An argument against overabundance and for a progressive consumption tax

Here’s Larry Ellison’s lifestyle, which relates to my previous post:

One of the mysteries surrounding Larry Ellison is how he can afford so many mansions, islands, yachts and planes, all while retaining his shares in his company.

Now we have some clues as to how Ellison funds his acquisitive lifestyle. . . .

Still, Ellison’s stock-backed borrowing has grown dramatically. Last year, he pledged 40 million shares. So the number of shares he’s using for personal loans and lines of credit have more than tripled over the past year. (Read more: Ultra Rich Spend Less on Bling)

One big reason may be Lanai. This summer, Ellison made news when he purchased the island, Hawaii’s sixth largest, for a reported $500 million.

His serial real-estate buying has continued: this week Ellison reportedly picked up another home in Malibu, where he already has at least five other properties.

His trophy collection now includes a former Astor family mansion in Rhode Island, a 10,742-foot home in San Francisco, a historic garden property in Kyoto, three parcels in Lake Tahoe, and Porcupine Creek, a 240-acre estate in California once owned by the billionaire couple Tim and Edra Blixseth, with its own 19-hole golf course.

Ellison also just took delivery of a new yacht, and has spent tens of millions on acquiring the BNP Paribas Open tennis tournament and sponsoring boats in the America’s Cup sailing race.

When does overabundance become a problem?  When every single peasant farmer in Bangladesh has the same lifestyle as Larry Ellison. Let me know when that happens and then we can talk.

This article also presents a good argument for a progressive consumption tax.  Obviously Ellison wouldn’t be happy to see a big new progressive consumption tax.  And obviously we should be careful we don’t impose such a high tax that our most talented people flee to France, or engage in wasteful tax avoidance strategies.  But on pure utilitarian grounds the case is clear, if Ellison’s wealth was cut in half, and the memory of the previous wealth was removed from his brain, he’d be just as happy.

I’d add that the “just deserts” argument for low taxes is also not persuasive.  Perhaps you could make that argument when people became rich though hard work.  But no one has the ability to produce billions in wealth on their own.  Adam Ozimek makes the following argument:

First, it is true that no distributions is commanded by the fabric of the universe. But it also seems pretty obvious to me that the basic concept of private property is a social construct rather than a government one. Now private property in a modern society does require government in order to function well. After all, the social construct of private property is a basic one, and in the real world laws need to be precise and often complex. Furthermore it is in many instances beneficial for everyone to limit private property for the greater good. But private property is not a government created construct, it is a social construct. And this social construct often does provide us with a default form of economic institutions.

Imagine a plane crashes on an uninhabited island with many survivors. It is clear to all that they will be here for the rest of their lives, outside of the laws of their different homelands. Imagine one man walking up to another and casually taking the watch off his wrist. “Hey what are you doing?” the man losing his watch would say. “We haven’t elected a government and defined private property yet, so you can’t own this”. Does this sound plausible? I don’t think so. Sure, you could easily imagine one man taking the watch because he is stronger, and nobody can stop him. But both the taker or the takee would understand that the man’s property is being taken. Both thief and owner recognize private property even in the absence of a government or legal system, and even if the thief chooses to ignore this.

This notion of just deserts does fit our moral intuitions.  But the billionaires of today got their wealth through property laws that don’t match our moral intuitions.  Thus it seems intuitively wrong to steal a tomato that Steve Jobs grew in his garden, but not to allow Samsung to make products with an iPhone-like zoom function.

So why not reform intellectual property laws and then refrain from redistribution?  Because they are completely separate issues.  We should reform the IP laws so that Apple has more competition.  But the optimal set of intellectual property rights should be those that maximize global real output in the long run, not those that match our moral intuitions.  Suppose I invented a drug that cured lung cancer, and refused to market the drug.  Then suppose another firm tries to market the drug.    Do our moral intuitions suggest that action is “theft of property” just because I have a patent?  Obviously not.  The socially optimal intellectual property regime for encouraging medical innovation is completely unrelated to moral intuitions about how much of the resulting benefits is “deserved” by the inventor.

PS.  I’m seeing bloggers claiming the French are implementing the Saez tax plan.  Not so, the French law excludes income on capital, as it should.  The rate is still somewhat too high, but not a complete disaster.

PPS.  I see the NGDP debate rages on.  The bottom line is that NGDP doesn’t matter very much if wages are flexible.  If they are sticky (and they are) it becomes all-important.  Indeed a fall in NGDP/person will seriously distort the labor market regardless of whether it’s caused by tight money or falling productivity combined with an inflation target.  Having said that, obviously it’s the supply-side (what Miles Kimball calls the “deeper magic”) that drives the long run.


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61 Responses to “An argument against overabundance and for a progressive consumption tax”

  1. Gravatar of Kevin Dick Kevin Dick
    28. September 2012 at 17:29

    How would we implement a progressive consumption tax without creating a huge reporting burden? Or were you thinking we’d use a form of price discrimination and tax large luxury goods?

