Sunday, August 17, 2014

Is It Impossible To Tax The Wealthy?

Ok, somebody 'splain this to me.

Obviously not true...but why?

Note: to my shame, I have never had an economics class. I am an economic nincompoop. All I know is what I've learned in the gutter


Blogger The Mystic said...

Well, I'm no economist, but I have taken two economics courses, so get ready for some armchair economic professorhood.

If you ask me, basically, the guy who wrote this article is trying to be clever with his "for the government to consume more goods and services, somebody else must consume fewer" position.

Such a position is only true, of course, if you assume all (domestic) goods and services are "consumed" (which is probably never true in a country such as America) and you're looking at a static snapshot of the (domestic) goods and services available in the nation. If there are goods and services available without takers, then no one needs to consume less for the government to consume more.

And one might argue that Mr. Kendrick's $84 million is something like a good without a taker.

But we can bracket that point for now.

What's most important, it seems to me, is that the guy seems to have a very strange definition of "consume," (or perhaps "good"?) since he clearly doesn't think Mr. Kendrick has consumed the $84 million in his bank account. He tries to play around with the assertion that Mr. Kendrick "just pushes cars around all day," ignoring (among other things, such as economic transactions in which he is clearly partaking, like food, utilities, property taxes, capital gains from investments, etc.) the plain fact that the man pushes cars around all day while having consumed his $84 million in liquid, monetary goods.

Mr. Kendrick doesn't have to spend money to be considered to have consumed that money, since that $84 million is now a set of goods not available to anyone else. Even if he's just pushing cars around, he's sitting on $84 million that no one else can use or touch. This is one of the reasons we should tax the idle rich, obviously.

The author's strangeness gets more strange when he talks about what happens when the government takes Mr. Kendrick's $84 million. He tries to suggest that nothing other than meaningless shifting of ones and zeroes occur, but that is obviously false. Mr. Kendrick now consumes far fewer goods, as his $84 million is gone. If he can somehow persist in sustaining himself while only pushing cars around, then sure he will, but the government will now own and determine a use for his $84 million. The goods have changed hands, Mr. Kendrick has no longer consumed those goods, and the government has the power to spend them.

He tries to say some crap about the bank losing the use of that money and that this now means other, non-Mr.-Kendrick people bear the burden of the tax, but since Mr. Kendrick has lost his fortune, the collateral damage, albeit real, is certainly not the majority of the burden of the tax. It's probably not even significant.

6:17 PM  
Blogger Aaron Boyden said...

That would be kind of true if we faced a situation where our economy was restrained by limited capacity, where if the government bought more that would have to come from there being less somewhere else. But we are in a recession, with badly under-used capacity, so more demand, say from Mr. Kendrick's money being spent, could be used to employ some of the currently unemployed people and idle capital goods which are presently in surplus.

6:19 PM  
Blogger The Mystic said...

I like this, too: "'Taxing the rich' cannot work unless you do it in a way that induces the rich to consume less."

That simply, obviously, makes no sense. If a rich old miser has $84 million and does nothing with it, taxing that and repurposing it for the use of the public obviously works.

This author needs to view money as a good, and not as a completely independent non-real good. Divisions are commonly drawn between money and natural resources, but the way this guy's doing it just confuses the matter.

I'm interested in why you are unable to completely shred this article on your own. Maybe I'm committing some sort of reasoning error(s) which I am overlooking. I didn't exactly spend hours on this, but it sure didn't seem to warrant it...

6:26 PM  
Anonymous Lewis Carroll said...


Here is where Landsburg goes wrong:

"Here’s why it’s impossible: For the government to consume more goods and services, somebody else must consume fewer."

This assumes that the volume and/or value of all goods and services is finite; or at least that we are close to the putative cap. This may be true if the economy is at full capacity and/or full employment, but is clearly false if there is any slack e.g. unused capacity, labor or other factor inputs in the system.

While it may be true that we are in theory constrained by finite amounts of real, worldwide resources (e.g. fossil-based energy sources, fresh water), no serious economists since the Physiocrats (} believes that these limitations imply a direct limit on the value of economic output.

