The one marshmallow party

[Update:  The original title had a typo.]

Two years ago I did a post on the famous marshmallow experiment.  At the end I made an offhand comment that the Dems were the “two one marshmallow party.”  A lot of commenters were outraged, and I backed off.  Yes, the GOP is often just as guilty.

But how will the Dems explain this outrage:

President Obama’s budget, to be released next week, will limit how much wealthy individuals – like Mitt Romney – can keep in IRAs and other retirement accounts.

The proposal would save around $9 billion over a decade, a senior administration official said, while also bringing more fairness to the tax code.

The senior administration official said that wealthy taxpayers can currently “accumulate many millions of dollars in these accounts, substantially more than is needed to fund reasonable levels of retirement saving.”

Under the plan, a taxpayer’s tax-preferred retirement account, like an IRA, could not finance more than $205,000 per year of retirement – or right around $3 million this year.

And please don’t give me any nonsense about “inequality.”  This proposal is bad on both equity and efficiency grounds.  Obama should propose cutbacks in Social Security for those why had high annual wage incomes (like me), not those who saved a high fraction of their income (like me).

I bet they don’t even grandfather in those (like me) who have already put a lot of money into their 401k plans.  We really are becoming a banana republic.  How much longer before the government simply seizes the private pensions, as they did in Argentina?

And why claim this adds “more fairness to the tax code?”  Does Obama actually have any economic advisers who understand the basic principles of public finance?  Is there anyone in the administration who understands why capital income should not be taxed?  If not, maybe Brad DeLong could give them a short course.

PS.  I notice that Greg Mankiw was also annoyed.


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76 Responses to “The one marshmallow party”

  1. Gravatar of Russ Abbott Russ Abbott
    6. April 2013 at 16:54

    I would appreciate it if you would explain briefly why capital income should not be taxed. Thanks.

  2. Gravatar of Don Geddis Don Geddis
    6. April 2013 at 17:06

    @Russ: I’ll take a stab at it: (1) you want to tax consumption (which is the actual claim on society’s resources), rather than income (which you would rather encourage, instead of discourage with taxation); and (2) taxes on capital provide incentives for consuming more now, instead of saving / investing now, and consuming in the future.

    Ideal taxes attempt to be neutral about changing people’s behavior, or perhaps discourage behaviors that we want less of. But society is actually stronger as we do less current consumption and more investment for the future, so it is counterproductive to have a tax on capital income which has the reverse incentive.

  3. Gravatar of Bill Ellis Bill Ellis
    6. April 2013 at 17:20

    Scott says… How much longer before the government simply seizes the private pensions, as they did in Argentina?

    ROTFL .

  4. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    6. April 2013 at 17:22

    ‘ Is there anyone in the administration who understands why capital income should not be taxed?’

    Obama himself doesn’t even understand auto insurance.

  5. Gravatar of Bill Ellis Bill Ellis
    6. April 2013 at 17:24

    Three Mill cap seems way low.
    Got to start the bargaining some where. Let’s see where it end up.

  6. Gravatar of Andrew Andrew
    6. April 2013 at 17:24

    Russ, I am not sure that anyone will be able to explain “briefly” why capital income should not be taxed, because it is a complex subject. But Scott has explained why already, at length and multiple times. Here is, I think, his most pertinent post:

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

  7. Gravatar of Steve Reilly Steve Reilly
    6. April 2013 at 17:28

    Mark Thoma on the proposal: http://bit.ly/10FuRl8

  8. Gravatar of Justin Rietz Justin Rietz
    6. April 2013 at 17:31

    Politically, it’s easier to attack retirement accounts for the wealthy vs. social security.

  9. Gravatar of Bill Ellis Bill Ellis
    6. April 2013 at 17:45

    So If a person has too much in their IRA they can just move it to another investment vehicle… Right ?

    But they lose the government subsidy…(compared to how other investments are treated. )

    I am not crying….

  10. Gravatar of John Papola John Papola
    6. April 2013 at 17:57

    He’s just being a “good” Keynesian. Savings is bad. Consumption is good. Increased consumption creates jobs through magical multipliers and so-called “derived demand”. Or maybe it’s just more grabbing at any money he think he can get away with to help buy more votes for his cronies and there’s not a shred of economic reasoning behind it whatsoever, like most actual policy.

  11. Gravatar of ssumner ssumner
    6. April 2013 at 18:44

    Bill, What government subsidy?

  12. Gravatar of Blackadder Blackadder
    6. April 2013 at 18:51

    I assume you meant to say that the Dems are the one marshmallow party.

  13. Gravatar of Greg Hill Greg Hill
    6. April 2013 at 19:00

    John Papola writes, “He’s just being a ‘good’ Keynesian. Savings is bad. Consumption is good.”

    A massive and persistent misunderstanding of Keynes condensed into three sentences. What Keynes actually said was that the act of saving, i.e., not spending, necessarily reduces current income without giving rise to any corresponding demand for goods in the future. More poetically, “abstinence does not build cities. If the spirit of enterprise is alive, wealth will accumulate whether people intend to save or not.”

    Scott, et al, on one of the empirical questions, here’s Raj Chetty, et al,

    “When individuals in the top income tax bracket received a smaller tax subsidy for retirement savings, they started saving less in retirement accounts….. but the same individuals increased the amount they were saving outside retirement accounts by almost exactly the same amount, leaving total savings essentially unchanged. We estimate that each $1 of government expenditure on the subsidy raised total savings by 1 cent.” From http://obs.rc.fas.harvard.edu/chetty/ret_savings.html

    @Russ Abbott,

    You can find a good case for the taxation of capital income here: http://www.interfluidity.com/v2/4218.html

  14. Gravatar of Kevin Dick Kevin Dick
    6. April 2013 at 19:05

    @Russ. Here’s the relevant explanation from Garret Jones

    http://econlog.econlib.org/archives/2013/03/redistributing.html

    “Under standard, pretty flexible assumptions, it’s impossible to tax capitalists, give the money to workers, and raise the total long-run income of workers.

    Not, hard, not inefficient, not socially wasteful, not immoral: Impossible.

    If you tax capital income and hand all of the tax revenue to workers, then in the long run (or the “steady state”) you’ll wind up with a smaller capital stock. And since workers use the capital stock to earn their wages, the capital tax pushes down their wages. “

  15. Gravatar of Benjamin Cole Benjamin Cole
    6. April 2013 at 19:24

    Where to start on the US tax code? On its face it is unfair, as it violates KISS, or Keep It Simple Stupid. In democracies, policies must be simple, or they are not transparent and thus bad government.

    Simple does not mean inelegant, or not artful, or unintelligent. Indeed, many great thinkers come to simplicity at the end of arduous effort.

    How about we cut federal outlays to 10 percent of GDP, and fund half of that with a national sales tax, and half by printing money? End of story. No other taxes.

    Too simple.

  16. Gravatar of Bill Ellis Bill Ellis
    6. April 2013 at 19:25

    Compared to other investment vehicles IRAs get favorable tax treatment.. Right?… tax-deductibility of contributions.

    If not what is so great about them? Why don’t you just switch to another uncapped vehicle ?

    And if not how could it save the government money by limiting them ? If it is costing some tax payers money while others benefit… it is a subsidy.

