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Good debates this week/month

ResponsiblyIrresponsible
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4/25/2015 5:38:07 PM
Posted: 1 year ago
At 4/25/2015 5:27:23 PM, Mikal wrote:
(12) http://www.debate.org...

This debate, in particular, makes me salivate.

That is all.
~ResponsiblyIrresponsible

DDO's Economics Messiah
16kadams
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4/25/2015 6:34:36 PM
Posted: 1 year ago
I am in 3 of them :D
https://www.youtube.com...
https://rekonomics.wordpress.com...
"A trend is a trend, but the question is, will it bend? Will it alter its course through some unforeseen force and come to a premature end?" -- Alec Cairncross
16kadams
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4/25/2015 6:36:17 PM
Posted: 1 year ago
At 4/25/2015 5:38:07 PM, ResponsiblyIrresponsible wrote:
At 4/25/2015 5:27:23 PM, Mikal wrote:
(12) http://www.debate.org...

This debate, in particular, makes me salivate.

That is all.

Did you like my arguments? :D
https://www.youtube.com...
https://rekonomics.wordpress.com...
"A trend is a trend, but the question is, will it bend? Will it alter its course through some unforeseen force and come to a premature end?" -- Alec Cairncross
bluesteel
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4/25/2015 6:37:47 PM
Posted: 1 year ago
At 4/25/2015 5:38:07 PM, ResponsiblyIrresponsible wrote:
At 4/25/2015 5:27:23 PM, Mikal wrote:
(12) http://www.debate.org...

This debate, in particular, makes me salivate.

That is all.

You can't possibly implement a progressive consumption tax. How do you know at the point of sale what the person's income is?
You can't reason someone out of a position they didn't reason themselves into - Jonathan Swift (paraphrase)
ResponsiblyIrresponsible
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4/25/2015 6:46:29 PM
Posted: 1 year ago
At 4/25/2015 6:37:47 PM, bluesteel wrote:
At 4/25/2015 5:38:07 PM, ResponsiblyIrresponsible wrote:
At 4/25/2015 5:27:23 PM, Mikal wrote:
(12) http://www.debate.org...

This debate, in particular, makes me salivate.

That is all.

You can't possibly implement a progressive consumption tax. How do you know at the point of sale what the person's income is?

I'm admittedly not as well-versed as I'd like to be on implementation, but there are a few different formulations.

A good example is the X-tax: http://www.princeton.edu...
~ResponsiblyIrresponsible

DDO's Economics Messiah
ResponsiblyIrresponsible
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4/25/2015 6:46:53 PM
Posted: 1 year ago
At 4/25/2015 6:36:17 PM, 16kadams wrote:
At 4/25/2015 5:38:07 PM, ResponsiblyIrresponsible wrote:
At 4/25/2015 5:27:23 PM, Mikal wrote:
(12) http://www.debate.org...

This debate, in particular, makes me salivate.

That is all.

Did you like my arguments? :D

Didn't finish reading them, lol.
~ResponsiblyIrresponsible

DDO's Economics Messiah
16kadams
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4/25/2015 6:47:10 PM
Posted: 1 year ago
At 4/25/2015 6:46:53 PM, ResponsiblyIrresponsible wrote:
At 4/25/2015 6:36:17 PM, 16kadams wrote:
At 4/25/2015 5:38:07 PM, ResponsiblyIrresponsible wrote:
At 4/25/2015 5:27:23 PM, Mikal wrote:
(12) http://www.debate.org...

This debate, in particular, makes me salivate.

That is all.

Did you like my arguments? :D

Didn't finish reading them, lol.

P
https://www.youtube.com...
https://rekonomics.wordpress.com...
"A trend is a trend, but the question is, will it bend? Will it alter its course through some unforeseen force and come to a premature end?" -- Alec Cairncross
kasmic
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4/25/2015 6:47:37 PM
Posted: 1 year ago
(10) http://www.debate.org...

If only people could vote on this so I know how badly I lost haha.
"Liberalism Defined" http://www.debate.org...
"The Social Contract" http://www.debate.org...
"Intro to IR An Open Discussion" http://www.debate.org...

Check out my website, the Sensible Soapbox http://www.sensiblesoapbox.com...
My latest article: http://www.sensiblesoapbox.com...
bluesteel
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4/25/2015 7:05:35 PM
Posted: 1 year ago
At 4/25/2015 6:46:29 PM, ResponsiblyIrresponsible wrote:
At 4/25/2015 6:37:47 PM, bluesteel wrote:
At 4/25/2015 5:38:07 PM, ResponsiblyIrresponsible wrote:
At 4/25/2015 5:27:23 PM, Mikal wrote:
(12) http://www.debate.org...

This debate, in particular, makes me salivate.

That is all.

You can't possibly implement a progressive consumption tax. How do you know at the point of sale what the person's income is?

I'm admittedly not as well-versed as I'd like to be on implementation, but there are a few different formulations.

A good example is the X-tax: http://www.princeton.edu...

If I had anything more invested in this topic that a cursory disbelief then I might actually read an entire research paper to get my answer. But I don't. You would be doing me a large favor by giving me a tl;dr on its implement. Is the consumer tax paid yearly, like with income tax? If so, it sacrifices perfect compliance for extremely low compliance. Income tax compliance is 2/3 at most, and it's easier to hide cash purchases than actual income. Also, filing your returns and having to dig up every receipt you've ever gotten sounds ridiculous (like Mitch Hedberg musing on why he would ever need a receipt for a donut).

The reason sales tax is done at point of sale is perfect compliance. But there'd be no way for merchants to implement a progressive tax. They have no way of knowing the customer's annual earnings.

Also, it just seems stupid to me in general to have a progressive consumption tax. Our economy is not geared towards having a high savings rate (our economy is consumption driven, unlike say China's), and the rich's MPC is already low enough. A progressive tax would lower their MPC even more. It provides a disincentive to consume to the one group whose consumption we actually need to increase.

