In the past, I’ve poked fun at progressives who don’t seem to know what they want. The wealth tax on luxury yachts was repealed partly at the behest of progressive politicians that worried it might cost jobs in the yacht building industry. But unless you destroy jobs producing consumption goods for the rich, it is literally impossible to use their resources to help the poor.
Dean Baker is one progressive who does understand this point:
If we think of the prospects of reducing consumption with a wealth tax, they don’t look very promising. Consider our latest round of incredibly rich people, like Elon Musk, Jeff Bezos, and Mark Zuckerberg, all of whom have over $100 billion in wealth. While I am sure these people all live very well, I doubt they spend substantially more on their own consumption in a year than your typical single-digit billionaire. There are only so many homes you can live in, cars you can drive, trips you take, etc.
This means that if we taxed away 10 percent, 20 percent, or even 50 percent of their wealth, it will have very little impact on their consumption. This means that it will not get us very far in freeing up resources for an expanded social welfare state. We will not be able to pay for Medicare for All or free college by taxing away these people’s wealth, we will have to focus on policies that reduce the consumption of a far larger group of people.
Of course just because a wealth tax is bad doesn’t mean that taxing the consumption of the rich is necessarily any better. I favor a progressive consumption tax, but there are also reasonable arguments against the idea. My point is that the rich basically can do three things with their wealth: consumption, investment and charity. Progressives tend to deny that government spending crowds out investment, and they presumably don’t want the funds to come out of charity. So that leaves consumption. Either accept that you are trying to destroy jobs in the production of luxury goods, or else give up all hope for economic redistribution.
The essay is full of lots of other great observations:
If we stacked everyone in the world by wealth, going from richest to poorest, those at the very bottom would be recent graduates of Harvard business and medical school. I’m not kidding. Many of these people have borrowed hundreds of thousands of dollars to pay for their education. Most of them have few if any assets. This means that on net, they are hundreds of thousands of dollars in the hole.
Do we really want a definition of economic wellbeing that says a recent HBS grad is much poorer than homeless person in Calcutta?
And this:
The money in a retirement account is included in standard calculations of wealth. Traditional pensions generally are not. (We can impute values for these pensions, but this is generally not done in most wealth calculations.) This leads to a story where we would say that a person with a 401(k) is much wealthier than a person with a traditional pension, even if they have no better prospects for retirement income.
PS. I have a new piece in The Hill on asset price bubbles.
READER COMMENTS
Philo
Feb 21 2021 at 1:40pm
Language Police directive: Kolkata.
Scott Sumner
Feb 21 2021 at 5:18pm
That’s the Indian spelling. (Unless you want to insist I replace Germany with “Deutschland”) 🙂
robc
Feb 22 2021 at 8:46am
I have never figured out the consistency of that.
Why, for example, were the Turin Olympics called Torino in the US, but other locations haven’t been translated? I have yet to see NBC refer to the 東京 Olympics in 2021.
Scott Sumner
Feb 22 2021 at 5:37pm
The only consistency you’ll ever find is that some people consistently like to find silly reasons to criticize others. (Not blaming Philo; I know he was just joking. I’m referring to the PC police.)
Thomas Hutcheson
Feb 21 2021 at 1:53pm
A progressive consumption tax would start to bite way below the multimillionaire level, although the rate would go above 100% for some levels. And it could be implemented without totally uncapping the deduction for 401k type savings. Income taxation at very high levels probably does not induce much less work effort. And if some dog walkers become day-care workers, is tat so bad?
Matthias
Feb 21 2021 at 8:39pm
You are right that consumption taxes can realistically go beyond 100%. (Unlike income taxes.)
But such high tax rates will lead to a lot of ‘tax optimisation’, ie change of behaviour to avoid taxes. And that’s not all just ‘consume less’, but will mostly be of the variety of ‘get expensive lawyers and accountants so that what I doing is not consumption by the letter of the law’. (And, of course, just rich people moving to other parts of the world.)
A moderate consumption tax is probably fine, though.
If you want to raise lots of revenue, go with a land value tax for most of it.
robc
Feb 22 2021 at 8:48am
How does an LVT raise lots of revenue?
As a proponent of the SLT, it pretty much caps out well below current revenue levels. Which is part of the selling point, IMO.
T Boyle
Feb 22 2021 at 1:38pm
Thomas, high tax rates tend not to induce much change in work effort in mid-income groups in the short term: they’ve already sunk the investment in their human capital, and what else are they going to do?
But for higher-income groups, absolutely. You can’t believe in declining utility of wealth and also not believe that high-income individuals will divert their efforts to non-taxable activities – if nothing else, by drifting into work they can do with much less effort, while net income falls only marginally (thus displacing the people “below” until, at the “bottom”, someone is squeezed out of the workforce). The truly wealthy really do leave, although it can take a while. And, although the mid-income groups don’t reduce work effort, they do reduce spending and increase non-taxable activities: DIY becomes much more popular, for example (and, again, people get squeezed out of the workforce).
In the longer term, across the whole economy, you get less investment in human capital and more system gaming: this is why, for example, you wind up having to offer subsidized college tuition (who’s going to pay full price for college if the resulting income benefits get taxed heavily?) and start to see much higher uptake of social services and rising cultural acceptance of tax evasion by the second generation – to say nothing of increased lobbying for special treatment by those who still aspire toward – or still have – wealth.
robc
Feb 22 2021 at 4:15pm
Really, it is pretty simple. Deadweight loss is proportional to the square of the tax rate, so unless the tax has a very low deadweight loss, a very high tax rate is going to lead to large deadweight loss to the economy, even if targeted at the rich.