  17. Gravatar of TallDave TallDave
    6. April 2013 at 19:28

    “At some point, I think, you’ve saved enough money.”

    Kevin Dick — that’s the best answer I’ve seen, thanks for sharing.

    Like Scott, we save about half what we make (it helps when your spouse not only has a good income but grew up in a much poorer country). I don’t think the one-marshmellowers should starve, but we didn’t buy furniture on Craigslist so we could give our money to them.

  18. Gravatar of Greg Hill Greg Hill
    6. April 2013 at 19:31

    Kevin Dick quotes Garret Jones, “Under standard, pretty flexible assumptions, it’s impossible to tax capitalists, give the money to workers, and raise the total long-run income of workers.” And tops it off with, “Not, hard, not inefficient, not socially wasteful, not immoral: Impossible.”

    Unfortunately, this completely glosses over the very special assumptions required to produce this result. See http://www.interfluidity.com/v2/4218.html

  19. Gravatar of TallDave TallDave
    6. April 2013 at 19:36

    Benjamin Cole,

    I think that’s actually symptomatic of a larger problem — the legal code itself is now impossible for the average person to understand (e.g. the 3000-page Obamacare and it’s 50-page subsidy application).

    Who benefits from overly complex law? Lawyers (who can sell their expertise), lobbbyists (who can influence the legislation), legislators (who can sell more favors), regulators (mission creep ho!, plus golden departure opportunities), large industry (barriers to entry, favors, golden landing pads for regulators). It’s another way for politicoeconomic elites to extract wealth from a country. That’s why regulations are the one sure growth industry (notice the graph has no negative axis).

  20. Gravatar of Edward Edward
    6. April 2013 at 19:44

    Scott, sadly,
    I dont agree with you on the issue of capital gains it all. Although I understand the argument about punishing savers, its not at all clear that taxing capital gains is taxing income twice, consider CEOS paid in stock options.
    And your answer to that is… what exactly. Monitor and tax that market value of whatever financial instrument that a ceo is paid in?
    It would be a bureaucratic and administrative nightmare you know it will.nightmare, you know it will. And smart savers realize that its not the amount you save, but the quality of your investment that matters. Value and growth investors who pick severely undervalued stocks typically earn 500-1000% return on their investments in a three to five year period. Why do most people not do this? Severe impatience. You have to wait… and wait…. and wait…. for the gem you picked out of a trashcan to be noticed by the crowd, and for them to bid you thousands upon thousands. And smart investors price in capital gains taxes anyway, and inflation.

    Speaking of which, I was completely and utterly fascinated by a piece of data I came across about household and corporate american savings rates during the 1970’s I believe, (though I’m not sure) the combined total was something like 20% of gdp, And this was in a period of raging inflation. Why? I have a one possible theory, and I hope you’ll comment. Money illusion on the part of savers. When you have high but relatively stable inflation as you has in the seventies, 13% gains in nominal median wages, and 10% inflation on average Interest rates remain high for a long time. Savers see this, and just like workers, are fooled into thinking: “This is fantastic! 11% interest rates!”

    On the flip side, the 1920’s were a period of growth, and actual mild deflation which is supposed to increase saving, or at least cash hoarding, and yet, the savings rate of Americans was… Negative. Isn’t this bizarre, Austrians?

  21. Gravatar of Justin Rietz Justin Rietz
    6. April 2013 at 19:45

    Bill –

    Government spending imposes costs on taxpayers. If the government was making lump sum payments into IRAs, that would be a cost/subsidy.

    By your definition (at least as I interpret it), we could say that having a top tax rate of 40% instead of 75% is a cost, and that not taxing bubblegum at 50% is a cost. Or that your employer paying you $50,000 instead of $100,000 is a cost to you.

  22. Gravatar of Edward Edward
    6. April 2013 at 19:49

    I meant to ask Scott, Does the above piece of data actually suggest that we need higher ngdp level targets such as 6-7 percent (I’m not advocating 10-13) to counterintuitively achieve more saving?

  23. Gravatar of Bill Ellis Bill Ellis
    6. April 2013 at 20:01

    Tall Dave,
    Lots of those regs are the result of rent seeking for the elite.
    Do you think destroying the welfare state will stop the elite from achieving all the privilege they do now ?

    Libertarians don’t want a nation where only the elite can pull off rent seeking do they ?
    So why is the welfare state their main target and obsession ?

    Best regards, Short Bill.

  24. Gravatar of Bill Ellis Bill Ellis
    6. April 2013 at 20:05

    Justin Rietz,

    Lest say a nation has ten people. Each pay ten dollars in taxes. But the Government provides benefits unequally.

    Five citizens get 9 bucks in benefits while the other five get 11.
    The Five that get 9 have subsidized the five that get 11.

  25. Gravatar of ssumner ssumner
    6. April 2013 at 20:11

    Blackadder, Thanks, I corrected it.

    Greg Hill, I have doubts about those empirical results, but they do confirm my claim that the policy is bad on both equity and efficiency grounds. And let’s not forget that the rest of fiscal policy is riddled with anti-saving bias, almost everywhere you look. Even in areas like college finance. You could make a good argument for the government subsidizing saving.

    Bill, You must pay income taxes on every single dollar you take out of a 401K. There is no subsidy. If it looks like a subsidy it’s because the taxes on other forms of saving are so outrageous. And let’s not forget that investment income is not even indexed to inflation, which means the tax rate is often far over 100% (on T-securities, for instance.)

    Edward, I feel like I’m playing a game of whack-a-mole. I’ve refuted those arguments many times. Stock options paid as compensation are fully taxable as income–you even must pay payroll taxes.

    I don’t know where you got the savings data, but it’s not even close to being accurate. There was a lot of investment in the 1920s and the US ran CA surpluses, so obviously saving rates were very high. I’d love to know your source, so I could rip it apart. (I’ve just done my taxes, so I’m in a very bad mood.)

    Everyone, I don’t see any evidence that Dems even care about the problem. If they did then they would favor replacing the income tax with a payroll tax, at least for everyone making less than say $100,000/year in investment income from stocks and bonds. It’s a no-brainer reform, but I’ve never seen one Dem propose it. Hence I think all the talk about “the rich CEOs” is a smokescreen. The Dems represent the people that made $100,000/year and blew all their income on BMWs, and now want to redistribute wealth from the savers who made $100,000/year to the spenders who made $100,000/year. It’s that simple. I’ll will continue to assume bad faith until I see a sign that they are serious about tax reform. And pointing to a handful of high income people who might abuse the system is no answer.

  26. Gravatar of ssumner ssumner
    6. April 2013 at 20:13

    Edward, No, higher NGDP growth rates would discourage saving, by increasing the tax rate on saving.

  27. Gravatar of ssumner ssumner
    6. April 2013 at 20:14

    Are Dems so brain dead that they don’t know how to tax the rich without taxing high savers more than low savers? I thought they claimed the GOP was the stupid party?

  28. Gravatar of Justin Rietz Justin Rietz
    6. April 2013 at 20:28

    Bill –

    I agree with your hypothetical. But to apply it to retirement accounts, you would have to show that the wealthy pay in less than they receive in government benefits in comparison to the less wealthy.

