Comment by RivieraKid
9 years ago
The drawback of taxing wealth is that it distorts markets, it discourages saving.
EDIT: Can't comment ("You're posting too fast, blah blah blah"). Here are some replies to the comments bellow:
> It's encouraging people to make their money be productive instead of stashing it under a mattress.
When you have money in the bank, you're effectively lending most of it to other people. Your money is "productive", which is encouraged by the interest.
> Everything distorts markets. The question is how to distort markets into providing the best outcome.
Neutral tax (https://en.wikipedia.org/wiki/Optimal_tax) doesn't. But of course, market distortion is not the only or primary factor in policy decision-making.
There are plenty of analogous policies in America. For example, universities are required to spend 10% (or some other percent?) of their total endowment each year in order to keep their tax-free status. This is why Harvard & Co. need to continue fundraising each year despite their massive endowments - they're massively discouraged from just 'saving' as well.
Everything distorts markets. The question is how to distort markets into providing the best outcome.
Other non-profit entities (such as private foundations) are required to spend a certain fraction of their money each year or pay taxes. Universities are exempted from that requirement.
from [0]: "Harvard targets an annual endowment payout rate of 5.0 to 5.5 percent of market value. The University's actual payout rate has fluctuated over the past 10 years, from a low of 4.2 percent in fiscal year 2006 to a high of 6.1 percent in fiscal year 2010."
[0] https://www.harvard.edu/about-harvard/harvard-glance/endowme...
[1] https://www.irs.gov/charities-non-profits/private-foundation...
Woah, I did not know that universities were exempt! The head of my alma mater's investment fund definitely did not mention that...
Frankly,the trickle-down economics is not working.Plain and simple. Giving the rich lower tax and expecting them to invest the money back to the economy has been proved not to be working.
And we know now that the ultra-rich folks tend to take the money,windfall from lower tax, and hide it in Virgin-Island, Panama,Cayman Island and other offshore tax havens.
I liked the older term they used to use for "trickle down". They used to call it "horse and sparrow" economics:
https://en.wikipedia.org/wiki/Trickle-down_economics#Critici...
"Mr. David Stockman has said that supply-side economics was merely a cover for the trickle-down approach to economic policy—what an older and less elegant generation called the horse-and-sparrow theory: 'If you feed the horse enough oats, some will pass through to the road for the sparrows.'"
It feels more honest that way.
To have this discussion properly, we would need to talk about tax incidence. (https://en.wikipedia.org/wiki/Tax_incidence)
It's a relatively well known fact that eg it doesn't really matter too much whether officially the employer or the employee is required to pay the employees income tax---the money comes out of the same pot.
Similar things happen for other taxes. Eg VAT in European countries seems to be paid for by the shops, but it wouldn't make a difference (apart from convenience in collection) if you'd levied it directly on the shoppers.
Any discussions about 'trickle-down economics' is incomplete without tax-incidence.
Indeed. And saving/investing is important! It's not a coincidence that the industrial revolution happened in a country with a secure established rule of law such that people could make investments without worrying about losing them at the whim of a dictator.
Much better to tax consumption.
More importantly, it happened in a country which forced people off their land at gunpoint, into urban poverty, where they provided a huge supply of cheap, fungible, and utterly disposable factory labor.
But that would run counter to the neo-liberal narrative... After all, the rule of law serves to protect investments, not the peasant forced off his land.
Where was the rule of law to protect said peasants? Perhaps the rule of law isn't actually necessary for industrialization - as long as capital is protected, everything is all well and good. Unless you're a peasant.
[1] https://en.wikipedia.org/wiki/Inclosure_Acts
Urbanization was certainly important in the development of industrialization, in that urbanization is essential for all forms of specialization; but I would dispute the notion that having a large supply of cheap labour was important. To the contrary, since industrialization is the process whereby capital is invested in order to increase worker productivity, it is less useful where there is a cheap workforce, not more useful.
I agree that the rule of law didn't protect peasants who were forced off their hereditary lands. You'll note that it wasn't the peasants who led the industrial revolution.
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That happened as well in S. America, but S. America did not become a superpower. There's something else at work.
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This is an underappreciated factor in the industrial revolution.
Taxing consumption is regressive; as your wealth increases, the amount of dollars spent relative to your wealth continues to decrease.
In the long run, every dollar of wealth gets spent.
As a practical matter, consumption taxes can be made progressive by combining them with a low-income tax credit or a universal basic income.
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The fallacy here is that there is a pure form of market that isn't inherently distorted by the man-made rules required bring it into existence at all against wilderness of nature's 'rules' of the wild.
Discouraging savings is actually the point. We should tax money that sits idle and provides tax benefits to money invested.
If you can build wealth around being active rather than just reaping the benefit of interest of interests then that should be encouraged rather than just grabbing and keeping.
