Piketty-Poketty-Poo: Some people are just itching to up tax to capital ... I'll cop to being a bear of little brain, for it can take me a long time to spot what should be obvious. And so it is with my taking so long to work out what's really going on with Capital in the Twenty-First Century author Thomas Piketty and all that wealth inequality stuff. I believe his book is essentially a political …
So if I understand correctly about this Progressive Consumption Tax, then it's like VAT but charged in tiers like income tax is now, so a loaf of bread at a few quid might have 1% or 5% PCT, whereas a new VW Up! at about £10k might be, say 25% PCT, and a brand new £2 million Bugatti Veyron might be up to 100% PCT.
Is that right?
It's not charged on what you buy as and when you buy it. It's charged on the income that you used to buy it.
It really is just like having all your savings, all the earnings from your savings, all your additions to your savings, in one giant tax free ISA. And you pay normal income tax rates only when you take the cash out of your ISA.
Very like pensions used to work until a few weeks ago. You pay no income tax on hte money you put into a pension pot. Your earnings in he pension pot pay no tax. But when you draw down your pension you pay normal income tax rates.
Speaking as a bleeding-heart liberal, while I can't dispute the question of efficiency being good for the mean income of society, can you clarify what this policy does to protect the least fortunate against the sort of grinding poverty which sees them relying on 8p tins of baked beans and food banks?
That's all much more about how you spend the money that you've raised, rather than how you've raised the money. Just for the record, yes, callous neoliberal that I am, I support there being both a welfare state and a safety net.
Perhaps a slightly different one to the one we've got (I'd like a citizen's basic income rather than means tested support) but that social insurance system, in some form or another, not only will stay but should.
Mainly on efficiency grounds.
I take it as obvious that there's going to be a welfare state and also that there ought to be one. So, what's the least damaging one we can have?
There's two set of damage done by its existence. One is obviously in the deadweight costs of the taxation needed to pay for it. But we've already agreed that that's got to happen as we've agreed that there should be a welfare state. After that it's just a technical matter of raising the tax money in the least damaging manner.
The second set of damages is in the incentives to those who get caught in the system. There's several places in the UK tax/benefit system were marginal tax rates are over 80% and a couple where they're over 100%. And, yes, we really do believe that there's a Laffer Curve. But in this reading of it the people who really suffer are those low paid people whose benefits get withdrawn, who get charged two taxes upon their incomes, as those incomes rise. I've forgotten the actual numbers but someone on HB, getting tax credits for a kid or two and earning £6k to £15 k a year, those sorts of numbers, faces the highest, by a long way, marginal tax (plus benefit withdrawal) rate of anyone in the country.
Which is absurd of course: no one who does recognise the Laffer Curve's existence thinks it only applies to rich people.
So, my support for a universal basic income is to make this side of it all more efficient. A basic (around the current old age pension pledge of £140 a week) income for each and every adult in the kingdom would cost something not dissimilar to the current welfare state. We can then dispose of all of the rest of it, including such things as the minimum wage etc.
Still need to have a bit more for those entirely incapable of dealing with things for themselves, but essentially the apparatus gets replaced with mailing the checks out.
All of which hugely improves the incentives for the lowly paid to try to gain more income. Eventually, to the benefit of us all.
But do note it's all entirely an argument about the efficiency of the system.
I'm confused, perhaps the coffee hasn't kicked in yet.
In your Forbes contribution from April...
http://www.forbes.com/sites/timworstall/2014/04/24/a-problem-with-thomas-pikettys-wealth-tax-solution-to-r-g/
...you advocate land taxes but not "wealth" taxes. Land is a form of capital, capital is a form of wealth. Income and capital are fungible (since one can extract income from capital appreciation and invest income in new capital).
From my reading (I haven't finished CI21C, obviously) Piketty's most stimulating point is that capital/wealth concentrates until war destroys it. If we want to create a society without war we must find other ways to constantly redistribute capital/wealth or else bad things.
In most of the commentary about CI21C, commentators/ards mix labour income with wealth/return on wealth. Piketty seems mostly relaxed about unequal returns on labour (e.g. nurses vs seven figure bankers). It's not about our salaries, it's about our stuff.
Land is a bit different from other forms of capital. As they're not making any more of it taxing it isn't going to be distortionary.
Roughly, the least distortionary to most are: land, consumption, income, capital and corporate then transactions taxes (FTT etc). Distortion can also be described as deadweight cost, or how much economic activity do you destroy just by having that tax?
