The case for 80% tax rates on the rich

If you dare to stray from the liberal orthodoxy on inequality, you are often assumed to be the sort of right-winger who also opposes gay marriage, carbon taxes and fiscal stimulus.  So perhaps I should mention the areas where I agree with the left on inequality.

1.  High MTRs on the rich.  Recall that in recent posts I argued that the baseline assumption should be equal taxes on current and future consumption (i.e. no taxes on investment income) and you only deviate from that when there are important second order issues such as risk/insurance and tax evasion problems.  In my view the strong presumption of sharply decreasing marginal utility at high levels of consumption means that the baseline tax policy is highly progressive, and to deviate from that assumption conservatives need to make arguments based on second order effects. Ironically some of the very same second order effects apply, such as risk and tax evasion.  I don’t really have any idea what the top rate should be, but for extremely high levels of consumption it’s certainly plausible that an 80% rate might be appropriate. I’d support that rate in a deal for a pure consumption tax and abolition of income taxes.  A $40 million dollar yacht will motivate a financier just as well as a $200 million yacht, in a world where financiers mostly care about how they are doing relative to other rich guys.  And they’d still be able to put expensive paintings on their walls—prices would fall and who else would buy them?  But fewer artists will be able to live in Brooklyn or Chelsea.

Of course I still think the top income tax rate should be zero, but high MTRs on ultra-high level consumption are fine.

2.  The system is rigged, so the rich don’t deserve their money.  We could have set up the system differently.  We could have put Donald Trump in jail for 20 years when he first went bankrupt, or let other people copy Microsoft Windows, just as we allow others to freely copy Coke’s soft drink recipe.  Yes, the decisions we made were often justified.  I’m glad we didn’t put Trump in jail for 20 . . . er . . . , well you get the point.  

Think of it as a big Monopoly game.  If the developers of Monopoly had required the owner of Boardwalk to share 40% of their profits from Boardwalk with the other players, that would have been just one more rule.  Even if the current rules are justified on efficiency grounds (and they are not all justified), that doesn’t make the beneficiaries of the rules “deserving” of their good fortune. Trump could have just as easily been born as a one-armed beggar on the streets of Dhaka. Progressive taxes are just one more arbitrary rule in the game of life, like 20 year patent protection for some inventions but not others, or get-out-of-jail free cards for people that can’t pay back millions in debt.

The downside for the left is that this means that poor Americans also don’t deserve any more than that beggar in Dhaka. Recall that we must import millions of foreigners to do jobs like picking peaches in the hot Georgia sun because even poor Americans have high enough living standards that the job isn’t attractive. And I don’t blame them.  I favor low wage subsidies for utilitarian reasons—to reduce suffering—not because anyone deserves anything.

3.  Weaken intellectual property rights, but don’t eliminate them.  When you compare market caps for companies like GM and What’s Up Whatsapp, it hard to avoid the conclusion that lots of the recent surge in inequality comes from the fact that wealth is being amassed by creating clever ideas that can be replicated at almost zero cost.  The Silicon Valley entrepreneurs and the financial sector people who fund them are getting very rich.  I don’t have an ax to grind here; I’m a pragmatist on this and all other issues.  Whatever Alex Tabarrok thinks about IP is my view as well.

4.  Weaken zoning laws that limit dense development.  As with IP, you find support for this from both the left and the right (as well as opposition from both sides.)

5.  Subsidies for low wage workers.  The left seems to be losing some enthusiasm for this idea, but it’s still a good one.

6.  Open borders.  My views on this are kind of hard to explain.  I am convinced by Bryan Caplan’s arguments on utilitarian grounds.  And yet I view this issue as being different from all other policy issues in one key respect.  This is the only good policy reform that I can think of that might well make Americans significantly worse off.  In other cases what’s good for the world is generally good for America, or perhaps roughly neutral.  So is it too much to ask for Americans to agree to open borders?  Not if everyone was like Jesus.  But although I’d personally vote in favor in a referendum, if I were a typical middle class American with the same level of selfishness that I currently have, I might vote against.  That’s why I prefer to work for more modest gains, such as a rate of immigration of say 1% per year (i.e. 3 million people.)  I believe that would greatly reduce illegal immigration.  I’d prefer a balance of low and high skilled workers.  I realize that this would reduce the amount that we could plausibly do with low wage subsidies, but it’s still the right thing to do.  (Bryan will say that in 1850 I would have favored “gradually” reducing slavery.)

If you are confused by my wishy-washy views on immigration, here’s an analogy. On purely utilitarian grounds I’d have to say that transferring my entire pension to the poor of Dhaka is probably a good idea.  If you hooked me up to a lie detector I’d have to say it’s the “right policy.” But I don’t do it because of the thought of still grading papers at age 83, and because I’m a selfish bastard.  Fortunately, that dilemma doesn’t occur on any of the public policy issues I discuss in my blog.  I always say what I believe (rightly or wrongly) is the right policy.  I just don’t talk about the sort of proposals that Peter Singer might contemplate.

So I’m actually in favor of lots of policies that would address inequality.  And no one can argue these are trivial policies, I’ve singled out most of the biggest policy issues that relate to inequality. So why do I always feel like I’m on the right wing side of the debate?  I think it’s partly because I write about things I find intellectually interesting.  To me it’s a no brainer that we should have a progressive consumption tax.  I’ve made this argument on and off for 5 years, but don’t dwell on it. I find the confusion between income taxes and consumption taxes to be more interesting.  Or the way in which the left misinterprets income inequality data.  Or the minimum wage debate.

Those who read my blog know that I’ve been making the argument for years that the top 20% is functionally middle class, not upper class, and that the “poor” include lots of young people (including me at age 25) and lots of retired people who aren’t really poor because they have assets.   And that there’s lots of churn, as lots of people are in the top 1% for a single year because they sell a property. And now the NYT catches up to what I’m been preaching for 5 years.  Everyone is SHOCKED to find out that 12% of people are in the top 1%, or that 73% are in the top 20%.  A Boston cop married to a nurse makes $200,000.  Why is anyone who pays attention surprised to find out that the top 5% aren’t who we thought they were?  As the left has figured this out, they focused first on the top 1%, and then on the top 0.1%.  That’s progress.

I think the biggest area where I disagree with the left is that I’m way less nationalistic than most liberals, or Pat Buchanan.  If anything I care more about the overseas poor, because they are much poorer.  I actually find some of the things I read on the progressive side (and on the right as well) to be almost grotesquely insensitive.  In recent decades living standards in places like China, India and even Africa have grown considerably faster than in the developed world. And yet we are constantly told that inequality is getting worse and that it is the defining issue of our time.  If we dissent we are scolded for being “insensitive.”

Remember the famous joke about the Lincoln assassination? It would have been insensitive to say to Mrs. Lincoln; “Yes, your husband was shot, but the play was pretty good.”  In 1945 it would have been insensitive to say to a European; “Yes, there was WWII and the Holocaust, but overall Europe’s done well in the past 5 years because the economies of Sweden, Switzerland, and Spain have boomed.” And it is insensitive to say; “Yes, billions have been raised out of abject misery but inequality is getting worse because the gap between average Americans and the top 1% is widening.”

Yes, let’s have progressive taxes, but do it sensibly and don’t exaggerate the problem.  That’s all.

PS.  My daughter just got back from a field trip to a high school in central China.  It was the number one rated high school in mostly rural Chongren country, Jiangzi (an inland province.)  Her group had raised money for financial aid for 22 students to attend high school that otherwise could not afford to do so (tuition is $80 a semester.)  The classrooms each have 60 students (vs. 20 at her school.)  They visited some of the students’ homes, where the entire family would live in just a single room with few furnishings and a bare concrete floor.  (Pity that they are building all that housing that China “doesn’t need.”)  One of the brightest of the 22 students was crippled with a progressive degenerative disease.  His mom literally carried him on her back between classrooms, as schools in China are not handicapped accessible. My daughter said the classes seemed very academically rigorous, especially math.

If you ever convince me that I’m wrong about “deserve,” I won’t conclude that Donald Trump or Donald Sterling deserve their money.  Rather I’d tax it and give it to that more deserving mom. Indeed I’d take most of the money we spend on welfare and move it overseas.


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90 Responses to “The case for 80% tax rates on the rich”

  1. Gravatar of Alan Reynolds Alan Reynolds
    28. April 2014 at 05:06

    Speaking of nationalism, Paul Krugman and the White House blog have been admiring Teddy Roosevelt’s “new nationalism” speech which is actually nothing new. http://www.cato.org/blog/paul-krugmans-nostalgia-teddy-roosevelts-new-nationalism

  2. Gravatar of dtoh dtoh
    28. April 2014 at 05:16

    Scott,
    As you know I totally agree on a progressive consumption tax, and I think the easiest to way to implement it is to also eliminate wage taxes and to implement a national progressive sales tax and local/federal taxes on assets used for private consumption (houses, boats, paintings, etc.)

    The progressivity could be implemented by issuing “credit” like cards to all US residents with a balance which exempts or reduces the sales tax up to the balance amount. The balance would decline by the amount of each purchase until the card was fully used after which point, you would pay to full tax rate.

  3. Gravatar of beamish beamish
    28. April 2014 at 05:17

    Here’s an clear thing that Robert Frank wrote for Slate about progressive consumption taxes a few years ago.

  4. Gravatar of dtoh dtoh
    28. April 2014 at 05:35

    Scott,
    A few other random points on equality or inequality.

