Should people who are patient and/or have blue eyes be taxed at higher rates?
I’m pretty sure than most people don’t think it’s fair to tax people at higher rates, just based on eye color. What about taxing people who are more patient? I think most people do favor policies that tax patient people at higher rates, although they they usually don’t know that the policies they favor would have that effect. Ray Fisman has a very puzzling article discussing the pros and cons of eliminating the “tax shelter” for 401k accounts.
It turns out that savings incentives had scarcely any impact on the rate at which Danes accumulated nest eggs, while the nudges were very effective in making people save. These findings suggest that 401(k) plans and their brethren””which cost the U.S. government as much as $100 billion a year in lost revenue””don’t do much to further their stated objective of boosting retirement savings. Even if $100 billion wouldn’t go all that far toward solving America’s debt problems, it suggests that smart approaches to eliminating or improving government programs could quickly add up to fiscal solvency””and might help the two sides find common ground.
The reason we have tax shelters like the 401(k) is to change the relative cost of spending money today versus saving for tomorrow. Exempting retirement investments from taxation increases the saver’s return on his investment, so a rational cost-benefit calculation should lead most people to put something away for the future.
It seems to me that we should defer taxes on money saved because it is the fair thing to do. Or if you want to be a utilitarian about it, because consumption is more closely correlated with utility than income. People putting money into 401ks don’t get any sort of tax break–they must pay taxes on 100% of the funds (principal and interest) when the money is withdrawn. The taxes are simply deferred. If all saving were treated like 401k accounts then the government would be adopting a neutral position between current and future consumption, as it should. I see no reason why either blue-eyed people or patient people should pay a higher tax rate on their lifetime consumption, as compared to a brown-eyed person, or an impatient person who consumes the same resources at an earlier stage of life.
Fisman points to a Danish study that shows the effects of saving incentives are very small, at least in the short run. However I would caution readers that short run elasticities are almost always much lower than long run elasticities. On the other hand, unlike many libertarians I’m not opposed to policies “nudging” people to save more, as our economy is absolutely riddled with all sorts of disincentives to save.
I suppose there is one utilitarian argument for taxing savers at a higher rate—they might derive less utility from an extra dollar of lifetime wealth than less patient people. Of course (as Mankiw once showed) the same argument might apply to height, and all sorts of other innate characteristics. It could also be applied to ethnicity. Given our society’s moral revulsion against “discrimination,” I don’t know if there’d be much support for policies that might imply (even indirectly) that certain ethnic groups should face higher tax rates than other ethnic groups. What do you think? Are there any innate characteristics that we ought to tax at higher rates, for a given level of resources?
Update: Josh Hendrickson just sent me an email that is far better than this post, and much shorter:
People with patience and blue eyes are taxed higher, its called Scandinavia. 🙂
(Note his last name.)
Update: Here’s Evan Soltas:
Allowing the 2001 and 2003 tax cuts to expire would be, in large part, a win for Democrats. The party’s platform calls for reverting to the top two income-tax brackets under Clinton — 36 percent and 39.6 percent — while preserving the rate reductions for the lower brackets. Limits to personal exemptions and itemized deductions are another part of the Democratic plan, coming in at $200,000 in income for individuals and $250,000 for married couples. The top capital-gains tax rate would rise to 23.8 percent, due to an additional 3.8 percent levy in the Affordable Care Act.
The sentence about capital gains is correct. The second sentence is correct but slightly misleading, and should read:
Obama is proposing that we raise the top two income-tax brackets to higher levels than under Clinton — 39.8% percent and 43.4% percent, due to an additional 3.8 percent levy in the Affordable Care Act — while preserving the rate reductions for the lower brackets.
This NYT assertion is completely inaccurate:
Even if Republicans were to agree to Mr. Obama’s core demand “” that the top marginal income rates return to the Clinton-era levels of 36 percent and 39.6 percent after Dec. 31, rather than stay at the Bush-era rates of 33 percent and 35 percent “” the additional revenue would be only about a quarter of the $1.6 trillion that Mr. Obama wants to collect over 10 years.
He’s proposing even higher top rates.
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9. December 2012 at 06:21
How about splitting the difference. Tax those accounts that are excessive like Gov Romney’s 100MM IRA?
9. December 2012 at 06:39
As long as income is taxed, SMB owners and married people with children should be taxed at lower rates.
http://www.morganwarstler.com/post/37059806940/gop-the-party-of-fairness
The silver lining of dealing with the left is taking their philosophies and ruining their day with them.
Nudging single parents to marry is teh awesome!
9. December 2012 at 07:25
Bosco, I favor a progressive consumption tax, which would hit Romney harder. But no tax on capital income.
Morgan, I’d be happy if they simply removed the marriage penalty.
9. December 2012 at 07:35
You have to tax people somehow, and, as a first approximation, a fair way to do it is to minimize annoyance and maximize utility. If that implied heavier taxes poor historically oppressed minorities, then I can see how it would reasonable to object on grounds of justice. But if that means collecting more taxes (either more at an absolute value or as a percentage of wealth or income) from rich white men who don’t get as much pleasure from their money, then, no, there’s no reasonable objection on grounds of fairness.
I’m worried that I annoyed you into becoming more right wing. I’m sorry if I did.
9. December 2012 at 07:37
Interesting post.
Have you read something like this:
http://www.uwyo.edu/aadland/research/timecompression.pdf
Essentially, it’s the flipside of the argument you are presenting above.
You state that some people value future consumption more, and we should not discriminate against them.
The counterpoint is not that some people value future consumption more, BUT RATHER that some people are incapable of perceiving future consumption (they suffer from time compression).
You cast this debate in terms of patience vs. impatient, which cannot avoid the cultural context (intended or not) that patience is a virtue.
The psych literature recasts this as time perception – people who consume now are just as patient, they are just incapable of perceiving their future selves. Indeed, there is substantial evidence that when people are forced to visualize their future selves through various techniques, they save a great deal more money.
9. December 2012 at 07:41
If blue eyes were associated with higher levels of income, then, sure, tax ppl w/ blue eyes. This is the whole point of Mankiw’s hypothetical tax on height: From an optimal tax-policy standpoint, it would be best to tax something that is highly correlated w/ earnings but that doesn’t produce disincentive effects.
Say blue eyes were associated with higher levels of income — maybe they are, I’m not sure. Then a question every libertarian must grapple w/ is: What did those w/ blue eyes do to deserve the higher earnings power? If that question can’t be answered sufficiently, then the earnings power should be taxed away.
9. December 2012 at 07:50
With regard to the morality issue:
Imagine 2 people… Let’s call one Older Sister, and one Younger Brother.
Older sister is rationale. Younger Brother suffers from a disorder called time compression.
Older sister cuts a deal with Younger Brother through a deal-making engine called Mr. Market.
Both participants have 10 cookies today and 10 cookies tomorrow. These cookies don’t just taste good, but they’re healthy too! Older Sister makes this offer: One cookie today, for 10 cookies tomorrow.
Younger brother accepts deal.
In your model, Younger Brother is better off with this deal, than without this deal. But on day 2, Younger Brother is unhappy – he’s only gotten 11 cookies, Older Sister got 29. Older Sister tells him he’s better off because the consumption of 1 cookie yesterday was more valuable to him than 10 cookies today. Younger Brother disagrees…
Is Older Sister right?
In the super-rationale world of micro, yes. In the psychological world of behavioral economics, no, because on day 1 decision Younger Brother perceived 1 day as a very long time (much longer than it actually was), and that did not reflect his true preferences, BUT RATHER A PSYCHOLOGICAL IMPAIRMENT.
In Younger Brother’s opinion, Mr. Market is something that exists to allow people who don’t suffer from that handicap to take ruthless advantage of people who do.
In Older Sister’s opinion, this is true, but she’s too smart to say so. Instead, she builds a very rationale argument showing that Mr. Market always sets a fair intertemporal exchange rate to account for consumption preferences AND optimize efficient investment.