So an efficient tax system (although perhaps not an equitable one) would want to be towards the beginning of that list, not the end of it.
And concerning land Piketty's entirely wrong (as Saez and Zucman show in another paper) that only war destroys that value. The great land value destruction in the UK was 1870s to 1890s, as the Great Plains and the Steppes were opened up to cultivation by the steamship and the train. That's what bankrupted the old aristocracy (or much of it).
"From my reading (I haven't finished CI21C, obviously) Piketty's most stimulating point is that capital/wealth concentrates until war destroys it. If we want to create a society without war we must find other ways to constantly redistribute capital/wealth or else bad things."
If this is what he says then he has a very poor grasp on history and logic.
Firstly there are a number of other ways in which wealth is destroyed - fire, flood, drought, disease, lack of maintenance, spendthrift heirs ... history has seen them all.
Secondly the implication here seems to be that there is something happening that requires such concentrations to be destroyed and that invokes wars to do it so that wars are an inevitable consequence of those concentrations. Even given the curious leap of logic which come up with that requirement the other means of destroying such concentrations doesn't require wars.
Finally, even if we accept the first sentence the second is a non sequitur. Aggressive behaviour in humans appears to be innate. Even with an equitable distribution of wealth we would find things to fight about.
It's not levied at an item level, but paid based on your yearly consumption...
"Spent £25k this year, then pay 10% spent £250k this year pay 50%"
This has the effect of making the loaf of bread one price for the low consumer and another price for the high consumer.
Whether this is equitable is a matter of philosophical opinion. It is however economically indifferent to the current model we have today where although the loaf of bread has the same sticker price, someone on a larger income has to earn more to pay for it due to a progressive tax regime.
"But any money that you'd put away into savings (broadly defined, cash in the bank, a holiday home, stocks, a pension) would then be deducted from that income. "
Oh yes, holiday homes, a collection of classic motor cars, a cellar of fine wines, crates of jewellery, etc., etc., those would all be tax free, because, well, they're investments. Crusts of bread however, being purely consumption, would be taxed to the eyeballs.
I think you're being a bit naive about this. When you distinguish between "investment" and "consumption", you simply create a vast tax consultant industry which launders consumption categories into investment categories. The current compromise on tax rates simply reflects prior experience with that.
This is where harsh reality meets fluffy theory and theory comes off the worse for it. Money is money and governments have to tax it where they can find it if they want to have any to spend. When you do create special investment categories, you need to put narrow limitations and low caps on it to keep the abuse down to tolerable levels. Trying to get too clever about taxation simply puts money into the pockets of those accountants who are even cleverer at finding the loopholes.
>When you distinguish between "investment" and "consumption", you simply create a vast tax consultant industry which launders consumption categories into investment categories.
+1
Take the example of investment properties. Buying ever more houses as investments drives up the costs of housing so the poor become renters. That portion of their income becomes taxed "consumption" whereas for those who can afford to get on the ladder, it becomes tax-free capital. The wealthy acquire ever more wealth (because it is tax efficient which accelerates the process) forcing up the prices and making it impossible for the poorer people to get to the point where they can get on the ladder.
You've created a situation where the poor pay a higher percentage of their income in tax than the wealthy, which is generally seen as unfair. The notion that "its ok because they'll pay tax when they consume" doesn't hold because what happens is that they acquire the vast majority of the wealth pie and the consumption portion of it is relatively small. We then have lots of wealth locked away in the hands of the very few, with little consumption and therefore tax to keep things afloat.
We've seen a similar effect when mortgage rules were relaxed. Prices go through the roof and everyone becomes "wealthy" except that after the first generation, they also become mired in massive debt. Eventually, people realise that no-one can afford to pay the mortgages and the whole system collapses. Well, not the whole system. Those who are wealthy enough to make it through the collapse without selling can pick up lots of cheap housing that gets auctioned off from defaulters (who keep the debt despite losing the assets) and again the wealth is concentrated. The banks get a handout, paid for from tax (mostly from those who are poor and are consuming rather than "investing") and the whole cycle starts again. Unfortunately, eventually, there isn't enough tax to support the government because the poor people have nothing, and the rich have to move their assets to a more stable location, leaving behind a mass of debt, both personal and governmental. This is the kind of thing which makes governments go to war in order to distract the populace and to get them into a frame of mind where they are willing to accept deprivation.
