Classic Adam Smith quote: "This disposition to admire, and almost to worship, the rich and the powerful, and to despise, or, at least, to neglect persons of poor and mean condition, though necessary both to establish and to maintain the distinction of ranks and the order of society, is, at the same time, the great and most universal cause of the corruption of our moral sentiments."
To be clear, none of the points I’ve raised here have anything to do with the fact that wealth naturally gives the rich more options in life. I understand that. Rather all 8 of the preceding examples involve explicit government policies that favor the rich over the poor. Not one of these inequities would require “redistribution” in order to level the playing field.
I liked the paragraph, but couldnt understand what it was doing in item number 8. Clearly that swiss model is redistributive (fixed benefit to all who are paying different taxes). US private education is purchased on the free market, and the buyers lose the public benefit they would get otherwise. The opponents of voucher programs do not appear to me to be trying to privilege an aristocracy even subconsciously, they seem mostly to be trying to support the very unglamorous teachers union, and basically hate that the rich can opt out but cant do anything to stop them.
I believe the pro-rich bias is subconscious, and I agree with your claim that voters are not knowingly trying to help the rich. But they are adopting a public policy that favors the rich, relative to the alternative where every single child in America receives a voucher that can be used in any school (as they do in Sweden.) I think this is true of many such policies. NYC doesn't give preferential property tax rates on billionaires because they are trying to help billionaires, but the policy does in fact help billionaires.
I like the public schools (relative to vouchers) mostly help the rich take. I think this must apply to the very rich who dont care at all about tuition and just want to keep out the riff raff. The middle rich for whom the tuition still bites might prefer vouchers, though there may be elements of zero sum credentialsim for which it backfires.
But even in Sweden it seems there are some small number of rich ppl only enclaves that charge tuition and are not voucher eligible. Seems like in the US, there would be a larger number of those. So that policy may have no overall impact on the very rich.
So when I lived in Africa, I'd hear the occasional quip from ordinary people about how they understand and tolerate when the current autocrat in power skims money off the government. Because they found it natural: if they were in his position,they'd do the same.
Come to think of it, I believe an analogous sentiment animates a lot of how Trump gets forgiveness for all his sins from ordinary people. They sympathize and relate.
Can't agree with legalization of prostitution without a lot more protections for the people in the profession. Those I cared for sick or dying during the AIDS plague and at other times when I worked ERs and cared for those injured in the line of duty, they did not decide upon prostitution in lieu other respectable work. Almost all began as runaway teenagers without skills who ended up making money for people who offered them "protection" from the mean streets. No social security or health benefits entailed. No opportunity for skill development. In real life this is in no way "female empowerment" for any but perhaps a very few and I have never met any of those.
The problems you describe are precisely why it is essential that we legalize prostitution. These problems are far more likely to occur when prostitution is in the underground economy and prostitutes are exploited by pimps.
"But then suppose someone argued, 'The income of the super rich (at the margin) mostly goes to either charity, or to new investments that help the economy grow. Let the middle class pay a bit more in taxes, to make up for the shortfall.'
Can I honestly say that this argument is wrong? No, I cannot."
One could honestly say that argument is wrong. Our progressive income tax is good and is not desirable due to the marginal utility of the income; such thinking could justify a flat tax just as easily as a progressive consumption tax. Rather, the marginal cost to *one's own personal freedom* to use their earnings of their labor is far greater at the lower end of the income spectrum.
If the progressive income tax was justified in utility terms, we'd have to get into all these debates about what good is it in society for a working class person to make a little more and afford a car versus taking the bus. I have little interest in those arguments, though I am aware some urbanists think it's very important they don't get a car. I find that a bit strange. But if we understand the progressive income tax is justified in personal freedom terms, it's entirely defensible. There's just no need to grant the above argument in the first place.
An income tax rate on the middle class is corrosive to a middle class earner's freedom to start a business, pursue a vocation, buy a new property, or all matter of projects requiring capital. It takes from their earnings of their labor, and thus reduces their ability to pursue these various ends. This imposition is even more true for a working class earner trying to become middle class.
An income tax rate on the upper class is does not have *zero* harms on personal freedom, but it's less the case. The marginal harm to personal freedom to pursue all sorts of ends gets lower the further up the income spectrum you go. If one protests that it reduces their ability to put a very large investment into a firm or charity, consider that the middle income earner never has this ability in the first place.
