What do people think "the rich" do with their money? Store it under a mattress? Keep it in an underground vault so they can go swim in it while laughing maniacally?

Of course they don't. They invest it. They put it in Treasuries, Mutual Funds, Individual Stocks, CDs, Money Markets, Plain Old Checking Accounts.

That money is most definitely not sitting still. It is out there flowing through the economy, financing mortgages, construction, businesses, and probably anything else you can think of.

The only reason to tax the rich as far as economic stimulation goes, is if you believe the Government can do better with the money than the market can. If that is what you believe, fine, just say so and state that as your argument.

But this idea that somehow money is sequestered when owned by rich people is absurd.

Where any investment happens also matters - I suspect that recently most of the value of investments have gone to raising the quality of living conditions for the middle classes in China and India, rather than in America or Western Europe. In a sense, the planting is being done overseas, and the harvesting is happening at home. One may argue that this is morally desirable, but it's not clear that it is the outcome that would be chosen by enlightened American or European self-interest.

Interest rates being as low as they are also seems to imply that there are few solid value-creating investments to be had at home in a retail sense - otherwise it would be trivial to invest money at a higher rate of interest and become quickly more rich.

One final point - money is power. When money is so heavily concentrated in the hands of very few people, you have the same very few people being very powerful economically and picking winners and losers. This happens to be exactly the problem that a lot of people who are for market-driven economies have with socialism/communism - power concentrated is too prone to failure and not as great a driver for progress as power diluted.

Yes, and it's worth noting that this pushes food prices up, which, in turn, pushes poor people down.

That is, despite record low interest rates, most people and corporations who have money are in fact choosing to "keep it under the mattress", refusing to invest it. There are lots of companies out there sitting on mountains of cash, not spending it.

Of course, they're not literally keeping it under the mattress. They instead keep it in extremely low yielding US treasuries, which is the economic equivalent. Now, if the government was to invest this money which they are able to borrow so cheaply, that might change things... This would be the "fiscal stimulus" that many Keynesian economists are advocating until employment and/or inflation both go up.

Of course this is not in itself an argument for increased taxation on the rich. That's an orthogonal issue, IMHO.

All we can say is that giving tax breaks to the rich doesn't seem to work. Maybe it should. In theory it sounds like it should. But it doesn't. Or, at least, it hasn't.

Giving tax-breaks to the middle class does seem to work.

In short, we don't know why the economy works the way it does, so our best bet is to go do the things we were doing when the economy was strong. Maybe that would help.

Also, even for the same investment: financing a construction of a house, a 100K dollar paid by someone to buy a house, gives more social value than rich guy saving 100K that are being lent as a mortgage.

And of course there's the problem of concentration of power via money , vs distributed power.

I think this is a very important point. There's been an important ongoing debate in some European countries, on taxes paid vs. benefits provided by the state. It's a natural tendency for some kinds of state to become increasingly dependent on tax money, be it through self-expansion (hiring more and more public servants) or provision of extra benefits to society. While this was no big deal in the post-WWII, it has become increasingly relevant with the consequent improvements in life expectancy and decrease in birth rate.

OTOH, the market is purely profit-oriented and profit is seldom in agreement with the public interest. "The rich" won't care to pay my unemployment benefits when I lose my job or my hypothetical child's health expenses.

One answer is make-work, i.e., hobbyist jobs. The other is general hedonism. Conservatives fear that the latter would be destructive - that it would lead to widespread addiction and criminality. The question: "What would you do if you didn't have to work?" can be answered in many different ways depending upon a person's history, self-image and inclination.

For example if you look at agriculture from the point of capabilities(physical repetitive labor), you see machines replacing humans. You see same powers in manufacturing.

But what about eye sight, coordination, adaptivity, ability to offer good enough human service, retaining and sorting large knowledge bases, intelligence and other capabilities ? Computers are improving in all those capabilities, and contionously replace people.

The "robot utopia" will be when machines can do those things better/cheaper than us. Then maybe the only capability that will be left is being an authentic human, for jobs that people prefer authentic humans would do.

Whether humans have this advantage over machine replicas, how many jobs like this would be available and what form this jobs would take(maybe being humiliated as servants like so common in India today?) are interesting questions.

Let me make a few points:

1) Nothing the OP has written has anything to do with economics.

2) Who pays, which is the subject of the current "fiscal cliff" brinksmanship, is almost entirely a political question, not an economic one. That is, economists' insight into the present American dilemma is mostly limited to a determination of how the distribution of tax receipts under whatever bargain prevails will affect future economic growth. All other considerations are political, and economists like Krugman and Mankiw who weigh in vociferously do so as politicians, not economists.

3) Bailouts come in two distinct flavors: (a) those whose purpose is to provide essential liquidity to the capital markets at the core of our economies, while they're in distress, and (b) those that are basically handouts to the politically connected. Almost always (a) and (b) overlap. In a financial crisis, like the one we went recently went through, initially (a) dominates—"Wall Street" bailouts, necessary bailouts, lead off. Sometimes, as recently, (b) soon gain ground. The bailouts of Detroit, as with pretty much all "Main Street" bailouts, are in the latter category. These are politically motivated, not economically motivated, bailouts

3) I stand (hope!) to gain most of my future income from capital gains. I do not believe that there is any strong argument for treating capital gains differently from other other income as a matter of economic policy. There are, of course, political arguments in either direction.†

4) As I've written in reply to other HN submissions, I see little reason to believe that we are meaningfully nearer an economic singularity with respect to robot labor than in times recently past. Capital has always eroded the position of labor and forced workers into more productive roles that are less directly competitive with machines. If the situation changes dramatically, it will be clear in discussions here long before economists catch on, but we're not there yet. Nowhere close.