If we had less consumption prior to 2008, for example, the financial crisis would have resulted in more money being lost. There's a limit to good sources of investment capital, which is why junk mortgage backed securities took off.
You can't reason someone out of a position they didn't reason themselves into - Jonathan Swift (paraphrase)
ResponsiblyIrresponsible
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4/25/2015 7:30:12 PM
Posted: 1 year ago
At 4/25/2015 7:05:35 PM, bluesteel wrote:
If I had anything more invested in this topic that a cursory disbelief then I might actually read an entire research paper to get my answer. But I don't. You would be doing me a large favor by giving me a tl;dr on its implement.

Sure. I didn't know you actually wanted to discuss this detail, and frankly I haven't much time to actually flesh my thoughts out on this entirely -- mainly because I've been far too busy to actually read into this as much as I would like -- but here it goes:

It's basically a progressive tax on wages -- you could think of it like a payroll withholding tax, with the typical marginal tax brackets, in lieu of an actual sales-tax-esque mark-up. The implication is that businesses and investors would pay a flat rate at the highest marginal rate, whereas there would be some sort of phase-out provision for low-income workers, comparable to the EITC.

The implication is that a wage tax is, effectively, the same thing as a consumption tax -- avoids double taxation all together, removes distortions that encourage present consumption at the expense of savings and thus future consumption, etc.

Is the consumer tax paid yearly, like with income tax? If so, it sacrifices perfect compliance for extremely low compliance. Income tax compliance is 2/3 at most, and it's easier to hide cash purchases than actual income. Also, filing your returns and having to dig up every receipt you've ever gotten sounds ridiculous (like Mitch Hedberg musing on why he would ever need a receipt for a donut).

No, it would, to my understanding, be levied in the same way as a payroll tax -- i.e., taken out of weekly or bimonthly earnings -- so compliance wouldn't be much of an issue, though I agree it would be in some formulations.

The reason sales tax is done at point of sale is perfect compliance. But there'd be no way for merchants to implement a progressive tax. They have no way of knowing the customer's annual earnings.

I don't think a sales tax would necessarily translate into perfect compliance; but, nevertheless, I think this is right.

The point isn't to have a literal progressive sales tax to the effect of, "if you earn above X, your rate is Y percent," but to have what amounts to a progressive tax on funds available for consumption, but unlike an income tax, it doesn't add wage and capital income.

Also, it just seems stupid to me in general to have a progressive consumption tax. Our economy is not geared towards having a high savings rate (our economy is consumption driven, unlike say China's), and the rich's MPC is already low enough. A progressive tax would lower their MPC even more. It provides a disincentive to consume to the one group whose consumption we actually need to increase.

I completely disagree with this for a number of reasons, first because this would *not* by any means translate into a lower MPC.

(Interestingly enough, China is actually transitioning to a consumption-based economy, primarily because it wants the yuan to compete with the dollar on a global scale, and its forex manipulation hasn't exactly gone over well on a global scale).

Second, I disagree entirely that consumption is what "we need to increase." There's a tendency to equate consumption with demand, though obviously that is far from the case. There's a reasonable body of research -- that I can't seem to find at the moment, though I believe it came out of the St. Louis Fed -- suggesting that investment-led recoveries are far more robust than consumption-led recoveries, which is consistent with the fact that investment is the most volatile portion of GDP, meaning that it's most responsible and associated with short-run output fluctuations. Increasing the savings rate -- which is nearly at historic lows, though much of that is a function of endogenous changes in fiscal policy -- would increase the amount of funds available for investment, after which monetary policy would simply take the wheel.

Third, there's plenty of evidence -- and this is the basis for the Solow-growth model, actually -- that higher savings is associated with faster long-run growth, and that increased capital accumulation tends to lead to higher total factor productivity and thus higher real per capita GDP. Cross-country variations in TFP, of course, are hard to properly measure, though a faster savings rate to rotate the investment function upward are the primary way of reaching what is called the "golden rule" level of capital -- i.e., maximizing future levels of consumption per worker.

If we had less consumption prior to 2008, for example, the financial crisis would have resulted in more money being lost.

No, the financial crisis of 2008 was partly *driven* by an unmerited increase in autonomous spending, driven by artificially inflated home values; without that consumption -- and, frankly, I do not why you're insinuating that a progressive consumption tax would reduce consumption, when in fact it would do the opposite (if anything, it would only reduce consumption amongst the affluent who would bear the highest tax) -- which was driven by people borrowing against artificially inflated collateral, the subsequent deleveraging cycle (which Ken Rogoff called a "debt supercycle") would have been far more mild, and the recovery less tepid, because the reason recessions following financial crises are so bad is that they're driven by massive accumulations in private-sector debt: that results in a prolonged period of deleveraging, and THAT depresses consumption (Rogoff and Reinhart 2009, Romer and Romer 2015).

Even if this plan depressed consumption in the short run, via a basic Solow Model, it would decrease current consumption, increase current investment, and then increase future consumption by significantly increasing capital accumulation.

There's a limit to good sources of investment capital, which is why junk mortgage backed securities took off.

Debt instruments aren't the type of investment capital I'm talking about. In fact, they aren't even included in the GDP calculation. I'm talking about physical capital -- machines, for instance, that boost productivity, or additional inventory investment, which by boosting productivity, also tends to boost wages.
~ResponsiblyIrresponsible

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bluesteel
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4/25/2015 7:53:08 PM
Posted: 1 year ago
At 4/25/2015 7:30:12 PM, ResponsiblyIrresponsible wrote:
At 4/25/2015 7:05:35 PM, bluesteel wrote:
If I had anything more invested in this topic that a cursory disbelief then I might actually read an entire research paper to get my answer. But I don't. You would be doing me a large favor by giving me a tl;dr on its implement.

