A commenter recently asked the following in regard to consumption taxes:

What if I buy a yacht and it’s primary purpose is to entertain clients?

I see this confusion all the time. Consumption is consumption; it has nothing to do with what the purpose is. Enjoying a yacht is consumption, not investment.

I’ve actually seen people argue that “business lunches” are not consumption if they are done for a business purpose. That’s wrong. Eating is the most “consumption-y” of all form of consumption. You are literally consuming something. How can that not be consumption?

The lunch costs more than you otherwise would have spent? Tough, it’s still consumption.  Done primarily to make a client happy?  Tough, it’s still consumption.  It’s consumption done for a business purpose.

The mistake here is to assume the term “investment” is somehow related to “business”, and “consumption” is somehow related to “personal”. Not so, it is investment if I build a house for myself, even if no “business” is involved.  And business lunches are consumption, learn more before starting your own business.

Recall that “income” and “profit” are meaningless concepts, and hence your intuition about whether business lunches should be deductible when calculating profits has no bearing on the issue of whether they are consumption or investment. 

In my view, business lunches should not be tax deductible.  Making them deductible leads to a lot of wasted time and aggravation.  I spend a lot of time filling out travel expense reports, time I could use for leisure or productive work.  At least half this time is spent calculating the cost of meals, snapping pictures of receipts, e-mailing the receipts, filling out a new form for every single receipt, etc.  What a waste!

The field of economics is regressing. We are forgetting what we knew about monetary policy back in 2007, and we are also forgetting what we knew about public finance back in 2007. This is incredibly discouraging.
For non-economists, I’ll start with a simple thought experiment to explain the basic principles of public finance.

Imagine a country where everyone earns exactly the same wage income, $80,000/year from age 25 to 65. No one inherits any money.

The only investment is a safe asset that earns a 5% rate of return. Assume no inflation.

Some people like to save a lot for future consumption, while others spend their money today and save very little.

What do we know about this world?

1. There is substantial income inequality.
2. There is lots of inequality in measured wealth.
3. Actual wealth is identical, in the sense that every single person has identical lifetime consumption in present value terms.

(Wealth, properly measured, is supposed to represent the present value of future expected consumption, for you and those to whom you give money.)

The society that I described does not have any economic inequality, in any meaningful sense. Everyone has exactly the same amount of resources to work with over their lives; they simply choose to spend their money at different points in time.

[I’ve seen people argue that a lack of patience is a disability, like being born without a right arm. I view preference for current goods over future goods as being no different from preference for strawberries over blueberries. Maybe that’s because I made the mistake of consuming too little when I was young.  I don’t view myself as being better off than those who enjoyed life while young.]

ALL TAXES ARE CONSUMPTION TAXES!

All taxes are 100% consumption taxes.  That’s public finance 101.  The burden of a tax is its impact on consumption.  Saving and investment are simply a way of generating future consumption, for you or the person you give the money to.

When economists like me use the term “consumption tax” we are referring to taxes that tax current and future consumption at the same rate.   We actually mean, “time neutral consumption taxes”.  Examples include VATs, payroll taxes, and income tax systems with unlimited 401k privileges.  (I.e., no limit on contributions and no mandatory withdrawal date.)

An ordinary income tax system does tax capital income, as do corporate income taxes, capital gains taxes, etc.  These are also consumption taxes in a sense, but they are not called consumption taxes because they tax future consumption at a higher rate than current consumption.

In my imaginary example above, an income tax would tax those who preferred future consumption at a higher rate than those who prefer current consumption.  At first pass, that looks distortionary.

Now it’s perfectly OK to say that the simple public finance theories do not work in the real world.  Some “capital income” is disguised labor income.  Maybe for that reason we should tax capital income.  I’ve argued that when in doubt, capital income should be treated as labor income.  But you’d have to be completely insane to believe that all capital income is disguised labor income.

Unfortunately, the profession seems to be completely insane, as I see more and more economists making nonsensical comments such as claiming that the super rich pay a lower rate of tax than the middle class.  In making that claim, they are treating “income” as the correct base to use when evaluating tax incidence, not consumption.  That’s a freshman level error, completely unacceptable.  If you see an economist doing that, just stop reading.  Nothing they have to say will have any value.  In fact, income is a meaningless concept.  The tax rates faced by billionaires are meaningless numbers.

Progressives should be advocating a progressive consumption tax.  This tax system would tax current and future consumption at the same rate, but would tax high levels of consumption at much higher rates than low levels of consumption.

There are many ways to get there, and undoubtedly many compromises that must be made.  Perhaps “second best” options need to be considered.  But if you don’t even understand the proper destination, what chance is there of developing a sound strategy?

PS.  Tim Peach recently pointed out to me that Estonia is the country whose tax system is closest to being time neutral.

Trump:  No quid pro quo!  No quid pro quo!

Chief of Staff Mulvaney:  Yes, there was quid pro quo.

I suppose when you are caught red-handed, and one staff member after another confirms the whistleblower’s account, then this is pretty much all that’s left:

“I have news for everybody: Get over it. There’s going to be political influence in foreign policy. That is going to happen. Elections have consequences,” Mulvaney said.