† – I am very much an Internet libertarian (small "L"). I despise most taxes, and I believe that much government spending is wasteful in the sense that the money would be more productive, in net, in other uses. I also (b) realize that taxation is as much about values, our values as citizens and as human beings, as it is about economics. (I also am aware that that "the path to hell is paved with good intentions" is close to being a theorem of public finance.) Lastly, my motivation for studying economics has come more from an interest in the various and common ways in which markets fail than from the ways in which they work.

ORLY? There's a paragraph in the article which starts with "Proponents of trickle-downism" and ends with "A dollar given to a poor man multiplies faster, Keynes observed, than a dollar given to a rich man."

As far as I know, that paragraph is

1) Conventional wisdom, and not widely disputed.

2) Economics

3) Of direct impact on the political question of who should pay more tax, seeing as removing a dollar of tax is the same as "a dollar given".

This may be conventional wisdom, but it doesn't make sense to me. It seems to me that how much economic growth is caused by spending dollars depends on what they're spent on, not who is spending them.

Growth caused by dollars spent on consumption is linear: the "size of the economy" is just the total number of dollars spent. If people are buying more stuff, the economy is larger; but that's all.

Growth caused by dollars spent on investment and innovation is exponential: it increases the amount of stuff that can be had for a given number of dollars, or even adds new stuff that previously could not be obtained at any price.

I think most dollars spent by both poor people and rich people are spent on consumption, not investment. So it seems to me that finding ways to get more dollars to be spent on investment rather than consumption is the best way to increase economic growth.

Uh huh. Please help me out with some links as to why Keynes was wrong on this. He may be, but "seems" doesn't suggest that you have made much of a study of it. I haven't gone much further in my studies, perhaps you could help me here?

> economic growth is caused by spending dollars depends on what they're spent on, not who is spending

Half correct. The argument is that an extra dollar in the hands of a poor person is much more likely to be spent sooner on some basic good like food, and to another relatively poor person who will do likewise. i.e. with higher velocity of money. http://en.wikipedia.org/wiki/Velocity_of_money The article mentions this. You know about velocity of money, right?

> I think most dollars spent by both poor people and rich people are spent on consumption, not investment

ORLY? Most arguments that I have read on it claim that most dollars spent by rich people are spent on investment. i.e. Rich people can save and invest, poor people can't. Saving and investment is slow velocity money storage.

In short, since money given to poor people will probably be spent a few times over before it ends up in some corporation's coffers, why would "helicopter money" http://www.guardian.co.uk/commentisfree/2012/jan/26/economy-... be worse than the current policy of printing money and giving it to banks who don't want to lend it out to any investment?

> Growth caused by dollars spent on investment and innovation is exponential. So it seems to me that finding ways to get more dollars to be spent on investment rather than consumption is the best way to increase economic growth.

please supply a link to an article about how "exponential innovation" is more important than monetary velocity. It may be, but not because it "seems" to someone. Right now, that's just gibberish to me.

Yes, and the most common definition of "the size of the economy" is GDP, which is, as I understand it, linearly related to the velocity of money. That's another way of saying what I was saying, that economic growth due to spending on consumption is linear.

Most arguments that I have read on it claim that most dollars spent by rich people are spent on investment

I'm not sure that's quite what they claim. They certainly claim that rich people spend more on investment than poor people, and as you point out, that makes sense because they can afford to and poor people can't. But that's not the same as saying that most of what rich people spend is spent on investment.

Spending on expensive houses, cars, private jets, yachts, traveling around the world, personal assistants, etc., etc., is all consumption, not investment. As far as I can tell, that's what most of rich people's spending is. The ones that make the news, like Bill Gates or Warren Buffett, seem to me to be the exceptions. But I would love to see hard data if there is any.

why would "helicopter money" be worse than the current policy of printing money and giving it to banks who don't want to lend it out to any investment?

I agree that "helicopter money" wouldn't be any worse than giving money to banks that don't lend it out; in fact, economically speaking, "helicopter money" might actually be better, since the money would actually get spent. However, both of them are short-term solutions, like giving a nitroglycerine pill to someone having a heart attack. Neither of them fix any underlying chronic problems.

please supply a link to an article about how "exponential" innovation is more important than monetary velocity

I haven't seen my statement about growth due to spending on investment being exponential phrased in exactly that way, but investment being equivalent to compound interest, which grows exponentially, is a commonplace among economists.

As for "velocity of money", try this article by Henry Hazlitt:

http://mises.org/daily/2916

Two key points, from the summary at the end of the article:

"Velocity of circulation is a result, not a cause. It is commonly a passive resultant of changes in people's relative valuations of money and goods."

"V is never an independent factor on the side of money, because the transfer of goods must speed up, other things being equal, to an equal amount. It is just as valid to think of the velocity of circulation of money being caused by what happens on the side of goods as by what happens on the side of money."

In other words, trying to "help the economy" by trying to speed up the velocity of money is getting things backwards.

Not at all. Poor people expend on consumption. Rich people spend far more on investment and savings. Yeah, Paul Allen might have a 10G$ superyacht, but he's worth 14.8T$, the majority in securities, bonds and so on, I presume.

> Growth caused by dollars spent on consumption is linear [...] Growth caused by dollars spent on investment and innovation is exponential [...]

Well, you implicitly assume there that this investment would mean that demand would increase. That is, you assume Say's Law holds true. But you are not being fair here. Symmetry in your argument would require that growth by demand should also be "exponential", as any increase in demand would the same effect in investment that any increase in investment has in demand. So both would be positive-feedback loops, to the exact same degree. Say's Law says it is.