    1. Like you, I have a hard time supporting progressive taxes for the purposes of redistribution, when the redistribution is going to “poor” Americans.

    2. I think the main reason for progressive taxes is to generate sufficient tax revenue.

    3. I think you underestimate the motivational benefit to economic growth of a $200 million yacht.

    4. If you believe inequality it unfair, why limit your efforts to equalize to just money? Why not try to equalize love and happiness as well?

    5. I agree with you about getting rid of rules that rig the game but that provide no societal benefit.

    6. Other than inheritance, really hard training for and really hard work at really hard jobs (e.g. NBA basketball players, investment bankers, CEOs, developing new software, starting a hedge fund, successful musician) are the main reason people make a lot of money. Luck and smarts help a little, but by themselves won’t get you anywhere.

  5. Gravatar of J.V. Dubois J.V. Dubois
    28. April 2014 at 06:00

    This is a pretty good post, including the “selfish bastard” part. You may count me in that group. I think that this remark could be a start of an interesting discussion on its own.

    Anyways I think this post possibly deserves to be part of “Quick intro to my views” section so that it is there for everyone to link next time some topic spurring a lot of partisan controversy is discussed here.

  6. Gravatar of Morgan Warstler Morgan Warstler
    28. April 2014 at 06:24

    Every time I watch Matt Bruenig try to go after the nature of property as just another “construct” or the host of oddball Non-Aggression Principle libertarians I lay down this very, very, very simple explanation of things:

    1. Property exists before the state. Hegemons rule.

    2. States can’t be formed unless they appeal to the hegemons and get them to buy in.

    3. The first thing states must do to get hegemon buy in is assure that they keep control of what they had before. (title property).

    4. Security – courts and then violent enforcement of that property is the first “state service” – the hegmons ALREADY were paying using their excess production of property to non-hegemons to get them to maintain their security. (ie smart guys paying big guys to listen to them) .

    So the general rule is: The PRICE of security has to be lower than the hegemons paid before the state, so they are made richer.

    Taxes are literally NEGATIVE on the hegemons for agreeing amongst themselves to form a state.

    5. Therefore, any policy idea you have – the decider – is a SELF INTERESTED HEGEMON. In the long run, you must win approval of top 1/3 in US, or no soup for you.

    This is of course, exactly what one learns from watching the TV show Deadwood.

    Frankly, once you adopt this mindset, it is entirely easy to go after the oligarchs, bc THEY TOO need the approval of the hegemons.

    I agree with this list of ideas Scott puts forth, but #6 open borders violates the first law creation of state.

    The hegemons do not approve.

  7. Gravatar of Floccina Floccina
    28. April 2014 at 06:52

    Really great post (especially #2). The policy debate flaw is not in helping the poor to much or too little and taxing the rich too much or too little but about addressing poverty and wealth with maximum efficiency. If we could just get the Republicans and Democrats drop support of certain policies on efficiency grounds that would be a big victory.

  8. Gravatar of dwb dwb
    28. April 2014 at 07:11

    “lots of the recent surge in inequality comes from the fact that wealth is being amassed by creating clever ideas that can be replicated at almost zero cost”

    The exact opposite of this: Facebook, Microsoft, Twitter, to a certain extent Google and Apple, all exhibit a network externality. So do certain features of financial and market information exchanges (Bloomberg – spend time on a fixed income trading floor with a Bloomberg terminal!), along with market making in securities.

    The network externality stems from the fact that the more people use it, the lower the overall cost. Microsoft, for example, because of the technological standard. Facebook and Twitter- who wants to be by themselves? And financial exchanges because of liquidity (higher liquidity, more rapid information diffusion and lower overall bid/ask costs esp for large size trades).

    The network externality means that the market for these products tends towards a natural monopoly or oligopoly. In financial exchanges, the CME and ICE have grown just huge as they eaten the competition. I have personally seen startup competitors fail because to succeed you need to move a critical mass of players off the CME clearing platform, which is excruciatingly hard.

    I think you have this exactly backwards: The recent surge in inequality (setting aside demographic trends) is to a certain extent the result of the fact that many of these billionaires (Zuckerberg, Bloomberg, Gates, Allen, Ellison, Jobs, etc) have made a lot of money in markets that tend naturally towards a high market share for their product because of the network externality.

  9. Gravatar of Ilya Ilya
    28. April 2014 at 07:32

    Scott,

    I was wondering where you learned your interesting and unique tax views? You would say they are based on common sense economic principles, but your views are not held by left wingers or right wingers.

    Your monetary views are very much influenced by Fisher, Friedman, Hautrey, and McCallum. And so I plan on reading them.

    Do you have any recommendations for authors, books, papers on such tax issues that have inspired you?

  10. Gravatar of Major_Freedom Major_Freedom
    28. April 2014 at 07:57

    All that advocacy for violence and theft.

    So little practising of that advocacy.

    Let the thugs in government do your dirty work, because you are too pure and holy to soil your hands

  11. Gravatar of Jim Glass Jim Glass
    28. April 2014 at 08:04

    “In 1945 it would have been insensitive to say to a European; ‘Yes, there was WWII and the Holocaust, but overall Europe’s done well in the past 5 years because the economies of Sweden, Switzerland, and Spain have boomed’.”

    Krugman, if not generally known for being politely sensitive, can be remarkably so when rhetorically useful, as with this subject. One of my favorite bits of his writing of all time was this a few years back while discussing inequality and earlier versions of Piketty’s numbers in The Nation (my empahasis added):

    http://www.thenation.com/article/death-horatio-alger?page=0,0

    Let’s talk first about the facts on income distribution. Thirty years ago we were a relatively middle-class nation. It had not always been thus: Gilded Age America was a highly unequal society, and it stayed that way through the 1920s.

    During the 1930s and ’40s, however, America experienced what the economic historians Claudia Goldin and Robert Margo have dubbed the Great Compression: a drastic narrowing of income gaps, probably as a result of New Deal policies. And the new economic order persisted for more than a generation: Strong unions; taxes on inherited wealth…

    Wow, the Great Depression and World War II were New Deal policies! If not specifically named as such by PK. (Want examples of how disingenuous PK can be? Start here).

    BTW, PK’s whole theme of his piece, that America’s famous former economic mobility has collapsed in our time, has been empirically refuted (even Saez says so).

    http://obs.rc.fas.harvard.edu/chetty/mobility_trends.pdf

  12. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    28. April 2014 at 08:19

    http://wwwpub.utdallas.edu/~liebowit/palgrave/network.html

    “Network effects should not properly be called network externalities unless the participants in the market fail to internalize these effects. After all, it would not be useful to have the term ‘externality’ mean something different in this literature than it does in the rest of economics. Unfortunately, the term externality has been used somewhat carelessly in this literature. Although the individual consumers of a product are not likely to internalize the effect of their joining a network on other members of a network, the owner of a network may very well internalize such effects. When the owner of a network (or technology) is able to internalize such network effects, they are no longer externalities.”

  13. Gravatar of Alfred Alfred
    28. April 2014 at 08:35

    “When you compare market caps for companies like GM and What’s Up”

    The correct spelling is WhatsApp

    http://www.whatsapp.com/

  14. Gravatar of Tommy Dorsett Tommy Dorsett
    28. April 2014 at 08:52

    “I don’t really have any idea what the top rate should be, but for extremely high levels of consumption it’s certainly plausible that an 80% rate might be appropriate.”

    Since we don’t know what the top of the Laffer Consumption Tax Curve is, I think we should be wary about stratospheric tax rates at the top. Unless the point is to simply shut down consumption completely at that point. Probably not a good idea.

  15. Gravatar of Cliff Cliff
    28. April 2014 at 10:56

    Are you sure the right thing for a utilitarian to do is give all their money overseas? Sure in the very immediate short term it will increase overall utility, but won’t most of the poor overseas “waste” the money, whereas if you keep it in the U.S. it will grow the economy and allow for even more charity later? I mean what if in 1900 the U.S. started donating huge amounts of money overseas- would the world be better off now?

  16. Gravatar of Steve Steve
    28. April 2014 at 10:58

    Some people have lots of children, and accept the risk those children suffer extreme indigence.

    Other people try to accumulate wealth and success, and accept the risk that they suffer extreme loneliness.

    I believe the problem with the utilitarian view of income and wealth inequality is that it holds values and institutions constant, when nothing could be further from the truth.

  17. Gravatar of Engineer Engineer
    28. April 2014 at 11:09

    But I don’t do it because of the thought of still grading papers at age 83

    Most people don’t even have the option of keeping their jobs til age 83.

  18. Gravatar of Luis Pedro Coelho Luis Pedro Coelho
    28. April 2014 at 11:26

    Bravo!

  19. Gravatar of Ray Lopez Ray Lopez
    28. April 2014 at 11:29

    Sumner sez: “I don’t have an ax to grind here; I’m a pragmatist on this and all other issues. Whatever Alex Tabarrok thinks about IP is my view as well.” – how can you reconcile those two sentences? AlexT is anti-patent by and large and most definitely anti-copyright, with an ax to grind it seems to me.

  20. Gravatar of SkepticalOfPsychics SkepticalOfPsychics
    28. April 2014 at 11:31

    As an economist, I understand why you’d build a “logical” argument on marginal utility. It (almost always) makes sense when constructing theoretical models. However, I’m curious if it can really stand up to scrutiny as the basis for policy. Take two individuals:

    – Bob loves the woods. He ears $30k per year, lives in a small house next to a national park, and spends all his free time out in the woods.
    – Chris lives in the city. Earns $100k per year and spends it all on a similar amount of housing and (considerably more expensive) entertainment.

