Tag Archives: wealth

On consumption and wealth

These two pieces are some of the best economic writing I’ve read in the last couple of months, and I thought that they were really important, because they articulate a position that is far more intelligent than the knee-jerk GOP narrative that unfortunately takes up too much space in the public discourse.

In any case, here is Karl Smith on why taxation should focus on consumption, not wealth:

This is why its important that we keep our eye on consumption, not income. There is no inherent social harm in someone amassing a large fortune. Nor, does it necessarily contrast with our Rawlsian sense of justice. It matters crucially what they do with that fortune.

If they spend it all on gold rims and mansions in the Hills, then by all means tax that. However, it they keep putting the profits back into the business to create bigger and better organizations, then we should let that process feed on itself, rather than slowly bleeding it.  Nor is there any particular reason why we should want to tax away income that was going to go to charity in the end.

Yes, many of the wealthy spend their money on lives of luxury while poor children attend classes in broken down schools. But, then go after the life of luxury, not the wealth.

And here is Arnold Kling, in an essay called When Labor is Capital:

From our more Austrian perspective, the Keynesian prescription will fail. Government spending tends to create or reinforce unsustainable patterns of production—temporary housing booms, transitory increases in auto sales, and the like. However, there is no reason to expect unsustainable patterns of production to stimulate the creation of sustainable patterns of specialization and trade. If anything, it would seem likely that government support for unsustainable patterns of production could make the market’s recalculation problem more confusing. It will delay long-term recovery, rather than hasten it.

Some Keynesian economists have proposed an even more unlikely solution, which is to revive the New Deal program of government-created jobs, as in the Works Progress Administration. This idea represents a complete denial of the contemporary reality that labor is capital. Real employment in today’s economy represents a long-term investment, not short-term make-work.

What needs to emerge are new, sustainable patterns of specialization and trade. Government does not have much incentive to create sustainable patterns of specialization and trade. In fact, the political system tends to favor subsidies to outmoded and unsustainable businesses.

Government could reduce the cost of investing in labor-capital. If it can be done in a fiscally responsible way, it would help to reduce the marginal tax rates on investment (the corporate profits tax) and employment (the payroll tax). This may require offsetting tax changes, such as eliminating the mortgage interest deduction or the deductibility of employer-provided health insurance.

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