Bottom line: If you’re someone who wants to see good economics being done or wants your students to see good economics being done, watch the video I discuss below. Larry Summers’s inputs are a microeconomics tour de force. Be aware, though, that Larry has one pretty awful proposal.
Various friends on Facebook and various bloggers have been recommending a panel discussion held at the Peterson Institute for International Economics and featuring Emmanuel Saez of UC Berkeley, Greg Mankiw of Harvard, and Larry Summers of Harvard. The recommendation is well deserved. The session is titled “Would a ‘Wealth Tax’ Help Combat Inequality? A Debate with Saez, Summers, and Mankiw.” It occurred at an October 17-18 conference.
Normally, I state exact times in such long discussions so that you can quickly go to those highlights. I’ll do so to some extent here, but I highly recommend that you watch the whole thing. If your time is limited, then watch Larry’s part, which begins at around the 20 minute point and the panel discussion, which begins at around the 50 minute point.
I’ll mention many high points and two criticisms of Larry, not of his analysis, but of his values.
First, although it isn’t absolutely necessary, you’re probably wise to watch Saez’s talk, which goes first and sets the stage. Second, the thing not to miss is Larry Summers’s talk. It’s a relentless application of microeconomics. He lays out how a wealth tax will give incentives to hide wealth or, to the extent it doesn’t, will give wealthy people incentives to donate more to their favorite causes.
Mankiw adds a number of good points but the real show is Summers.
In the panel discussion, Saez makes a weak attempt to back up his claims but Summers just doesn’t let go.
6:25: Saez claims that Amazon’s wealth and Jeff Bezos’s wealth are due to monopoly rents. Really? Amazon cuts prices on virtually everything and delivers incredibly quickly and that’s monopoly? I’ll mention a recent story whose type is not uncommon. I lost my pickleball paddle on Thursday morning and wanted to have a replacement so I could play Saturday morning. So on Thursday at around noon, I went to Amazon’s site. It told me that I had ordered a paddle 2 years ago. I liked it and so I ordered the same one. When I bought it 2 years ago, I paid about $150, including tax. When I bought it this time, I paid about $85 including tax. And it arrived in time for most of my play on Saturday. Those damn monopolists!
7:30: Saez says that it’s hard to measure wealth (true) because we don’t have a wealth tax yet. But even if we had the kind of wealth tax that he, Senator Warren, and Senator Sanders advocates, it would be hard to measure most people’s wealth because over 99 percent of Americans wouldn’t be subject to it. That is, unless he has something else in mind that he’s not telling us.
Now to Larry Summers.
20:45. Larry has been following the Twitter wars between Saez and his critics and finds himself 98.5% convinced that the critics are right. Saez’s data are “substantially inaccurate.” Phil Magness has weighed in on this.
22:00: The arguments about how the wealthy can use money to get a lot of political power don’t make sense in the context of a wealth tax. The reality is that with either the Democratic Party or the Republican Party, a wealthy person can get a lot of clout by spending $4 to $5 million a year. No substantial wealth tax is going to prevent the wealthiest people from spending that amount or even a multiple of that amount.
22:00: When you think about the worst special interest abuses, it’s things like the NRA. Really, Larry? How is the NRA abusive? He doesn’t say. He probably thinks, and probably correctly, that his audience doesn’t like the NRA and, therefore, he doesn’t need to make the case.
22:40: If you had a wealth tax, you would likely increase the clout of the wealthy because a standard way around wealth taxes [DRH note: just look at the estate tax for evidence] is to give away wealth.
24:40: Larry makes a point that his late mentor Martin Feldstein made. The higher Social Security and Medicare benefits are, the less need there is to save. So if you measure wealth the way it’s typically measured–tangible net worth–which excludes the present value of future retirement income streams, the bottom half will look very unwealthy.
25:50: Larry considers 3 activities wealthy people can do. Activity A is continuing to invest it productively. Activity B is consuming it. Activity C is donating it to causes and, thereby, having large political influence. A wealth tax, he notes, is most punitive of Activity A.
At around the 37:30 point, Greg Mankiw starts off strong, giving a comparison of Frank Frugal and Sam Spendthrift. A wealth tax, of course, would cause Frank Frugal, who is doing more for society, to pay higher taxes. I don’t know if Greg knows this, but his discussion is very much in line with early mid-19th century French economist Frederic Bastiat’s discussion in “What is Seen and What is Not Seen” of Mondor and his brother Ariste.
