Tax rates on all T-securities now exceed 100%

For the first time I can recall the tax rate on all T-securities (for someone in a 33% income tax bracket) exceeds 100%.  Even for the 30 year bond.  For 10 year T-bonds the tax rate is now nearly 1000%!  For 5 year T-notes the tax rate is now infinite—because the real yield of 5 year notes is now negative.

For those who don’t know how to compute tax rates, here’s an example:

The 10 year bond yields 2.05%.  Someone in the 33% bracket would pay 0.6765% of that in taxes.  But the real yield on the 10 year TIPS is only .07%.  So the tax is nearly 10 times the real yield.  Hence the tax rate is nearly 1000% (actually 966%.)

Tax rates are also extraordinarily high on corporate and muni bonds.  Even the tax on equities is far higher than the advertised rate.  And these calculations ignore the fact that (under an income tax) savings are double taxed.  The actual tax rates (relative to consumption) are still higher.

Of course you’d never find any of this out reading progressive blogs.  They still prattle on about how Buffett pays lower taxes than his secretary.  About how we can solve our problems by piling ever higher taxes on capitalists.  Liberal discourse on taxes is about as reality-based as conservative discussion of global warming.

We really need to switch to a progressive consumption tax.


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43 Responses to “Tax rates on all T-securities now exceed 100%”

  1. Gravatar of Hyena Hyena
    17. September 2011 at 11:44

    So… why does anyone invest at all rather than just stick the money in a checking account and leave it?

  2. Gravatar of Benjamin Cole Benjamin Cole
    17. September 2011 at 12:21

    “So… why does anyone invest at all rather than just stick the money in a checking account and leave it?”

    Well….money illusion. Also, Scott Sumner assumes the CPI is accurate.

    Many conservative economists contend the CPI actually overstates inflation, perhaps by a lot due increasingly rapid introduction of new technologies and services. For example, I replaced four land lines a year ago with one cell phone–and now I can take thousands of digital pictures for free, when I used to buy film by the box.

    I contend we are in mild deflation now, ergo current interest rates are about right, through they could go lower.

    Your mortgage payment on a median-priced house today in CA is $982 vs. $2,237….in 1987.

  3. Gravatar of Russ Abbott Russ Abbott
    17. September 2011 at 12:23

    I’m all in favor of a progressive consumption tax. I don’t see how that explains why Buffet doesn’t pay less than his secretary. I gather it has something to do with inflation, i.e., that invested money loses its value to inflation. Another way to put that is that invested money loses its value to time. But then don’t we all? I work for a year and earn a certain amount of money. You consider that pure earnings. Yet when I invest for a year and earn a return, you deduct from that an inflation cost. Well, I’m a year older after working for a year. Can I deduct my loss (perhaps a depreciation on my mind, body, knowledge, etc.) from my earnings according to your way of calculating taxes?

  4. Gravatar of Jason Jason
    17. September 2011 at 12:50

    If you told me the tax rate on something was 1000% I would guess that people would not consume any of it. Why are people buying 10-year bonds if the tax rate is 1000%? The global economic situation must be almost infinitely worse than the high price determined by the flight to safety would indicate!

    I also am a little confused on why you compare the nominal taxes to the real yield. If I calculated my nominal income taxes over 10 years and compared it to my real income after ten years, my tax rate would be higher, but I’m not sure what that number would mean … 100k income (no raise) over 10 years at 2% inflation at 20% tax rate gives me:

    (100 000 * 10) * exp((-0.02) * 10) = 818 730.753
    (10 * 100 000 * 0.20) / 818 730.753 = 0.244280552

    A 24% tax rate > 20% tax rate, but in terms of nominal taxes over real income.

  5. Gravatar of John John
    17. September 2011 at 12:53

    Forget the tax rates on T-bonds, your getting negative real returns due to near 4% inflation over the past year. That’s the worst and most regressive tax of all.