  29. Gravatar of Russ Abbott Russ Abbott
    6. April 2013 at 21:50

    OK. I have always bought a progressive consumption tax as preferable. But I’m not convinced that a labor tax is better than a capital gains tax.

    The blueberry argument (http://goo.gl/uzUuz) relies on the assumption that the world will offer you, say, 4%/year income on capital and that the owner of that capital is entitled to keep the 4% without tax. I didn’t see the justification for that.

    If the interest rate were 0% the saver would not pay more taxes than the spendthrift. In fact the saver could immediately convert the money he plans to save into blueberries and eat them later without suffering any tax loss. In fact the blueberries would decline in value since there is a cost to keeping them. So saving is a bad idea under that scenario. If all that matters is total blueberries eaten, better to eat them all now rather than lose some of them to storage costs.

    So there’s something in the assumption that one is entitled to keep the full gain from invested capital that seems wrong.

    Why do savings grow? As the blueberry example showed not everything that is saved grows. Saved blueberries must be stored at a cost.

    Saved capital grows because the saver is fortunate enough to live in a society that can use his capital productively. It would seem that the saver should pay part of the cost for keeping the society productive, i.e., part of the profit from the use of the saver’s capital should go back into maintaining the society.

    That’s the underlying justification for labor taxes: someone must pay the cost of keeping society going — and for providing a framework within one is able to sell one’s labor for money. The same argument would seem to apply for invested capital as for invested labor.

  30. Gravatar of Justin Rietz Justin Rietz
    6. April 2013 at 22:11

    “It would seem that the saver should pay part of the cost for keeping the society productive, i.e., part of the profit from the use of the saver’s capital should go back into maintaining the society.”

    This seems backwards to me. Savers help keep society productive by providing funds for investment, investment needed for growth.

    If your argument was correct, people would accept lower rates of return.

  31. Gravatar of TravisV TravisV
    7. April 2013 at 00:24

    Fascinating new column by Stiglitz on Japan:

    http://www.project-syndicate.org/print/shinzo-abe-and-soaring-confidence-in-japan-by-joseph-e–stiglitz

    Stiglitz is wrong about a lot of things. But at least he supports aggressive monetary policy. A big thing that he doesn’t understand is that the key to effective monetary policy isn’t removing “credit blockages.” The key is setting expectations by announcing a nominal target (inflation or NGDP) and then demonstrating your commitment to it with aggressive money creation. That’s what the Bank of Japan has done by announcing they want to increase inflation to 2%.

    Plus, Stiglitz is wrong about the short-term importance of fiscal policy (although infrastructure investment helps in the long-term). He doesn’t understand the “Sumner critique.”

    However, some of his suggestions for structural reform seem sensible.

  32. Gravatar of Petar Petar
    7. April 2013 at 00:43

    “We really are becoming a banana republic. How much longer before the government simply seizes the private pensions, as they did in Argentina?”

    Welcome to your (european) future. They tried to “raid” obligatory private pension funds in Croatia (I think they actually did it in Hungary) in order to cover the deficits at the begining of 2009.

    BTW, after living in ex communist country, I can tell you that Obamas rhetoric is more socialist than stuff coming from “socialist-democrats” here, but very close to those in Germany

  33. Gravatar of Vivian Darkbloom Vivian Darkbloom
    7. April 2013 at 00:58

    “The proposal would save around $9 billion over a decade, a senior administration official said, while also bringing more fairness to the tax code.”

    This is an interesting sentence to pick apart.

    Let’s start with “the proposal would *save*…”

    Funny that a legislative proposal designed to prevent saving is actually claiming to “save” the government. That’s an interesting idea. For every dollar the government is able to tax, the government “saves”.

    And, “around $9 billion over a decade”.

    Call me skeptical. Presumably, discouraging additional contributions (and perhaps taxing the “excess savings”) is estimated to bring in $9 billion up-front. Such estimates, like much of the government budget accounting, is front-loading revenues and rigging the accounting under a 10-year window.

    Actually, when a private individual saves money in a 401(k) account or some other tax-deferred savings vehicle, the government participates in those savings (with the exception of Roth accounts although the general economic benefits of that saving and investment are enjoyed by all). The amount saved, when distributed, is fully taxed at ordinary rates (these amounts are also subject to estate tax and, unlike non-deferred savings, heirs get no step-up in cost basis). The ability to tax these savings at ordinary rates is a double windfall for the government: The government not only gets to tax the savings but capital gains and dividends which would be taxed at “preferred” rates are converted to ordinary income and tax as such later. I’m very skeptical that the current regime costs the government any revenue. Over the longer-term, my best guess would be that deferred accounts actually “save” the government money (in the true sense of that word).

    Another problem with this proposal is that it does not appear to apply to defined benefit plans, such as the one that President Obama enjoys. Any idea what the net present value is of a $200,000 annual and inflation-adjusted pension is that begins three years from now for someone aged 55? This does not include other significant benefits such as free lifetime medical care. My guess is that it is well over $5 million, particularly at current interest rates.

    A couple of good questions for journalists to ask President Obama or one of his “senior administration officials” with respect to this proposal would be:

    –What is the approximate amount the government has (or must) “save” in order to pay the President a $200,000 annual inflation-adjusted pension for life beginning at age 55?

    –Does this proposal affect the amount of that pension or require that the President pay current income taxes on the excess amount “saved” to pay for it?

  34. Gravatar of Saturos Saturos
    7. April 2013 at 01:12

    Has this been posted already?

    Before I came to the Fund, I thought of the financial system as a set of arbitrage equations. Basically the Federal Reserve would chose one interest rate, and then the expectations hypothesis would give all the rates everywhere else with premia which might vary, but not very much. It was really easy. I thought of people on Wall Street as basically doing this for me so I didn¹t have to think about it.

    [Macroprudential tools allow a central bank to restrain lending in specific sectors without raising interest rates for the whole economy, such as increasing the minimum down payment required to get a mortgage, which reduces the loan-to-value ratio.] In principle, they can address specific issues in the financial sector. If there is a problem somewhere you can target the tool at the problem and not use the policy interest rate, which basically is kind of an atomic bomb without any precision.

    The big question here is: How reliable are these tools? How much can they be used? The answer “” from some experiments before the crisis with loan-to-value ratios and during crisis with variations in cyclical bank capital ratios or loan-to-value ratios or capital controls, such as in Brazil “” is this: They work but they don’t work great. People and institutions find ways around them. In the process of reducing the problem somewhere you tend to create distortions elsewhere.

    There is two-way interaction between monetary policy and macro prudential tools. When Ben Bernanke does expansionary monetary policy, quantitative easing, and interest rates on many assets are close to zero, there’s a tendency by many players to take risks to increase their rate of return Some of this risk actually we want them to take. Some we don¹t want them to take. That is the interaction of monetary policy on the financial system.

    You also have it the other way around. If you use macro prudential tools to, say, slow down the building in the housing sector but you have an effect on aggregate demand, which is going to decrease output.

    The question is: How do you organize the use of these tools? It makes sense to have them under the same roof. In practice means the central bank. But that poses questions not only about coordination between the two functions, but also about central bank independence.