  2. Gravatar of Matt Myers Matt Myers
    28. September 2012 at 17:50

    Hi Scott, I really enjoy your blog and the topic of this post is very interesting. Obviously, Mr. Ellison has by far surpassed the point where marginal utility of happiness is maximized in relation to his income and wealth. Furthermore, I agree that a redistribution of wealth is needed. However, naturally the redistribution would first occur between the wealthy elite and the government, and then it would be the government’s responsibility to redistribute the wealth in a responsible and effective manner, correct? But isn’t this the crux of the argument? Can we fully rely upon government to carry out the redistribution process in such a manner?

    Second, I feel your argument about IPR is actually a completely separate one. Living in China for the past 4+ years and studying public policy here, I have become convinced that strong protection of IPRs is one of the key foundations for innovation, and thus one of the reasons why innovation has yet to ferment in China. However, its possible that IPRs in America just need to be altered, not necessarily weakened, to help level the playing field between entrepreneurs and huge corporations.

  3. Gravatar of Bill Ellis Bill Ellis
    28. September 2012 at 18:31

    Any one…..
    A progressive consumption tax seem like society’s holy grail…

    But it never seems to pencil out. It seem like there is never enough money to maintain a social welfare system.

    Does anyone know of any progressive consumption tax proposals that can maintain or enhance the social welfare system that people have become accustom too ?

    Is there a progressive consumption tax approach that enhances economic equality ?

  4. Gravatar of Bob Murphy Bob Murphy
    28. September 2012 at 19:13

    It’s good timing, Scott. I obviously am not convincing anyone that you are nuts with my frontal assault on your NGDP arguments, so I was considering going for circumstantial evidence that your policy views must be wrong. This post is very useful.

  5. Gravatar of Morgan Warstler Morgan Warstler
    28. September 2012 at 19:34

    I have been telling this to Rortybomb, Matty, and the other fool who all keep trying to lay claim on property rights as myth.

    They simply ARE NOT super-star thinkers. It sucks when their id gets in the way.

    The best possible argument for progressives, in the face of the winning argument that might = right; personal force assures property rights sans state:

    1. LARGE land taxes

    2. But they only get them if revenue neutral to win over hegemony, so large land taxes offset by say income taxes on middle-upper middle class and above.

    This gets you the true libertarian position that TITLED land and property is the first strategic function of a state – so progressives AGREE the the guys holding the land before the state, have claim to it, BUT the cost of paying for the title office / state is a tax on the land.

    Title is the state legally recognizing ownership, you can privatize the cops, but you cannot privatize the title office, or you get MULTIPLE title offices all asserting authority over the same piece of land, you get nation-state war.

    So titling comes first in state formation.

    So IF you are the progressives and you will lose the state before property argument, you next best argument is to TAX the thing titled.

    In fact, progressives should seek a max tax rate high enough on land, since it is scarce, to keep it just expensive enough to hod on to, that most wealthy people don’t view it as a good store house of value. Make land a luxury good.

    Now, you get automatically much of what the left wing is really after, lots of dense urban environs in nice climates, with wealth transfer from generation to generation based on something that doesn’t include legacy ownership of a inelastic scarce commodity.

    It would be nice if Rorty/Matty etc focused their attention of saying, “lets cut income taxes A LOT and raise land taxes A LOT” but since they overall want more revenue, the will never make their best possible argument to the hegemony.

  6. Gravatar of Floccina Floccina
    28. September 2012 at 19:52

    Kevin and Bill
    Why not remove the cap on IRA contributions and allow people to pay progressive taxes only on what they do not put in their IRA + any withdrawals. Then all consumption is taxed at the same rate and taxes are greatly simplified.

  7. Gravatar of johnleemk johnleemk
    28. September 2012 at 20:05

    Bill Ellis:

    Most Western European welfare states have regressive consumption taxes. Unless you are adopting a theory of public choice which suggests that progressive consumption taxes cannot coexist with a redistributive state in the same political regime (and it isn’t obvious to me that such a theory has to be wrong), it seems logical to believe:

    * A regressive consumption tax can support (arguably, is necessary to support) a highly redistributive society/polity

    * A progressive consumption tax is more desirable and effective from a redistributive standpoint than a regressive consumption tax

    * Therefore a progressive consumption tax can support a highly redistributive society/polity

    Bob Murphy:

    Jeremy Bentham believed the idea of natural rights was “nonsense upon stilts”. It’s not obvious to me that people like him, or Scott for that matter, are crazy.

    Scott:

    The only quibble I would have with your post is that from a Rawlsian standpoint, it’s unquestionable that by far the biggest determinant of your socioeconomic well-being is where you are born. In theory, we should be pursuing a political regime that enables redistribution from the rich of the world (i.e. most Americans, perhaps 99% of them even) to the true poor of the world (say, those in South Sudan).