  6. Gravatar of John John
    17. September 2011 at 12:54

    The most economically beneficial tax arrangement would be a single flat income tax. The flat income tax has two advantages over a consumption tax: it doesn’t distort prices the way consumption taxes do and with consumption taxes you have to pay the government for the right to live.

  7. Gravatar of q q
    17. September 2011 at 13:24

    um you are missing an important point. the marginal tax rate on 99 cents of each dollar of income is ZERO, and the the marginal tax rate of the other 1% is WELL OVER 1000% – usually in the range of 2000%-3500%. don’t you understand rounding?

  8. Gravatar of David Pearson David Pearson
    17. September 2011 at 14:11

    Scott,

    Why argue against punitive taxes on T-bonds? The whole point of monetary policy is to create negative returns on those safe instruments. Imagine if we had a negative IOR. Banks would charge outrageous fees on deposits to compensate. A cohort of lower-middle-income seniors would risk outliving their money as a result.

  9. Gravatar of Scott Sumner Scott Sumner
    17. September 2011 at 14:55

    Hyena, The real after tax rate of return on checking accounts is even lower–minus 2%.

    Russ, I’m simply trying to calculate a real tax rate, I don’t think there is anything controversial about that. Last week I did a post on Buffett, which explains why his published tax rate is nonsense.

    Jason, I’m not comparing nominal with real, I’m comparing real with real.

    John, I was talking about expected tax rates. You said;

    “The most economically beneficial tax arrangement would be a single flat income tax. The flat income tax has two advantages over a consumption tax: it doesn’t distort prices the way consumption taxes do and with consumption taxes you have to pay the government for the right to live.”

    Just the opposite, income taxes are unfair and distort the relative price of present and future consumption. A consumption tax is the most neutral.

    q, ??????????

    David, I don’t agree about monetary policy. I advocate 5% NGDP targeting, which would probably result in much higher interest rates over time. The near zero rates we have today are caused by tight money.

  10. Gravatar of Johanes Halim Johanes Halim
    17. September 2011 at 16:54

    Prof, I am quite confused how one may end up with paying more taxes than what he earned (1000% tax rate), nominal or real. Suppose the Bond Prinpical = P and the nominal yield = Rn. In a world without taxes, after a period I will get P+(RnxP), (Rn x P) being the nominal return. Suppose the government want to tax away my return, the maximal they can do is to tax away all the return. If they do so, in the end I will get back my Principal with no return at all. Of course, my principal will worth less then in real term but that is due to the inflation not because of taxes. So my understanding is the maximal they can do is to tax away 100% of my earning, nominal or real.

    However, the scenario of taxing more than 100% of one’s earning could happen in my country. I do not want to expose it here because it is so silly I think it will never happen in US.

  11. Gravatar of Dan Kervick Dan Kervick
    17. September 2011 at 18:11

    This seems mathematically garbled. Why are you comparing the real yield with the tax rate on the nominal yield? If the real yield is only .07%, then the real value of the tax assessment on that real yield is 1/3rd of that, or .0231%. With a 33% nominal tax rate, the bond-holder pays 1/3 of the yield in taxes, however you measure the value of that yield.

  12. Gravatar of Scott Sumner Scott Sumner
    17. September 2011 at 18:27

    Johanes and Dan, In American taxes are levied on nominal income, not real income. Once you determine the amount of tax paid, you divide that amount by the real yield to get the real tax rate.

  13. Gravatar of Dan Kervick Dan Kervick
    17. September 2011 at 19:24

    Scott,

    Of course the taxes are levied on the nominal income. But then if you want to compare that quantity numerically with some other quantity, and derive a ratio, you need to apply the same unit of measurement to both quantities. In this case, you have to decide whether to use current dollars or 2021 dollars.

    If a $10,000 current purchase is going to deliver me $205 nominal dollars in 2021, and I am going to be assessed a tax of .33%, then I will be taxed $67.65 in 2021 dollars. Now the current dollar value of those 205 2021 dollars delivered to me 10 years from now is, as you say, much less than $205 current dollars. It is equal to $205 current dollars reduced by some factor k. But the current dollar value of the $67.65 2021 dollars I am going to be taxed is also much less that $67.65 current dollars – by the very factor k.

