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Thomas Piketty and the False Promise of “Solidarity”

According to many philosophers, starting with Kant, existence is not a predicate, but whether this is so or not, the first time I have ever seen it praised as something meritorious in itself was in a recent article in the Guardian newspaper, the bellwether of British center-left liberal (in the American sense) thought.

The article was titled “Our manifesto to save Europe from itself,” and was a manifesto collectively-signed by a number of European intellectuals and academics, but apparently written by Thomas Piketty, the French economist who recently, and rather unexpectedly, became a world celebrity with the publication of his book, Capital in the Twenty-First Century.  

Embedded in the article was the following curious statement:

Our ideas may not be perfect, but they do have the merit of existing.  

In so far as this means anything, it must mean that it is better to have bad ideas than no ideas at all, a proposition that I find dubious at best, and which I believe to be more likely false than true. The worst political monsters in the world had ideas, often many of them, that had the supposed merit of existing, but the somewhat graver defect of occasioning the deaths of millions of people. Give me any time a man, even a dictator, with no ideas rather than someone with the ideas of a Lenin, a Hitler, a Mao or a Pol Pot—or of an Islamic terrorist.

I am not sure that I should trust anyone very far with my investments, or with anything much much else, who was capable of expressing the sentiment that Professor Piketty here expressed. Few are the situations in human existence that cannot be made worse by ideas, more especially those of intellectuals and academics. But let us pass over this foolish sentence as if it were a mere slip of the pen and look at the actual ideas that had the merit of existing. Here, I am afraid, things are not much better.

That the world in general, and Europe in particular, is not going swimmingly may easily be admitted by people of all possible political opinions. At what time in history, indeed, were there not problems (which had the merit, or was it the demerit, of existing?) which caused dissatisfaction to many? But I am afraid that Professor Piketty has the equivalent in politics of stone-deafness in music.

He is worried by the rise of populism in Europe, which does indeed include worrying elements, if anything so nebulous as populism can be designated by a single term. But he does not see how he, and people like him, have played an important part in fostering such elements by means of their own ideas and ways of putting things. Thus:

Our continent is caught between political movements whose programme is confined to hunting down foreigners and refugees on one hand, and on the other those who claim to be European but in reality continue to consider that hardcore liberalism and the spread of competition is enough to define a political project.

Let us take “on the one hand” first. Hunting down is deliberately emotive language and connotes the posses (whose existence is not meritorious) of angry hunters who kill their prey when and wherever they find them. In fact, what he really means is that some governments  have denied entry to large numbers of people whose entitlement to the status of refugee is often doubtful, as well as having made some not very vigorous efforts to expel people who have no legal right to be in their countries.

The corollary of Professor Piketty’s way of putting it is that European governments have the duty to open their borders to whomever wishes to enter and must also accept the presence of any number, however large it might be, of people already illegally present, irrespective of the ease of absorbing them: in other words, that legality itself should be abolished and have no force. These are not doctrines that are likely to appeal to the people who have to suffer their consequences other than a choice of exotic cuisines every night to choose from. If you want to know why the gilets jaunes in France are angry, read Professor Piketty’s Manifesto for Democratisation in Europe, in which he makes President Macron look like a man of the people.

As to the other, or second hand, of the Professor’s false dichotomy, it seems to have escaped his notice that no European polity can be properly called “hardcore liberal.” For example, in his own country, France, the public sector accounts for more of the GDP than does the private sector, and though in other countries it accounts for less. But in no European country is the public sector inconsiderable. Indeed in every country, the public sector looms so large as to have a profound influence on the whole tenor of life. Furthermore, it is often difficult, so imbricated are they, to distinguish the public from the private sector. It would be more accurate to call European countries “hardcore corporatist” than “hardcore liberal”; to go further, it would be more accurate to say that the Professor is a hardcore Stalinist (though still it would not be not accurate) than to call European countries hardcore liberal: for the very high proportion of the French GDP accounted for by the public sector is still not enough for the Professor’s taste, and actually with a little effort with the aid of his ideas could be brought up to the levels of Stalin’s Russia.

In Britain, as in other countries, more than a quarter of the income tax is paid by 1 per cent of the population. But this is not enough for the Professor, irrespective of whether increasing the rate would increase the take (the purpose of tax being primarily symbolic). He would like capital to be taxed too, from above the not very high limit of $900,000. This would increase both equality and efficiency, according to the Professor, in so far as the money raised would then be redistributed and invested productively by the philosopher-kings of whom the professor is so notable an example.

All this is to be done in the name of what Piketty calls solidarity. ‘If Europe wants to restore solidarity with its citizens it must show concrete evidence that it is capable of establishing cooperation’: that is, it must raise taxes on the prosperous. Overlooking the question of what Europe actually is, or how it is to be defined (I suspect that the Professor thinks it is not  continent or a civilisation, but a bureaucracy), this seems to me the kind of solidarity that only someone suffering from autism could dream up, solidarity equalling taxation administered by politicians, bureaucrats and intellectual advisers.

The Professor is a populist pur et dur.

Reader Discussion

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on January 28, 2019 at 11:38:11 am

Pikettyk’s problem is to think that lack of redistribution is the principal fault of Europe and western country not the creation of richness

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Daniele
on January 28, 2019 at 12:58:55 pm

"The corollary of Professor Piketty’s way of putting it is that European governments have the duty to open their borders to whomever wishes to enter . . . "

I think you mean "whoever." Relative pronouns take the case corresponding to their function in the dependent clause. Since it's the subject of the clause "Whoever/whomever wishes to enter," it takes the nominative case.