    Of course for obvious reasons, such a political regime is not feasible, and if it were, it’s not clear that the redistributive benefits would outweigh the immense costs of such a regime. But the clearest implication then is that we need to liberate the poor of the world and allow them to choose where to live and work; we need open borders, or a regime as close to open borders as is feasible.

    It’s impossible for me to conceive of a consistent moral or ethical system which would simultaneously endorse redistribution of wealth from the rich in the US to the poor in the US, yet support policies that prevent the poor of the developing world from immigrating to the US.

    Nobody chooses where they are born, and yet every day, the regimes of the developed world effectively punish hundreds of millions of people for the crime of being born in the wrong country. I consider this the worst (from the standpoint of impact) and yet most universally permissible form of oppression in the world today.

  8. Gravatar of Saturos Saturos
    28. September 2012 at 20:49

    “But the optimal set of intellectual property rights should be those that maximize global real output in the long run, not those that match our moral intuitions.”

    Cue Bryan Caplan response in three, two, one…

    Prediction: he’ll talk about misconceptions regarding ethical intuitionism. He values liberty, efficiency, and desert, intuition-based reasoning means trading these off against each other, etc.

  9. Gravatar of Saturos Saturos
    28. September 2012 at 20:50

    In fact I’d encourage that response by posting a link to this page on EconLog, if I wasn’t already banned from EconLog for posting links.

  10. Gravatar of Bob Murphy Bob Murphy
    28. September 2012 at 20:51

    johnleemk wrote:

    Jeremy Bentham believed the idea of natural rights was “nonsense upon stilts”. It’s not obvious to me that people like him, or Scott for that matter, are crazy.

    Just think of it John: The Fed could kill two birds with one stone by raising NGDP through funding Jeremy Bentham’s pet project.

  11. Gravatar of DonG DonG
    28. September 2012 at 20:53

    A tiny wealth tax of 1% with a small consumption tax of 10% is best. The wealth tax works against the constant aggregation of wealth and rents through a captured government. The consumption tax is small enough that everybody can pay. You make the consumption progressive through a rebate (like FairTax) or through progressive spending. This system works when govt is corrupt, which is the natural state of affairs. Any tax system that requires govt. to be completely uncorrupted is broken.

  12. Gravatar of Saturos Saturos
    28. September 2012 at 20:58

    Jeremy Bentham also thought that interpersonal comparisons of utility were nonsense.

  13. Gravatar of Saturos Saturos
    28. September 2012 at 20:59

    Scott, how progressive would your tax be?

  14. Gravatar of Bill Ellis Bill Ellis
    28. September 2012 at 20:59

    Floccina,

    I am not against that… but I have know Idea how it would pencil out. Or how it would work practically.

    I am assuming that the IRA changes are supposed to decrease the need for revenue raised for Social Security . And it would for sure to some degree. But enough ?

    How would this work for the large segment of the population that does not have much disposable income to save ? Or people who would rather consume than save… even with the added cost of a consumption tax ? After all the increased cost of the consumption taxes are offset by the decrease in income taxes. I don’t see a real strong change in incentive. So Would people be required to contribute to their IRAs ?

    If not… then I doubt people would reliably save for their retirement. First, there is always a bunch of magical thinking in every society (economist don’t like to deal with irrationality do they ? ) AND because people are confident that we will not as a society let them sink….And too many people like me will fight to make sure we won’t let them sink…and old people vote.
    It is a self-fulfilling moral hazard that insures that people will not reliably save.

    Again.. Would people be required to contribute to their IRAs ? If so… Would the outcome be better than the collective system we have ? Why not just pool all the contributions into one giant IRA ?

  15. Gravatar of Bill Ellis Bill Ellis
    28. September 2012 at 21:30

    Scott says…” if Ellison’s wealth was cut in half, and the memory of the previous wealth was removed from his brain, he’d be just as happy.”

    Sounds like you are saying money is addictive… like a drug.

  16. Gravatar of Kevin Dick Kevin Dick
    28. September 2012 at 22:25

    @Floccina. So I have to make all investments through my IRA? What if I want to found a startup? Do I have to buy founder’s shares through my IRA? What about taking out a mortgage to buy a house? How much of a five bedroom house is consumption vs investment if I plan to rent out two of the rooms?

    And where does the progressiveness come from? How does Toyota know that I’m buying my family’s third car and Bob down the street is buying his family’s first car so I should pay more tax than Bob on the same item?

    Then what if my parents can’t take care of themselves. Is the marginal consumption tax rate on purchases I make on their behalf on my schedule or theirs? How does the vendor know?