    So if you measure both the yield I will receive at maturity and the amount I will be taxed in 2021 dollars, we get $205 and $67.25 respectively. But if you measure both the yield I will receive at maturity and the amount I will be taxed in 2011 dollars, we get $205k and $67.25k respectively. Either way the tax is .33.

    It makes no sense at all to measure the tax in current dollars and the yield in 2021 dollars – which is what you did – so as to claim the tax is somehow a massive multiple of the yield.

  14. Gravatar of William William
    17. September 2011 at 19:59

    q,

    I enjoyed your joke.

  15. Gravatar of Frank Tobin Frank Tobin
    17. September 2011 at 20:25

    Your comment about progressive blogs writing “[a]bout how we can solve our problems by piling ever higher taxes on capitalists” is misleading, as the language implies that we have been increasing taxes rates. This is not the case on the federal level for personal income, corporate income, or capital gains.

  16. Gravatar of KRG KRG
    17. September 2011 at 20:49

    How is this a sign of a problem with the tax rate rather than with the quantity of bonds available such that their rates can be forced into such poor territory.

    There are too few bonds compared to the market demand for them, so the price has risen to something that you are saying is far too high, and yet your solution is not to find a way to lower the price of bonds (ether by finding a way to reduce the amount of money pouring into the bond market, or by increasing the number of bonds being created sufficiently to meed demand at a more acceptable price), but, in fact, to discourage more productive uses of money and remove what disincentive exists to over-consume bonds. Perhaps you’re suggesting that, at this point, we should shoot the moon and drive all bond rates negative, so that all deficit based arguments against spending become nonsense?

    We either need to spend enough that we can create the quantity of bonds needed to lower the price on them, or we need to put stiffer financial taxes into place so the price on such becomes so high that it’s worth the currently significant risk of loss from using the money for consumption and capital purchases instead of financial investment.

  17. Gravatar of Russ Anderson Russ Anderson
    17. September 2011 at 21:52

    Who once said, “I pay no attention to real wages because I pay no attention to inflation.” How does one calculate real yield without paying attention to inflation?

    Or phrased another way, Is real really real? :-)

  18. Gravatar of David Pearson David Pearson
    17. September 2011 at 22:24

    Scott,

    Real rates are determined by the Fed, and they are negative. This is in contrast to Japan and to the U.S. in the 30’s. In both those cases seniors benefited from deflation.

    NGDP targeting produces positive real rates if it helps RGDP. If it doesn’t, it will produce consistently negative real rates. Again, bad news for seniors that outlive their money. Inflation may be an irrelevant concept, except when you’re 70 and living on a fixed income.

  19. Gravatar of Hyena Hyena
    17. September 2011 at 23:55

    Mr Kervick,

    Thanks. I dislike disingenuity.

  20. Gravatar of Martin Martin
    18. September 2011 at 02:27

    Scott,

    If tax rates are so high, why are people still holding those bonds? Shouldn’t people be willing to switch out of those bonds and into money with tax rates such as these? There are two reasons why they don’t: 1. they’re irrational. 2. there is a shortage of money. (3. I am drawing the wrong conclusions).

    What I am saying is: it seems as if this is pretty good evidence of tight money.

  21. Gravatar of W. Peden W. Peden
    18. September 2011 at 03:03

    I look forward to the day that the phrase “reality based” is out of fashion.

  22. Gravatar of Joel Fish Joel Fish
    18. September 2011 at 05:15

    I’m a non-economist with a question about a taxes. My question is: In general, what to people do with surplus revenues? If we were to impose a progressive consumption tax, this would discourage consumption, but then people have a surplus of revenues, so where does it go? Presumably the answer is investment, but what I want to know is what type of investments, and whether such investment would also be hit by the consumption tax? For instance, does a consumption tax apply to the purchase of stocks, bonds, mutual funds etc?

