Archive for the ‘dependent scholars’ Category

Wealth tax would require even more government monitoring

Not the paper, but the book cited below

Here’s a brief paper (pdf) by two Berkeley economists suggesting how a “progressive wealth tax” could work. They assume a 2% rate would be applied to wealth in excess of $50 million per household, or maybe $25 million per individual.  Most of us, then wouldn’t need to pay anything.  The only question for the authors is the practicality of such a tax.

I was surprised to discover that, according to the paper, wealth taxes already exist in Switzerland, Spain, Denmark, and Sweden.  References are cited indicating pretty good compliance, the lowest being in Switzerland (where the authors find the estimated 23%-34% evasion rate “not as compellingly identified as the other estimates.”)   I didn’t review the cited papers to learn the details of how the compliance was estimated.

They note that wealthy people can hide their assets abroad, but imply that they could be caught if the government had more resources.  While it’s possible for the wealthy to avoid some taxes by leaving the US and renouncing citizenship, the proposal includes a 40% tax on the wealth of the departers. They praise FATCA and recommend it be more vigorously enforced, without considering the disruptions it’s already caused (pdf) for many Americans who live or work abroad.

They aren’t concerned about the wealth tax reducing the availability of capital goods for productive use in the US, because they assume any decline in investment by Americans could be made up by foreigners, by the less-wealthy, or by government expenditures funded by the wealth tax.  They don’t address the issue of what percentage of “investment” is actually productive.

They also don’t worry that the wealth tax would reduce innovation, pointing out that most innovation is done by people with less than $50 million, that innovation is enhanced by providing children with exposure to it, and that the wealth tax might encourage the rich to invest in more productive ways. Again, they aren’t concerned about the extent to which “innovation” is a good thing.

They don’t believe the wealth tax would discourage talented people from immigrating, pointing out that the government imposes lots of barriers to immigration which it could adjust if needed.

As for the impact on charitable giving, they curiously suggest that “foundations used to shelter wealth (i.e., controlled by wealthy individuals and not used for charitable purposes) should be subject to the wealth tax.” They don’t explain how such foundations could be identified, and why they are currently tax exempt.

The scariest part of the paper regards “information reporting.” They point out that the IRS already requires extensive reporting of income and, to some extent, assets. These would just need to be modified to better report wealth.  Of course this means that everyone’s assets and liabilities needs to be reported, if only so the rest of us can “prove” that we don’t have enough net assets to be subject to the tax. For real estate, by the way, they assume that local assessor records would be an adequate source. They don’t address the problem of offshore secret trusts.  They indicate no interest in counting “intellectual property”

Many years ago, an anonymous former IRS agent wrote a book advocating a “Doomsday Machine,” which would record every financial transaction by anyone in the US (and presumably by Americans abroad, I don’t recall.) He thought this was the only way that the income tax, as it existed then, could be enforced. Of course, since that time, this kind of surveillance has been facilitated by the digitization of much of the economy.  It the book were updated,  he’d now have to expand his machine to include all kinds of assets and liabilities.

Just in case anybody read this far and missed the point:  A tax on the value of land, other natural resources, and government-protected privileges would avoid nearly all of the above problems, while still falling mainly on the wealthy.

update February 26 2019– NPR reports more poor results from wealth taxes, tho they don’t completely write them off.

If it were a dog it would bite them!



Book Review: Mariana Mazzucato: The Value of Everything: Making & Taking in a Global Economy [2018]

image credit: green kozi CC BY-NC-ND 2.0 https://flic.kr/p/aaEYAY

Taken from Henry George, the title of this post refers to economists who make good points but don’t get to their logical conclusion. Mariana Mazzucato may be another. We may start by looking at some of the main themes of her book.