If we understand the income tax's burden on freedom in this sense, a progressive income tax design becomes much more justifiable so we can secure the revenue to help those who cannot help themselves. By contrast, the utility argument does not see the ability to pursue private ends as a valuable metric in the first place, so it never comes to this conclusion about taxes. But it's the wrong metric.
I think you’re eliding the paternalistic instinct that motivates a lot of anti-vice laws. Part of the reason drugs and gambling are, and have been, policed more heavily among the poor, is that they are thought to cause relatively more harm to the poor, and to poor families and communities.
Also, one can see that the people slumped over on the streets of open-air fentanyl markets impose far greater costs on society than do the people snorting “glamorous” lines of coke in tucked-away restaurants and clubs.
I’m saying this as a supporter of drug legalization for all, but also in recognition of the perfectly plausible utilitarian arguments for restricting certain things from certain people.
Just like utilitarianism might lead one to offensive beliefs about not taxing the rich and hypocritically shaming the ugly, if I were a utilitarian I would probably support restricting certain vices to certain classes of people.
"people slumped over on the streets of open-air fentanyl markets"
I agree that this is a big problem, but what is its cause? In the early 2010s, the drug war was extended to Oxycontin, and fentanyl became widely used as a replacement. I'm under no illusion that legalizing drugs would make these problems go away, and I certainly agree with those who claim that cities like San Francisco are far too tolerant of anti-social behavior in public. But we've been fighting the drug war for 115 years, and I defy anyone to present a single piece of evidence that we are at all better off on that score than we were back in 1910.
I don't doubt that some people are motivated by paternalism, but it's hard to deny that there are also much darker motives at work. Consider GOP politicians who were enthusiastic drug warriors when the problem was primarily seen as a black issue, but suddenly became much more compassionate regarding providing treatment for drug users when the problem spread to white working class areas of the Midwest and Appalachia.
"Also, one can see that the people slumped over on the streets of open-air fentanyl markets impose far greater costs on society than do the people snorting “glamorous” lines of coke in tucked-away restaurants and clubs."
Given the fallout of various economic crashes, not to mention mistakes by surgeons or other professionals, I think this point is arguable.
These observations sound like a win for virtuous violence theory, which says that violence, such as from the law, is directed to regulate relationships, such as maintaining our expectations of how we relate to the rich and to the poor. Link to the research: https://psycnet.apa.org/record/2014-57875-000
"Rather all 8 of the preceding examples involve explicit government policies that favor the rich over the poor. "
I feel like you're just describing what we used to call.... aristocracy? I.e. those who have power. Only recently has it been changed to cover people who are merely wealthy.
You mentioned "rich over poor" but in every case what I see is inequality of power - not in the person who "gets away with it" but by whichever government official (cops, regulators, etc...) sets up the rules so that they can legally get away with it (or look the other way).
Take prostitution. There are lots of stories of cops taking advantage of its technically illegal nature and exploiting the prostitutes. They probably aren't rich. Are the cops aristocrats? I don't really think so, but they do have power.
I have seen the disparities over my adult 77 year lifetime, so I knew a lot of your points. But I wish you hadn't started out with: "I’ll argue that America contains a sort of hidden aristocracy. I use the term ‘hidden’, because neither the Republicans nor the Democrats are fully aware of the extent to which our society favors the rich and beautiful, often without knowing it. Both parties are complicit."
There, you are sadly mistaken and this foundational error disrupts your thesis. Of course they know it; they aspire to it, and frankly, so does everyone else in our dog eat dog economic system. Sadly, those in the national government, won't move against their own tentative or already attained privileges by enacting fairer tax and law enforcement legislation. (I haven't mentioned state and local elected officials because they pretty much do what the national parties prioritize for the same reasons the big boys and girls do what they do.
I agree with the thrust of this - elite bias has a tendancy to be disguised and viewed as 'the water we swim in'. I think another strong example is restrictive regulation on construction. It's defended as preventing slums, to preserve aesthetics or neighbourhood character or the environment, or simply reflexive/trendy opposition to development. The costs of these policies are concentrated on the poor, the wealthy can pay their way out of it, but it's often not recognised that way.
Having said this, it's not always an easy point to prove, many of these issues are complex and the bias isn't clear. For example in your drugs example, it's easy to imagine different reasoning. When we prohibit market activity for the good of consumers/society, there is a pretty standard bias to target the supply side and not the demand side. Sellers are the ones financially profiting from the transaction, are more provably knowledgable about what they are selling, and there seems like a natural logic to tacking the problem at it's source. I'd compare to ponzi schemes, unregulated medical services, ticket scalpers, selling alcohol to minors, counterfeit goods. In each case many consumers may benefit from the transaction, but are often not punished and generally seen as less culpable regardless of the economic balance.