The running order I've observed since the early 80s is
(i) there's an excess of savings looking for somewhere to be placed so
(ii) banks /building societies increase the multiple of income they'll lend and relax the criteria for mortgages (5 times income rather than 3.5 and of course we don't need to see evidence - self cert's fine)
(iii) with more (mortgage) money to spend prices go up until they hit a maximum and activity start's to slow unless or until
(iv) there's a contraction in lending either (a) government action to prevent overheating (1988 -Nigel Lawson & MIRAS) or (b) Government does SFA to prevent overheating and it all collapses in a pile of shit (2007 - Northern Rock).
(v) at this point house prices (aka values) drop through the floor. It might be sensible for the economy as a whole for lots of places to be repossessed and for the banks to take the hit in lost equity but as no one wants to piss away most of their wealth all that happens is activity drops with only those who really overstretched themselves and those who bought so early that they still have equity willing to sell. Since wholesale repossession is political poison interest rates drop enabling home owners to survive negative equity.
(vi) when a combination of increasing wages and increased lending erodes the cost of entry the market picks up. A few years later it goes nuts.
The major difference in this cycle is that with interest rates at near-zero and a banking system recovering from serious burns there's no pressure to increase lending. Whilst the economy has finally picked up wages haven't as we are employing more people (both native and migrant). Which puts the mockers on the usual recovery mechanism.
So, with a lack of new entrants, we're falling back on landlords to keep the market alive. People with savings have to put them somewhere so instead of giving them to the bank to lend to other people to buy houses they buy them themselves and let them out. In most places this has stopped house prices dropping rather than boosting them - the exception being London & the big cities (where the population is expanding) and indirectly places within commuting distance.
I think the real issue is that the barrier to entry for my kids generation is the equity of my generation. With 66% of households owner occupied good luck getting us to take a significant drop for the rest.
"(b) Government does SFA to prevent overheating and it all collapses in a pile of shit (2007 - Northern Rock)"
This was the result of the brilliant idea of using interest rates to manage inflation and then using a measure on inflation that excluded cost of housing. As if housing was just an insignificant part of household expenses.
Agreed, at least in part. It was also avoiding the nasty bit of Keynesian economics when in a boom the government is meant to pay back some of it's debts rather than ramping up spending and claiming there is no boom.
A sane move would have been to regulate the multiple of earnings that could be borrowed.
Many of the very rich arrange for much of their income to appear as capital gains rather than ordinary taxable income. (Often with the gains held in an off-shore tax free trust or company.) Having a tax set up like the US AMT with a rate of say 1% would be one way to get the very rich to pay some of the taxes that they otherwise evade. (Compute your income tax as normal then compare it to 1% of your wealth - you owe whichever is the higher. Possibly exempt the first million pounds of your wealth to avoid dragging the not very rich into the new tax.)
Confused about your comparisons with ISAs.
As I understand it you currently have two methods of managing taxation on long term savings.
Pay tax going in (ISA) or pay tax coming out (Pension).
This gives two options and the outcome is either gambling or judicious investment depending on the rules when you want your cash back.
If you change to taxing consumption then people with ISAs have been screwed over - taxed coming and going.
If you just close ISAs to new money then your only option is a pension - but not quite.
One of the commitments you make when accepting tax relief on pension contributions is that you will leave them in savings until you retire.
This is a strong incentive towards long term saving and also reassures the government and employers that you aren't going to take their contributions (if any) and cash them in next year for that much touted Lambourghini.
So what incentive are you going to offer to lock up savings until retirement?
Or do you believe that pensions are pointless and people should save and not spend and if they don't save then the state should bail them out?
Oh, yes! The golden bullet. That old chestnut of a small tax on all things, no exemptions, etc. But it is politically expedient to make exemptions. I don't think churches should necessarily tax free, but you might think charities should be. Best case, someone will write the rules but there will be unintended consequences that hammer the poor or discourage wealth creation. Worst case, the rules will be written by the people in power to enrich themselves and their friends.
Seems most likely to me that author of this quasi-review has his own axe to grind, and it didn't set well with Piketty's pile of data, so he's doing gymnastics trying to twist it into a form he can understand. While I would deny that I understood everything in Piketty's book, I'm sure that I understood a lot more than this guy, even though I have my own axe to grind. It's hard for me to summarize succinctly, but Picketty is mostly defending the current economics, and within that paradigm he thinks he has identified certain trends (especially of wealth concentration) that are clearly unsustainable.
My own take is that the paradigm is the problem, and Picketty's work is just another example of trying to find a bandage to cover the problems, when the REAL problem is that the economists are persisting in looking where the light is better, NOT where the real problems are hiding in the shadows. Money is easy to count, and even if your numbers (especially for the predictions) are completely wrong, numbers just look so solid and nice. Hey, look at our science of economics, and quit worrying about all our mistakes.
