of Germany thats not the case. You can transfer funds and assets to a “Stiftung” aka foundation. What you cant do is exclude children completely from your will, they are entitled to a minimum percentage of your assets. The rational behind this is to avoid dependancy on the good will of the parents incase of bad family relations. That percentage is much lower than the procedure if there was no will at all. Because there is a tax on inheritage that can scale up to 30% for relatives and up to 50% for everyone else there is a strong incentive to design your will in a way that avoids the taxman. Seeing that the inheritage tax generates, even for a rich country like germany, rather meager revenue, I think its safe to say that gaming the system in a way to minimize your desendants tax burden is very widespread.
    Another point i would love to see discussed more about wealth/inheritage tax is the accounting nightmare that it represents. I convinced its impossible even for a benign and theoreticly well versed lawmaker to come up with a system thats theorectily sound in valuating different asset classes equally. Bonds and stock are easy, but what about small and medium businesses and real estate. The only way to do that without insane amounts of paperwork is a discounted cash flow method or simple income multipliers. But then you are looking at the same thing that you try to get at with the income tax ( at least in germany revenue from real estate, dividends and stock gains are not income tax exempted).

  50. Gravatar of Joseph Joseph
    1. May 2014 at 02:42

    Scot, Ryan, I believe the institution behind the Mirrless result is that if you can identify the highest earner’s income with an income tax, you then reduce the marginal tax rate to zero on all income after that point and induce the highest earner to produce more, but at the same time total tax collected remains the same. That puts the upper tax rate at zero and then he showed that as ability, and hence income, increase the cost of higher MTR increases so you want to lower MTR on high ability/income earners.

    All of this is dependent on your ability distribution though. Without a bounded distribution like a log normal distrubtuion the result falls apart. And technically only one individual should ever actually face a zero MTR. The social welfare function is also kind of important, while the individual one isn’t so much, but most people use a variety of the more “standard” utility function so I don’t know how something like Scott’s nonlinear would fit in.

  51. Gravatar of ThomasH ThomasH
    1. May 2014 at 04:06

    Has anyone asked a European policymaker the rationalle behind disalloing large bequests to charity? Does this apply to gifts in life as well?

  52. Gravatar of ThomasH ThomasH
    1. May 2014 at 04:06

    “allowing” [Sorry]

  53. Gravatar of ssumner ssumner
    1. May 2014 at 04:38

    Peter, If in fact the middle class was created in the 1950s, I very much doubt it had anything to do with regulations banning banks from paying interest on checking accounts. Also, don’t forget that those banking regulations almost destroyed the banking system in the 1970s.

    foosion, You said;

    “Look at real wage growth at the median over the past few decades compared to growth at the upper 0.1%.”

    That data has been discredited. Repeatedly. People really need to stop citing it.

    Travis, I don’t follow that issue.

    Mark, I have to admit that I don’t follow the BEA personal income reports. Anything interesting today?

    Anthony. Sorry, but I don’t find that plausible. These governments can change the rules whenever they like. If 26 out of 27 have not done so, we should conclude there is a reason. And inequality is a hot button issue in Europe, contrary to your claim. They are about to do stupid things (minimum wage in Germany, 75% income tax rates in France) to address the issue, rather than address sensible reforms like bequest restrictions.

    Steven, You said;

    “The declining marginal utility of wealth and income is the entire basis of egalitarian theory, no? By definition, social utility is maximized when all members of the group have identical incomes or wealth. That’s an implication of the model, not an opinion.”

    No, that is not the implication of the model, not even close. That ignores incentives effects, etc.

    I see the rest of your comment understands that—so why make the claim in the first place?

    Skeptical of Psychics, All sorts of assumptions are possible, I think it’s most sensible to conclude that savers get utility from future consumption.

    Charitable deductions are a tough case—I can see arguments both ways.

    Tom, Lack of time. If we attacked every article we disagreed with it would leave no time for new stuff. Are there any issues we have not already rebutted?

    Doug, It probably makes more sense to tax houses on an annual basis, as that picks up home improvement and maintenance.

    Don, Comcast is not a person, and thus cannot absorb the burden of a tax.

    Vivian, I meant the agenda of those who ignore the issue.

    Luis, Obviously I disagree about CEOs, as does the stock market. They are very important.

    Causk, You said;

    “What you cant do is exclude children completely from your will, they are entitled to a minimum percentage of your assets. The rational behind this is to avoid dependancy on the good will of the parents incase of bad family relations.”

    I hope we can all agree that this is an idiotic justification.

    Thanks Joseph, That reminds me why I completely disregarded that implication of the model, it has no practical policy implications.

  54. Gravatar of ssumner ssumner
    1. May 2014 at 04:39

    Thomas, In at least some countries it does.

  55. Gravatar of BRL BRL
    1. May 2014 at 06:11

    I’m just starting to follow this discussion around the desirability of taxing consumption. It honestly is not an issue I had given a lot of thought to before. The logic makes sense to me, in that a tax that does not change consumption is in a sense “not paid” and thus not useful in addressing issues of inequality. However I still am not convinced that a society with huge inequalities of wealth but no inequalities of consumption is desirable. It would seem to me that the power to consume, even if not exercised, would give those with wealth much more say over how such a society was organized, and that they would be likely to organize it for the benefit of themselves (the few) rather than for the many. The benefits they might seek could have to do with deference or directing the types of consumption engaged in than with increasing their own consumption. Does anyone have thoughts on this?

  56. Gravatar of Mark A. Sadowski Mark A. Sadowski
    1. May 2014 at 06:23

    Scott,
    “Mark, I have to admit that I don’t follow the BEA personal income reports. Anything interesting today?”

    Because of the BEA’s preliminary report on 2014Q1 GDP, yesterday I had said that today’s BEA “personal income and outlays report” would show significant upward revisions in PCE.

