Posts Tagged ‘the new gilded age’

Kevin Drum suggests (modestly or “modestly”) that “everyone” should love the idea of trading the corporate income tax for carbon and financial transactions taxes.  I should just have a chuckle and leave it at that, but then again I get emails from the Tax Foundation that are remarkably lacking in irony.  Ezra Klein is happy with his policy-wonk hat on, but thinks there’s a political problem of giving fat cats an obvious break.  I argue that the problem is not just political.  Drum’s at least semi-serious claim is that taxing corporate income is bad because doing so is a drag on business and ends up getting paid by individuals anyway.  Neither necessarily militates against corporate income taxation in the real world.

Whether a “drag” on business or some other tax distortion that reduces private-sector activity (other things equal) is good or bad, on net, depends on the use to which the tax revenues are put.  In a world such as ours where public expenditures serve as public capital and intermediate goods in addition to government consumption, it’s straightforward to write a model where distortionary taxes are optimally set at non-zero levels.  (I once assisted the late Mancur Olson in doing so.)  These models do not even have to appeal to left-leaning aspects of reality such as the economic efficiency of negative-sum redistribution when marginal utility is declining and income and wealth are (very) unequally distributed.  So even if Drum’s switch is revenue-neutral and doesn’t stiff the government as such, it may still be improved upon — maybe not from the Tax Foundation’s perspective — by adding the distortionary tax on top of the efficiency-improving Pigovian taxes and spending the proceeds wisely.  Moreover, while we’re in tax policy fantasyland, the corporate income tax could be made more efficient without necessarily reducing its revenues by way of reforms that broaden its base and reduce the statutory marginal rates.

Second, merely noting the ultimate incidence of the corporate tax on individuals fails to consider significant issues of which individuals end up paying the tax.  Certainly, the tax may be passed onto individuals in part in their role as customers of businesses subject to the tax, but it will also fall on individuals as shareholders in the businesses to the extent the tax can’t be passed through.  Since shareholdings remain highly concentrated among the rich, this creates equity issues center-left wonks like Drum and Klein should be happy to entertain.

Moreover, eliminating taxation on corporate income would tend to have knock-on effects making the individual income tax system less efficient.  When tax system complexities create categories of income with preferential tax treatment, it creates opportunities for people who can choose how to realize their income to take their income in the low-taxed form.  This narrows the tax base and requires higher (and less efficient) rates to produce a given level of revenue.  In this case, untaxed corporate income gives retained earnings an indefinite tax deferral, so the incentive is to convert income from shareholdings such as dividends into unrealized capital gains (which also are tax-deferred).

The argument remains that making fat cats fatter is a small price to save for saving the planet for everybody else.  I can almost swallow that, but note that much of the noise over reforms seem to be geared towards masking the fact that people with ownership in existing corporations have as much or more to lose from climate and financial catastrophes than the rest of us suckers.

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Via Brad DeLong, Andrew Samwick on Peggy Noonan (yes, I know):

I think she is right in her main point about a ___________ leadership class in business and a _________ leadership class in government.

Noonan’s answers are “disheartened” and “mindless,” respectively. They’re not exactly my choices with the hard-right Republican base notionally out of power. Somehow I can’t imagine Wall Streeters of a certain pay grade saying, “I take this money more in sorrow than in greed.” I’m leaning towards “rapacious” and “corrupted.”

Good for Samwick for joining Bruce Bartlett in acknowledging that the Republican fiscal legacy of the Reagan-Bush era is a disaster. Then again, making the case for the ‘callous childhood’ view, we have Greg Mankiw writing “[t]he verdict on supply-side economics is mixed” in the NYT, and still getting to play Respectable Harvard Professor afterward.

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Felix Salmon has been following the photographer Annie Liebovitz’s personal-finance train wreck, and here he gets to a root of a financial-products regulation problem:

[There’s] a particularly American mindset: call it the Wealth Corollary of the Efficient Market Hypothesis. In a nutshell, it says that if you’ve made lots of money, you must be pretty smart.

I think there’s a pretty good case to be made that the EMH(WC) is responsible for a lot of the rules surrounding the limitations on who is and who is not allowed to invest in hedge funds, and also for many of the obsequious interviews with rich individuals frequently featured in the financial media.

I do feel a little sorry for the EMH here, as American worship of the rich is more a religion unto itself.  In a casual rendition, after all, the EMH suggests that if you’re making lots of money in the market, you’re some combination of lucky, patient, in possession of information that isn’t generally available, exploiting market power, and/or crooked.  On the human-capital front, brains are neither necessary nor sufficient for making lots of money.  The elevation of select nerds to the ranks of the super-rich via hedge-fund management in no way violates the conditions of my ‘folk EMH.’

Felix also makes an obvious but seemingly not widely recognized point (despite debacles like Bernard Madoff’s Ponzi scheme) that exploiting the financially-unsophisticated rich is profitable, since that’s where the money is:

The annals of finance are full of people taking advantage of the financially-illiterate, and while it’s certainly possible to take advantage of the financially-illiterate poor (lotteries, numbers games, payday lending, overdraft fees, etc) it’s equally lucrative to take advantage of the financially-illiterate rich, both through outright fraud and through hidden and/or excessive money-management fees.

A few years ago, I was shocked to see the statement of the time from the financial advisory business now known as Ameriprise; it looked like it was designed to conceal what they were charging, especially compared to the relatively transparent material I’m used to from Vanguard.  Some disclosure-oriented reforms would help to some extent, though they wouldn’t obviously do much for the other problem I saw in this case, which was the financial illiteracy of the CFP responsible for the set of investments in question.  Other seemingly excessive fees (as in, why hasn’t massive entry competed them away), such as the standard 2-and-20 hedge fund fee structure, are not hidden at all.

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