Obama reiterated the talking points he has been pushing for the last two weeks. Borrowing $700 billion to pay for a tax cut for “millionaires and billionaires” doesn’t make any sense, especially when one considers the evidence that the wealthy are far more likely to save than spend their tax cuts, thus providing very little stimulus to the economy. The cost-benefit analysis just doesn’t work.
Since he doesn’t understand monetary operations he doesn’t realize that if the money isn’t going to be spent there is no point in taxing it with regards to aggregate demand.
He’s giving the wrong reason for ‘taxing the rich.’
Not sure the average person on the street will understand your response. How about this as an alternative?
Leave cash in the hands of people who want to spend it! Then distribute taxes as public policy, to affect what they spend it on.
Since Obama doesn’t understand monetary operations he completely misses the point that net spending IS aggregate demand. Therefore, he doesn’t realize that, given ANY amount of currency not spent, no amount of taxes on that currency will immediately alter aggregate demand.
If our goal is to increase aggregate demand, then the obvious solutions are to:
a) reduce taxes on whatever amount of currency is already flowing through the hands of people most likely to spend it; or
b) increase the amount of money flowing to such people, or
c) do both of the above simultaneously.
taxes don’t get distributed to anyone. taxes just remove spending power. govt doesn’t get anything
🙂
“Then distribute taxes as public policy, to affect what they spend it on.”
What happens (as I understand it) is that when government taxes, deposit accounts/cash decrease and reserves in the banking system (assets) are transferred to Treasury (assets), resulting in a decrease in nongovernment net financial assets and an increase in Treasury assets, or reduction in Treasury liabilities if there is a deficit.
If there is a deficit, Treasury reserves that were disbursed in excess of reserves gained in taxes are shifted to tsy’s issued in offset. The tsy’s constitute a Treasury liability and a nongovernment asset (savings) equal to the budgetary deficit. The amount of disbursements (liabilities) is offset by those reserves the Treasury gains from taxes, i.e., the reserves (assets) it gets from taxes reduce its total liabilities in the period (deficit). So there is no government “saving” to be distributed. What has already been distributed (liabilities) is canceled by the increase in reserves (assets) from taxes. If taxes do not exceed the amount disbursed, a deficit results. Since letting the Bush tax cuts expire for the rich does not erase the deficit, there is no “saving” to be disbursed, rather the deficit is reduced.
But if the government runs a surplus (accumulates reserves as assets in excess of liabilities incurred in the period), then the Treasury has reserves in its reserve account that it can use for public purpose without having to get reserves from the Fed by issuing tsy’s in the case of a deficit. So in this sense, there can be a redistribution when the government “transfers” the reserves it got from taxes to disbursement for public purpose. That is not the case now and won’t be for a long time, given projections.
The Bush tax cuts just transferred the reserves that Treasury had accumulated over the Clinton years back into deposit accounts instead of committing them to public purpose, choosing to run deficits instead. (This was supposed to goose the economy according to Cheney channeling Laffer.)
The continuing shortfall of revenue relative to disbursements in the Bush years led to persistent deficits and rising national debt (nongovernment savings). This led to asset bubbles along with low price inflation, owing to failure to share productivity increases through wages (incomes), labor arbitrage, and cheap imports. Had government offset the liabilities for the wars with taxation, the deficit situation would have been different. Had the funds been more equally distributed, the massive deficits would likely have been price inflationary, not just asset inflationary.
Increasing taxes (on the rich) now would reduce the deficit, which is not called for in a disinflationary environment according to functional finance. Therefore, either the Bush tax cuts should be extended or even increased (payroll tax holiday), or the composition of the tax cuts should be changed (payroll tax holiday offset by increased taxation at the top tier), or else increases on the top tier should otherwise be justified economically.
I think that there are two separate issues here. First, a lot of the kerfuffle is over “the deficit” and the “ballooning national debt,” which MMT shows to be a canard. The other is the growth of inequality, which results in reduced aggregate demand because the top end of town does not proportionately spend on goods and services or invest productively, but rather saves and speculates in assets disproportionately. Therefore, I think that there are good arguments for changes in fiscal composition to address growing inequality. This involves some kind of redistribution, and targeted progressive taxation that taxes down gains from economic rent seems appropriate means. Accounting-wise, this could be used to justify a payroll tax holiday that would provide the middle class larger space to rebuild balance sheets or consume more.
This is not only an economic issue but a growing political and social problem. The poor typically don’t make a lot of noise. It is the middle class that gets upset when they get pinched financially. While we do need to address the plight of the poor and the middle class people that have fallen through the cracks with increased disbursements, the middle class at large would all be bolstered by a payroll tax holiday and that would go a long way to increasing their confidence and calming the upset. If people are (needlessly) concerned with the rising deficit, then offset it by letting the tax cuts expire for the top, although I would redefine the top significantly above 250K/yr (that’s upper middle class now, not “rich”). But if this cannot be done politically, it is not a big deal in my book. I would be willing to trade extending the Bush tax cut for a year or two for a payroll tax holiday and more emergency stabilization (“stimulus” is now a bad word, like “bailout”) over that period.
The number one thing now is closing the output gap and lowering unemployment ASAP. The rest is rather tangential, considering the economic and human costs involved.
“The other is the growth of inequality”
Absolute power corrupts absolutely. Some bankers have had too much individual success for one human being, remember it was the russian socialist paradise that put the first human in space. Ask Warren the next time he is driving his super yacht, where are his customer’s yachts? 😉
>taxes don’t get distributed to anyone.
>taxes just remove spending power. govt doesn’t get anything
>:)
> “Then distribute taxes as public policy, to affect what they spend it on.”
touche! in my haste I used what SEEMED like context-specific slang; 🙂 (at least to me)
how’s this?
“Then distribute tax burdens per current public policy decisions, to affect how much which people spend, and what they spend it on.”
What are your thoughts on a wholesale replacement of the income tax with a VAT or other consumption tax? Since savings are not taxed, you would get more “bang for the buck” in terms of reducing agg demand, and it will more quickly track the economy for better automatic stabilization.
The main problem I see with most who are advocating a VAT is that they want to do it in addition to Income tax in order to “get more revenue”, so the government can take over more of the economy.
The first thing to tax is economic rent – land rent, monopoly rent, and financial rent. These are parasitical on the system and should be taxed and regulated away. Read Michael Hudson on this, for example. Here’s a good place to start.
The Language of Looting/a>
I’m categorically against transactions taxes on transactions we want to encourage. like doing things for each other and selling things to each other. see the taxation section in soft currency economics thanks.
Well that means you’re categorically against income taxes too, since the economics of taxing income and taxing consumption works out similarly in terms of discouraging transactions. At least a VAT has the virtue of being easier and less instrusive to administer. Also, as Jim pointed out, under a VAT those who are happy to hoard monetary wealth won’t be discouraged from working.
It’s a question of the lesser of two evils. Perhaps in an ideal world, we can let real estate, luxury, and “sin” taxes do most of the work in reducing aggregate demand to acceptable levels, but we’re not going to get there any time soon.
Economic rent is income gained independently of production. Tax away economic rent — land rent, monopoly rent, and financial rent. Incentivize productive income and investment.
Check out this three minute video by Michael Hudson on economic rent
Ok, given that this is the 3rd time you have brought up the idea of taxing economic rent on this thread, can you please give some very specific examples of what you would tax if you had your druthers?
I see that taxing God-given natural resources makes sense at some level, but where do you have a problem with finance or insurance? Sure, there are many activities on Wall Street which are stupid, but I could say the same thing about any sector of the economy. Lawyers create a lot more useless work for themselves than just about anybody. And as I’ve said before, unions are the most blatant extortionists of all.
One of the biggest, and a solution that has been out there a long time, is taxing land rent, that is the increase in the value of land (not construction on the land) that results from public improvement of the surroundings, such as transportation, schools, etc. Traditionally, great fortunes have been make from privatizing the commons. This has rarely been adequately taxed relative to non-productive gain. In fact, it has been often subsided by socializing negative externalities.
Monopoly/oligopoly rent generally involves price setting that is not the result of price discovery in competitive markets. The result is profit far in excess of what is reasonable return relative to production cost. I often say that if Americans knew the real cost of goods sold on most items, they would faint. Travel to Asia and see what the price are, for example. There is little reason for the markups here other than perceived value. Every importer knows this dirty little secret, and I know people that have gotten rich off it. I had a friend (RIP) that considered himself “honest” in comparison with others and he had a rule for pricing that limited markups to no more than 20X. The staff often argued with him that people expected to pay more than that and would think there was something wrong with the goods if they were priced way out of line with other stores.
The claim is also that a great of financial “innovation” has been non-productive. Those gains, such as Wall Street bonuses resulting from non-productive financial innovation, would be taxable under this concept.
Wikipedia provides a summary and references on economic rent. There is some discussion there about issues related to arriving at a basis.
Here’s an interview with Michael Hudson:
A Tax Program for U.S. Economic Recovery (Feb 1, 2009)
He discusses taxation at the end. It’s a rather long piece but I found it worthwhile to read the whole thing.
Tom,
For instance the Farm Gate prices have not really increased at all in the last 30 years…I researched it a while back at USDA website and confirmed it with an acquaintence who has a PhD in Ag. This person indicated that farmers are generally pissed about it and know what goes on.
All that money that represents retail food price increases over the last 30 years is going to the FIRE sector…not the farmer. Outrageous.
I think generally Hudson is on to it although he is not 100% in paradigm imo, I wish he could get with Prof Wray at UMKC on nature of money/debt under NC currency, etc….found this one on his website related to our exchange over at Mike’s good read:
http://michael-hudson.com/2010/05/neoliberal-economics-v-theology/
Resp,
You still haven’t given me a concrete example besides the obvious one of taxing land.
“Monopoly/oligopoly rent generally involves price setting that is not the result of price discovery in competitive markets. The result is profit far in excess of what is reasonable return relative to production cost.”
I’m skeptical that monopolies/oligarchies exist, except for those created by the government. But I’m certainly happy to become a believer if you can give me something specific. I assume importers are subject to the same competitive pressures every other area of the economy is. Sure, there are times when somebody gets rich because they have first-mover advantage or because they are savvier or luckier than their competitors (or potential competitors), but somehow I don’t think that’s what you’re referring to (and I would vehemently disagree with you if you were that people getting rich from being entrepreneurial is a bad thing). The actual markup factor is completely irrelevant to me. The markup on the cost of production of a DVD or a book or a piece of software is pretty high too.
“Those gains, such as Wall Street bonuses resulting from non-productive financial innovation, would be taxable under this concept.”
And who, pray tell, is going to judge what is productive and what is non-productive? A government bureaucrat? Maybe I think his job is unproductive. Maybe government bureaucrats should have their salaries taxed at a higher rate than everybody else, especially those at the IRS. Although I guess it won’t matter, since these guys don’t seem to pay their taxes as it is.
Michael Hudson from interview cited above:
And who, pray tell, is going to judge what is productive and what is non-productive? A government bureaucrat?