    And in fact, according to this morning’s report, nominal PCE was revised upward by $6.7 billion in January and by $30.4 billion in February. Thus the nominal growth rates were increased from 2.1% and 3.2% respectively to 2.8% and 5.7% respectively at annual rates.

    Furthermore, March nominal PCE grew by 11.5% at an annual rate. (Prior to yesterday’s GDP report, I had been projecting a 7.5% rate of increase based on the 14.5% annual rate of growth in March retail and food service sales.)

    Despite the fact that this was totally baked into the cake by the BEA preliminary GDP estimate, RTT News is reporting this morning that “U.S. Personal Income And Spending Rise More Than Expected In March”:

    “…Additionally, the Commerce Department said personal spending surged up by 0.9 percent in March following an upwardly revised 0.5 percent increase in February.

    Spending had been expected to increase by about 0.6 percent compared to the 0.3 percent growth originally reported for the previous month.”

    http://www.rttnews.com/2312657/u-s-personal-income-and-spending-rise-more-than-expected-in-march.aspx

    Nevertheless stock futures remained unchanged after the data was released.

    http://online.wsj.com/article/BT-CO-20140501-707912.html

    So evidently the markets are smarter than the financial news reporters.

    I would say this is just one more piece of evidence in support of EMH.

  57. Gravatar of Luis Enrique Luis Enrique
    1. May 2014 at 06:37

    Scott

    The identity of the Duke of Gloucester is very important. He could quickly run the estate into the ground. If estates were valued by a market, no doubt the valuation would react strongly to the new Duke. This doesn’t mean that a riches enjoyed by the Duke compared to the pittance by his serfs reflect the fact that the Duke is a very high productivity individual whose endeavours have enlarged the size of the economic pie by a sum greater than his remuneration. Rather, it reflects the fact that he was put in charge of a huge surplus generating entity and given the power to take a big slice.

  58. Gravatar of Steven Kopits Steven Kopits
    1. May 2014 at 06:42

    Scott -

    From an egalitarian perspective (ie, using a three ideology model, in which egalitarianism is one of them), the underlying justification for redistributing income is indeed the declining marginal utility of wealth and income.

    The entire justification for a progressive taxation system is that the money taken from the higher earners helps spending recipients more than it hurts those taxed. And that’s not a controversial point.

    The critique of the egalitarian (and in many cases, socially conservative) position is as I listed above. But whenever an egalitarian wants to tax the rich, the implicit justification (if it is not pure envy or a fear of money’s distorting effects on individual rights) is, in fact, the declining marginal utility of wealth and income.

  59. Gravatar of Larry Larry
    1. May 2014 at 10:54

    I have some questions about a consumption based system:

    1. If I buy a home, do I pay a consumption tax? And is the basis my income or the value of the home?
    2. If I buy a used home or a used anything, do I pay a consumption tax?
    3. If I buy a company, do I pay a consumption tax?
    4. If I make copper wire and buy copper ore from a mining company, do I pay a consumption tax?
    5. If a consumption tax were to go forward, and it certainly has some advantages, how much tax would I pay for groceries? If I buy one chicken for $8, would I be taxed? If I bought 4 chickens at Costco for $30, would I be taxed?
    6. What would be the estimated tax rate on consumption, however defined, to replace the income tax?

    Or in other words, is this more than just an empty intellectual exercise, or is this for real?

  60. Gravatar of Joel Aaron Freeman Joel Aaron Freeman
    1. May 2014 at 11:21

    Luis, how do you know that the Duke’s productivity doesn’t justify his remuneration? Maybe the Duke is the cousin of the neighboring Emperor. Maybe the Duke visits the neighboring Emperor, curries favor, and dissuades the Emperor from invading and annexing the Duke’s realm. Not being invaded by a raping & pillaging Empire is a substantial benefit for the peasants.

    Let’s suppose that the Duke’s job is indeed not particularly hard, and that anyone can do it, and the Duke is taking 50% of the land surplus. In that case, if I’m a serf, I might say to my brethren that I could replace the Duke, and I promise that, if I gain power, I will only take 10% of surplus, distributing the rest. So then we put an arrow in the back of the Duke, and I become to new Duke, and I distribute the remaining 40% to everyone. Problem solved. And if I’m lying about being generous, I’m soon to get an arrow in my back as well.

    If the Duke/CEO is genuinely that useless, then it should be very easy to find someone will do the same job with equal skill for a tenth of the pay. So that’s the ultimate question: why don’t the shareholders hire a CEO for $1 million instead of for $10 million? Why do the shareholders consciously choose to forego $9 million in dividends?

  61. Gravatar of Larry Larry
    1. May 2014 at 11:22

    Still puzzling about “asset” purchases that offer substantial consumption value and how you measure the latter.

    If you rent, the rent goes into the consumption bucket. If you buy the condo you were renting for cash, that part of your “consumption” goes to 0.

    You can impute the rent on some basis, or you can treat debt-free asset purchases over a certain size as too few to worry about and just use interest and tax payments for the rest as the proxy. But that lets the plutocrat who lives on his $400M yacht off the hook, right?

  62. Gravatar of Joel Aaron Freeman Joel Aaron Freeman
    1. May 2014 at 11:38

    Steven, you said:

    “The entire justification for a progressive taxation system is that the money taken from the higher earners helps spending recipients more than it hurts those taxed. And that’s not a controversial point.”

    You’re ignoring the social benefit of investment. Suppose a rich man wants to invest in a new farming idea that makes bread cheaper. If the rich man invests and succeeds, he makes bread cheaper for poor people to buy, and the poor are better off. However, if the rich man is taxed and can’t afford the investment, bread is expensive than it would have been. The poor person is now worse off. This tax on the rich man hurt the poor man.