This fallacy is related to the one in which it is believed that the government cannot stimulate the economy through fiscal policy because any such government input 'crowds out' private investment. This is only true when there are NOT any resources / capacity in the economy that are idle. If there is spare labor and / or other capacity in the economy that would otherwise be unused, then government spending or investment cannot crowd out private such expenditures. In fact, it would bring that otherwise idle capacity into use, increasing overall economic output.

There is a lot more here about why Landsburg is wrong:

7:18 PM  
Anonymous Lewis Carroll said...


An implied part of that answer that I left out is that there is an assumption that the wealthy person in question would *consume* or spend every last dollar that they have. We know this is generally not true, and that the wealthy have a much lower 'marginal propensity to consume'.

So the last million dollars that a 9-firgure net worth individual has is a lot less likely to be spent on 'goods and services' than it would if divided among say 50 people with far fewer resources. Rather than being saved or invested, as is likely with the very well off individual, the funds would be more likely to be spend buying goods and services if distributed among those 50 others who are far less well off.

This is simply a positive economic statement, accepted by almost every economist. The marginal propensity to consume (as well as the so-called marginal utility of money) is assumed to diminish as one goes up the wealth ladder.

7:37 PM  
Anonymous Anonymous said...

Caveat: I am a physicist by training, not an economist. So, I may be quite wrong in this comment!

First off, I think Aaron Boyden nails the simple succinct answer.

Second, I think it is worth considering how the great depression ended for the US.

Mr. Landsburg would have you believe that “For the government to consume more goods and services, somebody else must consume fewer.”

If Landsbutg is correct, this must have been true in the 1941-45 time frame when the US grossly ramped up its spending. Either, the economy did not grow faster than before 1941, in which case Mr. Landsburg is correct, or the economy did, in fact grow in the 1941-45 time frame faster than the prior 10-12 years, in which case Mr. Landsburg is incorrect.

The US economy grew, despite unprecedented gov’t spending and borrowing.

It is easiest to see why if we rewind to 1929 when the stock market crashed, and fairly shortly thereafter the US economy locked up.

Consumer spending plummeted, companies started to let people go and drastically reduced production (and employment) and banks started to fail.

A significant fraction of people lost their jobs, or lost their savings in banks. More feared losing either (or both). This led to further contraction in consumer spending. Businesses, losing their customers, cut back production more, laying off more people, further reducing consumer spending and leading to yet more people being laid off.

Unemployment peaks around 25%

FDR is elected, the New Deal begins, and a new equilibrium is reached with large scale deficit spending be used to hire people so that they can spend money so that businesses can hire more people who will then have money to spend, closing this loop.

However, the New Deal is not enough to get the US economy back into a sustainable position.

What is needed is a reason to ramp up government deficit spending to the next level. Enter WW II.

Economically, WWII is the US going on a deficit spending bender, spending like the proverbial drunken sailor.

Many Americans are put to work doing economically useful things like building new highways, railways, ports, and airports, as well as inventing nifty new technologies, such as vacuum tubes that can operate inside an artillery shell (which will enable Motorola to perfect the car radio), radar, and the atom bomb. (All will, in one way or another, create new industries or enhance existing industries.)

Many Americans are put to work doing economically useless things, such as digging ditches at Army bases, building airplanes and ships that will be destroyed in their first combat, and making rounds for training exercises. (A ship on the bottom of the ocean does not contribute substantially to the economy.)

And, employment blossoms and the economy booms.

The moral? When (as Aaron Boyden states) “ we are in a recession, with badly under-used capacity, so more demand, say from Mr. Kendrick's money being spent, could be used to employ some of the currently unemployed people and idle capital goods which are presently in surplus.”

If there is slack capacity, government spending can put that capacity to work (as it did in WW II), putting cash in the hands of workers who otherwise would have no income, so that they can spend and in so doing stimulate the economy. The government has to pay for its borrowings, but can do so over a 30 year time span. By paying back today’s spending in later years we win for multiple reasons. First, we pay off most of our debt with depreciated dollars. In fact, if our economy grows faster than the debt, we are on a safe path back to home!

Second, we spend less in any given year than the economic boost we got in the year of stimulus.

Jim Bales

12:56 AM  
Blogger Winston Smith said...

Wow, thanks everybody.

The argument smells of rat (obviously), and I had some guesses, but, ignorant of economics as I am, I didn't trust any of my hypotheses.

The excess capacity point, of course, makes perfect sense.

Econ is cool

7:54 AM  

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