You would force people to consume? There's diminishing returns to that. At some point there are fewer worthwhile things to spend on and you start creating an system of make-work with the attendant environmental destruction and resource exhaustion. Free markets are neutral on these questions, it's policy that distorts social preference away from conservation and towards unsustainable growth that exacerbate the situation we're in now.
How would I force them to do it?
They would still make money if they kept them it would just be less beneficial than it is now. No long term capital gains as an example.
People with little money consume everything they have already, they have no choice, no retirements no nothing.
> We should tax money that sits idle and provide tax benefits to money invested
>> You would force people to consume?
That's a complete misreading of the comment
Money in a savings account is money invested.
> money invested
Only in the most inefficient way possible. The 'problem' is banks are limited in what they can do with this money which ends up creating investment bubbles and other market distortions which hurt the economy overall. If you slowly transitioned banks so they could not invest this money over say 100 years the net result would not be harmful.
In the end money is not actual wealth, it's simply a representation of wealth. Anything that turns money into more money needs an intermediary where some cash flow is generated. And those intermediary's are often harmful see in excess like pay day loans.
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Thanks to fiat money there's no money sitting idle: if you stuff your paper bills under a mattress, the central bank is just gonna print more money (temporarily) to reach its eg inflation targets. (And if you take your money out from under your mattress, they will print less money for a while.)
That Wikipedia page links to a interesting piece: "Taxing Land is Better Than Neutral: Land Taxes, Land Speculation and the Timing of Development" (https://books.google.co.uk/books/about/Taxing_Land_is_Better...)
It's encouraging people to make their money be productive instead of stashing it under a mattress. That doesn't sound like a bad thing to me.
The rich aren't stashing most of their money under a mattress. Gates, Bezos, etc are worth billions, but that wealth is almost all based off of the stock prices in the companies they own percentagess of.
Tax the ownership interest in equities, just as we have property taxes for land ownership.
We could also take the route of the Federal Reserve purchasing up equities (The Bank Of Japan does this [1]), issuing deposit accounts to citizens directly (trivial for the Federal Reserve to support this [disclaimer: I work in the financial services industry, and feel qualified to make this statement]), and providing UBI to those accounts using the Federal Reserve as an intermediary/conduit (lookout Blackrock and Vanguard! there's a new index fund manager on the block!).
Voilà, Citizen's Dividend.
EDIT: The Federal Reserve operates independently of the US government, and does not require Congressional or Presidential approval to perform this "monetary policy". [2]
"Although an instrument of the U.S. Government, the Federal Reserve System considers itself "an independent central bank because its monetary policy decisions do not have to be approved by the President or anyone else in the executive or legislative branches of government, it does not receive funding appropriated by the Congress, and the terms of the members of the Board of Governors span multiple presidential and congressional terms."
[1] https://www.bloomberg.com/news/articles/2017-07-18/boj-s-etf...
[2] https://en.wikipedia.org/wiki/Federal_Reserve_System
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Yes they are. They are shifting trillions into tax free foundations, trillions offshore, and trillions into corporate stock buy backs.
When you have trillions you just need a bigger mattress, like Ireland, for instance.
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Inflation does that. Cash in your mattress loses 2% a year. A wealth tax would presumably tax productive wealth as much as unproductive wealth.
> It's encouraging people to make their money be productive instead of stashing it under a mattress. That doesn't sound like a bad thing to me.
It is, because storing money under a mattress is equivalent of investing in money itself. As OP said too, it is like you lent your money to all the other investors in the economy (because you taking that money out of the economy reduces the prices of capital goods, which means they can now acquire it for cheaper). This results in wealth creation, which you benefit from when you take the money out from under the mattress.
This of course, can only work as an active investment strategy if you have a fixed or predictable money supply. For an inflationary currency such as any fiat currency, you will just get screwed.
This works great for cryptocurrencies for instance, people keep talking about how nobody has any incentive to invest in Bitcoin projects if just holding it will make it go up. Well, when bitcoin holders hold bitcoin, bitcoin economy still grows, and the purchasing power of their bitcoin goes up.
The economy does not care whether you put your money in a bank or under your mattress. The central bank will influence interest rates in response to your actions. What matters is the amount of money that's actually chasing goods and services.
If the central bank wants banks to have more reserves for loans, it buys assets from banks in exchange for newly created reserves. Money markets are a command economy.
You are right about monetary offset, if the central bank is well-run. (Which eg the Fed wasn't during the last recession.)
Of course, someone still has to decide whether to consume now or invest. Or whether to invest in economically efficient ways, or in ways that are only economically efficient because of weird tax arrangements (but are actually less productive).
> it discourages saving.
Taxing wealth encourages investment because you have to turn a yearly return in excess of the wealth tax to not have your wealth shrink.
The incentives to be wealthy will never disappear. Taxing wealth just makes it harder and makes sure that those who are wealthy work for it.
Perhaps that kind of distortion is a good thing. Perhaps the market isn’t an all-seeing all-knowingly omnipotent entity independent of the humans that created and participate in it.
IOW you should explain why “market distortions” are inherently a bad thing.