The headline is probably a lie.
Readers who have been with us for a while know I'll see something, somewhere, sometime in the future and want to save it to the blog. I'll do so and lose any pretense to statement/action integration. Which word probably has the same Latin root as integrity.
Oh well.
Hell, I can
already foresee a future post that will require making a lie of the headline:
If we are going the route of a Piketty wealth tax we need to look at doing one of these:
A
Domesday Book!
The snippet above is for
Doddingtree, Worcestershire:
- Total population:
26 households
(quite large).
-
Total tax assessment:
8
geld units
(very large).
-
Value:
Taxable value 8 geld units.
Value to lord in 1066 £6.
Value to lord in 1086 £4.
-
Households:
4 villagers.
8 smallholders.
12 slaves.
2 riders.
-
Ploughland:
16 ploughlands (ploughs possible).
2 lord's plough teams.
10 men's plough teams.
-
Other resources:
Woodland 1.5 * 0.5 leagues.
-
Lord in 1066:
Thorkil.
-
Lord in 1086:
Hereford St Mary, bishop of.
-
Tenant-in-chief in 1086:
Hereford St Mary, bishop of.
I'm guessing not a lot of inequality, except for the Bishop.
And the slaves.
Producing a GINI coefficient of
infinity never mind.
So there you go, I'm shewn to be a liar less than half way down the page.
I should probably go with the headline we used when this piece was first posted,
Jan. 3, 2012:
"TAXES, CAPITAL AND JOBS"
Over the last few years I've come to believe that all income, earned and
unearned, should be taxed at the same rate, that preferential taxation
of capital no longer leads to the intended policy effects of job
creation and increasing capital investment in plant, property and
equipment but rather is a bought-and-paid-for scam perpetrated by the
financier class.
On a related point, it's time to get rid of the carried interest
loophole which taxes income at cap gains rates for private equity and
hedge funds.
That carried interest should not be treated as a capital gain can be proven quite easily.
Show me one tax return where a carried interest capital loss was allowed.
[
you won't be invited to any of the meetings ever again -ed]
At the lower end of the income scale there should be some minimum tax. Everyone should have some skin in the game.
I'll be coming back to all these topics throughout 2012, in the meantime
here's the granddaddy of Econ papers for folks interested in this
stuff, sincere thanks to the reader who turned my vague recollection of
the thesis into an actual PDF copy. It is as pertinent and fresh today
as the day it was written, 34 years ago
TAXES, CAPITAL AND JOBS
By Mason Gaffney
A paper delivered to the National Tax Association, Chicago, August, 1978.
Adapted for use in a course in Macro-economics, Winter, 1996.
INTRODUCTION
We hear a lot these days about the need for more capital
to make jobs. Some of what we hear and read we may discount as
self-serving, lobbying for more preferential tax treatment of profits.
Yet there is a case argued by sincere and public-minded people on
objective grounds which we must take seriously.
It had better be a good case, because it goes far toward destroying
the progressivity case, the one on which the American public has bought
the income tax concept. Preferential income tax treatment of property
income cuts off the top brackets of income receivers from tax liability,
especially when we exempt capital gains. Preferential treatment exempts
or favors the unearned increment to land values, especially again when
we favor capital gains. The thrust of proposals being seriously advanced
today is to convert the income tax into simply another payroll tax,
socializing a large share of personal effort while eliminating the
public equity in the land and capital resources of the nation.
Preferential tax treatment for property also destroys the neutrality
or uniformity argument for income taxation. It encourages substituting
capital and land for labor. It forces higher rates on personal effort,
thus weakening the incentive to work while maximizing the incentive to
lobby in legislatures and the Congress for public works and other
federal outlays which create unearned increments to land values.
Are these hardships necessary to stir investors to make jobs? This
paper outlines an alternative thesis that the misuse of capital, rather
than simple shortage, is to blame for lack of jobs. The key to making
jobs is changing the use and form of capital we already have. Tax
preferences for property income, in their present and proposed forms,
bias investors against using capital to make jobs, doing more harm than
good.