Sure. I didn't know you actually wanted to discuss this detail, and frankly I haven't much time to actually flesh my thoughts out on this entirely -- mainly because I've been far too busy to actually read into this as much as I would like -- but here it goes:

It's basically a progressive tax on wages -- you could think of it like a payroll withholding tax, with the typical marginal tax brackets, in lieu of an actual sales-tax-esque mark-up. The implication is that businesses and investors would pay a flat rate at the highest marginal rate, whereas there would be some sort of phase-out provision for low-income workers, comparable to the EITC.

The implication is that a wage tax is, effectively, the same thing as a consumption tax -- avoids double taxation all together, removes distortions that encourage present consumption at the expense of savings and thus future consumption, etc.


Is the consumer tax paid yearly, like with income tax? If so, it sacrifices perfect compliance for extremely low compliance. Income tax compliance is 2/3 at most, and it's easier to hide cash purchases than actual income. Also, filing your returns and having to dig up every receipt you've ever gotten sounds ridiculous (like Mitch Hedberg musing on why he would ever need a receipt for a donut).

No, it would, to my understanding, be levied in the same way as a payroll tax -- i.e., taken out of weekly or bimonthly earnings -- so compliance wouldn't be much of an issue, though I agree it would be in some formulations.

I fail to understand how this is properly labeled a consumption tax. That's an income tax.



The reason sales tax is done at point of sale is perfect compliance. But there'd be no way for merchants to implement a progressive tax. They have no way of knowing the customer's annual earnings.

I don't think a sales tax would necessarily translate into perfect compliance; but, nevertheless, I think this is right.

The point isn't to have a literal progressive sales tax to the effect of, "if you earn above X, your rate is Y percent," but to have what amounts to a progressive tax on funds available for consumption, but unlike an income tax, it doesn't add wage and capital income.

I don't know what you mean by "wage" income in this context. Capital income is already taxed at a much lower rate than income (capital gains tax).


Also, it just seems stupid to me in general to have a progressive consumption tax. Our economy is not geared towards having a high savings rate (our economy is consumption driven, unlike say China's), and the rich's MPC is already low enough. A progressive tax would lower their MPC even more. It provides a disincentive to consume to the one group whose consumption we actually need to increase.

I completely disagree with this for a number of reasons, first because this would *not* by any means translate into a lower MPC.

(Interestingly enough, China is actually transitioning to a consumption-based economy, primarily because it wants the yuan to compete with the dollar on a global scale, and its forex manipulation hasn't exactly gone over well on a global scale).

Second, I disagree entirely that consumption is what "we need to increase." There's a tendency to equate consumption with demand, though obviously that is far from the case. There's a reasonable body of research -- that I can't seem to find at the moment, though I believe it came out of the St. Louis Fed -- suggesting that investment-led recoveries are far more robust than consumption-led recoveries, which is consistent with the fact that investment is the most volatile portion of GDP, meaning that it's most responsible and associated with short-run output fluctuations. Increasing the savings rate -- which is nearly at historic lows, though much of that is a function of endogenous changes in fiscal policy -- would increase the amount of funds available for investment, after which monetary policy would simply take the wheel.

Historical data is meaningless. Investment driven recoveries are better because there were investment opportunities, e.g. Asian Tiger development. You're looking at historical anomalies and trying to generalize them to always hold. Without consumption, there's no reason to invest in capital stock (e.g. the Great Depression).

Third, there's plenty of evidence -- and this is the basis for the Solow-growth model, actually -- that higher savings is associated with faster long-run growth, and that increased capital accumulation tends to lead to higher total factor productivity and thus higher real per capita GDP. Cross-country variations in TFP, of course, are hard to properly measure, though a faster savings rate to rotate the investment function upward are the primary way of reaching what is called the "golden rule" level of capital -- i.e., maximizing future levels of consumption per worker.

If we had less consumption prior to 2008, for example, the financial crisis would have resulted in more money being lost.

No, the financial crisis of 2008 was partly *driven* by an unmerited increase in autonomous spending, driven by artificially inflated home values; without that consumption -- and, frankly, I do not why you're insinuating that a progressive consumption tax would reduce consumption, when in fact it would do the opposite (if anything, it would only reduce consumption amongst the affluent who would bear the highest tax) -- which was driven by people borrowing against artificially inflated collateral, the subsequent deleveraging cycle (which Ken Rogoff called a "debt supercycle") would have been far more mild, and the recovery less tepid, because the reason recessions following financial crises are so bad is that they're driven by massive accumulations in private-sector debt: that results in a prolonged period of deleveraging, and THAT depresses consumption (Rogoff and Reinhart 2009, Romer and Romer 2015).

Pretty much everyone who has written about the financial crisis (e.g. Charles Morris) agrees that the mortgage bubble was a drop in the bucket, and the economy could have easily recovered from it. It was the CDO's and mortgage backed securities that amplified the effect of the bubble bursting to such a large extent that it contracted financial markets to the point where there was no investment capital left to do anything. We built a giant bubble on top of a smaller bubble.


Even if this plan depressed consumption in the short run, via a basic Solow Model, it would decrease current consumption, increase current investment, and then increase future consumption by significantly increasing capital accumulation.

There's a limit to good sources of investment capital, which is why junk mortgage backed securities took off.

Debt instruments aren't the type of investment capital I'm talking about. In fact, they aren't even included in the GDP calculation. I'm talking about physical capital -- machines, for instance, that boost productivity, or additional inventory investment, which by boosting productivity, also tends to boost wages.

There's no large business in the modern economy that refuses to boost productivity due to a lack of investment capital. If automation would boost their profits, they do it.

And most of the wealthy's investment capital goes to investing in stocks or other investment vehicles, not VC funding of startups.
You can't reason someone out of a position they didn't reason themselves into - Jonathan Swift (paraphrase)
Lee001
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4/25/2015 8:04:50 PM
Posted: 1 year ago
At 4/25/2015 5:27:23 PM, Mikal wrote:
These are all good debates that are out/finished. Look over them and vote and read if possible.