    So you don’t know that redistributing the rich’s income to the poor is genuinely helping the poor. You are letting the poor have more money, but you’re also reducing investment. The question is: what is greater? The benefit to the poor of the rich man’s investment? Or the benefit to the poor via an income transfer?

    Progressive consumption tax takes fully realizes that argument you made about decreasing marginal utility. However, unlike income taxes, it does so WITHOUT harming investment.

  63. Gravatar of Richard Treitel Richard Treitel
    1. May 2014 at 13:04

    As Morgan Warstler hints above, “consumption” just means something different for a billionaire. Take Elon Musk (is he a full-fledged billionaire yet?). He has ploughed a large chunk of his fortune into SpaceX, because he wants to go to Mars. In a few years, SpaceX will sell Elon Musk a ticket to Mars for a measly few million, which you are welcome to tax as consumption, because the real cost of going to Mars is all the money he has ever put into SpaceX, minus any profit he gets out of it. So in an important sense, all that money is consumption, though any accountant would swear that it was investment.

    I forget whether Bill Gates has a yacht. I think he doesn’t want to live on a yacht: he wants to live on a planet where billions of people thank him for making their lives better. He’ll derive more satisfaction from that than from a yacht three miles long. So although it may look as if he’s giving tens of billions away, I say he is consuming them, in the sense of exchanging them for something he wants.

    If I ever make two billion, I’ll give you one, and then you’ll understand.

  64. Gravatar of Steven Kopits Steven Kopits
    1. May 2014 at 13:38

    Joel -

    Most taxes will harm investment; so will a consumption tax. I lived in Hungary with a 25% VAT, and believe me, it motivated a lot of tax-related behavior. For example, I never bought clothes or jewelry or electronics in Hungary. Some businesses just really didn’t exist in Hungary, because people would go to some nearby country to buy the respective goods. There is no free lunch, and that includes a VAT.

    Let me be clear: I am not an egalitarian. However, I am arguing an egalitarian perspective: that redistribution is justified due to declining marginal utility of wealth and income. And ceteris paribus, that’s true.

    Ceteris is not always paribus, and that’s the liberal (libertarian) critique of egalitarianism. I listed several arguments in that regard.

    However, if you accept that declining marginal utility of wealth and income is the economic foundation of egalitarian ideology, then you can actually start to quantify equality versus liberty, with the argument reduced essentially to a time value of money (or discount rate, if you prefer). That would be huge progress compared to where we are now.

    By the way, all the action in inequality is at the low end of the curve. There’s a much bigger difference between a middle class Honduran and their maid than there is between Bill Gates and a senior Microsoft programmer. So increases in income at low levels are much more important–have much greater affect–than reducing the incomes of the wealthy. Progress is about growth, not redistribution.

    I addressed the problems of accumulation of capital (the rich man investing for a good new product) above. So, yes,

  65. Gravatar of Joel Aaron Freeman Joel Aaron Freeman
    1. May 2014 at 14:36

    I understand that you’re not necessarily advocating the policy, but sort-of playing devil’s advocate. Agreed that there’s no free lunch. Agreed that consumption taxes are distortionary.

    I just don’t see how a 25% VAT reduces investment. If I tax yachts, then there’s less investment in new yachting business, but I don’t think this will reduce overall investment. Overall investment is determined by overall savings. If the savings don’t go into yachting businesses, they can go somewhere else. Worst case scenario, if all the entrepreneurs where I live are bumbling morons, I can invest overseas.

    Similarly, if I apply a general 25% VAT, people buy more stuff in other countries, but the only effect of that is to increase the amount of trade. I buy stuff in Austria with Hungarian currency, and then the Austrians use that currency to get other things from Hungary. Where do you see the downside to VAT kick in?

  66. Gravatar of Bill Woolsey Bill Woolsey
    1. May 2014 at 23:32

    Taking 80% of what someone earned because they utilize it in a way you don’t approve is totalitarian.

    If someone earns a very high income, and chooses to “consume” it, rather than save it, stealing it from them is wrong.

    A 80% marginal tax rate generates pretty a very high average tax rates at high levels of consumption.

    That’s OK, we won’t steal all the income you are earning as long as you don’t use it in an unapproved way–any consumption.

    Why? We have decided that your really won’t get any “happiness” from consumption.

    And that is what we do. We determine what will make people happy and only allow them to do things that we believe will substantially increase their happiness.

    Totalitarian.

    As far as I can see, the entire argument is based upon the intuition that no one can have any use for levels of consumption much beyond what _you_ are used to.

    David Friedman once argued that people have some kind of intuition that if they had twice their current income they would have everything they really want. It is because people mostly focus on marginal changes.

    How do you determine the exact schedule of the 80% marginal consumption tax?

    Does Scott Sumner do it? I just can’t believe that spending over $500k gets any added happiness by consuming any more, so I will take 80% of what they earned if they foolishly spend it on consumer goods that really make no contribution to their happiness?

    Or, do you have in mind middle class people funding additional government programs that benefit themselves by taxing other people at high rates?

    Like I said before– awful.

    By the way, I favor a “progressive” consumption tax. Really digressive. A zero rate on the first bit and then a constant rate on everything else. But more like 10% on everything over $20,000.

    But, I am a libertarian and respect individual choice.

  67. Gravatar of Luis Enrique Luis Enrique
    2. May 2014 at 00:57

    Joel,

    thanks for the laugh.

    yes of course Lords in feudal societies must earn their keep otherwise the serfs would simply rise up and replace them!

  68. Gravatar of Steven Kopits Steven Kopits
    2. May 2014 at 03:27

    Let’s take Bill’s example from above, and put a 10% tax (or let’s be Hungarian and put a 25% VAT) on everything over $20,000.

