This Economist article points out some of the many small academic works that quibble over details with Piketty and Saez. But that's not anything new. The major points of their work, and especially of Piketty's monumental _Capital for the 21st century_ still stand: that capital is a positive feedback loop in a way that labor is not; that mid-20th-century laws that put brakes on this feedback loop have been removed; that a variety of data sources are confirming growing inequality and market capture particularly in the UK and US; and that the only reasonable solution for this is a tax on owned capital (not on income or cap gains) and the political chances of this happening are slim, etc.
And in the end this article is another one in their house style: not particularly informative in the details, they're not arguing openly or forcefully against Piketty, but instead bring up enough different nitpicky papers that it starts sowing doubt in the mind of a reader who hasn't actually read the book.
But then again The Economist has had it out for Piketty (and Saez) for a long time now, they very clearly hate Piketty's Capital and keep sniping at it, but can't stop themselves from bringing it up all the time. :)
At least they are very open about their biases: they promote a view that the solution to all ills is lower taxes and less regulation. However, Piketty's analysis and proposed solution directly contradicts that.
>that mid-20th-century laws that put brakes on this feedback loop have been removed;
I don't believe that the purpose of mid-20th-century laws was to promote equality. Things were more equal then because: a) World Wars I & II destroyed huge amounts of capital, and b) fighting wars requires lots of money which requires raising taxes on people who can pay, since borrowing cannot fully fund general wars.
Economics are cyclical in the sense that in normal times people with power and wealth accumulate more power and wealth. Then a general period of war/revolution/epidemic/famine breaks out which disrupts power relationships and consumes wealth. This is the pattern in Europe since the 1300s and it also applies to dynastic changes in other societies, such as China.
The two positions are not mutually exclusive: massive economic disruption allows laws intended to promote equality to suddenly succeed. Likely WWI & II made politically impossible things suddenly possible. For example, FDR's attempts at Keynesian intervention were either timid or blocked (like the National Recovery Act). During the war taxes could be used to massively raise employment (albeit making weapons) and prime the pumps for the post war era.
And it is difficult to identify the motivation behind every piece of legislation but the Roosevelt administration, Beveridge, LBJ and others often acted with the clear intent of creating greater equality. And, as I think you point out, did things that would have been impossible before the wars.
The huge reduction in the XXth century was due to many factors.
You start in the XIXth century with the development of Anarchism, which, to oversimplify, spawned various movements such as democratic socialism or communism on the political side, but also syndicalism (anarcho-syndicalism). The appearance of these forces started to change/influence things even before WWI with a few laws regulating working conditions (ex: 6 days week in 1906 in France voted after the Courrières mine disaster, or in Germany with a basic form of social security put in place in the 1880ies).
The two World Wars, and specially the various states (France, UK, Germany Russia) defaulting on their debts (either through inflation or complete un-acknowledgment of the debt) basically killed the rentiers (previously it was really nice for them, 5%, with an economic growth of 1 to 2% and practically not inflation).
The rise of the legitimacy of the State also helped a lot. This is due to the rise of Nationalism, the efforts of various states to build a common identity, and also the technological developments which permitted for a state to reach every corner of its population (transport and communication). This lead to the legitimacy of states to raise taxes which would have caused revolts previously.
WWI and specially WWII also shifted mentalities hugely, it's quite interesting that countries either monetarily or literally in ruins created Social Security systems.
Lastly the degree of technological development and its progressive deployment between 1820 and 1980 (in Europe and North America) hugely improved material condition for most people. The equation is a bit different when you are past 80% of the economy being subsistence farming.
Yes, some past events did change wealth distribution (the Plague for example), but a change on that scale is not something ever seen before in History, the XXth was pretty exceptional in that regard.
Between the Plague and WW I&II there was the Reformation and following religious wars until the Peace of Augsburg, The Thirty Years War, and the French Revolution/Napoleonic Wars. These were periods of major conflict that leveled European societies. Other wars were limited in geographic scope and/or in their objectives and means used.
That’s definitely not the case in Europe. Socialist movements were on the verge of power in many countries before WWII, and actually ruled or heavily conditioned the political life all over the continent until the end of the Cold War. The war effort had been dealt with by the early ‘50s at the latest; the following 40 years were dominated by the fight for social and economic equality.
The war “helped” only in the sense that it often acted as a selection for the political classes in the following 20 years or so, in some cases literally (Italy and France).
Socialism gained only after World War I disrupted incumbent powers and wealth. World Wars I and II really need to be considered as a unit. War continued into the '20s in Eastern Europe and then resumes in 1936 in Spain. See "War of the World" by Niall Ferguson.
Socialism was not that strong before WW I destroyed the power structures of the German, Russian, Austro-Hungarian, and Ottoman Empires. The resumption of war in World War II destroyed the Japanese and Chinese Empires and enervated the British and French sufficiently that the British and French Empires dissolved after the war.
> I don't believe that the purpose of mid-20th-century laws was to promote equality.
They were rather explicitly a response to the conditions of the lower classes in a capitalist (in the relatively pure sense that was dominant before the rise of the modern mixed economy through the policies under discussion) economy.
it seems odd to dismiss papers that challenges Piketty's and Saez's conclusions as nitpicky. in complex systems the devil is most often in the details. and not only that, but the sort of project that Piketty took on has many potential methodological pitfalls. so, small details could actually mean a given premise or conclusion is invalid. how would you suggest someone go about assessing whether a paper is nitpicky vs something that should be taken seriously?
note that i'm not taking a position on the conclusions of Piketty and Saez, just pointing out that re-stating their claims does not say anything about the papers that argue against them and calling such papers nitpicky seems like a particularly weak critique in this instance.
> note that i'm not taking a position on the conclusions of Piketty and Saez, just pointing out that re-stating their claims does not say anything about the papers that argue against them and calling such papers nitpicky seems like a particularly weak critique in this instance.
There's another angle: in a general-interest publication like the Economist, over-emphasizing nit-picky flaws that fail to effect the core arguments of a work can have the effect of giving general-interest readers the impression the work has more serious flaws than it actually has.
I'm fairly well acquainted with the literature on this topic, and I think the opposite; the fact that most people don't understand why these "nitpicks" actually seriously undermine the premise and totally butcher the prescriptive suggestions makes it easy for readers to dismiss the criticism, especially in a general-interest publication. While there's a contrary effect for the skimming reader who just accepts that P&S' work is flawed without understanding it, I think that tends to be a much lower risk with the Economist audience.
> I'm fairly well acquainted with the literature on this topic
How so, exactly?
> and I think the opposite; the fact that most people don't understand why these "nitpicks" actually seriously undermine the premise and totally butcher the prescriptive suggestions
Personally, I'm inclined to withhold judgement until the dust settles, yay or nay. The topic is technically difficult, and there are a lot of actors with political interests in the outcome of the discussion that muddy the waters.
My biggest problem with Piketty & Saez's work is that it made pretty major economic policy prescriptions based on a model that was so simplistic that the result was borderline click-bait. And the end-result is that assertions have entered the political discourse ("the middle class's standard of living has been stagnant since the 1970s") that just aren't true.
Let's unpack that. If you want to quantify the middle class's standard of living, you have to look at:
1) Post-tax income.
2) Prices/product quality/
3) Benefits/services.
4) The characteristics of the middle class (age, race, immigration status, household size, etc).
Piketty & Saez look at pre-tax income, apparently only because it's easy to assess via tax receipts. That overlooks data that's highly relevant to addressing deep and substantial policy questions. For example, consider what would happen if the U.S. and Mexico merged. Immediately afterward, median income in the U.S. would drop significantly. But nobody's standard of living would change. I.e. looking at the "median" fails to account for changes in who comprises the median. In the U.S. the immigrant share of the population has almost tripled from 1970 to 2017. Even if you've got a great economy that's good at integrating people and equalizing their incomes over time, it's probably not realistic to expect first generation immigrants as a group to have the same income as native born people. Looking at just pre-tax incomes completely masks that effect.
Similarly, marriage rates and household sizes are down significantly since 1970. Married couples make significantly more money than non-married individuals. The median marired couple in Michigan has an income of $80,000, which is 45% higher than the combined income of the median single woman and median single man: https://www.mlive.com/news/2017/09/michigans_median_income_i.... Looking at pre-tax household income overlooks that effect entirely.
There's a story in here somewhere. But Piketty and Saez's analysis doesn't actually tell us anything.
Okay, but it’s not quite true that ‘nobody’s standard of living would change.’
Cartels would be free to cross the border and operate in the U.S. (no way the U.S. could handle a sudden spike in 100,000+ Member sophisticated criminal operations), so their quality of life would increase.
The lower class in the U.S. would have even more wage competition, so theirs might decrease, etc.
Over the time period, married couples often had a single income.
Now working class married couples are just as likely to have a total of two to six jobs between them, but their real median income is still lower than it was when only one person was working.
There are no "nit picks" to debate. Refusing to acknowledge the destruction of financial stability for the working class and lower middle class in the US and certain other Western countries is simple denialism.