Sorry. Pet peeve of mine.

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Seamus
on January 28, 2019 at 13:19:31 pm

Our ideas may not be perfect, but they do have the merit of existing.

Translation: Our ideas may not be perfect, but they do have the merit of being ours.

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QET
on January 28, 2019 at 17:39:16 pm

According to many philosophers, starting with Kant, existence is not a predicate, but whether this is so or not, the first time I have ever seen it praised as something meritorious in itself was in a recent article in the Guardian newspaper….

Readers in the US will be acquainted with the anti-abortion movement, where mere existence has long been praised as virtuous in and of itself. I’m surprised this viewpoint hasn’t reached the other side of the pond.

”Our ideas may not be perfect, but they do have the merit of existing.”

In so far as this means anything, it must mean that it is better to have bad ideas than no ideas at all, a proposition that I find dubious at best, and which I believe to be more likely false than true. The worst political monsters in the world had ideas, often many of them, that had the supposed merit of existing, but the somewhat graver defect of occasioning the deaths of millions of people. Give me any time a man, even a dictator, with no ideas rather than someone with the ideas of a Lenin, a Hitler, a Mao or a Pol Pot—or of an Islamic terrorist.

It's so rare that I hear anyone defending a lack of ideas, I must acknowledge Dalrymple at least for his novelty. He begins by decrying the premise that the existence of ideas is inherently meritocratic, and concludes by making an elaborate display that his own mind has remained unsullied by them.

And, sure enough, a world designed to Dalrymple’s liking would lack Lenins, Hitlers, and Maos, and millions of people would have avoid being killed. But a world without ideas would also lack any defenses against infectious diseases, and thus many additional hundreds of millions of people would be killed. I am not sure that I should trust anyone very far with my investments, or with anything much else, who was capable of expressing the sentiment that Dalrymple here expressed. At what time in history, indeed, were there not problems (bubonic plague, anyone?) that caused dissatisfaction to many? I am afraid that Dalrymple suffers from the equivalent of stone-headedness.

He is worried by the rise of populism in Europe, which does indeed include worrying elements, if anything so nebulous as populism can be designated by a single term. But he does not see how he, and people like him, have played an important part in fostering such elements by means of their own ideas….

“Any man who afflicts the human race with ideas must be prepared to see them misunderstood.” H. L. Mencken

[Piketty’s arguments] are not doctrines that are likely to appeal to the people who have to suffer their consequences other than a choice of exotic cuisines every night to choose from. If you want to know why the gilets jaunes in France are angry, read Professor Piketty’s Manifesto for Democratisation in Europe, in which he makes President Macron look like a man of the people.

And if you check out the Red Scarf movement, you’ll observe that vastly more people appear to support this point of view—and, by extension, Macron—than support the Yellow Vests. Evidence suggests that Macron IS a man of the people.

(How did we get into a situation where I’m basically defending establishmentarian Richard Nixon and his Moral Majority, and Dalrymple is defending the hippies? I know I’m going to kick myself after I hit the “Send” button....)

In Britain, as in other countries, more than a quarter of the income tax is paid by 1 per cent of the population. But this is not enough for the Professor, irrespective of whether increasing the rate would increase the take (the purpose of tax being primarily symbolic).

Having the top 1% pay a mere quarter of income taxes may indeed be less than Piketty would prefer. In the US, the richest 1% pay a third to a half of federal income taxes. Thus, the UK has a ways to go to achieve this measure of progressivity.

Now, how can it be that the top 1% would pay most of the federal income taxes? Obviously it’s because the top bracket has risen so high—except that it hasn’t; it’s fallen. Rather, this result is driven by the fact that the top 1% have become so fantastically rich that even with lower top brackets, they generate greater income tax revenues. This has been the thrust of Piketty’s thesis for years; thanks for noticing.

(Ok, in the US, the rise of the standard deduction has helped, too.)

He would like capital to be taxed too….

The US tax code creates some curious opportunities for income/capital to avoid taxation, so it hardly surprises me that economists would propose measures to compensate for this dynamic. To take a general example, property ownership is a substitute for renting. In effect, an owner pays himself a stream of rental revenues for the use of his own property, but the tax code does not recognize these revenues. Property taxes are one means of attempting to capture this weakness in the tax code.

[More progressive taxation] would increase both equality and efficiency, according to the Professor, in so far as the money raised would then be redistributed and invested productively by the philosopher-kings of whom the professor is so notable an example.

This reflects the standard economic principle of diminishing marginal returns. If Piketty is a philosopher king, so are most economists.

In the US, poor people have bizarrely high infant mortality rates. Greater redistribution might enable the kinds of investments that might give their children the same odds of survival as wealth infants have. I suspect Dalrymple would scoff at this suggestion. Then again, Dalrymple has made it clear that he does not find existence to be especially virtuous….
____

Snark aside, here’s my limited understanding regarding refugee status:

During WWII, many nations declined to accept Jews fleeing Nazi oppression. Afterwards, many of these nations expressed remorse, and made extravagant promises about extending relief to refugees fleeing oppression. But as the fear of oppression has waned among Western citizens, these promises have come to seem ever more gratuitous. The most idealistic/economically secure Western citizens favor more liberal refugee policies. The less economically secure/most nationalistic Western citizens favor greater limits on refugees.

I suspect Pikitty is in the former group, while Dalrymple is in the latter. Each side has its points, and polemics contribute little.