    OK, so let’s apply this to declining marginal utility (DMUWI) of wealth and income, and see what it gives us in terms of social equality.

    Most automobiles cost over $20k, so this would apply to anyone purchasing a new car. That means people with marginal incomes can’t afford a new car, or maybe not a car at all. With DMUWI, the difference between someone without a car to one with is likely much greater than the difference between someone with a new Camry to another with a new Tesla S. So the person being hurt is right at the bottom of the income scale. When I say all the action is at the low end of the utility curve, that’s what I’m saying. When the toll on the GW Bridge is $13, the guy whom it’s crucifying is the minimum wage laborer. It says, you’re not allowed to cross the GW Bridge is who hold a min wage job. That’s terrible. It’s incredibly anti egalitarian.

    But life doesn’t stop there. Why? Because VAT is tax deductible for firms. So all the clever kids will get their own kft, a Hungarian LLC, and lo!, now the VAT is deductible! Except for the dolts who don’t know how to that, like mid pay salaried workers.

    Oh, and if you have a kft, you start looking around for revenues and expenses to run through it: your house, your travel, etc. And your salary, too, because kft profit distributions are not subject sky-high social contributions. So all of sudden you have a two-track economy: fools who live from their salaries, and the clever guys who have their own companies on the side for tax purposes.

    Now, try to find a venture capitalist in Hungary to invest in your company. He’ll say, “But Akos, your reported profits are so low, therefore my valuation is also low.” And then Akos will respond, “Yes, but that’s only for tax purposes. I’m just using it to cheat the government. Join me, and you’ll see I’m a honest partner who can produce profits for you!”

    Now, do you see a problem with that? (True story, by the way.) Do you see how it will affect the structure of industry in the country? Does it give you a sense of why northern Italy is dominated by small family firms?

    It’s all nice and well to argue about 80% tax rates on the rich. But it misses the point. Taxes will ultimately be driven by spending. If the government is spending 32% of GDP in total–as was the case in the last couple of decades in the US–then tax rates don’t have to be extortionate on anyone. And if it’s 28%, then the economy will rock and roll, just as it did under Clinton.

    If the government is spending 57% of GDP, as it is in France, then taxes will be extortionate on everyone. The reality is that you don’t tend to find 25% VAT rates in countries with low government spending. What you see is that high VAT is accompanied by high taxes across the board: high income taxes, high social contributions, etc. And it leads to really impressive levels of tax avoidance and evasion.

    It’s fine to speculate about theoretical taxes on the top 0.1%, but the reality is that these things don’t happen in a vacuum.

  69. Gravatar of Steven Kopits Steven Kopits
    2. May 2014 at 03:42

    My latest on the barrel blog:

    http://blogs.platts.com/2014/05/01/oil-majors-costs-prices/

  70. Gravatar of TravisV TravisV
    2. May 2014 at 08:10

    “There’s An Interesting Theory That Inflation Is Actually Much Hotter Than Official Government Numbers”

    http://www.businessinsider.com/is-the-fed-ignoring-online-retail-in-its-inflation-measure-2014-5

  71. Gravatar of Adam Adam
    2. May 2014 at 08:19

    I’m not sure I see the implicit hidden agenda. I doubt many American liberals are even aware of foreign estate laws (I wasn’t). And its hardly surprising that political conditions are different, even for progressive Europeans.

    But I will say that taxing estates seems like one of the least disruptive and least burdensome means of raising revenue (even though in practice its not very much). It also may be the one way of putting a tax burden on a miser (via his family).

  72. Gravatar of Miser2 Miser2
    2. May 2014 at 10:01

    Everyone obsessed with tax concepts.

    The only way billionaires are generated in the first place is due to corporations. Abolish corporations and presto, you have equal opportunity, low income inequality, and, yes you lose a ton of conveniences but perhaps that is a better long term social construct.

    Considering the large scale demolishing of all natural environments in the name of corporate, meaning shareholder, interests, I’m simply saying: maybe the more useful way to solve social issues is to look at the source if the problem, and forget dealing with the symptoms.

    Not a single billionaire exists today that isn’t essentially a corporate entity.

  73. Gravatar of byomtov byomtov
    2. May 2014 at 12:14

    Tax burdens occur when people consume less. That means approximately 100% of all the articles you have ever read in your life on tax progressivity are utter nonsense. They look at the legal incidence as a share of income, whereas they should look at the economic incidence as a share of consumption. That’s not one but two huge errors. I’d encourage people to block out all the noise, and focus on how much the consumption of people will change under different tax regimes. That’s tax incidence.

    Why? You seem to be equating consumption in the economic sense with utility, and overlooking the fact that savings, or a miser’s hoard, also produce utility. Hence taxing them is a real tax in the sense of reducing the taxpayer’s utility.

    Suppose some non-billionaire non-miser had enough savings to cover his tax bills. Would you really say that, since he can choose to pay without reducing consumption that he is not really taxed?

  74. Gravatar of ssumner ssumner
    2. May 2014 at 17:29

    BRL, The most powerful special interests are not billionaires, but rather large groups within a single industry. Teachers, farmers, taxi drivers, auto dealers, doctors, lawyers, etc, etc.

    Mark, Thanks, looks like the 2nd quarter will be strong (based on today’s jobs figures.)

    Luis, If it matters a lot who runs a company (and you are right that it does) it makes sense for corporations to pay big salaries to try to get the best person.

    Steven, You are attacking a straw man. Only a philosopher would believe in that sort of silly egalitarian model. But at least we agree it’s nonsense!

    Larry, Consumption taxes apply to final consumer goods. The tax on the house could be done a per year basis (we already have that tax.)

    The yacht would clearly be treated as consumption.