    If you think now of central banks as having a much larger set of responsibilities and a much larger set of tools, then the issue of central bank independence becomes much more difficult. Do you actually want to give the central bank the independence to choose loan-to-value ratios without any supervision from the political process. Isn’t this going to lead to a democratic deficit in a way in which the central bank becomes too powerful? I¹m sure there are ways out. Perhaps there could be independence with respect to some dimensions of monetary policy -­ the traditional ones “” and some supervision for the rest or some interaction with a political process.

    http://blogs.wsj.com/economics/2013/04/01/olivier-blanchards-five-lessons-for-economists-from-the-financial-crisis/

  35. Gravatar of Benjamin Cole Benjamin Cole
    7. April 2013 at 01:42

    Tall Dave-

    Thanks for your comment.

    It sounds like we are in agreement, at least on some matters.

    And government should always follow KISS.

  36. Gravatar of Typhoon Jim Typhoon Jim
    7. April 2013 at 03:43

    Apart from the mention earlier, no one is addressing the empirical finding that most likely helped this proposal along:

    http://obs.rc.fas.harvard.edu/chetty/ret_savings.html

    It seems to me that the language about “government savings” is burying the lede. What really seems to matter here is that on the high end, the government was tax-favoring income that it didn’t have to, because it would be saved anyway. So we’ll stop doing that.

  37. Gravatar of Ashok Rao Ashok Rao
    7. April 2013 at 03:56

    Obama’s idea is about as ridiculous as Mankiw thinking that saving $50,000 a year is easy for someone “successful” and “frugal”. And that’s saying something.

  38. Gravatar of Squarely Rooted Squarely Rooted
    7. April 2013 at 04:20

    It is utterly astounding that none of the discussion thus far has included at least mention of this fact:

    http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Topics-IRA-Contribution-Limits

    For 2012, the maximum you can contribute to all of your traditional and Roth IRAs is the smaller of:
    $5,000 ($6,000 if you’re age 50 or older), or
    your taxable compensation for the year.
    For 2013, the maximum you can contribute to all of your traditional and Roth IRAs is the smaller of:
    $5,500 ($6,500 if you’re age 50 or older), or
    your taxable compensation for the year.

    If you start working when you are 18 and make a $5500 each year between 18 and 65, to accumulate $3mil you would have to average 8% growth, continuously compounded.

    To get to, say, $102 million, you’d have to see 17% growth.

    How this proposal penalizes savers above-and-beyond the contribution limits is beyond me. It seems to be solely a way to prevent tax avoidance by laundering certain assets through the IRA tax loopholes.

  39. Gravatar of Steve Steve
    7. April 2013 at 04:33

    If you want to go after Romney-sized IRAs, go after the root cause: contributions of deliberately underpriced, leveraged, off-shore, private equity vehicles to an IRA.

  40. Gravatar of Steve Steve
    7. April 2013 at 04:35

    Also, Vivian Darkbloom’s point is 100% on the money. If Obama’s proposal goes through, the actuarial value of defined benefit plans should be summed with IRA accounts and taxed until the defined benefit plans fall under a $3 million actuarial cap.

  41. Gravatar of Vivian Darkbloom Vivian Darkbloom
    7. April 2013 at 05:04

    Let me express the idea that when a private individual saves money in a deferred account such as a 401(k) plan the government is actually saving with that individual in a somewhat different way. When an individual sets aside $1,000 which is tax deferred (say against a 40 percent federal rate), the government is avoiding the immediate collection of $400 in tax. The government has parked its right to collect tax on that amount in the individual’s savings account. As the account grows, so does the government’s tax on the savings even if rates remain constant. The government’s decision to forgo immediate revenue satisfaction is a true form of savings.

    In the real world of finance, private companies refer to this sort of thing as a “deferred tax asset”. Those assets are carried on the balance sheet as a real asset, subject to valuation allowances. The federal government, however, is not subject to the normal valuation allowances a private company might use to discount these assets, such as the ability to generate future profits that will be offset by tax credit or NOL carryforwards. Rather, the government can, wily nilly (that’s a typo, but I let it stand as a serendipitous improvement) increase its “deferred tax assets” by simply raising tax rates on those deferred savings. *That* is government truly saving for a rainy day and is the opposite of grabbing the money immediately and squandering it.

  42. Gravatar of Justin Irving Justin Irving
    7. April 2013 at 05:20

    This makes one wonder if the GOP implosion is so good for libertarians. But then maybe all those soon to be not illegal immigrants, (you know, the 11 million with high educations and wide prospects in our robotifying economy) will vote for more supplyside friendly dems in the future.

  43. Gravatar of Jeremy Goodridgde Jeremy Goodridgde
    7. April 2013 at 05:21

    Scott: your proposals seem to punish work:

    Let’s say you have two people:

    1. One works one job — 40 hours — and makes 40,000 and saves 10%.
    2. Another person works two jobs — 80 hours — makes 40,000 and saves 5%.

    To you, the second person should be taxed more because they consumed more. Does it not matter that they worked TWICE as hard?

  44. Gravatar of ssumner ssumner
    7. April 2013 at 06:15

    Russ, A progressive payroll tax with no tax on cap gains IS a progressive consumption tax. So if you support progressive consumption taxes then we agree.

    TravisV, Thanks, at least his views on monetary policy are more sensible than in the past.

    Petar, Thanks for that info.

    Vivian, You said;

    “Another problem with this proposal is that it does not appear to apply to defined benefit plans, such as the one that President Obama enjoys.”

    Good point. I presume that’s because the Dems like defined benefit plans but don’t like defined contribution plans. Didn’t Obama crack down on private diploma mills, but not public diploma mills? Can someone confirm?

    And yes, at current interest rates isn’t the assumed 6.5% rate of return on the $3 million a bit rich? If you invest the $3 million in 10 years TIPS, what’s the real rate of return? Is it even above zero?

    Saturos, Isn’t the solution to have the Fed focus like a laser on M-policy, and have some other agency do macro-prudential regulation?

    Typhoon JIm, There is no “tax favoring” going on with IRAs. You pay the full tax when the money is withdrawn. The taxation of capital income means savers currently pay a higher tax rate on lifetime consumption than nonsavers. The goal is to level the playing field, so that everyone pays the same tax rate. Even if the effect on incentives was zero (which it obviously isn’t) you’d still want to eliminate all taxes on capital income.

    Ashok, Of course it’s easy! I’ve saved roughly half my income for almost my entire life. And I’m successful (a college teacher) but certainly not rich. Unless you think Boston cops are rich. (OK, I am rich by global standards, but not rich in the Mitt Romney sense that most people mean by the term. Upper middle class is probably a better term.) I’d guess that a high fraction of Chinese immigrants to America save half their income, even if working minimum wage jobs in NYC Chinatown. I understand that most people don’t want to do that, and I don’t blame them, but it’s not hard if you put your mind to it.

    Squarely. Over my entire career I’ll average under well $100,000 in income. I didn’t even start a 401k until in my 30s, I plan to retire at 62, and I certainly hope and expect to have $3 million in my 401k at some point.

    Jeremy, Yes, almost all taxes (unfortunately) except head taxes tend to tax work and encourage leisure. Perhaps land taxes are an exception. Since I favor land taxes my ideal tax plan would address the bias you identify better han any other plan that I know of.