41:45: Greg makes an interesting point about 2 versions of a Universal Basic Income, pointing out that though they look different, they are exactly the same. I was disappointed, though, that he didn’t point out that such a plan would, in one fell swoop, make the federal government much closer in size to the size of Western European governments. See my article for more.
52:38: Larry goes back to one of his themes that I criticized a decade ago–going after wealthy people who illegally hide their wealth. He says that government officials who go after them “are doing the Lord’s work.” I’m not a Christian, but if I were, I would never use that term to describe what they’re doing. Relatedly, Larry approvingly quotes Gene Sperling’s claim that wealthy Americans who renounce their U.S. citizenship to avoid U.S. taxes are “economic Benedict Arnolds.” Would he say that about Californians renouncing their California residency to move to Florida and avoid California’s high taxes? And if not, why not?
53:30: Larry says it’s good to penalize people for leaving the United States. I’m glad he didn’t have a say about people leaving Europe in the late 19th and early 20th centuries to avoid conscription, thus leaving their human capital intact.
1:01:40: Catherine Rampell of the Washington Post makes the point that Bastiat refuted in the link above, and Greg does a nice job of refuting it here. Actually, though, I think Bastiat did it better.
1:05:30 to about 1:10:00: Must be seen. Larry makes a point I made in some articles in Red Herring in the late 1990s about how Bill Gates’s wealth did not protect him from the Clinton Administration. Larry tells Saez he’s looking for a case when reducing a multi-billionaire’s wealth by 20 percent would cause better policy decisions or better decisions in general. Saez can’t give him one.
1:09:24: I missed it the first time around but Greg Mankiw makes the point that if Bill Gates had had 20 percent less wealth, he might have put less into eradicating disease in Africa and that’s what Saez is trying to get rid of.
1:10:10: Saez says “robber barons” means something. Unfortunately, Saez seems ignorant of that issue also.
1:11:20: Heather Boushey in the audience says that she wants wealthy people to have less influence about how their wealth is spent. Larry agrees with her, unfortunately, but points out, as he had earlier, that a wealth tax will give wealthy people an incentive to spend their wealth in ways that she doesn’t want. But before we get to Larry, Greg Mankiw has his finest moment of the session, pointing out that he, Greg, thinks Bill Gates spends his wealth better than Donald Trump would spend it; Greg points out how badly democracy works.
1:17:00: Larry makes a very good point about the practical issues involved that make it hard to tax capital gains annually rather than when realized. His hardware store story is great. He then goes on to point out that an increase in the future path of your income is a capital gain. He does that nicely too.
Overall, Larry was pretty much at his best. At times, he reminded me of David Friedman at his best, although with less of a twinkle in his eye.
READER COMMENTS
Jim Rose
Oct 27 2019 at 8:32pm
saez was a terrible debater. his presentation was no more than an explanation of a table on how the wealth of the superrich would be reduced. He had no counter punches to Summers or anyone else.
Jon Murphy
Oct 27 2019 at 10:14pm
Awesome. I know what I’m listening to next time I have to drive to campus
Thaomas
Oct 28 2019 at 7:50am
You are probably right about why Larry did not explain what he does not like the NRA. My guess is that he thinks the NRA has hijacked the multiple legitimate interests of gun users. It uses it’s influence rather to prevent any restrictions on ownership or acquisition of ownership with the fear that its members’ guns are going to be confiscated with the strong hint that the reason for the imaginary confiscation effort is not in any way related to public safety, suicide prevention, etc., but to permit a (left wing) authoritarian government.
Off topic, but I remain frustrated that UBI proponents do not explain the benefits of the UBI relative to a wage subsidy that transferred similar amounts of income to those that are working. Id say that UBI or equivalent wage subsidy making the US Government the size (I suppose you are measuring in % tax + deficits, not G) of the typical WE government is double counting as those disadvantages such as higher taxes and administrative costs are already part of the UBI/wage subsidy debate
Another off topic frustration that the implicit comparison of the Wealth taxation was not a progressive consumption tax.
robc
Oct 28 2019 at 8:39am
How would a progressive consumption tax be done? One of the advantages of the consumption tax is that the consumer can be entirely unknown. The business collects the tax and files paperwork, consumers are out of the loop.
David Henderson
Oct 28 2019 at 9:35am
I’m not advocating such a tax but it wouldn’t be hard to do. My old mentor Murray Weidenbaum worked on one with a U.S. Senator or two, whose names I’ve forgotten, in the 1990s. The idea is to give an unlimited deduction for contributions to IRAs and then have a progressive, i.e., graduated, tax structure for what’s left after those contributions.