(BTW, you know that I’m a William James style pragmatist, so all of this fairness stuff is difficult for me to think about.)
9. December 2012 at 07:51
> What do you think? Are there any innate characteristics that we
> ought to tax at higher rates, for a given level of resources?
You asked so I’ll take the bait 🙂
Absolutely not. It is morally wrong for the government to discriminate based on innate characteristics. The 14th amendment covers the characteristics that matter the most but just because eye color isn’t on the list wouldn’t make it any more moral to discriminate on that versus race. It is not only morally wrong, but a practical disaster because of the divisiveness such discrimination engenders within society, particularly if the intrinsic trait is strongly inheritable. Why is it that the United States is one of the only countries on earth where significant numbers of Blacks, Whites, Latinos, Asians, Muslims, Christians, and Jews live and work together? I believe that one key reason is our society’s rejection of discrimination based on innate characteristics. It is a matter of basic justice.
In my moral universe, the gay rights battles today hinge on the question of whether homosexuality is intrinsic. If it is, then it is immoral to withhold benefits of marriage from same sex couples. If it isn’t, that doesn’t mean discriminating against homosexuals is a good idea, but it would reduce the moral strength of the anti-discrimination argument.
9. December 2012 at 07:58
beamish and Seydl, Precisely how high should the tax on being Jewish be?
beamish, When have I ever favored taxes on capital or blue eyes? And by the way, lots of “progressive economists” favor progressive consumption taxes. I don’t see that as a right wing position.
I’d guess Hitler favored higher taxes on Jews. Here’s what Seydl said:
“What did those w/ blue eyes do to deserve the higher earnings power?”
That’s probably about what Hitler said about the Jews, except most Jews don’t have blue eyes.
JSeydl, I mentioned Mankiw’s argument in my post. It does no good to repeat it as if I’ve never heard it. Wouldn’t it make more sense to respond to the actual points I made in the final paragraph?
Statsguy, Elsewhere I’ve advocated forced saving programs, which would presumably address the issue you raise.
9. December 2012 at 08:01
Kenneth, Well said.
9. December 2012 at 08:04
I hadn’t realized that what was at issue was the optimal taxation point. When I said that it would be ok to tax rich white men at a higher rate, I meant as an unintended but foreseen consequence of taxing the rich at a higher rate. I don’t support high taxes on the blue eyed.
Whatever utility would be gained by avoiding disincentive effects would be lost by outrage generated in the populace by such a tax policy. People have intuitions about justice, and whether or not those intuitions are right, the utilitarian legislator should take them into account.
In this case, I think they’re right, and that a tax on the blue eyed, especially as a substitute for a tax on the wealthy, would be unjust, but that isn’t my argument.
9. December 2012 at 08:05
Statsguy, Regarding your second post, I’m also not much of a “fairness” guy, I look at things from a utilitarian perspective, which is the main reason why I am outraged by all the anti-saving policies in our country that reduce living standards. We should be investing much more and consuming much less. And those investments would include things like environmental cleanup and infrastructure.
But I also think Kenneth has a good point.
9. December 2012 at 08:07
beamish, Sorry, when I read yours and Seydl together I thought you were making the same point. He mentioned “blue eyed” and you mentioned “white men” If it’s just the side effect you were thinking of, then my comment was off base.
9. December 2012 at 08:11
When have I ever favored taxes on capital or blue eyes? And by the way, lots of “progressive economists” favor progressive consumption taxes. I don’t see that as a right wing position.
I guess never. I had thought that you had defended progressivity in taxation on the grounds of the diminishing marginal utility of money. That argument works best with a tax on wealth, doesn’t it?
9. December 2012 at 08:30
Stats,
As I said above, the MOMENT you want to open the door to behavioral econ, I’ll drive a truck thru it making being weak and helpless STILL SUCK.
Case in point:
Scott just wants to end the marriage penalty… but I’ll now go further… We should use the tax code to “nudge” single parents to marry.
Children of single parents are a social cost, so parents should feel immense financial pressure to marry.
This does nothing to the top end, and takes away liberty and freedom at the bottom end…
Just as Scott wants to force the one marshmallow eaters to be forced to save.
I’ll go further, we can TEST and IDENTIFY these broken and diseased people, and once we identify them, we can publicize that they aren’t statistically good mates.
And the market can take over…
9. December 2012 at 08:33
Stats, whatever the rules of the game are, the same people win. Once you get over that, just come to terms with it, your goal becomes to have as few of the rules as possible.
20% of the laws will get you 80% of the effects, after that the marginal improvement on new regs dwindles.
9. December 2012 at 08:33
beamish, Yes, I favor a progressive consumption tax precisely because of the diminishing marginal utility of money.
Wealth (properly measured) is the present value of future consumption. So a consumption tax is identical to a wealth tax, were it possible to tax all wealth including human capital.
9. December 2012 at 08:38
Scott, I am losing patience with high taxes…and so is my blue eyes…
9. December 2012 at 08:51
“In my moral universe, the gay rights battles today hinge on the question of whether homosexuality is intrinsic. If it is, then it is immoral to withhold benefits of marriage from same sex couples. If it isn’t, that doesn’t mean discriminating against homosexuals is a good idea, but it would reduce the moral strength of the anti-discrimination argument.”
“intrinsic” isn’t the right way to demand rights.
For years in Hollywood, I and partner ran the largest gay circuit party on the West Coast. So I’ve had a number of all nighters talking gay rights with hundreds of successful and activist gays who understand nature / nurture doesn’t really get at the issue.
Hinging rights on anything other than guns / force / violence / pain / threats – which is supported by “the creator,” opens Pandora’s box to proving out a lack of a gay gene.
If you REALLY want to get someone to be gay, or not be gay, lock them up with just women or just men for ten years.
That in the future, we might be able to shorten that time cycle and reprogram people, is always there.
Gays should not base their argument on anything other than freedom and liberty.
I WANT to love, marry, have sex with whoever I want, AND if you get in my way I will cause more problems than it is worth for you to fight me on it. I refuse to live my life unhappy, so I will MAKE you unhappy too.
That can NEVER be taken away.
9. December 2012 at 08:57
Wealth (properly measured) is the present value of future consumption.
By an individual during his lifetime?
Does the diminishing marginal utility of money apply to wealth properly measured as much as it applies to wealth as an accountant might measure it? Properly speaking, a talented 20 year old with $10000 in the bank might be wealthier than a 70 year old with a million dollars in the bank, but it’s not obvious that a $5000 tax would sting the young person less.
9. December 2012 at 09:05
One of the main economic arguments for raising tax rates on “the rich” as opposed to everyone else is that “the rich” as a group have a higher propensity to save their income. Thus, the argument goes, eliminating the Bush tax cuts for “the rich” would have a less significant *short-term* negative effect on GDP because a lower amount of each dollar not taxed would be immediately spent.
Aside from the short-term myopia, that argument advocates a policy blunderbuss. It is worse than taxing people with blue eyes because it is more akin to taxing all people with Scandinavian heritage because they have a higher propensity to have blue eyes.
9. December 2012 at 09:20
I guess you could make a theoretical arugment for higher rates for the patient if they cause lower growth for the rest of us.
9. December 2012 at 09:23
In any case someone who consumers all their money sooner rather than later isn’t necesarily “impatient.” It may be that they’re poor.
The poor necessarily have low savings rates. Those with more income can save more. So you can make the case based on tax progressivity.
9. December 2012 at 09:24
If I make $250 a week I’m much more likley to consume it all very quickly than if I make $2,500 a week.
9. December 2012 at 09:46
“If I make $250 a week I’m much more likley to consume it all very quickly than if I make $2,500 a week.”