> Now working class married couples are just as likely to have a total of two to six jobs between them, but their real median income is still lower than it was when only one person was working
This is very much false. Look at the data. Real median income of all households had risen by a relatively small amount, because there are many more households today with one adult than in the past. However, real median income of households with two adults had rose very substantially. Similarly, real median household income of households with one adult also rose substantially. The relative stagnation of real median household income is mostly an artifact of changes in the composition of the index.
> because there are many more households today with one adult than in the past
Not only that, but we should remember that there are simply more _people_ globally. Using the U.S. as an example - when my dad was born in 1954, the U.S. population was HALF of what it is now. Should we assume that all markets and wage/labor share increase linearly AND directly (in time) with population? Certainly not.
Somewhat tangential, this population factor also plays a major role (though not the only one) for the reason city or near-city housing prices have skyrocketed - building construction just didn't keep up with the sheer population growth in many advanced economies, even more so in cities of advanced economies. This is why my buddy in Palo Alto is, for all intents and purposes, forced to live with two retirees and 4 other Millenial devs to afford rent.
The relationship is causal. Married couples are a household. Married couples consist of two people. Two people is more than one person. Two incomes is more than one income, etc. Even though all married households are not dual income, those that are shift up the mean for the rest. This is an artifact of measurement via 'household'.
You've missed rayiner's argument, which is that the household income is more than the sum of the median man and the median woman. That is: two married people make more than two single people.
There are a number of arguments you could make as to why (for example: married people tend older and so are farther in their careers), but it's not just "married households have two incomes and single households have one".
> There are a number of arguments you could make as to why (for example: married people tend older and so are farther in their careers), but it's not just "married households have two incomes and single households have one".
Sure I didn't say it was the only explanation. But it is a sufficient one to prove the relationship is causal.
Notice how your response is even less than a restatement of Piketty's thesis, just the observation that theoretically, it is possible that some papers have valid criticisms. Well yes, but which ones?
The article cites Smith, Zidar and Zwick who have tweaked Saez and Zucman's equations regarding top income growth. Assuming different weights and biases results in--surprise, slightly different outputs. But it's a matter of degree, not a reversal of direction. After a couple paragraphs of quibbling, the Economist admits as much with the conclusion: "Few dispute that wealth shares at the top have risen in America, nor that the increase is driven by fortunes at the very top, among people who really can be considered an elite. The question, instead, is by just how much."
Do you have any actual arguments or are you just trying to sow FUD? Cause you sound exactly like a concern troll. Not providing any substantial arguments against Piketty, just vaguely suggesting that there are problems with his argument, then changing the subject to what’s nitpicky or not..
Give us a concrete argument, and we can discuss if it’s nitpicky or not. What you are doing is leading people into the weeds, which only helps the people making a profit of the positive feedback loop you do not seem to want to discuss. I don’t think that’s your intention, but it is the result..
Aren’t we discussing an article which actually lays out these arguments, and references the papers with more detail? At least, I thought that’s what we were doing. Under those circumstances it seems odd to complain about a lack of such arguments having been presented.
in complex systems the devil is most often in the details
The devil is sometimes in the details, but it's not in all the details. The sun is an incredibly complex system. But you could tweak an incredibly number of small variables and yield very little noticable change. An oncoming tsunami is an incredibly complex system, but the devil is in the overall brunt of the phenomenon.
It's a valid criticism to say an argument doesn't get at the meat but merely picks at the scraps. It's easy to frame such nitpicking in a misleading way -- by pointing out so many details that are not quite right you can sow doubt in the overall conclusion. And that's the accusation that's being made about this Economist article.
> This Economist article points out some of the many small academic works that quibble over details with Piketty and Saez [...] that capital is a positive feedback loop in a way that labor is not
Well the article mentions that:
> Matthew Rognlie, now of Northwestern University, argued that the rise in America’s capital share was accounted for by growing returns to housing, not by the shares and bonds which are held disproportionately by the top 1% of American households.
So it seems that housing is really the positive feedback circuit.
Yeah the most succinct criticism of Piketty is simple: The gains in r > g are almost exclusively down to housing, not other sources, and you can fix the housing problem without touching (and potentially cocking up) the rest of the economy if you wanted to.
Instead, people want to take Piketty's conclusion, not look at where the r > g comes from, and then go on to fuss about with other things (like forms of wealth distribution, taxes, etc), instead of directly addressing the one thing that causes most of the r > g, which is housing, which does not need massive economic intervention to solve, but something entirely different (relaxing of building laws, etc).
> which does not need massive economic intervention to solve, but something entirely different (relaxing of building laws, etc).
Nitpick: you're probably thinking of directly intervening with the economy through regulations and subsidies, but isn't disrupting the housing market technically going to be a massive economic intervention in practice? As in, kind of by definition?
Also, I'm not sure if it's actually that easy to change the laws surrounding housing in such a way that pushes back against wealth accumulation.
Well, I agree on both points, but "We should tax X [and maybe redistribute Y]" is very different from "We should de-regulate or fundamentally change Z", is all.
It's hard to actually address Piketty's inequality at all if people think it spawns from something fundamentally different from land/real estate appreciation.
> I'm not sure if it's actually that easy to change the laws surrounding housing
Totally agree, but I don't mean to make any claims about how hard it would be, only that it would actually address the thing in question, whereas other interventions would not.
Couldn't we address the real estate problem by having (more) property taxes? I wonder how much impact prop 13 alone had on the problem (I also wonder how the US analysis would look with California subtracted)
Of course such taxes wouldn't automatically create housing, but it definitely disincentivizes hoarding it, and allows the state to capture more of the accrued wealth to redistribute it. It makes real estate look like a less enticing holding and would make people less entrenched in defending its value, etc.
Property taxes are higher on more developed property. In general, when you tax something more you get less of it. There might be exceptions, but wouldn't a more credible plan be to relax some of the zoning and regulation that are widely acknowledged to deter housing construction?
I suspect the answer is that there is no "the" positive feedback circuit as not only can things get messed up in many ways interactions between components can make the issue that none involved intended. A simpler comical example is medical marijuana in California.
* Federal legislature dogmatically denies a medical usage.
* State approves it for medicinal use.
* Federal regulators threatens to arrest any doctor perscribing it.
* Intended medical gatekeeping loses power
Neither party wanted that laxer level of enforcement (regardless of outcome) but together they did so.
Besides zoning laws and building codes, dodd-frank and similar financial regulation has made speculative building of single family homes nearly impossible, if you are not 100% self-financing.
Which itself is a capital feedback loop which requires a not insignificant minimum outlay to enter the market.
Basically, the government said loans are too risky to give to builders, except to build the things the government wants.
Longer version: Many people were abusing interest-only loans and similar financing. It was blamed somewhat deservingly for the 2008 crash, as banks had incentives to sell as much financing as possible and then sell-off the loans in packages to others, offloading the risk. Repackage, resell, repeat. Eventually crash.
Without getting any deeper into the politics of that, Dodd-Frank was the regulation heavy government response, part of which redefines risk levels of loans, making financing, in general, a lot harder and more expensive to get. Simultaneously, it enacted government guaranteed loan programs for lenders and builders that meet certain criteria.
Keep in mind, there was a large army of homebuilders that besides facing a recession, suddenly couldn't sufficiently finance their main product via banks, and needed to find a way to stay in a business that's high-risk, high-capital, slow-cashflow, and low margin.
The only government loan programs that allowed similar sized financing to these builders all basically require some sort of public housing participation, the most profitable and easiest of which to qualify for is mid to large scale apartment complexes that would be contractually obligated to accept tenants receiving public assistance from HUD sponsored / affiliated programs. Some programs are available for mixed use or similar developments, usually with the involvement of local government controlled block grants.
But this has left a sizable gap between small business residential builders and the larger scale required to take on government sponsored projects.
The exceptions to this are generally contractors that have their own sources of capital, or builders that were already big enough to have existing appropriately sized collateral. But it's very applicable, in the context of barriers to business growth, especially capital.
When you pass an apartment construction site, start paying attention to how many of them have signs that include a HUD logo. It's a substantial percentage.
Property taxes are not wealth taxes, they are consumption taxes.
You can easily tell this because a person who owns a home outright pays the same tax as someone who owns a similar home but has a large mortgage. These two people have different levels of wealth but pay the same tax. This is because their consumption is the same.
A property tax takes effect without sales occurring, without the property being used, etc. There is no act of consumption to tax, other than simply existing. And before anyone argues that the use of the land is the consumption, that would only make sense if the value of the house wasn't taken into account as part of the property tax.
If property taxes were only levied at the time of sale (e.g. stamp duty in Australia), then it would be fair to call it a consumption tax.
It's not exactly the same as a sales tax that is paid all at once, but it's basically the same as the size of the tax scales with the size of the consumption rather than the size of one's wealth.
No. And if you buy an apple pie, you pay the sales tax on it, even if you give it to your kids to eat. And the sales tax is based on the price of the apple pie, not how many apples it contains.
It is still a consumption tax. If you rent the house out to others, presumably you'll pass on the consumption tax (or not, it doesn't matter).
Say you and I each buy a house. Yours is new construction and cost $1mm, mine was built in 1970, never remodeled, and is perhaps located somewhere more expensive and also cost $1mm. Common scenario in the SFBA.