According to the US Constitution, fiscal policy is the prerogative of the Congress. That’s how it is done now and will be in the future. Congress may delegate certain responsibilities such as the IRS to agencies as it sees fit. Who decides what “taxable income” is now?
Like it or not, this is the Constitution we are stuck with. Of course, one can try to amend it. The income tax was introduced by an amendment. (16th Amendment, 1913).
I would vehemently disagree with you if you were that people getting rich from being entrepreneurial is a bad thing
I am all for entrepreneuring in a truly competitive marketplace. I am against taxing income from productive contribution. I think it is a disincentive to be avoided as inefficient.
Indeed, the net is the budding entrepreneur’s biggest booster. We are witnessing the birth of a global marketplace in which anyone can compete rather inexpensively. I have friends whose kids or grandkids have done very well at a tender age. I am all for this.
Ebay is a good example of an intensely competitive international marketplace. A couple of weeks ago, I was researching an item I was interested in purchasing and found that Amazon had the lowest price among US stores. I discovered ostensibly the same item on Ebay for 25% of the Amazon price, including shipping from China. I suspected a knock-off, but when it arrives quite (quickly by air) I was happy to find that it was the same thing I would have received had I purchased it from Amazon. Shipping was a couple of days longer, but I could live with that.
what crap tom hickey
one can always find penumbra in constitution
Lerner monopoly index (yes, as in Abba Lerner).
http://books.google.com/books?id=K9fqiu1jg68C&pg=PA15&lpg=PA15
I suppose the corporate income tax could be replaced with value added tax with progressive rates based on the Lerner index or one of its iterations (like Kalecki’s, but I’ve seen others). That would do more to limit rent seeking than a 100 antitrust lawsuits.
“Indeed, the net is the budding entrepreneur’s biggest booster. We are witnessing the birth of a global marketplace in which anyone can compete rather inexpensively. I have friends whose kids or grandkids have done very well at a tender age. I am all for this.”
An odd statement from somebody who complains about rentiers all the time. Isn’t the internet the quintessential example of a government subsidized “highway” that improves the value of somebody’s “land” (read website)? Hasn’t Google benefited tremendously from not only the presence of the internet which was constructed by society, but also from the venture capital community in the Bay Area and the presence of brilliant computer programmers educated in our schools? Sergey Brin and Larry Page were snot-nosed kids younger than 30 who became multi-billionaires because they did a really good job on a project given to them by their graduate school thesis advisor.
How about all of the people who have gotten rich creating GPS enabled mapping/tracking software and devices? The GPS was created by and is maintained by the US government after all.
My point is that all entrepreneurs benefit from society and government and the accomplishments of people who came before them. So in some sense nobody really deserves to earn a billion dollars because it would be impossible for somebody to create a billion dollars worth of value without society. The same might be said about any worker or any job.
Perhaps, we are all rentiers.
Beowulf:
Lerner monopoly index (yes, as in Abba Lerner).
Great find. Thanks.
ESM, why shouldn’t government recapture the economic rent accruing to private entities from public investment and use of the commons, including through communications. That has already been covered by Michael Hudson, as a matter of fact.
“ESM, why shouldn’t government recapture the economic rent accruing to private entities from public investment and use of the commons, including through communications.”
The main reason is that it’s too difficult to do. It gets into the realm of central planning, and humanity has already tried that and has not achieved good results.
I am also against the government doing the reverse, e.g. providing tax incentives to create, develop, or use alternative energy sources. Even if the politicians and the bureaucrats could adequately understand all of the complexities involved (which they can’t), their decisions would invariably become tainted by the political and lobbying process.
So the alternative is to stick with a perverse income taxes that is economically inefficient, widely opposed at all income levels, and administered by the most hated agency of government?
The ability to tax backed by the ability to imprison gives the state extraordinary powers over individuals. I think we all agree that this power needs to be used with utmost discretion, efficiency and effectiveness. I am open to hearing any and all proposals that would improve this system. But staying with the present system, I don’t see as a viable option based on these criteria.
As far as central planning and command economies go, giving a small group of unelected and unaccountable technocrats control of the central bank and interest rate setting is the epitome of this. Who actually chooses the technocrats? The financial oligarchs that finance political campaigns. The US and most other countries are already centrally planned, command economies coordinated under an international command center of technocrats (BIS, EMF, etc.) selected by the international banking cartel.
I think we’re on the same page. I just think that adding to the complexity of the 55,000 page internal revenue code in order to determine what income is derived from productive activity and what is derived from “rents” is going to make things worse. Best of all would be to move away from an income tax and towards a land tax and a progressive consumption tax. I don’t begrudge Sergey Brin and Larry Page their $15B of accumulated wealth (each), but I do find their use of a luxury Boeing 767 for personal travel to be excessive. It makes sense to make them pay through the nose to consume like that.
but I do find their use of a luxury Boeing 767 for personal travel to be excessive. It makes sense to make them pay through the nose to consume like that.
I don’t have too much of a problem with that, although conspicuous consumption is a social problem when it goes viral and involves people in debt to keep up with the Joneses. But if the ultra-rich can consume without leverage, what’s the problem? It creates income for others. What difference does it make if some live high off the hog as long as this does not disadvantage others or the system itself? The mere fact of consumption is positive rather than negative. But if it becomes so endemic as to adversely affect the Gini coefficient, then it does have an effect that needs to be addressed.
The principle problem I have is with money awash at the top that bids up asset prices and leads to financial instability as described by Hyman Minsky. For example, the GFC in not result from subprime borrowing as much as the appetite for MBS and led to fraudulent and predatory lending to supply this appetite. This was not just US money but global “hot money.” This is now a global issue rather than only a national one, but it was driven by the US. As far as I can see, the wealthy profit most from economic rent, so this seems to be the place to tax that wealth. But, as I say, I am open to whatever can be shown to work.
Here’s something I haven’t thought a lot about but which seem to me to be something to consider. If we are going to have floating rates, shouldn’t we be reconsidering tariffs on imports and capital flow controls? Before the neoliberal “free trade,” a lot of revenue was raised through tariffs, which increase the price of imported goods and prevent employment exportation. Tariffs imposed by other countries also limit a country’s exports, conserving more the country’s resources for the own use of its own people. This would mitigate the pernicious effect of global labor arbitrage proceeding too speedily and causing economic disruption, for example.
transactions taxes discourage transactions
Tom, I absolutely agree, that’s why I’ve been on the Warren Buffett/Levy Institute “import certificate” bandwagon. Whether the market value of the ICs go to importers (Buffett) or are recycled into payroll tax cuts (Levy), reducing the trade deficit would reduce capital outflows. At the same time, it’d directly increase private savings and indirectly (as those savings are taxed) decrease govt deficit.
I know that’s a disagreement that Warren and Randy Wray have had with Wynne Godley and Dimitri Papadimitriou at the Levy Institute. In terms of economics, Warren’s right that we could reach full employment without tariffs if Congress were willing to spend what’s required for a Job Guarantee, payroll tax holiday and revenue sharing with state governments. The roadblock is political, there’s presently little or no support in Congress to do so. To get from here to there we need policies that, as David Colander would say, integrate sound finance with functional finance and expand from there. Using tariffs to replace payroll taxes seem like one promising area.
http://ideas.repec.org/p/mdl/mdlpap/0413.html
Flow problems arise due to excessive pressure. We see this now in the trade imbalance, with too much capital flowing to the US and too many import too fast, with too many jobs being exported. “Too many” is not based so much on economic criteria as social and political, since the US economy is probably large enough to handle it, if government would address it properly. But government is not, and a political backlash is building that needs to be taken into account. The pressure needs to be reduced without creating too much turbulence in the global system as a result. This needs to be thought through carefully instead engaging in arbitrary or retributive action that would needlessly upset the global economy, which is a growing concern.
The other place that flow can easily build up too much pressure is leverage. Controls that regulate the pressure need to be put in place here, too. It is unreasonable to think that the US and world can just go back to 2007 when leverage became unsustainable relative to wherewithal necessary to service it. when the wherewithal became chiefly asset appreciation, the handwriting was on the wall. But without leverage to amplify demand, the world economy is going to suffer from overcapacity for some time to come if it is chiefly income dependent. So there will likely be corresponding pressure to increase leverage again beyond prudent risk. Since the financial sector profits from leverage and is covered by government guarantees, adequate controls need to be imposed here, too. Instead, the financial sector seems to be gearing up for business as usual, looking for other “innovative” ways to run essentially the same playbook.
ESM, Ravi Batra lays out a case for Big Oil’s monopoly pricing of gasoline in The New Golden Age, p. 27-38, including how government disingenuously defended them from the charge in spite of evidence, as well as how hedge funds piled on the wagon.
>> Using tariffs to replace payroll taxes seem like one promising area.
>> http://ideas.repec.org/p/mdl/mdlpap/0413.html
so our entire tax history is causes simply by lobbyist wars between trade groups & domestic consumer groups?
how ironic
To a large degree, yes.
Charles Walters, past President of the National Organization of Raw Materials (disclosure, I am member): “Parenthetically, it must
be noted that the income tax made it possible to reduce tariffs and put in motion the world trade idea that dominates economics
today.”
Tariffs are a part of NORM’s 3-part plan to recover the economy.
From current President Randy Cook:
Charles Walters’ Unforgiven…the American Economic System SOLD for Debt and War pulled together the scant threads of an unfamiliar American experience.
That experience is the story of parity. It is the documentation for confidently arranging our public policies to produce widespread solvency and balanced development without debt. The remarkable feature of that widely unknown story is that we accomplished it here in the United States. We arranged our public policies to achieve the desired end and it worked. The policies were put in place and they proved themselves.
Due to his great effort in producing that book and his analysis and history related here, we have a possible practical solution to our present economic situation. “If the prices of raw materials, at the first point of sale, are in balance with the costs of labor and capital in the rest of the economy, you cannot have a depression,” Carl Wilken stated. We can investigate ag parity policy in a future article. The upshot is that we know it can be done and it isn’t even being considered.
For agriculture: non-recourse loans for the basic storable commodities at 90% honest parity (meaning a properly balanced base period reference), callable at 100% parity price in the marketplace, not a date certain; with a 30% strategic national reserve.
For trade: parity tariffs and equity of trade, meaning import prices are raised to our domestic parity price through fees payable by the importer. These fees shall be used to the credit of the originating nation for purchase of our domestic production at our price.
For money: increase Federal Reserve System reserve requirements in direct proportion to the increase in earned income generated by the first two steps.
These policies rely on each other to provide true national security by feeding and employing our people. There is no other foundation for securing our liberties. It seems trivial to say it but we cannot eat money or bullets, credit or bombs. In the 1890’s Lewis Carroll mused:
“He thought he saw a Banker’s Clerk
Descending from the bus:
He looked again, and found it was
A Hippopotamus.
‘If this should stay to dine,’ he said,
‘There won’t be much for us!'”
Universal Providence supplies ample raw materials for all our needs, not our greed. Wealth producers, not bankers or their clerks, should wield economic power.