The summary of how laissez-faire economics works is that everyone should be on the edge of starvation. Simple and arbitrary example just to clarify it. Let's say there are 3 drugstores in a region, and each of them is making a decent profit (and the consumers have reasonable freedom of choice). Pure laissez-faire invisible-hand economics says a 4th drugstore should be opened so that all of them are on the edge of starvation, and whoever makes a mistake or perhaps just blinks first will go bankrupt, returning us to the knife edge of profitability. It's basically a Darwinian thing, but we don't have to live like that, and no one except the Libertarians even pretends to want to.
Me? I want a NEW paradigm of economics. I think we should be thinking in terms of time, which is much more important than money--but much harder to count in convenient ways. Most obviously, none of us even knows how much time we have left.
That's a misunderstanding. The fourth drug store will only enter the market if it's the most profitable thing that the entrepreneur can do with her time and capital. Otherwise, she'll just take those somewhere else. The point is not that everyone gets ground down to the edge of starvation, as you put it, but that capital and skills move to where they're most useful - without infinite resources, that doesn't imply low returns.
It's an interesting take from someone who finds the current system ideologically unpalatable, by the way. The usual criticism is that the owners of capital get too much. Your criticism seems to be that they get too little.
I don't know if Picketty tries to make this distinction. The rest of the world fails badly, and indeed sometimes turns it upside down.
We should distinguish between Good Capital and Bad Capital.
Good Capital is the classic entrepreneur and his/her investors, putting their resources (money, time, effort, etc) into things which are in some way a net benefit. Note that that includes those who work in a productive field[1] and derive an income for their efforts, as well as those who invest their money.
Bad capital is the monopolisation or consumption of the commons: finite and indeed scarce resources. If you own property you can derive huge advantages from it, yet it's a zero-sum game: what I own, you are denied. Furthermore you expect the long-suffering taxpayer to support your monopoly, so If I and my very big mates decide to move in to your house, you'll turn to the police to restore your rights. In other words, people much poorer than you are required to pay to uphold your monopoly.
OK, having a house to live in is not a bad thing, but it's still less deserving of reward than Good Capital (the house being its own reward). But what about the property empire? That weekend home that stands empty most of the time, and could otherwise house some hard-pressed local family? Or to take another case, the destruction of the commons by burning of fossil fuels? These are Bad Capital, in that ownership of them confers no benefits but imposes actual costs on society.
Good capital should be encouraged. Bad capital should be taxed. All too often, our society does the exact opposite.
[1] Maybe even a more dubious field like writing provocative articles for some dodgy online publication.
It took me almost three months to read (I am not an economist, and needed some rest days).
The message that came over clearly (to me, at any rate) is that (a) the r > g thing will cause greater and greater inequality; (b) that Piketty offers a possible solution that seems to him the most effective; and (c) that his great fear is that if nothing is done, it will end in violent social upheaval, which is no-one's interest.
> Physicists do the same thing with gravity.
Save for the fact that, economic policies are man-made, while the laws of physics are not. While one can construct a set of economic policies benefiting the top 1% tax bracket, the laws of physics are immovable, and apply in the same way, and to the same exact extent, to everything and everyone.
Not to mention the fact that Economics isn't really a science. It predicts nothing and it is inherently incapable of creating repeatable experiments. The only thing it can somewhat do is explain what has already happened.
What would be interesting to see: if the top 1% tax bracket had the ability to cancel gravity at will, and only for themselves, would they do it?
This is very interesting indeed:
"Not to mention the fact that Economics isn't really a science. It predicts nothing "
Because what we've got here is economics (or economists) making a prediction.
We need money to fund government and we do want to have government. Thus we must levy taxes. We can do this in two ways:
1) We can tax land, consumption or incomes.
2) We can tax capital and or corporations.
The standard statement is that if we tax in manner 1) then the future will be richer than if we tax in manner 2).
I really am quite sure that that is a prediction.
> We need to tax corporations.
> I really am quite sure that that is a prediction.
In your world maybe it is a prediction. In the world of science that is not a prediction.
"Light in a vacuum will travel at a speed of exactly 299,792,458 meters per second" is a scientific prediction. I hope you understand the difference.
"Light in a vacuum will travel at a speed of exactly 299,792,458 meters per second" is a scientific prediction" . What? NO NO NO - that's what's called a FACT (y'know, provable, repeatable, evidence-based).