    Can you confidently say that the marginal utility of Chris’ last dollar exceed the marginal utility of Bob’s last dollar despite a 3x differnce in income? If not, add the additional clarification:

    – Bob and Chris both work from home and do the same job for the same hourly pay.

    If this latter scenario reverses your assessment, then the former scenario must also be uncertain (even though intuition may not admit it). As the basis for redistribution, the entire utilitarian framework depends on this type of comparison.

    Take it one step further and apply the insights of Prospect Theory (Tversky and Kahneman). Your argument for a purely relative assessment of the current state works until you admit that you’re already in the current state. Even if the marginal upward utility of a relatively richer person is lower than a relatively poorer person, it doesn’t follow that the transfer is superior… because it triggers the HIGHER downward marginal utility that is the basis for prospect theory.

    Insofar as utilitarianism depends on the ACTUAL (not theoretical) utility loss by the individual, it’s at least theoretically possible that the super-rich are super-rich for exactly the same reason as Chris works >3x the hours as Bob. They may self-select into the category because they derive most (or all) of their utility from the wealth… and the taking of 80% could be a much greater loss to them.

    ===

    I get that the intuition (and logic) is stronger at the low end when abject poverty is in play. However, your MTR on the rich (or super rich) does not depend on this fact. It must be supported by the opposite… confidence that you can make an inter-subjective utilitarian assessment… and the understanding that (disproportionately higher) misery is created in the transition to your stated policy.

    Do any of these points weaken your confidence in this conclusion?

  21. Gravatar of Floccina Floccina
    28. April 2014 at 11:33

    In other words I do not expect those way on the right or left to agree on he level of subsidy to the poor or the amount of tax at the top but hope that we can convince both that the way we do things now is very wasteful.

  22. Gravatar of Eliezer Yudkowsky Eliezer Yudkowsky
    28. April 2014 at 11:50

    My friends are confused about which particular reason you might have for thinking that open borders would leave current Americans worse off. I can guess, but you didn’t actually say, and if you said it earlier I don’t remember the post.

  23. Gravatar of Larry Larry
    28. April 2014 at 11:59

    “The system is rigged…” Well it is. That’s why Elizabeth Warren left the Republican party.

    This whole post is so blase about inequality and how it came about. It sort of says, well we could do these things, but why bother, really.

    You say we need a consumption tax rather an income tax. Fat Chance Of That. Why not start by eliminating all the capital gains games that rich people can play. I mean why not talk about what’s practical to do rather than stuff that’s pie in the sky? And talk about real existing inequalities rather than hypothetical ones?

    So go ahead and be a utilitarian and give all your money to poor people in Dhaka. You could also give your money to eliminate the structural racism in America. Or even build better schools.

    Open up your eyes, man.

  24. Gravatar of Mark A. Sadowski Mark A. Sadowski
    28. April 2014 at 12:30

    Scott,
    Off Topic.

    Gavyn Davies thinks there’s a contrast between the US and Swedish experiences and that this presents a paradox.

    http://blogs.ft.com/gavyndavies/2014/04/27/why-the-fed-will-miss-jeremy-stein/

    April 27, 2014

    Why the Fed will miss Jeremy Stein
    By Gavyn Davies

    “…This raises the paradoxical possibility that an early tightening in monetary policy might actually reduce not only the variability of unemployment in the future, but its average level as well. This is not so crazy. If the Fed had raised interest rates more aggressively in 2002-06, the financial crash, and the current level of unemployment, might have been less severe. We may not be there yet in the current cycle, but we soon could be.

    Paul Krugman rightly points to an opposite example. In Sweden, a tightening in monetary policy in recent years seems to have worsened the deflationary pressures in the economy. But that will not always be the case.

    These are genuinely difficult dilemmas, perhaps the most difficult in monetary policy today. Jeremy Stein may now be gone from the Fed, but his work should not be forgotten.”

    Davies’ presumption is that it was loose and not tight monetary policy which caused the US financial crisis. Let’s take a closer look.

    Since we’re considering the effect of interest rate policy on monetary policy stance let’s look at the fed funds rate and the yield spread from 2004 through 2008:

    https://research.stlouisfed.org/fred2/graph/?graph_id=75581&category_id=

    Note that the fed funds rate was was raised from 1.0% to 5.5% from May 2004 to June 2006 in quarter point increments. It was held at that rate through August 2006. The slope of the yield curve flattened (blue line) until it inverted in August 2006 and remained so through May 2007.

    Now let’s look at nominal GDP (NGDP) growth and financial sector leverage from 2003 through 2010:

    https://research.stlouisfed.org/fred2/graph/?graph_id=174785

    In response to the tightening of monetary policy, year on year NGDP growth slowed significantly and steadily from 6.5% in 2006Q1 to 5.3% in 2006Q3 to 4.3% in 2007Q1 to 3.1% in 2008Q1 to 2.7% in 2008Q2 to 1.9% in 2008Q3, the quarter Lehman Brothers filed for bankruptcy.

    In turn, financial sector leverage, which had been rising at a slow pace, accelerated significantly and steadily. Whereas it had only increased from 92.4% to 93.7% of GDP between 2003 and 2004, an increase of 1.3 points, it increased to 95.6% in 2005 (up 1.9 points) to 99.4% in 2006 (up 3.8 points) to 107.0% in 2007 (up 7.6 points) and then soared to a peak of 118.9% of GDP in 2009Q1.

    So, tighter monetary policy led to slower NGDP growth and rising financial sector leverage. High and rising financial sector leverage was of course an important causal factor in the US financial crisis.

    Since then of course, with the Fed’s zero interest rate policy and QE, financial sector leverage has declined to 82.4% of GDP, a plunge of 30.7%, and the first significant decline in financial sector leverage since 1933-49.

    (continued)

  25. Gravatar of Mark A. Sadowski Mark A. Sadowski
    28. April 2014 at 12:31

    (continued)

    Now, let’s look at Sweden.

    Here’s the 3-month interbank rate and the yield spread since 2009:

    https://research.stlouisfed.org/fred2/graph/?graph_id=174787

    The Riksbank lowered the repo rate to 0.25% in August 2009 and kept it at this rate through June 2010 (the 3-month interbank rate is close to the repo rate). It also maintained a (-0.25%) deposit rate, the first central bank to institute a negative interest rate. And the monetary base was maintained in the range of 270% to 350% larger than it had been in August 2008.

    Starting in July 2010 the repo rate was raised in quarter point increments until it reached 2.00% in July 2011, where it remained until December 2011. And by January 2011 the Riksbank’s monetary base was reduced to only 2% more than it had been in August 2011.

    The yield curve (blue line) was extremely steep during the period of the near zero repo rate policy, negative deposit rate and QE. But with the sharp increase in the policy rate and unwinding of QE, the yield curve severely flattened (although it did not invert) from September 2011 through September 2012.

    Here’s NGDP growth over the same period:

    https://research.stlouisfed.org/fred2/graph/?graph_id=174786

    Year on year NGDP growth soared from (-4.0%) in 2009Q3 to a staggering 9.5% by 2010Q4. With the tightening of monetary policy it plunged back down to 1.0% by 2011Q4.

    How did financial sector leverage perform during this period?

    Here’s loans and securities other than shares as a percent of GDP in the financial sector sector. All debt data comes from the ECB Statistical Warehouse.

    Quarter-Debt
    2009Q1-118.0
    2009Q2-118.7
    2009Q3-127.6
    2009Q4-126.2
    2010Q1-128.0
    2010Q2-124.2
    2010Q3-117.3
    2010Q4-113.1
    2011Q1-114.4
    2011Q2-115.3
    2011Q3-120.9
    2011Q4-122.8
    2012Q1-121.8
    2012Q2-120.4
    2012Q3-121.7
    2012Q4-119.6
    2013Q1-122.4
    2013Q2-125.8
    2013Q3-125.9

    Note that financial sector leverage fell from its peak of 128.0%, following the Great Recession, to 113.1% by 2010Q4, during the period of low interest rates, QE and high rates of NGDP growth, a decline of 11.6%. But during the period of interest rate increases, the unwinding of QE and slow NGDP growth, this has crept back up to 125.9% of GDP, just a hair’s breadth under its previous peak.

    In short, looser policy leads to falling financial sector leverage, and tighter policy leads to rising financial sector leverage. And this seems to be consistently true across both episodes.

    Since higher financial sector leverage is an important risk factor for financial crises, where is this dilemma of which Gavyn Davies speaks?

  26. Gravatar of o. nate o. nate
    28. April 2014 at 12:37

    Has anyone come up with a good idea for implementing progressive consumption taxes? It’s a lot more complicated than a regular sales tax or VAT, since the rate being charged depends on how much the person has consumed year-to-date. It would be difficult to compute that at the point of sale. It seems like the amount of intrusive government monitoring of purchases that would be required would present privacy concerns.

  27. Gravatar of ThomasH ThomasH
    28. April 2014 at 13:32

    This is my kind of Libertarianism.

    @o.nate: You have progressive (probably more progressive) taxes on “income” with offsets for savings and increases in assets and some kinds of “non-consumption” (charity? medical costs?).

  28. Gravatar of Mark A. Sadowski Mark A. Sadowski
    28. April 2014 at 13:38

    Scott,
    Off Topic.