I. MAKING MORE JOBS WITH THE SAME CAPITAL
Adam Smith stated the present thesis clearly:
The number of... laborers is...in proportion to the quantity of capital
stock which is employed in setting them to work, and to the particular
way in which it is so employed."
"The quantity of labor which equal
capitals are capable of putting in motion, varies extremely according to
their employment." ... "A capital employed in the home trade will
sometimes make 12 operations, or be sent out and returned 12 times,
before a capital employed in the foreign trade...has made one" 1
1 Adam Smith, Wealth of Nations, pp.. 338, 341, 349.
Adam Smith here refers to capital as stock in trade. For making jobs,
fixed capital frozen in buildings or turnpikes is so slow returning that
Smith does not bother mentioning it. Smith was following François
Quesnay, who had written a little earlier that capital stored up in
advance is an indispensable precondition for capitalists to make jobs.
After Smith, Ricardo developed the theme further. He asks what would
happen if a big fraction of our capital is diverted from circulating
(fast- turning) forms to "fixed" (slowturning) forms, exemplified by
"machinery."
He paints a grim scenario of the answer:
"the gross produce will have fallen from a value of 15,000 to a value of
7500; and as the power of supporting a population, and employing
labour, depends always on the gross produce of a nation, and not on its
net produce, there will necessarily be a diminution in the demand for
labour, population will become redundant, and the situation of the
labouring classes will be that of distress and poverty".2
John Stuart Mill makes Ricardo's point a little sharper. Like Ricardo, he distinguishes fixed from circulating capital:
"capital may be temporarily unemployed, as in the case of unsold goods
... during this interval it does not set in motion any industry ...
Capital is kept in existence from age to age not by preservation, but by
perpetual reproduction. ... To set free a capital which would otherwise
be locked up in a form useless for the support of labor, is, no doubt,
the same thing to the interests of laborers as the creation of a new
capital.
Capital ...in unsold goods does not set in motion any
industry. Capital may be so employed as not to support laborers, being
fixed in machinery, buildings,... locked up in the form useless for the
support of labor.
Suppose half (one's capital) effects a permanent improvement. ... He will employ next...year only half the number of laborers"3
That is, he doesn't get his money back from the permanent
improvement next year; it is like "unsold goods." Therefore, he has no
liquid funds to meet another payroll. The "permanent improvement,"
however useful over its full life, remains "unsold goods" next year. The
effect is the same as though he were left with a warehouse full of togs
or toys that would not sell. A monetarist economist might object that
the money could be printed by a friendly central bank. Mill would answer
that this funny money would not deliver any final goods to consumers,
and therefore only drive up prices. He had not learned to accept
inflation with the same facility as we have today (1978), or to regard
it as anything but a fraud. Monetarists and Keynesians have mocked Mill
for this fun-spoiling attitude, but th epresent "stagflation" - the
outcome of unlimited demand-side economic
policy - makes one realize they might still learn from Mill.
2 David Ricardo, Principles of Political Economy and Taxation (1817), p.272.
3 John Stuart Mill, Principles of Political Economy, (1872), pp. 41-63, passim. See also J. S. Mill, Essays
on Some Unsettled Issues of Political Economy (1874), pp. 55-59.
W. Stanley Jevons resented the authority accorded to Mill and
Ricardo, and attacked them. The drama of personal vendetta, and the
neo-classical compulsion to cast out Ricardo and Mill, have spawned a
false view that Jevons departed from them. Here, however, is what Jevons
actually wrote in his Chapter VII, "Theory of Capital":
"The views which I shall endeavour to establish on this subject are in
fundamental agreement with those adopted by Ricardo; ... The same
capital will serve for twice as much industry if it be absorbed or
invested for only half thetime"4.
Jevons develops the last sentence at some length, in a simple
mathematical model centered on the concept of a period of investment.
Before his premature death, he was trying to turn this into a full
explanation of boom-bust cycles. Jevons is the channel between English
and Austrian economists. It was a two- way channel: modern Austrians
still express one of their major concepts as "Ricardo Effect."