Randy asked Tom Vilsack in a public meeting last yaer:
“When you explained to the President that by faithfully executing your duties under Title 7, S602 of the US code and regulating agricultural markets at 100% parity, it would begin recovery of our nation’s economy in six months and yet would cost less than the $780 billion promised in the bank bailout, was the problem that he just didn’t believe you?”
Dumbfounded might ne an understatement.
Point being there is more than one way to get money flowing, but if you think it is hard explaining soft currency economics to folks try raw materials economics to any one that isn’t a farmer.
And we’ll know they understand the monetary system when they strategically put tariffs on exports rather than imports.
Unemployment is caused by taxes being too high for a given size govt.
more net imports just means that for a given size govt taxes can be that much lower.
Warren,
NORM’s proposal is designed to give American farmers, fisherman, miners and loggers first crack at American markets and also to prevent the inequity of trade Benjamin Franklin, perhaps America’s first raw material economist, wrote about in Positiona To Be Examined.
http://www.historycarper.com/resources/twobf3/position.htm
But your point is taken. Focusing just on what advantages Americans first may contribute to worldwide inequity and instability, with possible unintended consequences down the road.
see the brief section on taxation in ‘soft currency economics’ on the home page, right margin, thanks.
“Since he doesn’t understand monetary operations he doesn’t realize that if the money isn’t going to be spent there is no point in taxing it with regards to aggregate demand.”
Conversely, if they’re not going to spend it, there’s no point in cutting taxes just to let them save more.
If their MPC is low, the deflationary impact of taxes rather than deficits is minimal.
Why waste good deficits on the rich when the payoff is neglibile?
“Why waste good deficits on the rich when the payoff is neglibile?”
What do you mean by “waste?” Deficits don’t cost us anything if aggregate demand is too low. Here are some payoffs by the way:
1) the rich work harder because marginal tax rate is lower;
2) the rich are happier (the rich are people too);
3) certain investment projects the rich will decline now may look attractive at a lower tax rate, or if they have more money;
4) the rich can bid up assets of the poor and make the poor wealthier;
Finally, the statistics that show the rich don’t spend their tax cuts are based on a fallacy. Moodys discovered that when tax rates are lower, the rich save more and when tax rates are higher the rich save less. Ummm…. duh!
“… the rich work harder because marginal tax rate is lower …”
This obviously applies to the poor also, because ditch diggers are the hardest working people in the world, and they also have the lowest marginal tax rate.
“… the rich can bid up assets of the poor and make the poor wealthier …”
This is a joke, right? Because if it isn’t, it’s surely low-hanging fruit.
“… the rich can bid up assets of the poor and make the poor wealthier …”
This is a joke, right? Because if it isn’t, it’s surely low-hanging fruit.
Must be a joke, since the poor have no assets.
Tom,
This is perhaps another example of defining ‘poor’ as only a Stock measure, not a Flow measure. ie ESMs comment only addressed the Stock that is the assets of the ‘poor’.
Resp,
“This obviously applies to the poor also, because ditch diggers are the hardest working people in the world, and they also have the lowest marginal tax rate.”
It applies to everyone. Of course, it doesn’t matter how hard you work per se. It matters how productively you work. A ditch digger may work hard in that he exhausts himself physically, but getting him to work an extra 100 hours per year isn’t adding to the economy’s capacity terribly much.
By the way, at the bottom of the income scale, workers actually face extremely high marginal tax rates, over 100% in some situations, due to phase-outs of various credits. I certainly would like to see the whole idea of phase-outs to be thrown out.
“Must be a joke, since the poor have no assets.”
Well, first I was using the label “poor” as a substitute for “non-rich.” I thought this would be obvious since the context was the controversy about hiking taxes on those making over $250K per year.
Second, even the poor have assets. It’s just that they generally have financial liabilites exceeding their assets in value. By raising the value of assets generally — home values, business values, stock values, the value of art or jewelry — this helps the non-rich. Also, the potential value of a person’s labor is an asset. The rich don’t have to spend directly to raise the return on an individual worker’s labor. Lowering the cost of capital for a business, which induces the business to spend, can have the same effect.
I guess you could say this is basically the trickle-down theory. We may not agree on the efficacy of a trickle-down policy, but I think it is hard to argue the effect is zero or negative.
“Poor” is usually used in contrast to “middle class.” Middle class people have assets and income. Poor people have only income and welfare. Yeah, maybe they have a clunker car and a TV from Goodwill, but they are renters and generally live from paycheck to paycheck. Oh wait, they don’t even do that. Have you ever checked out the figures on the usury industry? If not, google “payday loans.” The complaint now is that the big banks are financing the payday loaners and profiting of the backs of the people subjected to usury to stay in the game.
not sure what cat you are trying to skin, but whatever it is there may be better ways to do it
The cat is the implementation of MMT.
I thought the idea was to offer net financial assets to non government until they stopped saving and started spending.
If the presumption is that the rich aren’t going to spend (your presumption – “he doesn’t realize that if the money isn’t going to be spent”), then why on earth would you create net financial assets for the rich by extending their tax cuts? Why wouldn’t you tax them and create net financial assets for some other group with a higher propensity to consume?
Anon, Let’s break down your question:
(A)Why wouldn’t you tax them and
(B) create net financial assets for some other group with a higher propensity to consume?
A has nothing to do with B. The government can (and should) increase net financial assets for those with a higher propensity to consume, whether by tax cuts or spending hikes. There’s no reason to raise taxes on anybody to do so.
The more I think about it, the more I think that tax cuts should be extended for everybody. Anything that undercuts the illusion that the government needs to raise taxes to increase spending is forward progress.
Good analysis Beowulf.
Ultimately, it’s a political question of how much you want to use the tax code to redistribute net financial assets (temporarily, by the way, since the rich are going to end up with much of the money that the non-rich spend anyway) or consumption.
But the income tax causes inefficiencies. So it seems kind of perverse to actually raise rates on the most productive group of people when there is no need to curtail aggregate demand currently.
And you are raising taxes. It’s ludicrous to call this a debate about whether to cut taxes for the rich. Tax rates have been where they are now for 7 years, and ever since the GFC started, most people have expected rates to stay where the are even past 2010.
It might be useful to review how we got to where we are:
1986-1988: whole tax code overhauled — highest marginal rate (HMT) dropped from 50% to 28%, but huge numbers of deductions disallowed and loopholes closed;
1991: breaking of “read my lips” pledge — HMT is 31%
1993: passing by 218-216 in the House (leading to the end of Chelsea Clinton’s mother-in-law’s congressional career — “bye bye Margorie”) and 50-50 in the Senate (with sex poodle Al Gore breaking the tie), retroactive to the beginning of the year — HMT is now 39.6% (composed of a 36% rate plus a 10% surcharge supposedly in place only until the budget was balanced)
2001: passing 240-154 in the House, 58-33 in the Senate, lowers HMT to 35% in steps over 5 years
2003: accelerates tax cuts made in 2001; HMT is 35% for 2004
Now, given that history, is it reasonable to argue that the rich deserve to be taxed at a 39.6% rate? Obviously, the rate is determined by arbitrary political decisions, but liberals have managed to make the narrative into one of cutting taxes for the rich. I don’t think the history suggests that there was ever a consensus that 39.6% was the appropriate HMT.
They don’t have to be related or interdependent.
I’ll repeat the question:
Why on earth would you create net financial assets for a group that by assumption isn’t going to spend as a result? This requires a stand alone answer, quite separate from the question of doing the same thing for a group that is going to spend.
You’re not creating net financial assets for a particular group. You’re simply deciding not to raise the rate at which you’re taking them away from that group.
Remember, the income tax distorts economic activity. Why would you want to distort economic activity even more than you’re already doing when you have no need to do so?
Beowulf: The more I think about it, the more I think that tax cuts should be extended for everybody. Anything that undercuts the illusion that the government needs to raise taxes to increase spending is forward progress.
The reason to tax the wealthy disproportionately by rate (progressive taxation) is to reduce wealth and income inequality (Gini coefficient), given empirical evidence that inequality increases economic inefficiency.
Secondly, the rich don’t just consume goods and services, save using savings instruments, or invest productively. They also speculate in assets and drive up asset prices (commodities are increasing being used as assets). Asset prices are excluded from measures of inflation; yet, it is established that price increases generally begin with assets, and often end with assets, when asset bubbles blow up and the result spreads to the production and consumption of goods and services, leading to economic contraction.
So, while I don’t think that it would be any big deal to extend the entire Bush tax cuts for a year or two, making them permanent is probably not a good idea. We are still not out of the GFC and re-priming the asset/leverage pump is a bad idea. More than a few savvy people are warning of a repeat if the issues leading to this crisis are not dealt with promptly. Money awash at the top is one of them, because that is the basis for financial innovation. Financial innovation was designed to meet the needs of the “global pool of hot money” looking for a “deal.”
You’re creating net financial assets relative to the alternative of reinstating the original tax rate.
The point being that the stated assumption was they’re not going to spend the money in question.
Which means there is no economic activity that will be distorted.
So how can you defend it?
Even MMT says that deficits are not unlimited – just that they’re not limited in the way most people think.
So if they’re not unlimited, why would you waste a good deficit in this case?
“Which means there is no economic activity that will be distorted.”
Working and earning money isn’t an economic activity?
ESM: Remember, the income tax distorts economic activity.
Tom Hickey: The reason to tax the wealthy disproportionately by rate (progressive taxation) is to reduce wealth and income inequality (Gini coefficient), given empirical evidence that inequality increases economic inefficiency.
The narrative suggests that all economic activity before taxation is free of distortion and thus fair and just. Simple and seemingly transparent for lack of government or any other explicit interference and arbitrary tax rates is not the same as fair and just, neither in process and certainly not in outcome. Define productivity and explain how it is possible for one person to be exponentially more productive than the next, to what extent this outcome is a matter of choice and not chance and justify the subsequent differences in quality of life. Tax rates may be arbitrary but so is the sleight of the invisible hand – it’s only that taxes are a more tangible kind of ‘distortion’ than others that influence the myriad of transactions which form economic activity. One question is, in which direction does the distortion work and is it possible to eliminate different kinds of distortions that cancel each other out? It’s also often a matter of balancing efficiency with a justifiable fairness in outcome which is defined in a democratic discourse.
How about a 100% inheritance tax, at least as a thought experiment? Not that it would be politically feasible but it would certainly help us attain a more credible basis for a meritocracy – which is what capitalism draws upon ethically. In any case, we need to at least agree on a bandwidth of acceptable outcomes to be able to discuss sense or senselessness of policy measures such as taxes. And one must always be aware of the distortive nature of societal norms and preexisting economic realities when judging the merit of any such measure.
“The narrative suggests that all economic activity before taxation is free of distortion and thus fair and just.”
Oliver, “fairness” and “justice” have nothing to with free (i.e. undistorted) markets. Do not conflate “free” with “fair.” I prefer a free market because a) it optimizes resource usage and allocation in terms of a sane measure of aggregate utility; and b) I appear to have the skills and work ethic necessary to thrive in it. The latter is perhaps a selfish reason, but at least I don’t have to be intellectually dishonest in order to support a system that benefits me. If I were lazy and unskilled, then maybe I would prefer more socialism and higher taxes, but that would be selfish too.