    Cullen Roche has a post on Abenomics which is data driven and reality based, but then careens off into Zombinomics towards the end.

    http://pragcap.com/has-the-abenomics-effect-run-its-course

    April 28, 2014

    Has the Abenomics Effect Run its Course?
    By Cullen Roche

    “…Not only do I fear that this has been primarily exchange rate driven, but I also fear that Japan’s terrible demographic trends are something that no central bank can overcome…”

    Hmmm, two fallacies in one sentence.

    1) Monetary policy is not the same thing as exchange rate manipulation.

    If exchange rate manipulation had been taking place we likely would have seen the Japan’s trade balance improve instead of grow worse. This is because exchange rate manipulation usually is undertaken to make exports prices more competitive.

    Expansionary monetary policy on the other hand leads to rising domestic demand which often results in a widening trade gap. Any depreciation in the exchange rate that takes place due to expansionary monetary policy is an effect, not a cause.

    Perhaps Cullen Roche thinks that Japan’s soaring inflation rate is primarily driven by the yen’s depreciation. But according to the World Bank, 2012 imports of goods and services as a percent of GDP were lower in Japan than any other country with the sole exception of Brazil. (Yes, lower than even the U.S.):

    http://data.worldbank.org/indicator/NE.IMP.GNFS.ZS

    Contrary to popular belief, Japan is almost the most closed country on earth when it comes to imports of foreign goods and services.

    And Japan’s year on year “core-core” CPI inflation rate is currently at 0.7%, the highest on a tax adjusted basis since 1995. This is very unlikely to have been influenced by the price of oil and other imports.

    2) Inflation is not a demographic phenomenon.

    Back in September I did a fairly exhaustive analysis of the relationship between labor force growth and inflation, the results of which are reported here:

    http://www.interfluidity.com/v2/4706.html

    I combined civilian labor force data from the OECD with CPI from AMECO for a group of 26 OECD nations, and computed 5-year compounded average civilian labor force growth rates and CPI inflation rates. The time periods ran from 1960-65 through 2007-12 with the exception of Korea which started with 1967-72. I regressed the average CPI inflation rates upon the average labor force growth rates. Fifteen of the 26 were statistically significant, and all at the 1% level with the exception of Poland which was at the 10% significance level. The average civilian labor force growth rate and average CPI inflation rate were positively correlated in Canada, Denmark, Finland, Greece, Iceland, Italy, Korea, New Zealand, Norway, the U.S. and Japan and negatively correlated in Spain, Luxembourg, the Netherlands and Poland.

    Next I conducted Granger causality tests using the Toda and Yamamato method on the level data over 1960-2012 (except for Korea which was over 1967-2012) for the 15 countries which had statistically significant correlations.

    In Japan’s case civilian labor force Granger causes CPI at the 1% significance level but CPI does not Granger cause civilian labor force. In Finland, Poland and Korea civilian labor force Granger causes CPI at the 5% significance level but CPI does not Granger cause civilian labor force. In Greece CPI Granger causes civilian labor force at the 1% significance level but civilian labor force does not Granger cause CPI. In Iceland and the U.S. CPI Granger causes civilian labor force at the 10% significance level but civilian labor force does not Granger cause CPI.

    So out of the 26 countries I looked at, fifteen have a significant correlation between average civilian labor force growth and average CPI inflation with eleven of the fifteen having a positive correlation. Of the eleven with positive correlation six demonstrate Granger causality with three showing one way causality from civilian labor force to CPI and three showing one way causality from CPI to civilian labor force. Of the four with negative correlation one demonstrates Granger causality from civilian labor force to CPI.

    Only three countries (Japan, Korea and Finland) out of the 26 support the kind of story Cullen Roche is implying.

  29. Gravatar of Doug M Doug M
    28. April 2014 at 13:41

    o. nate

    Option 1) Sales taxes. Give everyone $10,000 (that is what makes it progressive). Everyone pays the same rate. You can make purchases of certain necessities non-taxed. And you can make yachts subject to double tax if you wish.

    Option 2) Income tax. You go back to calculating and income, but you allow all net-savings to be deducted.

  30. Gravatar of Mark A. Sadowski Mark A. Sadowski
    28. April 2014 at 13:47

    Scott,
    Off Topic.

    Since I’m on the subject of Cullen Roche, is it just me or did Krugman take swipe at Monetary Realism today?

    http://krugman.blogs.nytimes.com/2014/04/28/a-monetary-puzzle/

    April 28, 2014

    A Monetary Puzzle
    By Paul Krugman

    “OK, color me puzzled. I’ve seen a number of people touting this Bank of England paper (pdf) on how banks create money as offering some kind of radical new way of looking at the economy. And it is a good piece. But it doesn’t seem, in any important way, to be at odds with what Tobin wrote 50 years ago (pdf) “” indeed, the BoE paper cites Tobin extensively. And I have always thought of money in Tobinesque terms, even if I sometimes use shorthand descriptions that can be misread if you take them out of context; the same is true of many economists.

    Furthermore, the key Tobin insight “” which is fully consistent with the BoE analysis “” is that while banks are indeed more complicated creatures than the mechanical lenders of deposits we like to portray in Econ 101, this doesn’t mean either that they have unlimited ability to create money or that they are somehow outside the usual rules of economics.

    Don’t let monetary realism slide into monetary mysticism!”

    I imagine this may be payback for some of the negative things that Pragmatic Capitalism has said about Krugman lately.

  31. Gravatar of TravisV TravisV
    28. April 2014 at 14:31

    Wall Street:

    “If it turns out to be Jeb versus Hillary we would love that and either outcome would be fine,” one top Republican-leaning Wall Street lawyer said over lunch in midtown Manhattan last week. “We could live with either one. Jeb versus Joe Biden would also be fine. It’s Rand Paul or Ted Cruz versus someone like Elizabeth Warren that would be everybody’s worst nightmare.”

    http://www.politico.com/story/2014/04/wall-street-republicans-hillary-clinton-2016-106070.html

  32. Gravatar of Bonnie Bonnie
    28. April 2014 at 15:03

    As a decentralist, it seems that a neglected aspect of doing the right things (I realize that is rather subjective) is at which level of government these should be applied. Lazy and miserly hegemons, as in Morgan’s comment, likely prefer the centralized approach to governance due to the relative effectiveness of fewer politicians to influence vs. 50 state houses to visit with multitudes more politicians and bureaucrats to bother with. A prime example of a case to be made for decentralization are the recent monetary policy issues. If one monetary authority loses its marbles, the chances that they all would are not so high. It is also likely to reduce the duration, and the scope and depth of impact given a wider collaborative effect in an environment that has multiple spheres of power over the same function. Being wrong is a lot more difficult to carry on or to cover up.

    At least one legal complication to the implementation of a national consumption tax is that the Federal Government does not currently have that power, which some are reasonably reluctant to grant without first repealing the 14th amendment to avoid ending up with both kinds of taxes. Although, in total, the average citizen is hit with all of them in order to fund sometimes duplicative and/or conflicting purposes across various tax authorities that exist with the federal system.

    Before addressing the kind of taxes we should have, whether the total tax the average citizen pays in a given year is rational should be addressed. We can tax as much as we wish in any way we wish, but if the purposes are duplicative or conflicting across various tax authorities, then they are for nothing no matter the principle or intent behind each individual tax; it is all still madness with the effect of the average citizen serving multiple masters for little public good.

    The states already have the power to tax consumption, which most do. And because we do have a federal system (small ‘f’) the better approach, in my opinion, is retain the original spirit of decentralization where political accountability is closer to those paying the tax for purposes appropriate to the needs and wants of the region rather than purposes preferable mostly for Morgan’s national hegemons. I am not particularly concerned about what they want, and I certainly should not have to be ruled by them while footing the bill.

  33. Gravatar of Miami Vice Miami Vice
    28. April 2014 at 15:14

    “Deserve’s got nothin’ to do with it.”
    -Will Munny

  34. Gravatar of Benny Lava Benny Lava
    28. April 2014 at 15:27

    I have a serious question about immigration. Is there a difference in net welfare between open immigration and open trade? I recall a paper a year ago demonstrated that open trade with China made American workers poorer. Makes sense though, it basically added 500 million workers to the labor pool. Demand and supply dictates wages will go down, and they did. Things got much better in China though.

    So would reducing all trade barriers with a nation have a similar effect as reducing all immigration restrictions? Or is the difference merely America’s superior governance?

  35. Gravatar of Morgan Warstler Morgan Warstler
    28. April 2014 at 15:28

    Bonnie,

    I don’t speak of national hegemons.

    I’m talking about the top 1/3 of people in every burg and burb who work in the private sector, run the PTAs and the churches, own their homes, vote in every election and spend of their earning life in the top 20% of America.

    They have far, far more wealth and power then the oligarchs and as many votes as the bottom 2/3.

    Grades don’t exactly reflect life outcomes, but we’re basically talking about the A and B students vs the rest.

    And the A and B students who put this thing together, don’t want Open Borders. And the fact that I want them, or Scott loves all the people equally, or Bryan Caplan whatever he’s going on about…

    The DEAL that the hegemons put together for all the rest is that this thing is a club with rights and privileges, and while some kinds of animals are more equal than others, everyone has a decent enough shot at being that kind of animal, that even if your parents are horrible, the top 1/3 is attainable.

    On the one hand, once we move to GI/CYB it is far far easier to pass Open Borders, bc non-citizens don’t get wage subsidies.

    But on the other, once we have a nation of native born people who all get to have fun jobs on GI, I suspect they will all take a “nativist” view of who gets to do the fun jobs and who has to do the hard labor jobs that are survivable without a GI.