(1) http://www.debate.org...
(2) http://www.debate.org...
(3) http://www.debate.org...
(4) http://www.debate.org...
(5) http://www.debate.org...
(6) http://www.debate.org...
(7) http://www.debate.org...
(8) http://www.debate.org...
(9) http://www.debate.org...
(10) http://www.debate.org...
(11) http://www.debate.org...
(12) http://www.debate.org...


These are just some of the ones that I have seen and/or are in

Yay.....#11
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ResponsiblyIrresponsible
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4/25/2015 8:10:45 PM
Posted: 1 year ago
At 4/25/2015 7:53:08 PM, bluesteel wrote:
I fail to understand how this is properly labeled a consumption tax. That's an income tax.

It isn't, though, because an income tax is levied on wage *and* capital income; this isn't, and the tax is levied prior to being dolled out -- in other words, it's reducing both current and future consumption by X percent, with X being the average tax rate paid by some individual person.

If you're interested, Scott Sumner has a good post fleshing out why these are effectively the same thing: http://www.themoneyillusion.com...

I don't know what you mean by "wage" income in this context. Capital income is already taxed at a much lower rate than income (capital gains tax).

Wage income is what you physically earn from your labor -- capital income was once earned from labor, but represents deferred consumption. Capital income is actually subject, in total, to a much higher tax rate than wages because it's taxed twice -- this tax does away with that.

Historical data is meaningless. Investment driven recoveries are better because there were investment opportunities, e.g. Asian Tiger development. You're looking at historical anomalies and trying to generalize them to always hold. Without consumption, there's no reason to invest in capital stock (e.g. the Great Depression).

I don't think it's by any means meaningless, but let's even take your argument at face value: surely, over time, there's a diminishing returns to capital accumulation. No one denies that, but the fact of the matter is that investment spending hasn't rebounded even close to as much as consumption has (in fact, if it had been, GDP would have grown at a significantly faster rate -- about 200 basis points, in fact [https://www.stlouisfed.org...]).

I don't think the Depression even represents that point at all. The Depression initially resulted from overly tight monetary policy, because the Fed decided to contact the money supply considerably from 1929 to 1932 to prick a stock-market bubble -- it was driven by a decline in *investment* spending.

Second, investment isn't a function solely of consumption, but of NGDP expectations -- consumption is a crucial component of that, surely, but insofar as an investment can generate a positive return (and consumption is factored into that, of course), there's reason to undertake it. Not to mention, investment for a business can quite literally be equated with consumption for a retailer -- and via the multiplier effect that I'm sure you accept, that would induce hiring and thus faster consumption, etc. Not to mention, if there's actually an incentive to invest, businesses are going to directly hire workers, anyway.

Third, there a myriad of profitable investment projections. Heck, infrastructure now, with a crapton of unemployed -- perhaps structurally unemployed, at this rate -- people and deteriorating infrastructure, a WPA would be extremely profitable right now.

Third, there's plenty of evidence -- and this is the basis for the Solow-growth model, actually -- that higher savings is associated with faster long-run growth, and that increased capital accumulation tends to lead to higher total factor productivity and thus higher real per capita GDP. Cross-country variations in TFP, of course, are hard to properly measure, though a faster savings rate to rotate the investment function upward are the primary way of reaching what is called the "golden rule" level of capital -- i.e., maximizing future levels of consumption per worker.

If we had less consumption prior to 2008, for example, the financial crisis would have resulted in more money being lost.

No, the financial crisis of 2008 was partly *driven* by an unmerited increase in autonomous spending, driven by artificially inflated home values; without that consumption -- and, frankly, I do not why you're insinuating that a progressive consumption tax would reduce consumption, when in fact it would do the opposite (if anything, it would only reduce consumption amongst the affluent who would bear the highest tax) -- which was driven by people borrowing against artificially inflated collateral, the subsequent deleveraging cycle (which Ken Rogoff called a "debt supercycle") would have been far more mild, and the recovery less tepid, because the reason recessions following financial crises are so bad is that they're driven by massive accumulations in private-sector debt: that results in a prolonged period of deleveraging, and THAT depresses consumption (Rogoff and Reinhart 2009, Romer and Romer 2015).

Pretty much everyone who has written about the financial crisis (e.g. Charles Morris) agrees that the mortgage bubble was a drop in the bucket, and the economy could have easily recovered from it. It was the CDO's and mortgage backed securities that amplified the effect of the bubble bursting to such a large extent that it contracted financial markets to the point where there was no investment capital left to do anything. We built a giant bubble on top of a smaller bubble.

I wasn't talking about the initial cause of the recession; Morris is right: CDO's and CDO's-cubed and credit-default-swaps and all this other hokus-pokus BS -- and the global ramifications -- is what made the recession as bad as it actually was. But the reason it was so prolonged was the impact on consumer balanced sheets, both domestic and abroad, and the fact that even a pickup in employment -- since, mind you, the recession officially ended in June 2009 -- wasn't enough to actually bolster consumption.


Even if this plan depressed consumption in the short run, via a basic Solow Model, it would decrease current consumption, increase current investment, and then increase future consumption by significantly increasing capital accumulation.

There's a limit to good sources of investment capital, which is why junk mortgage backed securities took off.

Debt instruments aren't the type of investment capital I'm talking about. In fact, they aren't even included in the GDP calculation. I'm talking about physical capital -- machines, for instance, that boost productivity, or additional inventory investment, which by boosting productivity, also tends to boost wages.

There's no large business in the modern economy that refuses to boost productivity due to a lack of investment capital. If automation would boost their profits, they do it.

Right now, that certainly isn't the case; business investment is in the toilet, actually, and has been for the past seven months of available. Granted, that's beyond the scope of this discussion, since that's driven by an appreciating dollar and falling oil prices -- the latter of which is a demand-side issue (i.e., purview of the Fed) and the latter a supply-side issue.

