Just because you plan for it doesn’t make it so.
In society, financial capital is considered more valuable than your labor. Financial capital is fungible, generally labor is not, as it is based upon individuals skills and talents. Financial capital can be used to acquire labor. While you want to equate their value, it is simply not so.
No, I think it’s you with the circular logic. “Some people deserve more money because they have more money.” That’s how I read your argument.
You can’t expect people to be creative and innovative when they are being economically crushed to death.
Wow, let’s discuss rationally using logic and economic fundamentals, instead of name calling and attributing statements that have never been said. And let’s suppport our comments with facts instead of emotion.
Avg person can’t be an innovator, because other innovators suppress wages. Any evidence how and where this occurs?
Why don’t the innovators let other people join? I see no evidence that this is the case or any logic as to why this would be true.
You can’t innovate unless you have the freedom to take economic risks. You can’t take economic risks if you’re living paycheck to paycheck.
The evidence that wage suppression is a thing is evident from the fact that wages remained unchanged for about thirty years despite productivity increasing dramatically. Who gets a share in the rewards of that productivity?
You are speaking in generalities. You first say that the innovators are suppressing wages…now you are generalizing the whole market is suppressing wages. Not everyone is an innovator, inventor, developer of new technologies.
And as I said earlier if your idea is good enough and you can demonstrate a feasibility to take it to market, you can find funding, and yes it is risky…but it’s also why the returns can be great.
Why do you think that Shark Tank is such a popular show? And it’s not fake…and there aren’t just 5 people in the world that will invest their money in good ideas…there are thousands…hundreds of thousands…there just are not enough good ideas for investors to find. That’s why there is so much dry powder/cash in the world looking for a home.
And good ideas are becoming more expensive as this trend has continued over the last 2 decades. As investors are willing to accept lower returns vs. not having the ability to invest in anything.
I see your point. I came at this kind of half-assed, sorry.
(Though I do want to say, I’m not really in a state of heightened emotion, that’s an easy way to dismiss someone, but even if I were emotional about this subject, the presence of emotion doesn’t indicate the absence of reason.)
I don’t know much at all about economic theory, but I know that economics in theory does not often work that way in reality. I know the economic situations of people around me, and I’d be hard-pressed to understand how a single working parent with two jobs has any chance at being able to take the kind of economic risks required to be an innovator or an entrepreneur. I’m doing pretty well for myself by comparison and not even I can take those sort of risks. They manage to succeed sometimes, because people are kind of amazing sometimes, but when it happens, it’s news for a reason. In general this is not a viable option for people who struggle economically. So any fair distribution of wealth in my opinion needs to start with everyone having the ability to participate in the system. If good ideas are that important, more people should be able to leverage them. And when these innovators do hit paydirt they are responsible for ensuring their employees have a share of the wealth. That’s a moral argument, not an economic one, as the question posed by the OP is, in my view, a moral one.
I think Shark Tank is a popular show because there are a lot of viewers who love the fantasy of having a great idea that makes them millions of dollars.
I’m not equating their value I’m saying that the following
is the exact opposite of what it should be. Labor should be considered more valuable than financial capital. That doesn’t mean laborers should get paid more than financiers, but that if we have preferential tax treatment it should be targeted to labor not finance.
Frankly, as you noted, the money they have ready to invest is either going to be invested or it will sit idle. Nudging up the tax rates on capital gains doesn’t change that dynamic, we aren’t going to get a flood of investors choosing to idle their money. If we wind up with less money available for investment, as you also noted, we already have more investment money than good ideas to fund.
If you don’t know the theory, then you don’t know how the theory matches with reality — not to what extent, not in what contexts, not where it works well, not where it works less well.
These two “arguments” can’t be so easily untangled.
It is necessary to first understand how the economic system works in order to understand what trade-offs exist in order to understand the relevant moral decision. A better world than this is certainty possible. At the same time, there are no magic wands. Human beings aren’t chess pieces that can be re-located at the whim of the great social planner.
Taxation in particular is a much trickier topic than almost anyone realizes.
One of the most obvious ways to see how tricky taxes can be is to ask people what will happen if the government taxes the sellers of gasoline. A common response, which in my own experience you are likely to hear immediately, is that the sellers will just increase the price of gasoline to the buyers. The sellers will just pass on most of the tax.
What does “economic theory” say about this?
It says that if the demand for gasoline is highly inelastic compared to supply, then sellers of gasoline will pass almost all of the burden onto the tax onto the buyers. This is a conditional prediction: it depends on the relative elasticities of supply and demand. But the theory can correspond to what people expect, at least given this condition.