    As related question, why are capital gains taxes so low compared to income taxes? The short answer, I suppose, is that taxes on capital hurt the economy much more than taxes on income. But I don’t understand how a “wealthy” person being unable to purchase more stocks hurts the economy (or rather how investing in stocks helps the economy).

  23. Gravatar of Rien Huizer Rien Huizer
    18. September 2011 at 05:36

    Scott, you are absolutely right. In fact we should go to several consumption taxes and phase out income tax. Less room for politicians to buy votes. But that is the problem: taxes exist for the benefit of politicians..

  24. Gravatar of Dan Kervick Dan Kervick
    18. September 2011 at 06:17

    Hyena,

    ?

  25. Gravatar of Ken Hirsh Ken Hirsh
    18. September 2011 at 06:45

    Scott,

    I would think you should be comparing the after-tax nominal return against inflation to get the after-tax real interest rate. You seem to be comparing the nominal tax cost on bond interest (not sure what one would call this!) to the TIPS-implied real rate. I don’t think this ratio should be thought of as a tax rate.

  26. Gravatar of Steve Roth Steve Roth
    18. September 2011 at 06:49

    Is the (implied) problem here that:

    1. It’s not fair!?

    or

    2. It creates macroeconomically destructive (dis)incentives.

    Benjamin Cole: people/businesses only hold bonds in this environment because of the money illusion. But assume that some/many people are less/not fooled by that illusion. Where will they hold their wealth?

    Given the current perceived riskiness of other financial securities, the only substitute is real investments — from tractors to training. This especially if they’re strong counterillusionists, and are worried about current/future inflation. (The value of real assets increases with inflation; that’s what inflation *is.*)

    So the value of real assets will increase, while the value of financial assets will decline. Thus debtors (those “intrepid souls” who borrowed to buy real assets) will get more buying power, while creditors will get less.

    Is a systemic incentive to make real investments a bad thing?

  27. Gravatar of bill woolsey bill woolsey
    18. September 2011 at 07:33

    I think Sumner is right.

    It is pretty basic. If you don’t a index a tax on interest for inflation, the tax rate on the real interest rate can be greater than 100%.

    The inflation rate is 5%. The nominal interest rate is 6%.

    If you hold currency, your nominal rate of return is zero percent and your real rate of return is -5%.

    If you lend at 6%, your nominal return is 6% and your real return is 1%.

    If the tax rate is 33% and it is charged on nominal income, then the after tax nominal return is 4% (more or less.) With 5% inflation, the real rate of return is -1%.

    This is much higher than the -5% from holding currency, so if that is the alternative to lending, it isn’t much of an option. Lending is much better.

    The decrease in the real return was 2% for a before tax 1% return. That looks like a 200% tax rate to me.

    Use numbers. You lend $100 at 6% interest. At the end of the year, you get $106. That is worth $101 of today’s dollars. If you held currency, you would have $100, and it would be worth $95 of today’s dollars.

    The tax rate is 33%. And so, after one year, you get $104 dollars, after tax. That is worth $99 of today’s dollars.

    In today’s dollars, you earned an income of $1 and paid a tax of $2 in today’s dollars. The tax rate was 200%.

    And paying that tax and having $99 of today’s dollars is better than holding currency and having $95 of today’s dollars.

    If there were stable prices, and the nominal interest rate were 1%, then the tax rate of 33% would leave an after tax real return of .67%, not -1%.

    If you index the tax on interest for inflation, then the $106 is reduced by 5% to $101 and the $1 is taxed .33%, and so $5.67 is left. The $5 compensates for inflation and the $.67 is the real return.

    There are some issues about the changing bases, but this is basically the way it works.

    If you want to come up with examples of higher tax rates due to inflation, have higher rates of inflation and lower real interest rates.

    Suppose the real interest rate is .5% and the inflation rate is 100%. The nominal interest rate is 100.5%. With 1/3 taxed, the result is approxmimately -33% real after tax return. That is 6600% of the .5% before tax real interest rate.