  17. Gravatar of Ritwik Ritwik
    28. September 2012 at 22:34

    Scott

    If I understand correctly, Iza Kaminska’s argument is that the world already has the productive capacity to provide the peasant farmers of Bangladesh Larry Ellison’s lifestyle. But the peasant farmers of Bangladesh do not have the financial claims to offer which would make the world utilise this productive capacity and produce for them.

    Ok, that’s an exaggerated version of the argument she makes. She doesn’t talk about peasant farmers in Bangladesh, only the non-elite in the developed world. And obviously, the comparison is with a ‘high’ quality of living, not Larry Ellison’s lifestyle.

    Kaminska/Skidelsky/Keynes make the argument that even over the long arc of the medium term – not just the business cycle – the economic problem is aggregate demand. The aggregate supply problem, the logical lodestone of economics, has been ‘solved’. In such a world, the distribution of the pie is extremely relevant as economists can’t hide behind ‘let’s grow the pie and let the market figure out distribution’. The pie is already big enough. And the market hasn’t gotten the distribution right. One section of he market – the wealth owners – is actively trying to reduce the pie to preserve its share of the pie.

    The lack of internationalism in her argument bothers me too. As you say, we have billions of peasant farmers. When they can all get a subscription of FT delivered at their doorsteps (my more humble take on your Larry Ellison comparison), we will talk about the end of scarcity. The absence of any Schumpeter-type focus on innovation pushing the boundaries of aggregate supply in new and undiscovered directions is bothersome too.

    But at one level, the argument is increasingly correct. Are the poor and the unemployed in the first world truly deprived? One would argue not. Does America need to have its students in so much debt, if it was not obsesses with preserving the risk averse capital gains fantasies of its creditors? One would argue not.

    India is self-sufficient in food, quantity wise. People still starve. China is ‘over-built’ in housing. People are still homeless. Malaria has been ‘solved’. But African children still die of it. These issues can be framed in public choice or development economics narratives. But macro-economically speaking, these are all examples of aggregate demand problems, where previously only AS problems were suspected. The supply problem has been solved, but we haven’t quite figured out how to create demand yet. And that is Kaminska’s contention.

  18. Gravatar of Peter N Peter N
    28. September 2012 at 22:46

    Many of the people who post here are college professors. To understand sticky wages, imagine what would happen if the college administration tried to cut your salaries.

    Would this idea be attractive to the administration, or would they think it would cause more problems than it would solve?

    This isn’t a very hard question to answer, I think.

  19. Gravatar of Larry Larry
    28. September 2012 at 23:49

    I love the PCT because it taxes you based on what you “eat”, rather than what you produce/earn. We want people to produce more and eat less. Administration/compliance should be about the same as the current IRS. Less if we fix the rest of the tax code. Note that PCT rates can be > 100% if we choose…

  20. Gravatar of RebelEconomist RebelEconomist
    29. September 2012 at 00:28

    Larry Ellison borrows against his stock holdings and uses the loans to buy real estate?

    Sounds like an argument for tighter monetary policy to me, and certainly against any change in monetary policy objectives that would prompt monetary easing right now, like NGDP targeting.

  21. Gravatar of Tim Worstall Tim Worstall
    29. September 2012 at 01:11

    “I’m seeing bloggers claiming the French are implementing the Saez tax plan. Not so, the French law excludes income on capital, as it should. The rate is still somewhat too high, but not a complete disaster.”

    Saez is quite clear in the academic papers that such high rates depend upon there not being possibilities for tax avoidance. However, in France, all you have to do to avoid the high rate is move out of the country. And Saez’s estimations of the possibility of avoidance do depend upon the US system, where such a simple change of residence does not allow such avoidance.

    The whole thing’s a bit of a dog’s dinner to be honest. He’s using the attributes of one tax system to describe optimal rates in an entirely different system.

    As to how you have a progressive consumption tax? You run it just like the current income tax. Except all additions to savings, all earnings from savings that are reinvested, are tax free (sorta like a giant 401k). All extractions from savings which are then consumed are taxed as income.

    And that’s it. You can have any rate you like on it, as many rates as you like.

  22. Gravatar of Morgan Warstler Morgan Warstler
    29. September 2012 at 04:36

    Tim +1

    Again, big land taxes that make holding land in most cases an unwise long term investment, and make land a strict consumption play, are as progressive as you can get.

    And you don’t lose the silly argument that property is a myth.

  23. Gravatar of Saturos Saturos
    29. September 2012 at 05:05

    Scott, what do you think of Greg Mankiw’s latest:
    http://gregmankiw.blogspot.com.au/2012/09/the-price-of-fiscal-uncertainty.html
    In particular what do you think of the paper?

