I no longer believe in capitalism. At all.

[Ben Kenobi]

I might add that those are only a few selections from the front half of the catalog. There's a full eighty pages of high-class schlock here, including at least half a dozen articles of footwear dedicated to the care of plantar fasciitis.

So the existence of stupid people with too much money disproves capitalism?

[kentonio]

No, everything I said is the majority view of right-wing economists.

I can understand why right wing economists would want poor people paying a bulk of the taxes, but your reasoning seems a bit bizarre. If you discourage people from consuming then where exactly is the incentive for your JK Rowling to produce anything?

[kentonio]

We want stuff for the poor. We want everyone to live as well as we do.

It'd probably help if you started by ensuring they remained healthy enough to work, and didn't try and take their slender incomes away by taxing their unavoidable levels of consumption.

[Ben Kenobi]

This is why there should be progressive consumption taxes.

Also this.

Look. I had my first glimpse at America and what blew me away (and still does), is how well off everyone here actually is. Seriously. Everyone has phones, even if they are on a bread line and homeless. So the question for me is if capitalism doesn't work, why are the poor so abundantly wealthy?

Is there really anyone truly poor in America?

[Ben Kenobi]

Now, if JKR then goes to a bunch of shops and exchanges those green pieces of paper back to society for a really expensive car, and hires a bunch of construction workers to build her a really enormous house, and hires a bunch of cooks to prepare amazing meals for her, she's now asking society give her tons of valuable stuff in return for Harry Potter, rather than cheap paper. Society is much worse off; all of those auto workers and construction workers and cooks could have been making that stuff for everyone else but now all of their output is dedicated solely to her.

Productive conversion of cash to hard assets is valuable to both Rowling, and everyone associated with these enterprises. It would be worse if Rowling simply put all that money in her bank account and sat on it.

True, if the money were spend on unproductive assets is one thing, but a vehicle (even after depreciation), is an asset that meets her transportation needs - a home meets her shelter needs, etc. Land is another.

Now, you can argue about how she is spending her money - but the fact she is spending her money on productive assets is a benefit to society.

[Jaguar]

It'd probably help if you started by ensuring they remained healthy enough to work, and didn't try and take their slender incomes away by taxing their unavoidable levels of consumption.

Hence progressive consumption taxes.

[Imran Siddiqui]

Everyone has phones, even if they are on a bread line and homeless.

Um, I know a good deal of homeless people who definitely do not own phones.

[Kidlicious]

No, everything I said is the majority view of right-wing economists.

Are you one of those right-wing Keynesians.

[kentonio]

Hence progressive consumption taxes.

I'm still failing to understand how this consumption tax is going to be progressive. So a high earner can buy the same stuff as a low earner and be taxed the same? Say the level of unavoidable consumption for a family with a home is $5000 a year (just to pull a random number out my ass), it's ok to tax someone earning $10,000 a year the same as someone earning $10,000,000 a year on those bare essentials? Isn't that basically the exact opposite of a progressive tax?

[Kuciwalker]

I can understand why right wing economists would want poor people paying a bulk of the taxes, but your reasoning seems a bit bizarre. If you discourage people from consuming then where exactly is the incentive for your JK Rowling to produce anything?

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.

[Jaguar]

I'm still failing to understand how this consumption tax is going to be progressive. So a high earner can buy the same stuff as a low earner and be taxed the same? Say the level of unavoidable consumption for a family with a home is $5000 a year (just to pull a random number out my ass), it's ok to tax someone earning $10,000 a year the same as someone earning $10,000,000 a year on those bare essentials? Isn't that basically the exact opposite of a progressive tax?

The object of progressive taxation is to evenly distribute the stuff. Since both people in that example are demanding only minimal stuff for themselves, they should probably not be taxed at all.

[Ben Kenobi]

Um, I know a good deal of homeless people who definitely do not own phones.

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

[Kidlicious]

The person sitting on a vast pile of money has already contributed to society. That's what he does when he does his job. Let's say you are JK Rowling; you have produced a huge amount of value for society by writing some really popular children's books that made lots of kids very happy. In return, society gave you green pieces of paper. That is an amazing deal; we can print enormous quantities of green paper for almost no cost, whereas it is really, really difficult to produce children's books of similar quality to Harry Potter.

Now, if JKR then goes to a bunch of shops and exchanges those green pieces of paper back to society for a really expensive car, and hires a bunch of construction workers to build her a really enormous house, and hires a bunch of cooks to prepare amazing meals for her, she's now asking society give her tons of valuable stuff in return for Harry Potter, rather than cheap paper. Society is much worse off; all of those auto workers and construction workers and cooks could have been making that stuff for everyone else but now all of their output is dedicated solely to her.

Couple of things here. First, nothing is preventing those workers from producing for other people. They can work overtime or the company can hire more workers. But the issue here is that by reducing consumption you are going to cause a decrease in production, because the people who are producing all that stuff for rich people are going to be laid off if they cut their consumption.

The other thing is that extra consumption does not necessarity mean higher prices. Sometimes it means lower prices and certainly does with autos and other such goods.

[Ben Kenobi]

I'm still failing to understand how this consumption tax is going to be progressive. So a high earner can buy the same stuff as a low earner and be taxed the same? Say the level of unavoidable consumption for a family with a home is $5000 a year (just to pull a random number out my ass), it's ok to tax someone earning $10,000 a year the same as someone earning $10,000,000 a year on those bare essentials? Isn't that basically the exact opposite of a progressive tax?

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.

[kentonio]

Thanks for the write up Kuci, it was an interesting read.