STUMP » Articles » Taxing Tuesday: Let's Tax Wealth! » 14 August 2018, 14:44

Where Stu & MP spout off about everything.

Taxing Tuesday: Let's Tax Wealth!  


14 August 2018, 14:44

There are already various taxes of wealth, and I don’t just mean estate taxes, but let’s ignore that for right now.

Here is the wonderful piece in the Economist, with the head and subhed:

Overhaul tax for the 21st century
Today’s tax systems are unforgivably cack-handed

For those not up on brit-speak, cack-handed is explained here. How very anti-sinister of them! Sic the sensitivity experts on the author! (who is the author? Hell if I know – that’s The Economist unsigned pieces for you.)

Let’s look at the meat:

Jean-Baptiste Colbert, the finance minister of Louis XIV of France, famously compared the art of raising tax to “plucking the goose so as to obtain the largest possible amount of feathers with the smallest possible amount of hissing”. Tax systems vary from one economy to another—Europe imposes value-added taxes, America does not. Yet in most countries three flaws show how the art of plucking has failed.

One is missed opportunities. Expensive housing, often the result of a shortage of land, has yielded windfall gains to homeowners in big, global cities. House prices there are 34% higher, on average, than five years ago, freezing young people out of home ownership (see Finance section). Windfall gains should be an obvious source of revenue, yet property taxes have stayed roughly constant at 6% of government revenues in rich countries, the same as before the boom.

Another flaw is that tax sometimes works against other priorities. Policymakers in the rich world worry about growing inequality, which is at its highest level in half a century. In the OECD, a group of mostly developed countries, the richest 10% of the population earn, on average, nine times more than the poorest 10%. Yet over this period, most economies (though not America’s) have shifted the composition of labour taxation slightly toward regressive payroll and social-security levies and away from progressive income taxes.

Tax systems have also failed to adapt to technological change. The rising importance of intellectual property means that it is almost impossible to pin down where a multinational really makes money. Tech giants like Apple and Amazon stash their intangible capital in havens such as Ireland, and pay too little tax elsewhere. This month it emerged that Amazon’s British subsidiary paid £1.7m ($2.2m) in tax last year, on profits of £72m and revenues of £11.4bn. By one recent estimate, close to 40% of multinational profits are shifted to low-tax countries each year.

So let’s break this down a bit.

First, a lot of that property value increase comes from blocking new development. I live in an area that’s pretty guilty of that – a lot of the land in my town can’t be developed at all. Remember Yesterday’s bit about not being able to swim in Peach Lake? That was 1918. Many more restrictions have come since that time, all in the name of NYC not needing to treat its water supply as much. Of course, we’re out in the boonies, and you have to get down pretty south in Westchester County before you can see high-rise apartment buildings. Currently.

Second, who actually gives a shit about inequality. Dear lord. U.S. taxation is pretty frickin progressive, so I don’t want to hear it from some rightie-superiorist Brit (to be sure, I’m right-handed myself… and anyway, I just find this amusing.) It seems to me most of the “inequality” bleaters are those pissed off that they’ve got the fancy degrees, but not making much money and definitely not getting as much respect anymore.


As in, it comes across as envy of those who did not have such foo-for-raws, and yet have amassed so much money. Clearly, money needs to be “redistributed” to people with useless credentials who think they should have more money.


Third, here’s the problem with “stashing their intangible capital”… all that means is where something shows up in the accounting. Intangibles exist only on balance sheets, because you’re supposed to try to value it for accounting purposes. You don’t know what value they really ever had until you look back over an entire history. Some of those intangibles are entirely bogus because of accounting standards requiring one to start with a value of acquisition cost on a balance sheet. Intangibles tend to be way out of whack, both under- and over-valued. If you start taxing based on those… well, just you wait and see what happens to accounting for these things, as well as new contortions to avoid these taxes.


So what is the amazing idea of this author to make up for all this stuff?