I agree that many people have the intuition that it makes more sense to go after the supply side, but I think that intuition is false. We think the cocaine mirror in the restaurant restroom is chic because deep down we don't think consuming cocaine is immoral.
"are more provably knowledgable about what they are selling"
I doubt this is true, but if it is it's probably mostly because of the fact that drugs are illegal, and hence quality is very uncertain.
The rich person with private security that wants to defund the police in the mistaken belief that will improve the lives of “marginalized people (as opposed to those who just want lower taxes) are indeed luxury beliefs, believes that if enacted as policy would not be detrimental to the belief holder. Henderson, however has something else in mind: beliefs that rich people hold but do not act on themselves but are detrimental to those who act on them.
A side point. but if Sumner favors a progressive consumption tax (and presumably that or a VAT instead of FICA) why does he also support limiting the deductability of SALT. Surely SALT is a non-consumption use of income as much as 401 K contributions (and why not uncap, those?)
FICA is a consumption tax on the theory that capitalist don’t eat and workers don’t save.
How does SALT deduction incentivize wasteful spending? Does all state and local government spending have 0>NPV? Yes it does complicate the 1040 by one additional line, but is that really a consideration? More than any other deduction? More than creating a category of “capital” income to be taxed preferentially instead of just taxing consumption?
I fail to see the unique perniciousness of SALT expenditures over other non-consumption categories.
"FICA is a consumption tax on the theory that capitalist don’t eat and workers don’t save."
You need to stop making these silly claims and start studying tax theory. My claim is not at all controversial among public finance experts. Labor taxes are consumption taxes.
As far as SALT, it's a roughly 40% federal subsidy for state spending.
Please explain how a tax on wage income (at least some of whihc can be saved) is more of a consumption tax than a …. consumption tax like a consumption VAT?
CHAT GPT could not figure it out, either
“Public finance experts generally do not see a tax on labor income as strictly equivalent to a consumption tax, but they do recognize important similarities, depending on the specifics of the tax system.
Here’s the logic:
Labor income tax reduces individuals' take-home pay, limiting what they can spend on consumption.
Consumption tax directly reduces the purchasing power of individuals when they spend money.
In theory, if individuals save no money and spend all their income, a labor income tax and a consumption tax can have similar economic effects — both reduce consumption by reducing disposable income.”
This seems to me to be pretty close to “Workers don’t save.”
What are Chat GPT and I missing?
I’m surprised that we agree only about progressive personal consumption taxes PPCT but not about a consumption VAT. In your view should we fund social insurance from the PPCT, too? If we had a PPCT would SALT be deducted from income to get to consumption or would it be counted as consumption? If states also had only consumption taxes, woud that alter your view of SALT?
I think it was something like this that reminded me about the progressive personal consumption tax. I understand perfectly (?) why an income tax needs to tax returns from past saving preferentially to get somewhat closer to taxation of consumption (eliminate “double taxation”). But our current system does not do so becasue of the taxation of business income and non-indexation of capital gains. That for me is the rationale for progressive personal taxation of consumption.
Neither then nor now, however, did I understand why to exclude non-wage income from the total from which non-consumption is deducted in order to get to “consumption” that we want to tax progressively [not to mention the ways that people could try to get income re-configured to make it appear to be a return on investment (that part of my public finance class I remember very well. :)) And the optics!.]
BTW, if we did have a progressive personal income tax, would reduction in the leisure/consumption trade-off be would the hassle of trying disentangle land value from the total value of real-estate?
LOL, are we now in a world where AIs are going to contradict me in the comment section? ChatGPT is now viewed as more of an authority than an economics professor? Okaaay. . . .
All taxes tax consumption. A "consumption tax" is a tax that taxes current and future consumption at the same rate. Both a VAT and a labor tax do that. A tax on capital income taxes future consumption at a higher rate than current income.
The fact that some labor income is saved is irrelevant, as a labor tax does not tax the income from investments, the money is taxed only once.