Second, this is the classical economic framework, which doesn't work. You need to factor in savings and debt, and then Say's Law breaks; demand doesn't equal investment anymore, and you need a Keynesian, IS-LM framework. Now, what I understand is that, while a failure of aggregate demand is a positive-feedback loop ( less demand -> less investment -> less income -> less demand ... ), the mechanism of debt makes a failure of aggregate investment be nothing at all: less investment -> more debt -> more investment -> more income -> more demand -> more investment ... Well, actually you have debt now, which can be easily be a problem. But my cursory, layman's understanding is that it's a much less severe problem, since d(GDP)/dt > 0 now.

I assume you mean 10M$ (million, 10^6) and 14.8B$ (billion, 10^9)? I doubt that Paul Allen is worth the entire US GDP. :-)

As for what his wealth is doing, say the majority of it is invested in securities, bonds, etc. How much actual investment is being done with that? "Investment" in the economic sense doesn't mean owning shares of stock, or bonds; it means applying resources to the creation of new forms of wealth, instead of to the consumption of existing forms of wealth. How efficiently is Paul Allen's money being used for that purpose? Since we're talking about Paul Allen, it may actually be used fairly well, but as I said before, he's an exception. I think most rich people do not really care how their money is being used, and don't spend much time or effort trying to use it efficiently. Why would they? Most of them are not entrepreneurs or investors; they're just people who happen to have a pile of money.

you assume Say's Law holds true

Even if I agree that it's true for the sake of argument (see below for further comment on that), it doesn't justify this claim:

Symmetry in your argument would require that growth by demand should also be "exponential"

No, because growth by demand is limited by supply. There was no demand for air travel in 1900, not because people could not have used it, but because it didn't exist. Once it existed, it created a whole new category of demand. To some extent that demand displaced other demand (some people now made trips by air that they would previously have made by car or train), but most of that demand was new demand that increased the total GDP. But that growth was only made possible by the existence of a new source of supply. New sources of supply are only created by investment, not consumption; that's the difference.

Second, this is the classical economic framework, which doesn't work.

Only according to all the non-classical economists whose jobs depend on saying that it doesn't work.

You need to factor in savings and debt, and then Say's Law breaks

In the short run, yes. But what is the savings and debt for? All these things do, in effect, is transfer resources through time: by saving now I put aside resources for later use; by taking on debt now I expend resources that I don't currently have, and pay for it later with excess resources. None of this changes the fact that ultimately, whatever is consumed must be produced.

Well, actually you have debt now, which can be easily be a problem. But my cursory, layman's understanding is that it's a much less severe problem, since d(GDP)/dt > 0 now.

Yes, it is, but why? As I said above, debt means you're using up resources now that you don't have (you borrow them from someone else) with the expectation that you will have excess resources in the future to pay it back. Where will the excess resources in the future come from?

The best outcome is that you have used the debt to fund investments that create new sources of supply, so you have a lot more wealth in the future and can easily afford to pay back the debt.

Another possible outcome is that you keep on increasing your tax base (this is the Krugman solution, referred to by someone else in another post in this thread), so that when the debt comes due you have a lot more people available to tax to pay it back.

The third possible outcome is that you inflate the debt away, by denominating it in your own currency instead of in actual goods. This is how the US government has historically dealt with its debt; US debt is denominated in dollars, and the US can print as many dollars as it likes, so effectively it can make its own debt as small as it likes by making dollars worth less.

For example, in the Krugman article, he mentions the US debt from World War II, and says that we never paid it back; it just grew increasingly irrelevant as the tax base grew. In other words, he says it was the second outcome. But he fails to mention that the US dollar has inflated by almost 1200 percent since World War II, i.e., by a factor of 12, whereas the tax base has grown by at most a factor of 3. So the third outcome has by far the largest effect.

Unfortunately some people believe them. https://www.google.co.uk/search?q=job+creators+myth

In the short run, I agree. In the long run, I disagree. As I said in another post upthread, there was no demand for air travel in 1900. The large current demand for air travel only exists because air travel now exists; it was created by the creation of a new source of supply.

As far as I can tell, it is a theory that failed in practice. Does this relate to your unsupported ideas on great benefits of innovation. I'm not sure if you are arguing for trickle-down, or just ignoring how it failed.

If there is some other theory of "trickle-down economics" that talks about long time scales, then I would be more receptive. Take the airplane again as an example: first it was only available to a few inventors; then only to the military and a few inventors and enthusiasts; then it started to be used for things like carrying mail; then for travel by people rich enough to afford it; then it kept expanding and the price kept dropping until now a large fraction of the population can afford an airplane trip. But that's a very different process than the one the "trickle-down" economists were talking about; what trickles down is the actual availability of a new thing, not money.

IMHO concentration of wealth at the top is not conducive to innovation at all - the wealthy and powerful would largely prefer to lock things down and keep the status quo than encourage disruptive innovations. e.g Gates and guards not highways. Patents and copyright extensions not free exchange of ideas and media. Monopolies not cheap goods.

You talk a lot about teh powers of innovation without any reference to any real world data or being specific about how to encourage it, so I feel that I can also present a vague, handwavy counterargument.

I think you mean equality trickling down? I didn't say it would, if by "equality" you mean equality of wealth in relative terms. But absolute wealth certainly does trickle down, as in my airplane example. An ordinary person today can buy things that the richest person in the world could not buy in 1900. The richest person in the world can also buy them, of course, plus things that an ordinary person cannot buy; but that doesn't change the fact that the ordinary person is a lot wealthier in many ways, in absolute terms, than the richest person in the world was in 1900.

