I no longer believe in capitalism. At all.

[Ben Kenobi]

There are actually a lot of rich people who more-or-less live similarly. There are a lot of people with that sort of ethic - you go to work because that is what you do, even after you have as much as you need, but you don't spend the extra money on flashy things; that's just gauche. It is good for society for us to elevate that lifestyle, to point it out as a model for how talented people who can command large salaries should live their lives, while denigrating the lifestyles of the rich people who are going to take back all the value they produced and spend it on frivolities.

Couple things here, Kuci.

Who decides what is and isn't a frivolity?

There are things that I spend my money on that really have very little to do with meeting my day to day needs. Many of those things, are things I treasure more than anything else.

Are they a frivolity if I believe they were money well spent?

Capitalism makes no such judgment. Money is money. If a service is considered valuable to some people, that they are willing to trade money for the service, then that service will continue.

Thrift is a virtue, in that it is conservation of money - saving what you have, continuing to work and make money, and leaving a better life for yourself and those you care about. If your argument is that investment is the best way to get ahead, I'm not going to argue with you. However - bear this in mind.

We are in the grips of a massive consumption depression. This is why you bankers are salivating over cash right now - because many of those with money are finding themselves unable to spend it because the businesses that would take their money are closing down.

People are using their money to pay down the excesses (or at least trying to), of the last 20 years or so. This is the inevitable retrenchment that Obama has done nothing to deal with. You see this, I see this, which is why you are telling people to put money away. We're in hock already and our generation isn't going to be able to afford to be as profligate as the boomers.

Probably a good thing in all.

[Kidlicious]

This is a fair cop, because we haven't quite told you the whole story.

Here's the traditional economist story:

In a traditional model you will start with the assumption that everyone does, in fact, consume their entire income. So she will end up drawing back the same resources from society; how are we gaining anything?

The key insight is that she has a choice of when to consume that income. She could consume all of it now, buying tons of obscene luxuries. Or she could save it to consume later.

The thing is, in our economy basically the only way to efficiently save income to consume later is to invest it; that is, to use that money to hire a guy to build a factory, or something like a factory: some kind of thing that will produce a steady stream of value over time. People rarely do this directly; much of the financial industry is just the mechanism by which people's desire to save for the future is transformed into hiring workers to build factories.

Now, relative to the status quo there are several reasons we would prefer JKR to make that choice (the choice to save the money rather than consume it now) more often than she would right now under the current tax code. The first and simplest is that the current tax code implicitly taxes "consuming later" more than "consuming now", through taxes on investment income; this implies that she will choose more "consuming now" and less "consuming later" than she would if taxes didn't exist; this distortion in her behavior causes welfare losses above and beyond the personal loss of welfare (to her) of the tax she pays.

The second is that we have a lot of evidence that investors already fail to capture a lot of the value of their investment; a lot of it "leaks out" to the rest of society. When a pharmaceutical company develops a drug that cures some disease, the total benefit to society is probably more valuable than just the sum of revenues that pharmaceutical company receives; the new drug was a lot more valuable to some of the people who bought it than the price they paid. If people defer more of their consumption then the outstanding stock of capital will be larger (even in the long run after people start drawing it down; the "steady state" stock of capital has to be larger to support more deferred consumption) and so more of this value will leak out to the rest of society.

Now, stepping outside the traditional model for a bit, we have a couple of other reasons to support this:

A third reason is that observably, sufficiently wealthy people don't consume all of their income. They just let their savings pile up and pile up. Look at Bill Gates or Warren Buffet. Even aside from their explicit philanthropy, these people are basically producing huge amounts of stuff and giving it to society for free. (The world might actually become a better place if we gave more money to Warren Buffet and just asked him to invest it well.) Warren Buffet lives in a house that originally cost $19,000 (in 1950). He is just the sort of person who doesn't really need much stuff but for some reason or other (pride, prestige, personal convictions) is driven to keep going to work and producing valuable stuff to make his number bigger. And on his death pretty much his entire fortune is pledged to the Bill & Melinda Gates Foundation, a charity. If you tax him, you aren't going to reduce the resources he takes from society (he takes very little already), you're just going to remove factories from his stewardship and put them in the government's. What advantage is there to that?

