Roger already posted a link to this but I want to focus on a particular section that hit to the heart of the matter, economic rent and how to tax it. Michael Hudson especially has convinced me that this is the key issue and the only workable approach within the system of capitalism that is consistent with the principles of capitalism.
In a perfectly competitive system there would be no economic rent because it would be competed away. Economic rent is the rotten fruit of imperfect competition. But perfect competition is an unachievable ideal in a modern monetary society, so other means to address rent as an externality are needed.
The purpose of capitalism is "capital formation, " where "capital" means productive capital as the means of production rather than financial claims on it or other financial wealth. In other words, capitalism is not about making people wealthy, increasing shareholder value, or making a profit. It's about increasing the ability of the society to produce the consumer goods that it needs and desires, and the capital goods necessary for that.
Economic rent is parasitical on the this process, and according to the principles of capitalism should be eliminated institutionally or discouraged, e.g., by taxing away. Henry George proposed doing this by taxing land rent, but land rent is not the only form of economic rent. There is also monopoly rent and financial rent, for example, and they figure large in the contemporary context of mass markets and the managerial capitalism and finance capitalism that are replacing entrepreneurial capitalism.
And so, updating Henry George’s single tax, Piketty proposes a global wealth tax, making similar claims about its benefits for both equality and growth.The Washington Post Editorial
For Piketty and George, the bottom line, both moral and economic, is to socialize “rent” — rent, that is, not in the colloquial sense but in the economic sense of income disconnected from productivity.
It’s an attractive vision: an egalitarian, productive society, purged of parasitical rent-seeking through the expedient of well-aimed taxes.
Alas, Piketty’s global wealth tax and George’s single tax suffer from the same defect, and it’s not political impracticality — after all, George nearly got himself elected mayor of New York City in 1886.
It’s the inherent difficulty of separating the productive, untaxed component of the return on land or capital from the unproductive, taxed part.
Clear in the pages of a treatise, the distinction is murkier in practice. The market price of a vacant lot can reflect potential productive uses, as well as the risk a buyer takes by betting on them. A similar analysis applies to the rate of return on capital.
As a result, it’s hard to devise a tax on wealth that raises a significant amount of revenue but doesn’t discourage at least some socially beneficial saving or entrepreneurship. The potential for adverse unintended consequences — economic and political — is greater than Piketty seems to realize.
Great private fortunes can indeed entitle their owners to an undue share of society’s current income and political power. At times, however, private wealth can serve as a font of charity or, indeed, a bulwark against government overreach.
We’ve been debating the right balance since the 19th century and probably will be long after the 21st.
Thomas Piketty identifies an important ill of capitalism but not its cure
Charles Lane, Editorial Writer
7 comments:
In a perfectly competitive system there would be no economic rent because it would be competed away. Economic rent is the rotten fruit of imperfect competition. But perfect competition is an unachievable ideal in a modern monetary society, so other means to address rent as an externality are needed.
FWIW, Piketty explicitly denies this. He believes a return to capital is going to occur in any system which is based on private property, and that more perfect competition would not eliminate the main dynamic in capitalism tending to produce inequality.
It’s the inherent difficulty of separating the productive, untaxed component of the return on land or capital from the unproductive, taxed part.
Now that's just pure bull. The land tax is pretty easy to assess. Because of the political pull of the "landed," however, difficulties have been created in terms of getting a complete registry of land ownership in England, for example. One should recall that the Normans imposed a comprehensive registry of all personal property on the English people. This hated document was known as the "Domesday book."
It comes down to political will. We probably do need to develop a modern rent theory. I don't see how it should need to depart so much from old ones. I mean how hard is it to develop criteria for determining earned income vs. unearned or productive investment vs. casino investment, etc.?
Henry George's real problem is that he didn't clarify at which level land should be taxed. Georgist researchers have since concluded that for the land tax to be most effective its should be applied at least at the state level or at the national level. The two basic problems with a locally assessed tax are under-taxing (especially local gentry) or a "tragedy of the commons scenario can be set up" so that the rent sharing community becomes so attractive as to become overpopulated with respect to the local resource capacity.
Piketty, at least, doesn't make that mistake. He realizes that his "rent tax" has to be assessed at the level at which the elite operate. Piketty is wrong in that he has no intention whatever of capturing even a meaningful portion let alone all of "rent." He seems to think that a modest "wealth tax" will "fund" some nice things, which misses the point a bit, I think.
FWIW, Piketty explicitly denies this. He believes a return to capital is going to occur in any system which is based on private property, and that more perfect competition would not eliminate the main dynamic in capitalism tending to produce inequality.
Then it's an imperfect system. The only perfect systems are ideal. They exist in logical space beyond time, not real space and time. This is the problem with neoclassical economics. It posits perfect competition as a model in time-independent logical space, and then argues that economic arrangements in actual economies should (normative) aim at approximately the model even though it is unrealizable.
Actual systems have imperfections, even the most highly engineered ones. Engineers design to tolerances.
Designing to tolerances needs to be done in social systems to reduce dysfunction.
The idea that a social system left to itself will function perfectly is an unwarranted assumption — if only because nothing is idiot-proof. :)
However, human societies are cultural and institutional, i.e., introduced artifact based on subjective differences.
The neoclassical notion of market perfection is unrealizable and the project of reducing market imperfections is nonsense.
Asymmetries of power and all that flows from them including distributional effects are the "natural" state of human societies. One of the these fundamental asymmetries of power is gender asymmetry, for example. It's structured in physical strength, and it has become embedded in culture and institutions. And we know that the other basic human drive other than sex is money (wealth). So go figure.
Great private fortunes can indeed entitle their owners to an undue share of society’s current income and political power. At times, however, private wealth can serve as a font of charity or, indeed, a bulwark against government overreach.
Oh spare me, Lord Fauntleroy.
Piketty, at least, doesn't make that mistake. He realizes that his "rent tax" has to be assessed at the level at which the elite operate. Piketty is wrong in that he has no intention whatever of capturing even a meaningful portion let alone all of "rent." He seems to think that a modest "wealth tax" will "fund" some nice things, which misses the point a bit, I think.
Right, economists see everything in terms of economics, and think of taxes funding government, even when at the common sense level they know this is ridiculous in a fiat system.
The problem with wealth asymmetry is that it is bound up in other social and political asymmetries that determine status and power.
The entire liberal revolution, led by the American Revolution and even more so by the French Revolution, was to put an end to privilege and establish equality of persons — "We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness."
Social asymmetries lead to privilege and inequality of persons, such as a double standard of law and its enforcement, which also often involves suppression of equal rights.
Economic asymmetry is more problematic socially and politically than it is economically. A system can potentially take quite a bit of asymmetry and still function fairly well economically if the interests of "the little people" are discounted and the poor disregarded as "natural" and even "necessary." To the degree that social dysfunction and illiberal politics are ignored, "some" economic inequality is "beneficial." If this gives the ownership class more power, then it is argued that "those who own the country should govern it."
But the result is social dysfunction and political turmoil resulting in suppression of human rights and civil liberties in the interest of "law and order," and to guarantee the "freedom" of "free markets."
Great private fortunes can indeed entitle their owners to an undue share of society’s current income and political power.
This is the conservative mindset v. the liberal mindset. John Jay's "The who own the country should govern it" versus Abraham Lincoln's "government of the people, people by the people and for the people." These views are mutually exclusive.
David,
They absolutely looooooove their 'charity'.... more soup kitchens!!!
"We’ve been debating the right balance since the 19th century and probably will be long after the 21st."
Right... its like the blind and stupid debating the blind and stupid...
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