There’s a Monty Python routine where a chartered accountant decides that he wants to be a lion tamer—until he discovers what that would actual entail. I’m reminded of it every time I hear politicians talk about taxing the rich.
In previous posts, I’ve discussed the example of the ill-fated luxury tax of 1991, which went after expensive yachts, automobiles, jewelry, etc. Even though the tax was quite low (10% on the boats above $100,000) it was eventually repealed, partly because liberal Democratic politicians worried that it was costing jobs in the yacht building industry.
In another post, I pointed out that New York City taxes many ultra-expensive condos at far lower rates than working class homes in Queens. And recall that New York’s mayor is quite left wing.
Now The Economist reports that things are getting even worse:
Donald Trump’s tax reform allowed individuals and companies to write off 100% of the cost of a new or used private jet against their federal taxes. For some plutocrats this has wiped out an entire year’s tax bill. For others, it has made buying a jet extraordinarily cheap.
The case for flying on a private jet is that it can save time for someone, such as a chief executive, whose time is extraordinarily valuable. Hence companies can offset the cost of these flights against their corporate-tax bills. In some countries the use of a private jet is a tax-free perk for executives. But a growing volume of research suggests that flying the boss privately is often a waste of money for shareholders. One analysis, by ICF, a consultancy, found that the jets are often used to fly to places where corporate titans are more likely to have holiday homes than business meetings, such as fancy ski resorts.
Even if there is a slight productivity benefit to flying in a private jet, it seems likely that the jet is also a sort of fringe benefit–consumption for the wealthy. After all, even commercial jets fly at roughly 500mph, so the time saved is presumably mostly in faster boarding and security clearance. And I see no justification for allowing private individuals to write off the cost, much less 100% of the cost.
I’m not sure why this tax benefit exists, but I suspect it is strongly supported by the producers of private jets. More broadly, I see several factors at play in the failure of our society to effectively tax the rich:
1. Widespread belief in primitive Keynesian theories that producing luxury goods creates jobs, rather than merely diverting jobs from other industries. (Note that I’m not blaming all or even most Keynesians. For instance, new Keynesians generally avoid this fallacy.)
2. The fallacy that “taxing the rich” is about getting rich people to write checks to the government, rather than reducing the consumption of the rich. Any tax that does not reduce consumption by rich people is not taxing the rich. If Warren Buffett writes a big check to the Treasury and reduces his charitable giving rather than his consumption, then you have not taxed Warren Buffett.
3. The political influence of producers of luxury goods.
There are much worse things than countries that bend over backwards to favor the rich, as we currently see in Venezuela. So I don’t regard the lack of luxury taxes as a huge problem for America, in and of itself.
My biggest complaint is that our failure to tax the rich in a reasonably sensible way (by taxing high levels of consumption) will lead us to attempt to tax the rich in a highly inefficient and destructive fashion, say with a tax on capital income, and not even succeed in our objective.
Allowing 100% write-offs of private jets will force us to have higher tax rates on saving and investment. Maybe not today or tomorrow, but when the bills come due for our current unsustainable fiscal path. That’s the real problem will these tax breaks.
PS. Corporate jets are also very bad for the environment.
PPS. The newest issue of The Economist reports on a proposal for a luxury tax on NYC condos valued at more than $5 million, but only if the unit is unoccupied. Huh?
PPPS. This NYC condo may be temporarily unoccupied.
READER COMMENTS
Benjamin Cole
Mar 18 2019 at 8:16pm
Great post.
Matthias Goergens
Mar 19 2019 at 1:30am
Charitable giving should probably not be pre-tax either. Lots of charities are pretty dubious, so it’s not a priori obvious that giving part of their income to the government (if they were taxed) would be a bad thing.
And giving to the MoMA to get your name mentioned or onto a wing of a new building, is definitely more like consumption than charitable giving.
And apropos consumption: investing your money in sweetheart projects to wield influence (at presumable a lower rate of return than what pure optimising for profit would give) is a form of consumption too. They are paying in last return for influence. But because it’s an opportunity cost, it never shows up anywhere on any books.