Now, distortions are those things that impair the optimal allocation of resources. Sometimes they are externalities, and that is a reason why taxes and regulations are needed in some areas to correct for them. But taxation of income in general is a distortion, and I don’t think any serious economist would claim otherwise. Income is probably the very worst thing you could tax because it is so difficult to define.
“Define productivity and explain how it is possible for one person to be exponentially more productive than the next …”
Do I really have to explain this? Some people I’ve worked with have negative productivity. Do you not agree that J. K. Rowling has created billions of dollars of wealth for the world? Can you do that?
Getting back to fairness and justice, those are political issues that can be addressed with less distortionary impact on free markets than the use of taxation of income. If you don’t want lazy, unskilled, stupid, unhealthy, or unlucky people to be poor, then I suppose the government can just give them money. That still involves taking resources from the rich (because the value of their net financial assets will be diminished, ceteris paribus), but it doesn’t necessarily penalize productive people (high income is not equal to rich), and it doesn’t disincentivize them from being productive.
As for the inheritance tax, I am completely against it. I don’t give a rat’s butt that somebody inherited his wealth. What difference does it make to me? The inheritance tax leads to all kinds of distortions. Not only do thousands of lawyers spend millions of hours per year helping rich people avoid the inheritance tax, but the tax also encourages wasteful charitable giving. The inheritance tax is probably why we have so many beautiful concert halls in the US. I like classical music (opera and ballet, not so much), but let’s face it, these things wouldn’t survive econonomically without the distortion created by the tax code.
If we are talking about the basic principles of MMT and taxation, it boils down to functional finance as far as I can tell, and that means using taxes to only to withdraw NFA as needed and fiscal injection only to increase NFA as needed economically, e..g., in order to sustain full employment and price stability, or to address negative externality. Since injections and withdrawals affect flow differently through targeting, the question involves how disbursements and taxes should best in targeted in any situation.
Injections and withdrawals can also be used non-economically, e.g., for social engineering, but that is a political issue.
We all know the differences of left and right on this, so it would probably be more helpful for an understanding of MMT if we focus on the economic issues involved. That does not mean that disbursements and taxation will not in fact be used politically. Of course, they will, but that’s a matter for the political blogs, I would think.
Where it comes in, though, is when a political view is bolstered by the economics and when a political view is not supported by the economics. For example, much of the argument from the right is that the politics of the left is economically unsound. That is a fair subject for debate, since a lot of this argument is based on neoliberal and Austrian grounds, which MMT does not support.
But can it be argued that MMT offers more support to one political view than another. For example, the JG, if it is an essential aspect of MMT as Bill Mitchell asserts, would put MMT on the left of the political spectrum. Is there any particular MMT view of how taxation should be targeted?
I maintain that any decision on whether or not to alter current tax rates or even whether to consider them temporary (as originally intended) or de facto permanent (talk about a ratchet effect) is necessarily a political one. I find the argument I often encounter that questions of distribution and the like are for politics and thus not valid for discussion in economics rest on a false sense divisibility of economics from other social influences including politics, law and implicit norms. Even if one could somehow establish the ‘right’ amount of NFA to add or subtract to any given economic situation for a desired effect such as full employment (which itself must be justified politically or morally anyway), any given amount of NFA before the intervention is already necessarily the product of an existing legal, moral, political etc. framework as well as all previous interventions such as the presence or absence of an inheritance tax. So the concept of not wanting to engage in any form of social engineering is in itself impossible because it is based on an ideal perception of ‘pureness’ of current reality and therefore assumes a decision to change or not change net NFA can be made without wading head first into politics.
Your assessment that the economy would be better off with the extension of the Bush cuts rather than without them is thus also a political statement as well as an economic one because it incorporates the political feasibility of attempting to change the current code to the disadvantage of a potent constituency. Any realistic proposal has to consider social realities, or else it becomes unrealistic, whereas all purely intellectual musings must be based on at least a vague philosophical image of an ideal society, the determination of which becomes political once it’s out of your (or my) head.
On a completely different note: Found this book via Steve Waldman’s blog: http://www.amazon.com/Persistence-Poverty-Economics-Well-Off-Cant/dp/0300120907
Highly recommendable and some interesting food for thought on why a low Gini coefficient is actually economically helpful. The increasing marginal utility of consumption among real scarcity is a potent concept.
Oliver, what I find in my reading is that economists predictably reach economic conclusions that fit their ideological basis. This appears to me to be curve fitting, or even seeing faces in clouds, the antithesis of the scientific approach.
What I am saying is that if economics is scientific and provides an explanation of economic reality that is testable, then it should be able to make economic predications about the outcome of various policy proposals concerning action. This is not forthcoming from the mainstream, which practices economics as religion, at least as far as I can tell as a non-economist.
The claim is that MMT is a such a scientific macro theory, based on operational reality and stock-flow consistent models. If so, MMT should be able to deliver a non-political (value-free) economic analysis of different courses of action. If it can’t, what are we doing here. EAch of us might as well just join the curve-fitters and propose our chosen ideological version of “reality” independent of operations and testability.
The human science ar not independent of norms, but they are not supposed to be normative. Norms and beliefs that are exhibited behaviorally and cognitive-emotionally are treated as empirical facts along with other facts. It can be established as a fact whether X believes p, for example, by observing X’s speech (expression of thought) and behavior. A human science identifies norms and show what results from espousing them in practice.
Agreed with regard to analysis. I find MMT helps peel away layers of myth to better realign theory with reality. But as soon as policy come into play, things become murky. I find it highly suspect if you and ESM manage to agree on anything because you’re evidently not aiming for the same outcome ;-). An unholy alliance can only be of temporary nature and that raises the question of ‘what next?’ – for me, a far more interesting question than ‘what now?’.
regards
Say that ESM and I were running for office in opposing parties. We would agree on the economics, but not necessarily on the policy. But whoever won, the policy would at least be reality-based, which it is not at present. There are always going to be political differences, and they will be decided politically, hopefully on the basis of agreement on operations and and facts, but difference in norms.
MMT as a common, reality based language, yes.
“Say that ESM and I were running for office in opposing parties. We would agree on the economics, but not necessarily on the policy. But whoever won, the policy would at least be reality-based, which it is not at present.
And, no matter who won, unemployment, which is still the most important problem the US has right now, would decrease quickly. If Tom won, unemployment might end up being 0%, and if I won, it might end up being 4%, but in both cases, it would still be a lot better than 9-10%.
I was watching part of Obama’s town hall yesterday, and I thought to myself, what would my question be? It would be the following:
“President Obama, please let me know if you disagree with my reasoning. The US government can create money out of thin air. It doesn’t need to borrow from anybody. The only problem with creating too much money is inflation, and the only reason to tax is keep inflation under control by taking money away from people which thereby reduces aggregate demand. Given that our problem is weak aggregate demand, why would you raise taxes on anybody?”
those are political options, also called ‘distributional’ issues.
personally I favor first taking care of those doing the actual work that produces the real goods and services we consume. Hence my payroll (FICA) tax holiday, etc.
More food for thought on extending tax cuts at the top. (hint: leakage)
Non-US groups reaped fruits of Bush tax cuts
Tom, I see that meddling Michael Hudson is putting subversive thoughts in the heads of President of Brazil’s economic advisers. :o)
http://www.counterpunch.org/hudson09202010.html
Excellent article, Beowulf. Thanks for calling attention to it.
BTW, in that article that I cited, while US stimulus is leaking abroad, a lot of it is going to the multinationals that control world trade rather than income/demand in emerging countries.
“He’s giving the wrong reason for ‘taxing the rich.’”
It appears Obama’s move is power politics wrapped in faulty economics. Obama is justifing a power shift for the ‘wrong reason’ on that it is wrong.
It is power that could force Obama to give the rich their tax break, which they won’t spend, in order for the middle class to have their tax break which they will spend.
Obama is trying to shift power as unspent money, especially in deflationary times, retains power.
Giving the rich their tax break will give them more power.
The question becomes,
Is it wrong to tax the rich to reduce their political power?
Can we justify higher taxes on the rich through economics?
“He’s giving the wrong reason for ‘taxing the rich.’ ”
That’s the best statement yet.
Does economics theory alone justify higher taxes on the rich?
No, but operations can – but ONLY as something incidental to coordinating all efforts to common goals. If a common goal isn’t selected first, then there’s no basis for selecting from whatever options are explored. Further, there’s no drive to explore enough options to define optimal methodology.
The problem that needs to be taxed away is economic rent — land rent, monopoly rent, and financial rent. It is non-productive and parasitical on the system.
See Michael Hudson, The Language of Looting
Productive investment and reasonable compensation commensurate with contribution should be incentivized. An advantage of taxation is that it can be targeted. The problem now is that fiscal targeting is perverse and damages the functioning of the economic system.
Global Empire and the International Banking Cartel (part 2)
Posted on August 20, 2010 by dvrabel
Last week I wrote an article explaining what I mean by the international banking cartel that operationally rules the economy–the Federal Reserve primary dealers. Some astute readers wondered why I didn’t report on the global regulatory institutions that have power over that cartel. Good question. And others asked for more clarity on the cartel itself.
Regarding the first question, I purposely focused on the cartel because so many people still don’t believe it exists due to false free market propaganda. If people don’t realize that a cartel of predatory usury institutions operationally controls the US, then why would they care about the regulatory framework over those institutions?
But the point is well-taken. The article might have implied those 18 dealer banks have ultimate power. Not at all. The key word in the above paragraphs is “operationally.” The dealers operate within a larger framework. They do not strategically rule over the framework itself. The ultimate rulers are the most senior private capital pools in the world who use the dealers as capital laundering machines and who create their desired framework through the central banks, IMF, BIS, and political institutions like the European Union and G20.
Since WWII, their desired framework has been to fuel global empire by milking the US population through the debt-dollar system centered around the Fed. Now that the US has been milked dry, things are shifting to a new milking center for the 21st century–China. Behind the scenes will be the senior capital pools currently in London and New York and the banking establishment in Switzerland, but on the surface Asia will emerge with profound power as China becomes the operational center of a new global empire based on a new global currency. At that point, the key dealers will simply plug into that new system. The world will think this represents the end of the US empire. But a US empire never really existed. More accurately the US was simply the latest host of the parasitic international banking empire that leeches off countries and plays them against each other. The parasite will quietly slither into Asia while using its media to blame the US host for the damage it has done.