  24. Gravatar of Saturos Saturos
    29. September 2012 at 05:15

    Chinese QE? (HT Tyler Cowen on Twitter)
    http://www.ft.com/intl/cms/s/0/607839b6-085f-11e2-b57f-00144feabdc0.html#axzz27QMv42zt

  25. Gravatar of Tom Hannaford Tom Hannaford
    29. September 2012 at 05:43

    I’ve become enamored with the idea of the X-Tax (terrible name, I know, but I understand the reasoning behind it), but to the better informed on here what seems to be the consensus on the plausibility of such a reform? From my understanding, it seems to be pretty close to what Tim suggested above…

  26. Gravatar of Saturos Saturos
    29. September 2012 at 05:55

    Scott, have you seen this one before?
    http://www.sciencedaily.com/releases/2009/03/090323211919.htm

  27. Gravatar of Saturos Saturos
    29. September 2012 at 05:58

    Talk about making economics more scientific! Perhaps you can use this one next time someone jibes you about being unable to explain wage stickiness.

  28. Gravatar of ssumner ssumner
    29. September 2012 at 07:00

    Kevin, I have many posts on that–start with a progressive payroll tax, which is identical to a consumption tax.

    Matt, If we can’t trust the government, they’ll screw us anyway, so nothing matters.

    You said;

    “Second, I feel your argument about IPR is actually a completely separate one.”

    That was my point.

    Floccina, Because you’d still have to fill out 1040 forms. That’s why.

    Johnleemk, A massive increase in immigration would help.

    DonG, If the government is corrupt they obviously won’t implement your system.

    Saturo, Strongly progressive for low wage people (wage subsidies), modestly between the middle class and rich.

    Ritwik, I refuse to believe she’s that stupid, she does write for the FT. Almost everyone in America would prefer a much richer lifestyle, and we certainly do know how to boost AD–does she think a helicopter drop wouldn’t boost NGDP? She had something else in mind–I’m not sure what.

    Tim, I agree on the French tax. But I disagree here:

    “As to how you have a progressive consumption tax? You run it just like the current income tax. Except all additions to savings, all earnings from savings that are reinvested, are tax free (sorta like a giant 401k). All extractions from savings which are then consumed are taxed as income.”

    The income tax MUST be abolished, it’s a huge pain in the ass. We need a progressive payoll tax, with no forms to fill out (unless yuou are a business.) A payroll tax is identical to a consumption tax.

  29. Gravatar of ssumner ssumner
    29. September 2012 at 07:06

    Saturos, How do you have time to read all this stuff?

    The money illusion study is worth a post. I think Mankiw overrates the fiscal drag:

    1. Stocks are doing very well dispite the looming fiscal cliff.

    2. The low NGDP growth (monetary policy) pretty much explains the low RGDP growth.

    But I’m sure there’s a bit of truth to what they say.

  30. Gravatar of Mike Sax Mike Sax
    29. September 2012 at 07:29

    So you could deal with a 75% income tax in exchange for no capital gains tax? Just making sure In understand you rightly.

    For me, whether or not it’s a pain in the ass filing tax returns, the question that matters more to me is whether people will be better off econoically.

    I’d rather fill out the returns if it’s a better deal than no returns-I’ve worked for H&R Block, but at least my returns aren’t very complicated-as there so little actual income.

    I’m still a skeptic of the idea of a progressive consumption tax though some of what I’ve read from Yglesias and others sounds like maybe in theory it could work

    Still I’m suspicious that it will mean less revenue or something. The devil is in the details as it’s very easy for a consumption tax to be regressive-especially sales taxes.

  31. Gravatar of Saturos Saturos
    29. September 2012 at 07:31

    So you don’t think high implicit MTRs matter that much for lower income people? I thought it mattered most for them?

    I was actually also looking for comments on the new book Mankiw’s reading, which was more critical of Obama’s negotiations on the debt-ceiling; i.e. the debate you were having earlier.

    Remember the study is from four years ago (about the time you started this blog…) The link to the paper itself is at the bottom of the article. Note that it says Akerlof was involved in “communicating the results”.

    I would have liked to see them test also whether economists were immune to money illusion.

    Also, doesn’t it disturb you that stocks are right back down after the announcement? http://thefaintofheart.wordpress.com/2012/09/26/fever-quickly-subsiding-that%C2%B4s-bad-news/
    If as I suggested the announcement was positive and markets have come down due to fresh news/jitters, couldn’t that be a worsening of expectations re the fiscal cliff?

    How do you have time to read all this stuff?

    Ummm… I use FeedDemon, so that partly explains it. And I actually don’t always read it all – I only skimmed the neurostudy article, and I sent you the Chinese easing link without reading it myself 😛 MoneyIllusion.com has become priority reading for me over the past year, I’ll tell you that much.

  32. Gravatar of Saturos Saturos
    29. September 2012 at 07:35

    Plus I’m just a reading-addict more generally, and I’m heading toward speed-reading skills of Cowenian proportions.

  33. Gravatar of ssumner ssumner
    29. September 2012 at 08:01

    Saturos, I favor (hourly) wage subsidies for the poor, that doesn’t impose a high MTR. The EITC is very different.