So if you take taxing consumption to the logical extreme, you should not tax capital income, but missing capital income (ie failure to achieve the maximal risk adjusted expected income). That’s of course a bit weird and hard to figure out, but I suspect it would essentially boil down to something very similar to a flat eg 1% on all assets, independent of return actually achieved.
Not sure if that actually makes sense?
IVV
Mar 22 2019 at 10:40am
Regarding charitable tax breaks, the new Trump tax laws did remove my charitable tax break. The SALT cap dropped my deductions to well below the standard deduction, so marginal charitable giving delivers no tax break.
(Total taxes went up, too.)
db
Mar 19 2019 at 5:11am
Actually this is not correct. While a significant amount of time is wasted in boarding and security clearance for commercial flights, the greatest time benefits to private flying are found in the ability to fly into smaller airports licated closer to the final destination, and to fly directly between these small airports rather than to waste hours in layovers at major hub airports.
The shorter door to door times for private flying are a major incentive to choose this mode of travel. Even flying a small non-jet powered airplane can get passengers more quickly between places than jet aircraft when there is no direct airline service between them.
robc
Mar 19 2019 at 7:48am
This is why the company I work for has a jet. We are a big international company in a small city without a true commercial airport. To fly commercial you have to add an additional 60-75 minutes of drive time. Plus parking and shuttle time.
The local airport is 5 mins from HQ.
Scott Sumner
Mar 19 2019 at 12:02pm
What about a 50% write-off for corporate private jets, and a 0% write-off for individual private jets?
robc
Mar 19 2019 at 12:10pm
I assume the corporate jet was depreciated over time.
That seems to be the right way, as opposed to an immediate write-off.
And I agree on the 0% write-off for individuals, unless they can depreciate it as a business expense.
Then again, I favor a 0% personal and corporate income tax rate, so if we are asking my opinion, the point it moot. I am a Single Land Taxer with no exceptions, not for churches, not for charities, not for governments (The Feds wouldnt have to pay themselves, but they would have to pay the state and local portion of the SLT for federal lands).
Thaomas
Mar 19 2019 at 7:15am
I think that the main difficulty in taxing (consumption of) the rich is the political influence of the rich working through the idea that taxing the rich would be both unjust (they are the “makers”) and counterproductive for growth (they would stop working and innovating). An “income” tax with high marginal rates and “deductions” for non-consumption could very effectively tax the rich.
Scott Sumner
Mar 19 2019 at 12:03pm
An income tax with unlimited 401k privileges makes much more sense than our current system, as you suggest.
robc
Mar 19 2019 at 12:12pm
Only if you remove the required disbursements starting at age 70.5 or whatever it is.
Scott Sumner
Mar 19 2019 at 11:20pm
Yes. That’s what “unlimited 401k privileges” means. No limits.
robc
Mar 20 2019 at 9:12am
I assumed you just meant unlimited on the front end. But yes, no minimum distribution on the backend either.
Johannes
Mar 19 2019 at 9:48am
Why is 2. a fallacy? Isn’t there a sense in which rich people’s charitable activities can be seen as consumption — buying status in a weird rich people’s game, albeit one with hopefully net-positive benefits for society.
Say that taxing Warren Buffet doesn’t change his consumption (or his charitable giving), but only makes him sell some investments and give the proceeds to the government, how is that not taxing him?
(Thanks for both your blogs Scott, they’ve taught me a lot. Also big thanks for making me read Knausgaard’s books.)
Scott Sumner
Mar 20 2019 at 8:04pm
Suppose the rich person gave $1 billion to the poor, who spent it on goods. Then suppose there is a 20% VAT on the goods bought by the poor. In that case, also taxing the rich person would be a form of double taxation. Like taxing both the giver and recipient of Christmas presents.
Now suppose they give the money to a college sports program. You could argue for a tax on college sports as a form of consumption.