IMHO concentration of wealth at the top is not conducive to innovation at all

Where did I argue that concentration of wealth drives innovation? All I was saying is that in the long run, thinking of the economy as purely demand-driven doesn't work, because new sources of supply come into existence and create new kinds of demand. I didn't say or assume anything that requires the new sources of supply to come into existence because wealth is concentrated at the top.

the wealthy and powerful would largely prefer to lock things down and keep the status quo than encourage disruptive innovations

To a large extent I agree with this. Most innovations are not driven by people who are already wealthy; they are driven by people who want to become wealthy. pg has said that he started Viaweb because he wanted to make enough money to not have to worry about money; he certainly was not in that state when he started it.

You talk a lot about teh powers of innovation without any reference to any real world data or being specific about how to encourage it

I have not talked about innovation being driven by the wealthy; that is something you are reading into what I said, not something that's really there in what I said. And I did give one real world example, the airplane. Do you dispute my general summary of how the airplane evolved, or how it created a new source of supply that didn't exist before, and therefore created new demand that didn't (and couldn't) exist before?

As for how to encourage innovation, I don't think anyone knows how to do it in the general case. But in general I think (and you appear to agree) that openness and transparency are better for innovation than secrecy, and that the government should not play favorites.

I also think that, even though relative inequality of wealth is an effect of innovation, not a cause of it, we should be careful about how we try to equalize relative inequality of wealth, because, as I noted above, innovators innovate because they want to become wealthy. If you take away the potential reward, you take away the motivation (pg makes this point in several of his essays, I believe).

However, one thing we could do to reduce relative inequality of wealth, which would not, I think, hurt innovation, would be to completely overhaul our financial system. The financial system is billed as providing capital for innovation, but only a very small fraction of transactions actually do that. Most transactions are zero-sum trades, and most people who have gotten rich through working the financial system (which means, today, a large fraction of wealthy people) have done it not by creating new wealth, but by transferring existing wealth from other people's pockets into their own, using asymmetric information to induce people to take the wrong end of zero-sum trades. I'm not saying that's easy to fix, but I think if it could be fixed, it would significantly reduce the concentration of wealth without hurting innovation.

Yes. You know what I mean, nit-picking ill becomes you.

> But absolute wealth certainly does trickle down

Not always true. There are many counterexamples in the last 100 years, outside of the west.

> I have not talked about innovation being driven by the wealthy

No, but you've talked around it a lot and failed to say something definite. You've said that it is as good as money in the rest of the system; it is not. Resources available to those who might become rich is much better – and this includes schools and hospitals for poor children at the expense of tax.

> Do you dispute my general summary of how the airplane evolved

I don't dispute that you cling to the airplane example as though it was a general law.

> pg makes this point

Pg is not always right. The extreme case of "take away the potential reward" entirely is of course not a good thing. However this straw man argument is much abused in the US at present.

> even though relative inequality of wealth is an effect of innovation, not a cause of it

Nope. What if it's got nothing to do with innovation at all? You see innovation everywhere; but the richest people are mostly not innovators at all, you say as much in the next paragraph. Which I agree with.

Agreed. I didn't mean to imply that it was always true. But the fact is that it does happen, therefore it can happen.

There are many counterexamples in the last 100 years, outside of the west.

And what makes those cases different from the cases in which it did happen? That seems to me to be a question worth investigating. One hypothesis: "outside of the west", people who aren't wealthy can't become wealthy by innovating, so they don't bother. In "the west", it's not easy to become wealthy by innovating, but it is at least possible.

you've talked around it a lot and failed to say something definite

I disagree; I've said a number of definite things. I think you are reading some things into my posts that I have not said, and failing to see some things that I have said. I give examples of both below.

You've said that it is as good as money in the rest of the system

Where did I say that? All I said was that innovation creates new sources of supply, which in turn enables new demand to exist that couldn't exist before. How does that equate to innovation being "as good as money"?

Resources available to those who might become rich is much better

Agreed; I haven't said anything that contradicts this.

you cling to the airplane example as though it was a general law.

It's not a general law, because, as I said above, innovation increasing absolute wealth doesn't always happen, and I didn't mean to imply that it did. But the example shows that it can happen. Again, you appear to be reading things into my posts that I didn't actually say.

this straw man argument is much abused in the US at present.

True, but I wasn't making the straw man argument. In fact I explicitly gave a case in which reducing inequality of wealth does not harm innovation: when the inequality in wealth is due to people gaming the system instead of doing productive work.

What if it's got nothing to do with innovation at all?

You agreed that "take away the potential reward entirely" is not a good thing; that means you agree that inequality of wealth has something to do with innovation.

Look what happens when a few large companies control an industry. Look at cable/internet companies. Look at wireless carriers. Look at monitor manufacturers. We see collusion to keep prices higher than they "ought" to be and sluggish innovation and growth. The large entities tend to favor more regulations that increase the barriers of entry to competitors (but vocally saying they dislike regulations... bs.) Comfortable people tend to favor the status quo, dislike shake ups, and don't want to have "work" to maintain their condition.

I would agree that competition helps innovation to flourish. I'm not so sure about capitalism, because the word "capitalism" can mean different things. Concentrating resources in the hands of a few large corporations can be viewed as "capitalism"; that's how the robber barons in the late 19th century in the US viewed it.