I read Dalrymple’s essay, stripped of its snark, to express the view that a person’s unenviable—even lethal—circumstance may not, by itself, establish a claim to refugee status, and that nations are justified in enforcing limits on immigration, even at the expense of pitiable people. I share this view. If a democratic nation wishes to extend greater compassion to immigrants, it should be free to do so—but also free to refrain.

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nobody.really
on January 28, 2019 at 17:39:38 pm

So, if we are somehow able to eliminate THEIR ideas, will we also be able to wish them (the philosopher-kings) out of existence?
I am all for that and it must be good as my positing this idea means that it EXISTS!

What a "maroon" as Bugs Bunny would say.

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Guttenburgs Press and Brewery
on January 29, 2019 at 05:47:58 am

[…] Theodore Dalrymple. […]

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Thomas Piketty gets the Theodore Dalrymple treatment « Samizdata
on January 29, 2019 at 08:13:31 am

I am fascinated that commenter nobody.really (in fact that any commenter ever) has chosen to write (including quotations) 1,168 words (5,624 printable characters) concerning Theodore Dalrymple's or anyone else's original article (also including quotations) of 1,145 words (5,448 printable characters.)

Best regards

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Nigel Sedgwick
on January 29, 2019 at 08:47:36 am

Piketty is the also the "genius" who believes that the upper limit of growth is 2%.

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Nicholas Capaldi
on January 29, 2019 at 09:01:25 am

Readers in the US will be acquainted with the anti-abortion movement, where mere existence has long been praised as virtuous in and of itself. I’m surprised this viewpoint hasn’t reached the other side of the pond.

This is unworthy of you. Not only do you know that this is not an application of Kant's statement, but even your attempted application has its own direct contrary: Readers in the EU will be acquainted with the euthanasia movement.

It’s so rare that I hear anyone defending a lack of ideas, I must acknowledge Dalrymple at least for his novelty. He begins by decrying the premise that the existence of ideas is inherently meritocratic, and concludes by making an elaborate display that his own mind has remained unsullied by them.

Say you have a bad headache and go to a doctor. He runs all kinds of tests and nothing turns up, suggests you just keep taking aspirin and wait it out. You go see another doctor, who confirms the negative tests but then tells you: "Hey, I have an idea--let me into your brain and I think that if I rearrange a part of your cerebellum, your headache will be gone. I haven't actually done this before, but my idea has the merit of existing." It is not necessary to refute or reject an idea only by means of another idea; all that is required is to estimate the risk inherent in the first idea. But if you feel you need a counter-idea, here's one: Letting Piketty et al. have their way rearranging European governance, on the strength of murky allegations of "structural problems" and unscrupulous misrepresentations as to the motives and virtue of people whose politics they dislike, is no more wise than letting that doctor carry out his idea on your brain.

As for refugees: first, the situation of Jews fleeing Nazi Germany is not germane to the present situation; using the same word to describe both does not magically make them equivalent; second, "the most economically secure" Westerners don;t have to live within a hundred miles of the masses of refugees, who are not moving to the Upper East Side, or the Back Bay, or Pacific Heights (or their European equivalents). I am relatively economically secure, and I favor letting that doctor into your brain, because the potential benefit to me of an improved attitude on your part far outweighs the risk to me that you'll end up a vegetable or worse.

To take a general example, property ownership is a substitute for renting. In effect, an owner pays himself a stream of rental revenues for the use of his own property, but the tax code does not recognize these revenues. Property taxes are one means of attempting to capture this weakness in the tax code.

Again, I find it hard to believe that you believe this. I first encountered this idea as a 1L in the basic federal income taxation class. The professor's first words to our class were a statement that the field of income taxation was the most intellectual area in the whole of law, owing to the fact that the concept of "income" is so inherently elastic and indeterminate; and he used your example (along with a couple of others) as evidence for his proposition. While his general proposition is irrefutable, being a matter of opinion, his examples, including yours, are not. Renting is rather a substitute for owning, than the other way around, in real terms (mathematically, b = a is the same as a = b, so for mathematical modelling purposes--i.e., PhD publication requirement and tenure-gaining purposes--your statement is tautologically correct). And the idea is not historical but a recent contrivance of economists, in the same category as "tax expenditures," to provide pseudo-intellectual cover for what is a fundamental and eternal habit of all governments at all times and in all places: expropriation of their subjects' wealth for their own use.

Finally, polemics often contribute much, decisively even. See, e.g., Thomas Paine, Karl Marx.

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QET
on January 29, 2019 at 09:11:07 am

How is that any more fascinating than that Dalrymple wrote an article of _______ words? It is both enjoyable and, sometimes, even edifying, to analyze an article's arguments, offer counter arguments of your own, and then wait for others to counter yours. What I find incomprehensible are people (there aren't any on this site so far as I can remember) who use comment fields only to call people names and curse them out.

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QET
on January 29, 2019 at 11:38:09 am

I think Jefferson (Thomas, that is) best summarizes nobody's *cleverness*:

“State a moral case to a ploughman and a professor. The former will decide it as well, and often better than the latter, because he has not been led astray by artificial rules.”

I would add that these artificial rules compel construction of an artificial world in which all manner of false equivalencies are not only possible but "de rigueur" (see the case of the renter vs owner cited by nobody).

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gabe
on January 29, 2019 at 12:39:51 pm

nobody.really: “[P]roperty ownership is a substitute for renting. In effect, an owner pays himself a stream of rental revenues for the use of his own property, but the tax code does not recognize these revenues. Property taxes are one means of attempting to capture this weakness in the tax code.”