I don’t understand the explanation. Joe earns a dollar and is inclined to save a dime. A consumption tax encourages him to save the dime and taxes him on the 90 an income tax taxes on the whole dollar. One day he will consume the dime plus return but it still seems that the consumption tax taxes consumption more on a NPV basis. Isn’t that a grater incentive than taxing the whole dollar but taxing the return at a preferential rate in the future or even zero? Both methods try to incentive saving, but the consumption tax seems more straightforward. Same question about FICA vs a consumption VAT. Doesn’t the latter encourage saving more?
What kind of progressive consumption tax do you favor that is equivalent to a labor income tax? It was you that reminded me of the consumption tax/income tax distinction that I had only vaguely hear about (or remembered) from my 1963 Public Finance course.
BTW I was not citing ChatGPT for its analysis, but for what it says is said by public finance experts. I was and still am unaware that the consensus of public finance experts is that a labor tax and consumption tax are equivalent. It seem to me they can be equivalent only if nothing is saved from labor income. If that is not their consensus I’d like to work through their analysis to see where I’m wrong.
I have some sympathy for the better treatment of the 'hidden aristocracy', although I think the US takes it to greater extremes than most democratic countries.
1. Drugs - I don't mind what people take, as long as I don't have to deal with it. If rich people get high in their homes and can give up cocaine easily, then go ahead. But if drunk and addicted people are laying on the pavement or stinking up my train, then I want them shipped off to the country to pick fruit. The same goes for prostitution and gambling. Legalisation is fine if people can handle it. We know there is a correlation between IQ and income and self-control. A lot of people in the bottom 15-30% of the population on self-control struggle with these things, like they do with even less addictive pursuits like social media. Personally, I expect rich people to manage their addictions and so don't have much sympathy for those who don't and who cause harm to others as a result. But maybe I am unusual.
2. Private equity - most people are way too dumb or naive to invest in unusual ventures. Rich people lose their fortunes every day on business deals their mates introduce them to. But like with drugs, as long as they don't lose their houses, pretty much no one cares. But when working class people spend half their incomes on poker (slot) machines, there is a call to ban or limit access to the machines because their kids aren't getting fed. Perhaps the reason that what we call 'private equity' appears to be so successful is that investing in it is limited to people who know something about running businesses, and as such, the market is highly competitive and attracts high quality people?
3. Divorce and scandal - I agree the 'single standard' resonates with most people because unequal sexual attractiveness is as close to a law of nature as there is: survival of the 'fittest' (in the Ali G sense). Another variable that I think is relevant to the difficulty of resisting temptation is age. In general, we expect more self-control from older people than younger people. If a 20-something football player or film star - or investment banker - sleeps around, it's more understandable than if a 50 year old does. Likewise, I think there is more sympathy for those who sleep with them.
Great post. But, I can’t resist one quibble. Drug, Alcohol and Gambling prohibitions were motivated at least in part by the claim that society faced a problem because of externalities from those activities, namely: people and families made indigent because of substance or gamboling addiction of the breadwinner. There is also the externality of crime committed by addicts to support their habits. The very wealthy are much less likely to become indigent and commit crimes since their wealth can compensate for their self-destructive behavior. So, I’m arguing that while the laws do give a pass to the wealthy, those laws can still stand up to having some utilitarian motivation. (Similar to taxing only the first $100 million in income)
I can but think that for many of your examples, things would improve, if we made the double standard more explicit and bound to legible rules. Mostly just for standard economic efficiency reasons.
So when Bill Gates spent about a decade of legal fights trying to import a Porsche, I think everyone would have been better off, if he'd been allowed to pay, say, million dollars to break that particular rule.
Similar for drugs: let people who are willing to pay some outrageous fee consume whatever substances they feel like. Ie legalise and tax.
The accredited investor schemes actually goes a bit in that direction (even if it's a lot messier than ideal): rich people don't need paternalism.
Whether poor people need paternalism is a different question. But at least we should make it relatively easy and straightforward to opt out.
Classic Adam Smith quote: "This disposition to admire, and almost to worship, the rich and the powerful, and to despise, or, at least, to neglect persons of poor and mean condition, though necessary both to establish and to maintain the distinction of ranks and the order of society, is, at the same time, the great and most universal cause of the corruption of our moral sentiments."
He was a very wise man.
The best paragraph in a strong post:
To be clear, none of the points I’ve raised here have anything to do with the fact that wealth naturally gives the rich more options in life. I understand that. Rather all 8 of the preceding examples involve explicit government policies that favor the rich over the poor. Not one of these inequities would require “redistribution” in order to level the playing field.
Thanks David.
You're welcome, Scott.