Fundamental tax reform can boost growth and make societies fairer—whatever the share of GDP a government takes in tax. Fortunately, the principles according to which rich countries can design a good system are clear: taxes should target rents, preserve incentives and be hard to avoid.

All countries should tax both property and inheritance more. These taxes are unpopular but mostly efficient. In a world where property ownership brings windfalls that persist across generations, such taxes are desirable. A conservative first step would be to roll back recent cuts to inheritance tax. A more radical approach would be to introduce a land-value tax, the most efficient of all property taxes and one with a long liberal heritage (see Briefing).

Note, this person is writing about UK politics.

Economists are sceptical of taxing other forms of capital, for the good reason that it discourages investment. But capital’s share of rich-world GDP has risen by four percentage points since 1975, transferring nearly $2trn of annual global income out of paycheques and into investors’ pockets. Given that competition is declining in many markets, this suggests that businesses are increasingly able to extract rents from the economy. Taxes on capital can target those rents without disturbing incentives so long as they include carve-outs for investment.

Is that a lot? I can’t even tell. (I assume the writer is using U.S. dollars, for some reason)

Let’s take a look what the Gross world product is:

In 2014, according to the CIA’s World Factbook, the GWP was around US$78.28 trillion in nominal terms and totalled approximately US$107.5 trillion in terms of purchasing power parity (PPP).2

Given you need investors to fuel this sort of thing, $2 trillion out of $78 trillion seems pretty fair to me (that’s only 2.6%, so I’m not sure where the 4 percentage points thing is coming from). For all I know, this person is pulling numbers out of their ass, though.

To stop companies shifting profits, governments should switch their focus from firms to investors. Profits ultimately flow to shareholders as dividends and buy-backs. But few people are likely to emigrate to avoid taxes on their investment income—Apple can move its intellectual property to Ireland, but it cannot put its shareholders there. Corporate tax should be a backstop, to ensure that investors who do not pay taxes themselves, such as foreigners and universities, still make some contribution. Full investment expensing should be standard; deductions for debt interest, which incentivise risky leverage for no good reason, should be scrapped.

I think it’s awesome that this person thinks pensions should be taxed through their investments. Fabulous idea. (“Oh, but all those huge institutional funds that own stocks will be exempt… wait… how much can we get in tax this way?”)

As the labour market continues to polarise between high earners and everyone else, income taxes should be low or negative for the lowest earners. That means getting rid of regressive payroll taxes which, in North America, could be replaced with underused taxes on consumption. Though these are also regressive, they are much more efficient.

Dear lord, this person is ignorant. There are zero and negative taxes on many low income folks in the United States. I assume they’ve got a hard cap on word count, otherwise they may be able to actually provide some real detail.

Also, I know they’re lumping in payroll taxes here, and I don’t mind that, but if you want to make those zero or negative, then you’re really decoupling Social Security/Medicare from “contributions”. I mean, it would expose the lie that one “earned” the benefits, which is why this is not going to happen, unless the old age programs explicitly become welfare-for-the-elderly programs. That’s going to take a while to get there. Even if most people get under $20K/year from Social Security, you mess with that at your own peril.

Here’s the conclusion:

One for you, nineteen for me

Adam Smith said that taxes should be efficient, certain, convenient and fair. Against that standard, today’s tax policies are unforgivably cack-handed. Politicians rarely consider the purpose and scope of taxation. When they do change tax codes, they clumsily bolt on new levies and snap off old ones, all in a rush for good headlines. Rewriting the codes means winning over sceptical voters and defying rapacious special interests. It is hard work. But the prize is well worth the fight.

Oh, very nice to quote Harrison’s Tax Man.


I agree that tax policy tends to be overly complicated, with multiple carve-outs for favored groups.

But the expenditure side (not “tax expenditure”, where you let somebody get a tax break, but an actual expenditure where the government sends money to a particular person or people), there are similar problems.

If we want to talk about rent-seeking, perhaps we can reduce expenditures by abolishing public employee unions entirely, or maybe there could be some sort of “union tax”. Just on the public employee unions, that is.