  45. Gravatar of Ashok Rao Ashok Rao
    7. April 2013 at 06:30

    Saving 50k a year sounds impossible to anyone earning under 150k a year (especially if you account for the fact that higher income jobs are disproportionately found in areas with much higher land prices and cost of living overall).

    Anyway, I think we’re both making the same point. Americans can save a lot more than they do, and dumb government policies discouraging that isn’t smart. I don’t think it’s smart discouraging people from having over $3m in savings, but I just think that will disincentivize an irrelevant number of people. (Though, I believe people earning an average of 80-200k can save a lot more than they do, and this will just make them that much worse… regardless, Obama is sending the wrong message with this one).

    As a side point, saving as an immigrant isn’t as easy as people make it out to be. When my parents were post-docs a family trip back to India (necessary – yes) would wipe out pretty much any savings outside of tax-deferred savings already going away to planned retirements (I guess immigrants are good at maxing this out). Of course, things are easier after time as on the lab bench…….

  46. Gravatar of Ashok Rao Ashok Rao
    7. April 2013 at 06:40

    Not to mention an economy saving 50% of its income isn’t optimal (as Karl Smith recently reminds us re: China… discount rates aren’t zero today, but they’re not far).

  47. Gravatar of Matt Waters Matt Waters
    7. April 2013 at 08:25

    I have to say I’m thoroughly confused by the post, the article and the comments.

    First of all, there’s the question of what exactly is a government subsidy. I’ve had debates with conservatives who refused to think of tax deductions as subsidies, even though they’re exactly the same as spending subsidies. Scott’s logic here seems to be that if the government taxed his money and then gave it back, that would be a subsidy, but if the government decides not to tax his money, then that’s not a subsidy.

    An IRA/401k is deferred taxation and it is a large subsidy for savers. The taxes not raised from IRA’s have to be raised from loans instead until taxes are paid and the interest on those loans is a subsidy. It’s a real government subsidy which, from a utility perspective, makes sense to take away for those with very high incomes. It could be done entirely the wrong way, but there do not seem to be enough details for me to see if it’s being done the wrong way.

    And in general, I am very much bothered by the myth that savers are innately morally good and consumers are innately morally bad. There is some absurd feeling out there that money that’s saved is saved forever and never spent, and therefore money that’s saved is money that’s never consumed. No, money that’s saved is consumption DEFERRED. The only way for money to never be consumed is to give it away, which is morally better.

    Another argument may be that higher earners who don’t save will somehow take from others down the line, whereas savers do not take from others. But since we do not means-test retirement benefits, this is not really true. Those with savings have the same access to Medicare and SS as those who did not save. Payroll taxes should perhaps correspond more to what’s eventually paid out of these programs, but there is not a huge injustice to savers. There is a transfer in general from the rich or poor, but taxes take from the rich generally regardless of savings.

  48. Gravatar of W. Peden W. Peden
    7. April 2013 at 09:49

    Matt Waters,

    I think that the main reason that conservatives (and non-conservatives) don’t like to talk about tax deductions as subsidies is that the meaning of ‘subsidy’ (a grant from the government) doesn’t apply to tax deductions, anymore than I am ‘giving’ you your marshmallow if I don’t take it from you.

    Now here’s the interesting question: if the word ‘subsidy’ has a meaning that tax deductions don’t fit, then why would some people describe tax deductions as subsidies? A charitable hypothesis is that it is a consequence of the idea that all things belong to the state first & foremost and people can only be granted ownership of anything as a privilige from the sovereign.

  49. Gravatar of Bill Ellis Bill Ellis
    7. April 2013 at 10:08

    Scott asks…Are Dems so brain dead that they don’t know how to tax the rich without taxing high savers more than low savers? I thought they claimed the GOP was the stupid party?

    Yes… and so are the repubs. (assuming we don’t want to tax high savers more. )
    Actually it is not brain dead as much as it is that most our politicians and lobbyist are one and the same.

    So tax reform is a game of rent seeking. The none of the rent seekers will give up what they. Instead of fighting over who gets what privilege, Tax reform arguments at this point should be all about simplifying… wealth transfer neutral… then we will all have a better view and better arguments about how to reform it. But that’s not gonna happen because…

    HERE is the Thing my LIBERTARIAN friends…

    The real block to simplifying the tax code is the elite. The vast bulk of our population would have little to gripe about if we simplified our tax code ( Wealth transfer neutral ). Because the majority of us are treated pretty much the same as each other. No one as a lot more privilege than the others.

    BUT the elite on the other hand have wildly different levels of privilege. We have corporation paying the top rate and ZERO…We have the very wealthy writing arcane tax law that the IRS does not even get. WE have guys like MIttens paying far less than other guys as rich as Mittens. THE WINNERS of the tax game are not about to let their privilege be taken away.

    That is the real reason why… “Dems (and repubs are) so brain dead that they don’t know how to tax the rich without taxing high savers more than low savers? They just don’t think of it. Because that is not what the game is about.

    There are literally thousands of things wrong with out tax system. We can argue about the trees, but we should be thinning the forest… WHy not start with rent seeking for the elite ?

    As it is you are up in arms over what is really a very small move in the “wrong” direction. While ignoring the fact that what you are upset about is reducing rent seeking for the better off.

  50. Gravatar of Russ Abbott Russ Abbott
    7. April 2013 at 11:09

    Scott, Where can I find the argument that “a progressive payroll tax with no tax on cap gains IS a progressive consumption tax”?

    Justin Rietz, You say that “Savers help keep society productive by providing funds for investment, investment needed for growth.” So do workers. Why do you consider labor less important for keeping society productive than capital?

  51. Gravatar of Jim Glass Jim Glass
    7. April 2013 at 12:52

    @ Matt Waters

    Scott’s logic here seems to be that if the government taxed his money and then gave it back, that would be a subsidy, but if the government decides not to tax his money, then that’s not a subsidy.

    Well, that logic is correct.

    Take as starters that the govt exists, needs to finance itself, and does so by taxing everybody under a uniform rule, to obtain its needed revenue of $X.

    Then to favor special interest group A, the politicians either…

    [] Makes a cash payment worth $Z to the members of A; or

    [] Creates a tax credit/deduction/other break worth $Z to the members of A, violating the otherwise uniform rule of taxation for their benefit.

    The fiscal consequences are *identical*, the govt’s fiscal position worsens by $Z as the members of A benefit by that same $Z. The the inside-game political consequences are the same too — as the politicians collect the same votes and other “thank yous” from the members of A by transferring the same $Z of funds to them either way.

    By far the biggest difference between the two options is in popular politics, where the first option can be attacked as “wasteful govt-growing spending” while the latter is praised as “healthy government-reducing tax cutting!”

    Thus the second option is politically *very* popular both with politicians and recipients of big-government largess — although that latter description is either very disingenuous or very naive, depending on who is voicing it.

    The fiscal and inside-political-game, government-growing consequences of a government expenditure are the same regardless of the exact mechanisms used to make it (or hide its real nature from the public). Which is why fiscal people call the first form of government spending an “expenditure” and the second form of government spending a “tax expenditure”. It is a govt expenditure either way.

    @ W. Peden

    Now here’s the interesting question: if the word ‘subsidy’ has a meaning that tax deductions don’t fit, then why would some people describe tax deductions as subsidies?