  36. Gravatar of Morgan Warstler Morgan Warstler
    28. April 2014 at 15:30

    So we end up with Open Borders and a much harder path to citizenship.

  37. Gravatar of BC BC
    28. April 2014 at 15:37

    Scott, what is your take on all of the Piketty-related fuss about r>g? I thought it was well known that if one receives every year a dividend growing at rate g, then the present value of that dividend stream is a geometric series that only converges if r>g to D1/(r-g). D1 is the first dividend, which could literally be a stock dividend, or it could represent a share of the economy’s output. This is just the so-called dividend discount model or Gordon growth model. (See http://en.wikipedia.org/wiki/Dividend_discount_model).

    So, to me, it seems obvious that r must be greater than g for wealth to be finite, but this doesn’t say anything about inequality. Also, if one consumes the dividend, then that dividend stream only grows at rate g, not r, and similarly for the value of the investment. So, it’s not the case that just because r>g, then “rentiers” will gain larger and larger “income shares”, even though income share isn’t that meaningful anyways.

    What am I missing?

  38. Gravatar of Mike W Mike W
    28. April 2014 at 15:56

    You scare me Scott…keep it up.

  39. Gravatar of benjamin cole benjamin cole
    28. April 2014 at 16:00

    Excellent blogging, one quibble.
    The laws of supply and demand apply to labor and Georgia peach farmers too. They cen get domestic labor but they might have to pay $20 an hour and set up pleasant tent housing. Peaches would cost more.
    Immigration is good but any nation needs time to accommodate population growth. 3 millioion immigrants a year sounds fine or even a little low.

  40. Gravatar of Don Geddis Don Geddis
    28. April 2014 at 16:11

    @ Benny Lava: “open trade with China made American workers poorer … it basically added 500 million workers to the labor pool” You would seem to be making the classic error of confusing absolute advantage with comparative advantage.

    It’s also worth noting the distinction between tradable goods vs. non-tradable things like some services (haircuts, massages).

    Your suggestion of a simple relationship between open trade with China, and declining American wages, is almost certainly false. (Even if it were to turn out that China trade actually did cause a decline in wages! For sure, though, the connection wouldn’t be the simple one you suggest.)

  41. Gravatar of Mike W Mike W
    28. April 2014 at 16:14

    OMG…you’re only 25?

  42. Gravatar of Garrett M Garrett M
    28. April 2014 at 17:49

    “On purely utilitarian grounds I’d have to say that transferring my entire pension to the poor of Dhaka is probably a good idea.”

    Assuming you meant that the government coerced you into doing so (and it isn’t charity on your part), I would disagree based on the second-order effect of others seeing your wealth appropriated and thus reducing their drive to produce on the margin.

  43. Gravatar of ssumner ssumner
    28. April 2014 at 18:44

    Alan, It’s depressing that Krugman liked that speech.

    beamish, Thanks for the link.

    dtoh, You said;

    “4. If you believe inequality it unfair, why limit your efforts to equalize to just money? Why not try to equalize love and happiness as well?”

    You missed the point. I don’t think inequality is at all unfair, I’m a utilitarian. That explains why I don’t want to make love and happiness more equal. I just want to increase aggregate happiness.

    Thanks JV.

    Morgan, Did patent protections exist before the state?

    Thanks Floccina.

    dwb, That’s what I meant. Companies like eBay can expand at almost zero marginal cost. It’s not just the monopoly aspect (although that’s a big part as you say), but also the low marginal cost of adding customers. Unlike with General Motors, each extra customer goes right to the bottom line (approximately.)

    Ilya, My utilitarianism doesn’t come from anywhere in particular. My views on tax issues comes from taking courses in public finance way back in grad school. I don’t recall the specific texts. Perhaps something on “The Fair Tax” would be helpful.

    Tommy, I actually think lots of billionaires would not reduce their consumption at all under my plan (Gates, Buffett, etc). Others would reduce their consumption by only a modest amount (recall that 80% of consumption is less than 80% of income.)

    Cliff, I’m not sure, but my hunch is that at the margin a bit more overseas aid and a bit less US welfare spending would boost world utility.

    Steve, That would be a good argument against total equality of income–I agree. It’s not a good argument against shifting $100 from Donald Sterling to that mom in China.

    Engineer, Good observation.

    Ray, I’ve tended to agree with the stuff he has written. But I’m not against all IP protections. If he is, I would not agree. I’d have to look at the details.

    Eliezer, Just to be clear, I favor open borders. Having said that, I think many (perhaps most) Americans would be unhappy with the congestion resulting from open borders. Maybe it reflects the area I live in. The western suburbs of Boston are dramatically less dense than western cities like Phoenix or LA. Perhaps 1/10th as dense in some cases like Weston/Lincoln/Concord. The people there are strongly opposed to any new development. They hate to see outsiders moving in, more traffic, etc. I’m guessing that open borders could lead to an extra 100 million Americans in a fairly short period of time. We could certainly handle that, but I think most Americans would be unhappy. I’m not sure how much of that is congestion worries and how much is job/wage fears, and how much is the perception that the culture (ethnicity) would change, etc. It’s a complex issue and I don’t feel I have a good grasp on it. But there’s lots of hostility to immigration in European countries, even ones that have relatively low levels of immigration.

    Keep in mind that illegals in America have a strong incentive to avoid doing anything that would attract attention from police. With open borders they would have a much weaker incentive to avoid attention from the police. That would be a good thing in my view, but there are downsides.

    Larry, Why don’t you stop wasting time commenting in blogs, and spend that time helping the poor by working in a soup kitchen? Don’t you think that would be a better use of your time. Or do you prefer being self-indulgent, regardless of how it affects others?

    And if you don’t address my arguments, how do you expect to change my mind?

    Mark, Thanks for that info. Interesting data on leverage. If we had done what Davies recommended, would the Great Recession have occurred in 2002-03, rather than 2008-09?

    More to come . . .

  44. Gravatar of Art Deco Art Deco
    28. April 2014 at 18:55

    My views on this are kind of hard to explain.

    No, they’re not. You traffic in abstractions and do not have a sense of solidarity with anyone outside of your affinity groups, which makes you a perfectly ordinary professional class bourgeois. Caplan is no different, just more obnoxious about it.

  45. Gravatar of ssumner ssumner
    28. April 2014 at 19:00

    o. nate. Progressive payroll taxes, and progressive income taxes with unlimited IRAs are 2 ideas. dtoh discusses another idea above.

    Mark, Glad to see Krugman putting them in their place.

    Travis. I like Jeb much more than W. But the first two Bushes have ruined his chances.

    I like Bill better than Hillary.

    Not sure it matters who is President.

    Bonnie, I’d support a much more decentralized US.

    Miami Vice, Great film.

    Benny, I think congestion is the big issue with immigration. But jobs/wages are another concern. I suspect the impact of China on wages is overstated. Chinese wages are now rising really, really fast. Will that impact American wages? If so, we should see it soon.

    BC, Haven’t read the book, but I agree about r > g.

    Ben, I agree.

    Garrett, I agree about incentives. I was just trying to show that I’m a hypocrite. After all, I could do so voluntarily.

    On the other hand, it’s actually really hard to give money to the poor without affect incentives. Even if tourist just walks down the streets of Dhaka handing out cash, they affect the decision to stay in the village vs move to the city, at the margin.

    So maybe I’m not a hypocrite! Or maybe dreaming up excuses like this makes me an even bigger phony.

  46. Gravatar of TAX RATE HAYWARD CA 2014 TAX RATE HAYWARD CA 2014
    28. April 2014 at 19:15

    […] TheMoneyIllusion » The case for 80% tax rates on the rich […]

  47. Gravatar of ssumner ssumner
    28. April 2014 at 19:19

    Skepticalofpsychics, I agree that the utilitarian argument for redistribution may be wrong. But I believe it is much more likely to be correct. And we can’t be completely confident about much of anything in the realm of economic policy.

  48. Gravatar of R Richard Schweitzer R Richard Schweitzer
    28. April 2014 at 19:56

    Would it be too radical to suggest that we return taxation to its original purpose of providing revenues for the functions of governments.

    Then, we proceed, through some particular political process, to determine whether the functions of governments include (and to what extent)allocating or controlling the distribution of incomes (and all that entails) and the possession of “wealth” (and all that entails).

    Nah! that might raise issues of who, how, and to what ends that determination might be made; or if made by whom, how and to what ends would the functions be exercised.

    Wouldn’t want tha to come up, would we?

  49. Gravatar of Ray Lopez Ray Lopez
    28. April 2014 at 20:38

    ssumner is a good man. He replies to his bloggers despite no doubt a heavy work schedule. I think by and large he has it right. As for IP protection, Prof. AlexT is anti-copyright and anti-patent as the system currently exists, but in a private email to me, and in his other writings, he is not against IP in general so upon reflection I think ssumner is largely correct about IP and AlexT’s views. As for whether IP existed before the state, I believe it does: one example that comes to mind is international magicians who have a code of conduct not to used another magician’s tricks (it is very strongly held to, and ostracizing is a real threat taken seriously by all professional magicians), as well as the rule of listing the authors in a academic paper by (usually) order of merit in contribution to the paper, as well as territorial claims by animals (as in trademarks, signaling of territory), the latter example also of course reinforces that property rights exist innately outside a formal state (property is also an artificial social construct too; I’m reading Stuart Banner’s new book on property).