    Of course, if the real interest rate were negative, the situation is worse,

  28. Gravatar of Scott Sumner Scott Sumner
    18. September 2011 at 08:15

    Dan, You are making this way too complicated. I am doing real calculations for each year interest is earned. Because I calculate a ratio, it doesn’t matter which year you pick as the base year, as long as you are consistent.

    If your real interest earnings in year X are $100, using year X as the base year, and your tax payment in year X is $1000, again using year X as the base year, the tax rate is 1000%. But that’s also true using any other year as the base year. For instance using a much earlier base year you might have $50 in real earnings and $500 in real taxes paid. The tax ratio is unaffected.

    Frank, Maybe, But Obama keeps advocating one tax increase after another, so I don’t think it was that unreasonable. He wants to repeal the Bush tax cuts. The health care bill includes another tax on the rich. And he just announced today a new tax proposal named after someone who doesn’t understand the first thing about taxes.

    KRG, With better economic policies we might have higher real yields. I agree. But given yields are low, should we have 1000% taxes on them? I don’t think so.

    Russ, I was expecting that comment. I favor abolishing all taxes on capital. In which case there’d be no difference between nominal and real tax rates, as there’s be no taxes on bonds at all. Most economists think real variables are important. They say things like “real wages of Americans have stagnated since 1973.” OK, if they believe that, why aren’t they talking about real tax rates on bonds exceeding 1000%? Why the silence?

    David, It’s not clear the Fed determines real rates, although I agree they influence them. In the 1930s it wasn’t seniors who benefited from deflation, it was government bondholders. Social security didn’t exist.

    Martin, You said;

    “If tax rates are so high, why are people still holding those bonds? Shouldn’t people be willing to switch out of those bonds and into money with tax rates such as these? There are two reasons why they don’t: 1. they’re irrational. 2. there is a shortage of money. (3. I am drawing the wrong conclusions).”

    No, the after tax real rate on cash is even lower than on bonds.

    Joel, Money not spent on consumption is saved, which means used to finance investment. There are many types of investment, and I can’t say which ones would grow–the market determines the allocation of capital.

    There should be no taxes on capital at all, as it discourages saving and investment. I explain why in this post:

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

    Rien, Yes, that’s the problem, but we must keep fighting.

    Ken, No, I am doing it the right way, see my answer to Dan above. It’s a ratio, and all that matters is that you are consistent in terms of base year indices.

    Steve, Both, it’s not fair and it creates bad incentives. But that’s not really my point here. I am trying to show that the media (and other bloggers) use data like tax rates that is economically meaningless. Even if we “fixed” the problem by indexing taxes on capital, I’d still be opposed–as there should be no taxes on capital.

    Bill, That’s right.

  29. Gravatar of Russ Abbott Russ Abbott
    18. September 2011 at 08:57

    Scott,

    As I said earlier, I completely agree that a steeply progressive tax on consumption is a good idea. But that doesn’t mean that everything else you say about taxes follows.

    In your reply to me you said that you had an earlier post on Buffet. In that post you wrote, “the tax rate on investment income should be zero–only consumption should be taxed. … Even worse, taxes on capital income represent double taxation, as the money was first taxed as labor income, and then taxed again as capital income.”

    I know that you believe that taxing capital income is a bad idea. That doesn’t mean it should be counted differently. An argument in favor of taxing capital income is that corporations have lots of privileges as legal persons. Capital income is money transferred from one legal person to another. That sort of transfer is generally taxed.

    Do you really want to do away with the idea of a corporation as a legal entity that limits the liability of the owners? If you did, that would strengthen your argument against taxing capital income. But I doubt you want to do that.

  30. Gravatar of Russ Abbott Russ Abbott
    18. September 2011 at 09:23

    P.S. Have you ever done a study to determine what a steeply progressive tax on consumption would have to look like if it were to replace our current system? Assume that spending patterns don’t change (unlikely but assume it anyway), What would your recommended tax rates be on various consumption levels?