If you refer to my comment, you really don’t get my point. A lot of people who make $2,500 a week (and more) spend the entire thing very quickly (and then some). They are big drivers of GDP. The blunderbuss policy point was that the argument that the group has a higher propensity to save bases policy on stereotypes of what an individual within a particular group *might* do if he/she conforms to stereotype, whether or not that individual conforms to the stereotype in practice. If my study concluded that in the short-term all persons with the surname “Sax”, on average, spend a greater portion of their income than persons with the surname name “Smith”, I suppose you would agree, *on that basis*, that the persons with the surname Sax should be subject to a higher tax?
9. December 2012 at 09:49
The libertarian-debate strategy: When you find yourself in a pickle, just accuse the other guy of supporting Hitler-like policies.
If you have proof that Hitler was a luck-egalitarian, then I’d love to see it, ssumner.
9. December 2012 at 10:04
Sax,
The reality is there ARE poor who make $250 and SAVE.
Forget the % of them who do, compared to others, I just want to see if you agree on either count.
1. The poor guy who saves should (policy) be rewarded.
2. The poor guy who saves ought (morally) to be rewarded.
9. December 2012 at 11:57
“Obama is proposing that we raise the top two income-tax brackets to higher levels than under Clinton “” 39.8% percent and 43.4% percent, due to an additional 3.8 percent levy in the Affordable Care Act – while preserving the rate reductions for the lower brackets.”
Scott, I believe you are making a factual error here.
Currently, people with income (from labor) higher than the threshold for the new ACA tax are already paying a 2.9% tax for Medicare (divided between employer and employee portion of the payroll tax). (On unearned income, there is no Medicare tax, just whatever tax rules apply to that income).
ACA imposes a 3.8% tax on unearned income above the threshold (I think 200K for individual and $250K for family).
ACA imposes a 0.9% tax on wage income above the threshold. Added to the 2.9% Medicare tax, this totals 3.8%. But, 2.9% of the 3.8% is already being paid today. Incrementally, the difference between the highest income tax bracket on wages on Jan 1, 1999 and on Jan 1, 2013 (assuming current rates expire) would be 0.9%, not 3.8%.
So, if you want to say that the top bracket on wage income will be 43.4% in January, you have to compare this to 42.5% during the Clinton administration.
9. December 2012 at 12:07
@ssumner – yes, I agree with your forced savings policy (have said many times), on purely utilitarian and paternalistic grounds (even though paternalism is a bad word), and on the grounds that people who don’t save create massive negative externalities for people like me who do save.
@Morgan – all utilitarian arguments are subject to slippery slopes. Likewise, so are all natural rights arguments.
I once had an argument with a well respected libertarian scholar at a conference who was arguing for air property rights – that way everyone could buy and sell air pollution rights, and pollution would hit its optimal level through coasian bargaining.
I pointed out that his initial definition of property rights created the outcome. If the initial definition was “everyone has the right to breathe 100% unpolluted air”, then any single individual can stop all pollution. ALL of it. Even with Coasian bargaining, all it takes is for ONE person to have high and massively inelastic demand for fresh air. The current “rights based” social contract falls apart – modern society could not exist.
9. December 2012 at 12:10
beamish, There are huge problems measuring wealth accurately, which is why I oppose a wealth tax. It’s easier to tax consumption. But if it could be measured correctly it ought to be identical to a wealth tax.
Vivian, Good point.
Mike Sax, How do any of your comments relate to the issues discussed in this post?
Seydl, I agree the “Hitler card” is always a completely disreputable argument. But if so, it should not be at all difficult for you to explain the difference between discrimination against Jews and discrimination against blue-eyed people. I eagerly await your answer, as I threw a softball over the plate for you. So hit it.
Michael, No mistake, it is you who is discussing wage income, not me. A tax on wage income is not an income tax. An income tax includes investment income as well. That top rate is rising from 35% to 43.4%. The top rate on wage income (which I didn’t discuss) is risng from 37.9% to 43.4%
9. December 2012 at 12:51
beamish, There are huge problems measuring wealth accurately, which is why I oppose a wealth tax. It’s easier to tax consumption. But if it could be measured correctly it ought to be identical to a wealth tax.
I think that you don’t favor a wealth tax for the reasons given in the original post, and not because it’s hard to measure wealth.
More exactly: there is a notion of wealth as the present value of future consumption. Taxing future consumption is equivalent to taxing wealth in that sense. There’s another notion of wealth which is the value of your property minus your liabilities. You oppose a tax on wealth in the second sense not because it’s hard to measure, but for other reasons.
All I’m saying is that marginal utility of wealth in the second sense may drop more sharply than the marginal utility of wealth in the first sense, and for that reason, the second sort of wealth may be a more appropriate object of taxation.
9. December 2012 at 14:58
I have no idea what you even mean by discrimination. My basic point was that the luck factor that determines high earnings should be taxed away — regardless of whether that factor is blue eyes, being Jewish, being tall, or whatever. This is also why I brought up the Mankiw proposal: To say that the proposal actually has moral weight along with being an efficient tax proposal.
9. December 2012 at 15:17
beamish, It’s pretty foolish to tell me that you know why I oppose something better than I do. Do you claim to be some sort of mind-reader? Most people have trouble understanding themselves, much less others. I’d try to figure out why you write such silly comment, before you try to analyze the motives of others.
You don’t seem to understand that a tax on wealth, properly measured, is identical to a tax on consumption. So there’d be no reason for me to favor one and oppose the other except problems of measurement. Without both sides knowing the relevant economic concepts, it’s pretty hard to have an intelligent conversation on the topic.
JSeydl, Fine, you favor a special excise tax on Jews because:
What did those Jews do to deserve the higher earnings power?
If that’s your answer, I’ll let it stand, and withdraw my analogy to Nazism. But I still think it’s a really strange argument to make.
9. December 2012 at 15:36
I’d try to figure out why you write such silly comment, before you try to analyze the motives of others.
You may want to reread my comment, Scott. If your considered view is that it’s silly, then I’ll stop.
9. December 2012 at 15:46
ssumner:
“You don’t seem to understand that a tax on wealth, properly measured, is identical to a tax on consumption.”
There are two problems with this…
1) This presumes that future laws are stable. A tax on wealth affects present AND future consumption, even if laws change. A tax on consumption only affects consumption while the tax is in effect.
2) This presumes that consumption cannot occur outside the legal boundary (or that expatriated wealth is taxed equivalently to consumption). The really wealthy do not care about nationality – they are equally happy consuming in the Caribbean, Singapore, Brunei, Switzerland, etc… We then observe consumption competition, or small countries competing to be the consumption destination of large countries. Libertarians think this is lovely, but it creates a free rider effect – and makes consumption taxes more difficult.
Not insurmountable, but consumption and wealth taxes are not perfectly fungible in the real world.
9. December 2012 at 17:14
Statsguy, Isn’t that what I said?
9. December 2012 at 17:27
beamish, Fine, so a mismeasured form of wealth might be more appropriate to tax. The brother that becomes a brain surgeon should be taxed much more lightly then the brother who becomes an auto dealer, assuming identical lifetime consumption?
No, I still oppose that, as I see no logical reason why human capital should be treated more lightly than physical capital. So I stand by my reasoning. I oppose a wealth tax because it won’t measure wealth correctly, and for no other reason. You’ll end up taxing certain only kinds of wealth.
9. December 2012 at 18:19
It is not necessary for people to save more to get more savings. If savings are not taxed savers will have more money and so savings will tend to increase.
9. December 2012 at 18:53
The key thing is that the Bohm-Bawerk Effect is unknown to economists like Paul Krugman, therefore they see no loses coming from penalizing the patient.
Hayek shows how the expansion of the length of production expands to return to labor in his _The Pure Theory of Capital_.
‘Thrift’ is a paradox for those economists who are oblivious to the logic of choice embodied in the Bohm-Bawerk Effect.
Scott writes,
“I’m pretty sure than most people don’t think it’s fair to tax people at higher rates, just based on eye color. What about taxing people who are more patient?”