There are actually a lot of rich people who more-or-less live similarly. There are a lot of people with that sort of ethic - you go to work because that is what you do, even after you have as much as you need, but you don't spend the extra money on flashy things; that's just gauche. It is good for society for us to elevate that lifestyle, to point it out as a model for how talented people who can command large salaries should live their lives, while denigrating the lifestyles of the rich people who are going to take back all the value they produced and spend it on frivolities.

IOW, if we can convince Warren Buffet to be Warren Buffet just by saying nice things about it, and structuring society to say "Warren Buffet is the right kind of rich person", we get stuff for free.

A fourth, and related reason, is that a lot of rich people want to save money so that they can leave it to their children. This is their actual motivation, it is their incentive to keep working when they could retire and live off their savings. In my experience this does not result in the kids all becoming layabout spendthrifts; it results in the kids adopting the same perspective on life, that they should be good stewards of their inheritance and make it bigger, so that they can leave even more to their children. Even if in the very long run the entire endowment gets spent down by some descendent, as with my second point this means that the outstanding capital stock has been much larger for a long time! All the while some of the value of that capital has been leaking out.

So you're saying that by increasing the taxes we pay we are getting free stuff?

We've got low interest rates and low inflation. We don't need a consumption tax. It makes no sense at all.

[Ben Kenobi]

We've got low interest rates and low inflation. We don't need a consumption tax. It makes no sense at all.

We absolutely need a consumption tax in replacement of income tax. We need to get more people working, and taxing them on their earnings is just killing the economy.

[Kidlicious]

Consumption taxes target everything that someone spends. People who make more money spend more money, and thus they end up paying more in taxes than poorer people who spend less. Ergo, consumption taxes are inherently progressive.

No. The rich save a higher percentage of their income. That makes a consumption tax regressive.

[Kidlicious]

We absolutely need a consumption tax in replacement of income tax. We need to get more people working, and taxing them on their earnings is just killing the economy.

A consumption tax is a business tax. It's nothing more than a gimic to reduce taxes for the rich. It may be fitting in an inflationary economy, but there are other better remedies for that.

[Imran Siddiqui]

In America? That's not been my experience here. Most of them do have plans, at least the ones I've met.

Yeah, in America. That is kind of where I live.

How does one get an address with which to pay a bill?

[Ben Kenobi]

No. The rich save a higher percentage of their income. That makes a consumption tax regressive.

Not when rent is exempt.

[Ben Kenobi]

Yeah, in America. That is kind of where I live.

How does one get an address with which to pay a bill?

Who says they pay a bill? They simply get a phone from a dollar store and pay for minutes on the phone.

[Ben Kenobi]

A consumption tax is a business tax. It's nothing more than a gimic to reduce taxes for the rich. It may be fitting in an inflationary economy, but there are other better remedies for that.

As a replacement for an income tax, it encourages people to work and save. Also, Texas says hello - it's the system that works well here, and we've been kicking everyone's asses.

[Jaguar]

A consumption tax is a business tax. It's nothing more than a gimic to reduce taxes for the rich. It may be fitting in an inflationary economy, but there are other better remedies for that.

Literally none of these sentences makes sense.

[Imran Siddiqui]

Who says they pay a bill? They simply get a phone from a dollar store and pay for minutes on the phone.

Regardless, no homeless people from the homeless ministries I've seen in Atlanta have cell phones.

[Kidlicious]

As a replacement for an income tax, it encourages people to work and save.

Buy reducing their disposable income and eliminating tax credits?

Also, Texas says hello - it's the system that works well here, and we've been kicking everyone's asses.

Texas isn't the only state that has a sales tax. So what? We are talking about adding a consumption tax on top of a sales tax.

[Ben Kenobi]

Regardless, no homeless people from the homeless ministries I've seen in Atlanta have cell phones.

Really? Interesting. Most of the ones I've worked with here do.

[Kidlicious]

Literally none of these sentences makes sense.

Thanks for reading anyway.

[Ben Kenobi]

Texas isn't the only state that has a sales tax. So what? We are talking about adding a consumption tax on top of a sales tax

No, we're talking about replacing the income tax with a consumption tax, moving from taxing wages to taxing spending. Rather than chasing after employers and making sure their workers are in compliance - you get the money when it comes out - to buy things. It's a much cheaper way of doing business, and the savings are enormous.

But what do I know? It works here. As special as Texas is - I'm sure it would work in other parts of the country. Maybe not California.