  • Value extractors are obtaining a large and increasing share of wealth produced, resulting in a smaller share for those who actually produce valuable goods and services. This problem has several interlocking causes.
  • Measures of national product (GDP) conceive value as equal to price, meaning that any profitable activity adds to national product even if it’s essentially an extraction of value rather than production of good or service of value. In recent decades, opportunities for private value extraction have multiplied.
  • One effect of this increase in private value extraction is that the extractors now have effective control of much of the government. Lobbying by value extractors changed national income concepts to include their extractions in GDP.
  • Further, the conventions of national income calculation tend to understate the value of government work. This is because the value of a private company’s production necessarily exceeds, on average, the cost of labor and capital inputs (otherwise the company would have no profit). A government’s production, by contrast, is treated as equal to the cost of the inputs, even if the value of the product is much greater.
  • Partly as a result of this undervaluation, some services previously provided by government have been “privatized,” which means, in most cases, are still funded by taxes but are performed by employees of private firms under contract.

Some examples of the problem:

  • As retirement income becomes based on earnings of assets, pools of assets grow and opportunities for value extraction multiply. This includes fees for managing investments, and various side-hustles.
  • As governmental functions are “privatized,” the quality of service drops along with the earnings of people who provide the service. But costs typically don’t decline because of contractors’ profits and lobbying expenses.
  • Patent privileges have been vastly expanded in recent decades. This provides more opportunities for value extraction, but actual useful innovation seems to be retarded by patents. Also, as patent offices have become understaffed relative to the workload, patents become easier to obtain.
  • Governments (or their banker overlords) seek to reduce the deficit/GDP ratio by reducing spending, failing to recognize that some kinds of government spending actually facilitate an increase in GDP far in excess of their cost.
  • The dominant neoclassical economic ideas assume that rent can be competed away, and that unemployment is voluntary. They further fail to recognize “the collective and cumulative processes behind innovation.”

The remedy? According to the author:

  • “We” need to “define and measure” the “collective contribution to wealth creation,” to overcome the “price=value thinking…” and recognize that most of the “…creation of value is collective.”
  • “We” should also recognize that the current structure of corporations, controlled by shareowners thru boards, with no formal role for employees, customers, and other “stakeholders,” is not the only possible or practical way to arrange things.
  • The role of governments, as well as nonprofits and cooperative organizations, in value creation needs to be recognized.
  • Tax laws need to be modified to advantage actual value creators rather than value extractors. In addition to changes in income tax laws, a small tax on financial transactions would be helpful.
  • Patent laws need to be modified to discourage abuse. To encourage particular kinds of innovation, bounties might be substituted for patents.
  • Portraying government as “investing, not spending, can eventually modify how it is regarded.” [of course this little trick has been used by U S politicians for many years.]
  • “We” need to develop a vision of what society needs, and set government priorities regarding infrastructure, services, and regulations to achieve it.

So what is the value of this book?

  • It does give some history of concepts of national income, going back to the 17th century and summarizing views of William Petty and Gregory King as well as Adam Smith, the Physiocrats, Ricardo, and (with special admiration) Marx and Keynes. It does discuss rent, mostly in an accurate way. There’s no mention of Henry George, perhaps because this part of the book is euro-centric, or perhaps for other reasons. She does mention some important Americans, including Elinor Ostrom.
  • It identifies the problem of accumulated privilege, resulting in value extraction, which impedes real progress.
  • It clearly describes some principal means by which value is extracted.
  • It taught me a few things about the way GDP is calculated, and the history of patents.
  • It clarifies that there’s nothing “natural” or “inevitable” about the way our economy is set up; many different arrangements for such components as corporations and patents could work, and some would be a lot better than what we have.
  • In a description of VW and the “dieselgate” affair, she acknowledges some of the limitations of her proposals.

As a Georgist, I see two big shortcomings with this book:

(1) Even tho nowadays the value extractors have effective control of governments and other powerful institutions, the author seems to assume that somehow these forces will be overcome once the people come to understand that government really is useful, and that the benefits it provides are far greater than is reflected in GDP. Furthermore and related, there is the assumption that the bulk of government expenditure is good, that government is for the most part honest and reliable. There is also almost no mention of the huge waste on military, punishment, and other expenditures which an honest and efficient government would need to eliminate. So, once proper understanding is achieved, the government will wisely set priorities and provide appropriate infrastructure and services. No method is proposed for accomplishing this, and the alternative of decentralization really gets no attention.