Robert Coffey
Oct 28 2019 at 8:17pm
That makes sense. The only thing I could think of was a flat consumption tax combined with a per capital rebate. A vat-ubi combo, sorta.
Which, now that I think about it, was basically the fair tax proposal.
David Henderson
Oct 29 2019 at 10:39am
There’s actually a huge difference between a VAT-UBI combination and the Weidenbaum version, a difference that makes the Weidenbaum version preferable. That is that the Weidenbaum version, unlike the VAT-UBI combo, is not nearly as susceptible to fraud. The UBI is in some ways like the EITC, and about 20% of the payments under EITC are to people defrauding the system.
nobody.really
Oct 29 2019 at 5:06pm
I’d like to hear more about this.
The EITC is intended for people who meet rather stringent qualifications–low income, but working. The UBI is intended for people who meet fairly limited qualifications–US citizenship, still alive, perhaps a lower age limit, perhaps with some opt-in provisions requiring waiver of other public benefits. (That is, you might have to waive Social Security or SNAP benefits in order to get your UBI check.) How much fraud would we expect to find that does not already exist?
Yeah, people might want to conceal/delay reporting that grandpa died–but surely they do that already due to Social Security?
Yeah, undocumented Juan might try to get a UBI based on a stolen Social Security Number–but perhaps not. Today, Juan uses the stolen Social Security Number in order to get a job, and the net effect is Juan pays INTO Social Security via FICA taxes. Joe, the actual owner of the Social Security Number, likely doesn’t know about Juan–and if he did, he’d thank Juan for the contribution. But once Joe learned that his UBI check had been diverted, he’d certainly file a complaint–and this would lead to officials hunting down Juan. So Juan would have a strong disincentive to engage in this kind of UBI fraud.
What other kinds of UBI fraud should we expect?
robc
Oct 30 2019 at 8:08am
I agree that the Weidenbaum version is preferable. The one change I would make is to not require the unlimited IRA be a retirement account. If you just want to delay consumption a few years, instead of to 59.5, you should be able to do it. The tax would come due whenever you take the money out, with no early withdrawal penalties.
David Henderson
Oct 30 2019 at 9:43am
Reply to robc below:
Yes, you’re right about the early withdrawal issue. In fact, the Weidenbaum version had no penalty for early withdrawal, if I recall correctly.
That reminds me that when my wife and I were saving to buy a house, shortly after we were married in 1983, each year we were torn between saving the max of $2,000 each in a deductible IRA versus saving about $1,500 each outside an IRA. With no withdrawal penalty, we would not have had that dilemma.
nobody.really
Oct 29 2019 at 10:39am
See David Bradford’s X Tax.
Jon Murphy
Oct 28 2019 at 7:56am
Saez’s comment and your response remind me of one of my all-time favorite articles, Microsoft and Standard Oil: Radical Lessons for Anti-Trust Reform by Don Boudreaux and Burt Folsom.
The long and short of Boudreaux and Folsom’s argument is that, before justifying any claims of market failure or support for anti-trust action, we need to see how the firm is actually behaving. In the case of both Microsoft and Standard Oil, the mere threat of competition kept them from fully capitalizing on their supposed monopoly positions.
We must remember that, economically speaking, a monopoly is more than just one firm in a particular industry. Monopolists also are output restrictors (which means they charge a price higher than what would occur under perfect competition if price were set at marginal cost) and tend to avoid innovation if it harms their pecuniary gains. That is why they lead to deadweight loss. If the supposed monopolist is not restricting output or reducing innovation, then they are not performing the harmful activities of a monopolist. Thus, anti-trust action (or, in Saez’s case, a wealth tax) would end up causing harm, not doing good.
Dylan
Oct 28 2019 at 11:46am
Wasn’t the case against Microsoft that they were indeed reducing innovation in the browser market? IE6 was a great browser when it was introduced, but as soon as they got a dominant market position they let it stagnate. When Netscape rose from the ashes as Phoenix/Firebird/Firefox it was a superior product in almost all ways except one. Since IE6 was so dominant, people who wrote websites had written directly to the quirks of IE6, and often times they were broken to the point of being unusable in any other browser. For the first couple of years I used Firebird, I needed an extension called IEView, that would quickly open up a website in an IE shell if it didn’t work natively. That eventually changed, but I think you could make a compelling case that the threat of antitrust action is at least partially responsible for making things change as quickly as they did.