    I read an except of that book, and it seems to me that the GOP was at least as much to blame.

    My best guess is that stocks are down due to the riots in Greece and Spain, I seem to recall they fell sharply that day. Maybe the fiscal cliff has some role, but where is the new information? The growing probability of a Obama win hurts stocks, but by a statistically insignficant amount. (Less than 1%)

    Mike, You didn’t understand me correctly, read it again.

  34. Gravatar of Saturos Saturos
    29. September 2012 at 08:31

    “Imagine a plane crashes on an uninhabited island with many survivors.”

    Lost started out as a really good show, they even had a character named Locke. I was hoping they’d explore these issues in more depth.

  35. Gravatar of johnleemk johnleemk
    29. September 2012 at 08:32

    Mike Sax:

    Reality has a liberal bias. Most modern welfare states garner significant revenue from regressive consumption taxes. That’s the reality already. A progressive consumption tax would be a substantial improvement over the current reality from a redistributive standpoint.

    For people whose ideas are supposedly rooted in liberal-biased reality, I find left liberals are disproportionately skeptical of consumption taxes. Western Europe and the rest of the Anglosphere have already proven that consumption taxation works; if anything one could argue that consumption taxes are necessary for a redistributive welfare state.

  36. Gravatar of Ritwik Ritwik
    29. September 2012 at 08:45

    Scott

    You’re not yet engaging with the post-scarcity argument yet, choosing to attack literal slips like ‘knowing how to solve AD’. Of course she (I?) believes that AD can be raised through helicopter drops. A debt jubilee is precisely a helicopter drop. But a debt jubilee won’t happen. Helicopter drops won’t happen. Monetary policy and fiscal policy is in thrall – cognitively – to bank creditors, and more broadly, wealth-preservers.

    In a post scarcity world, all recessions are issues of distribution. They are caused by the non-elite holding back consumption because they currently do not have financial claims to exchange in lieu for consumption. They are caused by current wealth owners holding back production that is technologically possible because the non-wealthy do not have financial claims to offer. A redistribution of wealth immediately coordinates both and solves the AD problem.

    When she talks about reducing the work-week, she is talking about holding back production because the demand for that production would only come from the creation (and redistribution) of financial claims for which we do not have the appetite yet.

    Of course everyone in the US wants to consume more. This demand fuels production, which then goes undemanded ex-post because of the lack of wealth. That is the post-scarcity world.

  37. Gravatar of Mike Sax Mike Sax
    29. September 2012 at 09:09

    johnmleenk the reason I think most liberals are skeptical of consumption taxes is that they seem to be by definition regressive. True Europe usues a regressive consumption tax. But I don’t want to follow them on that.

    If we could have a truly progressive consumption tax then great. My sketpicism is that either they will mean lower revenues-and so less government spending and so less social safety net-or they will actually be regressive.

    For moe we have enough regeressive taxes-the payroll tax. Again, I’m saying I’m skeptical but open to being convinced. There may be the plan that really is progressive and revenune neutral. If it exists and I’m convinced I’d embrace it.

  38. Gravatar of Kevin Dick Kevin Dick
    29. September 2012 at 09:09

    @Scott. I think I’ve read all of your posts. I know you’ve discussed the PCT. I just don’t understand how it works at the 1% boundary.

    Sure, it’s straightforward to implement in the obvious cases. But we’re trying to generate 30-40% of the tax dollars from the top 1% (who save a disproportionate share of their income).

    I’ve also read summaries about the X tax, but again, I don’t understand how it works for the 1%. It seems like the the loophole problem would be incredible. I guess it’s my security software background, but I see this as a system that’s easy to attack.

  39. Gravatar of Mike Sax Mike Sax
    29. September 2012 at 09:12

    Scott this is what I was interpreting:

    “I’m seeing bloggers claiming the French are implementing the Saez tax plan. Not so, the French law excludes income on capital, as it should. The rate is still somewhat too high, but not a complete disaster.”

    You seem to be saying that the French law-with it’s 75% top rate is not a disater-which I read as you can live with it.

    What am I missing?

  40. Gravatar of Mike Sax Mike Sax
    29. September 2012 at 09:14

    johnmleenk-I think beyond that most liberals are Keynesians and think of consumption as something we want more of even for the rich-after all that creates demand which therefore requires businesses to hire more people.

  41. Gravatar of Mike Sax Mike Sax
    29. September 2012 at 09:29

    Morgan what taxes are land taxes in the U.S. code? You tallking about property taxes? Or you mean large real estate? Give me the releveant taxes you have in mind?

  42. Gravatar of johnleemk johnleemk
    29. September 2012 at 09:58

    If we could have a truly progressive consumption tax then great. My sketpicism is that either they will mean lower revenues-and so less government spending and so less social safety net-or they will actually be regressive.