QET: “I find it hard to believe that you believe this. I first encountered this idea as a 1L in the basic federal income taxation class. The professor’s first words to our class were a statement that the field of income taxation was the most intellectual area in the whole of law, owing to the fact that the concept of “income” is so inherently elastic and indeterminate; and he used your example (along with a couple of others) as evidence for his proposition. While his general proposition is irrefutable, being a matter of opinion, his examples, including yours, are not. Renting is rather a substitute for owning, than the other way around, in real terms (mathematically, b = a is the same as a = b, so for mathematical modelling purposes–i.e., PhD publication requirement and tenure-gaining purposes–your statement is tautologically correct). And the idea is not historical but a recent contrivance of economists, in the same category as “tax expenditures,” to provide pseudo-intellectual cover for what is a fundamental and eternal habit of all governments at all times and in all places: expropriation of their subjects’ wealth for their own use.”

gabe: I would add that these artificial rules compel construction of an artificial world in which all manner of false equivalencies are not only possible but ‘de rigueur’ (see the case of the renter vs owner cited by nobody).”

Dudes—honestly? I find this proposition so self-evident, I can’t imagine anyone seriously disputing it.

Larry, Joe, and Curly own identical houses with identical mortgage and maintenance costs. Larry lives in his house. Joe rents his house to Curly, while Curly rents his house to Joe. Each person consumes identical housing services, and pays identical costs. Yet Joe and Curly will also pay income tax on the benefits they receive from home ownership—that is, from the rent. Larry effectively rents from himself, yet pays no income tax on the benefits he receives.

Moral: The income tax code creates an artificial incentive for home ownership—quite apart from the issue of deductibility of mortgage interest, or homestead exemptions, or preferred capital gains treatment. Moreover, this distortion influences all kinds of rent/buy decisions, not just real estate.

Yes, as QET observes (and is apparently quite shocked about), the goal of public finance is to raise funds to finance government operations. But there are more and less efficient ways to do this. (I sense QET didn't grasp that part, and thus may have missed out on the intellectual challenge that public finance poses.) And one measure of inefficiency is the degree to which collecting revenues prompts people to change their behavior. The fact that the income tax code gives people an incentive to buy instead of rent reflects an (arguable) inefficiency in the system--an inefficiency that might be partially offset by other policies, such as property taxes.

(I say an arguable inefficiency because there are some taxes--for example, excise taxes--that ARE intended to alter people's behavior. The fact that government has adopted so many policies encouraging home ownership indicates that arguably government DOES want to influence people's behavior in favor of buying homes. Still, the distorting effects of the income tax applies to all forms of ownership--down to the choice to buy a lawnmower rather than rent one from the shop down the street.)

The idea that the income tax creates incentives for people to change their behavior strikes me as irrefutable---regardless of whether anyone LIKES taxation, or regards renting as a substitute for owning rather than the other way around, or whatever.

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nobody.really
on January 29, 2019 at 13:07:29 pm

nobody:

I (we) do get your point. However, let me take issue with the much ballyhooed and overstated argument that the tax code significantly affects individual home purchase decisions.

While this may be true at the margins, i.e. those with a second home or those seeking to derive revenue from rental properties, for the overwhelming preponderance of homeowners the decision to purchase has very little to do with the tax benefits. I know of no one who has purchased their primary residence BECAUSE of the mortgage interest deduction. Rather, one, like myself, purchases a home in order to have a sense of rootedness, to make of the property something akin to a "vision" one possesses, to live in a preferred neighborhood and / or to enjoy the comforts of something that one OWNS (mortgage bankers notwithstanding). In fact, in many instances, it would be cheaper to rent and save the thousands per month that goes to interest and principal. As I recall, you claim to have matured while living in a tony neighborhood. Was it the "tony" or the interest deduction that encouraged your family to purchase in a tony neighborhood?

Again, here we see an unchallenged "artificial rule", tax code causes home ownership to rise, to distort our perception of human behavior / motivation - and all in furtherance of another theory of human behavior / justice.

I ain't buying it, brudda! - well, at least not for the tax deduction - Ha!

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gabe
on January 29, 2019 at 13:21:04 pm

I ain’t buying it, brudda! – well, at least not for the tax deduction....

Ooooof. Very cute, gabe.

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nobody.really
on January 29, 2019 at 14:42:20 pm

I can't believe we have to get into this further.

First, we must note that the rigor of your logic depends entirely on the assumptions: identical houses, identical costs. Under those assumptions there is zero probability that said transaction would occur in "the real world," not even were rental income untaxed. For one thing, it would be impossible for either Joe or Curly to make a profit from the transaction, since neither could charge the other more than he himself would be charged in return. And in the real world, there are no such identities; instead, certain people are privileged to judge when two circumstances are sufficiently like unto for the conclusion to be asserted, which they can do only by means of assumptions (e.g., that there exists (ha!) a party ready, willing and able right now to rent Larry's house to rent his identical house to Larry, and abstractions (mathematics) which must necessarily ignore real human motivation (i.e., pre-tax-code-affected motivation), such as, is such an arrangement more than trivially possible in the current, real world?