Now a few points of clarity for those who want to better understand the cartel dealers:
– They are not equal. Some play long-term strategic chess as they’re aligned with the senior capital pools mentioned above. Others play the short-term profit game as the chess players allow them. Of the US firms, JP Morgan Chase and Goldman Sachs are on top. While Goldman may appear to be #1 since its people have literally run key government agencies for about 20 years, I’d suggest that JPM Chase is preeminent. Not only does it have the most power due to its derivatives position, which gives it the highest claim on capital in the US, but also it’s the merger of the old aristocratic interests behind JP Morgan and the Rockefeller interests behind Chase Manhattan. So let’s just say it wouldn’t be in your financial interest to bet against this bank. Its power was demonstrated after the crash of 2008. The media suggested JPM emerged unscathed because it was the honest, good bank whereas bad, greedy banks failed. Yeah, and I live with Puff the Magic Dragon. Ask yourself, after the Corleone family killed the leaders of competitive families in The Godfather, did Congress investigate the losing families, or did they investigate Corleone? So why did Congress investigate the losing banks!? You don’t blame the firms that were driven out of business. You look to the firm that benefited most. The fact is, the crash of 2008 was the trigger for a restructuring M&A transaction of the US economy, and had there been a tombstone printed in the WSJ, just speculating here, the lead bank would have likely been JPM.
– Some members change over time. These are the short-term profit players. For example, Countrywide was a dealer while it helped inflate the real estate bubble and BT Alex Brown was a dealer while it helped inflate the first tech bubble. Both of them were leaders of their short-term niche markets because of their privileged risk/cost position as dealers, and both of them were acquired by senior dealers for a deep discount once senior capital was pulled, bursting their respective bubbles and leaving the losses in the hands of junior capital.
– The cartel is international, so we no longer live in a world of independent countries. It would be more appropriate to view countries as administrative districts of the banking system so the financial elite class can extract value from the lower and middle classes. One of the key insights from the movie Braveheart was how the royal elite from different countries cooperated with each other against the masses. Today it’s more sophisticated. The mathematical, formulaic banking system aligns the financial elite in different countries together against their populations by managing them as digits on a balance sheet. It’s a simple matter of math, accounting, and system management, not conspiracy.
– Both political parties serve the cartel. It controls and profits from the private sector corporate system (typically championed by the political right) and the government welfare system (typically championed by the political left). Choosing between Democrats and Republicans changes nothing.
– Finally, it means conventional wisdom about money is false. The problem isn’t that our money isn’t gold-backed. The problem isn’t fiat money. The problem is that all money is hierarchically controlled as an asset to private sector institutions and elite capital holders who have the ability to call-in their chips, i.e. your bank digits, whereas it’s an interest-bearing debt to governments and the people. This has immense ramifications I don’t have room to address here. Government neither prints money nor causes inflation in this system (if it would like the original colonies did to escape British banker austerity and usury, some of the current unemployed would have jobs and those losing their homes in foreclosure might find some relief). Rather, the cartel controls all money and drives inflation/deflation cycles. It has driven consistent inflation for 60+ years. So we are now facing painful deflation, or hyperinflation if the government makes a key mistake, as the senior capital pools attempt to bring about the new banking/currency framework. If the money system isn’t changed, the emergence of the 21st century global empire mentioned above is only a matter of time.
If the money system isn’t changed, the emergence of the 21st century global empire mentioned above is only a matter of time.
Yep, it’s well on the way, and there are no significant forces on the horizon to oppose it.
If the goal is to remove power from ‘the rich’ he should say so and get off the deficit thing.
And if that is the goal there are better ways of doing it
“And if that is the goal there are better ways of doing it”
I can think of 3 ways to reach the goal of reducing the ‘power’ or money the rich hold.
1) Have government set up taxes, donations and/or interest payments.
2) Sell them a nonfinancial asset in exchange for their financial assets.
3) Have a system that keeps them from accruing financial assets in the first place.
Perhaps this list is longer? Which choice is ‘better’?
the control can be on the spending side. like luxury taxes on purchases of things we don’t want produced.
see the taxation section in soft currency economics
“Obama has presided over the largest transfer of wealth to the top 2%.”
Arguments over putting a punitive tax on Wall Street bonuses have vanished.
Michael Hudson’s excellent writings on rentier income (“making money while you sleep”) . . .
All the above raise the question on whether taxation should be used as a fiscal policy tool in setting national goals.
Obama’s Making Work Pay tax credit which expires this year apparently costs $40 billion a year (though I’ve seen cost numbers range between $33 and $60 billion, it was just passed last year)
The MWP tax credit gives $400 to every worker earning under $75,000 ($800 to couples earning under $150,000). Let’s see if you made the MWP 6 times bigger, its a $2400 tax credit per worker. What’s more, we could make it the default destination for any tax increase or budget cuts. Cut Pentagon spending by $100 billion, Great, lets increase the MWP credit by a $1000; an extra $50 billion from estate taxes, why that’s an extra $500 a year to every worker.
The cognitive dissonance of deficit hawks opposing new spending at the same time they support new tax cuts is absurd. The Democrats will continue to get their butt kicked on budgetary issues until they accept that Cheney was right, deficits don’t matter. They should keep the Bush tax cuts in place AND provide tax credits for working families.
The tax code simply regulates behavior, income distribution and inflation. Right now, of course, inflation is overcontrolled, we’re at the brink of deflation. When we’re at 4% unemployment we can debate the best way to drain excess reserves from the banking system. It wouldn’t have to be by raising income taxes. Instead, we could impose mandatory retirement savings accounts or a financial transaction tax. But that question is millions of new jobs in the future.
” . . . tax credit which expires this year apparently costs $40 billion a year . . .” A tax credit costs nothing. Only taxes cost.
“. . . Cheney was right, deficits don’t matter.” Actually, he was wrong. Deficits do matter. They are absolutely necessary for a growing economy.
“. . . the best way to drain excess reserves from the banking system.” Are you talking about inflation? If so, taxing is the worst possible way to fight it. Yes, taxes destroy money and are anti-inflationary. But tax policy is too slow, too political and too imprecise to be used as an inflation control system.
Imagine that inflation was 6% today, and Congress wanted it to be 3%. Specifically, what new taxes would you pass or increase, and by how much? Considering that every tax has opponents, it would be like trying to do dental work by first going out to shop for a pile driver.
The way to fight inflation is to increase the comparative value of money by increasing the demand for money, not by trying to decrease the supply (which has negative economic consequences).
Rodger Malcolm Mitchell
Before I drive Warren bonkers, I should point out the even easier solution is a payroll tax holiday, I was just using the Making Work Pay tax credit as the vehicle because its already in the Internal Revenue Code and could be modified by Congress just changing the numbers.
Since income taxes go to general revenue (and not Social Security or Medicare trust funds), income tax credits don’t have to be “paid back”. Of course, there’s no economic reason that Social Security and Medicare Part A isn’t paid out of general revenue, Part B already is. But that’s another can of worms entirely. :o)
All this conversation about which tax is best and whom best to tax is meaningless. Let’s get down to basics. All federal taxes — that is ALL federal taxes — remove money from the economy and are destroyed.
Whether you tax Bill Gates $10 or my out-of-work neighbor $10, exactly $10 is removed from the economy and lost forever. The government neither saves it, accumulates it or uses it. It’s just gone.
Further, if you were to give Bill Gates or my neighbor $10, exactly $10 would be added to he economy, other than what they may use to pay down a debt. So all the talk about saving vs. spending vs. investing also is meaningless. If Bill buys some stock with his $10, that is exactly the same as if my neighbor buys food with his $10. Because the seller of the stock and the seller of the food also will save, spend or invest . . . and on and on and on.
In summary: Let’s not over-think and over-complicate this concept. All taxes destroy money. Period.
Rodger Malcolm Mitchell
True, yet fiscal targeting can make a difference, so it not just the absolute amount.
If Bill buys some stock with his $10, that is exactly the same as if my neighbor buys food with his $10. Because the seller of the stock and the seller of the food also will save, spend or invest . . . and on and on and on.
In summary: Let’s not over-think and over-complicate this concept. All taxes destroy money. Period.
Rodger, I agree with your statement “all taxes destroy money”, but I disagree with your assertion that Bill Gates buying stock is the same as your unemployed neighbor buying food. Leave aside macroeconomics, in terms of Judeo-Christian ethics, enabling someone with no income to eat is more important than enabling the richest man in the world to invest (and from his generous philanthropic work, I suspect Gates would agree).
In the wonderful Beardsley Ruml article that Warren posted, “Taxes for Revenue are Obsolete”, Ruml explains “what taxes are really for”:
http://www.huffingtonpost.com/warren-mosler/taxes-for-revenue-are-obs_b_542134.html
1. As an instrument of fiscal policy to help stabilize the purchasing power of the dollar;
2. To express public policy in the distribution of wealth and of income, as in the case of the progressive income and estate taxes;
3. To express public policy in subsidizing or in penalizing various industries and economic groups;
4. To isolate and assess directly the costs of certain national benefits, such as highways and social security.
I wonder how much of the first goal (price level stabilization) is accomplished by higher taxes on the wealthy. The richer a family is, the less percentage of their income they’re actually spending, so even stiff progressive taxes wouldn’t have as much impact on reducing aggregate demand as, say, a tax on middle class wages or sales transactions.
If Congress wishes to reduce income or wealth inequality, perhaps the most socially beneficial way would be to impose a wealth tax (in the form of, as I mention below, of a tax on unrealized capital gains on incomes over a high threshold) and then offering those taxpayers a 100% tax credit for charitable donations. The money stays in the economy just not in Bill Gates’s pocket, or more to the point, the pockets of other billionaires not as civic-minded as Bill and Melinda Gates. There are worse problems than an economy faced with a “charity bubble”. :o)
best way to reduce income or wealth inequality would be to:
1. muzzle the finance industry
2. find anyone who is smart, conceintous, and industrious, and then damage their brain so they can be less productive.
or of course we could import fewer strawberry pickers from mexico. but all of a sudden, when topic switches to bringing in illiterate illegal farmers, impact of inequality become less important
2. find anyone who is smart, conceintous, and industrious, and then damage their brain so they can be less productive.
Ahh, the Harrison Bergeron solution
http://en.wikipedia.org/wiki/Harrison_Bergeron
And I’m with you on the the strawberry pickers, I think Steve Sailer’s “Affordable Family Formation” thesis is quite sound.
Republicans should pursue policies that raise wages, lower demand for houses, and keep the public schools from eroding further. The most obvious way to move the country toward a more Republican future is to restrict immigration.
http://www.amconmag.com/article/2008/feb/11/00016/
Tom said, “. . . fiscal targeting can make a difference . . .”
Perhaps, although no one knows how to do it. The problem is, money doesn’t stop with its first use.
What happens when you give money to Mr. “A”? He spends, saves or invests it. In other words, he immediately gives it to Mr. “B,” who spends, saves or invests it. And on and on and on.
Economists act as though giving money to Mr. “A” is the beginning and the end, and they argue about whether that money is well targeted, when they have no idea what Messrs. B, C, D . . . .Z will do with it — and that money moves almost every day. It takes only a month or two to get from Mr. “A” to Mr. “Z.” How does Mr. “Z” figure into your targeting?
Rodger Malcolm Mitchell
Well, an example is targeting to the bottom through automatic stabilizers. Owing to the debt offset requirement the injected funds flow into tsy’s but injecting funding at the bottom where it will almost certainly be consumed immediately (increasing effective demand) is quite different from giving it to rich people who will immediately purchase tsy’s (savings) thereby eliminating the flow. Of course the government cannot control anything past the first user directly, but that is enough to increase effective demand.