Johannes
Mar 21 2019 at 6:11am
I’m not quite following you — perhaps it amounts to double taxation, but why wouldn’t it qualify as “taxing the rich”?
derek
Mar 19 2019 at 10:26am
Dang, I was initially thinking that it must be the case that the quote was a misreading of how corporations can now deduct 100% of depreciation all at once, but I trust The Economist to get it right. Some aspects of the TCJA bill were probably efficiency-increasing (e.g. SALT changes), but, man, there is so much efficiency-decreasing garbage in there too that I am not sure it was worth it since I am not very optimistic about Congress ever fixing it.
Ken P
Mar 19 2019 at 11:32am
If it is used for a legitimate business reason it should be deducted. Otherwise it should be taxed. Any personal use should be considered income at the going rate for a private jet rental and taxed accordingly.
Scott Sumner
Mar 19 2019 at 12:05pm
Ken, It’s often both. Consider businessmen who fly first class. It seems plausible that the extra cost above economy class is “consumption”. A first class ticket often has a business purpose, but a consumption purpose as well.
Ken P
Mar 19 2019 at 10:09pm
That’s a good point, Scott. It can get tricky to tease consumption out of the equation.
Corporate policies often take into account socioeconomic status when determining travel expenses. For example, meals are expected to be what someone of your payscale would reasonably be expected to purchase if they were not on a business trip. That approach makes sense, but it arguably results in paying for level of consumption when you are an executive having your steak and $100 bottle of wine at an upscale restaurant vs the employee having the rare trip and having their Applebees meal paid for.
Scott Sumner
Mar 19 2019 at 11:22pm
Ken, All meals are 100% consumption. That’s practically the definition of the word “consumption”. The fact that meals are considered a business expense is an outrage.
ChrisA
Mar 20 2019 at 12:51am
Scott
If I am travelling on business I am forced to buy my meals at a restaurant. If I am at home I usually eat home cooked meals which are much cheaper. Surely you would agree that my travel cost includes at least the incremental cost of the meal in the restaurant? Why then should it not be a legitimate business expense and be deducted like any other business expense?
robc
Mar 20 2019 at 9:14am
Aren’t meals 50% deductible, which works with ChrisA’s point.
Scott Sumner
Mar 20 2019 at 8:06pm
I disagree. Restaurant meals are 100% consumption. If your company is forcing you to spend more than otherwise, they should compensate you with a higher salary.
Kevin Dick
Mar 19 2019 at 1:30pm
Scott: from the larger picture standpoint, I assume you agree that the corporate tax should be zero in any case?
This situation highlights that we won’t save as much money on accountants, lawyers, and collections as we would like by eliminating the corporate tax.
There will still need a fair amount of paperwork and policing to prevent payments to individuals in the form of perks.
robc
Mar 19 2019 at 2:55pm
Kevin,
Eliminate the personal income tax too and you solve that problem!
Scott Sumner
Mar 19 2019 at 11:23pm
Kevin, Yes, it should be zero. But corporate jets should not be fully deductible if the tax exists.
robc
Mar 20 2019 at 9:51am
I am not sure how a corporate jet is fundamentally different than, say, a plumber’s truck. I assume the plumber can write off his truck entirely as long as he only uses it for business.
Its also no different than writing off a home office (although that leads to weird taxation if you later sell the house).
Scott Sumner
Mar 20 2019 at 8:08pm
I oppose tax write-offs for home offices. The plumber’s truck is a tricky one, but the corporate jet pretty clearly involves a strong consumption element.
In general, I prefer lower rates, simpler taxes, fewer deductions.
robc
Mar 21 2019 at 8:59am
I agree with that last sentence, but legitimate business costs should be deductible as long as we tax business income.
I think we just disagree on how much of a corporate jet cost is legitimate. For the company I work for, it allows day trips to a large customer in Bentonville, AR. The execs can leave their house in the morning at their normal time, get to the airport, meet with Walmart fly back and be home in a normal business day.