The point is, investment capital *is* necessary to actually invest in any project; if we disregarded that entirely, under normal circumstances interest rates would shoot the roof. Even if that were to boost productivity, that wouldn't be profitable.

And most of the wealthy's investment capital goes to investing in stocks or other investment vehicles, not VC funding of startups.

I don't think that's true at all; even if it were, rising stock prices are associated with a positive wealth effect, so it's a wash.
~ResponsiblyIrresponsible

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RevNge
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4/25/2015 8:16:04 PM
Posted: 1 year ago
At 4/25/2015 7:30:12 PM, ResponsiblyIrresponsible wrote:
At 4/25/2015 7:05:35 PM, bluesteel wrote:
If I had anything more invested in this topic that a cursory disbelief then I might actually read an entire research paper to get my answer. But I don't. You would be doing me a large favor by giving me a tl;dr on its implement.

Sure. I didn't know you actually wanted to discuss this detail, and frankly I haven't much time to actually flesh my thoughts out on this entirely -- mainly because I've been far too busy to actually read into this as much as I would like -- but here it goes:

It's basically a progressive tax on wages -- you could think of it like a payroll withholding tax, with the typical marginal tax brackets, in lieu of an actual sales-tax-esque mark-up. The implication is that businesses and investors would pay a flat rate at the highest marginal rate, whereas there would be some sort of phase-out provision for low-income workers, comparable to the EITC.

The implication is that a wage tax is, effectively, the same thing as a consumption tax -- avoids double taxation all together, removes distortions that encourage present consumption at the expense of savings and thus future consumption, etc.


Is the consumer tax paid yearly, like with income tax? If so, it sacrifices perfect compliance for extremely low compliance. Income tax compliance is 2/3 at most, and it's easier to hide cash purchases than actual income. Also, filing your returns and having to dig up every receipt you've ever gotten sounds ridiculous (like Mitch Hedberg musing on why he would ever need a receipt for a donut).

No, it would, to my understanding, be levied in the same way as a payroll tax -- i.e., taken out of weekly or bimonthly earnings -- so compliance wouldn't be much of an issue, though I agree it would be in some formulations.


The reason sales tax is done at point of sale is perfect compliance. But there'd be no way for merchants to implement a progressive tax. They have no way of knowing the customer's annual earnings.

I don't think a sales tax would necessarily translate into perfect compliance; but, nevertheless, I think this is right.

The point isn't to have a literal progressive sales tax to the effect of, "if you earn above X, your rate is Y percent," but to have what amounts to a progressive tax on funds available for consumption, but unlike an income tax, it doesn't add wage and capital income.

Also, it just seems stupid to me in general to have a progressive consumption tax. Our economy is not geared towards having a high savings rate (our economy is consumption driven, unlike say China's), and the rich's MPC is already low enough. A progressive tax would lower their MPC even more. It provides a disincentive to consume to the one group whose consumption we actually need to increase.

I completely disagree with this for a number of reasons, first because this would *not* by any means translate into a lower MPC.

(Interestingly enough, China is actually transitioning to a consumption-based economy, primarily because it wants the yuan to compete with the dollar on a global scale, and its forex manipulation hasn't exactly gone over well on a global scale).

Second, I disagree entirely that consumption is what "we need to increase." There's a tendency to equate consumption with demand, though obviously that is far from the case. There's a reasonable body of research -- that I can't seem to find at the moment, though I believe it came out of the St. Louis Fed -- suggesting that investment-led recoveries are far more robust than consumption-led recoveries, which is consistent with the fact that investment is the most volatile portion of GDP, meaning that it's most responsible and associated with short-run output fluctuations. Increasing the savings rate -- which is nearly at historic lows, though much of that is a function of endogenous changes in fiscal policy -- would increase the amount of funds available for investment, after which monetary policy would simply take the wheel.

Third, there's plenty of evidence -- and this is the basis for the Solow-growth model, actually -- that higher savings is associated with faster long-run growth, and that increased capital accumulation tends to lead to higher total factor productivity and thus higher real per capita GDP. Cross-country variations in TFP, of course, are hard to properly measure, though a faster savings rate to rotate the investment function upward are the primary way of reaching what is called the "golden rule" level of capital -- i.e., maximizing future levels of consumption per worker.

If we had less consumption prior to 2008, for example, the financial crisis would have resulted in more money being lost.

No, the financial crisis of 2008 was partly *driven* by an unmerited increase in autonomous spending, driven by artificially inflated home values; without that consumption -- and, frankly, I do not why you're insinuating that a progressive consumption tax would reduce consumption, when in fact it would do the opposite (if anything, it would only reduce consumption amongst the affluent who would bear the highest tax) -- which was driven by people borrowing against artificially inflated collateral, the subsequent deleveraging cycle (which Ken Rogoff called a "debt supercycle") would have been far more mild, and the recovery less tepid, because the reason recessions following financial crises are so bad is that they're driven by massive accumulations in private-sector debt: that results in a prolonged period of deleveraging, and THAT depresses consumption (Rogoff and Reinhart 2009, Romer and Romer 2015).

Even if this plan depressed consumption in the short run, via a basic Solow Model, it would decrease current consumption, increase current investment, and then increase future consumption by significantly increasing capital accumulation.

There's a limit to good sources of investment capital, which is why junk mortgage backed securities took off.

Debt instruments aren't the type of investment capital I'm talking about. In fact, they aren't even included in the GDP calculation. I'm talking about physical capital -- machines, for instance, that boost productivity, or additional inventory investment, which by boosting productivity, also tends to boost wages.

He said tl;dr m8 .__________________.
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4/25/2015 8:16:53 PM
Posted: 1 year ago
At 4/25/2015 8:10:45 PM, ResponsiblyIrresponsible wrote:
At 4/25/2015 7:53:08 PM, bluesteel wrote:
I fail to understand how this is properly labeled a consumption tax. That's an income tax.

It isn't, though, because an income tax is levied on wage *and* capital income; this isn't, and the tax is levied prior to being dolled out -- in other words, it's reducing both current and future consumption by X percent, with X being the average tax rate paid by some individual person.