BC
Feb 21 2021 at 6:40pm
Re: the recent Harvard MBA and medical school graduates, Baker asks, “Should we be concerned about these very poor people?”
Apparently, for Elizabeth Warren and the others advocating student debt forgiveness, the answer is, “Yes.” Of course, in considering wealth, we should be including human capital, net present value of one’s future *potential* earnings, as part of one’s wealth. I say potential earnings because someone that has the ability to land a lucrative Wall St job but instead chooses to work for lower pay at a non-profit is making a consumption decision whose value equals the difference in pay. For many people, especially when they are young, human capital wealth is much larger than financial wealth.
Baker makes a point that I hadn’t thought of before: social insurance is responsible for much wealth inequality. We could make a substantial dent in wealth inequality just by converting promised Social Security benefits into securities that could be deposited into one’s 401(k) or IRA. In fact, why not just replace FICA taxes with purchases of treasury bonds into one’s retirement account while we’re at it? It doesn’t seem fair that wealthy people get to hold much of their retirement savings as part of their own private wealth while working class people have a disproportionate share of their retirement savings held by the government, beyond the reach of their private wealth. CBO analysis of wealth distributional impact should be mandatory whenever Congress debates any social insurance program or privatization thereof.
Alan Goldhammer
Feb 21 2021 at 7:50pm
That works pretty well as long as the stock market is going up. Those people who were set to retire at the end of 2008 had a rude awakening if all their IRA money was in equities. Do you seriously think the purchase of treasuries is the path to a good retirement. Interest rates are so low right now that one won’t have much appreciation.
It sound as though you might not be retired and receiving Social Security. Anyone with modest investment income or a pension will see either 50% or 85% of their social security payments taxed. It is not free money.
Matthias
Feb 21 2021 at 8:45pm
I didn’t read this as BC advocating for treasuries as an investment.
Just as an accounting formality, acknowledging public pensions as essentially government debt.
But I might has misunderstood.
Mark Z
Feb 22 2021 at 2:58pm
Is this essentially what Natasha Sarin and Silvain Catherine contend here? That, as a matter of accounting, assessments of wealth inequality are incomplete if one ignores the value of social security entitlements as assets. Specifically, if the money (disproportionately poorer) people ‘own’ in the form of social security entitlements once they retire were instead invested in assets (assuming, absent social security, they just saved and invested their payroll tax), then they would be nominally wealthier because the rise in asset prices would have lifted them as well.
Note that this is all nominal. It’s not they would *really* be wealthier, but rather that because social security entitlements aren’t factored into net worth the way assets are, they appear to be nominally poorer (and wealth inequality seems to be getting worse statistically) when asset prices skyrocket.
Fred
Feb 21 2021 at 7:45pm
Wouldn’t the value of a degree from Harvard include the present value of the likely future income stream? I bought some Amazon stock when the company had no earnings; that turned out ok. The people who go into debt to get a diploma believe they are getting value.
Matthias
Feb 21 2021 at 8:45pm
And the people who finance them do so as well.
Random hobos don’t get such big loans.
Floccina
Feb 22 2021 at 11:37am
I find that I mostly agree with Dean Baker. He seems to the most philosophical and rational of the those on the left (if he is indeed on the left).
Also:
Leads me to mention the related idea that it is often expressed that growing up poor makes it very difficult to get ahead if one’s parents have little wealth and income during the child’s early life. So for example many would look at my success and say it was due to my father’s wealth and success, but as with many like me he did not have much wealth of income when I was a Child. He was private in the fire dpt with 5 children when I was 5. We lived in a low income part of town.
It seems to me that if poverty is the problem, it is not the poverty of lack of money. If you diagnose the problem wrong it hamper the solution.
BTW this weekend one of my “poor” friends was complaining to me about his neighbors, he told me stories of people threatening to get a gun and shoot someone, about a wife locking a husband out while having sex with another man, drug parties etc. Of course that is all anecdotal, I’m looking forward to stats in Bryan’s upcoming book, are the poor really as wild as they seem.
Michael Sandifer
Feb 22 2021 at 12:33pm
Your piece in The Hill is very good, but I think the statement on GameStop and related stocks could have been stronger. The more I think about it, the more this situation seems out of scope for the EMH, like those who trade on inside information. The EMH has never explained penny stock market manipulation well either, but no one cared, because so few people pay attention to penny stocks.
I particularly think your comments about tech stocks were insightful. It can be difficult to estimate the value of companies that have no earnings history and are burning cash at rapid rates, but have potentially very bright prospects due to technology, management, etc.
T Boyle
Feb 22 2021 at 1:46pm
It is important not to misunderstand the “E” in “EMH”. It does not mean that the price is “correct” in the sense that we will look back in retrospect and say “that price was correct”. It means that you cannot expect to profit from predicting what the price will do next. The price is “correct” in that sense.
Notice that, even if you think the price is “crazy” it is still “correct” in the EMH sense if you cannot tell how it will move next. It may be crazy, but if the consensus is that the weighted probability of it becoming even more crazy is equal to the weighted probability of it becoming more sane, then the consensus is that the current price is “correct,” given what we know now.
A peculiar aspect of all this is that if price movements were truly random, the EMH would be correct – even though, in this case, the prices would not necessarily ever be “correct” in any other sense of the word.
The EMH is harder to disprove, but also means a lot less, than people tend to think.
Michael Sandifer
Feb 24 2021 at 12:37am
Yes, I think I understand the EMH pretty well, for someone who isn’t expert in that line of research. I never said I thought EMH implied prices were correct. My point is, the GameStop example shows that prices are not always efficient, and as an example of market manipulation, it joins trading on inside information as being out of the scope of the theory.
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