Karl Marx, a student of classical political economy, expressed what
seems like the same idea in different words. He wrote of the "organic
composition of capital," meaning the degree to which it is fixed rather
than circulating. He devotes all of Book II of Das Kapital to treating
the turnover of capital. He gets so wound up in it, however, it is hard
for this reader, at least, to be sure where he comes out. Modern Marxist
writers, not reviewed here, have taken up his views at length. These
include Shaikh, Yaffe, Fine and Harris, Bell, and Weisskopf. Sherman
(1995) remarks the common themes in Marx and the Austrians. This
commonality did not abate the Austrians' militant anti- Marxism. Knut
Wicksell, who developed these ideas more fully and formally, is cited
near the end of this essay.
Ludwig Von Mises and Friedrich Hayek,
second-generation Austrian-school economists, advanced ideas derived
from those cited, and were prominent in the 1920s and early 1930s,
before Keynes. However, their variations on the theme modified it and,
in my view, muddied it considerably, and I will not cite them here.
Smith, Ricardo, Mill, Jevons and Wicksell make enough sense, and
represent enough collective wisdom, to attract our attention. In their
model, a shortage of job-making capital has two causes, pointing to two
different solutions. They direct our attention away from the cause we
hear most about today, a simple shortfall in quantity of capital. Let's
identify and remember this idea of simple quantity shortage as "Theorem
A." If we buy Theorem A, the obvious solution is to get more capital, in
whatever form. The classical economists' ideas point, rather, to a
"Theorem B." Theorem B says that unsold goods return no capital to meet
the next payroll. It says more: the reason goods are unsold is because
they are not ready to sell, being fixed in machinery and buildings. They
are "unripe." Inadequate demand is not the problem, at least not
initially. Unripeness of supply is the initiating problem.
4 William Stanley Jevons, The Theory of Political Economy (1871), Chp. 7, par VII.2 (pp. 222, 229 1st Ed.)
The solution proposed most vocally now in Washington is based on Theorem A.
It is to exempt property income from taxation, with the promise that
this will boost capital formation, and this in turn will make jobs. Less
is said about the necessary counterpart, to shift taxes to wages and
salaries and other compensation for personal service and effort, and to
employers as their share of the payroll tax. This
implied-but-unadvertised counterpart would, of course, directly destroy
jobs.
This method would seem to give away more to property than is needed to
accomplish the goal of making jobs. It exempts land income, especially
when preferential treatment of capital gains is emphasized. (The
investment tax credit, and accelerated depreciation for new construction
are free of this last criticism, however.) This method in practice also
exempts capital overseas, which really should be called home if the
purpose is to make jobs in our own country. Exporting capital makes
one-shot American jobs producing the capital; but to operate capital
makes jobs where the plants are located.
This method - preferential tax treatment of capital - perpetuates
and gives another twist to structural distortions that misallocate
capital and tie it up in labor-saving forms in highly capital-intensive
industries and activities. Some examples of this are premature streets
and water supply systems financed by tax-free municipal bonds.
Tax-sheltered exploration for oil and gas is another example: this ties
up capital for decades before recovery. In time this capital flows back
to us as usable energy; but cheap energy substitutes for labor, and
complements capital (like farm tractors and pumps) in downstream uses.
Yet another example is timber allowed to regenerate naturally, i.e.
without the labor of planting: this ties up land for 80 to 150 years
under each crop, with minimal use of labor.
Worse yet, this method shifts the tax burden to payrolls, driving a
deeper tax-wedge between the payroll and the dinner-table. This wedge
induces employers to substitute capital for labor, and causes many
potential workers to prefer untaxed welfare, crime, or the pursuit of
charity and unearned income to productive labor....MORE (17 page PDF)
Now that I've raised some hackles on the right let's talk about taxing foundations, trusts and NGO's...
In the meantime here's professor Gaffney's
website and
blog (last updated 2010).
*March 13