  50. Gravatar of Cory Cory
    28. April 2014 at 20:57

    Professor Sumner,

    My former Tax Professor I thought had an interesting take on the Income v. Consumption Tax Base debate.

    She suggests that what we really want when we’re talking about a progressive consumption tax is a tax on current and/or future income that is available for discretionary use/consumption.

    I’m sure you are plenty busy but perhaps if you feel like reading a paper on tax policy in your spare time you might check it out.

    http://papers.ssrn.com/sol3/papers.cfm?abstract_id=896353

  51. Gravatar of Tom Brown Tom Brown
    28. April 2014 at 21:39

    No reactions to this?
    http://angrybearblog.com/2014/04/is-the-fisher-effect-stable-or-unstable.html

  52. Gravatar of Tom Brown Tom Brown
    28. April 2014 at 23:57

    How about this?:
    http://everydayecon.wordpress.com/2014/04/28/on-pegging-the-interest-rate/

  53. Gravatar of TravisV TravisV
    29. April 2014 at 00:08

    Off-topic.

    Krugman wrote this post criticizing heterodox economics:

    “Here’s the story they tell themselves: the failure of economists to predict the global economic crisis (and the poor policy response thereto), plus the surge in inequality, show the failure of conventional economic analysis. So it’s time to dethrone the whole thing “” basically, the whole edifice dating back to Samuelson’s 1948 textbook “” and give other schools of thought equal time.

    Unfortunately for the heterodox (and arguably for the world), this gets the story of what actually happened almost completely wrong.

    It is true that economists failed to predict the 2008 crisis (and so did almost everyone). But this wasn’t because economics lacked the tools to understand such things “” we’ve long had a pretty good understanding of the logic of banking crises. What happened instead was a failure of real-world observation “” failure to notice the rising importance of shadow banking. Economists looked at conventional banks, saw that they were protected by deposit insurance, and failed to realize that more than half the de facto banking system didn’t look like that anymore. This was a case of myopia “” but it wasn’t a deep conceptual failure. And as soon as people did recognize the importance of shadow banking, the whole thing instantly fell into place: we were looking at a classic financial crisis.”

  54. Gravatar of TravisV TravisV
    29. April 2014 at 00:11

    Link to Krugman’s post:

    http://krugman.blogs.nytimes.com/2014/04/25/frustrations-of-the-heterodox

  55. Gravatar of TravisV TravisV
    29. April 2014 at 00:11

    Off-topic.

    A number of “heterodox” economists are taking on Krugman’s post. Here’s Philip Pilkington:

    http://www.nakedcapitalism.com/2014/04/pilkington-krugman-critique-of-the-critics.html

  56. Gravatar of Tom Brown Tom Brown
    29. April 2014 at 00:20

    TravisV, recall though that because people forgot … then that made Scott’s theory “heterodox” too (according to Scott):
    https://www.themoneyillusion.com/?p=13819
    😀

  57. Gravatar of Left Outside Left Outside
    29. April 2014 at 01:00

    You must have heard of http://www.givedirectly.org. They give money to poor people. You don’t even need to give up some of your pension!

    It doesn’t seem to negatively impact incentives either http://leftoutside.wordpress.com/2013/10/30/an-ethical-investment-with-a-28-annual-rate-of-return-that-reduces-domestic-violence/

    They’re a very lean organisation. Worth looking up given your priors.

  58. Gravatar of Morgan Warstler Morgan Warstler
    29. April 2014 at 05:20

    Scott, no, they didn’t. But secrets did.

    The Constitution screwed up on Slavery and Copyrights. We got rid of slavery.

  59. Gravatar of Daniel Daniel
    29. April 2014 at 05:53

    TravisV

    It is true that economists failed to predict the 2008 crisis (and so did almost everyone).

    http://en.wikipedia.org/wiki/Efficient-market_hypothesis

    End of conversation.

  60. Gravatar of o. nate o. nate
    29. April 2014 at 05:56

    So let’s say we implement the progressive consumption tax as a combination of a progressive income tax with an exemption for savings. It seems this is more or less like the existing 401K and IRA tax exemptions, except without the cap on contributions. So it seems this might not be hard to implement after all. I guess the drawback is that you can only count savings that go through this channel. What if you want to save for a shorter horizon (not until retirement)? Or what if you want to invest in a small business? That should count as savings too. I think this is where enforcement would get difficult. There would be lots of incentive to structure consumption in such a way that it would look like savings. I.e, instead of buying a yacht, set up a small business that buys the yacht and “invest” in it. But I guess that’s why we have the IRS.

  61. Gravatar of Ben J Ben J
    29. April 2014 at 06:22

    o. nate,

    I’m thinking of the corner store becoming the corner investment boutique.

    “I’d like to invest in a cup of a coffee and a bagel thanks”

  62. Gravatar of TravisV TravisV
    29. April 2014 at 06:50

    “IS BOE’s Carney Targeting Wage Growth?”

    http://blogs.wsj.com/economics/2014/04/29/is-boes-carney-targeting-wage-growth

  63. Gravatar of ssumner ssumner
    29. April 2014 at 07:31

    Ray, Interesting comment.

    Cory, I’m not persuaded, but didn’t have time to look at the whole thing.

    Thanks Left Outside.

    o. nate, Good points. My general comment is let’s not make the perfect the enemy of the good.

    2 points:

    The self employed are a difficult problem under any tax system, not just mine.

    For IRAs, you could allow people unlimited ability to use IRAs, and tax small accounts that people held outside IRAs, because they felt the hassle of IRA paperwork wasn’t worth the tax savings. That seems like a reasonable compromise.

  64. Gravatar of Benny Lava Benny Lava
    29. April 2014 at 07:40

    @Don Geddis

    You are making the simple mistake of ignoring demand and supply. Increase supply faster than demand and prices (in this case wages) goes down. I find it amusing that so many cannot grasp demand and supply, the most basic aspect of markets. The evidence that this is true is insurmountable: http://mobile.nytimes.com/2014/04/02/opinion/edsall-is-the-american-middle-class-losing-out-to-china-and-india.html?referrer=

  65. Gravatar of Benny Lava Benny Lava
    29. April 2014 at 07:41

    “I think congestion is the big issue with immigration.”

    What do you mean by this Scott? Do you mean that more immigrants will cause more traffic jams?

  66. Gravatar of Brian Donohue Brian Donohue
    29. April 2014 at 07:48

    “On purely utilitarian grounds I’d have to say that transferring my entire pension to the poor of Dhaka is probably a good idea. If you hooked me up to a lie detector I’d have to say it’s the “right policy.” But I don’t do it because of the thought of still grading papers at age 83, and because I’m a selfish bastard.”

    slow clap.

  67. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    29. April 2014 at 08:06

    ‘…it basically added 500 million workers to the labor pool. Demand and supply dictates wages will go down,….’

    No, those newly empowered workers will get paychecks and be added to the ‘demand pool’ too. ‘The elasticity’s the thing’.

    Speaking of inequality;

    http://www.marketwatch.com/story/rolls-royce-debuts-pinnacle-travel-phantom-2014-04-28

    ‘Rolls-Royce now has 15 dealerships in China alone, and another eight on the way. Its former sibling Bentley is also on a roll, opening dealerships as fast as it can in places like Ãœrümqi in China’s remote northwest, where just 10 years ago driving an Audi A6 made you some kind of big shot.’

  68. Gravatar of Morgan Warstler Morgan Warstler
    29. April 2014 at 08:12

    o. nate

    I like the sales tax version of progressive consumption tax. It’s just easier to collect.

    most importantly, it blends nicely into your GI payment in GI/CYB. We need to get down to everyone getting handout has a debit card, and whatever aid you get, for whatever the circumstances,…. WE KNOW how much you really had go into the account, we know what came out of it.

    The other main thing is not letting businesses write off consumption by executives and employees: dinners, travel, etc. ALL of it needs to be treated as individual consumption.

    I’m not worried about SMB owners, I’m worried about management at Fortune 1000.

  69. Gravatar of libertaer libertaer
    29. April 2014 at 09:15

    I agree that there is no “deserving” in a moral sense. Mainly because I don’t believe in free will. Nevertheless, incentives matter. If the 1% get their wealth by working, saving or taking risks, taxing them will have limits. If it comes down to site value and patents, we can get all picketty on them.

  70. Gravatar of Don Geddis Don Geddis
    29. April 2014 at 10:02

    @Benny Lava: “simple mistake of ignoring demand and supply” You accuse me of being ignorant of Econ101, and yet you don’t seem completely clear on the concept yourself.

    Start with: open trade with China is not identical to suddenly doubling the population of native US house carpenters. For example.

    Increase supply faster than demand” I don’t believe this is a meaningful phrase. Supply is a curve, relating price to quantity supplied. Demand is also such a curve (price to quantity demanded). In a free market the intersection of the two curves gives the equilibrium price and the quantity exchanged. Nowhere in Econ101, is your phrase particularly meaningful. Do you mean a shift in the supply curve? What does “faster” mean, with a shift? What does it matter whether one curve shifts “faster” than another?

    I find it amusing that so many cannot grasp demand and supply” Pot, kettle, black? Perhaps the concepts aren’t quite as intuitive as you imagine. As you seem to be demonstrating.

    The evidence that this is true is insurmountable” Your own link says: “Free trade…will…expand employment in exporting industries” The concerns are “in the short run”. This doesn’t seem to match at all, your (erroneous) analogy to suddenly expanding the labor supply, and wages necessarily falling because the supply of labor has increased.