A prediction suggests something MAY happen in the future, and may or may not be based on evidence. Or chicken entrails. Whichever.
Any system the needs to monitor $PERSONS not $CORPS is doomed to fail.
Govts like control. There is a sane tax reform site here in the USA that makes the very good points that:
1) auditing businesses is easier than people
i )($CORPS << $PEOPLE).
ii) CORPS don't normally move.
2) illegal aliens (of which there are maybe 20,000,000?) usually don't pay any income taxes,
3) it can be made budget neutral
4) the IRS could be a lot smaller, and probably target the business that have the lawyers to put up a stiff defence, rather than the average citizen that doesn't.
The details are important, but it really needs discussing.
Put simply, Govts love complicated systems because WE pay for them. Once you realise you are paying for something, you should demand value for money. Taxes have been used for millenia to basically shift wealth around usually from the bottom up - the accumulators always exploit those at the bottom.
People make the world a better place. Businesses provide the mechanisms to generate the means of consumption. Not hard to see that they should administer the burden in accordance with their income... A person can be in debt, but still needs to eat. A business in debt, is just a messy piece of paper.
There is no magic bullet I am sure, but the more complex a system that scales with number of people, it is doomed to either failure or massive inefficiency.
I'm not at all sure which situation we have now...
P.
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>So, if we tax what people earn by investing, then we're going to get less investing and the future will be poorer
Want to know an easy way to also have less investing, get rid of the government. Look at Somalia. People in the west never seem to understand how much their supposed useless governments actually encourage business and investment (through rule of law, stability, hell even things like legally enforceable deeds not requiring you and buddies having the most AK47s to possess things). I guess the argument as usual is that people with lots of capital shouldn't be expected to be ones to keep the system that benefits them running.
None of the economists that were mentioned in the article gave historical examples to bolster their arguments. All simply claimed the the "science" of economics says 'so and so' is correct trust us! If their theories were any good they would be able to show where in the past such a plan failed.
An example for those of us in the US is the current question of a minimum wage hike. We have had many of those in the past so an objective analysis should be possible if economics was a real science, however none that I know of has come forth.
I have to take issue with a few points:
"The reason is that people investing in stuff – in factories, buildings, machinery, new products – is what makes next year and the following ones richer than this one."
I've heard this, some in the US (who want to give the wealthy tax breaks) going so far as to refer to them as "job creators". The problem? It's not happening! The wealthiest here are bankers or investers; the investers use high frequency stock trading systems, so the investment uses flaws in the trading platform to get them money, taking it away from everyone else. The investments they make do not result in helping the companies they invest in, or result in any extra factories, buildings, machinery, or new products. The banks can be as incompetent as they want, and will get bailed out using money taken from everyone else. A lot of the banks are not agressively making loans, so people sticking this money sitting in the bank, it's not going back out to provide business (or personal) loans either.
"But any money that you'd put away into savings (broadly defined, cash in the bank, a holiday home, stocks, a pension) would then be deducted from that income. And then you pay income tax (or more accurately, a “consumption tax”) on the amount of money that you've spent that year."
The trouble with this, those near the poverty line will be spending 100% of their income already; they'd be short if you want to throw heavier taxes on everything they are buying now. The very wealthy can spend even well under 1% to get buy if they wanted and save the rest tax-free. We've got here in the US 0.1% of the population holding onto 21.5% of the wealth, the bottom 90% hold onto 25.6%. The bottom 50% has 1.1%. You could take EVERYTHING the bottom 50% have as tax, and it'd amount to a 5% tax rate on the wealth of the top 0.1%. This simply doesn't seem fair to me.
And why are we even arguing "wealth" when talking about most of the US (world?) population?
Most Americans are living with no wealth other than those that have some assumed value in their personal real estate - and of course that is much less liquid than bank deposits or stocks/etc.
The last I heard was that most Americans actually have negative wealth. Their debts (homes/etc.) are more than any capital value.
Taxing any cash flow (income/sales/VAT) will burden those that don't have wealth to draw upon for necessary purchases.
I have worked in the Netherlands where they DO tax your savings (except if towards a pension)
so:
- If you have a bank account they ASSUME you get 4% return, and then want 30% of that (i.e 1.2%) EVEN if you don't get 1.2% interest on it.
- If you own a house outright they want to tax an hypothetical return that you would get by renting it out. Our tax advice was never to pay off a mortgage, since keeping one we would not own the house and could get mortgage relief on earnings or pensions
The game is totally different for corporations & multinationals.
I am just pointing out that some governments think otherwise about savings.
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