    So you think a progressive consumption tax would put the US on the wrong side of the Laffer curve? What basis do you have for believing that? And if you believe that, do you also believe that raising income taxes in the US would put it on the wrong side of the Laffer curve?

    All this handwaving about regressive taxes assumes that the tax system is the only way or the best way to redistribute wealth. Frankly, I don’t see why any reasonable person would believe this to be the case, at least in most OECD countries. See: http://www.washingtonpost.com/blogs/ezra-klein/wp/2012/09/19/other-countries-dont-have-a-47/?print=1 (“In English: The less progressive the [tax] code, the more progressive the system.”)

    Consumption taxes are a great way to raise revenue, which is why conservatives tend to be so fearful of them. And if you trust your government enough to vote for higher taxes, you should trust it enough to spend those taxes on things you want (like more aid to the needy). If you don’t trust the government to redistribute the income it collects progressively, why are you advocating higher taxes in the first place?

    I think beyond that most liberals are Keynesians and think of consumption as something we want more of even for the rich-after all that creates demand which therefore requires businesses to hire more people.

    AD consists of consumption and investment. I prefer rich people to invest more than to consume more. They should stop bidding up the prices of iPhones and medical services so farmers in Bangladesh can actually afford these things. Also, see the Washington Post article I linked:

    European social democracies were only able to develop the programs they did because they used efficient consumption taxes that didn’t lower growth as much as progressive income taxes, particularly those on capital income. European countries needed tax systems that could raise a lot of money without hurting growth, and only regressive consumption taxes fit the bill.

  43. Gravatar of Floccina Floccina
    29. September 2012 at 11:36

    People will not go for a progressive payroll tax because if one gets lucky on an investment they want that luck taxed.
    Though my plan would require some thing like the 1040 (which
    I agree is a billion man hour waste). People’s 1040s would be far less complicated.
    It would be a payroll tax on what was not invested through the IRA + tax on withdrawals form the IRA.

    @Kevin yes they would start a business with money from their IRA and they Could buy a home through the IRA, borrowing from the IRA.

  44. Gravatar of Morgan Warstler Morgan Warstler
    29. September 2012 at 12:49

    Sax,

    My point is progressives ought to offer conservatives a trade: Large taxes on land value that is assessed yearly. In exchange, equal cuts in income taxes so the majority of the relief flows back to upper middle class. That’s a deal that can GET DONE.

    Now land is taxed just enough that much, that wealthy do not see land as a viable long term investment.

    Again the tax is not on the size of your building, it is on the land underneath.

    This gets progressives the kind of sardine living that they crave.

    It in some ways reduces the moral concerns around the first right to property, since it isn’t the price of buying the land that gets ya, it is the yearly taxes on it.

    It is a pretty libertarian concept to boot.

  45. Gravatar of Mike Sax Mike Sax
    29. September 2012 at 14:16

    Johnmleemk thanks for the link it gives a lot of food for thought.

    So Morgan how much land is out there for us to tax? Would this tradeoff be revenune neutral?

  46. Gravatar of John Papola John Papola
    29. September 2012 at 14:52

    Sorry folks, but Bob Murphy wins the thread by referencing the nightmarish “Panopticon”.

  47. Gravatar of Major_Freedom Major_Freedom
    29. September 2012 at 17:35

    All taxes are regressive, no matter how they are administered.

  48. Gravatar of Morgan Warstler Morgan Warstler
    29. September 2012 at 19:44

    Sax,

    You need to understand tax discussion like a massage – how hard to press/ well, how bad is it? How much pain can you take?

    The idea is, as demand to live in X increases, raise taxes on land in X, so suddenly “investors’ who would normally front run, can’t dont – since they get taxed ENOUGH to make the ROI disappear in short term.

    Now you have land prices and taxes born by those who live on the land as consumption, so they build UP, not out. Liberals like this.

    This is something you want. To get what you want, you just have to meet your opposition with a rel deal they will take.

    So it is tax neutral.

    Thus, whatever you can get out of land taxes – as much as you can get – the optimal land tax, you lower income taxes on your opposition.

    So you get what you want, and since this doesn’t grow govt. revenue you get to pitch it to the libertarians who naturally agree anyway.

    If there will be taxes, land taxes are the most natural tax to libertarians.

  49. Gravatar of Prakash Prakash
    29. September 2012 at 21:50

    I disagree with Scott and agree with Morgan on this issue. The land tax is indeed the best tax.

    It agrees with the world of agriculture where land was the source of wealth.

    It agrees with the world of industrial urbanisation where the value of the site is determined by the urban agglomeration around it.

    It agrees with the world of information technology where face to face contact has still not been eliminated and the truly talented mobile worker can go anywhere in the world and operate from there. Jurisdictions with a high land tax and low consumption and income taxes can outcompete the others in the long run, provided there is the political trust that they go through with it and stick to it.

