Discussion Tuesday

A statement that is becoming increasingly popular – but is it true?

Taxing capital, which is wealth, is the right way to address fundamental inequalities of opportunity in society

Once again, remember that these are points for discussion – I am not saying I agree or disagree with them.

  • Peter Cresswell

    Actual capital produces wealth and pays wages. Taxing capital then is the ideal way to reduce wealth creation and wage growth.

    • No doubt we could make the same argument about labour, especially given the always growing importance of human capital.

      However, if we are talking about inequalities of opportunity couldn’t a case be made that having some start with more than others imply that those who start with more have a greater opportunity in life. Access to credit markets, access to jobs, access to areas where they can develop good habits, could all be undermined by the existence of such a gap.

      Or is that simply an argument about poverty rather than opportunity 😉

  • Jim Rose

    Robert Lucas estimated that eliminating all taxes on income from capital and on capital gains would increase the U.S. capital stock by about 35% and consumption by7%.

    The twist in the tail was the transitional increase in savings and reduction in welfare from the transition reduction in consumption for a generation or so reduced this welfare gain from 7% to 1%.

    These transitional losses are something to remember the next time you talk to one of those fanatics – and their are too many of them – who go on about the need to increase savings in NZ.

    Diamond and Saez when calling for a top tax rate of 73%+ recently in the journal of economic perspectives passed over the issue of the optimal taxation of capital income being perhaps zero by referring to administrative issues at the capital-income boundary.

    If their elasticity numbers move, they may have to advocate lower taxes for the super-rich. If the elasticity of taxable income reaches 0.92, the current US top rate is optimal under the Diamond and Saez regime. They estimated a number of about 0.24.

    • Interesting stuff – have to say I generally agree, especially with regards to push to “savings”. I’d add that heterogeneity in preferences help to undermine the Diamond Saez result somewhat, as those who choose to have a higher income (less leisure, higher investment in human capital) will tend to do so because they view the labour/leisure trade-off differently.

      When it comes to taxation on capital, I’ve always been a bit uncertain with regards to whether human capital accumulation is appropriately captured in the estimates.

  • Luc Hansen

    Matt, you should take up designing assignment/exam questions!

    The statement you present is pretty strong, too strong for me.

    And I can’t say that I’ve actually seen it presented as an argument for reducing inequality of opportunity, and if I did, I would probably fall victim to a sharp intake of breath. 😉

    I would query whether capital is the same beast as wealth. I think a lot depends on how those two terms are defined.

    Then I would want to examine what exactly are the fundamental causes of inequality of opportunity and whether a particular tax would be a cure all – don’t get me wrong, greater redistribution is part of the mix, it seems to me, but only in terms of augmentation, or facilitation.

    Then I would want to examine how taxing capital can be seen as THE (sorry, can’t do italics) ‘right’ option – English is a funny old thing, when the ‘right’ option is really the ‘left’ option!

    And after all that, if i reached a conclusion, I guess I wouldn’t really be thinking like an economist 😉

    • You’ve picked it – it is hard to disagree or agree with a statement that isn’t complete. My hope is just to get people saying a bit of what they believe, or even just giving arguments they feel like making!

  • the words ‘taxing capital’ conjured up the thought of capital gains tax, but after reading a few of the other comments, not understand much of them, but that the question is tricky, I then wonder if you meaning outright capital, like the super tax in Monopoly 10% of all wealth.

    My first interpretation was backed up (in my mind) by the ‘address fundamental inequalities’ which is something we have, thus it must be talking about something to be added to the mix, to fix the existing problem.

    So assuming that’s all true, it turns into a would a CGT help society have more equality of opportunity? To which I assume your talking about housing. And maybe the fact there is a supply limit, and a tax advantage to owning investment property that is gaining in value due to the circular bubble of house price increases. Thus the tax advantage plus gains would seems like property has become wedge between the haves and the haves not.

    But a CGT might fix this, but would prick the bubble, and if the bubble stops does the market deflate, which would hurt the mid/upper’s thus be ‘very uncool’ thus not happen.

    So if the above is all true, would that be better, most likely, but is it going to happen, unlikely, and if I have every key idea/assumption backwards, enlightenment would be nice.