Unfortunately we’re seeing the same thing happen over again with Chrome, I’ve had multiple websites this week tell me they won’t work with anything but Chrome. This of course means they don’t get my business, but I’m pretty sure there are more people who will just switch to Chrome, rather than take a principled stand.
Jon Murphy
Oct 28 2019 at 12:50pm
That was indeed the case, but as you show, that wasn’t true.
Jeremy N
Nov 6 2019 at 3:07pm
Important to note here that the reason IE6 was an issue was that Microsoft used its dominance of operating systems (Windows 95 at the time) to give IE6 preferential treatment (Microsoft had tied the entire folder system through IE6 and also setting it as default web browser, etc.).
That’s how IE6 killed Netscape and, as you say, then it stagnated and there was very little competition in browsers for a while.
Alan Goldhammer
Oct 28 2019 at 8:33am
David – excellent overview. I watched the video when Alex mentioned it over on Marginal Revolution. Summers was in fine form and skewered the distributionist sector of the Democratic Party. Anyone who thinks a wealth tax will be easy to implement is fooling themselves; it makes for great populist excitement in debates but that’s about it.
David Henderson
Oct 28 2019 at 9:33am
Thanks, Alan.
You wrote:
Anyone who thinks a wealth tax will be easy to implement is fooling themselves; it makes for great populist excitement in debates but that’s about it.
True. But it’s not just the difficulty of implementation. Larry made those points well, but he also pointed out the huge unintended, but entirely predictable, consequences of a wealth tax that is implemented.
Lant Hayward Pritchett
Oct 28 2019 at 12:54pm
I think Larry said “The Lord’s work” (which is of course a common phrase meaning “a good thing”) and I am reasonably confident he not mean it in a specifically Christian way.
David Henderson
Oct 28 2019 at 3:04pm
I’m sure he didn’t. After all, Larry is Jewish. And I know it’s used that way.
So let me put it this way. Going after people who largely earned their wealth and are trying to hide it from rapacious governments is not “a good thing.”
And notice how quickly Larry went from the idea that tax laws should be enforced against wealthy people trying to hide their wealth to the idea that the government should change the law so that it’s even harder to legally get out of taxes even when one doesn’t live here. It is no more justified to make ex-Americans pay taxes to finance the U.S. government than it is to make French people pay taxes to finance the U.S. government.
By the way, Lant, I loved your critique of the RCT literature.
nobody.really
Oct 29 2019 at 10:54am
Haven’t listened yet. But in public finance debates, it’s customary to compare the advantages and disadvantages of any form of public finance to the advantages and disadvantages of some other mechanism for raising an equivalent sum.
I expect it is not hard to demonstrate that a wealth tax has bad consequences relative to a world in which public goods and services are provided by magic pixies. But is it worse than a world in which we raise income taxes to acquire the equivalent sums?
Jon Murphy
Oct 29 2019 at 4:48pm
That is addressed at length in the video and in the few written comments in the post
Mark Z
Oct 29 2019 at 11:08pm
Isn’t there at least something approaching a consensus among economists who study taxes that, in general, taxing consumption > taxing income > taxing wealth? I don’t think there’s much of a technical case for taxing wealth instead of income, hence why the case is usually made based on the idea of ‘reducing inequality,’ regardless of whatever inefficiency and waste it introduces.
Thomas Sewell
Oct 30 2019 at 9:26pm
I’ll give you the short version of the flaws of a wealth tax in terms of raising revenue.
On average, the European countries which implemented a wealth tax (and then later repealed it, for reasons which should become shortly obvious) in the long run would either raise negligible amounts of money or net lose tax money as a result of the tax.
That’s because the evasion the wealth tax incentivizes has the side of effect of also losing income/VAT/business/other taxes which used to be paid by the people now removing their wealth/investments/property from the jurisdiction of the countries which implemented a wealth tax.
So some people paid the wealth tax, but they were vastly outnumbered in financial effect by those who didn’t and who also stopped paying other taxes from moving their assets elsewhere. The wealth tax ends up as a full employment act for tax lawyers and accountants as well as incentivizes the export of capital and rich people. What is doesn’t accomplish is to raise substantial amounts of money, not even enough to pay for the bureacracy created for compliance.
So compared to almost every other type of tax in operation, it’s a real loser.
Jeremy N
Nov 6 2019 at 3:09pm
This is a great debate. It’s fairly rare, is it not, to get three renowned economists to argue the full spectrum of a public policy?
I’d be interested in listening to other examples.
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