Remarkably of the hundreds of emails we received in reaction to our op-ed, almost no one questioned Brandeis’s idea that we can have great concentrations of wealth, or democracy but not both. People questioned other aspects of our proposal, asking questions like (1) how would it work in a world of income bunching; (2) would people still have the incentive to work hard; and (2) is it fair to have very high tax rates on the affluent.
Our last post talked about alternative potential triggers. Here we tackle some more detailed questions about implementation including how to trade off different kinds of distortions. [emphasis added]
Read the rest at Freakonomics
Of Lags and Caps: Possible Implementations of a Brandeis Tax
by Ian Ayres
Interesting that no one has questioned the premise that wealth/income concentration is incompatible with liberal democracy.
"Minsky rightly argued, however, that extremes of income and wealth are not compatible with democracy. Thus, the case for limiting income and wealth at the top has more to do with creating a more just society than with redistributing income to eliminate poverty."
ReplyDeleteSTABILIZING AN UNSTABLE ECONOMY, Minsky, p. xxix
@ El Viejo
ReplyDeleteRight. Brandeis and Minsky were both prodigious thinkers. Their disagreement on this point shows that the premise is one that deserves debate.
My intuition is that wealth and income equality results in state capture and de facto oligarchy-plutonomy, but we need to look at evidence.
After arguing with my nephew for an hour on the subject we came to the conclusion that large incomes are compatible or sustainable with society and the economy if they add 'real' wealth to the nation. Steve Jobs might be a positive example. Wall St execs are dubious examples.
ReplyDeleteThe Republicans claim that the 'rich' create jobs. I think until recently they found it easier to put money into a hedge fund, while the self employed who might have incorporated and hired have been ham-strung with the Reagan self-employment tax.
Fix it with the tax structure: Corporations get tax incentives for R&D. Apply similar tax incentives to the rich. Why give a universal tax break to the rich? Give it to those who really do start new companies and hire people.
@ El viejo.
ReplyDeleteThis is the rationale for taxing away economic rent (land rent, monopoly rent, and financial rent) while leaving productive investment and income from production alone.
I would also argue that for market capitalism to be compatible with democracy, decentralization is required. Consolidation introduces market imperfections that curtail competition and inhibit innovation, and economies of scale lead to consolidation. Therefore, anti-trust regulation is needed.
Thanks for the link Tom, to crosspost my reply there:
ReplyDeleteIan, I like where your head is at, but instead of IRS definition of income (which is bent out of shape in all sorts of ways by Congress) you should stop and consider the Haig-Simon definition of income:
"value of all consumption in a given year plus the change in net worth." The vast majority of the income of the Forbes 400 is from capital gains and yet realized capital gains are taxed at only 15% while unrealized (or "accrued") gains are not only untaxed they're unmeasured unless and until the estate tax (a one-time net asset tax) is levied.
Its inequitable enough that a surgeon making $400,000 a year in earned income pays a 35% rate and an investor making $400,000--- or $400 million-- in long-term capital pays either 15% or 0%. The inequity would be compounded if the surgeon's tax rate is dramatically increased under a Brandeis tax while leaving accrued gains untaxed. Its premature to talk about a Brandeis tax until after we have a Vickrey tax. Nobel Prize winning economist (and proto-Supercruncher) William Vickrey thought THE failure of our tax code was the failure to tax unrealized capital gains.
"Nothing short of full taxation of such gains, including those accrued at the death of the taxpayer, can be accepted as an adequate solution. Any less than this means a continuation of a wide open avenue of tax avoidance that completely frustrates any attempt at equitable progression of the tax burden and seriously interferes with the efficient functioning of the economy."
Vickrey's solution was to tax capital gains retrospectively. Capital gains would be taxed (at ordinary income tax rates) when asset sold or owner died with an interest charge tacked on for each year asset was held. The simplest way from here to there is strike "26 USC 1(h) Maximum Capital Gains Rate " and replace with, "26 USC 1(h) Vickrey Tax":
"Notwithstanding any other provision of law, if the taxpayer disposes of a capital asset then the rules of Subsection 1271(1) shall apply to any gain recognized on such disposition in the same manner as if such gain were an excess distribution in respect of stock in a passive foreign investment company."
http://www.law.cornell.edu/uscode/html/uscode26/usc_sec_26_00001291----000-.html
That would take care of unrealized capital gains, stepped-up tax basis on inherited assets and the sub-ordinary income rates on capital gains (and dividends) in one fell swoop. Wouldn't be the worst idea to include Mitt Romney's proposal to exempt families earning less than $250k from the capital gains ta-- errr, Vickrey tax. I'm a fan of MMT economics myself so I think the economy is dramatically overtaxed already so I'd make this tax reform Grover Norquist-compliant by using whatever CBO projects in additional revenue to cut ordinary rates across the board to make it revenue neutral.
@ Hickey
ReplyDeleteI agree with 'decentralization'. I was self employed and was at the point of incorporation, but couldn't come up with the appropriate capital and eventually was taxed to death by the self-employment tax and went back to work for corporate America. I know I wasn't alone. You may remember the guy that flew his plane into the IRS building in Austin, TX.
That's the level of frustration at the grass roots business level.
This started in the 70's when corporations started working to rid themselves of taxation and get cheap laborers and buy factory automation. It was all a response to Inflationary Baby Boomer aggregate demand of the 70s.
(See Book: The Age of Greed)
Now we have the opposite problem. We overshot with world productive capacity and American workers (the consumers of world's goods) have had their buying capacity and working capacity slowly eroded away. (by debatable reasons) and at the same time Boomers are retiring and spending less or getting out of debt.
Granted that MMT says that deficits are not as fearful a thing as the public thinks, but it seems to me that we have three choices: We educate the public about MMT or we tax the rich and Corporate America and at the same time give tax breaks to the Middle Class or we increase immigration of self supportive professionals who will start businesses at the grass roots level and hire.