    Richard, You said;

    “I think he doesn’t want to live on a yacht: he wants to live on a planet where billions of people thank him for making their lives better. He’ll derive more satisfaction from that than from a yacht three miles long. So although it may look as if he’s giving tens of billions away, I say he is consuming them, in the sense of exchanging them for something he wants.”

    That’s not consumption because no resources are used up when Gates feels good about his impact. For consumption to occur there must be an opportunity cost.

    Bill, You said;

    “Taking 80% of what someone earned because they utilize it in a way you don’t approve is totalitarian.”

    I approve of consumption! But I still want to tax it–because I want to maximize aggregate utility. I just don’t want to double tax future consumption.

    You said;

    “As far as I can see, the entire argument is based upon the intuition that no one can have any use for levels of consumption much beyond what _you_ are used to.”

    Not at all. If that was the case I would have advocated very high MTRs on the rich, not just the ultra-rich.

    And “use” is a vague word. I don’t doubt that people can “use” 500 foot yachts, but I believe they’d enjoy a 400 foot one just as much.

    You said;

    How do you determine the exact schedule of the 80% marginal consumption tax?”

    Like with any other public policy, including NGDPLT–an educated guess.

    You said;

    “I just can’t believe that spending over $500k gets any added happiness by consuming any more, so I will take 80% of what they earned if they foolishly spend it on consumer goods that really make no contribution to their happiness?

    Or, do you have in mind middle class people funding additional government programs that benefit themselves by taxing other people at high rates?

    Like I said before– awful.”

    Glad we agree. I think both of the policies you suggested are awful. Both 80% tax rates on people consuming over $500,000, and policies that would lead to more government spending. They are both awful, just as you said. The question is why did you assume I was proposing such awful policies?

    You said;

    “I am a libertarian and respect individual choice.”

    Me too. I want equal taxes on present and future consumption, not a higher tax rate on future consumption (which is what advocates of income taxes favor.)

    byomtov, Nope, you cannot redistribute “thoughts” Making the miser less happy won’t make anyone else happier. (except Moldovans) Consumption involves opportunity costs. If the miser is not consuming, where to you get the resources to help others? Money is a veil–where are the resources?

  75. Gravatar of Tom Brown Tom Brown
    2. May 2014 at 19:39

    “you cannot redistribute “thoughts””

    Not just yet, but you’ve heard of the recent experiments in uploading false memories into mice? :D

    http://www.washingtonpost.com/blogs/compost/wp/2013/07/29/mit-scientists-implant-memory-in-mouse-brain/

  76. Gravatar of byomtov byomtov
    3. May 2014 at 06:46

    Making the miser less happy won’t make anyone else happier. (except Moldovans) Consumption involves opportunity costs. If the miser is not consuming, where to you get the resources to help others? Money is a veil–where are the resources?

    1. I didn’t know that the definition of a “tax” required that others be made happier. News to me.

    2. Do misers all live in full-employment economies? Is the supply of resources fixed? Are there no idle resources that could be put to more productive use with the miser’s money?

  77. Gravatar of byomtov byomtov
    3. May 2014 at 07:00

    you cannot redistribute “thoughts” Making the miser less happy won’t make anyone else happier.

    Further. Of course you can redistribute thoughts. If you assume that we derive utility from our savings then taking some of the miser’s hoard and redistributing it to others’ savings accounts makes those others happier, doesn’t it?

  78. Gravatar of Steven Kopits Steven Kopits
    3. May 2014 at 13:26

    I was quite serious, Scott.

    At its foundations, egalitarianism (and certain threads of social–compassionate–conservatism) very much derive from the notion of DMUWI.

    What do you think is the economic foundation of egalitarianism?

    If an 80 year-old woman fell down and broke her hip and had no money to pay for surgery, should we leave her on the floor to die in pain? Should her fate be left entirely to voluntary charity? Do you believe this would be adequate? Or would you have government coerce wealthy citizens to contribute part of their income to pay for her care?

    If you agree with the latter policy, on what philosophical basis would you endorse it? Would you endorse a policy which would require a poor, aged women to subsidize the expenses of top 0.1%-ers? (We do this in Princeton, by the way, with our public education system.) Why or why not?

    What is your ideological view of these things?

  79. Gravatar of ssumner ssumner
    4. May 2014 at 06:27

    byomtov, The point of redistribution is to help others. You cannot transfer thoughts. Even if you are right that the tax makes the miser less happy, that doesn’t in any way justify the tax. That was my point.

    Your second argument is based on Keynesian multiplier reasoning, which was discredited long ago.

    Steven, I think we are talking past each other. There are certainly loonies who believe the things that you claim, but that’s not a serious part of the field of economics. I’m talking about actual economic models that justify redistribution, not the musings of philosophers who are untrained in economics.

    You asked:

    “What is your ideological view of these things?”

    I’m a utilitarian.

  80. Gravatar of Steven Kopits Steven Kopits
    6. May 2014 at 03:58

    Scott,

    You’re actually not talking about anything. You’re avoiding the question, not answering it.

  81. Gravatar of Steven Kopits Steven Kopits
    6. May 2014 at 13:19

    As I understand it, a utilitarian would say:

    The utility to me of a woman falling down and breaking her hip is zero. I have no obligation to her and my neighbors may impose no obligation on me, since it has no utility to me. Whatever help is extended should be on a charitable and voluntary basis only.

    That’s utilitarian, I think.

    Very Sherlock.

  82. Gravatar of ssumner ssumner
    6. May 2014 at 17:13

    Steven, You said;

    “As I understand it, a utilitarian would say:

    The utility to me of a woman falling down and breaking her hip is zero. I have no obligation to her and my neighbors may impose no obligation on me, since it has no utility to me. Whatever help is extended should be on a charitable and voluntary basis only.”

    Um, no that isn’t even close to utilitarianism. And before you accuse me of dodging questions you might want to figure out the difference between opposition to taxes and utilitarianism.