9. December 2012 at 19:05
Morgan it’s simple economics. I don’t know how anyone can evel live of $250 a week much less save. However, assuming they do, why should they be rewarded either policy wise or morally?
Arguably the person who spends does the economy more good. I see no reason to favor savers over spenders and if anything I think that despite what conservatives seem to think-that there are all these disincentives to save-I think it’s mostly the opposite.
Mostly though Morgan, I got to be honest with you. You don’t sound like someone who has had to live off of $250 a weel recently. It doesn’t go nearly as far as you may think-maybe you did it back when it was much more money-like the early 90s or late 80s or whatever. Today good luck finding rent that is less than $1000.
Heck, good luck finidng rent that is only $1000. If you do find it then you can see the $250 a week would be spent on rent alone. How do you buy groceries, clothes, etc?
So I’m very pessimistic than it can be done-those who do already have extra income somewhere. Maybe a spouse or live in girlfriend/boyfriend, or maybe like Romney they borrow from their parents, or maybe it’s even Medicare-though probably not as you aren’t even allowed to make more than $800 without them cancelling your SS.
If conservatives want to reform SS-that’s a place we could do it-taking away the disincentive to work-but not by ending it but by letting people keep their benefits until a higher threshold. But I digress.
9. December 2012 at 19:13
Scott I was answering your question in the title: should the patient be taxes more. I think you can at least make the argument that the patient should be taxed more. That doesn’t mean I necessarily advocate it just that it’s not impossible to make the argument.
After all it’s nothing new to tax certain types of behaviour more than others. You favor a carbon tax for instance.
Some would argue that those who save a great deal have a similar negative Macro effect.
9. December 2012 at 21:44
I find the question of whether Federal taxation is necessary under NGDP targeting to be interesting — entities that do not print money would clearly still have to tax (state and local). But if you have money printing authority, why is there a compelling requirement to tax if you target NGDP?
If base money simply operates to keep NGDP on line at its absolute USD level trend (which is a 98% r-squared since the 18th century), it accelerates into below-trend and slows into above-trend.
If base money is geared toward NGDP variability, it cannot be geared toward bank lending variability. This means that base money (reserves in particular) is not available to discretionarily provide to banks. In fact, you don’t need reserves at all — banks need to go out themselves and get hold of a slice of NGDP-targeted base money (capital) — and if their loans are bad, they lose capital and can go under.
As population, technology, and capital expand over time, this means that base money expands at a consistent rate. This money printing can be carried out directly by the US Treasury — which can be a/the source of its spending power. Again, it does not matter where the base money is handed — it matters that it is created in aggregate. Pay the military and transfer programs more aggressively into NGDP below-trend phases, and restrict into above-trend expansions. (Oh, and by the way, eliminate the Federal tax code.)
Now we don’t know what the current base money volume ought to be in a NGDP targeting regime that cuts out fractional lending. The Treasury announces NGDP targeting and direct distribution of USD base money; the Fed goes into run-off mode. The economy’s base money requirements are likely much higher, and could serve as a one-off liquidity injection, like going off the gold standard (we are on the bank standard at present).
Consider it a merger of MMT, income stabilization policy, and NGDP targeting.
9. December 2012 at 23:43
Scott,
could you do a post one day on how the progressive consumption would be implemented? I guess a lot of people have never heard of the idea (me included), and would love to hear how it’s supposed to work in practice.
9. December 2012 at 23:54
*progressive consumption tax
10. December 2012 at 01:23
Here you go Scott: http://www.nytimes.com/2012/12/09/us/politics/new-taxes-to-take-effect-to-fund-health-care-law.html?ref=robertpear&_r=0
10. December 2012 at 01:38
“Morgan it’s simple economics. I don’t know how anyone can evel live of $250 a week much less save. However, assuming they do, why should they be rewarded either policy wise or morally?”
Assuming they do, one reason I could think of is so that they would not need to be “rewarded” twice: once for their current consumption and again later in life by living off the savings of others. In the current parlance, I think that’s called “a balanced approach”.
The “moral” aspects of this have been the subject of many a fable. For example, Aesop’s “The Ant and the Grasshopper” and Fontaine’s La cigale et la fourmi. There were many other antecedents. For example, let’s not forget the Book of Proverbs:
“Go to the ant, you sluggard! Consider her ways and be wise, which having no captain, overseer or ruler, provides her supplies in the summer, and gathers her food in the harvest” (6.6-9). and, also, ‘four things that are little upon the earth but they are exceeding wise. The ants are a people not strong, yet they provide their food in the summer.’ (30.24-5).
One might argue, rightfully, that “saving” is its own reward. But, as a matter of policy, I wonder why we would encourage the ant to turn into a grasshopper.
10. December 2012 at 05:12
From today’s WSJ:
“Mr. Obama says he merely wants tax rates to return to the “Clinton rates,” but rates are already scheduled to go higher than that thanks to ObamaCare. There’s the 0.9% Medicare surcharge on all income above $250,000, plus the 3.8% surcharge on investment income.”
http://online.wsj.com/article/SB10001424127887324640104578161204263495688.html?mod=WSJ_Opinion_carousel_1
Scott Sumner might take some comfort that at least one media source is getting it right.
10. December 2012 at 05:25
Scott: I read the article by Fisman and I truly don’t know how you can oppose it – especially given your stance on taxation from previous posts. These are the facts:
1. As you stated before, wage taxation is identical to consumption taxation. So imagine country that only has progressive wage tax and zero capital gains tax and zero consumption tax. Also that country is very efficient at labor taxation and not even high skilled employees like CEOs or hedge fund managers can avoid paying the tax.
2. Now there is a system called 401k that enables people to pay no wage tax if they promise to consume after they turn 62.
So now you created a reverse discrimination system to what you were originally opposing. You are punishing impatient. Extremely patient people will pay no taxes while impatient people will pay it all.
And the best thing is to be a child of some very patient parent – you get to inherit tax-free income of your parents and you can consume it all without you or your parent paying even a cent for this consumption.
The worst thing is to be a child of impatient parent because not only you get nothing as inheritance, but chances are that you will have to set aside some of your own already taxed wage income for them to have a decent life – thus starting a very tax-inneficient pay-as-you-go system with your own children.
10. December 2012 at 06:04
“2. Now there is a system called 401k that enables people to pay no wage tax if they promise to consume after they turn 62.
So now you created a reverse discrimination system to what you were originally opposing. You are punishing impatient. Extremely patient people will pay no taxes while impatient people will pay it all.”
This newly-invented vocabulary is extremely confusing. But, OK. Let’s agree here (for purposes of this discussion only) that “wage tax” is the income tax imposed on wages. Contributions to 401(k) plans are subject to current social security and Medicare levies. Those are levies on “wages”, too. Most people call those “taxes”, but that’s another discussion.
As I think Scott previously pointed out, those “patient people” will pay income tax on those deferred wages (or, shall we now call this “pension tax”?) at the time the 401(k) plan benefits are paid out. Uncle Sam and the rest of society will also benefit from the tax on the increase in value (if any) of those assets. It’s quite a stretch to say, as you do, that those “extremely patient people” will “pay no tax”.
In the meantime, the savings of those “extremely patient people” will be put to use in the economy by the “impatient”, for example, when they wish to take out a mortgage loan to buy a home, or even when those impatient folks want to put a new widescreen TV on their credit card. Were it not for those “extremely patient” people, I’m not sure that the “impatient” people could afford the luxury of all that current consumption very long. They would ultimately have to be patient (much, much more patient) were it not for the ants among us.
And, don’t forget—patience also has its costs in the form of deferred gratification. Those “extremely patient” folks will generally be rewarded for their patience, but that’s not without risk. Deferring consumption through savings is subject to many risks—the market risk of investments, inflation, etc.
The story about children is also a bit strange because in a very significant sense you make a great argument for *encouraging* patience through saving. Yes, children of the “extremely patient” are indeed fortunate. Perhaps that’s why, for the benefit of all kids, we should encourage, rather than discourage “patience”.