Second, your model is an unreasonably unrealistic example of the underlying principle involved, which is that Larry has an asset which he could monetize but instead consumes, where Joe and Curly have identical assets they choose to monetize. The same "income" the tax code attributes to Joe and Curly because it is received in cash must be imputed to Larry (who is understood to be paying the same rent to himself) or else it is privileging one choice and penalizing its opposite. Another way of saying it is that the choice to forego income itself is income (this is the metaphysical aspect that really excited my tax law prof). This is true of every asset. Take time.
Larry, Joe and Curly are lawyers with identical practices and identical billing rates. Larry spends the weekend reading books and watching Netflix while Joe and Curly perform billable work for clients. Not taxing Larry on that imputed, foregone income in effect, per your behaviorism rationale for tax policy, penalizes so-called "productive" work vis-a-vis recreation. Larry mows his own lawn while Joe pays Curly to mow Joe's lawn and Curly pays Joe to mow Curly's lawn. Etc. Larry's wife sleeps with him, while Joe's wife sleeps with Curly for a fee and Curly's wife sleeps with Joe for a fee (and we perforce assume that everything about Larry, Joe and Curly in that regard is, uh, identical). Etc. (and in this last case, the tax authorities have a real winner, because both Larry and his wife have imputed "income").

And framing the analysis as one of economic efficiency does not settle or even speak to the more fundamental question, the necessary condition of any such analytical approach, which is the choice to understand by "income" everything possessed by one that another pays money (whether in the real world or in a model under assumptions) to acquire (I might pay a math tutor money to acquire the mathematical understanding you possess naturally; is that understanding "income" to you? Of itself? Because your forego the money income you could receive by hiring yourself out as a tutor?; people from Boston pay thousands to travel to Miami in the winter to enjoy the Sun; should the Miami resident have those thousands imputed to him as income?).

Arguments from economic efficiency doth protest too much. I know of no political theory save perhaps some highly refined form of utilitarianism which holds that human societies should be ordered according to a model (because there is no such principle, only competing mathematical proofs) of tax optimization. Or rather: that it is a proper function of government to order and reorder society according to such a model. You use the word "distort," but that presupposes some sort of eternal Platonic Form by which to perceive the distortion. So again, the entire analytical approach is solely and simply tautological: once you create the definitions and axioms, the conclusions necessarily follow. But it is those axioms and definitions that are at issue.

I could go on, but Nigel Sedgwick would complain.

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QET
on January 29, 2019 at 15:33:09 pm

You seem to understand this argument better than I do, so help me out here.

Curly, Joe and Larry each have $100. Curly put his under a mattress for a rainy day. Joe lends $50 to Larry, who pays it back with interest, and then borrows $50 from Larry and pays him back with interest. The interest received by Joe and Larry is taxed. Does Curly have an untaxed stream of interest that he pays himself? If so what is the interest-rate? How would we know?

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z9z99
on January 29, 2019 at 15:44:07 pm

and that "capital" generates a 4% return annually.....woo hoo!

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OH Anarcho-Capitalist
on January 29, 2019 at 15:50:14 pm

What about Shemp?

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OH Anarcho-Capitalist
on January 29, 2019 at 16:36:05 pm

[T]he rigor of your logic depends entirely on the assumptions: identical houses, identical costs.

It doesn’t. I make those assumptions to clear away irrelevant variables, so that we can observe the relevant ones. Experiments generally involve an experimental and a control group, wherein all variables are kept as uniform as possible except the variable you wish to focus on. You are free to dismiss this kind of analysis as unrealistic—but you’ll be rejecting pretty much all of science.

I know of no political theory save perhaps some highly refined form of utilitarianism which holds that human societies should be ordered according to a model … of tax optimization.

Nor do I. “Should” implies a value judgment. I have not offered a value judgment.

Rather, I have argued that the tax code DOES create incentives what would not exist in the absence of the tax code. And nothing you have said here challenges that claim.

I sense you draw a distinction between the benefits a person receives when measured in units of currency vs. benefits a person receives when not measure in units of currency. I (and the theory of Public Finance) draw no such distinction. True, the tax code focuses on quantifiable income to facilitate computations and collections. But that reflects constraints of administration. Ideally, public finance would accord equal treatment to all forms of benefit—because when it doesn’t, people distort their behavior in order to evade taxation.

For example, imagine that a judge tells Curly that he must pay half of his salary to his ex as alimony, and Curly than announces that—facing an effective 50% tax rate—he’ll stop working and just sit around reading books from now on. Would the judge approve that? I expect not. Rather, I expect the judge would grant the ex a fixed sum reflecting half of the income AS IF Curly were continuing to earn as before. To do otherwise would be to give Curly an incentive to change his behavior—cut back on working—and the judge would want to avoid creating such a distorting incentive.

Now, it's entirely possible that in the absence of the divorce decree, Curly really would require from law and just sit around and read books, because the benefit he perceives from reading is equal to the benefit he would perceive from working and having more money. In that case (assuming Curly has enough savings), Curly might actually do that, and simply pay the alimony out of his savings. But otherwise, the judge might sanction Curly if he just read books and ran out of money for alimony. This is because money is a kind of benefit that a court can order to be transferred to the ex; the satisfaction of reading is not. In this practical sense, the two kinds of benefits differ. But in other respects, the two kinds of benefits are similar, and people recognize this fact when they make trade-offs between the two.

(Admittedly, this is a stylized example; property settlement policies vary by jurisdiction.)

You use the word “distort,” but that presupposes some sort of eternal Platonic Form by which to perceive the distortion.

Well, I kinda agree—but I suspect not in the way you intend it.

Here’s the idea: Absent constraints, people tend to behave in the way that best pleases them. Constraints tend to reduce people’s options, keeping them from behaving in the way that best pleases them. They adjust their behavior to make the best of the new circumstances—but they perceive themselves to be less well-off.

Taxes inevitably impose constraints. The trick is the find a way to raise the necessary funds while prompting the least change in behavior all else being equal--which means, in this case, relative to a world in which a person had no tax burdens. If a person would do X, but taxation causes her to do Y instead, this change is called "distortion." Thus, the concept of distortion refers to the more-or-less objective, observable phenomenon of behavior change.