    Did you even bother to look at my link on comparative advantage? Paul Samuelson famously cited it as the best answer to the question of a non-trivial and true discovery in economics. And it’s highly relevant to the question of the effects of open trade with China. But you still don’t seem to be aware of it.

  71. Gravatar of TravisV TravisV
    29. April 2014 at 10:37

    “Is Shorting China The New Widowmaker Trade?”

    http://seekingalpha.com/article/2172823-is-shorting-china-the-new-widowmaker-trade

    “Middle-class now fleeing China as well as the rich”

    http://www.economist.com/news/china/21601305-more-middle-classes-are-leaving-search-cleaner-slower-life-yearning-breathe

  72. Gravatar of Larry Larry
    29. April 2014 at 12:58

    Larry, Why don’t you stop wasting time commenting in blogs, and spend that time helping the poor by working in a soup kitchen? Don’t you think that would be a better use of your time. Or do you prefer being self-indulgent, regardless of how it affects others?

    And if you don’t address my arguments, how do you expect to change my mind?

    I’m pleased I got under your skin!

    I did address your arguments. Elizabeth Warren left the Republican party because she felt the playing field had been tipped toward the banks and away from the people. She is right. That’s a force for inequality that you ignore.

    Structural racism is another force for inequality alive and well in this American culture, which you also ignore.

    Bad schools are another force for inequality alive and well in this American culture which you also ignore. I think it is a tragedy that the American public school system has been allowed to deteriorate to the extent that it has. Our future is compromised by what has happened to our public schools, at all levels, elementary through post grad.

    So I am not sure who is more self-indulgent, you or me. I volunteer many hours to support my community, though not in soup kitchens, but I do grow vegetables that I donate to the local church.

  73. Gravatar of Bill Woolsey Bill Woolsey
    29. April 2014 at 13:47

    80% on consumption?

    Awful.

  74. Gravatar of TravisV TravisV
    29. April 2014 at 14:00

    Bob Murphy attacks Prof. Sumner:

    http://consultingbyrpm.com/blog/2014/04/a-post-having-absolutely-nothing-to-do-with-level-targeting-of-ngdp-growth.html

  75. Gravatar of Mike W Mike W
    29. April 2014 at 15:33

    So this progressive consumption taxation, is it essentially like an IRA? That is, the taxable income would be all income (wage income, dividends, interest and capital gains) less the increase or plus the decrease in the value of the savings vehicle (i.e., the IRA)?

    If Madonna earns $125 million during the year and socks away $100 million her taxable income is $25 million. The following year she earns $4 million in interest and buys a mansion for $10 million cash; her taxable income is $10 million.

    It seems like it would be much easier politically to get to that scheme from where we are than to get to Piketty’s wealth tax.

  76. Gravatar of Mike W Mike W
    29. April 2014 at 15:38

    I forgot to ask, has anyone modeled a consumption tax compared to our current income tax? In order to raise the same amount of federal revenue who’s ox would get gored?

  77. Gravatar of Mike W Mike W
    29. April 2014 at 15:58

    “…her taxable income is $10 million.”

    Her taxable income is $6 million.

  78. Gravatar of Major_Freedom Major_Freedom
    29. April 2014 at 16:19

    TravisV:

    Not sure if that constitutes an “attack.”

  79. Gravatar of Mark A. Sadowski Mark A. Sadowski
    29. April 2014 at 17:53

    One frequent meme that I hear about consumption taxes is that they will not raise much revenue because those with high incomes save a lot of their income. Thanks to the rash of recent studies on inequality we now know that this is unequivocably false.

    The BEA “personal savings rate” is computed with respect to disposable personal income (DPI). DPI does *not* include capital gains. This is logical because capital gains is not income derived from the production of new goods and services, and hence is *not* a part of GDP.

    The first attempt that I’m aware of to produce disaggregated personal savings rates by income class consistent with BEA (NIPA) accounting was by Maki and Palumbo in 2001. They actually found that the personal savings rate was *inversely* related to income quintile in 2000 and that the personal savings rate of the top quintile was *negative*.

    A recent paper by Cynamon and Fazzari (2014) uses Maki and Palumbo’s methods to disaggregate personal consumption expenditures (PCE) and “outlays” by income level. “Outlays” are PCE plus “personal current interest payments” (nonmortgage interest) and “personal current transfer payments”. “Outlays” are also equal to DPI less personal savings.

    Cynamon and Fazzari divide households into the top 5% and bottom 95% by income. Unfortunately they count capital gains as income and so Figure 5, which displays the ratio of PCE and the ratio of outlays to income from 1989 through 2012 is not useful for estimating the personal savings rate by income class, unless one makes an adjustment:

    https://pages.wustl.edu/files/pages/imce/fazz/cyn-fazz_consinequ_130113.pdf

    Cynamon and Fazzari get their capital gains data from the CBO (see Supplemental Data Excel File on right):

    http://www.cbo.gov/publication/43373

    Unfortunately the CBO data only runs through 2009 but it is very similar to Piketty and Saez’s numbers so one can splice them together. Thus it is possible to back out NIPA consistent personal savings rates by income class.

    Here is my best eyeballing (rounded to the nearest whole number) of the outlay rate (percent) of the top 5% from 2003 through 2012 from Cynamon and Fazzari’s Figure 5 combined with the share of taxable income (percent) derived from capital gains from the CBO (through 2009) and Piketty and Saez (2010-12):

    Year-Outlay-CapGains
    2003—–88–12.4
    2004—–85–16.6
    2005—–84–19.8
    2006—–82–20.7
    2007—–80–22.2
    2008—–85–13.7
    2009—–92—8.0
    2010—–95–11.4
    2011—–90–11.1
    2012—–90–14.6

    Taking the ratio of outlays to share of taxable income not derived from capital gains enables one to come up with the following estimates of the personal savings rate (percent) of the top 5% in income by year:

    2003-(-0.5)
    2004-(-1.9)
    2005-(-4.7)
    2006-(-2.1)
    2007-(-1.5)
    2008-(+1.5)
    2009-(+0.0)
    2010-(-7.2)
    2011-(-1.2)
    2012-(-5.4)
    Avg.-(-2.5)

    The fact that those with high incomes more often than not have had negative personal savings rates in recent years should not come as any surprise. The top 5% in income had 29.2% of the taxable income not derived from capital gains in 2005. The personal savings rate of all households only averaged 2.6% that same year. The US population is not known for its high savings rate.

    The bottom line is the idea that those with high incomes have high personal savings rates is one of the biggest myths in existence. It is a shared delusion by both Marxists on the far left and Neoreactionaries on the far right.

    A progressive consumption tax (PCT) with high MTRs might encourage those with high incomes to build fewer yachts the size of WW I battleships:

    http://www.boatinternational.com/bi-cms~/wp-content/uploads/2011/07/rising-sun-yacht-register-rm.jpg

    and put this money to somewhat more productive uses.

  80. Gravatar of Mark A. Sadowski Mark A. Sadowski
    29. April 2014 at 18:38

    Scott,
    Off Topic.

    The BEA’s preliminary estimate of 2014Q1 GDP will come out tomorrow, so it is time for my Nowcast.

    The preliminary numbers are absolutely attrocious. I project that they will show that NGDP only grew by 0.5% at an annual rate. The GDP implicit price deflator will increase by 1.9% at an annual rate. Thus I am projecting that the BEA’s preliminary 2014Q1 estimate will show that RGDP fell by 1.4% at an annual rate.

    Lest these numbers sound totally improbable, Macroeconomic Advisors is only nowcasting 0.5% RGDP growth at an annual rateand RBS only 0.6% RGDP growth. However other nowcasts are more optimistic, some as high as 2.5% RGDP growth at an annual rate.

    But my Nowcast is a clear outlier this time, and unlike the last time it was an outlier, it is on the low side.

    Last time this happened my estimate fared extremely well. This time we shall see.

    In my justification I should call attention to the fact that business inventories have been growing at a snail’s pace the last few months, and net exports have plunged mainly due to weak foreign demand:

    https://research.stlouisfed.org/fred2/graph/?graph_id=175110

    Furthermore, public construction spending (which I use to project government gross investment) has been in a free fall. The only really bright spot has been private nonresidential construction spending (which I use to project PNFI spending on structures):

    https://research.stlouisfed.org/fred2/graph/?graph_id=175111

    If my estimate proves to be way off, I predict it will be because of my projection of inventories, which are always a great source of uncertainty.

    So I’m really going out on a limb this time. I just hope it doesn’t break off.

  81. Gravatar of Jim Glass Jim Glass
    29. April 2014 at 21:09

    So this progressive consumption taxation, is it essentially like an IRA? That is, the taxable income would be all income (wage income, dividends, interest and capital gains) less the increase or plus the decrease in the value of the savings vehicle (i.e., the IRA)?

    This idea, ‘the no-deduction-limit IRA as consumption tax’ has been about in the tax world for decades.

    Taxable income is all income minus everything that goes into the IRA plus everything that comes out of the IRA. Simple. It effectively converts the current income tax system to a progressive consumption tax, because everything goes into the IRA and is saved until it is to be consumed.

    Note that it is illegal to borrow against assets in an IRA. That answers the common objection that the rich get tax free spending money by borrowing against assets.

    If Madonna earns $125 million during the year and socks away $100 million her taxable income is $25 million.

    Right.

    The following year she earns $4 million in interest and buys a mansion for $10 million cash; her taxable income is $10 million.

