Tag: capital gains

Categories
free trade & free markets tax policy

Impossible, They Say

Modern economics takes a long, circuitous route to the old wisdom of classical political economy: Laissez faire is best.

This ideal of free markets was pretty clearly established by Adam Smith, J.B. Say, David Ricardo, and others long ago. Frédéric Bastiat explained it best in layman’s terms.

But modern economic theory, with lots of math I don’t pretend to follow, often backs it up, too. Sure, sure: Much of modern theory sort of assumes unlimited government as the alternative to “market failure.” But the more you look (and look critically) at that theory — and increasing numbers of economists are doing just that — the more the case for government involvement falls flat.

This struck me as I was reading economist Garett Jones:

There’s an old story about a mathematician asking Paul Samuelson for one idea in economics that was simultaneously true and not obvious. Samuelson’s answer [was the Law of Comparative Advantage].  Today, I’ve got another: The Chamley-​Judd Redistribution Impossibility Theorem.

Chamley and Judd separately came to the same discovery: In the long run, capital taxes are far more distorting tha[n] most economists had thought, so distorting that the optimal tax rate on capital is zero.  If you’ve got a fixed tax bill it’s better to have the workers pay it.

Jones goes on:

Under standard, pretty flexible assumptions, it’s impossible to tax capitalists, give the money to workers, and raise the total long-​run income of workers.

Not, hard, not inefficient, not socially wasteful, not immoral: Impossible. 

Hard as policy wonks and their patrons, the politicians, may try, any redistribution from the owners of capital to workers will make workers worse off.

Jones discusses some of the niceties of the theory.

But I confess: to me it’s all déjà vu. Or, to conjure up another French term, laissez faire all over again.

This is Common Sense. I’m Paul Jacob.

Categories
ideological culture tax policy

Curvewise, Gainswise

The so-​called “Laffer Curve” — the graphic representation of the varying relationship between tax rates and tax revenues — really bugs people left of center.

The curve maps an economic reality, showing that not all increases in tax rates can increase tax revenues. Why object to reality?

Perhaps because, on the left, taxes are seen less as a practical means to raise government revenue than as an expression of one’s values. The more “leftist” one is, the more equality matters, which too often boils down to: the more one wants to punish the rich. Higher rates stifle the economy and garner less revenue? Big deal. Consequences be damned. One’s values must be expressed.

This came out in Barack Obama’s first presidential campaign. He famously didn’t care whether a capital gains tax rate increase would decrease revenues, as has happened in the past. For him, “fairness” was more important.

Interestingly, it appears that capital gains tax rates tend to top out Laffer-​Curve-​wise much lower than income taxes. The reason? One seeks a return on capital from invested savings, but one also fears the possibility of loss.  Risk. Pile higher tax rates onto the already palpable negative of uncertainty, and the investor will be tempted to consume his capital rather than engage further in risking his wealth for less reward.

But I confess: I sort of sympathize with the left’s attitude towards taxation. I don’t really want the government to maximize revenue, either. Government misspends most everything it takes in, so I’d prefer lower rates for reasons maximizing quality, not equality.

I bet that the poor, though, would be far better off were the rich not targeted for extra penalties. But that’s not an egalitarian concern, for me. It’s a humanitarian concern.

This is Common Sense. I’m Paul Jacob.