Now suppose that this condition holds more broadly than just gasoline. Then what about capital gains? Corporate profits? Other taxes on capital investment? I would guess that almost everyone who aligns with you politically would suggest increasing those rates.
But the gasoline argument two paragraphs hasn’t gone anywhere. Those forces are still relevant.
How do the supporters of these taxes know that corporate taxes aren’t mostly passed on to the corporations’ own workers and customers? Or other capital income taxes, like capital gains? What if the seller of a house can simply jack up the asking price to the next buyer because of the higher capital gains tax? I’m not saying that this is likely. I’m saying that there a coherent logic that underlies all of these questions. Even beyond those cases, allocation of capital in general is essential to the future prosperity of all nations. Any potential negative effects can and do compound over time, because of changes in long-run productivity. What about those effects?
This is the difference between the economist and the political partisan. (Or at least: the idealized version of the economist. I do not deny that most real-world specimens fall far short.) The economist wants to know what the relative elasticities are, whether the tax burden will be transferred, or whether there will be a change in investment patterns, a change in future technological innovation, which would result in a lessening of economic prosperity for future generations.
Literally all of these are “economic questions”, in the sense that there are potentially predictable consequences from certain government policies.
And obviously, all of those economic consequences also have moral heft.
But the economic question is an essential element of the moral question, because otherwise we’re comparing an unachievable utopian ideal against this fallen world where living people actually reside. Reality can never measure up to the unobtainable ideal. That’s precisely why even the milder forms of utopian thinking often hurt the very people who are ostensibly supposed to be helped by these policies.
It’s impossible to know the “moral” effect of capital gains on the poor without having some minimal understanding of how this intricate system actually works. And that understanding takes some legitimate effort to acquire.
Thank you for that response. It was educational for me.
Well, don’t we have historical precedent? What happened in the past when tax rates were raised for corporations? Did wages go down?
What about other forces, like, say, political pressure? Say a corporation sees its tax raised - of course they will want to pass that on to the worker, but what if public pressure makes that difficult to get away with? What if the workers successfully unionize? What if, concurrent with raised taxes, policy was changed in some other way to benefit corporations? How do we account for the impact of climate change? How do we really know that the way the economy has historically worked is the way that it will always work? What happens if AI takes away 50% of the workforce? We’re facing historically new circumstances all the time.
There are so many factors here, it kind of reminds me of psychology (something I do know about.) We can run an RCT experiment and determine that a certain intervention works for most people most of the time in a laboratory setting, this is called efficacy. But you put that intervention out on the street, and you’ve got a whole different ballgame. Factors that couldn’t be simulated in a laboratory. Comorbid diagnoses. Rapport with a specific counselor. Substance abuse, domestic violence, poverty, trauma, how long insurance is willing to cover your treatments, a bazillion factors you couldn’t put in your experiments.
This makes it very difficult to predict anything.
If economic theory is so complicated, that explains why economists often disagree. But it stands to reason that such a complex theory or system is going to be frequently confounded by factors not accounted for in that theory. That doesn’t mean the theory isn’t useful, but it does mean its prediction power has been decreased.
For me it seems the best chance we’ve got of making accurate economic predictions is assessing what’s happened in the past. So, what’s happened like that in the past that we can point to as a model?
Because my understanding of history is that back when tax rates were much, much higher for corporations, employees were doing pretty well. And then in the past thirty or so years, taxes were slashed dramatically for corporations and their employees didn’t see a cent of their improved productivity. My understanding of history is that substantial wealth inequality tends to signal an unstable democracy. I’m open to other historical evidence, though. 100% sincerely trying to learn.
Prosperity for who? Do we define prosperity by the dollar amount of wealth in the nation, or by how many people have wealth?
What is the purpose of prosperity if it doesn’t benefit the people at large?
For almost everyone.
Wages are higher where there is more capital per person.
The difference between a rich nation and poor nation is the amount of capital. Natural resources are nice, but it’s the stock of capital per person that drives international differences in prosperity.
If your definition of prosperity excludes “the people at large”, then I don’t agree with your definition, and I will not use it.
The question to ask here is: Did wages go down compared to what wages would have been?
Corporate taxes aren’t the only force that affects wages. There are many other influences. It won’t work to run a single-variable regression that excludes everything else in the world, point to the coefficient, and declare that it’s the most important cause-and-effect force at play. Other things are happening, including many of the complications you specifically mentioned in your post.