  31. Gravatar of Joel Fish Joel Fish
    18. September 2011 at 10:36

    Scott,

    Thank you for the link. Very informative. I still don’t buy your argument for zero inheritance tax, but the rest made a lot of sense.

  32. Gravatar of KRG KRG
    18. September 2011 at 16:58

    Since the only investment that people are actually forced to buy bonds with is Social Security, I think asking whether the tax rate should be so high is the wrongs question, given that people want to buy them, despite the projected loss. They’re opting into being taxes at that level. It would be the worst kind of kludge to try to adjust the tax rates to make bonds more profitable if when the market is stating that it’s willing to push bond prices high enough to take that loss; all you’d end up doing is pulling more people into bonds and pushing them back up to the same level of loss, which is the wrong direction; we need to be guiding people toward capital, not away from it.

  33. Gravatar of Floccina Floccina
    18. September 2011 at 19:34

    I believe that the CPI is much higher than real inflation. The last few years we may be in deflation. On the other hand I think that inflation was higher than the CPI from 2000 to 2008.

  34. Gravatar of acarraro acarraro
    19. September 2011 at 04:27

    I agree with the analysis, but does it really matter?

    I am not sure about the US, but in the UK there are several forms of savings (usually linked to retirment plans) that avoid all income taxes. Aren’t 401(k) plans such a scheme? Muni bonds are tax free as far as I know… Or just sell the bonds before the coupon is due and buy them later… or buy t-bills…

    In the UK you have a lifetime (~£2m) and yearly allowance (~£50k) for contributions to a pension fund on which you’ll pay taxes only once you receive benefits. Terms got a lot worse after 2008 to avoid people contributing too much money after the tax rate increase (used to be £225k a year).

    I think such schemes solve the issue you mention for most people (with the additional benefit that they are forced savings so nudge the people in the right direction)…

  35. Gravatar of Steve Roth Steve Roth
    19. September 2011 at 07:21

    Scott: “there should be no taxes on capital”

    1. Are you referring to real capital (what Kuznets called “the true savings of the nation”) or financial capital? The term, absent one of those modifiers, is meaningless.

    2. You don’t address my central point: that systemic incentives that encourage investment spending on real capital as opposed to hoarding of financial capital could be quite positive in their effects. What say you?

  36. Gravatar of MikeDC MikeDC
    19. September 2011 at 09:07

    I’ve actually always thought it’s hard to a distinction between much investment and consumption, let alone “real” and “financial” capital investment. In reality the vast majority of it is very fungible.

    My computer, my home, my education, my car… they can all be defined as capital or consumptive goods based on changing circumstance.

    Likewise, there’s a fine line between “real capital” and “useless crap”, and it’s unclear that incentivizing the purchase of the latter over, say, investment in productive research and education is a worthwhile proposition. In that context, privileging physical capital would funnel financial capital to lots of obviously short-sighted uses.

    Ultimately, financial capital, as we understand it, can be applied to either

  37. Gravatar of Scott Sumner Scott Sumner
    19. September 2011 at 09:54

    Russ, Whether something is “generally taxed” is irrelevant. Almost all tax systems are grossly inefficient. The point is to make them more efficient, by taxing consumption rather than income.

    I don’t follow your argument about taxing corporations. If the government wants to charge some sort of fee for the privilege of limited liability, that’s one thing. But it shouldn’t be in the form of an income tax.

    It’s very difficult to know what a tax of equal progressivity would look like, because no one knows how progressive our current system is. To take the most obvious example, no one knows who pays the corporate income tax. There is also dispute about how progressive personal income taxes are. How much of the income tax is passed on via higher prices? (for brain surgery, legal fees, etc.)

    Thanks Joel.

    KRG, The fact that people buy bonds despite the high tax rates is irrelevant. People buy cigarettes despite high rates, indeed they worked on jobs when we had 90% income tax rates in the 1950s. The problem is that some taxes distort economic decision-making.