    Perhaps an even more interesting questions is: if a deduction or other tax break enacted to financially benefit one special interest group has effects identical to that of a transparent govt expenditure, subsidy, favoring that special group, why do the members of that group insist it is not so?

    I mean, the answer is obvious. What’s interesting about the question is why it is so seldom asked.

  52. Gravatar of Jim Glass Jim Glass
    7. April 2013 at 13:12

    @ Russ Abbott

    Justin Rietz, You say that “Savers help keep society productive by providing funds for investment, investment needed for growth.” So do workers. Why do you consider labor less important for keeping society productive than capital?

    Capital accumulates and compounds to make laborers richer. Labor doesn’t, it is always immediately fully consumed.

    Without any accumulated capital you’d still be using a stick to try to dig your dinner out of the ground, assuming you’re lucky enough to find it there.

    And as capital accumulates the wage rate earned by labor increases, as labor continually becomes the relatively more scarce factor (supply and demand pricing there, you know.)

    In the example Krugman used to like, why does someone who cuts hair in Manhattan earn $100 an hour more than someone who cuts hair in some poor African oountry-side? Well, where is there the most capital, by a whole lot?

  53. Gravatar of Russ Abbott Russ Abbott
    7. April 2013 at 14:39

    Jim Glass, I’m not arguing that we don’t need means to save and invest. But that’s not the issue.

    You make a number of statements that need much more explanation.

    “Capital accumulates and compounds to make laborers richer.” How does capital make laborers richer? What mechanism are you citing for this?

    “Labor … is always immediately fully consumed.” Why do you say this? Anything that’s created may be consumed or saved. It doesn’t matter whether it was created using labor or capital — or more likely some combination.

    “as capital accumulates the wage rate earned by labor increases,” The trends lately seem not to support this. (a) Capital has been capturing an increasing share of profits. This has been going on for decades. (b) Many laborers have been forced to accept jobs that pay lower rates than their former jobs.

    “why does someone who cuts hair in Manhattan earn $100 an hour more than someone who cuts hair in some poor African country-side?” Because the US has a higher standard of living. That’s not the same thing as saying that capital alone is responsible for that higher standard of living.

  54. Gravatar of Mike Sax Mike Sax
    7. April 2013 at 16:08

    I’d like to give less SS benefits to high income people-raising or ending the cap would be a great idea it seems to me.

    However, the argument I’ve heard against this is that it would effectively turn SS into a welfare program. If SS was means tested it would get less support.

    I’m not sure I agree with this; if they were to end the cap how many Americans would be effected: probably just the top 10% income earnings but that’s the premise and apparently it’s the lines FDR was thinking in when he devised it.

    Incidentally, Ezra KLein recently had an interesting piece about progressive taxation vs. progressive distribution of transfers and benefits.

    Bascially the U.S. especially but also to a large extent Britain actually tax more progressively than the contintnental European countries like Sweden, Germany, and France who have the really geneeroius government redistribution programs.

    Germany has the most generious welfare state but they fund it regressively.

    http://diaryofarepublicanhater.blogspot.com/2013/04/us-taxes-most-progressive-in-developed.html

    I any case, the reason for this seems to be the same idea behind FDR’s thinking on SS: if you are going to have some very generous welfare programs have less progressive taxation to avoid losing public suppot.

  55. Gravatar of Michael Michael
    7. April 2013 at 16:10

    Jim Glass wrote:

    “Capital accumulates and compounds to make laborers richer. Labor doesn’t, it is always immediately fully consumed.”

    Aren’t you ignoring human capital?

  56. Gravatar of Bill Ellis Bill Ellis
    7. April 2013 at 18:20

    Poor economists…
    They think politicians and are listening to them (when they do ) because their arguments are compelling…

    But really all politicians are doing is looking for rationalizations to support what they already support.

    Well, some economist know this… and they play along… seeking positions among the elite.

  57. Gravatar of Jim Glass Jim Glass
    7. April 2013 at 21:06

    Jim Glass…You make a number of statements that need much more explanation.

    “Capital accumulates and compounds to make laborers richer.” How does capital make laborers richer?

    Is this really not apparent? Consider two kinds of agriculture:

    (1) One has ample capital in the form of tractors, reapers, roads, technology of all sorts, trucks, railroads, refrigerators holding food for your convenience at your local supermarket to pick up after you finish reading this thread. The other…

    (2) has no capital, forcing you as a laborer to use your labor to try to scratch your living out of the ground, literally, in subsistence agriculture, albeit over a much shorter life expectancy.

    In which world are you as a laborer better off? This is really pretty basic.

    What mechanism are you citing for this?

    If the above isn’t apparent by itself, did you read what I wrote before about supply and demand setting the price of the relatively scarcer factor?

    “why does someone who cuts hair in Manhattan earn $100 an hour more than someone who cuts hair in some poor African country-side?”

    Because the US has a higher standard of living.

    Well, yes. But I don’t think Krugman will take that logic as a refutation of his example. 🙂

    That’s not the same thing as saying that capital alone is responsible for that higher standard of living.

    Why did you inject the word “alone”?

    Say “necessary if not sufficient” instead. Of course capital can be squandered. But to have a society with rich laborers who enjoy a rising standard of living, a high and rising accumulation of capital is a necessity.

    If you don’t believe it, find the nation that lacks ample capital that has rich laborers enjoying a rising standard of living. Supply and demand again, when labor is the factor in greatest supply, its price is *low*. The level of capital accumulation correlates directly with standard of living.

    Removing the capital from agriculture = subsistence agriculture = grinding poverty and a much lower life expectancy for, well, you.

    And, of course, no capital, no iPhone! No Internet, no blogs to comments in denying the importance of capital!

    (a) Capital has been capturing an increasing share of profits.

    That sentence doesn’t make much sense. I think you mean “profits are taking an increasing share of income”. Which is typical for the recovery period from a recession. After all, wages zoomed way up above profits as profits collapsed during the recession.

    But what does that have to do with anything? When I talk of “capital accumulation” why do you change the subject to “profits”, which is something entirely different?

    (b) Many laborers have been forced to accept jobs that pay lower rates than their former jobs.

    Not only that, but even in absolute boom economies (like the 3.9% unemployment bubble-boom circa 2000) many businesses fail outright and their employees lose their jobs totally and become unemployed with no wage at all!

    So … Point?

  58. Gravatar of dtoh dtoh
    7. April 2013 at 21:36

    Jim Glass,

    Agree with most of your comments on capital and the standard of living of laborers. I guess the only observation I would make is that in developing countries, there are really two things that drive higher output (standard of living): the first as you say is a “rising accumulation of capital,” the other IMHO is an increasing specialization of labor. One of the reasons for low productivity is that the laborer who is scratching a living out of the ground is also a carpenter, a plumber, a cook, a transportation company, a rice processor etc. etc.

    As a result, a) the transition from task to task is inefficient and b) because he is a carpenter only a few hours a week it doesn’t make sense to invest in tools (capital) to increase his productivity as a carpenter (or plumber or rice processor, or etc. etc.)

  59. Gravatar of Jim Glass Jim Glass
    7. April 2013 at 21:55

    President Obama’s budget, to be released next week, will limit how much wealthy individuals – like Mitt Romney – can keep in IRAs and other retirement accounts.