If I draw curves on a blackboard, I can point to the first place the curves cross, and then the second place the curves cross, and I can say the system will tend to go from one to the other all else equal. Before and after. But obviously labor market changes aren’t instantaneous. There has to be adjustment over time. So this sort of economic model shows tendency in this case, not immediate effect, and a tendency that is one effect among many others.
We must look at numbers over time. But then you have the statistical problems of teasing out a gradual effect on the path of wages — perhaps wages still go up, but more slowly than they would have otherwise — in a world where everything else is also changing. How do you isolate that effect?
Not. Easily.
Rather than spending a couple hundred pages talking about the statistical issues here, I’d like to focus a little more narrowly. For my more limited purpose here, I’d like to mention again the stock of capital per person as a simplification of the problem. Wages tend to be higher where there’s more capital. There’s generally more capital in places where the investment of capital receives higher rewards, which includes not only taxation but also (quite necessarily) strong and secure legal systems that protect the accumulation of capital, which acts as incentive for the creation of capital.
I can’t tell you the “ideal tax policy”, or where exactly the right balance is (at least not in a way that would convince you). But places that generally encourage the creation and accumulation of capital have higher wages.
The explanation for this is actually rather “obvious”, at least after a couple basic observations. First, capital acts to increase productivity. That’s the whole point of it. Second, the marginal value of additional units of the same good tends to be lower than the value of previous units, which means that higher levels of production from increased productivity will tend to drive down the price of goods. (This is more commonly called “supply and demand” but my own description here drives directly at the underlying mechanism.)
More capital results in more production, and more production drives down prices. The result is that workers earn more on average in places with more capital. This result jumps out of any international comparison. What is the difference between a rich country and a poor country? Rich countries have a lot of capital per person. Poor countries don’t.
I teach a lot of international students. Some of them (it is said) are overwhelmingly pressured by their families to send remittances home. If a student can earn more in a single hour here than a sibling at home can in days of toil — which is often the case — then they face a trade-off between the current well-being of their family and their studies.
This is the kind of thing you see when your institution targets scholarships every year at promising students from extremely poor countries. The wage difference is staggering, even for the least skilled work. These are hard choices.
There is a tendency toward provincialism in these kinds of discussions. “Here is one country’s wages. Here is one country’s past tax history. Here is one country’s productivity. Here is one country’s wages over time.” Often these conveniently selected numbers omit relevant context, whether deliberately or accidentally.
That is not going to work.
It’s advisable to cast a wide net because of the large amount of noise in the data, and the large amount of fluctuation in economic conditions across countries and across time.
You asked an excellent question. Exactly the right question. What is the effect?
But I simply can’t answer that question, at least not directly, without going into a few hundred pages of explanation. My more general purpose here is not to say that you should take everything I write as gospel truth. Obviously not. These things are complicated. Anyone can be mistaken. (…possibly even including myself…) My point is to gesture emphatically at the complexity.
You also mention this complexity. At some length. That’s good. We agree about the complexity of these issues. And I appreciate that you are tentative in your conclusions. So that’s the point I want to pick up from here. The following is part of Michael Huemer’s “In Praise of Passivity” (PDF). Huemer is a philosopher, not an economist, but he makes the following point very forcefully (even if I disagree with some of what follows):
In 1799, America’s first President, George Washington, fell ill with what is now thought to have been an infection of the epiglottis in his throat, a rare but serious condition that can lead to blockage of the airway and eventual suffocation. 1 His good friend and personal physician attended him, along with two consulting physicians. Medicines and poultices were tried, along with five episodes of bloodletting that together removed over half of Washington’s blood. As one contemporaneous account explained, “The proper remedies were administered, but without producing their healing effects.” 2 The former President died shortly thereafter. Needless to say, his treatment either had no effect or actually hastened the end.
Washington’s doctors were respected experts, and they applied standard medical procedures. Why were they unable to help him? Put simply, they could not help because they had no idea what they were doing. The human body is an extremely complex mechanism. To repair it generally requires a detailed and precise understanding of that mechanism and of the nature of the disorder afflicting it–knowledge that no one at the time possessed. Without such understanding, almost any significant intervention in the body will be harmful.
Emphasis added.
I don’t blame anyone who cites the complexity of the economy as a reason to dismiss economic analysis. That’s a reasonable stance.
What I object to is the rejection of economic analysis in favor of conveniently pre-selected data and ideologically comfortable stories. “Nobody knows what is going on” is a fully reasonable stance, but it also has direct policy implications, the most important of which is Huemer’s advocacy of “passivity”. The principle of “First, Do No Harm” comes immediately into play. If people don’t know what they’re doing when they mess around with a complex system, then they should not mess around with it. Changes should be small. Conclusions should be tentative. This is good advice for everyone — and that includes economists and (especially) policy-makers who are running uncontrolled experiments on other people’s lives based on very little data and almost zero understanding.