    Utilitarianism is the view that public policy should attempt to maximize aggregate utility.

  83. Gravatar of Major_Freedom Major_Freedom
    6. May 2014 at 19:37

    “Utilitarianism is the view that public policy should attempt to maximize aggregate utility.”

    Right, which means, and to Steven’s point, if “enough” people found utility in throwing a woman down a flight of stairs and broke her hip, then because it would increase “aggregate” utility, then according to utilitarian ethics it would be justified to throw the woman down the stairs and breaking her hip!

    Utilitarianism is a silly and naive attempt to replace the utility of a dictator with the utility of “the people”, or “society”, or some other collectivist gobbledygook that rejects individual utility and is willing to sacrifice the individual for the sake of others, who happen to be more numerous and therefore with more rights and privileges. It’s popular in democratic countries like the US.

  84. Gravatar of Steven Kopits Steven Kopits
    7. May 2014 at 05:27

    Aggregate utility as a concept is either a socialist or socially conservative concept. It’s not libertarian (liberal) at all.

    In that view, the individual rights are subordinate to that of the group as a whole.

    But what’s your metric for “aggregate utility”? GDP is not that, because that implies you would be satisfied if one person had all the wealth and income, and everyone else starved. Fixing the woman’s hip isn’t going to increase income–she doesn’t produce anything and is just drawing resources from productive members of society.

    As a result, I think it brings you right back to the declining marginal utility of wealth and income as a starting point, after which we apply all those provisos and considerations which both you and I have noted. No?

  85. Gravatar of Steven Kopits Steven Kopits
    7. May 2014 at 05:40

    Put another way, if we are to measure utility in dollar terms–and I think we have to, if we want it to be a useful concept as a practical matter–then we have to recognize that marginal utility declines with wealth and income.

    You yourself contend that: “Some conservatives questioned my assumption of very low marginal utility of consumption at very high levels of consumption. I find it completely implausible that ultra-rich get significant marginal utility from extra consumption…”

    Therefore, in a static analysis with a population of homogenous individuals (ie, ceteris paribus conditions) identical in all respects except wealth and income, aggregate utility must be highest when all individuals have the same wealth and income. That is the Pareto optimal state. It’s a mathematical proof, not a philosophical statement.

    If you believe in aggregate utility, then that’s your starting point, it seems to me.

  86. Gravatar of ssumner ssumner
    8. May 2014 at 06:08

    Steven, You said;

    “Aggregate utility as a concept is either a socialist or socially conservative concept. It’s not libertarian (liberal) at all.”

    So Bentham and Mill were not liberals?

    I’m neither socialist nor socially conservative, and I know lots of other utilitarians who are neither.

    Utility depends on much more than just dollar income, but even if it was just dollar income you’d be wrong. Utilitarianism does not imply that equal income gives the higher aggregate income, because a society with equal income will have far lower total income, indeed almost no total income at all! So extreme egalitarianism is not an implication of utilitarianism. I happen to think a modest amount of redistribution is an implication, but I also freely admit I may be wrong on that point.

  87. Gravatar of TravisV TravisV
    8. May 2014 at 09:04

    Major_Freedom,

    You wrote:

    “It’s popular in democratic countries like the US.”

    You dislike democracy? What alternative to democracy would you prefer?

  88. Gravatar of Major_Freedom Major_Freedom
    8. May 2014 at 09:45

    “So Bentham and Mill were not liberals?”

    Both Bentham and Mill were more socialist than liberal.

    Bentham’s work became more and more statist over time. He started out as Smithian laissez-faire. He wrote on abolishing usury laws, and advocated for unfettered market competition. He was a devout Ricardian-Smithian on economics. He wrote thst government could not bring about am increase in supply of capital, but could only redirect it to less valuable uses. He also countered the mercantilist dogma: “Why should the mere increase of money have any other effect than to lower its value?…How would it cause any increase in the production of commodities…Money cannot call forth goods…but goods can call for the money.”

    But his utilitarianism was a poison that slowly festered in his mind. Utilitarianism after all allows the gates to swing wide open into statism. In an almost afterthought, in one of his books he included in a sort of appendix the loony germ of inflationism. He wrote that government paper money can increase the supply of capital if resources were not “fully employed.” As is canon in inflationist circles, there is always a conspicuous absence of any analysis for WHY those resources were not employed in the first place.

    Of course, the answer must be that they are asking for too high of prices. Inflation is a means of fooling resource owners into asking for a lower real price.

    Bentham’s insanity went ever deeper. He then advocated for government to not just float bonds and variable rates, but impose a monopoly of paper notes. This would enable the government to borrow interest free. In response to challenges for just how many notes should be issued, he replied “the amount of paper currency in the country.” In other word’s, the sky is the limit.

    He then wrote:

    “No addition is ever made to the quantity of labour in any place,but by an addition made to the quantity of money in that place…In this point of view, then, money, it should seem, is the cause,and the cause sine qua non,of labour and general wealth.”

    So much for his Smithianism!

    By the end, he totally reversed course, on ad hoc utilitarian grounds, on usury laws, and wrote that usury laws were good after all, since it allowed the government to borrow at lower rates. How is this justified you ask? He said the benefits to government outweigh any private benefits otherwise:

    “I should expect to find the advantages of it in this respect predominate over its disadvantages in all others.”

    Bentham, the alleged ‘individualist’ and exponent of laissez-faire, finds that advantage to government outweighs all private disadvantage!

    And, he even wrote to government to impose price controls on bread. Why? Because the mass of people would just love that of course! Then there would be a “rational” and “determinate standard” for the good and moral price of bread.

    Utlitarian insanity.

    Bentham then wrote a diatribe against laissez-faire.