There is also government interference involved (as you imply with your comment about regulations). For example, those same robber barons did not make their money through fair competition; they made it by getting the government to outlaw fair competition, for example by handing out exclusive rights to run railroads through various parts of the country. Similar remarks apply to some of the other examples you give--cable/internet companies, for example, are largely local government-granted monopolies. (Wireless carriers are too, to an extent--for example, Verizon has an exclusive deal to put repeaters in the Washington, DC Metro tunnels, so their phones can get a signal but nobody else's can. Result: lots more commuters have Verizon phones.)

You could say that "economics has become the continuation of politics by other means" :)

Anyway, just to add to your points to which I mostly agree, it kind of baffles me that economists that hold key positions do not say it out loud that they don't know what they're doing anymore. I mean running the world economy on close to 0% Central Bank rates for almost 3 years now it's like operating your computer on Safe Mode for doing critical "launch a rocket to the Moon" missions (I work as IT, in case it wasn't obvious by now :)).

Central bankers don't say this because their main job is to pretend that the future is brighter than anyone might reasonably think it to be; but academic economists will readily admit that they're in uncharted territory (with landmarks vaguely reminiscent of various times past on every horizon).

Can I make a bad analogy?—Macro policy these days is a bit like the Manhattan Project. It's aimed at a greater good, which you might just as well call the lesser evil, and there's a chance (discounted by the mainstream) that they'll ignite the atmosphere and put an end to us all.

The argument for favorable taxation of dividends is less direct -- that they're roughly equivalent to capital gains returned through repurchase or retained as cash, and that there's an efficiency argument for returning that money to shareholders. If dividends are taxed higher than capital gains, there's a strong tax incentive to do stock buybacks or retain earnings instead.

The real trouble is that it makes certain assets de facto inalienable. Suppose you've bought at $100k and your asset is now worth $150k. If you hold it, your expectation is to make $75k (a 50% increase) over the next holding period (say 20 years). By contrast, there is an alternative investment that will provide a 55% increase over the same period, which it would be economically efficient for you to take advantage of. But not under a 35% capital gains tax. Because then instead of collecting returns on $150k, you're suddenly collecting returns on only $132.5k (= $150k - ($50k x .35)), and the 55% return is no longer better for you than the existing 50% return, even though it's better for the economy at large.

The effect is most problematic for small business owners, because they typically have near-zero basis in their holdings. They "bought" the stock when the company started for around $0 and now it's worth a million dollars, so the gain is the entire amount. If they sell they instantly lose 35% of their investment capital, so they don't sell, ever, because no alternative investment is worth that kind of a hit.

And then on top of that, because of this, the government never sees the tax revenue, because the disincentive to sell is too large to ever be met -- so 35% of nothing ends up smaller than 15% of something.

Would a wealth tax be less economically distorting than a capital gains tax, at least with respect to encouraging people to exchange assets in an economically efficient way?

Sure, but then you've got a different problem. What happens to illiquid assets? If the value of the illiquid assets your business uses in its operations goes up (land, trademark goodwill, whatever) then you would immediately owe wealth tax on the appreciation, but if the business is only just breaking even as an operation, now you've got to shut down the business and sell the assets to cover the tax owed.

And then of course if you exempt illiquid assets you get a whole new kind of distortion where everybody puts their money in whatever assets are exempt.

What you could do is have an asset tax with brackets, e.g. no tax on the first five million dollars of assets and then X percent on everything over that. And then presumably anyone subject to the tax would have so much wealth that selling some would not be a hardship. But it's still not perfect, because you would immediately see families dispersing their assets between everyone they can trust to keep any single individual's total below the threshold.

The way you fix the distortion is by accounting for it. If someone sells an investment asset and then uses the money to purchase another investment asset, allow them to roll over the basis into the new asset. Then there is no distortion because you can trade investment assets for one another with no change in tax liability or tax realization.

Which is actually kind of cool now that I'm thinking about it, because it's kind of like a consumption tax that only applies to investment income -- the money gets taxed when they spend it on something that isn't an investment, but poor people whose money doesn't come from investment sources don't pay the tax. Which means you can have a substantial tax rate without a lot of distortion -- or at least, the distortion would be to encourage the rich to invest rather than spend. But if we like investing then maybe that's OK.

That's essentially how tax-deferred retirement accounts work, right? (or other structures, like an investment company or REIT)

It would be interesting to let people set up these more easily for individual purposes. There would be some corner cases like a non-rental property (do you tax the OER instead of the full amount?)

All of this starts to get really complex. I wonder how much of the capital gains vs. income tax issues go away if the rate of each is the same and very low (<10%). At some point, transaction costs would start to dominate.

The other solution would be lower taxes and higher inheritance taxes (even up to 100%). If there weren't family businesses as ongoing concerns, and all assets were financial, I think there would be a pretty reasonable argument for lower income and gains taxes and higher inheritance taxes.

Sometimes, sure. The trouble is that not everyone can use those structures. A corporation can't use an individual retirement account, but it will still make investment choices and "pay" (i.e. make every cost effective but economically damaging contortion necessary to avoid) income and capital gains tax. Likewise someone investing money they anticipate needing before the official retirement age for any reason. And I think most structures of that nature have caps on the amount of tax you can defer using them.

Making it the rule rather than the exception would reduce the distortionary effects substantially, and would simply things a whole lot too.

>All of this starts to get really complex. I wonder how much of the capital gains vs. income tax issues go away if the rate of each is the same and very low (<10%). At some point, transaction costs would start to dominate.

It's questionable whether that would raise enough revenue to cover existing expenditures, so then you've got to figure out what to cut.