Raising tax rates on the rich may make left wing liberals feel good but if history is any guide it may not succeed in making the rich pay a greater portion of overall tax receipts.
A Wall Street Journal editorial from July 21, 2008 noted that after the 2003 Bush tax cuts, tax revenue collected from millionaire households rose from $136 billion in 2003 to $274 billion in 2006. Taxes paid by the richest 1% of US households rose from 37% of all taxes in FY 2000 to 39% in 2005 and taxes paid by the richest 5% of US households rose to 60% of all tax revenue in 2005 from 56% in 2000.
Ed, I’m not tracking you– how is that “history any guide”? The WSJ was discussing a tax cut and not a tax hike. If the rich were taking a greater share of national income, they might have paid in even more in taxes without the Bush tax cuts. Of course, one reason tax revenue from millionaire households was way up was because the cut in the capital gains tax rate reduced the “lock-in” effect that high cap gains taxes impose (people hold onto to assets with accrued gains to avoid paying tax on realization of their capital gains).
Of course, there’s another way to eliminate the lock-in effect… adding unrealized capital gains to the tax base. Whether you hold it or sell it wouldn’t matter to Uncle Sam. I’d eliminate all capital gains taxes for families under $250,000 a year and add unrealized cap gains for families over $1 million a year. Recycle the additional revenue (and there’s be a lot) into tax cuts on wage earners.
There is so much discussion here about taxing this cohort, taxing that cohort and how much.
But if savings is the ultimate problem for economy why don’t we tax savings?! Everything that is not spent is taxes and ciao good bye
Sergei,
Perhaps without the JG, taxing savings would be unfair for people preparing for a ‘rainy day’…or saving for an overpriced college education for children, etc….
With ‘free’ education, Warren’s $5k medical coverage proposal, a JG, expanded EITC, etc…ie things that would make all of our citizens minimally “wealthy” as a Flow measure (instead of the usual way people look at wealth as a Stock measure) I could see perhaps taxing savings as this would perhaps prevent miserly behavior which then would be opposite the desired outcome of the macro policy which would be for people to take advantage of the govt arranged Flows.
Short of these types of reforms, the savings tax might be punitive to people who are just trying to survive long term..
Resp,
” . . . the savings tax might be punitive to people who are just trying to survive long term.”
I’m surprised you folks are reading Warren’s blog and talking about good and bad taxes. There are no good taxes, other than perhaps taxes on bad stuff like tobacco and liquor. All taxes hurt the economy. Period.
Arguing about which tax is best is like arguing about whether it’s better to be shot in the head or shot in the heart.
Rodger Malcolm Mitchell
Rodger, it is not about bad or good taxes. It is about nominal and optimal size of budget deficit given the particular type of problematic behaviour in the economy. It is just natural for human beings to optimize efforts. Something along the lines of 80/20
Of course, the implication of this type of thinking is that there is no reason to levy taxes at any time for any reason on anybody – so why have a debate about any aspect of taxation in any situation? That becomes a major credibility problem for MMT. If not, then why not have a debate about tax distribution in this case? That’s the flip side of deficit and net financial asset distribution, as well as deficit distribution over time. One way or another, which is it – analysis of distribution, or total loss of credibility?
Anon, I am not convinced that the Chartalist theory of state money and taxes is essential to MMT,, but MMT does say that taxes are necessary to reduce inflationary pressure by withdrawing NFA in the interest of price stability. Then the question becomes whose ox is to be gored and how much. I think that is also a distribution question since there seems to be empirical evidence that income and wealth inequality in an economy does matter. These are the things maybe we should be focusing on?
Tom H.,
… all that makes sense. But if you look at the comment to which I originally responded, it suggests that distribution is simply not an issue when aggregate demand requires a boost. I think that’s counterproductive. Why not fine tune your tax incidence along the way? To the degree that there are any taxes at all already in place, a decision on distribution was made in the past. Why would you simply ignore that dimension when fine tuning taxes and deficits going forward toward ongoing aggregate demand objectives?
I am just suggesting that we focus on the economics and try to separate out the politics. As I understand MMT, at this point taxes need to be cut/disbursements increases to increase the deficit, since the propensity to save/delever has increased and the output gap/unemployment is still large (and exports haven’t counterbalanced). So then the question becomes whether there is any composition of tax cuts/expenditure increases that influences flows to produce a more effective and efficient result. After that, we can consider the political ramifications. But the first option proposed should be the optimal one. If that is not possible politically, what is optimal under the circumstances.
“So then the question becomes whether there is any composition of tax cuts/expenditure increases that influences flows to produce a more effective and efficient result”
… I agree, that’s the right way to approach it
watching Obama …
somebody may want to put Bill Mitchell on suicide watch
I am not convinced that the Chartalist theory of state money and taxes is essential to MMT
I should add that the failure of the euro (stateless money) would convince me of the Chartalist position. It looks like this could to be tested.
I don’t have a problem with the Chartalist theory of taxation as the driver of demand for state issued money. It’s an argument about the leverage of taxation in enforcing state authority. It’s a reasonable argument.
But it is very interesting that the MMT argument for higher deficits pushes that leverage to the limit, and double dares those who challenge that same Chartalist explanation.
for a given size govt there is a level of taxation that corresponds to full employment
Well, you control inflation with either interest rates/unemployment or taxes. The value of the JG as I understand it is to provide a anchor for the price of labor in aid of price stability.
So then it becomes a debate over which approach is more efficient and effective, and effectiveness has to measured against social and political goals, such as are broadly established in the Preamble and specified in the Constitution and laws.
Matt, I do not think one needs JG etc. to follow some basic rules of fairness. Taxing savings is definitely not worse than taxing income which distorts spending regardless of needs/wants. In this sense inflation, as ESM argues, is the most distortive way to tax savings because it applies to the same extent to everybody.
I was rather thinking of a progressive savings tax pretty much in line with the progressive income tax but with the maximum tax rate much closer to 100%. Tax rates can also have a grace period (say some years) but then kick-in and increase over time (passed from income). This structure allows for rainy day savings but punishes outrages savings aka bill gates. And in order to avoid shuffling of money between gates and buffet there also should be an expensive transaction tax on capital goods / instruments and a very punitive tax on capital gains when realized within a given period of time.
Sergei, and what is the “nominal and optimal size of budget deficit given the particular type of problematic behaviour in the economy”? If you don’t know, name someone who does. If no one knows, what are you discussing? Just a bunch of “Blah, blah, blah,” with no substantiation coming from anywhere.
Anon, you say, ” . . .the implication of this type of thinking is that there is no reason to levy taxes at any time for any reason on anybody – so why have a debate about any aspect of taxation in any situation? That becomes a major credibility problem for MMT.”
It’s only a credibility problem for those people who think taxes are necessary. They aren’t. I suppose we could pander to the majority by saying, “O.K., taxes are necessary, but not so high.” Of course, that would be lying.
Galileo could have avoided lots of problems by taking that approach, but then, no one would remember his name.
Roger MM …
that’s an interesting view. Have you actually posed that question directly to the MMT people? Do they believe taxes aren’t necessary? They’ll tell you they’re necessary to create demand for the currency, but that’s a bit of a ruse, because acceptance of the currency could be enforced otherwise. So how would they respond to your claim? Because, in the case of not reinstating tax cuts for the rich, they support your position. That’s my point. They can’t have it both ways.
Tom Hickey: ‘I should add that the failure of the euro (stateless money) would convince me of the Chartalist position. It looks like this could to be tested.’
Well, then you can consider yourself convinced. Because the euro will continue to be a failure. In my opinion MMT is not just an economic theory (what used to be political economy) but Economic Policy. In that regard the eurozone can not be a success. It is not a state & will not be a state.
A tax on savings already exists. It’s called inflation. If you don’t want people to have savings, then why would you be worried about having too much aggregate demand?
That being said, it’s crazy to punish saving. What could be better for society than to have somebody produce more than he consumes? That allows some people to consume more than they produce, and I guarantee you we will have no shortage of such people as long as the government runs a sane fiscal policy.
What allows people to consume more than they produce is excessive leverage, i.e., leverage that in the end cannot be serviced. Demand is drawn forward on insufficient income and assets.
I’m talking about real goods and services here. If we produce on average 10 potatoes per person per year, then for somebody to consume 15 potatoes, at least one other person is going to have to consume fewer than 10 potatoes. That’s assuming you can’t store potatoes long-term, which is true for mnre than 70% of the goods and services produced in the economy.
But when excessive leverage becomes endemic, then the society as a whole consumes more than it can afford, and it cannot continue to consume what it cannot afford indefinitely. Americans were dis-saving in aggregate as the figures show. I don’t think that the problem was as much with lack of a “sane fiscal policy” as an insane lending policy traceable to moral hazard, that is, imprudent loans extended relying on implicit and explicit government guarantees.
you moron tom hickey
saving, which is what we are talking about, is the opposite of taking on leverage.
and yes, saving, will let person consume more than product in period
finally, both fiscal policy and credit policy in US is and was insane. it is as insane as obama wondering why “stimulus” which consists of funnelling tax payer money to Democrats via Unions is not embraced with crieds of delite.
Joe Costello, Buy My Debt, Ben!
LOL, geez. Zanon, you and Tom kill me. Seriously guys, I reiterate my plea— you two should start a talk show and/or a detective agency! :o)
But what’s interesting is that you’re both right. It seems to be conventional wisdom that both the US govt sector and the US private sector are both overleveraged with too much debt. But that can’t possibly be true unless the US was running a Cali, Colombia-style trade surplus. In reality he record govt deficit is mirrored by record private savings IN AGGREGATE. If the flows are matched, the stocks are not… Household wealth ($53 trillion) far exceeds the public debt ($13 trillion), both of which are are dwarfed by US human capital (EPA/OMB human life value $7 million x pop. of 300 million) of $2.1 quadrillion, but I digress.
The problem is income and wealth inequality, if 1% of the population controls a quarter of the income and a third of the wealth, well, that’s where you’ll find the net private savings. And that’s how excessive leverage can be endemic among a large fraction (even a majority, for that matter) even as the private sector in aggregate is net saving.
This is a problem. I take Zanon’s point that there’s no reason to import more poor people from other countries (or to bail out unions that have priced themselves out of the market). As I mentioned above, Steve Sailer’s Affordable Family Formation policies should be (but aren’t) what both major parties are aiming for– higher wages, affordable housing, decent public schools.
Hey, James Carville and Mary Matlin make a great tag team on the talk show circuit. Maybe Zanon and I should challenge them.
I take Zanon’s point that there’s no reason to import more poor people from other countries
Well, I live in Iowa at the moment and surprisingly to some, there are a lot of Latin immigrants here, and a good deal of them are probably illegal. But no one is complaining about them taking jobs from US workers, because they work chiefly in the meat packing plants that no American wants to work at. Iowa grows chiefly feed corn, and feed corn is used to feed hogs, which are raised on CAFO’s (Concentrated Animal Feeding Operations). Anyone who has been within five miles of one of these places would not want to work there. Seriously. Of course the slaughter houses and packing plants are nearby. The people who come here work very hard under really difficult conditions so they can send some money home. Iowa is not as big a beef producer as states like neighboring Nebraska, which grows wheat instead of corn. But Iowa beef is considered superior because is is “Iowa bred, corn fed.”