(2) While rent is mentioned, and for the most part correctly characterized, there’s no discussion of how rent can be used to properly fund services and eliminate other taxes. It’s true, of course, that some privileges are best eliminated, but for use of real estate parcels, electromagnetic spectrum, and other natural resources the wise policy in most cases is to allow private ownership but collect virtually all the rent for public use.

And then there are a few little nits to pick.

  • She does not like corporations to distribute profits to shareholders. Partly this seems to be because share buybacks are one of the several ways that corporate management contrives to reward themselves excessively, but also she displays a fundamental belief that corporations should reinvest in their business, apparently without regard for whether management believes worthwhile opportunities are available.
  • “A recent study by researchers at the University of Pennsylvania…” is referenced on page 219, but without footnote or citation.
  • On page 44 she describes rent as including “what you pay a landlord to live in a flat.” This is inconsistent with the way she uses the term elsewhere in the book, since only part of what you pay to live in a flat is to cover the proportionate share of the land it occupies; much is for use of the structure (capital) and services (labor).

In conclusion, this is a pretty good book for understanding how some means of wealth extraction work and why it poses a danger to the rest of us. It encourages us to consider alternative ways for organizing our communities. But it’s weak on practical solutions.

additional note: Mariana Mazzucato has recently been interviewed regarding this book on Econtalk and Alphachat.

another additional note: Font sizes may appear a bit screwy herein because I haven’t figured out how to enlarge the teeny font that seems to be the default in WordPress lists under the new Gutenberg editor. Someday maybe I will.

Suppose Northern Illinois University, all its students, staff, and buildings disappeared

NIU campus scene. Credit: EarlRShumaker via flickr (cc)

NIU campus scene. Credit: EarlRShumaker via flickr (cc)

Well, then, that would reduce economic activity in the region.  On that basis, the University estimates the impact would be $900 million annually.  That’s figured by counting staff salaries, student expenditures, capital improvements, and the multiplier effect of each.

But of course this is a phony argument, intended to maintain the flows of tax dollars to the state’s “higher education” system. Let’s just suppose that all government funding of the University stopped. Quite possibly it could remain in operation, as lots of nongovernment schools do. But suppose otherwise.  Tomorrow morning we wake up and find that Northern Illinois University is going out of business.  And, just to keep the exercise meaningful, suppose none of the other Illinois government schools are able to pick up the slack; maybe they went out of business too, or maybe they just won’t expand.

So now there’s a big campus for sale. Would a nongovernment school want to buy it?  Or maybe one or more other organizations, such as a mental hospital, retirement community, corporate think-tank, drug rehabilitation center, penal facility, religious group, will want to buy the space?  The campus won’t remain empty.  It will be re-used or redeveloped, and that will involve an unknown (but positive) number of jobs and investments.

What about the students? It seems the economic return on college credentials is decreasing,  but surely it has some value for some people.  There are lots of colleges, public and private, looking for students.  Some students will decide to put full-time formal education aside for a time, look for jobs or start businesses.  And starting a business might be a good idea, with a labor force suddenly available.

And the faculty? Surely they’re employable, as consultants or teachers elsewhere, or doing something else.  If they really can’t do anything but teach at a government school, what necessary skills do they lack?

Meanwhile, we also need to consider the benefit to taxpayers of no longer funding the University.  How much would they save?  Or, more  likely, taxpayers would “save” nothing, but more funds would be available to cover other existing obligations, which does seem to result in some public benefit.

One more thing.  This topic was raised by a link in an email I received, labeled “What’s a state university worth to the region in which it’s located?”  That’s kind of meaningless; do we mean “to the people living in the region,” or “to the taxpayers of the region,” or “to the owners of land in the region,” or something else? And necessarily, the analysis needs to imagine what would happen in the absence of the university.  Do there exist any examples of a significant state university shutting down?  I know of none.  Perhaps a test is needed. Maybe I shouldn’t be surprised that Cold Spring Shops hasn’t commented on this.