It seems to me the simple thing to do is to make the purchase of an investment tax deductible and then make the full amount of its sale taxable as income. Then if you sell an investment and buy another one in the same amount, the deduction cancels the income. If you sell an investment and use the money to buy a smaller investment and a non-investment purchase, the cost of the latter isn't deductible and becomes taxable as income.

Then the only question is how to define what an investment is. Which is by no means trivial, but we already have a good framework in place in the form of deciding what purchases are eligible for existing deductions like business operating costs vs. personal consumption in partnerships and LLCs.

>If there weren't family businesses as ongoing concerns, and all assets were financial, I think there would be a pretty reasonable argument for lower income and gains taxes and higher inheritance taxes.

You can't have an inheritance tax rate higher than the personal income rate or people will just hire their heirs to be the Vice President of Collecting a Huge Paycheck and arrange to have no assets left when they die. That's why they call it the Death Tax: It only applies to people who die unexpectedly. Anyone old or sick enough to expect death within the next few years and with enough assets to hire a financial planner has already arranged to avoid it.

Perhaps you believe errantly, (or maybe you choose to ignore, as Mitt Romney did), that during one of the worst recessions and liquidity crisis in modern American history, that they would have gotten funding from an equity company?

The auto bailout was about stopping the freefall. It was common sense. Markets fail. Look at the history before the Fed. Look at how people starved to death in Russia because of rigid adherence to free market principals. If they had taken a more balanced approach, markets would be freer today.

On 3.2) True. On 4) Capital does not erode the position of labor. It has nothing to do with it at all. It is an estimate of labors worth. Simple supply and demand. The policies of a nation (globalization, unionization), technology, are the levers which cause supply of labor to fall or rise. Capital might make it easier to exchange labor, but that's about it.

Thank you for saying that. I hate it when mostly moral or political issues are labeled as "economics"...

The lower tax rate for dividends, for example, is a carrot dangling in front of a would-be enterpreneur. The idea of having less of the fruits of your labor forcefully taken away from you is very appealing.

Of course, the alternative is to take your intelligence to a friendlier tax climate, and be milked less by that other government. That carrot is a pretty good idea, because in this case, your original government gets nothing.

You seem to be missing the part about being an enterpreneur? Imagine you've got your own one-man LLC/whatever. This would be a business entity that basically just amounts to you yourself, and relies on only your personal skills to make any money.

I assume we don't need to take this any further.. ?

1) I think the author incorrectly tries to nullify the family budget metaphor for economic prescription. While any metaphor only goes so far, he attempts to compare the micro-economic interactions within the family ("essentially communist") with the macro-economic revenue/spending/balancing act for a national budget. He misses the point that, in observing that we must "understand a family as a group of people functioning a single economic agent" we must consider the requirements of that economic unit to adhere to reasonable financial policies, such as making sure revenues are sufficient to cover debt service and expenses.

2) I think the author mis-characterizes the post WWII affluence of the American economy as a result of the wartime government spending combined with some magical wealth redistribution scheme inherent in a wartime economy. In reality, I believe the great American prosperity was more to do with the nation's near monopoly on manufacturing capacity after most of Europe was decimated (and Japan as well).

3) I agree with the author that "trickle-down": economics (actually more of a political thing than a real economic theory) is inherently flawed. I think he also misapplies the family metaphor here, as well, mixing the micro with the macro.

All in all this was an enjoyable and well-written article, and I appreciate the author's ideas about the "Robot Utopia." I don;t agree, but what fun is it if we always agree, right?

http://krugman.blogs.nytimes.com/2012/12/28/policy-implicati...

HN story: http://news.ycombinator.com/item?id=4978136

The top 1% in the US has around $12 trillion in wealth, which is about the public part of the debt ($16 trillion total).

http://www.irs.gov/pub/irs-soi/12pwwinbulwealth07.pdf

http://en.wikipedia.org/wiki/United_States_public_debt

I found it hilarious how vaadu led his comment with "OP fails on basic math" and then lands a turd like that...

Just so that we're nice and clear what you're saying is that the rich would rather leave a country rather than shoulder a fairer share of the social burden. I have three things to say to that. 1) If someone is that selfish I would be glad they left. 2) When taxes were much higher the rich and wealthy did not seem to leave the country. 3) The US of A appears to have had a culture of entrepreneurship in times of higher taxation and I just don't believe that this kind of economic calculus would figure in the mind of an immigrant all that much, there are a whole host of factors.

Regarding #1. You're basically whining about helping the less well off in society. We should of course just let them rot and feel no compassion for our fellow human being. If you keep shouting this long enough it will definitely distract us from from the actual solution, the _just_ solution, which is increasing the taxation on the rich and creating a climate of fairer wealth distribution. But that's the problem, isn't it? You don't want to live in a fair society. You want to less in a manifestly unequal society where some make out like bandits, and some are ground down day after day.

And #2. If the math is so basic why don't you run through the numbers for us?

Sorry for the snark but I cannot stand people with your attitude.

how is that a more _just_ solution? it is _a_ solution, but whether it is just or not is an opinion, and many would offer a different one.

I m not saying that i don't want an unequal society. whether you tax the rich more or not, an unequal society exists not because there are rich people, but because there are people who can't escape the traps that they either born into, or fell into. When the rich see that they are unfairly taxed, they would and will want to leave. And these are not just the top hat wearing, cigar smoking people - they are hard working professionals, who managed to secure some money, so they can live comfortably.

And yes, some rich people will probably leave the country if you raise taxes on them. But that's no more an argument against raising taxes on the rich than "if you increase the price of bananas, people will stop buying bananas!" is an argument against raising the prices on bananas. If we want to stop talking about opinions and subjective ideas, then what you're left with on that specific point is simply an optimization problem.