    Floccina, I agree.

    acarraro, It’s far worse here, we are limited to about $20,000/year, depending on age.

    Steve, I don’t think you understand how capital works. Financial capital is claims to the income streams for real capital. You don’t want to tax either.

    I have no idea what you mean by hoarding financial capital.

    MikeDC, I agree that it is hard to draw a sharp line, but we already need to do so with an income tax, so I’m not adding any new complications.

  38. Gravatar of Steve Roth Steve Roth
    19. September 2011 at 09:56

    MikeDC: Yes, consumption/investment is a somewhat arbitrary distinction. Lunch is investment in the afternoon’s work. But just because there’s orange doesn’t mean that you can’t distinguish between red and yellow.

    And yes, real investment is inevitably a leaky bucket — some/lots of it won’t pay off, will decay (“capital consumption”) too fast to yield net benefit. But I don’t understand how that leads to this:

    “privileging physical capital would funnel financial capital to lots of obviously short-sighted uses”

    I like the analogy of pianos being mass-produced. You get a lot more piano playing and piano music, much of it crap. But you get a lot more good piano music too. Seems like a net win.

    Does money circulating in the financial system — jumping between different securities/storage vehicles (with associated increases and decreases in the values of different financial asset classes) — but never entering the real economy via consumption or investment, have the same salutary effects as money circulating through purchases/sales of real goods and short-term deposit accounts?

    This is where I find my main (uneducated) confusion about monetary policy, whether via NGDP level targeting or other: how (except via higher inflation [expectations]) does it encourage people to buy (hence sell) more real goods, which trading is where the real surplus in an economy presumably comes from?

  39. Gravatar of MikeDC MikeDC
    19. September 2011 at 12:23

    Steven, I was being a little obtuse with the consumption/investment split to draw a parallel between financial capital, real capital, and human capital. To follow your analogy:

    To get good piano music, you need both more pianos (real capital) and more piano players (human capital). Favoring real capital will result in a systematic overproduction of pianos and underproduction of piano players. Further, it’ll result in a stagnation in piano and musical instrument quality improvements and productive efficiency (which are the result of knowledge improvements).

    Knowledge is the name of the game when it comes to economic growth, not physical capital.

  40. Gravatar of Floccina Floccina
    19. September 2011 at 16:07

    My computer, my home, my education, my car… they can all be defined as capital or consumptive goods based on changing circumstance.

    You consume the depreciation on your computer home and car.
    Should a consumption tax tax on the depreciation of a home?

  41. Gravatar of Steve Roth Steve Roth
    20. September 2011 at 06:08

    Mike, both physical and human capital constitute real capital (as distinct from financial “capital”). I’m not suggesting that physical should be privileged over human. QTC. Rather than investment spending on real capital should be encouraged in preference to storing of capital in financial securities.

  42. Gravatar of MikeDC MikeDC
    20. September 2011 at 06:32

    OK, I don’t see why you’d want to monkey with folks’ fundamental time-preference judgement.

    Setting aside the possibility that much of my savings are someone else’s investment, and assume my financial capital is purely stuffing my mattress with cash and I still don’t get it.

    Even in a mildly inflationary environment, I’m losing capital by holding the cash. That is, I have a strong incentive to invest already. I know, I know, Money Illusion! But that only takes us so far. It’s not mutually exclusive to the possibility that investment opportunities simply look worse than the alternative of holding cash.

    Forget money illusion, there’s a lot of reasonable explanations as to why “later” is a better time than “now” to open a new piano factory.

  43. Gravatar of Scott Sumner Scott Sumner
    20. September 2011 at 12:17

    MikeDC, Your argument suggest we should treat education expenditures as investments in human capital. I’m OK with that.

    Steve Roth, You said;

    “Rather than investment spending on real capital should be encouraged in preference to storing of capital in financial securities.”

    I don’t think we need worry about that, because it’s impossible.

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