 

Storytelling can be patented

typewriter

credit: mpclemens via flickr(cc)

We already knew that computers, equipped with proper algorithms, could write stories pretty much indistinguishable from the work of professional journalists working under deadline pressure. And had I been paying attention, I’d know that the company behind this, a “spinout” from Northwestern University, is also moving into other “turn data into a story” tasks, which from the examples here seem to mainly focus on financial reporting, tho it also appears that buyers of used cars can be exposed to “automated and individualized vehicle stories” (pdf) about their cars, which presumably helps sales. And it’s no secret that In Q Tel, an affiliate of your Central Intelligence Agency, is one of several investors behind the company.

So, it’s technology, it’s government, it’s marketing– why am I surprised that it’s protected by a bunch of patents on different variations on “automatic generation of a story?” Here I am, using a computer with many automatic functions to generate a sort of story about this company, and I really haven’t time to read and try to understand all their patents. I guess I better stop before I get in more trouble.

h/t Crain’s.

NY Times reports another benefit of the citizens dividend

photo credit: coal dubya via flickr (cc)

photo credit: coal dubya via flickr (cc)

If the earth belongs to the people, then whatever is paid for the use thereof belongs to them in some equitable fashion also.  Therefore, beyond what’s needed for legitimate government purposes, there would seem to be enough for a considerable “citizen’s dividend” for everyone.  Plenty of discussion on this subject can be found here.

My guess is that it would likely be enough to replace most of the aid programs which provide funds — rarely enough but maybe better than nothing — to low income people.  One advantage is that it could be administered at relatively modest expense.  A related advantage is that it can probably be made to work, with everyone getting what they’re entitled to. This latter aspect is what came to mind when I read this NY Times article, in which a Georgetown law professor summarizes “a litany of automation and contracting meltdowns” whereby the poor were unable to obtain benefits to which they were entitled under various aid programs and which may have been essential to their support.

His point seems to be that, while healthcare.gov suffered major problems initially, it was soon repaired because its failure affected many non-poor people. (I have no idea how well-repaired it might be, but will assume he is correct about this.)  He does not mention the citizens dividend, perhaps is unaware of it, or maybe ignores it because it would likely reduce the demand for lawyers. But he makes the case. A regular check for everyone, as a just entitlement, would be a far simpler system than most of the means-tested (and otherwise-restricted) aid programs which cost taxpayers so much money.

And while we’re on the subject of means-tested programs, consider this:

[I]f a single mother has two children in childcare and she’s making $36,000, she’ll pay about $310 a month for childcare. Then, if she gets a raise to $37,000, she’ll need to pay $1,200 a month for childcare because of the loss of a subsidy.

Of course, it needn’t be a raise, it might just be a decision to work a bit of overtime. I have written about this before and I will probably have to write about it again. Means-tested aid is a disgrace.

 

More propaganda I am too slothful to review

Graffito image by Horia Varlan (cc) via flickr

Graffito image by Horia Varlan (cc) via flickr

A new report “Copyright Industries in the U S Economy” has been released by the IIPA (A conspiracy of seven associations of copyprivilege holders).  I should read and review it, but I could not do a better job than Mike Masnick, so read his review and the comments thereon.  Of course, IIPA and its members probably have several staff and/or automatons, whose duties include responding to constructive comments. Fortunately, they get responded to in turn.

Like the man said

“In order to preserve and enhance jobs, exports and economic contributions, it is critical that we have strong legal protections for U.S. creativity and innovation in the U.S. and abroad.”

Which means creators need to be free to create, with strong legal protection against those who would try to prevent their use of ideas which may have been touched by others.

Economists theorizing about Detroit

Hazen Pingree statue in Detroit. Photo by Dave Hogg via Flickr (cc)

Hazen Pingree statue in Detroit. Photo by Dave Hogg via Flickr (cc)

Econ Talk is at it again, applying economic theory to real problems, not getting hung up on matters historical or spatial. In the most recent episode, Edward Glaeser of Harvard talks with regular host Russ Roberts about the problems of Detroit.  They do make some valid points about economic development, such as the need for adequate basic services rather than flashy new projects, and that a city which has lost a lot of population probably doesn’t need additional infrastructure (but reluctantly agreeing that perhaps some repair or modernization might be good.)