10. December 2012 at 06:09
Long-term average for federal taxes is 18.5%. Consumption is about 70% of GDP. In order to get the same amount of revenue you need 26.5% VAT. Assuming about 1/3 of consumption is on basics we don’t want to tax (or we’d get a fairly regressive system), we get to around 40% VAT.
These numbers are just guesses, but I don’t think I am miles away… I think it’d would be very difficult. You’d get all kind of transaction were you consume abroad and
Implementing the progressive consumption tax through payroll would be a nightmare. Everybody (or at least most people with a decent income) would incorporate and it would be madness. Here in the UK there are already a lot of regulation to determine who can or cannot incorporate and the difference in rates is less than 10%.
10. December 2012 at 06:11
ssumner:
“Statsguy, Isn’t that what I said?”
Yes, it is – I was just calling out some details beyond just the measurement issue.
But even implementing wealth/income taxes has issues, and these issues are not secondary – example from today
http://www.bloomberg.com/news/2010-10-21/google-2-4-rate-shows-how-60-billion-u-s-revenue-lost-to-tax-loopholes.html
Some estimates of EU lost taxes due to tax shelters are 1 to 1.3 trillion. Now, it’s certainly not that high, because if the revenue wasn’t misaccounted, the rates would be lower. But we DO know that the share of total US tax revenue from corporate taxes has plummeted over the decades
10. December 2012 at 06:13
“”2. Now there is a system called 401k that enables people to pay no wage tax if they promise to consume after they turn 62.”
I forgot to add that this “promise” is never really made. If there is any “promise” it is implied and can easily be broken (at the cost of paying tax on the early distribution and a 10 percent penalty). You also seem to confuse these “early distribution” rules with social security. (And, you further seem to think, erroneously, that by taking the payout after age 62, you will pay *no* tax. If that’s your understanding, I suggest you make an immediate appointment with a financial advisor to update your retirement plan).
Distributions (taxable, but without penalty) can be made as early as age 59.5 years. There are several exceptions that allow even earlier distributions.
I’m bringing this to you as a public service.
10. December 2012 at 06:13
So, I’m still a little hesitant about some of the small picture stuff, but I’ve come around on the big question. If the main reason for redistributive taxes is that the poor get more utility out of money than the rich, then that’s an added reason for a consumption tax. All other things equal, someone who spends more places a lower marginal utility on a dollar, and those are the people we want to tax.
10. December 2012 at 06:14
graph
http://blogs.reuters.com/felix-salmon/files/2011/11/fredgraph2.png
10. December 2012 at 06:32
Vivian: There can be two arguments made about the tax-sheltered 401k plan
1. It is immoral because it is the same thing as taxing blue-eyed people. Only it is taxing patient people. And this is what I contest. In USA the bulk of the taxes is not consumption tax, it is an income tax. Very large part of the income tax is wage tax. So people who call for exempting large part of people from paying taxes (discriminating those who were left to carry the burden) should have some serious arguments on their side.
And no, moral argument does not stand because exempting somebody who has green eyes is in the core the same thing as arguing to taxing blue-eyed more. Which brings us to #2
2. There are some serious external benefits in exempting people from such tax. One point – that savings exemption greatly increases incentives to save – were contested in the original study Fisman mentions.
Plus if it is savings and investment that is what we need, there are other ways how to get it without tax-discrimination of impatient people – or even worse – to find some alternative and even more damaging source of tax revenue compared to wage tax.
We may create the 401k so that it is compulsory (like in Singapore) or apply some libertarian nudges to increase participation.
But Scott did not provide any fact-driven evidence for exempting 401k contributions from taxes other then saying “be wary of long-run elasticity” – which is a perfectly valid point and also a perfect example for somebody arguing for tax exemption to study and prove.
If I would let Scott go with this very weak argument, then by the same account he has to let other people go with equally lame arguments like “You have a point that there are all these wonderful and concrete things associated with NGDP targeting, but there are surely yet-unknown risks associated with changing our current policy – for instance even if wage prices were sticky in the short run as research shows, they had to adjust by now. Therefore it is OK for us to ignore you. Goodbye.”
10. December 2012 at 06:39
Scott – mistakes aplenty, as Michael pointed out.
1. A guy who has zero investment and has no wage income (e.g., an S-corp owner) currently currently has a 35% top marginal tax rate and that rate would rise to 39.6%.
2. A guy in the same position as 1, but with investment income would face a hike in marginal tax on THAT investment income only of 3.8%
3. An unfortunate ducky who makes all of his income from wages currently has a marginal rate of 37.9% thanks to medicare witholding and that would rise to 43.4%.
10. December 2012 at 06:54
Vivian Darkbloom: “And, you further seem to think, erroneously, that by taking the payout after age 62, you will pay *no* tax”
I am not a US resident, but pension savings tax incentives are pretty common everywhere, so this how I think it works:
1. You earn your wage, anything that you save for retirement does not count as tax base for tax calculation
2. If you draw your account earlier then in retirement, then you your savings are taxed by the going tax rate + penalty (this is not important)
3. Once you reach pension age (62 or so) the government allows you to use these tax-free pension saving to purchase annuity – that is lifelong monthly income financed from your savings. In most countries this income is not considered a wage and therefore it is taxed in different (lighter) regime in most countries it is not taxed at all.
You are free to send some of that income to your children who may use it to consume things they like and save larger part of their regular income in their pension savings account. If you do this form of inverse pay-as-you-go, you just invented a scheme for tax evasion for your whole family.
10. December 2012 at 06:56
Vivian your answer tends to confirm my suspcioun that the reason conservatives prefer savers to spenders is a moral judgment rather than one of utility.
Still are there no takers who will explain to me how someone who makes $250 a week-we’ll even presume that’s after taxes-are able to save money-provided they dont have another income source somehwere-past savings from when they had more income, or a trust fund or a spouse, etc?
I say in today’s world it’s impossible-unless they live in public housing which in the minds of many around here is probably considered “welfare.”
10. December 2012 at 06:58
“Mr. Obama says he merely wants tax rates to return to the “Clinton rates,” but rates are already scheduled to go higher than that thanks to ObamaCare. There’s the 0.9% Medicare surcharge on all income above $250,000, plus the 3.8% surcharge on investment income.”
Why should a 3.8% investment tax be factored into the federal income tax?
10. December 2012 at 07:07
Vivian, I actually hadn’t seen this comment of yours:
“If you refer to my comment, you really don’t get my point. A lot of people who make $2,500 a week (and more) spend the entire thing very quickly (and then some). They are big drivers of GDP. The blunderbuss policy point was that the argument that the group has a higher propensity to save bases policy on stereotypes of what an individual within a particular group *might* do if he/she conforms to stereotype, whether or not that individual conforms to the stereotype in practice. If my study concluded that in the short-term all persons with the surname “Sax”, on average, spend a greater portion of their income than persons with the surname name “Smith”, I suppose you would agree, *on that basis*, that the persons with the surname Sax should be subject to a higher tax?”
Yet, I don’t think it’s a question of making crude stereotypes. If you say that someone with the name “Sax” saves more or less, it’s not an intellectual argument as obviously there’s no way to know based on such criteria.
If I say that someone who makes just $250 a week likley doesn’t save much or anything, that’s not a stereotype, it’s simple math.
Again, I would love to have either you or Morgan or anyone who makes this argument engage in the simple math of it. $250 is not even enough to pay your rent today forget about saving anything.
The only way you can save is if you have some sort of “passive income” or savings from when you made a lot more money.
Mitt Romney is again “unemployed” as he joked at a diner-of course this joke fell flat. After all, if you have $250,000,000 million you can afford to be “unemployed” for as long as you like.
So if he gets a job that pays him $250 a week and he’s able to “save” it’s hardly the point I’m getting at.