A commercial flight would turn the same trip into two full days. I am not sure how much more the jet costs than car travel to the airport, parking fees, commercial tickets, rental car in Little Rock, more gas costs, a hotel room and a lost day of work. It is quite possible the corporate jet is cheaper. Probably not, but it isn’t clear to me. All those other costs would be legitimate business expenses, I am not sure how replacing it with a different means suddenly makes it illegitimate.
Floccina
Mar 19 2019 at 3:40pm
Yeah people like to only think of one side of the story. I’ve asked people who are for more gun control, what is your projection of how many young men will go to jail if your proposed gun control laws are passed? They usually have not thought of that at all.
Fred_in_PA
Mar 19 2019 at 5:24pm
As an amateur, I’m a little intimidated by Thaomas’s comment, but . . .
“Makers” & “innovators” seems to describe sports figures, performing artists, and early stage entrepreneurs — not the super-wealthy whose money the taxers covet. And, too, I suspect such (merely) rich performers work for more than money: Thus taxing away their incomes may not proportionately discourage their working. They are, however, much more numerous than the super-wealthy. (But “howevers” on the “howevers”; it will still take 50 of these $20-millionaires to equal one billionaire.)
But especially with the super-wealthy, I think we slam into argument #2; namely, “The fallacy that “taxing the rich” is about getting rich people to write checks to the government, rather than reducing the consumption of the rich.” One of the niceties of being super-rich is that you can buy anything you want / that price-is-no-object. (Or, as J.P. Morgan supposedly said about the costs of a yacht, “If you have to ask, you can’t afford one.”) If this attitude holds, then “consumption” taxes practically can’t be high enough to discourage their consumption. “What care I, a multi-billionaire, whether the yacht costs $100 million or $200 million? I still want one.” At this point, it’s not their consumption that gets decremented; It’s what’s left over after their consumption — namely their savings / investing. And the “merely” wealthy may at least aspire to the same devil-may-care lifestyle.
I suspect that virtually all attempts to decrement the profligate lifestyles of the rich and famous result instead in punishing investment. Punishing investment hurts the working men & women who would have sought employment in those to-be-built facilities.
(How is it that practically every socialist society on the planet understands the desirability of getting the wealthy to invest in their country, but the supposedly capitalist Americans can’t see that? Or worse; we get hot and bothered when they invest over there, but will throw up barriers when they think to invest here? (Are you listening, AOC?))
Thomas Sewell
Mar 20 2019 at 10:02pm
You’re right that because most of the rich’s wealth is invested, almost every attempt to “tax the rich” actually just ends up reducing investment, generally for something (a government program) which doesn’t have a good of an effect on the world than that investment would have, in terms of additional wealth later, jobs, etc…
A big issue with taxing consumption is that the wealthier someone is, the more options they have in terms of the location and alternatives for their consumption. So you can raise taxes on yachts all you want, but you’ll immediately start causing substitution into other forms of consumption instead (speed-boats, or ski-dos, or private jets, renting out cruise ships, or whatever) and ultimately shift consumption into a different taxing jurisdiction, in which case you just lost your original tax revenues from yachts, didn’t actually end much consumption and instead also just added some more inefficiency in the market for yachts-and-yacht-substitutes.
Juan Manuel Pérez Pórrúa Pérez
Mar 20 2019 at 2:33pm
Charitable giving is a form of consumption.
MarkW
Mar 21 2019 at 8:53am
One of the big hidden costs of corporate aircraft (not just jets) to shareholders is the risk of the CEO (possibly along with the rest of the management team) dying in a crash. Private aviation is not only much more dangerous than commercial aviation, it’s more dangerous than driving by a pretty wide margin. ‘Corporate Executive killed in plane crash’ yields many, many pages of hits:
https://tinyurl.com/y66vglwy
Michael Sandifer
Mar 21 2019 at 11:01am
To me, the key here is to stop taxing most incomes, especially business and investment income. I like taxing externalities first. We should tax what we want to disincent. So, I agree with Scott there, that taxing consumption by the wealthy is preferable to taxing income, for example.