Is one year of your consumption equivalent to one year of my consumption? Like a car, the longer you use it the higher the likelihood that something expensive goes wrong. But unlike a car, our homes are probably appreciating at close to the same rate.
That's a circular explanation, but maybe I'm reading it that way because we aren't aligned on what 'consumption' means. For a durable good like a house or a couch I think it would be something like expected service life / interval * over-or-underuse multiplier.
The interval technique makes sense to me on goods that are used over time or taxed over time. You can pay for a house all at once, and if you were only paying property tax once I think I would agree with you that the tax is consumption tax. Yet property taxes are annual, so in order for property tax to be a consumption tax we would have to enumerate how much consumption is occurring during that year.
Consider something simpler, like a sofa. We both buy the same sofa with a service life of 10 years. Did we consume the sofa when we bought it? Or do we consume it over its useful life? If I jump on the sofa daily and it lasts for 1 year, I've consumed it in a year. If you barely sit on it and it lasts you 20 years, you've consumed it over 20 years.
Does that make sense? How are you defining consumption?
I believe that in most jurisdictions, the "guts" of property tax millage formulas is based on a 10-year interval (or maybe more accurately, 1/10 of the assessed value). However, that's always seemed arbitrary to me, as: 1) it's never "paid-off" and 2) millage rates are set in conjunction with this known value.
So while it may not be a satisfying answer, in my experience, self-circular is just sort of the way it is.
Also, the consumed / depreciated value comparison doesn't sit right with me, since for business expenses (tax write-off purposes), it's based on zero value at end of life. Any previously depreciated value recovered at sale has to be (re)taxed; you only get to ultimately deduct true depreciated value, albeit (re-)payment is delayed to year of sale.
Regardless, real property (non-movable) is rarely disposed of for zero value, so "depreciated" value isn't a good estimate for "consumed " value.
Property taxes are neither wealth or consumption taxes. Those are not the only two options.
You could just as easily charge the mortgage holder the property tax, and that mortgage holder will then charge the that amount as an extra fee on the mortgage. What does that do to your argument?
Seem to me Property tax is basically a toll. Just like you pay a toll to use a road, you pay a toll to use a house.
The wealth difference is not as great as it seems, it's just the interest on the mortgage minus tax incentives and the opportunity cost of paying it off.
What if you're into houses, you don't have a car, don't have a computer, you spend all your money on a nice house. Why should you pay more local taxes than people who pay one-time taxes on stuff (computers, music, clothing#?
If we believe rich people should pay more taxes (higher percentage), then we have already established a system for this. Why not making local taxes a fraction of income taxes?
Why are lower class people who's only capital is their house taxed on their capital, while rich people who own bonds and stock not get taxed on THEIR capital?
True. But housing is also tax-privileged in other ways. Most notable is the mortgage interest on federal income tax.
More subtle is the fact that the value of the imputed rent from owning your own home is not taxed. I.e. if you rent your home to someone else, you pay income tax on the rent you collect. But if you "rent to yourself" by owning your own home, you don't pay tax on this implicit form of income.
If I own my own house, I do so because I already paid for it. That cost me more at that time than the person who's renting pays in rent. So why should my owning my house be considered "implicit income" because I don't have to pay rent? It should be considered money I've prepaid.
And then there are similar situations. If I've paid off my car, is it implicit income because I don't have a car payment? If I don't own a cell phone, do I have implicit income on the amount of a cell plan?
For that matter, the homeless have lots of implicit income. That's not a useful way of analyzing their circumstances, though.
I feel like the "implicit income" idea has an unstated assumption: The "normal" situation is for you to be paying out every dime you receive, and if you don't, that part you don't spend is "income". I absolutely reject that view. The world is not entitled to my spending.
I don't think that's the assumption that it's based on. It's more like, when you own an asset, you get to benefit from the consumption of that asset.
You did not "prepay" for the consumption of that asset. You paid to own the asset, which entitles you to consume it while you own it, but the value you get from consuming it is not deducted from the resale value of the asset. Example: you buy a house in 2010 for $500,000 that would cost you $4,000 a month to rent. In 2012 you sell it for $500,000. During those two years you received $96,000 of value from owning the house. You are now $96,000 richer than if you had rented the house instead of buying it (minus expenses associated with the house, and opportunity costs of having your money tied up in the house).
It's true that the same reasoning applies to other assets. I would assume, but don't know, that the reason people don't talk about imputed income for other assets is that the amounts are just much smaller in most cases.
Well, dcolkitt was talking about imputed income in the context of tax advantages. I assumed (perhaps wrongly) that the subtext was that people who own houses should be taxed on the "imputed income" as if it were real income. That raised my hackles - perhaps wrongly.
Still... there's something funny in the "imputed income" accounting. Let's say I buy a house for $500,000. I live in it. I don't pay rent, though the house would rent for $4000/month.
Or, let's say I buy the same house, but don't live in it. I live somewhere else instead, paying $4000/month in rent. But I also rent out the house I own, receiving $4000/month in rent for that house. My net is $0... except that I probably pay taxes on the $4000/month I receive. But if dcolkitt's point is not that should have to pay taxes on the "imputed income" of owning my house, then the "imputed income" is exactly offset by the "imputed foregone income" - I could have rented out the house, but I didn't.
I think your example actually helps make the case for imputed income, because whether you happen to live in the same house you own has huge tax consequences, which doesn't seem optimal. Without imputed income you are incentivized to live in the house that you own, even if it is worth less to you than what you could rent it for, because that way you don't have to pay taxes on that consumption value.
If you had to pay taxes on the imputed $4k a month then you would prefer to rent it out to someone who actually values it at $4k a month, and move yourself to a house that is better suited to you.
Right. But then you've changed the default from "not having to pay tax" to "having to pay tax". That is, far more people live in the house they own than rent out the one house they own and live somewhere else. Right now the 5% (say) who rent out the house they own get taxed, the 95% who live in the house they own don't. The change you propose would result in the 95% now also being taxed. That's fair, I suppose, but it's also the most drastic change you could make to create fairness. You could, for example, offer the 5% that the rent they pay could offset their rental income for tax purposes.
So why change it in the direction you propose? We're back at my initial complaint: This turns into "Saving money rather than spending it deprives us of the tax we would have received, so we'll tax your saving as if you had spent it. Don't own a cell phone? Pay us the taxes that would have been on your monthly bill anyway. Don't own a car? Pay us the registration fee anyway. Walk to work? Pay us the gasoline tax anyway. Don't drink alcohol? Pay us the taxes as if you did. Don't smoke? Pay us the taxes on the cigarettes that you could have smoked. Don't visit national parks? Pay us the entry fees anyway."
Do you see that that's insane? But if it's insane, why isn't "imputed rent" as something taxable insane?
It's insane, but we're basically already there, on some levels.
Politicians have been using that method of accounting for years, when describing taxpayer savings.
And it's not quite the same, but the method of tabulating the number of deaths in Puerto Rico after Maria also comes to mind. No "receipts", just statistics of what the numbers should be.
You also don’t get to claim 3.6% deduction of basis of the improvements (everything but the land) plus other rental related expenses if you live in it which you would if you rented it out. This has the effect of significantly reducing the tax owed on rented property throughout the course of ownership.
Similarly, rented property has an unlimited deduction on mortgage interest rather than the capped deduction available for owner-occupied housing.
Except in California we had proposition 13, so that property taxes are severely hamstrung; I wonder how much impact that alone has on the overall analysis given the size of California as part of the US economy.
I really think we should bring them back but it's anathema. The usual argument has something to do with a little grandma living on a fixed income who suddenly can't afford taxes on the home she's owned for 40 years. (And not, say, a landlord who owns dozens of buildings, though it benefits him far more)
I'd have to do the math but to me it seems like ridiculous housing prices make up for prop 13, while also pushing the tax burden to those best equipped to handle it (people in the position to afford to buy expensive houses)
So while grandma's only paying taxes on a tax-appraised value of $200k for a home worth $1mm on the open market, people who buy today are paying tax on $1mm+ for homes that "should be" (or would be in other states) worth $200k.
Not really. See some of the charts here [1]. Key quotes to show the effect:
"The year before Proposition 13 passed, property taxes comprised over 90 percent of cities’ and counties’ local tax revenue. Today, that share is less than two–thirds."
"Cities’ and counties’ tax revenue per person has declined since Proposition 13. However, looking across all California local governments’ per–person revenue—excluding state and federal funds—revenues increased 36 percent since Proposition 13. In comparison, similar per–person revenues for local governments across the country increased by almost 70 percent over the same period."
Basically the state had to struggle to make up the tax revenue difference via other fees and assessments, and it never caught up to where it was before or to where it is in other states without such a measure.
And yet many region have taxe based on the value of the house, so a tax on capital, a tax on wealth. Often the only capital middle and lower class have access to.