But the main theme seems to be privatize, privatize, and privatize, which includes giving public money and public assets to private operators (such as charter schools), and funding infrastructure and services from direct user fees, exemplified by toll roads.  Curiously they don’t say much about taxes, not even asserting that lower taxes are needed, and certainly they betray no knowledge of the value of taxing land.

It’s interesting, if disconcerting, to compare this to “quite possibly Detroit’s finest mayor,” Hazen Pingree. This January 6 2013 Detroit News article tells the story. Having built a successful shoe-manufacturing business, Pingree found himself drafted by Republicans in 1889 to run for mayor against the dominant Democrats. He won, and started working to improve the city.  Republicans, having a fair share of the monopolies and sweetheart deals that Pingree wanted to eliminate, were not pleased.  But he turned out to be a skilled politician, was elected three more times as Mayor, then twice as Governor of Michigan.

Detroit at the time of Pingree’s election had few paved streets, mainly because paving had to be paid by the owners of adjacent property (and was done by politically-connected contractors).  Pingree’s solution was to use the City’s general tax revenues, not only for streets but also for sewers and other infrastructure needs.  His remedy for a failing public school system was to arrest the school board. His preferred tax policy: A single tax on land value, no special deals  (one of his important reforms as Governor was to bring about proper taxation of railroad property.) More about Pingree at Wikipedia, with additional links there.

None of this means that the interview isn’t worth listening to, but let’s remember, everything takes place at a location, every useful urban location has value, and the value rightly belongs to the community who creates it.

How China and Wal-Mart Help the Poor to Pay more Rent

Good interview last week on EconTalk, with Enrico Moretti who has a new book, The New Geography of Jobs. Some places are growing and innovating, some stagnating and declining.  Which one would you rather live in? Enrico seems to prefer the innovative one, where workers are more educated (at least in the credential sense), jobs are available, and even if you’re working in a local service job — barber, dentist, whatever — your wage will be higher.  Host Russ Roberts keeps Moretti pretty much honest, sure wages will be higher but so will — they don’t dare use the phrase — economic rent. And so if you’re a homeowner, you benefit (assuming of course that you bought before the innovative, growing local economy was widely recognized), while if you’re a renter, perhaps not.

From the interview, it appears that the book includes some analysis of how working people benefit from low-cost imports and big-box stores. I don’t doubt it, if the working person can afford to support an auto-centric way of life then these developments do benefit her/his standard of living.

Moretti suggests that places will be better off if their workforce has more formal education.  Roberts is at his best here, pointing out that, sure, college professors would say that.  Moretti does seem to recognize that, as more people get credentialed (“skilled”), this will tend to reduce the earnings gap between the unskilled and the specialised. He does not say that it does so by reducing earnings of the skilled, but we can figure that out.

The most irritating part, for anyone who understands political economy, is the assertion that wages for service workers are higher in innovative, growing regions because service workers are more productive there.  I don’t know if they’re more productive, maybe a dentist fixing the teeth of $100,000 engineers is more productive than one who does the same for $25,000 laborers, I have no idea.  But regardless, wages aren’t determined by productivity.  They’re determined by the alternatives: If the employer can get competent labor for less, she almost certainly will do so, over time if not right away. And if the worker can find a job that, all things considered, is more satisfactory, why wouldn’t he take it?

Karl Marx at the Tea Party

K Marx

photo credit: jtriefn via flickr (cc)

As the national debt finds its support in the public revenue, which must cover the yearly payments for interest, etc., the modern system of taxation was the necessary complement of the system of national loans. The loans enable the government to meet extraordinary expenses, without the tax-payers feeling it immediately, but they necessitate, as a consequence, increased taxes. On the other hand, the raising of taxation caused by the accumulation of debts contracted one after another, compels the government always to have recourse to new loans for new extraordinary expenses. Modern fiscality, whose pivot is formed by taxes on the most necessary means of subsistence (thereby increasing their price), thus contains within itself the germ of automatic progression. Over-taxation is not an incident, but rather a principle. In Holland, therefore, where this system was first inaugurated, the great patriot, De Witt, has in his “Maxims” extolled it as the best system for making the wage-labourer submissive, frugal, industrious, and overburdened with labour. The destructive influence that it exercises on the condition of the wage-labourer concerns us less however, here, than the forcible expropriation, resulting from it, of peasants, artisans, and in a word, all elements of the lower middle-class.