If you're interested, Scott Sumner has a good post fleshing out why these are effectively the same thing: http://www.themoneyillusion.com...

I don't know what you mean by "wage" income in this context. Capital income is already taxed at a much lower rate than income (capital gains tax).

Wage income is what you physically earn from your labor -- capital income was once earned from labor, but represents deferred consumption. Capital income is actually subject, in total, to a much higher tax rate than wages because it's taxed twice -- this tax does away with that.

Oh okay, so eliminates capital gains too. Which means Warren Buffet pays an effectively zero percent tax rate? He doesn't take a traditional pay check.


Historical data is meaningless. Investment driven recoveries are better because there were investment opportunities, e.g. Asian Tiger development. You're looking at historical anomalies and trying to generalize them to always hold. Without consumption, there's no reason to invest in capital stock (e.g. the Great Depression).

I don't think it's by any means meaningless, but let's even take your argument at face value: surely, over time, there's a diminishing returns to capital accumulation. No one denies that, but the fact of the matter is that investment spending hasn't rebounded even close to as much as consumption has (in fact, if it had been, GDP would have grown at a significantly faster rate -- about 200 basis points, in fact [https://www.stlouisfed.org...]).

I just don't see how that can be true. If there are all these uber profitable investment opportunities out there, why are wealthy people choosing not to invest then?
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4/25/2015 8:17:14 PM
Posted: 1 year ago
At 4/25/2015 8:16:04 PM, RevNge wrote:
He said tl;dr m8 .__________________.

He responded to it, lol -- and I think his responses were fairly lengthy themselves.

I'm perfectly willing to debate this, irrespective of the fact that I *should* be writing this paper...
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4/25/2015 8:23:16 PM
Posted: 1 year ago
At 4/25/2015 8:16:53 PM, bluesteel wrote:
Oh okay, so eliminates capital gains too. Which means Warren Buffet pays an effectively zero percent tax rate? He doesn't take a traditional pay check.

It's not an effectively zero tax. In fact, he paid a higher tax on his capital income than he would have had he kept what he earned in labor income and consumed with it in the present, in lieu of saving it.

As an illustration:

Let's say we both earn $10 today, and we're tax at 10%, and thus we each pay 1 dollar. In this scenario, you opt to consume with the remaining $9, meaning your effective tax rate is 10%; let's say that I chose to consume $5 and save $4. We earned the same in PV terms assuming we can access the same discount rate, though I'll nevertheless be taxed *again* on what I earned from whatever I invested the $4.

I just don't see how that can be true. If there are all these uber profitable investment opportunities out there, why are wealthy people choosing not to invest then?

Because the economy sucks, lol, and NGDP expectations -- which is a fancy, wonkish way of saying expectations of aggregate demand -- are in the toilet.

Not to mention, the private sector doesn't exactly have full reign over investing in infrastructure projects; maybe it should have some ability to do so, though.

Heck, I think some liberal writer from the Nation supported that, and then Ken Rogoff advocated for it. I could endorse that, lol.
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4/25/2015 8:23:56 PM
Posted: 1 year ago

I don't think the Depression even represents that point at all. The Depression initially resulted from overly tight monetary policy, because the Fed decided to contact the money supply considerably from 1929 to 1932 to prick a stock-market bubble -- it was driven by a decline in *investment* spending.

You can't honestly posit a single cause for the Great Depression like that. Scholars don't agree on the cause, and aggregate demand was a huge factor in why investment declined, as were trade protection battles that made aggregate demand in other countries a non-factor in our economy.


Second, investment isn't a function solely of consumption, but of NGDP expectations -- consumption is a crucial component of that, surely, but insofar as an investment can generate a positive return (and consumption is factored into that, of course), there's reason to undertake it. Not to mention, investment for a business can quite literally be equated with consumption for a retailer -- and via the multiplier effect that I'm sure you accept, that would induce hiring and thus faster consumption, etc. Not to mention, if there's actually an incentive to invest, businesses are going to directly hire workers, anyway.

The least risky businesses to invest in are the ones who earn so much in profits that they don't need investment funds. The most risky are the ones that need cash infusions, and disincentivizing consumption doesn't alter an investor's risk profile.


Third, there a myriad of profitable investment projections. Heck, infrastructure now, with a crapton of unemployed -- perhaps structurally unemployed, at this rate -- people and deteriorating infrastructure, a WPA would be extremely profitable right now.

WPA = government. Infrastructure is a collective action problem if you expect it to be done by the private sector. This has nothing to do with a consumption tax, unless the tax raises the total tax rate, which you could do with an income tax as well.



Third, there's plenty of evidence -- and this is the basis for the Solow-growth model, actually -- that higher savings is associated with faster long-run growth, and that increased capital accumulation tends to lead to higher total factor productivity and thus higher real per capita GDP. Cross-country variations in TFP, of course, are hard to properly measure, though a faster savings rate to rotate the investment function upward are the primary way of reaching what is called the "golden rule" level of capital -- i.e., maximizing future levels of consumption per worker.

If we had less consumption prior to 2008, for example, the financial crisis would have resulted in more money being lost.

No, the financial crisis of 2008 was partly *driven* by an unmerited increase in autonomous spending, driven by artificially inflated home values; without that consumption -- and, frankly, I do not why you're insinuating that a progressive consumption tax would reduce consumption, when in fact it would do the opposite (if anything, it would only reduce consumption amongst the affluent who would bear the highest tax) -- which was driven by people borrowing against artificially inflated collateral, the subsequent deleveraging cycle (which Ken Rogoff called a "debt supercycle") would have been far more mild, and the recovery less tepid, because the reason recessions following financial crises are so bad is that they're driven by massive accumulations in private-sector debt: that results in a prolonged period of deleveraging, and THAT depresses consumption (Rogoff and Reinhart 2009, Romer and Romer 2015).