A key thing about the mid-century is that the actual manufacturing capabilities of most of the world (with the sole exception of the US basically) were completed destroyed by WWII. Britain and Germany were devastated. This means that in the 1950's the US was essentially acting as the sole industrial power at full strength serving the rest of the world. We were playing worldwide economics on easy mode: as if we were the only ones that had modern technology and fully functioning infrastructure, while all other countries wanted our goods. This is why it is bizarre to draw any conclusions about taxes or any other economic principles from this very unique period of time: you could probably put in place just about any law and still have the United States be ridiculously successful. We are now actually competing with other parts of the world.
>We were playing worldwide economics on easy mode: as if we were the only ones that had modern technology and fully functioning infrastructure, while all other countries wanted our goods. This is why it is bizarre to draw any conclusions about taxes or any other economic principles from this very unique period of time: you could probably put in place just about any law and still have the United States be ridiculously successful.
IIRC Pickety made this exact point in his book Capital in the 21st Century. Looking back at that time period as something to emulate or get policy ideas from is misguided for this reason. Instead of thinking of it as "a time of enlightenment when the people fought the billionaires and achieved utopia" it would probably be better to think of it as "a historical aberration which will probably never happen again".
Agricultural efficiency, and food handling and storage are big cornerstones in this past century too. We were a world of frequent famine and hunger and now one of abject abundance.
If the capital returns 4% and is taxed at a 30% rate, you will have the same effect as if the capital is taxed at a rate of 1.15%.
I think the biggest injustice is that return of capital isn't taxed at the same rate as income from labor.
Someone who earns $100'000 from labor and $50'000 from return on capital should be taxed at the same rate as someone who earns 150'000 from labor.
> I think the biggest injustice is that return of capital isn't taxed at the same rate as income from labor.
Almost there. One step further and you’ll realize the root injustice is that rent is taxed less than either returns to capital or labor.
Compensation for labor and returns to productive risk bearing or entrepreneurship should not be taxed. Rent seeking, where profit is guaranteed disproportionate to investment of labor or capital should be taxed out of existence.
Before income tax, nobody had any idea about who was making what. Fast forward 100 years and we still have no idea about who holds how much capital. Even if you disagree on a universal wealth tax (just like we have for income) there is an argument to be made that it is important information to policymakers.
Other than that Piketty argues that larger wealth means larger returns (per unit capital) and that is a very strong argument against a flat capital gains tax.
Moreover I think wealth can be used in ways which don't necessarily produce an income: for influence, as collateral...
>>Before income tax, nobody had any idea about who was making what.
That's precisely why the income tax is socially harmful. It forces people to divulge intimate personal information to the state, under pain of imprisonment. It's nothing less than warrantless mass surveillance.
The government having this much information on people creates an information asymmetry in society that makes the state incomparably powerful relative to private citizens. This manifests as trends like the suburbs of Washington, DC being the wealthiest in the US, and seeing the most income growth in the US over the last 40 years.
> The government having this much information on people creates an information asymmetry in society that makes the state incomparably powerful relative to private citizens.
Government, in a democratic society, is simply the citizens wielding their power collectively. It cannot possibly be more powerful than the citizens it serves.
A democratic system of rules doesn't mean a democratic distribution of power. Rules rarely have their intended effect 100%.
In all democracies, elites form, which wield far more political power, and derive far more benefit from government, than voters.
Even in a perfectly democratic society, giving the majority, acting collectively through their government, so much power over individuals would be dangerous, because it would create enormous rent-seeking opportunities for those who wield the most influence over public opinion and because it would endanger persecuted minorities.
> Other than that Piketty argues that larger wealth means larger returns (per unit capital) and that is a very strong argument against a flat capital gains tax.
But someone who earns more will also have a higher marginal tax rate.
There is probably better risk tolerance once you have a net worth above e few months of expenses. But someone with $10M will be able to get the same risk adjusted return as someone who has a net worth of $100k.
> But someone who earns more will also have a higher marginal tax rate.
Not currently on capital
> But someone with $10M will be able to get the same risk adjusted return as someone who has a net worth of $100k.
That's exactly what Piketty has shown to be false. If you look at stuff like endowments and sovereign funds you'll see gains that are nowhere near what's possible even for funds that have $100M in capital.
There are economies of scale involved here, both in diversification and in management. Moreover some markets are not even available to investors who are not larger than a certain threshold.
I said in my comment that return on capital should be taxed the same as labor income.
> That's exactly what Piketty has shown to be false. If you look at stuff like endowments and sovereign funds you'll see gains that are nowhere near what's possible even for funds that have $100M in capital.
Do they really outperform a basic index fund strategy? Any data on this?
There isn't a market that offers better risk adjusted returns than than what is available with affordable index funds.
The only exception are probably the index funds of Dimensional Fund Advisors. They are only available to investors that have an approved financial advisor.
> Do they really outperform a basic index fund strategy? Any data on this?
Yeah, Piketty's book. But of course the Norwegian government and Harvard administrators are just a bunch of idiots, they have billions of dollars to invest and didn't think of a basic index fund! Now they can save a lot of money firing whoever was managing it for them!
Most fund managers are very intelligent people, yet most of them fail to outperform a basic index fund.
The Harvard endowement underperformed the sp500 by more than 3% annually for the last 10 years. So instead of a plus of 220% it produced a plus of about 130% over the same period.
There is lots of data that shows that passive strategies outperform hedge fund and these university funds.
It might be sound strategy for an endowment to give up upside in the most raging of bull markets that we’ve ever seen in exchange for lower drawdown in down markets. A low beta portfolio underperformed (by definition) in 2009-2019.
I’m a staunch proponent of passive index investing so I suspect we largely agree on philosophy, but the mere fact that someone underperformed in the somewhat historically anomalous market we’ve enjoyed for the last decade is not conclusive that they clowned it, IMO. If they outperformed 2005-2008 or outperform in the next bear market, that would be evidence again full clown performance.
That article states they outperformed when measured over a 10, 15, 20, and 25 year period and underperformed over a 5 year period. (See the table. The longer periods include the more recent periods meaning they had strong outperformance early that more than made up for the recent under.)
Is that evidence that they’re dramatically underperforming? It seems the story is mixed and you could argue either way depending on whether you think the last 5 years are more important than the prior 20 or not. (It might be, if you argue that something fundamental changed. That would fall into the “this time it’s different” which is generally falsified eventually.)
The endowements averaged the market over the last 25 years. There will always be some funds that will outperform the market. In the majority of the cases this will be luck. (Except for exposure to known risk factors like size or value)
Harvard is optimizing for a different objective than retail investors or even smaller endowments. It can afford to take less risk and get less return.
Lots of small colleges with 100MM endowments using a passive strategy will fail to survive the next deep recession. They need those returns to survive, so they have no choice but to accept the associated risk. But one deep down market without an associated counter cyclical uptick in enrollment numbers and they are dead. Ask any small private college CFO and they'll agree.
On the other hand, the public markets could lose all their value and Harvard would still be able to cover its operating expenses.
Harvard's goal is to survive for centuries. The goal of a college with a 100MM endowment is to make payroll during the next few school years.
Taxing capital incentivizes putting it to work. If you only tax gains then people can endlessly horde wealth. Taxing the wealth itself makes hording unappealing... I think.
> But hoarding wealth isn't a problem for inequality.
It absolutely can be, especially for wealth that is finite. (Like land for housing)
> Inflation is the process that incentivizes capital to be put to work.
Does it though? Inflation mostly just punishes labor alone, labor feels the effects of inflation far more severely than anyone else.
With enough capital (the amount anyone 'hoarding wealth' already has), the capital automatically buys itself out of any problem of inflation, because the returns to sit on that cash are routinely higher than inflation itself is.
Inflation can't currently incentivize capital to be put to work, because capital just sitting doing nothing already far out-earns any loss from inflation. And for inflation to be strong enough to actually incentivize capital to be used, you'd have to bump it to astronomical heights (like say, 15-25%), at which point you've completely obliterated all wage-earning people's lives.
This is why many well-respected people advocate for a wealth tax. In a perfect world, inflation would be exactly 0, and a strong punitive wealth tax would discourage greedy people from hoarding wealth.
The market already has a mechanism for incentivizing putting capital to work, though. If something is held off the market ("hoarded", in your terminology), it reduces supply, and the returns in that area go up, making it more attractive to do something with it.
For money-wealth, the outlook is even better. If Scrooge McDuck, puts all his money into his basement so he can swim in them, he has removed those from the supply and increases the value of everyone else's money while he holds it off the market.
I'm not an expert, but what you describe as "capital sitting doing nothing" is, presumably, capital invested in some kind of market index? In which case it's by definition not "sitting doing nothing", right?
Unless you were referring to capital in the sense of owned non-market property that appreciates with time? Land/property values are a major topic of discussion throughout this thread for sure.
Just trying to make sure I'm following the thread of the argument here.
> With enough capital (the amount anyone 'hoarding wealth' already has), the capital automatically buys itself out of any problem of inflation, because the returns to sit on that cash are routinely higher than inflation itself is.
I remember the late 1970s, when inflation was 14%, and sitting on cash paid 5%. There have been times when your "just sit on cash" approach meant losing your shirt.