    If she earns ‘only’ $4 million and gets the other $6 million by withdrawing it from the IRA, then yes her tax bill is on $10 million.

    It seems like it would be much easier politically to get to that scheme from where we are than to get to Piketty’s wealth tax.

    Exactly so. The whole system is already in place and has been proven in practice over 40 years. All that is needed is to remove the contribution limit.

    This is a *world* of difference from “new” and “reform” taxes like VATs, flat taxes, wealth taxes, and so on, that require re-workings of the whole tax system with who-knows-what unexpected consequences and inevitable brutal political fights and corrupting gamesmanship.

    Plus the left-right political “deal” to make it so is readily apparent: The left gets to kill off favorable low tax rates for the big capital gains of ‘the rich’, nobody will ever again say Warren Buffett pays a lower tax rate than his secretary; the right gets 100% tax deferral for savings and investment in unlimited amount, as long as they really are saved. And economists of both left and right in large number are on record supporting the idea (if that matters to anyone). Very much the kind of left-right deal that got the Tax Reform Act of 1986 (the best one ever) passed *when* the politicians finally decided they actually wanted to pass a reform.

    The problem is they don’t want to now. Everybody gets much more reward by proposing far more radical changes that have zero chance of ever becoming real, by demanding higher/lower rates in the current system, etc. There’s no significant interest group actually pushing for real tax reform today (as opposed to posing about it, there’s never any shortage of people and interest groups doing that).

  82. Gravatar of Negation of Ideology Negation of Ideology
    30. April 2014 at 01:30

    Nice post, but I’m baffled by the Trump reference and this quote:

    “or get-out-of-jail free cards for people that can’t pay back millions in debt.”

    Why is there an assumption that people should go to jail for not being able to do something? How can there be a moral obligation to do the impossible?

    I read the link, and it sounds to me like Trump’s creditors determined it was more profitable for them to extend the loan and take an equity stake in the collateral than to foreclose on it. It was a business decision.

    When those sophisticated creditors made those loans, were they unaware of the bankruptcy laws of the United States or the possibility that the assets would not be able to generate enough cash to pay back the loans with interest?

  83. Gravatar of Negation of Ideology Negation of Ideology
    30. April 2014 at 01:43

    Jim Glass –

    “Plus the left-right political “deal” to make it so is readily apparent: The left gets to kill off favorable low tax rates for the big capital gains of ‘the rich’, nobody will ever again say Warren Buffett pays a lower tax rate than his secretary; the right gets 100% tax deferral for savings and investment in unlimited amount, as long as they really are saved. ”

    I agree, but I would add that you should also get rid of the Roth IRA as part of the deal. Otherwise ‘the rich’ would still be paying lower, in some cases 0%. Overall it would be a revenue gain to the Treasury in the long term, probably not in the short term.

    I think we should also get rid of the double tax on corporate earnings, either by making them all into S-corps or just allowing deductions for dividends. I’m not sure how to make up that kind of revenue loss, because it would be substantial.

  84. Gravatar of Benny Lava Benny Lava
    30. April 2014 at 06:45

    Don Geddis,

    You ask “What does “faster” mean, with a shift? What does it matter whether one curve shifts “faster” than another?”

    The answer is here:
    http://www.ugrad.math.ubc.ca/coursedoc/math101/notes/applications/velocity.html

    You’re welcome.

    Also you probably ignore this paragraph because it made you feel bad but here it is again:

    “The authors calculate the income losses over a period of 10 years during which imports from China increased by $1,000 for each American worker in a competitive industry. The decline was sharper for the subset of workers without college degrees, at 1.21 percentage points, compared with a 0.53 percentage point decline for those with college degrees, but it is notable that wages for both groups fell.”

    I don’t particularly care what econ 101 has to say. Econ is a fraud science where, when the facts don’t match the theory, the facts are discarded. Frauds publish completely bogus papers like the Rogoff paper on debt and GDP growth to mislead people in order to support policies that make them feel good. I understand comparative advantage, both relative and absolute. I can tell from your post that you are so angry, which is why I know you are a fraud.

  85. Gravatar of Don Geddis Don Geddis
    30. April 2014 at 08:29

    @Benny Lava. Amusing. So now you say “I don’t particularly care what econ 101 has to say. Econ is a fraud science” but earlier you said “I find it amusing that so many cannot grasp demand and supply, the most basic aspect of markets.” and “Makes sense though, it basically added 500 million workers to the labor pool. Demand and supply dictates wages will go down, and they did.

    So apparently, what is “obvious” to your personal common sense, is too complex for Econ 101 to get right. Hmm.

  86. Gravatar of SkepticalOfPsychics SkepticalOfPsychics
    30. April 2014 at 12:14

    In case it wasn’t obvious, I chose the moniker for my response because real life assessments of interpersonal Utilitarian basically require that you can read the minds of other people. Theoretically useful but a poor basis for policy.

    You respond:

    “I agree that the utilitarian argument for redistribution may be wrong. But I believe it is much more likely to be correct. And we can’t be completely confident about much of anything in the realm of economic policy.”

    I have trouble with your phrasing because the odds that my concerns flip the net utility of a policy depends strongly on the policy you’re advocating:

    – If you only tax billionaires and only feed the starving, it’s almost certain to be utility increasing.
    – If you take some arbitrary middle and tax every dollar above that line at 80% (multiplied by prospect theory’s downward utility penalty) and use that to subsidize everyone below that threshold, you’re FAR more likely (perhaps even highly likely) to net-destroy utility (even setting aside second-order incentive effects).
    – Since you’re advocating a “highly progressive tax”, you’re making trade-offs at many points on the scale. That leads me to assume that issues in the latter are relevant (but perhaps not dominant).

    Can you be more specific on the tax structure that meets this requirement?

    P.S. I think the real weakness of your overall approach is the second-order effects of reduced savings/capital, but you’re sophisticated enough to see that case for yourself. More vulnerable, I believe, are your fundamental utilitarian assumption and (eventually) the degree to which nominal income/consumption is a good proxy for those underlying marginal utilities (e.g. when you add in cost of living considerations).

  87. Gravatar of ssumner ssumner
    1. May 2014 at 05:03

    Benny, Not just auto traffic, but other forms of congestion as well. More crowded subways, airports, more pollution, water shortages in the southwest, etc, etc. Housing would become more expensive. And there are other possible downsides, like lower wages in certain job categories. Cultural change, etc.

    My own view is that people tend to overstate these risks, but I do think they are real. I should add that I don’t feel that I have a good grasp of the size of population inflow that would occur with open borders–but I suspect it would be large, especially from Asia. It might well be several 100 million.

    Larry, You said;

    “I volunteer many hours to support my community, though not in soup kitchens, but I do grow vegetables that I donate to the local church.”

    I salute your vegetable production!

    Bill, Check my newer post.

    Mike, That’s right.

    No, $10 million.

    Jim Glass, Good comment.

    Negation, You said;

    “Why is there an assumption that people should go to jail for not being able to do something?”

    You misunderstood my point. I don’t think he should go to jail. I said the rules could be set up that way, indeed they once were. Tax and patent and bankruptcy rules are all arbitrary human creations. There is no “natural” system.

    Skeptical of Psychics, I’m also skeptical of interpersonal utility comparisons. At best we have very rough estimates. You said:

    “If you take some arbitrary middle and tax every dollar above that line at 80% (multiplied by prospect theory’s downward utility penalty) and use that to subsidize everyone below that threshold, you’re FAR more likely (perhaps even highly likely) to net-destroy utility (even setting aside second-order incentive effects)”

    I agree and would strong oppose high MTRs for the middle class. I was referring to the ultra-rich.

    I view myself as a moderate supply-sider, so I am well aware of the distortions caused by high MTRs.

  88. Gravatar of QWERTY QWERTY
    2. May 2014 at 12:47

    Dear Scott

    In other words: open borders will create a lot of problems and be expensive for the average american citizen. Whats the upside?
    Is there any evidence at all, that more people in a country makes it richer?

    And why do you only expect 100 millions. The population of Africa is expected to rise with a billion during the coming 40 years. The population of Pakistan will double to 300 million. And so on.

    What do you think the cost associated with riots from poor immigrants will be? Or will they just assimilate easily without trouble, because all the poor africans that are crossing the sea to europe, are not going to the US instead. A flight from Senegal to USA is cheaper than a boat to Italy from Libya.
    Do you think there are good reasons why the europeans are increasingly antiimmigration, or are they just “racist”?

    I think it is amazing how shallow ideas about immigration that most economist have, even people like you who are not trying 100% endorsing open borders.

    In general these ideas about mass immigration are so far away from the realities of europe, Canada, nevada, australia.
    Immigration pr. se. is not an enourmous wealth generator.

  89. Gravatar of ssumner ssumner
    2. May 2014 at 17:32

    Qwerty, The huge upside is pretty obvious–it’s the immigrants who get the big gains.

    I find it odd that some people ask me what these “congestion effects” are that I refer to, and others (like you) complain that I don’t understand the congestion effects.

    If your argument is that open borders are politically impossible–of course I agree.

  90. Gravatar of Efficient Market Bubbles and Why Is Scott Sumner a Libertarian? Efficient Market Bubbles and Why Is Scott Sumner a Libertarian?
    1. March 2016 at 11:29

    […] I wonder too why someone who is in favor of a carbon tax (can’t find good link but he is), 80% consumption tax rates on rich people, who thinks that if Republicans delayed a 40% surtax on employers who offer […]

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