    “I have not, I never had, nor shall have, any horror, sentimental or anarchical, of the hand of government. I leave it to Adam Smith, and the champions of the rights of man…to talk of invasions of natural liberty, and to give as a special argument against this or that law, an argument the effect of which would be to put a negative upon all laws. The interference of government, as often as in my jumbled view of the matter the smallest balance on the side of advantage is the result, is an event I witness with altogether as much satisfaction as I should its forbearance, and with much more than I should its negligence.”

    Sumner, you are going down the same utilitarian slippery slope that Bentham did.

  89. Gravatar of Major_Freedom Major_Freedom
    8. May 2014 at 11:05

    TravisV:

    “You dislike democracy? What alternative to democracy would you prefer?”

    What I had in mind with my comment is the prevalence for democratic thinking to spill over into ethics and even science.

    On a side note, to answer your questions:

    1. Yes.

    2. Private law society.

    I dislike democracy being violently imposed on people against their consent. I am perfectly fine with people consenting to subject themselves to the whims of half a group of people plus one. Just don’t foist it on those who own land that they do not want to offer up as subject to majority dictat.

    Democracy is 2 wolves and a sheep voting on what’s for dinner.

  90. Gravatar of TravisV TravisV
    8. May 2014 at 12:23

    Major_Freedom,

    For some reason, in the real world, nothing remotely close to your ideal “private law society” arrangement has ever emerged. Meanwhile, democracy has thrived and, along with it, living standards have flourished……

  91. Gravatar of Major_Freedom Major_Freedom
    8. May 2014 at 15:52

    TravisV:

    “For some reason, in the real world, nothing remotely close to your ideal “private law society” arrangement has ever emerged.”

    That’s false. See the work of David Friedman.

    “Meanwhile, democracy has thrived and, along with it, living standards have flourished……”

    Living standards have thrived under limited government, not democracy. Now democracy is overruling limited government, and growth in living standards has shrunk down to a crawl.

    See, when you see two variables that are correlated, what often happens, as in your case, is that you impute your ideology into the relation as cause and effect. Global warming is up and so are pirate attacks. Cancer is up and so is the money supply.

    We’ve never had a murder and rape free world, ever, and yet living standards have risen. Does that entitle you to say that the murder and rape were causal factors?

    Living standards have grown *despite* democratic violence, not *because* of it.

    And just because nothing remotely resembling private law is dominant today, this does not prove that it cannot ever happen, or that it is not the best way to prosperity and health living.

    In the year 1600AD for example, “nothing remotely resembling” a democratic world existed. The world was despotic/monarchical. And some historicist fool at the time might claim that because democracy was tried and failed in ancient Greece, that it somehow proves that democracy cannot arise in the future.

    You are throwing an ideology at me, which is fine, don’t get me wrong, but at least recognize what it is you are thinking. I don’t think you even know why you believe what you believe.

  92. Gravatar of Philippe Philippe
    8. May 2014 at 16:51

    “Living standards have grown *despite* democratic violence, not *because* of it”

    So suddenly living standards increased massively in the modern democratic era, after centuries of little to no progress, but you think democracy had nothing to do with this?

  93. Gravatar of Major_Freedom Major_Freedom
    8. May 2014 at 17:16

    Philippe:

    Suppose from 10,000 BC until 1600 AD most people were raped 7 days a week. Suppose living standards did not grow very much during this time.

    Now suppose from 1600 until today most people were raped only one day a week. Suppose living standards did grow very much during this time.

    Question: Would you consider this data as suggesting “evidence” that raping people (at a rate of one day a week) is a positive contributing factor for raising people’s living standards?

    Again, you have to be aware of the difference between X occurring because of Y occurring, and X occurring despite Y occurring.

    Any rise in people’s standard of living cannot be caused by some people (51% of population) violently ruling other people (49% of the population).

  94. Gravatar of Major_Freedom Major_Freedom
    8. May 2014 at 17:19

    Philippe:

    In other words, you have to show a theory for how democratic rule activity positively raises people’s living standards.

    Naive interpretations from a single independent variable correlation analysis is not enough.

  95. Gravatar of Philippe Philippe
    8. May 2014 at 18:27

    “Would you consider this data as suggesting “evidence” that raping people (at a rate of one day a week) is a positive contributing factor for raising people’s living standards?”

    A reduction in rapes per week is an improvement in living standards, by any sane definition. You don’t sound very sane though.

    “Any rise in people’s standard of living cannot be caused by some people (51% of population) violently ruling other people (49% of the population)”.

    That’s just your perverse description of democracy. I have no real interest in your perverse descriptions of things as your underlying ideology is pure undiluted garbage of the worst possible kind.

  96. Gravatar of Major_Freedom Major_Freedom
    8. May 2014 at 19:55

    “A reduction in rapes per week is an improvement in living standards, by any sane definition.”

    But are the amount of rapes that remain positively contributing to improving living standards? That is the question.

    The principle I am getting at is that democracy is actually associated with higher living standards only to the extent that it is less violent than previous political rules of activity. It is not that democracy itself is causing the higher living standards. In the positive causal relationship, it is the productive activity that can take place on a wider scale on account of the reduction in violence, that causes the rise.

    But democracy is *still* reducing living standards from what they otherwise would have been had even less violence been foisted on people through some legal structure superior to democracy that allows for even more productive energies to flow.

    “That’s just your perverse description of democracy. I have no real interest in your perverse descriptions of things as your underlying ideology is pure undiluted garbage of the worst possible kind.”

    No, that is the actual meaning of democracy. The reason you are not experiencing it in its full degree is precisely because of individualistic, anti-democratic ideology that is guiding practical activity in the real world.

    My ideology is elimination of initiations of violence, towards zero in society. And you call that “pure undiluted garbage of the worst possible kind.” YOU are perverse, not me. I am sane and rational. You’re a crazy person who believes hurting innocent people is moral and good.