But taxing capital is not possible and probably a bad idea. This will require you to list everything you own to the government who will then evaluate the worth of it. I really can't think of much else that's a worse violation of privacy. It will also make owning something expensive a bad idea, because you'll have to pay to own it. In fact, can you even say that you own it at that point? Aren't you basically renting it from the government instead? Thinking more about it, I'm surprised that totalitarian systems didn't have a wealth tax.
Come off it, it’s not like this isn’t a staple of political economy since the 1800s or so.
A very charitable description of Piketty’s big ted talk of a book is that it suffers from the same flaws of classics like “A monetary history of the United States” by Friedman and Schwartz: it uses empirics as gargoyles, not as structural beams. It seems to be a great argument that’s backed by numbers — but whatever you make of it, the numbers are a distraction.
The cringe of it is that Piketty’s numbers are also fraudulent, as extensively documented by dozens upon dozens of important scholars.
> ... as extensively documented by dozens upon dozens of important scholars.
Do tell. In particular, give some references to those who you are talking about rather than leaving us to do our own searches (and then guessing which results are those you are talking about).
And also tell who we should believe the criticisms of these "important scholars" and not the criticisms of the criticisms.
> they promote a view that the solution to all ills is lower taxes and less regulation.
I’ve read the Economist for a long time and have never gotten that impression. That’s more the Republican Party platform, who they really don’t support. In the articles, they explicitly argue for more regulation in the form of enhanced anti-trust laws and enforcement.
> the only reasonable solution for this is a tax on owned capital (not on income or cap gains) and the political chances of this happening are slim
Seems to be a cornerstone policy of multiple presidential candidates in the US at the moment. We have it in the Netherlands. I don't think it's that unlikely.
Not sure how much it helps with inequality in the Netherlands though. If anything I think it stimulates people and businesses to invest, which either means the wealthy people make more money, or they lose it. At the most it creates jobs. People on low salaries aren't really benefited.
In the Netherlands (where I currently reside as well) I think this tax can easily be avoided by placing your assets in some sort of shell company. When the startup I used to work for IPO'd I was not surprised to find that most of the important stockholders were using such companies (presumably) to avoid being taxed on their hundreds of millions/billions of euros.
I know that the Belastingdienst is going after people pretty hard for tax avoidance/evasion at the moment. Things are changing quite quickly in this area in the EU, and NL is no exception. What worked well for people 5 years ago could well result in a pretty full on audit now leading to nasty bills to pay back owed taxes.
The only problem is companies like Amazon, Google etc. are still getting away with paying 0 taxes everywhere... easier for the Belastingdienst to take on SME's first I guess. :/
As soon as you get it out of there either as income (at least some part is required) or as dividend and you start paying taxes. Not before so this is allowed and legal (and smart). They are about 25-30% in total well below the top tier of about 52% in case of income tax.
Note that the Dutch wealth tax replaces their capital gains tax. It’s a tax on the assumed returns on capital assets. (Of course unlike a capital gains tax the wealth tax reaches unrealized gains. But the rate is also lower than a capital gains tax would be. It’s possible to come out ahead compared to a capital gains tax depending on your situation.)
Yeah. IIRC the "assumed returns" is finally going to be changed now so it's more in line with actual returns outside of more risky single stock investments (or other risky ventures)
Not to mention that Piketty has a relatively soft list of proposals and research compared to the 'old guard' of critics of capital. The Economist's arguments against Piketty are only there because he's the most radical economist on capital's horizon. By presenting Piketty as radical on the issue of inequality, the arguments from modern, radical economists on every other aspect of capital are shut out. For example, beyond Piketty we have John Roemer, beyond Roemer we have Veneziani & Yoshihara, beyond them we have Fred Moseley, Andrew Kliman, Sekine, Itoh...
In other words, Piketty gets so much criticism because he's the least radical of a bunch of radical economists, and because of that, he hasn't left capital's horizon.
Would you happen to have some suggestions on where to start further reading of radical economics? I'm halfway through "Doughnut Economics" right now, but it's a bit simple -- I was looking for something more challenging.
J.E. Roemer's classic 1982 book[0] on exploitation from a game-theoretic standpoint is generally the beginning of the post-Marxian era of radical economics. However, his is not the only approach, now there are theories which attempt to reformulate the Marxist concept into a theory of unequal exchange of labour. Roberto Veneziani[1] has a great many papers on this theory of exploitation, expressed mathematically, in particular, two principles: profit-exploitation correspondance principle, and the class-exploitation correspondance principle. Andrew Kliman[2] and Fred Moseley[3] are two economists with very contrasting approaches to Marx's labour theory of value and its application today, as well as other "problems" in Marx (such as the transformation problem). Moseley also criticizes some of Piketty's methods[4]. Kliman and Patrick Murray agree that, providing the labour theory of value is true, then we can deduce Marxian exploitation - however their approach is less economic and more philosophical. This is because Murray objects to the use of neoclassical models and methods, with good reason[5]. Vrousalis[6] takes a non-Marxian approach to dominatiton and exploitation under capitalism.
For the latest stuff in the field, check out the main journals[7][8] and Brill's Historical Materialism book series, and this one[9] in particular.
I had a very different takeaway from Piketty's book. Namely, that inflation (primarily hyper inflation) has been the only force to reduce income inequality. For example, Jeff Bezos is much more affected than I am if the government decides to give everyone a $1B. Thus, governments looking to end income inequality shouldn't be afraid of high inflation.
Bezos is basically entirely invested in stocks (Amazon). His exposure to monetary inflation is roughly 0. If the government hands out 1bn to everyone that'll happen at the expense of cash / bond holders. Prices from Amazon services will just adjust accordingly to the inflation spike along with their profit margins.
In the US at least they're still still taxed for capital gains, but the capital gains tax doesn't account for inflation. So if there's 2% inflation that causes the value of your stocks to rise by 2%, that is taxed as a capital gain, so in real teams you have less money afterwards. Non-inflation-adjusted capital gains tax is essentially a wealth tax.
Fair point. But assumes Bezos doesn't loophole capital gains taxes to 0, which I could be wrong about but i feel like he does. That effect will also be maxed out to cap gains rates.
If my wealth is in anything beyond cash -- say I own a huge hotel chain, or the largest retail company in the country -- how is inflation a tax on my wealth? My businesses will still be generating the same proportion of the economy as they were before.
If inflation causes the nominal value of your hotel chain to increase 2%, you have to pay capital gains tax on this nominal gain (at least in countries where capital gains tax is not adjusted for inflation), leaving you with less real value afterwards.
Only if you sell. And if you're invested in a company that is only growing at the rate of inflation then I'd imagine they are paying a decent dividend which is very possibly a qualified dividend that has no tax associated with it. Reinvesting that into the company creates a compound effect far greater than the inflation rate and will be taxed at the LTCG rate one day when divested from.
That only matters if you realize the gains. If you own a business like a hotel, car wash, etc. and intend to keep it, you are not affected by value increases of the business itself. In fact, for many privately held businesses, it is not even known what the value of the business is because there is no reason to calculate it.
I'm not even sure how accurately some small businesses can be valued. A local cupcake lady or artist might run a business that makes decent money, but all the income and value is derived from their unique style. Remove them and the business is almost worthless.
If a tax on capital is instituted are there mechanisms to value such cases?
With the current wealth-tax proposals by Warren and Sanders. the owner first of all would probably owe zero wealth tax unless she was worth more than $32 million, or $50 million for Warren. I doubt any local cupcake businesses are worth anywhere close to that much.
Second, an actual business of that size would probably be owned by some other corporate entity created for that purpose, not an individual, and that entity would be paying its own taxes.
Finally, Warren and Sanders both plan on beefing up the IRS to answer these kinds of questions, which will certainly be thorny for some kinds of assets.
Only for wealth stored as currency. For debts, inflation effectively transfers money from lenders to borrowers by reducing the value of debts. Other things, for example stocks and real estate, are only nominally affected by inflation.
Inflation comes in different flavors. If all you do is print and hand out 1bn to each citizen, they'll just be able to outspend other dollar holders in the world. Prices will adjust, but the amount of real goods in the world per capita is unchanged. You're just reallocating who gets what amongst monetary savers. If your wealth is in the actual stuff people end up buying, this is very much a side concern for you. Bezos is in that camp.
Is there any aggregate data on how the money printed by the U.S. government has been distributed historically? Inflation only helps the average person if they get a slice of the money printed, and I have a feeling the vast majority of it hasn't been going directly to John and Jane Doe.
> This Economist article points out some of the many small academic works that quibble over details with Piketty and Saez. But that's not anything new
These are not nitpicks. What you measure drastically changes the results. Piketty and Saez presented their own revision to their data in 2018 that shows starkly different results than the 2013 data everyone cites: http://gabriel-zucman.eu/files/PSZ2018QJE.pdf
For example figure 3 shows that when you account for tax transfers, the bottom 50%’s share of income is only a few points lower than in 1960, though significantly lower than the peak of about 25% in 1970. It also shows that, contrary to common assertions, the bottom 50% income has grown consistently since 1960 adjusted for inflation. Figure 1 shows that the labor share of income has been flat since 1940 when you account for benefits. (Put another way, capital’s share of income is flat.)