When ABC News reporter Jonathan Karl pointed out that withholding aid to Ukraine until an investigation into the DNC server was launched was the very definition of a quid pro quo, Mulvaney responded, “We do that all the time with foreign policy.”

Yeah, you also lie all the time.

PS.  A grieving UK family visits the White House and Trump thinks to himself, “How can I use this for my political advantage”, and then humiliates them.

PPS.  The administration just announced that the G-7 meeting would be held at a Trump resort.  I guess he’s trying to cash in while still in office.

The Trump Doral golf resort was also the site at which a violent video that depicted Mr Trump shooting and stabbing his political opponents was reportedly shown to a group of the president’s supporters.

I’m sure they all laughed uproariously at all the fake carnage.  After all, these are people who find Trump’s “jokes” to be funny.  I think I knew some of them, back when I was in the 8th grade.

Tyler Cowen has offered advice, now I’ll offer my own.  You should say:

“Hong Kong is and should remain a part of China. I hope the people of Hong Kong will be allowed to choose their local government officials in democratic elections.”

This is better than, “I support the HK protestors”, because it’s much harder for the Chinese government to mischaracterize your views. The Chinese government feeds a biased account of Hong Kong to its citizens. They are being told that the protestors are terrorists who are trying to achieve independence for Hong Kong at the instigation of foreign powers like the US.  Who would support that?

Of course the official Chinese story is a lie, but many citizens don’t know that. (Some do, I can assure you.) My phrasing would be interpreted by Hong Kong residents as being supportive of their push for democracy, and it would not greatly offend Mainland residents who are worried about Hong Kong independence, but care very little about how the local officials are picked.

It’s possible that the Chinese government would misquote the celebrity to make them look bad, but that’s actually a bit less likely than you might assume. Many Chinese people have access to international news and the Chinese government tries to walk a fine line, distorting the news without losing all credibility. China’s government is not quite like North Korea’s, they actually care a little bit about their image. I doubt they’d completely re-write a celebrity’s comment.

I don’t expect celebrities to know any of these nuances, and hence I’d cut them some slack if they ignored my advice. Actually, I couldn’t care less what any celebrity says on any issue.

I get certain comments quite often, so perhaps I should reply in one place.

1. “You should not say “we”, you should say “the US government”.

Guilty as charged; it’s a habit that’s hard to shake. Thus when I say “I hope the US loses the trade war”, I actually mean I hope Trump loses the trade war, in which case the US will win.

In my defense, lots of people make the same mistake. They’ll say “The US beat Uruguay in the World Cup”, not the US football team beat Uruguay’s team at the World Cup.”

2. “Why do you say public opinion polls are misleading, then cite them when it suits your interests?”

When I cite public opinion polls, it’s generally to push back against the conventional wisdom on an issue. Thus if I cite polls showing that American’s increasingly support trade, it’s to push back against claims that Trump was elected because Americans increasingly oppose trade. The burden of proof is on those that make the original assertion.

Here’s another way of making the point. If you want to show that anti-trade feeling is on the rise, you must first find surveys that show that to be true, and then prove the surveys are not biased by the wording of the question. I simply pointed out that those fashionable Trump experts hadn’t even surmounted the first hurdle; the polls don’t even show what they claim. If they want to find alternative evidence they are free to do so (perhaps mind reading machines?), but thus far they’ve failed to find non-poll evidence for their claims.

3.  “Even if free trade is generally good, shouldn’t the US launch a trade war to stop the Chinese from stealing IP?”

Probably not, for a variety of reasons.  It’s almost inevitable that lower income places will steal IP from the rich.  American teenagers used to illegally download songs and movies.  They didn’t think they were doing anything seriously wrong—more like jaywalking.  They certainly didn’t view themselves as being the moral equivalent of burglars.

When America was young we stole lots of industrial secrets from the UK. Europe stole the compass, gunpowder, paper and printing, porcelain, etc., from the China.   That’s the way the world is.  It’s not just the Chinese; the Indians, the Vietnamese, and other developing countries do the same thing.

Even if it’s bad, the average American suffers very little harm.  Tech billionaires lose some profits, but if it helps China develop faster that actually helps average Americans, as we benefit in multiple ways from a world that moves from poor to middle class.

And even if we should retaliate, trade wars are a blunt instrument, unlikely to be effective and likely to hurt lots of innocent bystanders.  If there’s proof that a specific China company stole IP from a US tech firm, then you might want to blackball that specific Chinese firm, in the way we’ve gone after Huawei.  But not an all out trade war.  The Chinese government probably couldn’t even stop IP theft if it wanted to.

We’d be better off focusing on positive initiatives, such as reforming our IP laws.  How about reducing copyright protection from nearly 100 years to more like 10?  Hollywood makes plenty of money from songs and movies in the first 10 years, after that allow America consumers to benefits from cheap goods that can be produced at near zero marginal cost.  Remove IP protection from lots of dubious “business practices” that are far from the original vision of patent laws.

The trade war is hurting lots of people all over the world, including in America.  It’s rarely the case that a four cushion shot in billiards will work, and it’s rarely the case that the indirect effect of highly destructive policies will eventually offset the upfront costs.