I liked the paragraph, but couldnt understand what it was doing in item number 8. Clearly that swiss model is redistributive (fixed benefit to all who are paying different taxes). US private education is purchased on the free market, and the buyers lose the public benefit they would get otherwise. The opponents of voucher programs do not appear to me to be trying to privilege an aristocracy even subconsciously, they seem mostly to be trying to support the very unglamorous teachers union, and basically hate that the rich can opt out but cant do anything to stop them.
I believe the pro-rich bias is subconscious, and I agree with your claim that voters are not knowingly trying to help the rich. But they are adopting a public policy that favors the rich, relative to the alternative where every single child in America receives a voucher that can be used in any school (as they do in Sweden.) I think this is true of many such policies. NYC doesn't give preferential property tax rates on billionaires because they are trying to help billionaires, but the policy does in fact help billionaires.
I like the public schools (relative to vouchers) mostly help the rich take. I think this must apply to the very rich who dont care at all about tuition and just want to keep out the riff raff. The middle rich for whom the tuition still bites might prefer vouchers, though there may be elements of zero sum credentialsim for which it backfires.
But even in Sweden it seems there are some small number of rich ppl only enclaves that charge tuition and are not voucher eligible. Seems like in the US, there would be a larger number of those. So that policy may have no overall impact on the very rich.
So when I lived in Africa, I'd hear the occasional quip from ordinary people about how they understand and tolerate when the current autocrat in power skims money off the government. Because they found it natural: if they were in his position,they'd do the same.
Come to think of it, I believe an analogous sentiment animates a lot of how Trump gets forgiveness for all his sins from ordinary people. They sympathize and relate.
Corollary: the poor have luxury beliefs too.
"the poor have luxury beliefs too"
Yes, that's also my view.
Can't agree with legalization of prostitution without a lot more protections for the people in the profession. Those I cared for sick or dying during the AIDS plague and at other times when I worked ERs and cared for those injured in the line of duty, they did not decide upon prostitution in lieu other respectable work. Almost all began as runaway teenagers without skills who ended up making money for people who offered them "protection" from the mean streets. No social security or health benefits entailed. No opportunity for skill development. In real life this is in no way "female empowerment" for any but perhaps a very few and I have never met any of those.
The problems you describe are precisely why it is essential that we legalize prostitution. These problems are far more likely to occur when prostitution is in the underground economy and prostitutes are exploited by pimps.
"But then suppose someone argued, 'The income of the super rich (at the margin) mostly goes to either charity, or to new investments that help the economy grow. Let the middle class pay a bit more in taxes, to make up for the shortfall.'
Can I honestly say that this argument is wrong? No, I cannot."
One could honestly say that argument is wrong. Our progressive income tax is good and is not desirable due to the marginal utility of the income; such thinking could justify a flat tax just as easily as a progressive consumption tax. Rather, the marginal cost to *one's own personal freedom* to use their earnings of their labor is far greater at the lower end of the income spectrum.
If the progressive income tax was justified in utility terms, we'd have to get into all these debates about what good is it in society for a working class person to make a little more and afford a car versus taking the bus. I have little interest in those arguments, though I am aware some urbanists think it's very important they don't get a car. I find that a bit strange. But if we understand the progressive income tax is justified in personal freedom terms, it's entirely defensible. There's just no need to grant the above argument in the first place.
Sorry, I don't follow. Can you be more specific on the connection between taxes and freedom?
An income tax rate on the middle class is corrosive to a middle class earner's freedom to start a business, pursue a vocation, buy a new property, or all matter of projects requiring capital. It takes from their earnings of their labor, and thus reduces their ability to pursue these various ends. This imposition is even more true for a working class earner trying to become middle class.
An income tax rate on the upper class is does not have *zero* harms on personal freedom, but it's less the case. The marginal harm to personal freedom to pursue all sorts of ends gets lower the further up the income spectrum you go. If one protests that it reduces their ability to put a very large investment into a firm or charity, consider that the middle income earner never has this ability in the first place.
If we understand the income tax's burden on freedom in this sense, a progressive income tax design becomes much more justifiable so we can secure the revenue to help those who cannot help themselves. By contrast, the utility argument does not see the ability to pursue private ends as a valuable metric in the first place, so it never comes to this conclusion about taxes. But it's the wrong metric.
Ok, now I see your point. This is why I prefer a steeply progressive consumption tax.