The data about returns to capital are particularly important. Supporters of wealth taxes and capital taxes tend to point to rising inequality as the justification for such approaches. But if the returns to capital aren’t increasing as a fraction of the economy, that argument gets harder. Of course there may be other arguments in favor of such taxes, but those seem less well developed.
The point the Economist article makes well is that inequality is hard to measure, and the simple definition used by Piketty and Saez’s initial analysis is inadequate. For example, there is a whole school of libertarian thought that, even if you believe the government should be in the business of redistribution, the best approach is to maximize growth through a free, deregulated economy and then tax individual incomes to provide generous welfare benefits. Most of the developed world has moved in that direction over the last 30 years. Under Piketty and Saez’s 2013 model, which excludes tax transfers, you can’t accurately describe inequality in a country that uses such a model.
Moreover, there are additional analyses showing that, when you look at consumption rather than income (which accounts for both tax transfers and falling prices from globalization) inequality is basically unchanged since the 1970s: https://voxeu.org/article/consumption-and-income-inequality-.... That is to say, the bottom 10% get to consume about the same fraction of total production as they did half a century ago. Of course there are downsides to consumption measures too, insofar as the data is sparser for incomes at the top. (The measure above includes money spent on mortgages for mansions, but not private yachts, for example.)
But just because something is easy to measure (pre-tax income) doesn’t mean it’s the right thing to measure!
While I don't have the time to read the PSZ paper right now, I'll just point out that their introduction contradicts your post, that the results are starkly different. I'll just quote verbatim from p 557:
> Even after taxes and transfers, there has been close to zero growth for working-age adults in the bottom 50% of the distribution since 1980. The aggregate flow of individualized government transfers has increased,but these transfers are largely targeted to the elderly and the middle-class (individuals above the median and below the 90th percentile). Transfers that go to the bottom 50% of earners havenot been large enough to lift their incomes significantly."
> "... our data show a sharp divergence in the growth experienced by the bottom 50% versus the rest of the economy. The average pretax income of the bottom 50% of adults has stagnated at about $16,000 per adult (in constant 2014 dollars ...) . As a result, the bottom 50% income share has collapsed from about 20% in 1980 to 12% in 2014. In the meantime, the average pretax income of top 1% adults rose from $420,000 to about $1.3 million, and their income share increased from about 12% in the early 1980s to 20% in 2014. The two groups have essentially switched their income shares, with eight points of national income transferred from the bottom 50% to the top 1%. The top 1% income share is now almost twice as large as the bottom 50% share, a group that is by definition 50 times more numerous. In 1980, top 1% adults earned on average 27 times more than bottom 50% adults before tax, while they earn 81 times more today. Second, government redistribution has offset only a smallfraction of the increase in pretax inequality."
INHO we should be looking much more at consumption and a lot less at income or (worst of all) assets.
In what way does it matter that Warren Buffet has X times my income and Y times my assets, if he drives the same kind of car and lives in about the same kind of house? It means he has more power than me in a capitalistic system, sure. But is that really so wrong or unfair? I think it’s actually kind of a good thing: most people would just consume like crazy and ruin the planet if they came into that kind of money...
> INHO we should be looking much more at consumption and a lot less at income or (worst of all) assets.
At what age can you retire?
Can you afford education for yourself and your children? Can you afford the home in the district with the good schools? How much debt will you and your children be in after finishing college?
What are the odds you go bankrupt from a medical incident, even with "insurance"?
"Consumption" of cars, electronics, restaurant meals, etc. are not the really significant economic expenditures in a persons life. It's those big items that create debt slaves and crippling economic anxiety.
> Can you afford the home in the district with the good schools?
Let me pick on that one in particular. Let's suppose that we redistributed all the assets in the country evenly (never mind how). Doing so did not increase the number of homes in districts with good schools. So not everyone can have them, no matter how much money everyone has. Who's going to get those houses? Not everyone who has school-aged kids.
Or take college. Redistribute all the money, and it won't change the number of college classrooms. Who's going to get to go? Not everyone.
Same with beach houses. There are more people who want beach houses than there are beach houses. Redistribute all assets evenly, and it may change who has the beach houses, but it won't change the fact that more people want them than have them.
If everyone had the same amount of money, these things would still be allocated on the basis of who's willing to pay the most for them - that is, who's willing to give up the most other things in order to get that thing.
Remove money entirely, and these things will still be allocated somehow - by who gets luckiest in the lottery, or who has the best political connections, for example. There is no system that magically makes there be as many beach houses as there are people who want them. So there will always be the problem of how scarce resources are allocated.
> If everyone had the same amount of money, these things would still be allocated on the basis of who's willing to pay the most for them - that is, who's willing to give up the most other things in order to get that thing.
Though that's arguably a better situation from the equality perspective. Right now we have people who are allocated everything they want and others who are allocated none of what they need. Taking redistribution to a monomaniacal extreme is probably a bad idea for well understood reasons, but that doesn't mean that redistribution doesn't have its place.
> I think it’s actually kind of a good thing: most people would just consume like crazy and ruin the planet if they came into that kind of money...
Crazy to think we might consume ourselves into fundamentally altering our ecosystem and causing mass migrations and death if we didn't have all of those rich guys around.
> It means [a billionaire] has more power than me in a capitalistic system, sure. But is that really so wrong or unfair?
Where does that leave democracy?
> I think it’s actually kind of a good thing: most people would just consume like crazy and ruin the planet if they came into that kind of money...
That bears a striking resemblance to some anti-democratic rhetoric I've seen. For instance, one of the rationales the CCP gives for the lack of multi-party democracy in China is that the Chinese people would use their political power irresponsibly, so it's better for everyone that the [insert positive adjectives here] party have a monopoly on political power.
I don’t believe that economic power is the same as coercive power. The former let’s you dangle a carrot in front of people. The latter let’s you threaten to kill them. There’s a difference, and democracy (with constitutional restrictions) should IMHO primarily be a way to distribute coercive power.
Economic power can do much more than dangle a carrot. It can buy coercive power. It can also buy propaganda machines to fool people into believing what economic power needs them to believe. Economic power also gets to decide which projects are worth pursuing in our society.
> if he drives the same kind of car and lives in about the same kind of house?
Most wealthy people don't behave like Warren Buffet.
> It means he has more power than me in a capitalistic system
Which allows him to shape the system however he chooses, and as is the case this is usually in favor of the power holder.
> But is that really so wrong or unfair? I think it’s actually kind of a good thing: most people would just consume like crazy and ruin the planet if they came into that kind of money...
In other words, poor people can't be trusted with money so they should remain poor and deprived?
If you honestly believe that people can't be trusted with their money then why not have a system where people aren't as reliant on money? (e.g. free health care, free basic housing, free public transportation) In such a system you don't have to worry about people abusing wealth they can't control.
> At least they are very open about their biases: they promote a view that the solution to all ills is lower taxes and less regulation.
That's a (common) caricature of The Economist's views. Their actual policy proposals are quite a bit more nuanced than that, and often call for taxes and regulation.
You are asserting that there is broad academic agreement that Piketty's major points still stand, but that is far from true -- in fact they never stood under serious scrutiny at all. Outside of simply describing tautalogies, his major point is that inequality is rising because the rate of return on capital is exceeding the economy's growth rate, from which he makes a logical leap that inequality will increase inexorably without intervention. This point fails to consider that people spend some (and sometimes a lot) of their earnings from capital, which dissipates their wealth back into the economy. Historical data show that wealth does not end up growing faster than income because of the effect of spending the wealth (you have to spend basically none of it to maintain a growth rate that is greater than GDP). A good number of serious academics have raised this and other points. His book is best understood as a popular argument for specific political ends, and since it gives a veneer of academic seriousness to those ends it has been popular.
> and that the only reasonable solution for this is a tax on owned capital (not on income or cap gains) and the political chances of this happening are slim, etc.
I think another reasonable solution, and one which actually has a chance of happening, is a land value tax
In all seriousness, that is precisely what government is intended to do: take a portion of the private surplus and apply it to the public interest, thus increasing total productivity.
This requires a lot of the investment environment that isn't a given. Capital loses its feedback loop if inflation outpaces economic growth or if the quality of investment opportunities declines significantly.
There is no given that just having $10 million dollars means it will be easy to outpace inflation and not end up with less.
Professional labor can have a positive feedback loop, like engineering, law, medicine, even bureaucrats. you can get more efficient with more experience and usually can make more money. Less risky then capital investment. Also small business is a mix of labor and capital.
