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If you advocate the complete abolition of all personal income taxes, corporate income taxes, and inheritance taxes, the left will think you are beyond the pale. If you then suggest that 80% MTRs on the consumption of the ultra-rich might be appropriate, the right won’t be happy. Let me just offer a few observations:

1. Some on the left argue that consumption taxes will favor the ultra-rich because they consume a very small share of their income. But if that’s so, then no tax regime will put much of a tax burden on the ultra-rich. Just as you can’t squeeze blood from a stone, you can’t put a tax burden on misers. As Steven Landsburg pointed out in one of my all time favorite posts, society views misers like Scrooge as being selfish individuals, when actually it’s people who consume a lot who are selfish. Misers leave more for others to consume.

2. Some conservatives questioned my assumption of very low marginal utility of consumption at very high levels of consumption. I find it completely implausible that ultra-rich get significant marginal utility from extra consumption, apart from the satisfaction of doing better than other billionaires. But note that this sort of “nah-nah, I have a bigger boat than you do” utility would not be at all affected by a tax regime that applied to all billionaires.

Here’s an example. A billionaire might get a great deal of satisfaction from a 400-foot yacht if his rival billionaire has a 300-foot yacht. There is data that shows happiness increases all the way up the income scale. So I do buy that argument. But I would insist that roughly the same enjoyment would be gained from a 300-foot yacht if his rival had a 200-foot yacht. If an 80% consumption tax reduces each billionaire’s consumption proportionately, then could it really impact their happiness? Perhaps I’m missing something, but that claim seems preposterous. That doesn’t mean you necessarily want to go to the very top of the Laffer curve, as there are deadweight losses associated with high MTRs. But unless I see good empirical evidence that those losses are important in the very, very, very tiny labor market for the ultra-rich, I’ll continue to assume that standard public finance theory plus utilitarian values implies that the MTRs on the consumption of the ultra-rich ought to be fairly high.

Tax burdens occur when people consume less. That means approximately 100% of all the articles you have ever read in your life on tax progressivity are utter nonsense. They look at the legal incidence as a share of income, whereas they should look at the economic incidence as a share of consumption. That’s not one but two huge errors. I’d encourage people to block out all the noise, and focus on how much the consumption of people will change under different tax regimes. That’s tax incidence.

3. The left seems very unhappy with proposals to eliminate all capital taxation, including inheritance taxes. They seem to view the heirs of the wealthy as being “undeserving.” I agree about that, but I also think yachts are undeserving, and thus I believe the billionaire who spends a fortune on yachts should be taxed just as highly as a billionaire who gives his fortune to his children. But that’s just me.

In any case, I sometimes wonder whether the left has a hidden agenda here. As an analogy, suppose I were crusading for the legalization of pot in Massachusetts. And suppose that day after day I got hammered by drug warriors, who insisted that pot was a threat to western civilization. Would they be sincere? Perhaps. But now suppose that while this was going on all of the countries in Europe did not just allow the smoking of marijuana, they mandated it!! Residents were forced at gunpoint to smoke pot. And now let’s suppose that the drug warriors who strongly objected to my “pro-choice” views were completely silent about that outrageous European policy. Then I might suspect something else is going on.

What does this have to do with taxes, inheritance, and meritocracy? Consider this article from the Economist:

TO UNDERSTAND one of the gulfs separating the Anglo-Saxon world from continental Europe, consider Warren Buffett’s children. Omaha’s sage investor long ago said he would leave most of his fortune to charity, with more modest sums to his offspring. For Mr Buffett, leaving vast wealth to his children would be “anti-social” in a society that “aspires to be a meritocracy.” In 26 out of 27 European Union countries, Mr Buffett’s plans would not just be shocking, but illegal. The exception is Britain, or rather England and Wales (Scotland has its own, centuries-old legal system, with a strong continental flavour). In continental Europe a big part of an estate (often around half) is reserved for the surviving children of the deceased and must be equally divided between them. This “forced heirship” makes it impossible to disinherit feckless children (though several countries exclude bequests to “unworthy” children, who have for example murdered a parent or two). Such rules also make it hard to reward the deserving by, say, leaving more to a daughter who gave up a career to care for her ailing parents. Finally, “clawback” laws in many countries stop parents from dodging forced heirship by giving assets away while they are still alive. This applies to gifts made in the last years of life (two years in Austria, ten in Germany), or much longer: in some countries, no time limit applies.

So it’s illegal for a European billionaire to give 70% of his fortune to starving kids in low income countries, because his children “deserve” the money. And these policies exist in the most “progressive” welfare states on the planet. Now ask yourself how often you’ve heard complaints about these laws from progressives who are terrified by the prospect of wealthy dynasties. I can hear crickets chirping.

I would love to see an old German billionaire give his entire fortune to the Gates Foundation, and then see the German government have to go to court to try to claw back the money to redirect it to some spoiled kids who spend all their time partying in Ibiza.

What is the real agenda here, if not preventing dynasties? I’m not sure. Perhaps the European welfare states fear that altruism to the poorest of the world’s poor would leave less money to tax; less revenue for the world’s most lavish welfare states. What do you think? What is the hidden agenda? Whatever it is, it must be morally repulsive.

PS. I’d like to congratulate Mark Sadowski on his NGDP forecast of only 0.5% (and minus 1.4% for RGDP). Yes, the actual number for NGDP was 1.4%, and 0.1% for RGDP. But the consensus was well over 3%, and around 1.5% for RGDP. You should have taken a long position in bonds right before the report, as this was the market reaction:

Treasuries are seeing a sharp reversal following the soft Q1 GDP (0.1% actual v. 1.0% expected) print.

Mark was too low, but the consensus was too high. And we didn’t know that Mark nailed the 2013:4 numbers until the revisions came in. My comment section consistently offers good investment tips. If Goldman Sachs hired this guy they could recoup his entire salary trading on a single GDP number.

In the blogosphere, Mark is the undisputed King of Data.

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This entry was posted on April 30th, 2014 and is filed under Misc.. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response or Trackback from your own site.