Young Americans are leaving Iowa in droves for the big cities to make their fortunes, and the family farm is being absorbed into agribusiness, which is taking over the state. Des Moines is the largest city in the state, which has only a couple of cities, and the 2009 estimated population was ~5.6 thousand. I live in Iowa City, the home of the University of Iowa. The estimated population was 62 thousand with 11 thousand families and 45K university students. It’s a ghost town on holidays. So the immigrant population is growing, and you should be happy if you eat meat.
The problem is income and wealth inequality, if 1% of the population controls a quarter of the income and a third of the wealth, well, that’s where you’ll find the net private savings. And that’s how excessive leverage can be endemic among a large fraction (even a majority, for that matter) even as the private sector in aggregate is net saving.
That is the point, isn’t it.
one thing we can do about savings is stop tax advantaging it under the false notion that it’s needed for investment.
(see the 7 deadly innocent frauds)
that will go a long way towards obviating some of the issues regarding savings being discussed
Tom, To make two follow up points:
1. Using th the Lerner Index to tax monopolies profits is certainly not original with me. It was Bill Vickrey who noted that controlling inflation with a tax (or a cap and trade market) on value added prices increases would have the additional benefit of taxing away monopoly pricing power.
2. I said “little or no support in Congress” for MMT (Mosler Monetary Theory™), let me unpack “little”. Last Congress, Barbara Lee (the Oakland congresswoman and chair of the Congressional Black Caucus) proposed HR 1050 A Living Wage, Jobs for All Act (wasn’t re-introduced this Congress, no doubt in deference to the Obama WH). Essentially, Lee and her 20 co-sponsors wanted to legislatively enact FDR’s Economic Bill of Rights. You can take or leave their specific policy goals (some of the language seems dated, as if it were pulled directly from the 1945 Full Employment bill) but I like where their heads are at. The last two sections of the bill are the money shots, eviscerating the statutory debt limit and the paygo budget rules.
(c) Concurrent Resolution on Economic Policy- Not later than July 1 of each year the Joint Economic Committee shall submit to the Senate and the House of Representatives a Concurrent Resolution on Economic Policy setting forth both in aggregate terms and in detail its proposed goals for employment by type of employment, with special attention to hours, wages, and social benefits, and for reducing unemployment, underemployment, and poverty in urban, suburban and rural areas. Notwithstanding any other provisions of law, these goals shall serve as the framework for any concurrent resolutions on the Federal budget.
SEC. 6. AUTHORIZATION OF APPROPRIATIONS.
There are hereby authorized to be appropriated such sums as may be necessary for operating and investment expenses to implement the policies, programs and projects set forth in accordance with this Act.
http://www.govtrack.us/congress/billtext.xpd?bill=h110-1050
Anon, you said, ” . . .They’ll (MMTers) tell you they’re (taxes) necessary to create demand for the currency, but that’s a bit of a ruse . . .”
True. I’ve reminded Randy Wray and others that even were taxes necessary to create demand for currency, the taxes did not have to be federal. There are ample state and local taxes for the purpose. Randy agrees. States and local governments are not monetarily sovereign, and so do need taxes. Federal taxes can be eliminated.
But MMTers also believe taxes should be used to fight inflation, by reducing the money supply. I disagree. Taxes are far too slow, too political and too imprecise to be able to control inflation. Imagine that inflation were 6% and the government wanted to lower it to 3%. Visualize trying to create a tax bill to accomplish that delicate goal, and then getting it through Congress in a timely fashion. Impossible.
Interest rates, by providing the reward for owning money, increase the value of money vs. non-money, so interest rates can prevent and control inflation. They can be applied quickly and in small increments, without laborious Congressional approvals.
Rodger Malcolm Mitchell
Rodger, in the political system we live in yes, a change in interest rates can be done at any time by the Federal Reserve while a change in tax rates is a long and winding road. It doesn’t have to be that way, Congress could give the President authority to adjust tax rates when economic conditions warrant a fiscal policy intervention.
Wynne Godley and Marc Lavoie wrote an interesting paper on this topic, “Fiscal Policy in a Stock-flow Consistent (SFC) Model”.
It follows from the model that if the fiscal stance is not set in the appropriate fashion—that is, at a well-defined level and growth rate—then full employment and low inflation will not be achieved in a sustainable way. We also show that fiscal policy on its own could achieve both full employment and a target rate of inflation.
http://www.levyinstitute.org/publications/?docid=911
I disagree with your view that high interest rates can control inflation. At a time of high inflation, high interest rates will exasperate inflation. Interest is a cost to business like any other and it will be passed on in the form of higher prices. The government will be increasing interest payments on its debt which will be stimulating the economy at a time that it should be withdrawing stimulus.
And a higher interest rate in one country relative to another will cause money to be pulled into that country and prices will also rise.
The only way I can see how high interest payments can control inflation is by destroying businesses because they will not be able to service their debt and for this reason they will be forced to reduce employment which will cause demand to fall. And you will be putting domestic industry at a disadvantage relative to your trading partners.
“Taxes are far too slow, too political and too imprecise to be able to control inflation.”
Agreed. That’s a fundamental problem with MMT. Don’t know where it addresses it.
It’s why we have a separate monetary policy. It’s blunt when blunt is needed.
Anon,
Consider this cycle I believe is the first where US public debt has gone well beyond bank loans and leases.
I think per Feds H.8 L&Ls are about 6.8T and soon here, public debt is at about 9T going to 10T next year ….
So monetary policy may indeed work in reverse from here for sure. A 1% increase in rates would result in extra 100B flow to non-govt, while only a 70B increase in debt service to borrowers providing only a 70B shot for whatever behavior monetary types think this discourages…, I wonder if they realize this?…This may be a first time for where these two Stock measures are now as compared to each other….Public ‘debt’ well in excess of bank L&Ls.
Get ready for the boom times when the Fed starts to tighten?
Resp,
Matt F.,
Good point.
… the impact of a 1 per cent rate increase on non-government income from treasuries is deferred according to the term structure of government debt.
… the net impact on both non government assets and liabilities depends on a comparison of the respective term structures. If liabilities are shorter term than assets, then rate increases bite.
… also, borrowers are different from lenders. It’s the gross bite on borrowers that packs the tightening punch – not so much the macro net.
Anon:
“Even MMT says that deficits are not unlimited – just that they’re not limited in the way most people think.
So if they’re not unlimited, why would you waste a good deficit in this case?”
Good point. The MMT statement is that “Robin Hood was a thief not a saviour” http://bilbo.economicoutlook.net/blog/?p=9006
The neoclassicals think that Money is fixed, so taxes simply take money from the rich and give it to the poor. However, since the argument is wrong, MMTers would conclude that the conclusion is also wrong. It – taxing – shouldn’t be looked at as a redistribution, at least my interpretation considering the title of the post linked above.
I think you missed the point of Bill’s post, which was that if we have excess capacity in some area where poor people are deprived (food, say), then it’s not necessary for governments to raise funds to purchase the surplus capacity and distribute it to the poor. Governments simply have to credit the producers’ bank accounts.
Anon’s point, which is reasonable (although made tendentiously), is that there are opportunity costs to any particular MMT-compliant fiscal policy that the government chooses. It may be fine for the government to drop money out of helicopters until aggregate demand is adequate, but perhaps the government could have hired unemployed construction workers to build roads and bridges instead. The latter policy may have had a greater positive impact than the former, or vice versa.
The way I see it, the safest policy of all is to cut income taxes, particularly in the highest marginal bracket where taxes are quite high (upwards of 50% for somebody living in New York City if the Bush tax cuts are allowed to lapse). Additional government spending is likely to be inefficient, just as most government spending is. Transfer payments on a per capita basis, either to individual households or to state governments, seems fair and would probably be effective, but you would be missing out on the extra incentive to work hard that comes with lower marginal tax rates.
Transfer payments on a per capita basis, either to individual households or to state governments, seems fair and would probably be effective, but you would be missing out on the extra incentive to work hard that comes with lower marginal tax rates.
Is that more or less extra than for other income brackets?
The marginal effect of tax cuts / payments is greater the closer you get to subsistence level incomes which is in tune with the marginal propensity to consume story. And the steeper the income / wealth distribution the more transfers you need to move people out of poverty, because poverty isn’t an absolute measure. So, not only do well directed payments generate more impact than undirected ones, but transfers directed to flatten income distribution (to a reasonable extent, I guess) will probably show better results than others.
And to get back to your JK Rowling argument: JK Rowling has succeeded beyond her own wildest dreams so the outcome can hardly be seen as the main motivator to create her work in the first place. Furthermore, one can imagine many circumstances outside of her immediate control that would have produced a completely different outcome. She could e.g. have been been a Mongolian native speaker which would have made her discovery highly improbable. She could have lived in a time of religious persecution where she would have been burnt as a witch. She could have written in a time without the possibilities that our modern media and globalised markets present. Or, she could have been poor or uneducated and would subsequently never have found the time or developed the intellectual capacity to create her work. Etc. etc.
One economically relevant question is, how many other JK Rowlings, or people of other, possibly more profound historic potential, are sitting on the sidelines, not able to reach their full potential or not being awarded appropriately for lack of opportunity, recognition or other factors beyond their personal influence? And could part of what isn’t paid out to JK Rowlings personally be used towards a higher yield of overall human potential, deficitus paribus?
And the inverse question, also related to what Anon said above is, how much difference would it have made to JK Rowling’s personal and our collective economic wellbeing, had she either never earned as much as she did, or if more of her profits had been taxed away afterwards. I think near zero is the answer for most realistic scenarios.
Or do you think that if we all pitched in to double Lloyd Blankfein’s income he would set out do twice God’s work? And regarding your colleague who’s productivity you say was negative: I suspect a pay cut in the range of 80% would have motivated him more to get off his lazy *rse and prove himself to his superiors than any decrease in the marginal tax rate could have. I know that wasn’t why you came up with the example but I couldn’t resist using it to pick your other arguments apart ;-).
“Is that more or less extra than for other income brackets?”
I’m for ALL marginal income tax rates being reduced. Part of the problem with our pastiche of taxes, credits, deductions, and phase-outs is that there are places towards the left end of the Marginal Tax Rate vs Income curve where the marginal tax rate exceeds 100%. That’s just crazy beyond belief, but that’s what you end up with when you have so much social engineering built into the income tax.
“…because poverty isn’t an absolute measure.”
Interesting. I think you have admitted that envy (one of the seven deadly sins, and in my opinion the most destructive) is the basis for leftist attacks against inequality. It isn’t that all people are entitled to have enough resources to meet their basic needs, it’s that people are entitled to have enough, so that they don’t feel jealous.
Re: J.K. Rowling
Once again you are inserting a concept of fairness into the discussion. I never said that it was fair that J. K. Rowling should be in a position where she could create $2B of wealth. She’s obviously very lucky. She’s actually a poor writer (although extremely creative — and I admit I love the Harry Potter books), and there’s no doubt that she wouldn’t have been as successful if her native language weren’t English or if she had been born 30 years earlier.