Corey
Mar 21 2019 at 12:00pm
While I trust the Economist, I can only find reference to a corporate deduction for private jets in the tax bill, nothing about an individual tax break. Does anybody have a reference for that?
Ahmed Fares
Mar 22 2019 at 12:54am
The problem with taxing the rich to give to the poor is the differing marginal propensities to consume. Because the rich reduce their spending by less than the poor increase their spending, aggregate demand rises. The central bank then steps in with higher interest rates to curb demand, i.e., the monetary offset. Hence the saying:
What fiscal policy gives, monetary policy takes away.
The poor end up paying higher interest rates on their debt, and the higher interest payments end up in the hands of the rich. Thus, the money comes around from the rich back to the rich full circle.
Warren Platts
Mar 24 2019 at 11:06pm
I gotta say I respectfully disagree with the entire premise of this article: that we should tax the rich by taxing, and hence reducing their consumption. If anything, we should want to get them to reduce their savings and increase their consumption by taxing their investment income. The capital gains tax should be the same as the earned income tax. And non-resident foreigners should have to pay the capital gains tax as well. Currently, non-resident alien investors pay zero capital gains taxes on their equity investments (albeit, they pay taxes on real estate capital gains).
My reasoning is that we are a consumption driven economy. If the rich want to buy yachts and Lear Jets that’s good and is to be encouraged. It adds to the GDP, creates highly desirable manufacturing jobs, and expands the tax base.
Rich people save too much in this country. There is no shortage of investment funds for truly productive, desired investment opportunities. The opposite is the case, actually. The result is the excess savings flow into speculative investments where the “investor” is merely gambling on rising prices. Asset bubbles are the result, and the bubble bursting causes major recessions that can take a decade to recover from. The trade deficit/capital surplus only exacerbates this problem.
Therefore, we should reduce I and add to C in the GDP equation. The way we do that is by taxing investment income.
If you want to tax consumption by the rich, the way to do that is with tariffs. If a company wants a corporate jet, by all means let them, but if it is a foreign made jet, there should be 50% or 100% tariff on it. If they buy an American jet, it should be 100% deductable. If they buy a foreign jet, 0% deduction.
Bottom line: We want to encourage the rich to increase their contribution to Cd in the GDP equation, and reduce their spending on Cf and I; by increasing demand for domestic production, not only do we create jobs, but along with those jobs we increase the number of investment opportunities in the real economy producing actual goods and services rather than chasing ever higher prices in the casino…
Warren Platts
Mar 24 2019 at 11:09pm
I might add that Adam Smith himself advocated soaking the rich through tariffs on luxury items purchased by the rich as great way to raise government revenue.
Ahmed Fares
Mar 25 2019 at 1:56am
by increasing demand for domestic production, not only do we create jobs,
A nation’s imports finances its exports. When Americans buy imports, it puts US dollars in the hand of foreigners, which are then used to buy US exports.
Without imports, US dollars become scarce in the foreign exchange market which drives up the value of the US dollar, restricting US exports. The US loses jobs in the export sector and the benefits of trade.
Warren Platts
Mar 25 2019 at 9:04am
The exchange rate mechanism is supposed to result in balanced trade over the long run. The fact that hasn’t happened in about 50 years implies to me that the exchange rate mechanism is broken.
At any rate, there is no need for a general discussion of the “benefits of trade.” What I proposed was a tariff on luxury items typically purchased by superrich individuals and megacorporations.
Given three options: (1) tax all luxuries; (2) tax only imported luxuries; (3) tax no luxuries, why exactly should (2) be rejected out of hand? If there was a place for tariffs at all, I would think it would be here.
As Adam Smith pointed out, such tariffs on luxuries will not raise price levels for working class folks who shop at Walmart, yet would still grant an advantage to our home workmen who produce such luxuries.
Ahmed Fares
Mar 27 2019 at 1:53am
The exchange rate mechanism is supposed to result in balanced trade over the long run.
Not for the US which is the reserve currency. It must run trade deficits in size to allow other countries to accumulate US dollars.
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