    Not to worry, presidential budgets are political posing, not real budget plans. E.g., the “tobacco tax to pay for pre-school” make no sense at all after a moment’s thought and will never be enacted, but serves the same purpose as Bill Clinton’s “midnight basketball”.

    This will never be enacted either. No chance. It’s a sop thrown to the left-side class warriors in his base who are mightily peeved by the proposal to chain-link the annual CPI adjustment to SS, which actually might happen.

    Of course, the opposite would be much better policy. Removing the contribution limits for tax deferred accounts for everybody while also eliminating the favorable tax rate on capital gains is a well-known proposal in the tax field to effectively create a real consumption tax system.

    Also of course, being that this proposal is actually relatively *doable* both logistically (only minor changes to tax code needed, well-proven tax infrastructure remains in place) and politically (each side gets something as per the TRA ’86 — the right gets tax-free treatment for investments as long as they are actually invested, the left gets higher tax rates on consumption of investments by the rich), it gets very little attention from the many “reformers” who want “better” utopian complete re-writes of the tax code that can never, ever happen. So it won’t happen either.

  60. Gravatar of Jim Glass Jim Glass
    7. April 2013 at 22:01

    @ Bill Ellis

    Poor economists … They think politicians and are listening to them (when they do ) because their arguments are compelling … But really all politicians are doing is looking for rationalizations to support what they already support. Well, some economist know this…

    Completely correct. “Blinder’s Law”: the more economists agree about something the more they are ignored.

    Some few years ago the AER did a survey of economists world-wide and found that the one thing they agreed upon most with near total unanimity was “price controls, *especially* residential rent controls, are bad”.

    “Next to bombing, rent control is the most efficient technique known so far for destroying the housing stock of cities.”
    — Assar Lindbeck, chairman of the Nobel Prize committee for Economics.

    But this world-wide unanimous opinion of the world’s economists hasn’t given a single qualm to the politicians of NYC who have been re-enacting “emergency, temporary” rent regulations since WWII forward apparently to the end of time. Once the politicians decide what they are going to do in their own interest, they couldn’t care less what economists think.

    OTOH, create a split of opinion among economists on some issue relevant to a political fight, and both sides will rush to employ their expert economic opinions on their own side of the argument, against all the expert economic opinions on the other.

    There’s a whole book of the collected ruminations of top economists on the impotence of economists in politics, “What Do Economists Contribute?“. And it’s a good read too.

    Coase is the optimist among them. He says that if their collective work increases the efficiency of govt spending by 0.01%, considering the size of government and the size of their salaries, they are providing a massive return to society relative to its investment in them.

  61. Gravatar of ssumner ssumner
    8. April 2013 at 05:29

    Ashok, For those you have trouble imagining someone making 150k being able to save half their income, I’d be glad to show them how. It’s really easy.

    Matt, I’m afraid you don’t know the principles of tax theory. A neutral tax system taxes current and future consumption at identical rates. That means no taxes on capital income. That’s public finance 101. There is no subsidy involved. To compare a consumption tax to something like the mortgage interest deduction is absurd. I agree the mortgage tax deduction is a subsidy, and a horrible idea. I’m for making taxes as neutral as possible.

    And you comments about “virtuous savers” are wrong; no one is making any moral claims to superiority. I favor tax neutrality.

    Russ, It’s not an “argument” it’s a fact. And you can find it in any good public finance textbook. Or google my post on blueberries and watermelon.

    Mike Sax, You said;

    “I’d like to give less SS benefits to high income people-raising or ending the cap would be a great idea it seems to me.:”

    This is a horrible idea. They should cut back SS benefits to those with high wage earnings, not high income. The latter idea would treat savers unfairly.

    And Germany does not have the most generous welfare state, far from it.

    Jim Glass, I agree that they should remove the contribution limit.

  62. Gravatar of johnleemk johnleemk
    8. April 2013 at 05:48

    Bill Ellis:

    “So If a person has too much in their IRA they can just move it to another investment vehicle… Right ?”

    There are surtaxes and fees (in addition to regular taxes) assessed on early withdrawals from tax-advantaged retirement accounts. The person with over $3MM in a retirement account who has to withdraw the excess (assuming the cap becomes a reality) will pay more in tax on his or her investments than someone who had just placed their money in a non-tax advantaged account from the start, unless a special provision in the law imposing the cap specifically allows for such withdrawals.

  63. Gravatar of J.V. Dubois J.V. Dubois
    8. April 2013 at 08:19

    Scott: I actually may or may not agree with Mike here based on what the proposal actually means. And to start I have to say that I agree with you about consumption/wage taxation and that I am aware of your (correct) arguments

    But this seems different to me. Maybe it is because I do not understand 401k taxation plan so let me explain at the beginning what I think is going on.

    1) One marshmallow version of Scott earns $80,000 in wages and saves nothing. He pays (for instance) 30% tax on whole income that is 80,000 x 0.3 x 40 (years) = 960,000 in taxes

    2) Two marshmallow real Scott earns $80,000 in wages but saves half in tax-free pension account. Let’s ignore progressive taxation and just assume that his real take-home pay will be taxed by same rate, that means that over the lifetime real Scott pays 40,000 x 0.3 x 40 = 480,000 in taxes

    But we may assume that on the day retiring – when Scott takes money from pension account and buys pension product, this real Scot will be one time taxed (or he may be taxed every year during which he receives his payment). So all he did was defering taxation until the day the pension was paid out.

    So from what I understand is that Obama proposes kind of double-taxation. Government will first tax every penny you put into the pension account and then it will tax you at the time you get your pension payment from your already taxed funds that you kept as your pension savings. And this is incorrect from basic taxation model as you shown.

    But in the same way it IS a subsidy, because tax code for other (non-pension) savings is very dumb even now. So in a way this tax-free pensions can be correctly seen as a “loophole” in otherwise very dumb tax law.

    PS: There are countries (like Slovakia) where the tax code is even dumber than this. A few years ago right leaning party introduced a new type of vocabulary into the tax code. They do not differentiate between wages and capital gains, but between “active” and “passive” income. Active income being things like wages and passive income being thing like returns from stocks interests and/or income from property you rented out. And now the key thing is that your passive income is automatically taxed at the highest income tax rate rate. Like even if you are poor and the only income you have is renting out some property you inherited – bad luck, it is “passive” income you will be taxed in full.

    So they either could not invent a way of how to tax rich people and not to hurt middle-or lower class. Or there is another explanation – that they do not give a crap about low and middle class (even upper middle class). They all have their own interests in tax code, and efficiency is often not one of them.

  64. Gravatar of Russ Abbott Russ Abbott
    8. April 2013 at 08:39

    @Jim Glass,

    You’re changing the subject. Yes, an economy that uses capital is generally richer than one that doesn’t. That’s not the same thing as saying that capital makes labor richer. A farm with tractors, etc. will be more productive than one without. That’s no guarantee that the farm workers on that farm will be richer.

    And no, your example is not self-explanatory.

  65. Gravatar of Russ Abbott Russ Abbott
    8. April 2013 at 09:12

    Scott, In response to my request for your reasoning that “a progressive payroll tax with no tax on cap gains IS a progressive consumption tax” you point to your blueberries and watermelon post (which I had read before).