10. December 2012 at 07:15
It’s a sad day when people actually believe that NOT taxing something “costs the government…lost revenues”. What the Hell? The government doesn’t exist to collect revenues. If a tax is (legally) not paid, the government hasn’t lost a thing. The government isn’t a business. The government isn’t a household. The government doesn’t exist to make a profit, and therefore NOT taxing something, or not taxing something at X rate, doesn’t cause it to lose revenues. When the people are taxed, THEY lose revenues. Their households lose revenues.
The government does not earn money. It confiscates it. If a neighborhood watch program or an increase in private gun ownership thwarts a would-be robber from breaking into and stealing from houses that he had in mind to hit, would you say that the robber lost revenues?
10. December 2012 at 07:31
Mike Sax,
I do not know why you are so intent on this argument…how much traveling around the U.S. have you actually done? People everywhere including myself have found ways to live on such a salary for a big part of their lives. The challenge is to make sure there are real options for work access, livability and consumption in this common range, not the other way around i.e. further raising income levels for ever more distorted equilibrium. I can tell you that as a previous small business owner, what with governmental requirements, it is not always possible to pay one’s employees the fashionable supposed living wage. When that is the only option many small business people have to resort to simply doing the work themselves which means even fewer people get hired. I need to get work NOW. The fact that so many small business people are in this position means I have to try a lot harder to find a job than I used to.
10. December 2012 at 07:40
Scott,
I believe this:
“People putting money into 401ks don’t get any sort of tax break-they must pay taxes on 100% of the funds (principal and interest) when the money is withdrawn.”
ignores the value of “inside build-up”, deferred taxation of earning on earnings, which is a true source of tax subsidy here:
http://www.octoberthree.com/news/article/The-value-of-retirement-benefits-and-tax-policy
10. December 2012 at 07:40
Mike,
One more thing. Lots of the powers that be actually love your arguments, because arguments about livable income act as a foil to hide the real problems. That allows those powers not to worry about the supply side restructuring that really needs to be done.
10. December 2012 at 07:45
JV Dubois wrote:
“3. Once you reach pension age (62 or so) the government allows you to use these tax-free pension saving to purchase annuity – that is lifelong monthly income financed from your savings. In most countries this income is not considered a wage and therefore it is taxed in different (lighter) regime in most countries it is not taxed at all.”
That is clearly not how it works in the US, as I explained above. We follow a normally rational concept known as “basis” under which you get no cost basis for income from assets that have not previously been subject to income (or been “subject to” estate or gift) tax. That subsequent pension income (annuity or not) is taxed at *ordinary* income tax rates when withdrawn (even by heirs if the inherit the account). Having lived and worked in three different countries outside the US, I can also tell you it is not my experience in those other countries, either.
Not only that, because the income is taxed at ordinary rates, savings within a 401(k) plan, to the extent they are attributable to distributed dividends or capital gains, do *not* benefit from the otherwise applicable “favorable” rates. So, in a sense, the rules supposedly favoring “the extremely patient” retirement account savers actually punishes them for their patience by denying them the (partial) relief from corporate/individual level double taxation that the US system affords savers outside those accounts. We could also discuss inflation, but another time. Come to think of it, to the extent those savings are invested in US corporate stock, the current earnings at the corporate level *are* subject to current federal income tax. There are all sorts of benefits of “savings” that accrue not only to the saver himself but society at large. I think that’s called “capitalism”.
I don’t think the issue here can be rationally discussed without some basic understanding of how the existing tax rules work. Unfortunately, I guess, for non-US readers like you, this is generally a US-centric blog, particularly on tax-related subjects.
10. December 2012 at 07:48
Kevin Donohue:
My prior post is for you, too.
10. December 2012 at 07:53
Becky I don’t know that I’m anymore intent on this argument that say Bob Murphy and Scott were on the argument about whether there are Cantillon effects or Scott is on claiming Obama’s a liar on taxes.
I ask the question only because I’m quite serious? Isn’t consumption good for the economy? Yet Scott and many others seem to think saving is what counts. To me saving is the whole problem-that’s why we’ve been in the Lesser Depression-no spending.
Yet Scott also says that what’s needed is higher aggregate spending in the eonomy so it’s kind of confusing. I guess what I call saving he calls “hoarding.”
But if someone saves today is no guarantee that they will spend in a way that benefits the economy tomorrow.
I’ve had to try very hard to find a job as well. If nothing else I’ve learned altenrative ways of making money-after all these tough years. I never thought I would be a telemarketer-and have any success at it-but there you are. Between this, my brother starting a new S-corp where I will do his books for him-and the money I’m finally starting to see a little bit on my blog I finally see the basis to an “exit” strategy.
Yes, my “partisan hack blog” is starting to make a little money. To read about the latest dustup, see here.
http://diaryofarepublicanhater.blogspot.com/2012/12/mary-matalin-and-george-will-gang-up-on.html
So Becky I want what you want-I’m not being deliberately perverse.
10. December 2012 at 07:55
Sax,
Have you not heard / seen stories of 4 bedroom homes with 10 adults living in them?
I don’t care if you think this is ACCEPTABLE, that’s not up for discussion.
What is up for discussion is IF there are poor that put themselves through this to save money, do you truly insist that they aren’t to be rewarded for that?
10. December 2012 at 08:00
Well, Morgan, how would you like to reward them. I’m all for doing something to help them.
10. December 2012 at 08:43
Vivian, you make a good point: investments that produce capital gains may not mkae sense inside a 401(k). My point pertains to “income-producing” investments, which are a sizeable portion of investments for all but the very rich.
10. December 2012 at 08:46
Vivian: in most European countries they use a German model where by far the largest part of wage tax is are various social security contributions and levies
There is nothing inherently wrong with this system – if it would not be used by government to provide public goods available to everybody.
For instance in Germany you are obliged to pay healthcare levy contribution for your wage income. And since Germany has universal healthcare, where majority of costs is covered by government with no relation to how much you actually contributed, this contribution/levy can by all means be considered as a tax.
So being able to move your wage income into a different category (even capital gains) is by itself a huge tax relief. The closest thing to US is if you imagine new medicare tax introduced by Obama only on wages. I believe that under current law you can avoid paying that tax by exempting 401k contribution from tax base never to receive it again as a wage tax.
So this is the core of my argument. Unless income you get from your pension savings will be taxed in exactly the same as your current income is taxed now on margin (accounting for their present future value including inflation and other things you mention),then there will be some form of discrimination of either patient or impatient people exactly along the main argument that Scott proposes. And it is not easy to say in which way it goes.
10. December 2012 at 08:54
Well Becky I guess we disagree. I don’t put much stock in supply side arguments. What kind of supply side restructuring do you have in mind?
10. December 2012 at 08:58
JW Dubois at 0:525 today
“So now you created a reverse discrimination system to what you were originally opposing. You are punishing impatient. Extremely patient people will pay no taxes while impatient people will pay it all.”
JV Dubois at 0:846 today
“…then there will be some form of discrimination of either patient or impatient people exactly along the main argument that Scott proposes. And it is not easy to say in which way it goes.”
One of the minor rewards of commenting on sites like this is that sometimes one does succeed in correcting misperceptions and changing minds, although I often wonder if it’s worth the effort.
10. December 2012 at 09:01
Scott you ask…”I’m pretty sure than most people don’t think it’s fair to tax people at higher rates, just based on eye color. What about taxing people who are more patient?”
What you are actualy asking is… “Is it OK to Tax Success?”.
Patience is in this case a quality of success. We all know, “Patience is a virtue”. Blue eyes ( though lovely ) on the other hand do not provide a significant advantage when it come to success.
You could just as easily ask… “Is it fair to tax hard work, smarts, or luck?”
We are not taxing the qualities that make up success in the abstract. ( They don’t always produce success do they ? And sometimes success comes to those with out theses qualities. ) We are taxing the success itself.
We have a long tradition a of taxing success. Adam Smith advocated for it.