The government is essentially selling a product, which is a big old package of laws, regulations, court systems, public programs, etc. which make the country a nice place to live and do business in. Taxes are the price that the government charges for that product, and compared to much of the world, that price is very low. So to say that all (or most) of the rich people would leave the country if their taxes increased is roughly equivalent to saying that the US is an inferior good, competing on price alone. And I don't think that many people, including most who make such claims, believe that for a second. At least, not as far as the wealthy are concerned.

I actually did the math on this a few years back. Old data and I don't have the exact numbers we figured, but it was (roughly) that if you took the top 10% and taxed their income at 90%, and then took the bottom 90% and taxed them at something like 2%, and had no other forms of taxes, and no changes to spending, then the debt would be paid off within a single presidential term.

Please actually make sure you are informed before you go criticizing others for "failing at basic math".

Which makes no sense because with that drastic a change in tax rates, spending patterns would have to change drastically as well.

Instead the problem is that you're also assuming that everyone's incomes stay the same, so you can just recompute the government's revenue by applying the new tax rates to the same income figures as before. That would give you a much higher revenue figure.

But that won't happen: instead rich people will find ways to decrease their taxable income, so that the revenue increase you're calculating won't actually materialize.

Check out this article:

http://reason.com/blog/2010/11/29/the-remarkably-stable-amou...

It shows that government revenue as a percentage of GDP has been remarkably stable over large changes in tax rates.

Is it possible to tax the most powerful people in world like that? No, probably not, as you said. It would require extremely smart people to write extremely smart laws while somehow keeping lobbyists from intentionally inserting tax loopholes, so good luck to us with that.

Would the "real" income of the top 10% remain the same under such conditions? Hard to say, really. We don't really have the data to see how an economy would behave under such alien circumstances, so any predictions we make are bound to be based on ideology, and ideology is notoriously poor at making accurate predictions.

TLDR: "I'm not an Economist", followed by quoting Paul Krugman.

So, care to actually present a counterargument or are you content to be an obnoxious blowhard?

This is a cynical and knee jerk commentary that's emblematic of the sort of middle brow dismissals we've been working to limit on HN.

For all of the competing thoughts on economics, I don't think it's a stretch to say it's enormously complicated. Even on the most cursory examination it doesn't break down to "more productivity = better economy". "Real economists" and "neo-liberals" may in fact be fucking it all up, but I'm quite certain they'd have done no better if they modeled the economy like you have.

When your world view requires that millions of highly educated, trained, and experienced people - who have pursued a rigorous, academic field of study for decades - are all simultaneously out to lunch, possibly maliciously, the onus is perhaps on you to provide more substantiation than "they're fucking it all up".

Side note: At this point I'd be very happy with HN being refocused on strictly tech/startup related posts. Every time a more general or controversial topic comes up it ends up very much like this thread. Unsubstantiated knee-jerk ad hominem. Followed by equally unsubstantiated hyperbolic cynical equip.

A large amount of bath tubs and pipes are leaking, worldwide.

I am from Brazil, we are going full double dip here ( ie: in 2009 the government went batshit crazy in allowing credit, and then we has 7% growth rate, thus year we had several months of negative growth, and banks complaining of a huge rise in defaults )

The "resource curse" is a well-studied phenomenon, and there is both symptomatic evidence and causal analysis that suggests it is starting to apply to developed countries.

The examples I have seen were focused on the finance "industry", especially in the UK, but it definitely looks applicable to other countries and the non-distribution of the "automation-dividend".

"First, families have to pay back their debt. Governments don’t — all they need to do is ensure that debt grows more slowly than their tax base."[1]

Which of course, if it isn't obvious, is, literally+legally false and figuratively BS.

[1] http://www.nytimes.com/2012/01/02/opinion/krugman-nobody-und...

You don't know what the word verb "to quote" means, nor the verb "to plagiarize".

The author of TFA did neither. There was no quote, and the family vs. nation metaphor is much older than Krugman's article.

And of course, Krugman is right, because what he says is descriptive of things that have already happened, and those things did, in fact, happen.

Now I disagree somewhat with Krugman on the importance of debt (the state having too much seems to make it defer to much to the bankers, who should be reigned in much more) , but hey, he's a Nobel-prize winning economist and I am a dude with an opinion.

-- Um, no. Its false.

The entire idea is false coming (literally) and going (figuratively).

but hey, he's a Nobel-prize winning economist...

== This is not even worth responding to.

Your evidence being? Your say-so?

"but hey, he's a Nobel-prize winning economist... == This is not even worth responding to."

If you had actually read and comprehended what I wrote, I was comparing him to myself, not to you.

But if the shoe fits...speaking of which: since you have given zero evidence for your opinion, reputation actually is the only thing we can go on...oh wait...Krugman actually did provide evidence for what he wrote, how typical of him!

"First, [PQR borrower] have to pay back their debt. [XYZ borrowes] don’t — all they need to do is ensure that debt grows more slowly than their [earnings] base."

Second, to the extent this is even "metaphorically" true, it is only trivially true. For any borrower XYZ and PQR alike, I can make the same claim. eg, A corporation can "roll-over" its debt indefinitely under this constrain (for example, GE has done this for 100 years) or not. But also so can a family/business (eg. even a home roll-over a mortgage w. home equity loan or ect...then kids inherit house, etc). But all borowers as a mechanic do this through....paying back the old debt....first and issuing new debt....so again Krugman's is literally a false (as well as misleading) statement.

First, governments have done so in the past. With this alone your point is trivially false by simple observation.

Secondly, the US government, like other governments, can change the law.