I think you’re eliding the paternalistic instinct that motivates a lot of anti-vice laws. Part of the reason drugs and gambling are, and have been, policed more heavily among the poor, is that they are thought to cause relatively more harm to the poor, and to poor families and communities.
Also, one can see that the people slumped over on the streets of open-air fentanyl markets impose far greater costs on society than do the people snorting “glamorous” lines of coke in tucked-away restaurants and clubs.
I’m saying this as a supporter of drug legalization for all, but also in recognition of the perfectly plausible utilitarian arguments for restricting certain things from certain people.
Just like utilitarianism might lead one to offensive beliefs about not taxing the rich and hypocritically shaming the ugly, if I were a utilitarian I would probably support restricting certain vices to certain classes of people.
"people slumped over on the streets of open-air fentanyl markets"
I agree that this is a big problem, but what is its cause? In the early 2010s, the drug war was extended to Oxycontin, and fentanyl became widely used as a replacement. I'm under no illusion that legalizing drugs would make these problems go away, and I certainly agree with those who claim that cities like San Francisco are far too tolerant of anti-social behavior in public. But we've been fighting the drug war for 115 years, and I defy anyone to present a single piece of evidence that we are at all better off on that score than we were back in 1910.
I don't doubt that some people are motivated by paternalism, but it's hard to deny that there are also much darker motives at work. Consider GOP politicians who were enthusiastic drug warriors when the problem was primarily seen as a black issue, but suddenly became much more compassionate regarding providing treatment for drug users when the problem spread to white working class areas of the Midwest and Appalachia.
"Also, one can see that the people slumped over on the streets of open-air fentanyl markets impose far greater costs on society than do the people snorting “glamorous” lines of coke in tucked-away restaurants and clubs."
Given the fallout of various economic crashes, not to mention mistakes by surgeons or other professionals, I think this point is arguable.
These observations sound like a win for virtuous violence theory, which says that violence, such as from the law, is directed to regulate relationships, such as maintaining our expectations of how we relate to the rich and to the poor. Link to the research: https://psycnet.apa.org/record/2014-57875-000
That makes sense. I think people subconsciously believe the rich and beautiful are better than the poor. Even liberal people often have this view.
"Hidden aristocracy"
"Rather all 8 of the preceding examples involve explicit government policies that favor the rich over the poor. "
I feel like you're just describing what we used to call.... aristocracy? I.e. those who have power. Only recently has it been changed to cover people who are merely wealthy.
You mentioned "rich over poor" but in every case what I see is inequality of power - not in the person who "gets away with it" but by whichever government official (cops, regulators, etc...) sets up the rules so that they can legally get away with it (or look the other way).
Take prostitution. There are lots of stories of cops taking advantage of its technically illegal nature and exploiting the prostitutes. They probably aren't rich. Are the cops aristocrats? I don't really think so, but they do have power.
Those are fair points. I did say the rich and the beautiful, but perhaps you could add in other powerful groups like the police.
I have seen the disparities over my adult 77 year lifetime, so I knew a lot of your points. But I wish you hadn't started out with: "I’ll argue that America contains a sort of hidden aristocracy. I use the term ‘hidden’, because neither the Republicans nor the Democrats are fully aware of the extent to which our society favors the rich and beautiful, often without knowing it. Both parties are complicit."
There, you are sadly mistaken and this foundational error disrupts your thesis. Of course they know it; they aspire to it, and frankly, so does everyone else in our dog eat dog economic system. Sadly, those in the national government, won't move against their own tentative or already attained privileges by enacting fairer tax and law enforcement legislation. (I haven't mentioned state and local elected officials because they pretty much do what the national parties prioritize for the same reasons the big boys and girls do what they do.
A great post. Thank you.
I agree with the thrust of this - elite bias has a tendancy to be disguised and viewed as 'the water we swim in'. I think another strong example is restrictive regulation on construction. It's defended as preventing slums, to preserve aesthetics or neighbourhood character or the environment, or simply reflexive/trendy opposition to development. The costs of these policies are concentrated on the poor, the wealthy can pay their way out of it, but it's often not recognised that way.
Having said this, it's not always an easy point to prove, many of these issues are complex and the bias isn't clear. For example in your drugs example, it's easy to imagine different reasoning. When we prohibit market activity for the good of consumers/society, there is a pretty standard bias to target the supply side and not the demand side. Sellers are the ones financially profiting from the transaction, are more provably knowledgable about what they are selling, and there seems like a natural logic to tacking the problem at it's source. I'd compare to ponzi schemes, unregulated medical services, ticket scalpers, selling alcohol to minors, counterfeit goods. In each case many consumers may benefit from the transaction, but are often not punished and generally seen as less culpable regardless of the economic balance.