For example, when we increase the sales tax, people buy less stuff (or will shift their purchases to another jurisdiction), according to their “price elasticity of demand.” We say that the tax has “distorted” their behavior—and we can observe and measure that behavior change, regardless of our personal value system. In this sense, I deny your “Platonic Form” critique.

That said, when I talk about a world without taxation "all else being equal," I'm describing a world in which the person I'm observing pays no taxes, yet continues to enjoy the benefits of government services (police, fire, national defense, roads, reliable currency, educated populace, courts, laws, disease management, etc.) Clearly, such a world could not exist if EVERYONE was free of taxation. So, in that sense, you might criticize the economic model as relying on idealized “Platonic Forms.” But if we understand the model to refer to an individual's marginal incentives, this stylization doesn’t alter the analysis or conclusions.

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nobody.really
on January 29, 2019 at 16:36:06 pm

And the Ploughman laughs hysterically, then bemusedly smiles because he is not being taxed on the acreage that he has left fallow.

Perhaps only the Shadow and nobody knows!

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gabe
on January 29, 2019 at 17:03:10 pm

Does Curly have an untaxed stream of interest that he pays himself? If so what is the interest-rate? How would we know?

Yes, I would impute interest to him, reflecting a prevailing risk-adjusted rate of return. Two illustrations:

A. Matthew 25:14-30—

14 “[A] man about to go on a journey … called his own slaves and entrusted his possessions to them. 15 To one he gave five talents, to another, two, and to another, one, each according to his own ability; and he went on his journey. 16 Immediatelythe one who had received the five talents went and traded with them, and gained five more. 17 In the same manner the one who had received the two talents gained two more. 18 But he who received the one talent went away, and dug a hole in the ground and hid his master’s money.

19 “After a long time the master of those slaves came and settled accounts with them. 20 The one who had received the five talents came up and brought five more talents, saying, ‘Master, you entrusted five talents to me. See, I have gained five more talents.’ 21 His master said to him, ‘Well done….’

22 “Also the one who had received the two talents came up and said, ‘Master, you entrusted two talents to me. See, I have gained two more talents.’ 23 His master said to him, ‘Well done…..’

24 “And the one also who had received the one talent came up and said, ‘Master, I … hid your talent in the ground. See, you have what is yours.’

26 “But his master answered and said to him, ‘You wicked, lazy slave…. 27 [Y]ou ought to have put my money in the bank, and on my arrival I would have received my money back with interest. 28 Therefore take away the talent from him….’”

B. Imagine a regulated utility asks government for the authority to raise rates on customers, arguing that they need the funds for some maintenance project. But the utility has a pile of cash, raised from ratepayers, that they have kept in a vault and that if they had invested that money in CDs it would have generated sufficient funds to pay for the project. Should government authorize the utility to raise rates? Or should it tell the utility that it’s gonna have to pay for that project by cutting their dividends to shareholds, since it was the shareholds who picked such a wicked, lazy management?

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nobody.really
on January 29, 2019 at 17:33:37 pm

OK so now it would appear that old coffee cans or mattress springs are capable of generating interest / dividends.
Only in nobody's world is this conceivable.

Now as to taxing all manner of benefits (real or imagined).
It may interest you to know that the Washington State Legislature has empowered certain municipalities (Seattle) to propose and create special taxing districts. They are deemed Local Improvement Districts (LID). Under this policy / practice, the City may propose that any area that undergoes some "improvement" (loosely defined) may be subject to special tax assessments / levies based upon a presumptive "benefit" (even more loosely defined) to be enjoyed by the property owners in that LID.
How is the size of the benefit to be determined?
At what rate is the benefit to be taxed?
Does the rate of taxation vary with proximity to the "improvement"?
How do we counter the deleterious effects of interruptions to business while the improvement is being made? Or do we? (Hint: The City Fathers, in this case, Mothers WILL not consider this).
So here we have nobody's grand scheme in action - to tax that which has not yet been realized and may never be realized as a benefit. Not unlike Curly's "interest" accruing while sitting in a coffee can.
At least in Seattle the property owners may veto the district under certain conditions (not likely given the City's stranglehold on licensing); nobody, however, would tax any and all benefit one may derive from any and all non-economic activity.
I enjoy raising roses. Is that benefit to be taxable.
Hey, why not intimate relations - doubtless, there is some benefit to be enjoyed from that activity, even if it is only imagined during old age. How is the tax to be determined? frequency, duration, etc?

Only by operating within a world of economic theory / rules may one propose such folly as imputing interest to dead money or prospective improvements - neither of which may actually be realized.

I think I may have a nice bottle of Walla Walla Valley Petit Verdot - Shhhh! don;t tell anyone, I don;t want to be taxed for the benefit of enjoying this fine wine.

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gabe
on January 29, 2019 at 17:52:57 pm

nobody,

Thank you for your response. After consideration, I do not find it persuasive. Please explain how you are not taxing potential income, even if creating the illusion you are not doing so by using the word "imputed." Why would we not impute income to a lawyer who makes a modest living working for a charity, when he could potentially make much more working for a large firm or corporation? What prevents the taxman from deciding that you are not making as much as he thinks you should, for whatever reason, and impute the difference to you?

I think on this point, I shall have to conclude that QET has the better argument.

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z9z99
on January 29, 2019 at 18:02:50 pm

nobody, however, would tax any and all benefit one may derive from any and all non-economic activity….