  50. Gravatar of Morgan Warstler Morgan Warstler
    29. September 2012 at 22:06

    Prakash proves himself the smartest guy that any of you have met in months.

    If Prakash walked into a bar, it would bend.

  51. Gravatar of Saturos Saturos
    29. September 2012 at 23:20

    Prakash, Morgan, what do you think of this criticism of Georgism?

  52. Gravatar of Saturos Saturos
    29. September 2012 at 23:21

    Sorry, here it is: http://econlog.econlib.org/archives/2012/02/a_search-theore.html

  53. Gravatar of Tim Worstall Tim Worstall
    30. September 2012 at 07:06

    “The income tax MUST be abolished, it’s a huge pain in the ass. We need a progressive payoll tax, with no forms to fill out ”

    Eh? How would that work? How do you tax the self employed with a payroll tax and no forms?

    And the income tax is a terribly simple tax. It’s the definition of income that is so hard to define. And a payroll tax suffers from exactly that same problem.

  54. Gravatar of ssumner ssumner
    30. September 2012 at 07:45

    John, Was the Panopticon more or less humane that existing prisons at the time of Bentham?

    Tim, I overstated things in my reply to you. I’ve always maintained that the self-employed would always have to fill out taxes. But that’s a very small share of the population. The rest of us should not have to fill out tax forms.

  55. Gravatar of ssumner ssumner
    30. September 2012 at 07:53

    Saturos, There are ways to overcome those objections. You can tax land based on the average value of land in the district.

  56. Gravatar of Kevin Dick Kevin Dick
    30. September 2012 at 09:35

    +1 to Tim’s point.

    @Scott and Floccina. I predict a huge increase in the top 10% of earners to being self-employed (perhaps through LLC or S corp) under this scheme so they can freely consume wearing their entrepreneur hat (have a company car, company club membership, etc. ).

    I also predict the emergence of “businesses” in which the wealthy invest that are essentially “consumption clubs”. And the informal trading of the consumption rights that come with these “investments”.

    Yes, you can create laws that make these practices illegal, but I doubt the amount of effort going to police the PCT will be less than if we made the obvious income tax simplifications you proposed a few posts back.

  57. Gravatar of Saturos Saturos
    30. September 2012 at 09:38

    Scott, so where’s the incentive to discover new below-average land, or reallocate land from one below average use to another slightly better one?

    And you have to make the appropriate comparisons when judging the Panopticon. Not a static immediate comparison, but a long-run dynamic, public choice, Lucas critique comparison.

  58. Gravatar of Negation of Ideology Negation of Ideology
    30. September 2012 at 11:44

    Morgan is correct in saying:

    “Title is the state legally recognizing ownership, you can privatize the cops, but you cannot privatize the title office, or you get MULTIPLE title offices all asserting authority over the same piece of land, you get nation-state war.”

    Property rights are a matter of law and governance, and cost resources to enforce. Therefore only those who pay the costs of enforcement (taxes) have any right to property. But why limit it to land? Isn’t that true of all property? Intellectual property, security ownership, and contracts are also enforced by the government – shouldn’t those be treated the same in the tax code?

  59. Gravatar of Eorr Eorr
    30. September 2012 at 12:47

    Federal land taxes are a non-starter as they would require a constitutional amendment. I always wonder about a wealth tax over a specified amount. What is the best way to discourage rent-seekers? I think it is pretty clear that the super-rich have amassed their wealth through rents and been over-compensated for their genuinely good investments. I think this is why billionaires are usually more liberal than multi-millionaires.

  60. Gravatar of Floccina Floccina
    30. September 2012 at 14:40

    @Kevin they can beat the income tax in the same way. A company car is now an expense.

  61. Gravatar of Prakash Prakash
    30. September 2012 at 23:17

    Morgan, Thanks for the compliments. In my own eyes, I sincerely doubt that I approach bar bending mental ability. :)

    Saturos, Isegoria and KJ in the comments section of Caplan’s post discuss this issue well.

    The problems are

    1. The government does not behave like a profit maximizing firm. A molbugian sovereign (www.unqualified-reservations.blogspot.com) would put out bounties to discover every possible use of the land they own, with respect to known technology.
    2. Real life quasi georgist states like Singapore and HK own a share of the land and use it for public housing. This is theoritically inferior to a georgist tax, but since it is practice, as opposed to theory, it cannot be totally dismissed. I am a business systems analyst and I appreciate the deep knowledge that gets built up in legacy systems.
    3. Scott’s point- you can always use the average value of the land around.
    4. I think that an offset to the land tax could be developed which takes into account the capital expenditure of the structure itself. We need to know things like how far (in kms) does the influence of good capital development go. This needs empirical study.

    Georgism is probably the least developed branch of classic liberalism. It should be developed further and “gamed with”, as Morgan might say. I simply don’t think the search theoritic critique is a good one.

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