So why bother creating a, cryptic-apples to oranges-false gotya scenario ?
If you want to argue that we should not tax success… Just do so.
Is that what you are saying ? Seems so.
10. December 2012 at 09:13
“[U]nlike many libertarians I’m not opposed to policies ‘nudging’ people to save more, as our economy is absolutely riddled with all sorts of disincentives to save.” Governmental *nudges* are repulsive, and ideally we wouldn’t have them; but policies that are objectionable in the ideal may yet be best in the real world *where there are already other bad policies* in place. Given X (some bad policy), it may be better to have Y (some other ideally bad policy which, however, counteracts some of the bad effects of X) than not.
What, then, should the policy wonk *advocate*? He should try to avoid saying anything that suggests that X is *good*. But if he judges that X cannot be got rid of, he may be justified in focusing on advocating Y, not emphasizing the fact that under ideal circumstances he would be opposed to Y (though probably he should not explicitly deny this fact).
Note, however, that a policy that cannot be got rid of *tomorrow* may yet be vulnerable *next year*, or *next decade*, or *next century*. The longer the time frame, the more likely it is that any given bad policy *will* be got rid of. And if bad policy X were not partly neutralized by Y, it might be got rid of all the sooner: people who suffer with the unneutralized X may come to reject it sooner than if its bad effects were partly counteracted. Also, Y, once adopted, may endure forever through inertia, even after X (its raison d’être) has finally been repealed; this would be unfortunate.
In short, policy advocacy is a tricky business.
10. December 2012 at 09:56
Ssumner,
“Wealth (properly measured) is the present value of future consumption. So a consumption tax is identical to a wealth tax, were it possible to tax all wealth including human capital.”
I think that this is a horrible definition of wealth…This suggests that young people with no assets to their name are wealthy, and a person on his deathbed, regardless of the size of his bank account is poor. If you count the assets that a person hopes to pass on to his children “consumed”, then previous sentence is not correct.
Wealth is measured in the resources a person controls.
Mike Sax,
“I guess you could make a theoretical arugment for higher rates for the patient if they cause lower growth for the rest of us.”
Based on this and following posts, you are suggesting that people who consume more of their income contribute more to GDP growth.
A bump in income to a person who spends more of their income contributes to aggregate demand in the current time period more than the same bump in income would for a saver. Howerver, the saver will contribute more to future demand. Furthermore, the dollar saved becomes a dollar futher to invest. Subsidizing the marginal consumer at cost of taxing the saver boosts demand in the present at the cost of GDP growth.
This is at the center of the Left / Right devide. The Left beleives it is important to boost the level of GDP now. The Right believes that very small changes in the rate of growth become large changes over time.
10. December 2012 at 09:59
Mike,
Think of Morgan’s house example with four bedrooms and 10 adults. This might actually be quite an “egalitarian” house in that all the roomers all have paying jobs, and so understand their relationship with one another to have logical limitations and boundaries. Now, contrast this household with one in which certain individuals have no nearby job or means to assist in that home’s upkeep. In such a circumstance, an egalitarian relationship in the household is not actually possible. So, why do we not have more places for people to live in which they can actually contribute to their overall environment and responsibilities? In our present supply side reality, home valuations and services provisions have chased one another up the ladder for so long, that few further real adjustments upward are possible. (In other words local municipalities wanted higher home valuations in large part for the range of services those valuations could make possible)
One reason I am such a strong supporter of NGDPLT is that over time it can point out the need for necessary balance between wealth creation and services provision. Some Austrians believe that “natural” devaluation of certain sectors is all that’s necessary, but it’s not that simple. Devaluations for whom, and why? With NGDPLT it becomes possible to look at overall output compared to spending and say, why are such large percentages of consumer offerings being presented as if certain portions of a population actually make X amount of money, when they don’t? The imaginary consumer scenario led banks in recent years to either hijack common sense accounting realities, or walk away from the whole scenario as in the present. Why haven’t bankers had a larger role in convincing their localities to once again adhere to the old standards in income for the houses that get built? If people at local levels were given the tools to think about overall balances in what is monetarily possible, they would concentrate more on needed supply side solutions that also correspond with NGDPLT targeting in the long run. NGDPLT and supply side solutions are joined at the hip.
10. December 2012 at 11:00
Doug and Brenda, TK for your thoughtful responses.
It’s tough to even know what to say to these rather subtle arguments.
Becky are what you saying at bottom is that people who are struggling need affordable prices for their consumption? At least you seem not to believe it’s as simple the Austrian belief that prices will always get lower if you just let them. Still how do you get prices more affordable?
Interesting that you say NGDP and supply side is “joined at the hip” I’ve wondered about that. My troulbe is I’m just very bad at supply side arguments. I try to read them with an open mind but I never end up buying them.The impact usually seems to me to be regressive. Maybe I don’t understand them well enough.
Doug, interesting thought:
“This is at the center of the Left / Right devide. The Left beleives it is important to boost the level of GDP now. The Right believes that very small changes in the rate of growth become large changes over time.”
How do you really decide between them though? My troulbe is I see little proof of supply side success. For me when I hear supply side I just think of Reagn and George W. Bush which are not good images for me.
10. December 2012 at 11:29
Mike,
Admittedly that is my interpretation, or “take”. NGDPLT is especially intended to make things easier at the macro level for aggregate demand. In terms of what the Fed does, AD is the place to start for measurement and interpretation. However, even though level targeting could closely follow what people spend and just be thought of primarily in AD terms, there could still be “expectations” problems (not enough growth in this instance) given the power struggles between what actually gets produced, and how, at local and national levels. Such power struggles could continue to result in hidden overall deadweight losses, reducing the overall trajectory in output, if there are not ongoing coordination efforts with potential aggregate supply.
10. December 2012 at 11:32
See I think that the long term is really an elusive idea. Since Solow in the 50s isn’t the take away that a large part of the cause long term growth is simply impossible to explain?
As to what contributes to long term growht we mostly don’t know, is my impression.
10. December 2012 at 14:44
Mike Sax where do you live. I will rent you a nice one bedroom in a great location (walking distance to UF, Shands and Vet hospital perfect for hospital workers or students) here in Gainesville FL for $500/month.
10. December 2012 at 17:53
People who are saving are “buying” financial security. There is utility in that (otherwise there would not be an insurance industry), so why not tax that?
10. December 2012 at 18:02
Mike Sax, you said;
“Some would argue that those who save a great deal have a similar negative Macro effect.”
Those would be people who don’t understand macro.
Anders, The Nordic countries probably come closest. Since your name sounds Nordic, maybe that helps.
Basically a progressive consumption tax is a 20% VAT with a rebate so that the poor pay no VAT, and then a steeply progressive wage tax People pay no payroll tax at all until their income rises above the national average. You also need some special taxes for the self employed so that they don’t shield wage income as investment income.
JV. Because income taxes are bad, and the 401k turns an income tax into a consumption tax, which is good.
Brian, No I didn’t ignore that. Standard tax theory 101 says the neutral tax does not tax investment income at all.
Bill, I’m all for taxing success. What I don’t favor is taxing a patient successful person more than an equally successful person who is not patient.
10. December 2012 at 20:59
So Scott everybody who understands Macro prefers saving to spending?
Floccina that sounds great to me. If only I didn’t live all the way up here in NY.
10. December 2012 at 21:01
“What I don’t favor is taxing a patient successful person more than an equally successful person who is not patient.”
Is that solely a moral argument or is there utility in it?
11. December 2012 at 01:44
Scott: Your response is not valid. Just to repeat, your main argument as I understand it is something like this
1. There exists 401k tax exemption that obviously has some value to some people. Otherwise they would not protest its discontinuation
2. You claim that to cancel this tax exemption equals taxing people based on their innate characteristic – like is being patient.
3. I say, that there is an alternative view. One can see ENACTING this tax exemption in the past as a tax discrimination against impatient people.