Pretty much everyone who has written about the financial crisis (e.g. Charles Morris) agrees that the mortgage bubble was a drop in the bucket, and the economy could have easily recovered from it. It was the CDO's and mortgage backed securities that amplified the effect of the bubble bursting to such a large extent that it contracted financial markets to the point where there was no investment capital left to do anything. We built a giant bubble on top of a smaller bubble.

I wasn't talking about the initial cause of the recession; Morris is right: CDO's and CDO's-cubed and credit-default-swaps and all this other hokus-pokus BS -- and the global ramifications -- is what made the recession as bad as it actually was. But the reason it was so prolonged was the impact on consumer balanced sheets, both domestic and abroad, and the fact that even a pickup in employment -- since, mind you, the recession officially ended in June 2009 -- wasn't enough to actually bolster consumption.

So lower consumption is bad... Show me a non-highly stratified investment driven economy that you would call a success.



Even if this plan depressed consumption in the short run, via a basic Solow Model, it would decrease current consumption, increase current investment, and then increase future consumption by significantly increasing capital accumulation.

There's a limit to good sources of investment capital, which is why junk mortgage backed securities took off.

Debt instruments aren't the type of investment capital I'm talking about. In fact, they aren't even included in the GDP calculation. I'm talking about physical capital -- machines, for instance, that boost productivity, or additional inventory investment, which by boosting productivity, also tends to boost wages.

There's no large business in the modern economy that refuses to boost productivity due to a lack of investment capital. If automation would boost their profits, they do it.

Right now, that certainly isn't the case; business investment is in the toilet, actually, and has been for the past seven months of available. Granted, that's beyond the scope of this discussion, since that's driven by an appreciating dollar and falling oil prices -- the latter of which is a demand-side issue (i.e., purview of the Fed) and the latter a supply-side issue.

The point is, investment capital *is* necessary to actually invest in any project; if we disregarded that entirely, under normal circumstances interest rates would shoot the roof. Even if that were to boost productivity, that wouldn't be profitable.

And most of the wealthy's investment capital goes to investing in stocks or other investment vehicles, not VC funding of startups.

I don't think that's true at all; even if it were, rising stock prices are associated with a positive wealth effect, so it's a wash.
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4/25/2015 8:30:02 PM
Posted: 1 year ago
At 4/25/2015 8:23:16 PM, ResponsiblyIrresponsible wrote:
At 4/25/2015 8:16:53 PM, bluesteel wrote:
Oh okay, so eliminates capital gains too. Which means Warren Buffet pays an effectively zero percent tax rate? He doesn't take a traditional pay check.

It's not an effectively zero tax. In fact, he paid a higher tax on his capital income than he would have had he kept what he earned in labor income and consumed with it in the present, in lieu of saving it.

All of his earnings come from capital investment. If he paid it to himself as a salary, he'd be taxed at the highest income tax rate, which is much higher than the capital gains rate. He doesn't earn a salary as CEO, pay income tax, and then reinvest it in Berkshire. He just earns money directly from his investments.


As an illustration:

Let's say we both earn $10 today, and we're tax at 10%, and thus we each pay 1 dollar. In this scenario, you opt to consume with the remaining $9, meaning your effective tax rate is 10%; let's say that I chose to consume $5 and save $4. We earned the same in PV terms assuming we can access the same discount rate, though I'll nevertheless be taxed *again* on what I earned from whatever I invested the $4.

I just don't see how that can be true. If there are all these uber profitable investment opportunities out there, why are wealthy people choosing not to invest then?

Because the economy sucks, lol, and NGDP expectations -- which is a fancy, wonkish way of saying expectations of aggregate demand -- are in the toilet.

So how does a higher savings rate matter if you don't fix agg demand? The proposal only seems to work if it lowers the effective tax rates paid by the middle class significantly and offsets it with much steeper consumption taxes on the upper class. This is effectively equivalent though to tax cuts for the middle class under the current system, and raising the income tax on the top 1%.


Not to mention, the private sector doesn't exactly have full reign over investing in infrastructure projects; maybe it should have some ability to do so, though.

Heck, I think some liberal writer from the Nation supported that, and then Ken Rogoff advocated for it. I could endorse that, lol.
You can't reason someone out of a position they didn't reason themselves into - Jonathan Swift (paraphrase)
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4/25/2015 8:31:09 PM
Posted: 1 year ago
At 4/25/2015 8:23:16 PM, ResponsiblyIrresponsible wrote:


Regardless, I think we should celebrate turning this thread into one Mikal no longer has any interest in reading.
You can't reason someone out of a position they didn't reason themselves into - Jonathan Swift (paraphrase)
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4/25/2015 8:31:45 PM
Posted: 1 year ago
At 4/25/2015 8:16:04 PM, RevNge wrote:
At 4/25/2015 7:30:12 PM, ResponsiblyIrresponsible wrote:
At 4/25/2015 7:05:35 PM, bluesteel wrote:
If I had anything more invested in this topic that a cursory disbelief then I might actually read an entire research paper to get my answer. But I don't. You would be doing me a large favor by giving me a tl;dr on its implement.

Sure. I didn't know you actually wanted to discuss this detail, and frankly I haven't much time to actually flesh my thoughts out on this entirely -- mainly because I've been far too busy to actually read into this as much as I would like -- but here it goes:

It's basically a progressive tax on wages -- you could think of it like a payroll withholding tax, with the typical marginal tax brackets, in lieu of an actual sales-tax-esque mark-up. The implication is that businesses and investors would pay a flat rate at the highest marginal rate, whereas there would be some sort of phase-out provision for low-income workers, comparable to the EITC.

The implication is that a wage tax is, effectively, the same thing as a consumption tax -- avoids double taxation all together, removes distortions that encourage present consumption at the expense of savings and thus future consumption, etc.