  97. Gravatar of Philippe Philippe
    9. May 2014 at 05:19

    “are the amount of rapes that remain positively contributing to improving living standards?”

    Rapes don’t positively contribute to living standards.
    Democracy is not rape.

    The rest of your comment is he usual stupid crap.

    “My ideology is elimination of initiations of violence”

    No it isn’t. You are a liar, nothing more.

  98. Gravatar of Philippe Philippe
    9. May 2014 at 05:19

    “are the amount of rapes that remain positively contributing to improving living standards?”

    Rapes don’t positively contribute to living standards.
    Democracy is not rape.

    The rest of your comment is he usual stupid crap.

    “My ideology is elimination of initiations of violence”

    No it isn’t. You are a liar, nothing more.

  99. Gravatar of Steven Kopits Steven Kopits
    9. May 2014 at 08:00

    Scott -

    Your write: “Utility depends on much more than just dollar income…” I agree, but you have to measure it somehow if it is to inform policy. It can be income, consumption, wealth, etc, but at some point you’ll end up using dollars as a practical matter, with all the caveats that deserves. And for a classical liberal, that’s a feature, not a bug.

    “Utilitarianism does not imply that equal income gives the higher aggregate income, because a society with equal income will have far lower total income, indeed almost no total income at all!”

    Please note that I carefully caveated my statement above: I stated that I was arguing from an egalitarian perspective, not a liberal or socially conservative one. Those would imply potentially different lines of reasoning. Second, I used “static” and “ceteris paribus”. Those are important considerations. However, if we take the case of Venezuela, it is clear that the population preferred redistributive policies that are to the ultimate detriment of that country. From the point of view of the electorate, the Chavez/Maduro policies seem to be taken as optimal. If you’re going to counter, “But over the long run…”, then we are arguing about discount rates–which is where I entered this discussion. Argentina, for example, never seems to get to the long run.

    Finally, as regards thinkers like Mill, Bentham, Rothbard, or Hayek, for that matter, there is no established theory of social conservatism. This lack of theory leads to a certain schizophrenia among classically liberal writers. Conservative thinkers are even worse. They have notions, but no theory at all.

    If an egalitarian wants to equalize the marginal utility of wealth and income across population; the liberal(libertarian) wants to maximize the utility of the individual. What’s the conservative want to maximize? Half the people in the US describe themselves as “conservative”. What is that, exactly?

  100. Gravatar of Steven Kopits Steven Kopits
    9. May 2014 at 09:43

    Let me add another comment regarding egalitarianism, and why some countries–like Italy, Greece, Argentina, and Venezuela–never seem to get to the long run.

    The choice to vote for growth over redistribution rests on some key assumptions, notably:

    - that growth will occur
    - that politicians will act as proper agents
    - that growth will be redistributed on some basis to the voter
    - that growth has a greater benefit than redistribution to the voter
    - a low discount rate

    Now, if you’re an economics professor, then you probably have faith in most or all of these assumptions. You believe in growth, that politics works (in advanced countries, at least), that you’ll personally share in the growth (ie, you’re a meritocrat), and you believe, as someone nearer the top of the income distribution ladder, that taxes will not redistribute income your way (just the opposite, actually).

    But if you live in a favela in Brazil, for example, you may not believe in these assumptions. You may think that politicians don’t know how to grow the economy; that they and their cronies will steal any benefits that should arise; that you can get more redistributing from others than you can from your own efforts; and that something today is worth more than the promise of anything tomorrow.

    In such a case, you may well prefer egalitarian policies–importantly, even if they do not maximize or increase national income. In this world, the voter is always maximizing short term benefit; there is no “long run” as such. There is no “us”, only “me”.

    Actually, I think the describes Argentina pretty well.

  101. Gravatar of Major-Freedom Major-Freedom
    9. May 2014 at 17:03

    Philippe:

    “are the amount of rapes that remain positively contributing to improving living standards?”

    “Rapes don’t positively contribute to living standards.”

    But according to your democracy “logic”, because rape exists, because it is taking place today, it must be a causal factor in the rise of living standards.

    Or let’s use a different example. The dramatic rise in living standards the last few hundred years is also correlated with the rise in racism and slavery against blacks in the US. It wasn’t until European settlers kidnapped and forced blacks into slavery in the US that living standards dramatically rose, and they continued to rise after slavery was abolished but with still lots of racism against blacks.

    According to your democracy “logic”, slavery and racism were causal factors of the rise in living standards.

    “Democracy is not rape.”

    The logic of my rape example is the same as your logic of democracy.

    “The rest of your comment is he usual stupid crap.”

    In other words, you refuse or are unable to engage your own premises.

    “My ideology is elimination of initiations of violence”

    “No it isn’t. You are a liar, nothing more.”

    Yes, it is. No, I am not lying. I, contrary to you, am against initiations of violence. You support initiations of violence as long as that violence has 51% support of the population.

    You support initiations of violence because you are pro-state. The state is created and maintained on the basis of initiations of violence.

    You are the one with the depraved, twisted, immoral and garbage worldview. Not me. I am as pure as the snow on a mountaintop. I am the one who makes you feel inferior, self-loathing, mentally defective, and bitter. And that suits me just fine, because violence advocating thugs like you don’t deserve to be anything else.

  102. Gravatar of Philippe Philippe
    9. May 2014 at 17:44

    “according to your democracy “logic”, because rape exists, because it is taking place today, it must be a causal factor in the rise of living standards”

    No, I don’t think that, nor have I ever said that.

    “I, contrary to you, am against initiations of violence.”

    No you aren’t. You’re just a liar.

    “I am as pure as the snow on a mountaintop.”

    No, you are a delusional and thoroughly nasty individual, who shouldn’t be trusted, because you are also a compulsive liar

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