I agree that many people have the intuition that it makes more sense to go after the supply side, but I think that intuition is false. We think the cocaine mirror in the restaurant restroom is chic because deep down we don't think consuming cocaine is immoral.
"are more provably knowledgable about what they are selling"
I doubt this is true, but if it is it's probably mostly because of the fact that drugs are illegal, and hence quality is very uncertain.
"unregulated medical services, ticket scalpers"
These restrictions are also bad public polices.
The rich person with private security that wants to defund the police in the mistaken belief that will improve the lives of “marginalized people (as opposed to those who just want lower taxes) are indeed luxury beliefs, believes that if enacted as policy would not be detrimental to the belief holder. Henderson, however has something else in mind: beliefs that rich people hold but do not act on themselves but are detrimental to those who act on them.
Yes, I understand that Henderson has a different view.
A side point. but if Sumner favors a progressive consumption tax (and presumably that or a VAT instead of FICA) why does he also support limiting the deductability of SALT. Surely SALT is a non-consumption use of income as much as 401 K contributions (and why not uncap, those?)
FICA is a consumption tax.
SALT makes state governments less efficient by subsidizing wasteful spending, and makes the tax system more complicated and less efficient.
FICA is a consumption tax on the theory that capitalist don’t eat and workers don’t save.
How does SALT deduction incentivize wasteful spending? Does all state and local government spending have 0>NPV? Yes it does complicate the 1040 by one additional line, but is that really a consideration? More than any other deduction? More than creating a category of “capital” income to be taxed preferentially instead of just taxing consumption?
I fail to see the unique perniciousness of SALT expenditures over other non-consumption categories.
"FICA is a consumption tax on the theory that capitalist don’t eat and workers don’t save."
You need to stop making these silly claims and start studying tax theory. My claim is not at all controversial among public finance experts. Labor taxes are consumption taxes.
As far as SALT, it's a roughly 40% federal subsidy for state spending.
Please explain how a tax on wage income (at least some of whihc can be saved) is more of a consumption tax than a …. consumption tax like a consumption VAT?
CHAT GPT could not figure it out, either
“Public finance experts generally do not see a tax on labor income as strictly equivalent to a consumption tax, but they do recognize important similarities, depending on the specifics of the tax system.
Here’s the logic:
Labor income tax reduces individuals' take-home pay, limiting what they can spend on consumption.
Consumption tax directly reduces the purchasing power of individuals when they spend money.
In theory, if individuals save no money and spend all their income, a labor income tax and a consumption tax can have similar economic effects — both reduce consumption by reducing disposable income.”
This seems to me to be pretty close to “Workers don’t save.”
What are Chat GPT and I missing?
I’m surprised that we agree only about progressive personal consumption taxes PPCT but not about a consumption VAT. In your view should we fund social insurance from the PPCT, too? If we had a PPCT would SALT be deducted from income to get to consumption or would it be counted as consumption? If states also had only consumption taxes, woud that alter your view of SALT?
Maybe this would help:
https://www.themoneyillusion.com/income-a-meaningless-misleading-and-pernicious-concept/
I think it was something like this that reminded me about the progressive personal consumption tax. I understand perfectly (?) why an income tax needs to tax returns from past saving preferentially to get somewhat closer to taxation of consumption (eliminate “double taxation”). But our current system does not do so becasue of the taxation of business income and non-indexation of capital gains. That for me is the rationale for progressive personal taxation of consumption.
Neither then nor now, however, did I understand why to exclude non-wage income from the total from which non-consumption is deducted in order to get to “consumption” that we want to tax progressively [not to mention the ways that people could try to get income re-configured to make it appear to be a return on investment (that part of my public finance class I remember very well. :)) And the optics!.]
BTW, if we did have a progressive personal income tax, would reduction in the leisure/consumption trade-off be would the hassle of trying disentangle land value from the total value of real-estate?
LOL, are we now in a world where AIs are going to contradict me in the comment section? ChatGPT is now viewed as more of an authority than an economics professor? Okaaay. . . .
All taxes tax consumption. A "consumption tax" is a tax that taxes current and future consumption at the same rate. Both a VAT and a labor tax do that. A tax on capital income taxes future consumption at a higher rate than current income.