The very same thing is valid for your counterargument. Poor impatient people who spend their income now have to pay bad income tax AND less bad consumption tax. You want to make it so that patient people will pay only consumption tax when they are old.
This clearly makes impatient people worse off compared to patient people ABOVE whatever returns patient people will receive on their savings. This argument is invalid.
The only argument that is valid is if you prove that there is a positive externality tied to people saving money AND that tax exemption is the best way to support this socially useful behavior.
Only then we can stand up and say to all impatient people
“We are very sorry that you were born this way, but we have to tax you more than patient people because we all reap benefits from them being patient. So it is just and fair to make it up to them for their support of our society.
Our best estimates show that the social value of their behavior is approximately this much and it is that much that we will ask from you to pay in tax to finance the subsidy”
11. December 2012 at 03:53
J.V Dubois nails it.
“I say, that there is an alternative view. One can see ENACTING this tax exemption in the past as a tax discrimination against impatient people.”
“The very same thing is valid for your counterargument. Poor impatient people who spend their income now have to pay bad income tax AND less bad consumption tax. You want to make it so that patient people will pay only consumption tax when they are old.”
“This clearly makes impatient people worse off compared to patient people ABOVE whatever returns patient people will receive on their savings. This argument is invalid.”
“The only argument that is valid is if you prove that there is a positive externality tied to people saving money AND that tax exemption is the best way to support this socially useful behavior.”
“Only then we can stand up and say to all impatient people”
“We are very sorry that you were born this way, but we have to tax you more than patient people because we all reap benefits from them being patient. So it is just and fair to make it up to them for their support of our society.”
This was what I was trying to get at but he puts it in a very good, succinct way. I see it as basically you want to specially disadvantage the impatient at the expense of the patient.
JV is exactly right that this is only justifiable if we can show that the overall economy benefits from favoring the patient over the impatient. That’s why I had above asked if your concern had any utilitarian implication or was just a moral judgment.
11. December 2012 at 04:37
Mike: I tried to put the best defense for Scott and even that did not pass the test.
I just have to say that even if it was shown that patience has positive social value, it is in my eyes not enough to immediately start the process of the subsidy. I say that subsidy in such cases makes sense only as far as it motivates production of the public good on the margin.
Otherwise we would pave way to incredibly meddling state. We could have tax exemptions for somebody to have their lawn and the house maintained – because it generates a positive externality of good neighborhood to other people living in the area. Some of these externalities are hard to count, other times the pro-social behaviour can be a reward of its own like if it for instance increases the status of that person etc.
So yes, this may not seem just and fair to some, but if we have a person born in a way that she will generate positive spillovers to the rest of the economy no matter the size of financial compensation she recieves, then it does not make sense to tax other people and “force” such a compensation on her.
This reminds me of an age old discussion about IP laws. Should they exist to promote innovation and fine arts, or should they exist so that artists and inventors (and their heirs) will get what they are “entitled” to by stumbling upon (or painfully inventing) this or that great idea – basically fully compensating the positive externality their ideas will generate down to the cent.
11. December 2012 at 05:20
Mike and J.V. Dubois, the current system taxes people more heavily if they prefer to defer consumption. Scott’s ideal system would not discriminate according to when people chose to consume their wealth. There’s no dispute here.
11. December 2012 at 05:23
I don’t understand the capital-tax fanatics. Do you not realize how much wealthier everyone in the US would be if the capital stock were at its optimal steady-state?
11. December 2012 at 05:30
I was reluctant to speak of 401ks because of the fairness aspect, but to tax it does seem to be “kicking a person while he’s down” as some people took 401ks as a distant second preference from their employers…people who once had pension plans with those same employers and then the 401ks got “beat up” not so long ago. For those individuals, the 401k mostly had value in their minds because it was tax exempt in the first place, i.e. the most valuable thing about it.
11. December 2012 at 06:40
Saturos:
I don’t understand the capital-tax fanatics.
Yes you do. We all understand them. Capital gains is considered a wealthy man’s income. Economic problems can be eliminated by taking from the rich and giving to the poor. What’s more, capital gains derive from capitalists exploiting workers, so it is a rather unjustified income to begin with.
Do you not realize how much wealthier everyone in the US would be if the capital stock were at its optimal steady-state?
Quibble: There is no objective optimal steady-state of capital. People can be wealthier by continual increases in capital, in both absolute terms and relative to consumption terms. It is asymptotic towards minimum consumption in the present, and maximum economic growth going forward. If the existing capital stock were sufficient, then the rate of savings and investment relative to consumption can be 99 to 1, or higher.
11. December 2012 at 07:39
MF, not sure what you mean, but the growth rate is not a simple function of the savings rate. And welfare is consumption. I was talking about steady-states.
11. December 2012 at 08:00
Scott:
“Bill, I’m all for taxing success. What I don’t favor is taxing a patient successful person more than an equally successful person who is not patient.”
Can’t two “equal” people who’s only difference is their propensity to save, be seen as more or less successful? The one who saves more will generate additional income, thus he should be taxed higher anyway (and would be in the consumption tax as well, assuming inheritance is a last act of spending all the remaining wealth).
Or are you considering people as equal if they would have the same life-time consumption assuming no taxes on capital income?
I guess it is the second. I leave the first part because someone else might make a similar error of thought.
“Basically a progressive consumption tax is a 20% VAT with a rebate so that the poor pay no VAT, and then a steeply progressive wage tax…”
In a pure consumption tax approach, income is taxed equally whether it comes from work or capital (except for compound interest). But adding a progressive wage tax is shifting the burden largely to labor income. Isn’t this suggestion, the result of the inability to build a consumption based tax system with comparable properties to the current income tax
system? (progressivity is not a yes/no – property it can have different degrees for different income levels)
Also I cannot really see the fundamental difference to an income tax approach (except that capital income is taxed lower), if the biggest chunk of the progressive part of the revenue comes from labor income, not consumption.
11. December 2012 at 08:12
Saturos:
I think you overlooked a word I used. I said savings and investment.
I am just saying that there is no steady state savings and investment (which can be a proxy for steady state capital stock, as worn out and used up capital is exactly replaced, and no more) that is optimal for economic growth. For whatever level you propose as optimal, I can suggest slightly more saving and investment (assuming people can still sacrifice current consumption a little more), which can add to the capital stock, increase labor productivity even further, and boost output even further. Unless of course by “optimal” you meant maximum saving and investment that is biologically possible for people to take, where more saving and investment would put people below minimum subsistence.
I agree with you that there is not a simple function of growth with the savings rate, but I will not agree with you if you say that it isn’t at least monotonic.
12. December 2012 at 05:21
JV, That’s simply wrong. A 401k takes a distortionary income tax which double taxes money saved, and turns it into a neutral consumption tax that single taxes money saved. Prove me wrong and I guarantee you’ll win a Nobel Prize in econ–it would disprove the bedrock theory of public finance. You’d turn the entire field upside down.
Johannes, Consider the following example. Suppose two people earn a $1. One spends it on 2 apples and the other buys 4 pears. Should we tax one at a higher rate, merely because he chose a different consumption bundle?
Now suppose that one bought 2 apples today, and the other chose 4 apples in 2022. I would argue that 4 apples in 2022 are different from from 2 apples today in the same way as 4 pears today are different from 2 apples today. People have different consumption preferences.
You said;
“In a pure consumption tax approach, income is taxed equally whether it comes from work or capital (except for compound interest). But adding a progressive wage tax is shifting the burden largely to labor income.”‘
This is flat out false. A wage tax is equal to a consumption tax. Check out any public finance textbook.
12. December 2012 at 06:43
scott,
“A wage tax is equal to a consumption tax.” Is this 101 stuff? Cuz it doesn’t feel like it.
What about trust fund babies?
What about those whose income derives from returns on capital?
More germane considering the demographic and finacial challenges facing this country: What about me vs. my retired parents?
Are you just operating on some high theoretical level?
24. March 2017 at 04:20
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