I don’t really understand why people say a tax on owned capital is so far fetched when we are all okay with property taxes which is literally a wealth tax on a subset of owned capital. The only difference is that property taxes are regressive and not progressive
> This Economist article points out some of the many small academic works that quibble over details with Piketty and Saez. But that's not anything new. The major points of their work, and especially of Piketty's monumental _Capital for the 21st century_ still stand: that capital is a positive feedback loop in a way that labor is not; that mid-20th-century laws that put brakes on this feedback loop have been removed; that a variety of data sources are confirming growing inequality and market capture particularly in the UK and US; and that the only reasonable solution for this is a tax on owned capital (not on income or cap gains) and the political chances of this happening are slim, etc. [emphasis added]
I'm a bit surprised that you included ad hominem accusations of bias and haterism given the adjectives in the first paragraph. :)
But, in seriousness, Piketty's work is pretty poor. The empirical data is now discounted [0], the `r > g` claim was debunked shortly after publication [1]. The fate of the latter claim seems fatal to Piketty's attempts to accurately model the world and prescribe solutions. For instance, capital depreciates as it ages, and can do so dramatically due to obsolescence or damage. Redeploying capital toward new uses is generally quite costly, due to the high inelasticities of capital. Labor is much more elastic to different tasks of production. (I should note that the inelasticity of "human capital" in the modern service-based economy, which is indeed a problem. "Learn to code" is a meme deployed by trolls, but it reflects a real economic reality. The increasing prevalence of human capital and its inelasticities also undercuts Picketty.)
Further, Piketty himself defines capital in such a way (he uses it essentially synonymously with wealth) that his argument is almost tautological, and also fails to account for wealth stored in e.g. real estate (or the works of Picasso, for that matter). Increases in real estate prices (driven almost entirely by well-understood microeconomic structural issues and not by some abstract macro mathematical inequality) account for the amount r exceeds g.
Any usual definition of capital emphasizes that it is a factor of production, not merely wealth. Capital is the fixed "stuff" we use to produce other stuff. It might be a dump truck or an assembly line process or even knowledge of C++. Housing stock almost certainly fails the factor of production test, and thus shouldn't be counted as capital (the status of a Picasso as a factor of production is an exercise left to the reader). (By analogy, labor is also defined as a factor of production, and doesn't include the value of leisure hours or time spent sleeping.) Piketty's book sales might not have been so high had he simply argued that fixed supplies of highly-demanded scarce resources tend to increase over time, and that land in a reurbanizing and NIMBY-ish period is by far the strongest such asset. Henry George said more insightful things about the same subject over a century before Piketty had an economics professorship. (I'm not arguing that George's solutions were great. I'm more enthusiastic about ideas like nuisance-based zoning as opposed to use-based: they seem to achieve the desired effects of stability and low inequality without a ton of extraction. I somehow doubt that Piketty would share this enthusiasm. [2][3])
Ultimately, if these small attacks of death by 1000 cuts on Piketty's work don't convince you (and I would characterize some of the attacks as quite substantial) that it was very flawed and probably just nonsense, then maybe ask yourself if any evidence whatsoever would convince you that Piketty is (broadly speaking) wrong.
Have not read his latest "People, Power, and Profits: Progressive Capitalism for an Age of Discontent", but I think Stiglitz has basically been saying the same as the gist of this article: equality is essential to sustainable capitalism.
Afaik his finding are disputed. And even if not, why should it even be desirable to encourage labor? If capital is so great, people should seek owning capital, not seek to work more. As they say, savings plans start at 50$/month.
It seems rather great that this opportunity exists (assuming it is true). The alternative is that you have to work and work until you die.
Because a good chunk of people suck at delayed gratification so are incapable of saving money. Even on an average income it's not unfeasible to retire a millionaire if saving a significant percent (and indeed there are people who do this, small businesspeople and tradespeople, the "millionaires next door").
That's silly - compared to cavemen, even workers in third world countries are "rich", being able to trade things for goods and services and not being required to hunt and gather. Inequality solved?
yes, exactly; to have equality, you'll have to reduce everyone to the lower common denominator, which will be rather low
Also, I don't see why exactly inequality is inherently bad. I'm poorer than Bezos, _and that is a good thing_. Pretty much like Steph Curry is better than me at basketball and so he should have a lot more ball possesion should we be playing on the same team, Bezos is much better than me in allocating resources, so he should have a lot more resources to play with.
to have equality, you'll have to reduce everyone to the lower common denominator, which will be rather low
Why must everyone go down to the lower common denominator? Wouldn't moving everyone to the average also be equality? For most middle-class Westerners that would be a reduction, but for most people on Earth that would very likely be a small improvement, and in some cases a significant improvement.
The real problem is that it's logistically impossible. Someone living in the middle of a desert just can't have access to the sort of food wealth and stable energy supply we have because the technologies to get those things to where they are don't really exist yet. That doesn't mean we shouldn't try to move everyone towards the average a bit though.
California has ports and airports and... roads. People stay in the same places for a long time. Try delivering fresh produce to nomadic Bedouin tribes in the Eastern Sahara and you might find it a little trickier.
A huge number of people work very hard for much less than middle class Westerners have. They would all get more than they have now. I suspect that would lead to better global productivity even with the loss of your input.
It's a bit of a strawman to take arguments of the general form "we should enact policies to reduce inequality" and implicitly restate them as "we should enact policies that force perfect equality," then argue against that restatement, don't you think?
I think the concept of "inequality" itself is a type of straw man. It's basically a problem that will perputually exist. Arguments (straw man or not) pointing out the lack of a concrete, absolute (non-relative), morally justified goal is appropriate as long as "inequality" itself is the stated "problem."
If we were talking about a fixed, concrete goal, then I'd agree with you. Reducing poverty, reducing world hunger, increasing standards of living, etc are things that can be accomplished by setting some absolute, concrete moral goals, which moving towards by any measure might be considered morally good. But "inequality" on its own is, prima facia, a term that requires comparison to the point of "perfect equality".
Doing good things might result in less inequality, but reducing inequality for the sake of itself is just justification of envy. There's nothing inherently "evil" or even negative about it.
On a side note: "Reducing inequality" is an activists dream. They can sell political solutions forever for a problem that will always exist, by some form of the definition.
(Unless we were to oversimplify it and set some standard deviation type hard-target for income distribution, but I've not heard anyone suggest this, let alone an appropriate "fair" target distribution. I'm not for it, but it's at least a measurable goal.)
> Bezos is much better than me in allocating resources, so he should have a lot more resources to play with.
How do you know that, though? Have you had the opportunity to be in the exact same place he was for the exact same time? Do you sincerely believe there aren't, in the billions of people on earth, someone with better resource allocation skills than Bezos? Having more money is not proof of ability.
Bezos also had parents that gave him a several 100 thousand dollar loan that they never expected to be paid back. He's a product of Montessori and Ivy League education. Definitely not a rags to riches story
From 100 thousands to Billions is kind of rags to riches. And even so - you are saying he doesn't deserve his success? It doesn't count because he went to Montessori school?
The problem I think is that people attribute all of success to the sheer iron will and willingness to suffer of the individual, when that just isn't the case. Are you attributing all of Amazon's success to Bezos solely? If he left do you assume Amazon would immediately start to fail? Was it Bill Gates alone who kept Microsoft afloat?
You have to consider luck, there's a ton of people in the world who put in the work and didn't get anything, and it's not just because they didn't work hard enough.
I don't see how luck invalidates my point; yes, you probably need luck to make big bucks, but that is just a part of the game. If you make so that no one can get seriously rich, "to prevent exploitation", congratulations, this is how you get Soviet Union, with Gulag and Golodomor and other stuff, but with oh so nice intentions, workers owning means of production, blah blah blah
Not everybody becomes a Billionaire, but most people with intelligence and skill amount to at least something. The luck factor is mitigated by people trying several things until they succeed. You throw out the hypothetical example of the talented people who didn't amount to anything, but how common is it really?
Would you also say Steve Jobs was merely lucky, and everybody else could have founded Apple? Perhaps people just don't know enough about what those CEOs do?
And of course at a basic level, it is always luck, because even being born, being healthy, the place where you are born, intelligence, and so on, are luck.
I think to assume people don't deserve stuff because they were lucky is rather backwards.
Imagine you had a brain tumor, and you need brain surgery. There is a surgeon who was very lucky - he was born white, male, to a wealthy family, so that he could afford to go to the best schools to become a really good brain surgeon.
Would you then say that guy doesn't deserve your money, because he was just lucky?`
I'd say that's just bullshit. It doesn't matter why or how he got his qualifications by luck, magic, whatever. What matters right now, what makes you willing to give him money, is that he can provide you with the best odds of a successful brain surgery.
You are welcome to pick a random poor person from the street to perform that surgery, for the sake of fairness. After all, it isn't their fault that they weren't able to afford the education to become a brain surgeon, right?
And if you say that brain surgeon should have to operate on you for free, that is exploitation, plain and simple. You dispose of his body. In the end he would be punished for becoming a brain surgeon, because people would feel entitled to his services and would make him work 20 hours a day, with no compensation.
Why exactly is inequality a problem? Because people suffer from their envy?
People starving, having no health care, low life expectancy, that sort of thing, are problems. Their neighbor having more money in the bank is not really a problem.
There are also actually differences in skills, performance, diligence, and so on. It would be very unfair if some people weren't allowed to earn more money than others.
Whether it should be possible to be arbitrarily rich is another question.
> People starving, having no health care, low life expectancy, that sort of thing, are problems. Their neighbor having more money in the bank is not really a problem.
Most people, when they critique wealth inequality, aren't critiquing their neighbors because most people in the same zip code are going to be at similar levels. When people critique wealth inequality, they're talking about the Koch brothers, or other parties who leverage capital to gain unfair advantage and political powers and then work against the first half of your statement.