The fact that some labor income is saved is irrelevant, as a labor tax does not tax the income from investments, the money is taxed only once.
I don’t understand the explanation. Joe earns a dollar and is inclined to save a dime. A consumption tax encourages him to save the dime and taxes him on the 90 an income tax taxes on the whole dollar. One day he will consume the dime plus return but it still seems that the consumption tax taxes consumption more on a NPV basis. Isn’t that a grater incentive than taxing the whole dollar but taxing the return at a preferential rate in the future or even zero? Both methods try to incentive saving, but the consumption tax seems more straightforward. Same question about FICA vs a consumption VAT. Doesn’t the latter encourage saving more?
What kind of progressive consumption tax do you favor that is equivalent to a labor income tax? It was you that reminded me of the consumption tax/income tax distinction that I had only vaguely hear about (or remembered) from my 1963 Public Finance course.
BTW I was not citing ChatGPT for its analysis, but for what it says is said by public finance experts. I was and still am unaware that the consensus of public finance experts is that a labor tax and consumption tax are equivalent. It seem to me they can be equivalent only if nothing is saved from labor income. If that is not their consensus I’d like to work through their analysis to see where I’m wrong.
I have some sympathy for the better treatment of the 'hidden aristocracy', although I think the US takes it to greater extremes than most democratic countries.
1. Drugs - I don't mind what people take, as long as I don't have to deal with it. If rich people get high in their homes and can give up cocaine easily, then go ahead. But if drunk and addicted people are laying on the pavement or stinking up my train, then I want them shipped off to the country to pick fruit. The same goes for prostitution and gambling. Legalisation is fine if people can handle it. We know there is a correlation between IQ and income and self-control. A lot of people in the bottom 15-30% of the population on self-control struggle with these things, like they do with even less addictive pursuits like social media. Personally, I expect rich people to manage their addictions and so don't have much sympathy for those who don't and who cause harm to others as a result. But maybe I am unusual.
2. Private equity - most people are way too dumb or naive to invest in unusual ventures. Rich people lose their fortunes every day on business deals their mates introduce them to. But like with drugs, as long as they don't lose their houses, pretty much no one cares. But when working class people spend half their incomes on poker (slot) machines, there is a call to ban or limit access to the machines because their kids aren't getting fed. Perhaps the reason that what we call 'private equity' appears to be so successful is that investing in it is limited to people who know something about running businesses, and as such, the market is highly competitive and attracts high quality people?
3. Divorce and scandal - I agree the 'single standard' resonates with most people because unequal sexual attractiveness is as close to a law of nature as there is: survival of the 'fittest' (in the Ali G sense). Another variable that I think is relevant to the difficulty of resisting temptation is age. In general, we expect more self-control from older people than younger people. If a 20-something football player or film star - or investment banker - sleeps around, it's more understandable than if a 50 year old does. Likewise, I think there is more sympathy for those who sleep with them.
"But if drunk and addicted people"
That's my argument, treat them exactly the same. Why is one legal and the other illegal?
"The same goes for prostitution"
One of the reasons we have so many streetwalkers is that brothels are illegal.
Great post. But, I can’t resist one quibble. Drug, Alcohol and Gambling prohibitions were motivated at least in part by the claim that society faced a problem because of externalities from those activities, namely: people and families made indigent because of substance or gamboling addiction of the breadwinner. There is also the externality of crime committed by addicts to support their habits. The very wealthy are much less likely to become indigent and commit crimes since their wealth can compensate for their self-destructive behavior. So, I’m arguing that while the laws do give a pass to the wealthy, those laws can still stand up to having some utilitarian motivation. (Similar to taxing only the first $100 million in income)
"There is also the externality of crime committed by addicts to support their habits."
This is exactly why I favor legalizing drugs, to stop this sort of crime. In a legal market, drugs would be quite cheap.
I can but think that for many of your examples, things would improve, if we made the double standard more explicit and bound to legible rules. Mostly just for standard economic efficiency reasons.
So when Bill Gates spent about a decade of legal fights trying to import a Porsche, I think everyone would have been better off, if he'd been allowed to pay, say, million dollars to break that particular rule.
Similar for drugs: let people who are willing to pay some outrageous fee consume whatever substances they feel like. Ie legalise and tax.
The accredited investor schemes actually goes a bit in that direction (even if it's a lot messier than ideal): rich people don't need paternalism.
Whether poor people need paternalism is a different question. But at least we should make it relatively easy and straightforward to opt out.