Tax the Rich?

Interesting “Ted Talk”: should we tax the rich

The speaker argues that, yes, we should. He really attacks the theory that the rich are job creators by advancing a pretty simple Keyensian argument: that what really matters in an economy is aggregate demand. When consumers demand things, then businesses can hire people, which in turn feeds consumer demand. The rich don’t spend that much, they mostly save, and so it would be better to put this money either into the pockets of poorer people, or into public services that benefit poor and middle class Americans. He argues that this isn’t going to reduce “jobs” because more people will be spending, and that will induce businesses to hire more.

A few comments.
1. This is not even close to a remotely new idea. Why not have an actual economist like Paul Krugman on TED? For some
reason, Keynes seems more risqué when coming from the mouth of a capitalist, I guess.


2.The big problem here is that It assumes that “low aggregate demand” is the cause of unemployment. That is just a theory. There are lots of economists who argue unemployment is caused by structural factors: a mismatch between the skills in the economy and the technology that is out there. In the structural story, you need entrepreneurs to come along and use this new labour for something. Jobs are not created, but “discovered”. And, in this climate you don’t want high taxes on capital gains to deter potential investors. You want to make it easier for business people to do business.

3. It assumes that fiscal policy can increase demand, and therefore jobs. Once again, there is tones of economic literature on this and it’s not clear that things work this way in practice.

4. Ignores many “micro” effects of taxation on peoples behaviour.

5.Assumes the government will act in a benign manner. But governments are not perfect and they respond to political incentives.

Overall, the talk does a good job of conveying the idea in 5 minutes. But it’s an overly simplistic idea, it’s not new or really that innovative, and it’s not without its problems.

Why don’ t we tax bad behaviour? (as opposed to good behaviour?)

Taxation has a redistributive function, namely to pay for government operations, programs, transfers among people; but, it can be used as policy tool to curb bad behaviour and reduce ‘negative externalities’. Taxes on alcohol and tobacco are examples of taxation designed, partially, to mitigate bad behaviour. The first use of taxation is something that left wingers generally support. The second is one that those on the right tend to find more acceptable. A sensible general heuristic for government taxation is as follows: if you want more of a good or service than the market will provide, then you subsidize it; if you want less, tax it. The first is more concerned with generating revenue; the second, with ensuring that policies don’t disrupt market-based incentives.


Can we somehow combine this heuristic with the need to pay for the costs of government? If so, it makes no sense to tax income. Income is the result of hard work, education etc.. Therefore, an income tax is a tax on a ‘good behaviour, namely, ‘working’. We shouldn’t punish desirable behaviour with taxation because, we'll get less of it. Why not just replace income taxes, which punish good behaviour, with excise taxes on socially and economically undesirable activity. So, instead of taxing income and investment (capital gains), we heavily tax a wide range of undesirable behaviours with negative externalities such as pollution, carbon emissions, religion, alcohol, tobacco, drugs, liberal-arts degrees, sugar, cable TV, celebrity magazines, meat etc… I’m sure we can think of more. This would have the advantage of reducing the prevailance of costly bad behaviour. We would also stop discourging good behaviour (working), and because there are lots of bad things we could potentially tax, it might also generate enough revenue to pay for the costs of government.

The Car ...

In defense of the automobile:

I am making a strong claim. Automobility is not just something for which people in their ingenuity or idiosyncrasy might happen to hanker. Rather, automobile transport is a good for people in virtue of its intrinsic features. Because automobility is a mode of extending the scope and magnitude of self-direction, it is worthwhile. Moreover, the value of automobility is strongly complementary to other core values of our culture, such as freedom of association, pursuit of knowledge, economic advancement, privacy, even the expression of religious commitments and love. If these contentions are even partially cogent, then opponents of the automobile must take on and surmount a stronger burden of proof than they have heretofore acknowledged; for they must show not only that instrumental costs of marginal automobile usage outweigh the benefits, but they also must additionally establish that these costs outweigh the inherent good of the exercise of free mobility. That heightened burden will be difficult indeed to satisfy.

Who is afraid of a little debate?

Conservative MP Stephen Woodworth’s private member’s motion, proposing a committee that would re-examine when Canadian foetuses ought legally to become “human,” is being held up as evidence of Stephen Harper’s secret plan to curtail women’s reproductive rights. This story sort of bugged me. The “liberals” are massively overreacting. The politics seem pretty obvious. Harper wants to appease his social conservative base. He isn’t going to reopen the abortion debate, as he has said repeatedly. It would be a really bad move politically, and this is all he cares about. Harper’s “secret agenda” is not that secret: to be Prime Minister. Now, is this debate about the status of the foetus some attack on the “abortion argument”? No. Is a foetus "alive"1 second before its birth? Of course. How about 1 minute? 1 hour? 1 day? 1 week? ... 2 weeks? Where is the line? I don’t know, but I do know that “birth” just makes no sense. Full disclosure: I'm pro-choice. That is, I am in favour of letting women kill their unborn children, who are, in some instances, actually "alive" by any biological definition. If you find that unpalatable, maybe you shouldn't be pro-choice. If your argument for pro-choice rests on this, then you better rethink your position; and it wouldn't hurt you to listen to some debate on the subject. Also, I find it refreshing that our politicians want to discuss philosophy and bioethics. In short, lefties, clam the f*ck down please.

Thoughts on Taxation

Well said, Mr. Krauthammer:

The Buffett Rule redistributes deck chairs on the Titanic, ostensibly to make more available for those in steerage. Nice idea, but the iceberg cometh. The enterprise is an exercise in misdirection — a distraction not just from Obama’s dismal record on growth and unemployment but, more importantly, from his dereliction of duty in failing to this day to address the utterly predictable and devastating debt crisis ahead.

The Buffett rule is just a cleverly disguised capital gains tax. Good politics; bad economics. The term "fairness" as applied to taxation is also interesting. Clearly, people have differing conceptions of the term "fair". The fact that it is completely subjective makes it analytically vacuous, conceptually meaningless, and even dangerous. As Krauthammer points out, this latest attempt to tax the rich is a poor substitute for genuine tax reform, which is what is needed in the United States.

Canadian Housing Bubble

Smart post from Jesse Klein on the Canadian Housing Market:

By guaranteeing 100% of CMHC-insured mortgages and 90% of privately insured loans, the government removes the risk from banks and investors, making it much easier to get loans. And although the government has tightened lending standards recently and may do so again in the near future, a report from the Reason Foundation in the U.S. found that government guarantees always underprice risk, drive mortgage investment into unsafe markets and inflate housing prices by distorting the allocation of capital. Government simply cannot price risk accurately; while private lenders, if unencumbered by market-distorting policies, have every incentive to price risk appropriately.

AM: The comparison with the U.S. is apt, in these respects: Low interest rates, and a government sponsered entity that has offset the risk faced by commercial lenders and investers. On the other hand, we don't have the same "too big to fail" history; non-recourse loans are rare... would a housing bubble collapse have the same effects in Canada?

Quote of the Day

Quote of the day, from Alberto Mingardi in the WSJ:

Centralized government allocates resources badly—regardless of its intentions. The very nature of centralization makes it impossible to collect and compute all the information that is needed. This is as true for any grand scheme of industrial planning as it is for the government-led welfare systems that characterize Europe's "social model."

AM: As the article explains, this applies to both hard central planning, and softer forms of "social democracy." We are seeing the results in Europe.