18/4/16: Taxing 1%?.. Make My Day...

An interesting paper on the dynamics of income inequality from Xavier Gabaix, Jean-Michel Lasry, Pierre-Louis Lions and Benjamin Moll (December 2015, CEPR Discussion Paper No. DP11028: http://ssrn.com/abstract=2714268).

Take in the abstract alone for key conclusion:

“The past forty years have seen a rapid rise in top income inequality in the United States. While there is a large number of existing theories of the Pareto tail of the long-run income distributions, almost none of these address the fast rise in top inequality observed in the data. We show that standard theories, which build on a random growth mechanism, generate transition dynamics that are an order of magnitude too slow relative to those observed in the data. We then suggest two parsimonious deviations from the canonical model that can explain such changes: "scale dependence" that may arise from changes in skill prices, and "type dependence," i.e. the presence of some "high-growth types." These deviations are consistent with theories in which the increase in top income inequality is driven by the rise of "superstar" entrepreneurs or managers.”

So the key to alleviating inequality increases (if the key were to be found in income / wealth tax territory so frequently inhabited by socialstas) is not to tax all high earners, but to tax the very left tail of the high earners’ distribution, or so-called “"superstar" entrepreneurs or managers”. It’s not a 1% tax, nor a tax on wealth (capital), nor a tax on “anyone earning more than EUR100,000” (the latter being commonly bandied around the countries like Ireland), that is a panacea. It is, rather, a tax on Zuckerbergs and Bloombergs, Bezoses and Ellisons et al.

Which, sort of, means taxing exactly those who create own wealth, rather than inherit it from mommy or daddy… Perverse? If it is the “high-growth types” that are the baddies, not the Rothschilds or the Kochs who inherited wealth, at fault, then the entrepreneurs should be taken out and fiscally shot.

And if you do, here’s what you will be fiscally shooting at: innovation (see http://www.nber.org/papers/w21247). The linked paper conclusion: “our findings vindicate the Schumpeterian view whereby the rise in top income shares is partly related to innovation-led growth, where innovation itself fosters social mobility at the top through creative destruction”.

Dust out that ‘tax the 1%’ argument, again… please.

19/10/2013: Debt Bias and Wealth Taxes: Pesky IMF Ideas...

Nasty little bit from the IMF Fiscal Monitor - a box-out on page 49 of the report...

So the IMF basically reminds us that once things get desperate, wealth taxes (err... Irish pensions levy anyone?) or put differently - expropriation of private wealth - can be contemplated...

Reinhart and Rogoff have warned us all about the Financial Repression coming, so no surprise here. What is, however, surprising is the IMF estimate at the end of the box-out. "The tax rates needed to bring public debt to precrisis levels... are sizeable: reducing debt ratios to end-2007 levels would require (for a sample of 15 euro area countries) a tax rate of about 10 percent of households with positive net wealth".

Give it a thought - 10 percent on average for the euro area... for Ireland? 20%? 30%?.. And, of course, what will that do to households' debt?.. oh, wait, that does not matter in Europe...


Oh, and while on the topic of debt. I wrote recently (here) about the issue of 'debt bias' (incentives to hold debt over equity) in tax systems... Here's a chart from the same report (page 45) showing the impact of eliminating 'debt bias' in tax system on systemic stability of the country financial system:

Of course, Irish policymakers are keen to eliminate the bias - not because it can help repair the systemic instability of our financial system, but because eliminating the bias will increase state yields from debt-funded property loans (via closing of the mortgages interest relief).

Once again, the problem is that of legacy - what do such closures of 'debt bias' do to sustainability of mortgages debt already carried in the system? Once again, no one pays any attention to the issue...

12/7/2012: Wealth taxes - coming up next to Europe near you...

And so wealth taxes (on those who are not all that wealthy, in fact) is a matter of EU-wide policy now, thanks to Schauble: link here and here. Note, the idea is to tax property assets in excess of €250,000 - with an additional one-off levy of 10% on top of other taxes and presumably, as per talk in one of the links about 'capital taxes' other assets can be included. And the original source for the grand idea is here.

Thus, the logic goes, you've saved for the retirement (which requires at least as much in provisions as the tax bound) and you are not a drag on social pensions system. Off you go, pay up...

One question - what happens if two years from now property values drop and your property 'wealth' declines to below €250K... do you get a refund?.. Question two - what happens when tax is levied and as the result, property markets go into further contractions, forcing question one above to the forefront?.. Question three - what happens in the long run when taxes have depleted not only disposable (investable) incomes, but also investable (and largely illiquid) wealth - do pensions provisions go up?.. do Governments step in to provide cheap capital for investment?.. does Schauble and his friends drop their own pensions demands to compensate economy for €230 billion they've sucked out of investment pool?..

Idiots squad has never been so much enforced in Europe as today.