> Whether it should be possible to be arbitrarily rich is another question.
I, too, am in favor of a 100% wealth tax upon death. No more freeloading failsons.
Well, again, start accumulating capital, if it is such an unfair advantage.
"I, too, am in favor of a 100% wealth tax upon death. No more freeloading failsons."
I am absolute against such a thing, in fact I consider it an insane proposal.
It seems one of the fundamental human rights should be people being allowed to provide for their children.
People work to have successful children. It is absolutely incorrect that all children should have the same starting positions for a fair world. If a couple works hard to earn money, and others don't work and instead pop out 10 children, why on earth would it be fair to take money from the hard working parents to distribute it to all? I know many people who would like to have more children, but feel they can't afford them. Why should they be punished for being responsible.
It even starts before people have children. They work hard to be attractive and find a good mate, to improve the odds for their children. That is basic human nature.
The acts of their parents are not the children's fault, of course, and everybody should be given a fair chance to make it in life. But there are limits. Both strategies can be valid (have few children and try to give them a good head start in live vs having as many children as possible and leaving them to their own devices), but it would be unfair to politically punish one strategy over the other. At the very least, if you take away money from the responsible parents, you should have to limit the behavior of the irresponsible parents.
The only way to make things completely equal for everyone is to disallow people to have children, and instead rise future children in clone factories. Why should that be considered desirable?
And even more basic than that: people should be allowed to do with their money as they please. Including giving it to their children.
> I am absolute against such a thing, in fact I consider it an insane proposal.
44 minutes ago
> Whether it should be possible to be arbitrarily rich is another question.
You were so close to getting it, what happened to you?
> Well, again, start accumulating capital, if it is such an unfair advantage.
Hey, person who can barely make it to get by and spends all of their income on subsistence-level living, why don't you just get more capital?
> The acts of their parents are not the children's fault, of course, and everybody should be given a fair chance to make it in life. But there are limits.
You continually try and straddle the line with these declarations, but just draw completely arbitrary distinctions: everyone should be given a fair chance to make it--but what is fair, how is this decided, who enforces it? What are these limits and why are they decided? There's no rhyme or reason to what you're saying, just whatever sounds the best to you.
> And even more basic than that: people should be allowed to do with their money as they please.
So it's perfectly acceptable when Coca Cola sends death squads to kill labor organizers. The ancap fever dream is terrifying.
"> Whether it should be possible to be arbitrarily rich is another question.
You were so close to getting it, what happened to you?"
There is a difference between limiting how rich anybody can get, and taking everything away from families if the head of family dies.
"Hey, person who can barely make it to get by and spends all of their income on subsistence-level living, why don't you just get more capital?"
How many such people even exist? If you barely make it, you should aim to improve your situation. Try to find a better job, try to learn skills that enable you to get a better job, and so on. Few people are really doomed to such a situation forever. And those who are, usually because of illness, need charitable help or insurance. It's a separate problem.
"everyone should be given a fair chance to make it--but what is fair, how is this decided, who enforces it?"
Well who do you want to decide what is fair?
I think markets are the best mechanism to establish fair prices. Other than that, you can establish some baseline - access to housing, food and education, so that people can try to make something out of their lives. It can be discussed. But certainly it doesn't mean fair has to be everybody has to have the exact same starting positions. It is not even possible, because not all parents are the same. If your parent is Paul Graham and he teaches you programming, you already have an advantage against other kids, even without economic resources.
"So it's perfectly acceptable when Coca Cola sends death squads to kill labor organizers."
Obviously not. I think you are being silly here. Basic laws still apply.
> I, too, am in favor of a 100% wealth tax upon death. No more freeloading failsons.
I am very far from an economic leftist, but the elimination of inheritance seems to me the fastest, fairest, path to equality of opportunity (the disposition of the confiscated assets is a separate argument). Tax the dead guy.
That's one of the top defining characteristics of "economic leftist" type systems.
Either you don't fully grasp the implications of such a policy, or you may want to re-evaluate your economic self-identity.
I'll add- it's not just the rich that this hits. This means taking a family's home when parents die, unless they pay for it again.
Which means it's basically an incentive for people to rent everything and own nothing. A Subscription based economy for everything. And companies will love it, since they'll provide the subscriptions and corporations never die, so it won't affect corporate wealth.
This is just the tip of the iceberg, but it's not difficult to see a floodgate of unintended consequences. And only the rich will be able to afford the accountants and lawyers to double-Irish/ Dutch-sandwich loopholes.
1. The government must be funded, taxes are inescapable
2. Financial/material inheritance is inherently cosmically unfair (Paris Hilton and orphan street dweller have equal merit claim to the Hilton fortune)
3. Your children's "inheritance" is their genetic endowment, the benefits of being raised by you, and whatever material help you can provide during your lifetime
4. The details (and loopholes) of the implementation are an exercise for the student (I'm not super concerned whether a "family farm" must be liquidated, or how every last penny of Warren Buffett's fortune is confiscated)
> Which means it's basically an incentive for people to rent everything and own nothing.
This may be true toward the end of one's life, and I'm not sure this is a bad thing. Your children's inheritance is a distant concern for most your time on earth; your savings is almost entirely a prudent hedge against a lean harvest.
FWIW, I am strongly against (national) Government expansion, and would be fine with just setting all the confiscated funds on fire.
Then the dead guy will give all his money to his kids before dying.
At the very least the dead guy will pay for them to go to Harvard, arrange the appropriate internships, etc.
It’s very possible to preserve a class system without actually transferring wealth to your children upon death.
Just use your wealth and money to make sure they’re set before you die.
Easy-peasy.
Just look at the many children of still-Alice billionaires. They’re not hurting.
For example, Warren Buffet announced he was giving away all his wealth, created a foundation that possesses most of his wealth, and named his son as director.
Not rocket science.
And that doesn’t include the affects of private tutors, nanny’s, quality education, etc.
> Then the dead guy will give all his money to his kids before dying.
Don't let the perfect be the enemy of good enough. Inequality is a fundamental part of human existence, but I'd prefer that inequality to be as much as possible an expression of individual merit rather than a financial windfall as a result of parental success.
As I mention in another reply, your "inheritance" is what you get while your parents are alive.
It’s not so much the perfect being the enemy of the good, as the fundamental point being missed.
The goal is to prevent persistent, cross-generational inequality. High inheritance taxes simply won’t accomplish this. Or even come close.
The only policy that had ever achieved the sort of field-evening you want is a very strong public sector.
Providing quality education, job, opportunities to everyone (or at least lots of people).
A good example is Sweden. Sweden had massive asset-inequality. A handful of families are massively wealthy, and the successfully pass that wealth down generations.
Yet Sweden had little income inequality, because of their strong public services.
My complaint with inheritance is not that perpetuates income inequality (though it may do that). I don't care about income inequality in the abstract, it bothers me not a whit that multi-billionaires prosper while the poorest in the US live merely pretty OK lives.
I simply hate the unfairness of this particular form of wealth transfer: the winners hit the jackpot without even buying a ticket.
You're just incentivizing rich people to put all their assets in holdings companies and then giving their children ownership before they die. I wouldn't be surprised if this is how its done today.
Presumably there are people who are being exploited in the world. But to claim in general poverty is a result of exploitation seems very questionable.
Start with basics. People live in the woods, with nothing. Some start building a hut from sticks, others don't. The ones living in huts suddenly are richer than the ones who don't, even though they haven't taken anything away from the ones who don't have huts.
And of the ones who don't have huts demand some of the huts from the people who built them, who is doing the exploiting?
People in huts eventually band together into villages, villages start to trade goods with one another. Eventually the largest village is able to coerce (either using the threat of force via superior military or through infiltration, bribery subversion etc) the smaller villages into giving it the best deals.
The largest village gets very rich while extracting all the resources and goods from the smaller villages around it. The largest village is able to ram through treaties, trade pacts etc that favor it's interests, it is able to interfere in politics of surrounding villages and sometimes provides backing to despots or outright overthrow leadership of smaller villages that might be doing something the largest village does not agree with.
What you say is true, but when people usually talk about inequality, they're talking about inequality in a specific country. In your example that would be inequality inside a single village rather than between the villages.
Also, with similarly bad faith you could say that when the first group was building their huts, the second group was sharpening their sticks. Once the huts were completed they used their sharpened sticks to coerce the richer people (those with huts) to give them huts too.
We'll, I guess all notions can seem silly from some perspective. Children climbing up chimneys or adults wearing diapers to meet chicken plucking quotas can seen silly from a certain perspective, but usually not a first person one.
And in the end this article is another one in their house style: not particularly informative in the details, they're not arguing openly or forcefully against Piketty, but instead bring up enough different nitpicky papers that it starts sowing doubt in the mind of a reader who hasn't actually read the book.
But then again The Economist has had it out for Piketty (and Saez) for a long time now, they very clearly hate Piketty's Capital and keep sniping at it, but can't stop themselves from bringing it up all the time. :)
At least they are very open about their biases: they promote a view that the solution to all ills is lower taxes and less regulation. However, Piketty's analysis and proposed solution directly contradicts that.