Hey, why not intimate relations…?

I recall reading some social science research from the UK, estimating the number of sex acts performed each year throughout the country, and how that number changed over time. Of course, the first question was how the researchers generated this estimate. Their answer: “We’d love to tell you—but then government would tax it.”

Look, I get it: No one likes paying taxes, or even reporting income. So people freak out about the idea of taxes being assessed on unfamiliar things—ESPECIALLY things that are not measured in liquid assets such as cash.

Thus, people freak out about the estate tax being assessed against a “family farm,”—oh, woe for the destruction of the family farm! Today the tax applies to only about 2000 people, and no one has yet found an example of a family farm having to be liquidated to pay the estate tax. But the idea of assessing a tax against an illiquid asset such as a ($11.15 million) family farm provokes anxiety.

But try for a moment to be a grown-up: Yes, we need government services. Yes, they cost money. And no, for most services a user fee would not be an efficient source of revenues. The Ancient Greeks instituted a progressive income tax. If there were a better system, I suspect someone would have found it by now.

Yes, we tax liquid assets because it’s administratively convenient to do so, and thus familiar—NOT because such a system is inherently virtuous. But the virtue of the 1986 Tax Reform was to broaden the base (tax more stuff) and lower the rate, thereby reducing the extent to which any given tax alters people’s behavior. By the same reasoning, it would be desirable to broaden the base as much as possible, taxing all kinds of benefits. We don’t, not because we lack a rationale, but because we lack a mechanism.

So go ahead, trot out all your examples of unfamiliar things being taxed, and chuckle. Gosh, how unfamiliar! And therefore, how absurd! But remember, when we tax income, we tax productive behavior—and effectively discourage it. Why do we regard this as such a great system? Well, because it’s workable, and therefore familiar. But a moment’s reflection should persuade you that it’s really a pretty bad system. It’s just better than (nearly) anything else we’ve come up with.

In short, don’t be too quick to condemn the unfamiliar to praise the familiar. Stretch your mind every now and then; it’s good exercise.

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nobody.really
on January 29, 2019 at 18:07:37 pm

And briefly, how does one address this problem that arises from "imputing."

Let us say that Curly, Joe and Larry each own a painting by the same artist, having identical values. Now we do the same exercise. Curly is content to have his painting hang above the mantel. Joe sells his to Larry for fair market value and books a profit, and the next day buys Larry's, again for fair market value. Now all three have property to which one may "impute" income, so all of them have imputed income, but Joe and Larry also have actual income. They do not pay the same tax as Curly, regardless of the fact that their property is identical.

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z9z99
on January 29, 2019 at 21:57:25 pm

Please explain how you are not taxing potential income….

OK: I’m not taxing potential income because I have no power to tax.

But, ideally, we WOULD have the power to measure and tax potential income, and to assess taxes on that basis. The rationale is lengthy but, I believe, congruent with the two illustrations I offered above. If you’re interested, I develop these ideas in a long series of comments beginning here.

Let us say that Curly, Joe and Larry each own a painting by the same artist, having identical values. Now we do the same exercise. Curly is content to have his painting hang above the mantel. Joe sells his to Larry for fair market value and books a profit, and the next day buys Larry’s, again for fair market value. Now all three have property to which one may “impute” income, so all of them have imputed income, but Joe and Larry also have actual income. They do not pay the same tax as Curly, regardless of the fact that their property is identical.

People who sell assets receive a selling price, and can be taxed on that selling price minus the seller’s basis in the asset. So, if the seller had previously bought the asset, he could deduct the acquisition price from the sales price, and pay (capital gains) taxes on any net gain, or recording a (capital) loss against other tax liabilities. (Then the taxpayer may carry-over losses into future tax periods, and under some circumstances may re-file prior tax returns to record a loss.)

In sum, Joe and Larry could sell their paintings to each other repeatedly, but so long as the final sales price of the tax year equaled the original purchase price, the net effect would be no gain or loss, and thus no tax consequence—just like for Curly, who never sold anything. But if the sales price of the paintings differed from the basis, the seller would record a (capital) gain or loss--while Curly would not.

Note that the fact that selling an asset may trigger a taxable event will tend to influence (distort) the seller’s choice to sell, and the timing of the sale. To eliminate this distortion, ideally the tax code would reflect the value of all assets relative to their market values, in a “mark-to-market” manner. Moreover, ideally this policy would apply to the value of his painting, his stocks, his house, his car, and the jar of peanut butter on his shelf.

This taxing scheme may seem odd, but firms approximate this behavior when they engage in depreciation—gradually writing down the value of assets they have neither broken nor sold, and treating these write-downs as an expense to be offset against income.

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nobody.really
on January 29, 2019 at 23:42:27 pm

I will give you credit for effort, but I am less convinced than when you started. Every sentence gives rise to more questions. To the original example, you tax Curly on the basis of his stashed assets. Joe and Larry also have the same amount of cash. Are they also taxed on the cash and the interest they earned? Isn’t the whole point of this thought experiment regarding imputed rent that similar assets should provide similar tax burdens? We tax all three on their $100, but in addition tax Joe and Larry on their interest.

You determine the imputed tax rate by “risk-adjusted” rates. Are we to assume this is the so-called risk free rate of US treasuries? If the risk free rate is different than what Joe and Larry charged each other in interest, you have the same problem that you had in the beginning, except now everyone is subject to an asset tax. The “imputed income” now just starts from a different baseline. When tax-adjusted rate increases, does the tax as well? What are the expected economic effects of tax rates increasing whenever interests rise?