    In that post you write:

    “And as we will see, a labor tax (like the 2.9% Medicare tax) is identical to a consumption tax (like a VAT.)”

    and

    “An equal-sized VAT would have an identical effect, cutting consumption for each person in half, at each point in time.”

    As I understand this post, you are talking about a flat consumption tax. How do you get progressivity? At the end of the post you say a progressive consumption tax is collected automatically like FICA. How can the government collect a progressive tax automatically? The tax depends on aggregate consumption over a period. I don’t see how that can be done automatically. Your argument that it can be done automatically is based on the claim that a payroll tax, which I agree can be done automatically and progressively, is the same as a progressive consumption tax. But that case was not made.

    I think one problem is that you assume a positive investment return. As I said originally, the investor should reasonably be expected to pay (out of his investment returns) part of the cost of maintaining the society that affords him that benefit.

    Consider Grasshopper and Ant. Assume they have the same income over a given year. Ant saves and consumes over a longer period (e.g., including years of famine) than does grasshopper (who just goes hungry). Therefore since our consumption tax is progressive Ant pays a lower total consumption tax than Grasshopper. But if a payroll tax were collected over the period when the income was earned, they would have payed the same tax. So the two taxes are not the same.

  66. Gravatar of mpowell mpowell
    8. April 2013 at 09:26


    Capital accumulates and compounds to make laborers richer. Labor doesn’t, it is always immediately fully consumed.

    I wish I had a link to an article I read recently talking about this claim and it’s implications. Here are two questions I have in leiu of a more detailed argument:

    First, why are you so sure capital is what accumulates? I have read estimates in numerous places that only about 10% of the value of the US economy is based on physical capital and the other 90% is social capital. This is not a widely challenged point as far as I am aware (even if the numbers vary slightly based on assumptions). And it really does seem like labor is going to play an important role here. Just about anyone who has a decent job would probably tell you their productivity increases over time. How do you square that with the claim that labor is always immediately consumed?

    Second, why would you equate capital, the cash value of your stock portfolio with capital, that thing which causes worker productivity to be higher? There is a sense in which they are related, but they are definitely not exactly the same thing. Not in a way that I would immediately agree that taxing individual’s capital gains returns will have a direct effect on business investment (which I assume is what generates ‘capital’).

  67. Gravatar of Ashok Rao Ashok Rao
    8. April 2013 at 09:40

    Scott, you said “Ashok, For those you have trouble imagining someone making 150k being able to save half their income, I’d be glad to show them how. It’s really easy.”

    I said, “Though, I believe people earning an average of 80-200k can save a lot more than they do, and this will just make them that much worse… regardless, Obama is sending the wrong message with this one”

  68. Gravatar of mpowell mpowell
    8. April 2013 at 11:46

    Actually, it looks like Greg Hill linked to the argument I was referring to above.

  69. Gravatar of Bill Ellis Bill Ellis
    8. April 2013 at 12:08

    johnleemk,

    You are right. I asked that badly. I hope there will be some provision for people who find themselves “over-invested” if the new regs take place to move their money with out penalty.

    All I was trying to say is that IRA’s have an advantage, (privilege) that other types of investment don’t.

  70. Gravatar of ssumner ssumner
    9. April 2013 at 07:44

    JV, That’s a very strange definition of subsidy, which I don’t understand. If a thief robs several people at gunpoint, and was intending to rob me, then decides not to, has he subsidized me?

    Russ, Of course investors should pay their fair share in taxes, but they shouldn’t be taxed at a higher rate on future consumption than current consumption, that makes no sense. As an analogy, married people should have to pay their fair share of taxes, but they shouldn’t have to pay higher taxes than if they were not married.

    I don’t follow your progressivity argument, it doesn’t change anything.

    Ashok, Yes, I read that too, but I generally comment on the parts I disagree with.

  71. Gravatar of Floccina Floccina
    9. April 2013 at 08:12

    The proposal would save around $9 billion over a decade, a senior administration official said, while also bringing more fairness to the tax code.

    Hahaha. Save? Bringing more fairness? Funny.

    But you know that the rationally ignorant voter will buy it. They like to save and they like fairness.

    So maybe this is an OK time to point out that one can put different amounts of money in IRA’s, Simple IRA’s and 401K’s is there any reasonable justification for this or it just corruption?

    BTW I think that it would be a good idea to allow a person to put as much as he want into an IRA and be taxed on withdrawals.

  72. Gravatar of Floccina Floccina
    9. April 2013 at 10:04

    For SS how about we lower the FICA tax to 8% and take the monthly intake from the FICA tax and divide it by the number of citizens over 65 and write a check for that amount to each one.

  73. Gravatar of Floccina Floccina
    9. April 2013 at 11:03

    Why then is the Obama Admin not going to allow us to put as much pretax money as we want to into an IRA up until it reaches $3 million?

  74. Gravatar of J.V. Dubois J.V. Dubois
    10. April 2013 at 07:09

    Scot: If all and every american citizen needs to pay tax of $1000 except for Scott Sumner who pays 0 – would you not see it as a subsidy? You end up with $1000 more than everybody else. If every american citizen has to pay $1001 in taxes except for scott Scott Sumner who not only does not pay any tax, but also receives a $250,000,000 gift from government then it is a government subsidy of $250,001,000 for Scott Sumner.

    Preferential tax treatment of somebody or something is subsidy for somebody or something. 20% VAT on consumption of everything except food, books and drugs (which are taxed by 10% VAT) is a subsidy of food, books and drugs.

  75. Gravatar of Russ Abbott Russ Abbott
    10. April 2013 at 10:29

    Scott, Sorry to keep dragging this out, but here’s the argument for why a progressive consumption tax cannot be equivalent to a payroll tax.

    Grasshopper and Ant each earn $100,000 in year 1. Grasshopper consumes $90,000 and is taxed at 30%, i.e., $27,000. Ant consumes $50,000 and is taxed at 10%, i.e., $5,000. The tax rates are different because the tax is progressive. For simplicity let’s count “consumption” as the total spent, including taxes. So Grasshopper has $10,000 left, and Ant has $50,000 left.

    Year 2 is a famine. No one has any income. Ant consumes his remaining $50,000 and is taxed another $5,000. Grasshopper lives very hungrily on his remaining $10,000, and is taxed at 5%, i.e, $500.

    Over the two years they both earned and consumed (including taxes) $100,000. Ant paid a total of $10,000 in taxes; Grasshopper paid a total of $27,500 in taxes. Since we want a progressive consumption tax, that’s the result we want.

    I see no way to create a payroll tax that will achieve that result. After all, from a payroll perspective, Ant and Grasshopper are identical. They both earned $100,000 in year 1 and $0 in year two. How can a payroll tax distinguish between them?

  76. Gravatar of Russ Abbott Russ Abbott
    10. April 2013 at 14:34

    P.S. My approach of calculating the tax on what I also call the total of taxes and spending, makes the numbers come out wrong. The basic idea still holds, though. To make the numbers right, assume each party pays taxes from savings that he had before year 1. So Grasshopper starts Year 1 with savings of $27,500, and Ant starts Year 1 with savings of $10,000. At the end of Year 2, both parties have nothing left. I think that’s fixes it up.

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