The thing is, such a tax on rent-seeking would probably not be high enough:

Tullock paradox refers to the apparent paradox, described by Tullock, on the low costs of rent-seeking relative to the gains from rent-seeking.

The paradox is that rent-seekers wanting political favors can bribe politicians at a cost much lower than the value of the favor to the rent-seeker. For instance, a rent seeker who hopes to gain a billion dollars from a particular political policy may need to bribe politicians only to the tune of ten million dollars, which is about 1% of the gain to the rent-seeker. Luigi Zingales frames it by asking, “Why is there so little money in politics?” because a naive model of political bribery and/or campaign spending should result in beneficiaries of government subsidies being willing to spend an amount up to the value of the subsidies themselves, when in fact only a small fraction of that is spent.

So I recommend actually putting policy up for auction to lobbyists, public unions, etc., and make the reserve price fairly high. Maybe a couple trillion dollars. Per year. Sounds like a start.

[There is no paradox when the decision makers are hit by none of the costs of the rent-seeking, personally. Politicians don’t need large bribes for a win-win (that the taxpayers lose isn’t the pol’s problem)]


Wirepoints: Don’t buy into the Pritzker progressive tax pitch

Illinois gubernatorial candidate J.B. Pritzker has a new TV ad where he promises to raise taxes on the rich – on guys like him and Gov. Bruce Rauner – while lowering taxes on the middle class.

Don’t buy it. It’s an empty promise. He’ll end up taxing the middle class as well.

The proof is in the tax rates of Illinois’ neighboring states. Just look at how they tax the middle class. Their rates – whether headline or effective – are typically higher than those in Illinois, unless it’s Indiana or Michigan. They have low flat tax structures.

Look at Iowa. The state’s taxes marginal income between $14,382 and $23,970 at rate of 6.12 percent. Even incomes between $47,940 and $71,910, certainly middle class, are taxed at a marginal rate of almost 8 percent.

Or look at Minnesota, its lowest marginal rate of 5.35 percent is higher than Illinois’ flat 4.95 percent rate. The tax rates only go up from there.
Pritzker isn’t telling the truth about his tax plan – he won’t even give Illinoisans any specifics. But he should be forced to – by the media, the political elite and Illinois voters.

Pritzker promises to spend billions and billions more on everything from education to healthcare to pensions. But he can’t do that without hitting up the middle class – just as politicians have done in neighboring states and around the country.

Tax Foundation: The Benefits of Cutting the Corporate Income Tax Rate

Key Findings

One of the most significant provisions of the Tax Cuts and Jobs Act is the permanently lower federal corporate income tax rate, which decreased from 35 percent to 21 percent.

Prior to the Tax Cuts and Jobs Act, the United States’ high statutory corporate tax rate stood out among rates worldwide. Among countries in the Organisation for Economic Co-operation and Development (OECD), the U.S. combined corporate income tax rate was the highest. Now, post-tax reform, the rate is close to average.

Economic evidence suggests that corporate income taxes are the most harmful type of tax and that workers bear a portion of the burden. Reducing the corporate income tax will benefit workers as new investments boost productivity and lead to wage growth.\

Tax Foundation: State Gasoline Tax Rates as of July 2018


So… did this mayor actually drink Sam Adams before?

I’m always skeptical of particular product boycotts… lots of people don’t drink Sam Adams (I used to, but I don’t now, mainly because I prefer wine and whiskey.. and the cheap IPA I buy at Trader Joe’s.)

Hmmm, gas tax repeal in California? I’ll have to check that one out.

Ugh, needs a little better graphic design. And I assume they’re referring to one of the companies he founded not paying corporate income taxes for five years… probably due to losses. Yes, it’s tough to pay taxes on negative profits, y’all. I’m sure the company/companies paid payroll taxes, property taxes, etc.

The comedian there is Larry Grayson.

See you next week for more tax fun!

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