Thirdly, if you haven't noticed, governments are sort of at the top of the food chain, so they can (and do) not bother changing, but instead simply ignore the law, which they do all the time. So you have a judgement against a government, how are you going to enforce it? Ask the same government to send its own police against itself? Good luck with that. March on Argentina? BYOA - Bring Your Own Army.

Fourth, one thing that countries like the US can do that neither families nor corporations can do is inflate away their debt. This is of course one of Krugman's criticisms against the Euro: that countries there have given up this ability, and so the only way to try to get rid of the debt is so-called "austerity" measures, which aren't really working in those countries where they are being tried, as GDP drops faster than the debt and therefore the crucial debt-to-GDP ratio gets worse rather than better. Also: free entertainment in the form of riots in the street.

Fifth, as Krugman keeps pointing out, the government is not really some separate entity. Most of the debt is debt we have against ourselves, within the family, to stick with the analogy, it doesn't actually make the family poorer. Unlike, say, a mortgage.

Sixth, with the power to raise taxes, governments have a pretty secure way of ensuring their earnings base, unlike families or corporations.

Krugman is a US citizen, purporting to advise the US government. He is not in a position to advise the government to break the law. No economist is, for the very reason that Economic analysis pre-supposed the rule of law. If you throw out "obeying the law" you throw out the field of Economics, generally speaking.

Second, there is the empirical fact the the US debt is subject to being held by insitutions that are constrained by law as to holding only certain classes of securities. Your pension fund cannot hold XXX rated t-secs if they are below investment grade thresholds. So, the who would hold 17trillion of US debt after a default? Talk about too big to fail...

And furthermore, there are stronger constraints on policy set in in the constitution that prevent 'interference with contract' which generally speaking includes financial contracts. It is not the case that the government can dis-regard the Constitution and appropriate value through cynical public policy.

And just as a general point, now that you've sunken to this desperate level, take a look around at the company you are keeping? Seriously. The rule of law trumps economics. Full stop. (Ask the 2009 nobel prize winners).

Lastly, taxes as an "asset class" if you want to condier them that are a "derivative" of corporate and personal earnings (at first approximation). The are, like any derivative, dependant on the value of the underlying assets. They are therefore subject to the same constraints--ie, unless corporate earnings are infiinite, taxes-as-dervatives cannot be infiinte through logic/math.

This is all unimpressive rubbish that you put forth here. The reason I didn;t walk through all of this before is it is a waste of time even giving Krugman the attention.

Now that we've debunked the claim that Krugman's assertion is "literally" false, we can concentrate on whether it ("government debt is not like family debt") is BS.

(By the way, thanks for filling me in on taxes being a derivative of earnings; there I was using "debt-to-GDP ratios" all this time without a clue as to what those strange words meant!)

First, of course, is the question of what Krugman is advocating. Is it simply defaulting on the debt? No. In fact: "So yes, debt matters. But right now, other things matter more".

What are those other matters? Exactly the "underlying asset class" you mention. Governments can spend money on either the numerator (debt) or denominator (GDP) to improve the debt-to-GDP ratio, families rarely have that option (spending money tends to not lead to raises, unless you live in Baku).

Greece for example has tried reducing their debt by cutting spending (so far with limited success), with the side-effect of putting the economy into deep recession (+free street entertainment) and actually making the debt-to-gdp ratio much, much worse, now at 170% of GDP:

http://www.tradingeconomics.com/greece/government-debt-to-gd...

The other possibly immediate problem with debt is interest rates, but so far that just doesn't seem to be a problem, with rates sub 1%. In fact, with rates this low one might consider it negligent to not use those rates for investments with even modest ROI.

No, its literally false. You haven't "debunked" anything.

Honestly, if you don't understand any of this I cannot help you, further.

What Krugman said is literally true (he gives examples in the article, I have given others). And the actual point that he makes about the relative nature of the debt and thus the question for governments as to wether to work on the numerator or the denominator is one that you yourself brought up, unprompted.

Finally, his biggest point (AFAICT) is that this is debt that is largely internal, therefore it doesn't actually make the country poorer.

In fact, you brought up pension funds: these actually have a big problem when there isn't any "safe" government debt to invest in. Heck, they are actually starting to get into trouble now, with the yields of that government debt so incredibly low (recent emissions of Danish and German debt had negative interest rates, so you paid some money to the government for holding onto your money for a while).

Wikipedia: "Ad hominem reasoning is normally described as an informal fallacy,[2][3][4] more precisely an irrelevance."

http://en.wikipedia.org/wiki/Ad_hominem

Yep, you're right about that, too. It's really not a falacy. It's a fallacy. And also Nietzsche, not Neitszche. And devastating, not devastaing.

As to devastating ad hominems: I'd suggest they might become a trifle more devastating if you start with elementary spelling, work your way up via basic grammar ("its" vs "it's") and simple word semantics such as "quote" and "plagiarism" all the way to reading comprehension before attempting to tackle economics and philosophy.

Just sayin'

Funny how that works, right? That must be the edge case.

He also argues against straw-men such as this: Proponents of trickle-downism will argue that the little-taxed corporate executive will in fact share his wealth by spending it

(Proponents of "trickle-downism" don't claim this.)

and uses misleading definitions like this: A poor person, by contrast, needs more than he can afford.

(By this definition there are virtually no poor people in America, thus his policy prescriptions are impossible. http://www.census.gov/prod/2008pubs/h150-07.pdf )

I strongly suspect "everywhere else previously industrialized in the world had been largely destroyed" had a lot to do with it.

I don't think it's the greatest article to ever hit HN, and it's almost pure politics.