— K Marx, Capital, Part VIII Chapter XXXI (source)

So Karl objects to public debts, sees them requiring high taxes as a way to keep the workers docile and the lower middle-class poor. What part of this do the Tea-Partiers disagree with?

Did you hear the one about the two economists….

…who spoke for over an hour about cities, development, migration, and density, and asserted that America would be more productive if our cities were denser, and did not mention economic rent nor land value?

They did it here, on econ-talk, and you can download the podcast or just read a pretty good text summary (I do not recall them using the word “land” either, but it appears several times in the text summary so I must have missed it). The book itself seems to be available only on Amazon Kindle, which as I understand it means I cannot buy it, but only license a copy to read. But from the interview I gather that author Ryan Avent has determined that American cities (and some suburbs too) are not as densely developed as they “should” be, and that this is due to local governments’ reluctance to allow development at optimal densities.

Now certainly there’s no question that local governments, usually reacting to neighborhood concerns, often refuse to allow development at densities which are physically workable. I recall one suburb where a proposal would have had single-family houses on lots of 9000 square feet.  Community reaction was that the kind of people who would live on such small lots would not be desirable neighbors, even tho in many other cities such a lot would be considered oversize.  These concerns are often stated as “property value” arguments, and perhaps they really are.  That’s an expected consequence of an economic system where ordinary people cannot expect to accumulate much money by working and saving, and must hope to profit from rising prices of the real estate they occupy.

And it’s not unknown for the politicians whose approval is needed for major developments to take advantage of the opportunity for personal gain, legal or otherwise but surely wrong.

So how is it to be decided what the optimal density is? In  Science of Political Economy, Henry George observes that, for each kind of production, there is an optimal density at which to work.  That density depends on what is being produced, the technology applied, the number of workers available, their skills, the quantity to be produced, etc., so it will change over time.  Avent may be correct that we would be better off if higher densities were permitted in some already-dense desirable places, but he certainly didn’t offer much evidence in this podcast.

But let us assume that higher density would be a good thing (and I am certain that in some places it would be), how is it to be achieved? Avent seems to assume that a reduction in land use regulation would be the proper method, because the market is efficient and so density would rise to the appropriate level.

But communities are more complicated than that, and you can’t, or at least shouldn’t, ignore externalities.  The first builder to put a high-rise in a desirable townhouse neighborhood may profit nicely.  However, not only does the character of the community start to change, but different infrastructure is needed.  Can the streets handle the traffic, or can acceptable public transport be provided? Will the sewer and water system handle the load? What are the other effects on the larger community, and how can they be dealt with? There are loads of reasons why it makes sense for the community, acting thru its local government, to have a major say in its development.

But to really irritate those who understand political economy, Avent says:

[I]f you had a sort of density charge–I hate to tax density in that way but in terms of being realistic about the distribution of cost–you could channel some of that into investing in local amenities: could be parks, could be transit, something to try to convince local stake-holders that density is going to be in their interest. So normally we think of taxes as discouraging an activity–which it would. It would make it more expensive for developers to make urban areas more dense.

Yes, some way for the community to share in the benefits of increased density. Can you say “land value tax?” It doesn’t tax development, it taxes development potential.  It pressures landowners to build at appropriate densities, but doesn’t punish them for doing so. Supported by competent and realistic zoning, it guides density to the places where is works.

Somebody told me once that the Economist, for which Avent is a correspondent, is a pretty good source of economic news except that it refuses to acknowledge the possibility, let alone the benefits, of a land value tax. I still haven’t seen anything that contradicts this assertion.