But what I see constantly is “Nobody knows what is going on, therefore we should do what I always wanted to do in the first place.” This is a version of what Scott Alexander calls an Isolated Demand for Rigor.
Most people — and I’m talking like 99% here — don’t actually know what taxation is. I don’t mean theory here. I mean basic tangible points related to the allocation of scarce resources. “Money is taken from here, and transferred there” is less than one tenth of the story. (Strangely, tax accountants can be some of the worst cases here, because their deep knowledge of legal incidence often blinds them entirely to the economic incidence.)
You’re right about the complexities.
But I want to emphasize here the mistake to use those complexities as an excuse to rely on a single-variable regression as a guide to policy. (I’m not saying that you personally are necessarily doing this.) Statistically, it is necessary to cast a wide net.
In theoretical analysis, the way to deal with these complexities is to first simplify. Work through a very, very, very basic question. Answer the living hell out of that basic question. Look at the world and make the simplest and most obvious possible observations about it. Not even theory. Just basic, common-sensical observation. Then add one piece of complexity, and answer the hell out of that expanded question. Iterate.
The way not to deal with these complexities is to flatten them out, and decide that that flattened story should guide policy because everything else is so complex. It is complex. But complexity suggests tentative belief, or even the suspension of judgment. “Passivity.”
I’m not arguing in this small space that you should believe me about everything. (Although you should on the point related to capital per person, because it is totally obvious and absolutely overwhelming.)
I’m saying instead that the tentative attitude you are putting forth is good, and should be continued. You should seriously consider the possibility that we live in a world where the “ideal” corporate tax rate (and capital tax rate in general) is, from the perspective of the workers, much different from what nearly anyone would intuitively expect.
Thank you for your thorough response. You’ve given me a lot to think about. Any recommended reading?
…maybe?
One of my problems is that I ordinarily deal with a “captive audience” who have to learn what I tell them. My responsibility is to prepare them for the next rung up the ladder, where they must once again learn what they are told. I am not required to convince them.
I try to convince anyway. I don’t know if I succeed. For example, I point out the distinction between:
Buying milk is in the first group. Saving for retirement is in the second. People are much more reasonable about the first set of choices than the second. Economics in general does much better with analyzing reasonable behavior, which is the first group rather than the second. But this week I made the point that issues related to economic policy properly belong to the second group rather than the first. So I polled the class: Should people really trust economists? (Most of them said “no”. This is hilarious. They are learning.)
To get your foot in the door, maybe I would suggest David Friedman’s Hidden Order. This is a friendly intro version into very important ideas. It’s fun and entertaining… at least for someone like me.
More specifically, it is a friendly intro version of David Friedman’s textbook Price Theory: An Intermediate Text. (Intermediate is a description of difficulty, not a matter of prerequisite. It is fully understandable to a sufficiently dedicated reader.) Unfortunately it is out of paper print, but a version is webbed for free on his homepage and the newest version is available for Amazon Kindle. I have an extensive library of intro/intermediate econ texts, and this is the absolute best I know. If I had a big red button that could download it Matrix-style into everyone’s brains, I’d be sorely tempted to push it.
He tries to convince. But even when you don’t find him convincing, all of his books are interesting and worthwhile.
When I first started reading David Friedman ::mumblemumble:: years ago, I was not convinced.
Now I am.
Mostly.
Great! Thank you! (Edit: ooh, it’s on Kindle Unlimited!) It’s also interesting to me where economics intersects with an interest of mine, social psychology. I’m interested in how people generally behave in various circumstances. Understanding human behavior, when it’s at its best, when it’s at its worst, helps me figure out better ways for me to live. I have wanted to learn about economics for a long time, but I’ve never been sure where to start. In undergrad I had a political economy course which was heavily biased toward a socialist viewpoint, but I wasn’t really paying attention to that class due to other life events, so nobody can say I was brainwashed. When I was a social work student I tried to get into a social economics course but they said it was reserved for policy students. I was macro social work, so no economics course for me. Which is too bad, if you really think about it. My entire field is about how systems work and what makes better systems for the most marginalized people - don’t you think some knowledge of economics would be foundational to that?
Another thanks to @Hellestal. I’m always enlightened and humbled when you stop in.
No evidence? How about Bill Gates? John D. Rockefeller? Al Capone? Successful capitalists don’t like competition because a lack of competition allows them to set costs lower and prices higher and give them more profits. That’s the logic you’re missing.