When do we value assets for tax purposes? Assume you put $100 in low beta utility stocks, and your neighbor invests in high volatility biotechs. His assets at any given time may vary between, say $10 and $250 during the course of the year. When do we value his investment account? When is the taxable event for dormant assets? Do we impute income on the assumption that assets will be invested short term and taxed as ordinary income, or long term and taxed as capital gains? Return on investment correlates with risk. The closer one gets to retirement, the conventional wisdom is that one should lessen exposure to risk. Does this affect imputation of income? If the risk-free rate is near zero, how is that different from the status quo? If Curly buys a painting and Joe and Larry lend money to each other, do we impute the same income from the money lending to Curly’s painting? What of assets having different liquidity? What about trusts? Do we tax assets that can’t be invested as though they were?

Also, if we talk about capital gains, depreciation, etc., note that landlords Joe and Larry can deduct maintenance and repairs to their properties, so they really aren’t exactly comparable to someone who lives in his own house.

I actually forgot why we’re talking about this. Have a good night.

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z9z99
on January 30, 2019 at 01:00:56 am

To the original example, you tax Curly on the basis of his stashed assets. Joe and Larry also have the same amount of cash. Are they also taxed on the cash and the interest they earned? Isn’t the whole point of this thought experiment regarding imputed rent that similar assets should provide similar tax burdens? We tax all three on their $100, but in addition tax Joe and Larry on their interest.

I wouldn’t tax anyone on the basis of their initial $100. I WOULD tax based on their interest or imputed interest. In short, I would treat all three guys the same.

You determine the imputed tax rate by “risk-adjusted” rates. Are we to assume this is the so-called risk free rate of US treasuries? …. If the risk-free rate is near zero, how is that different from the status quo?

I grant you, people disagree about the relevant interest rate. But let’s go with something approaching a short-term, risk-free rate—that is, pretty much the lowest rate. A person who keeps his money in a jar presumably wants to reduce risk and maintain liquidity, so we should impute this benefit accordingly.

So as a practical matter, THIS might not increase people’s tax bills much. Quite the opposite, as you’ll see next.

If the risk free rate is different than what Joe and Larry charged each other in interest, you have the same problem that you had in the beginning, except now everyone is subject to an asset tax.

Yup. So ideally, we’d tax people at this low rate REGARDLESS of the actual rate they earned. So the net effect of this policy might be to reduce the taxable income for people with a lot of investment income.

But here the theory again runs into practical problems with liquidity: If someone invests in junk bonds and earns a fortune, they pay a modest tax. If they invest in junk bonds and lose it all—they pay the same modest tax. Obviously, there are practical challenges with collecting taxes from people who have lost everything.

When tax-adjusted rate increases, does the tax as well? What are the expected economic effects of tax rates increasing whenever interests rise?

The imputed interest rate/rate of return simply refers to the amount of income to impute to the taxpayer. The tax rate would remain at whatever that tax code prescribes.

What about trusts? Do we tax assets that can’t be invested as though they were?

Depends on why the assets can’t be invested. A currency museum, for example, would have an excuse for not depositing all its currency in a bank to earn interest. But you’d want to avoid creating a loophole that people could exploit.

Landlords Joe and Larry can deduct maintenance and repairs to their properties, so they really aren’t exactly comparable to someone who lives in his own house.

Yeah, there are a million niggling distinctions. Once upon a time, this distinction wouldn’t matter so much. Yes, landlords can deduct maintenance and depreciation costs against current income—but depreciation would reduce basis, so they’d pay for it in the end. Conversely, homeowners could add maintenance costs to their basis, to they’d report lower gains/higher losses when they eventually sold. Now that homes tend to get a broad exemption from capital gains tax, the tax differences between landlords and homeowners have grown more significant.

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nobody.really
on January 30, 2019 at 09:17:38 am

Thanks, nobody.really for doing all the work. Fortunately, the received value is not constrained by taxes (familiar/unfamiliar) - thus no spectral disincentive.

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Anthony
on January 30, 2019 at 11:25:02 am

NO - it seems to me that nobody is "stretching here" - AND what nobody is attempting to stretch to is a TAX ON ASSETS / WEALTH - which of course is the latest lunacy coming from the AOC's of the Democrat fringe.

Are you now proposing to tax Curly's $100 in a coffee can? If so, then you are also proposing to tax all assets that citizens possess BECAUSE at some point they may be placed in the "productive" economy and thus we may *impute* a certain level of interest / gain / return on those assets.

As for stretching my mind, I concede, being a simple fellow, I am unable (and perhaps unwilling0 to stretch my thinking to such ludicrous limits as to arrogate to myself, or the minions at the IRS, the right to presume that something "idle" is actually "productively" engaged in commerce.
Let us tax the "single A baseball player on his potential income as a major league star" such a scenario at least has the benefit of taxing someone who is actively, albeit unsuccessfully, engaging in productive activity.

NOW I KNOW WHERE YOU HAVE BEEN THESE PAST MONTHS.
Working with AOC and other Democrats to begin the process of implementing a wealth tax.

But as Z and QET have asserted - it is rather unconvincing.

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gabe
on September 02, 2020 at 14:24:03 pm

Why the snide remark about autism at the end of the article? Perhaps that signals the author's own inability to see past his liberal bias and understand why Picketty promotes a graduated wealth tax as a means to redistribute wealth. The straw man ignores what is actually argued for. A tax on wealth does not mean anything over 900000 is confiscated but that some level of tax is extracted. Try again and maybe cite Picketty's actual claims.

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Michael

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