As for her not working as hard if her marginal tax rate was higher, well, I think it’s possible that she wouldn’t have worked as hard on in some areas. Sure, finishing the books might have happened anyway, even if she wasn’t being paid at all, but working on the movies and granting licenses for Potter-themed toys and other crap was probably not high on her list of priorities. After-tax money I’m sure gave her some incentive.
But in reality, I think the tax rate does not affect the work behavior of the super-duper wealthy very much, since they’re not working specifically for money anymore but for glory. It does affect how much they pay their lawyers to find ways of shielding their income, however (which is incredibly unproductive).
But for less wealthy high-earners, I think the marginal tax rate is extremely important. It is for me and a lot of people I know. When 40% of your income goes to taxes and then another 40% goes to maintaining the lifestyle to which you’ve become accustomed, and then the President says he wants to raise your taxes 5% (which means fully 25% of your previous disposable income), it gets your attention.
I’m for ALL marginal income tax rates being reduced.
1% of 500’000 is still more than 10% of 30’000, etc. A flat tax is a distributional statement just as a strong progressive or regressive one is. And progressive taxes have the added value of being stronger automatic stabilisers.
there are places towards the left end of the Marginal Tax Rate vs Income curve where the marginal tax rate exceeds 100%. That’s just crazy beyond belief, but that’s what you end up with when you have so much social engineering built into the income tax.
If that’s true, then yes, it is crazy. If anything, there should be progression not regression. I loathe paying taxes just like the next person and am open to other solutions that address distributional issues more elegantly. I’ve often seen Warren write there are better ways than per income tax. Not sure what they are. Maybe ‘rentier’ taxes as suggested by Michael Hudson and including Warren’s land tax would do the trick. But I’m with you that ‘rentier’ is rather a flaky term. To me, it’s about whom profits should accrue to and what they represent in terms of value, power and how persistent and self-perpetuating they should be allowed to be. There’s a reason the Austrians are allergic to inflation and inheritance taxes.
I don’t buy into the talk that distribution and fairness aren’t things economics should deal with. I think they’re just about the only things economics can and bloody well should deal with. And while getting everyone back to work is a start and a strong distributional statement in its own right, it is not the end of all discussions.
I think you have admitted that envy (one of the seven deadly sins, and in my opinion the most destructive) is the basis for leftist attacks against inequality. It isn’t that all people are entitled to have enough resources to meet their basic needs, it’s that people are entitled to have enough, so that they don’t feel jealous.
As opposed to greed and pride which you conveniently find to be less destructive than envy, I suspect? Let’s not get too biblical about things here. The same mechanisms that render an owner of a 3000 ft2 house with double garage, yearly vacation abroad etc. middle class nowadays as opposed to super rich 100 years ago also change the perception of poverty. You admit as much yourself when you use the term ‘become accustomed to’. Social spheres change in line with shifts in expectations and norms over time. No envy needed. The real issue to me is whether there is any connection between the spheres that warrant the term ‘society’ for a people who happen to share the same borders and resources. I’m not saying this connection needs to be as intricately knit as in some Asian societies, I’d say that is unrealistic and possibly even counter-productive in light of modern communications and migration. The American Dream, although to me somewhat superficial, is a good example of a very basic social contract that would probably work quite well if were true. I think it’s up to economists (and others) to constantly assess whether it holds and if not, to damn well do something about it. And if that means robbing the rich (I could be convinced otherwise ;-)), so be it – although I do agree with you that one must be careful not to use the term ‘rich’ too loosely – 250K is effectively still middle class in most areas nowadays. And I have nothing against the rich, nor any other group per se, just to be clear.
I don’t buy into the talk that distribution and fairness aren’t things economics should deal with. I think they’re just about the only things economics can and bloody well should deal with.
Oliver, historically speaking, this is the original meaning of “political economy,” which is branch of ethics and social/political philosophy. It is what the Classical economists were concerned with. Political economy and modern economics separated paths at the time of the marginal revolution, when economists decided that that economics should be scientific, or at least look like a science by having a lot of mathematical models.
I completely agree that economics has to get back to being political economy to be relevant in the world. Right now, it is being used an ideological tool in scientific disguise.
ESM, I don’t see the leftist position as being based on envy as much as outrage at injustice. If it were a level playing field, then perhaps that might be the case, but most people who have eyes can see that it is not a level playing field. Most poor and middle class people are all that interested in acquiring huge assets. That only appeals to the acquisitive class. What the middle class and poor object to is apparently being ripped off by the acquisitors. That is what the kerfuffle over the bailouts is about, for instance, and that is not a left wing kerfuffle. It is going on in the GOP.
Where I do see the envy is at the upper echelons. The well-to-do and even the rich are quite envious of the superrich, where the difference in income and wealth seems to stem from not from merit but from luck, connections, and/or cheating. As a result they find themselves falling behind.
Beowulf said, “Congress could give the President authority to adjust tax rates when economic conditions warrant a fiscal policy intervention.”
I’m afraid that would tilt the balance of power too far toward the executive branch. Congress rightly would resist. Further, even without Congress, tinkering with tax rates to affect inflation is beyond the abilities of any human. The dates of collection, the amounts collected, the affects on the individual items being taxed, the massive uncertainty added to an already too-uncertain system, would create a nightmare.
Again I give the example: “Imagine that inflation were 6% and the government wanted to lower it to 3%.” What taxes would you change to effect that reduction? Any notice given to the public? What taxes would you change when inflation fell back to 3%?
BFG, your thought that interest rates exacerbate inflation is a popular MMT belief, and has some “push” logic to it. I believe interest has both inflationary and anti-inflationary effects.
Interest is a minuscule part of most business costs, so it probably does have a minuscule inflationary effect. However, because money is a commodity, the value of which is based on risk and reward, and interest is the reward for owning money, that increase in reward increases the value of money, and has a much more powerful anti-inflationary effect.
The Fed has raised rates to fight inflation, and the approach has seemed to work. Despite massive federal spending over the past 30 years, we have avoided inflation (except for 1980, when interest rates helped cure it).
Rodger Malcolm Mitchell
I’m afraid that would tilt the balance of power too far toward the executive branch. Congress rightly would resist.
Probably better to do this through something like automatic stabilization using some SFC-based formula. That would take one act of Congress, and then Congress could adjust as needed.
Tom, I’d agree with that. A formula based approached makes sense, and certainly would go over better with Congress than authorizing the President to revise the Internal Revenue Code.
As for Rodger’s question on how to control inflation against interest rates, I’ll cite again Bill Vickrey’s proposal for:
A system of marketable rights to value added, (or “gross markups”) issued to firms enjoying limited liability, proportioned to the prime factors employed, such as labor and capital, with an aggregate face value corresponding to the overall market value of the output at a programmed overall price level. Firms encountering a specially favorable market could realize a higher than normal level of markups only by purchasing rights from firms less favorably situated. The market value of the rights would vary automatically so as to apply the correct downward pressure on markups to produce the desired overall price level. A suitable penalty tax would be levied on any firm found to have had value added in excess of the warrants held.
http://books.google.com/books?id=Vc02oO-GB9sC&lpg=PA199&ots=e6PQCNfF_E&dq=vickrey%20gross%20markups&pg=PA199
Rodger, I’d say prices have fallen because of the hugh advances in technical innovation. The unempoyment rate over the last 30 years has been very high. It’s not only an MMT belief. A.H. Gibson recognised this phenomenon. His research indicated that the long-term interest rate and the trend of inflation were positively correlated. It shows that the rise in interest rates follows the rise in prices. It became known as the Gibson Paradox. Prices do fall but only because the hike in interest rates causes a recession.
There is also a hugh distribution problem from the young to the old with high interest rates.
imho inflation came down when it did in spite of the fed
Beowulf quoted Vickrey: “A system of marketable rights to value added, (or “gross markups”) issued to firms enjoying limited liability, proportioned to the prime factors employed, such as labor and capital, with an aggregate face value corresponding to the overall market value of the output at a programmed overall price level.”
Anyone who writes one sentence containing nine prepositional clauses, cannot possibly know what he is talking about.
BGF said, “It shows that the rise in interest rates follows the rise in prices.”
Of course. The Fed raises interest rates, when prices rise. That’s how the Fed stops inflation.
So far, the answers to this post suggest that preventing and curing inflation involve:
1. “Automatic stabilizers” (aka do nothing)
2. Tax policy (aka do the impossible)
3. Spending policy (aka do the opposite of what didn’t cause the inflation in the first place)
Anyone who does not believe the relative value of money is determined by risk and reward (interest), has discovered a brand new economics.
Rodger Malcolm Mitchell
Rodger, I think that the debate is over the marginal effect of rate changes. Normally they produce the expected result of altering the balance of supply/demand through price. However, at the extremes, interest rate changes are less effective. When thing are booming, people willingly pay much higher rates as the cost of participation, and at the trough of busts, no one wants to borrow no matter that rates are at the zero bound. The problem is that problems arise at the extremes, where interest rate changes are least effective.
Tom, are you talking about “effective” at stopping inflation or effective at stimulating the economy. I believe the former, not the later. The Fed believes both, which is why they pray we never will have a stagflation
Rodger Malcolm Mitchell
The Fed’s mandate is about employment and price stability. I don’t think that there is any mandate to manage the economy (command system?)
Anyone who writes one sentence containing nine prepositional clauses, cannot possibly know what he is talking about.
He won the Nobel Prize in Economics, not Literature.
I believe I edited out a section (sorry for dropping the ellipses) for space, so the one who doesn’t know what he’s talking about is me! Besides, Vickrey won his Nobel Prize in Economics, not Literature.
His former graduate student David Colander explains the concept at greater length (and better grammar) here.
http://community.middlebury.edu/~colander/articles/real_theory_inflation.pdf
Rodger,
If long term interest rates follow wholesale prices how is hiking interest rates higher meant to cure inflation. Is that not following prices up and adding to inflation?
Low inflation is associated with low interest rates. I know the FED can raise interest rates, which can bring down inflation but only by creating a recession if there high enough. Does inflation rise in advance of an interest rate hike? What inflation are you targetting, CPI, Asset Price Inflation? If you are aiming for house prices and mortgages are financed with short term interest rates, this will lead to wage price inflation because workers will look for higher wages to service their mortgages.
What about regulating the capital base of the banks? Is that not the ultimate arbiter of how much credit a bank can create? Raising the Capital Adequacy Rate in times of high inflation.
that’s how the fed tries to stop inflation- rate increases.
unfortunately rate hikes seem to me to make inflation worse each time they do it.
nor do rate cuts add to inflation.
so they say 20 years of 0 rates with no inflation in japan is the exception, and now 2 years of 0 rates in the US is an exception as well…
as they say, follow the money, in this case the interest income channels.
Meant “prepositional phrases”
Ha ha, well I cut and pasted the same sentence twice, so no worries.
Here’s an old Levy Intitute paper about anti-inflation markets
http://ideas.repec.org/p/lev/wrkpap/71.html