Is the consumer tax paid yearly, like with income tax? If so, it sacrifices perfect compliance for extremely low compliance. Income tax compliance is 2/3 at most, and it's easier to hide cash purchases than actual income. Also, filing your returns and having to dig up every receipt you've ever gotten sounds ridiculous (like Mitch Hedberg musing on why he would ever need a receipt for a donut).

No, it would, to my understanding, be levied in the same way as a payroll tax -- i.e., taken out of weekly or bimonthly earnings -- so compliance wouldn't be much of an issue, though I agree it would be in some formulations.


The reason sales tax is done at point of sale is perfect compliance. But there'd be no way for merchants to implement a progressive tax. They have no way of knowing the customer's annual earnings.

I don't think a sales tax would necessarily translate into perfect compliance; but, nevertheless, I think this is right.

The point isn't to have a literal progressive sales tax to the effect of, "if you earn above X, your rate is Y percent," but to have what amounts to a progressive tax on funds available for consumption, but unlike an income tax, it doesn't add wage and capital income.

Also, it just seems stupid to me in general to have a progressive consumption tax. Our economy is not geared towards having a high savings rate (our economy is consumption driven, unlike say China's), and the rich's MPC is already low enough. A progressive tax would lower their MPC even more. It provides a disincentive to consume to the one group whose consumption we actually need to increase.

I completely disagree with this for a number of reasons, first because this would *not* by any means translate into a lower MPC.

(Interestingly enough, China is actually transitioning to a consumption-based economy, primarily because it wants the yuan to compete with the dollar on a global scale, and its forex manipulation hasn't exactly gone over well on a global scale).

Second, I disagree entirely that consumption is what "we need to increase." There's a tendency to equate consumption with demand, though obviously that is far from the case. There's a reasonable body of research -- that I can't seem to find at the moment, though I believe it came out of the St. Louis Fed -- suggesting that investment-led recoveries are far more robust than consumption-led recoveries, which is consistent with the fact that investment is the most volatile portion of GDP, meaning that it's most responsible and associated with short-run output fluctuations. Increasing the savings rate -- which is nearly at historic lows, though much of that is a function of endogenous changes in fiscal policy -- would increase the amount of funds available for investment, after which monetary policy would simply take the wheel.

Third, there's plenty of evidence -- and this is the basis for the Solow-growth model, actually -- that higher savings is associated with faster long-run growth, and that increased capital accumulation tends to lead to higher total factor productivity and thus higher real per capita GDP. Cross-country variations in TFP, of course, are hard to properly measure, though a faster savings rate to rotate the investment function upward are the primary way of reaching what is called the "golden rule" level of capital -- i.e., maximizing future levels of consumption per worker.

If we had less consumption prior to 2008, for example, the financial crisis would have resulted in more money being lost.

No, the financial crisis of 2008 was partly *driven* by an unmerited increase in autonomous spending, driven by artificially inflated home values; without that consumption -- and, frankly, I do not why you're insinuating that a progressive consumption tax would reduce consumption, when in fact it would do the opposite (if anything, it would only reduce consumption amongst the affluent who would bear the highest tax) -- which was driven by people borrowing against artificially inflated collateral, the subsequent deleveraging cycle (which Ken Rogoff called a "debt supercycle") would have been far more mild, and the recovery less tepid, because the reason recessions following financial crises are so bad is that they're driven by massive accumulations in private-sector debt: that results in a prolonged period of deleveraging, and THAT depresses consumption (Rogoff and Reinhart 2009, Romer and Romer 2015).

Even if this plan depressed consumption in the short run, via a basic Solow Model, it would decrease current consumption, increase current investment, and then increase future consumption by significantly increasing capital accumulation.

There's a limit to good sources of investment capital, which is why junk mortgage backed securities took off.

Debt instruments aren't the type of investment capital I'm talking about. In fact, they aren't even included in the GDP calculation. I'm talking about physical capital -- machines, for instance, that boost productivity, or additional inventory investment, which by boosting productivity, also tends to boost wages.

He said tl;dr m8 .__________________.

error 404.
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4/25/2015 8:34:30 PM
Posted: 1 year ago
At 4/25/2015 8:23:56 PM, bluesteel wrote:

I don't think the Depression even represents that point at all. The Depression initially resulted from overly tight monetary policy, because the Fed decided to contact the money supply considerably from 1929 to 1932 to prick a stock-market bubble -- it was driven by a decline in *investment* spending.

You can't honestly posit a single cause for the Great Depression like that. Scholars don't agree on the cause, and aggregate demand was a huge factor in why investment declined, as were trade protection battles that made aggregate demand in other countries a non-factor in our economy.

But you just agreed with me, lol. You said that aggregate demand fell -- investment is a *component* of aggregate demand (11 percent, in fact), and that resulted from a stock-market bubble, tight monetary policy, and subsequent deleveraging.

It's true that there's debate over what ultimately made the Depression as bad it was -- deleveraging or tight money -- but almost no one would deny that a fall in autonomous spending was what made both the Depression and Great Recession as bad as they were.

The least risky businesses to invest in are the ones who earn so much in profits that they don't need investment funds. The most risky are the ones that need cash infusions, and disincentivizing consumption doesn't alter an investor's risk profile.

It isn't a matter of discentivizing consumption -- but of removing discentives on savings. Via basic IS-LM, an increase in savings leads to a lower discount rate, and thus higher discounted cash flows and a higher NPV, which is used to weigh whether investors ought to consider a project, even adjusting for the risk of that project.

In other words, a lower cost of financing -- or you could even say a lower opportunity cost of investing -- actually makes more risky projects attractive.

WPA = government. Infrastructure is a collective action problem if you expect it to be done by the private sector. This has nothing to do with a consumption tax, unless the tax raises the total tax rate, which you could do with an income tax as well.

Is =/= Ought; I was giving you an example of a profitable investment project. Surely there are many, though infrastructure -- and perhaps education -- are easily amongst the most profitable at the moment. I could foresee some sort of public-private partnership in funding infrastructure projects.

So lower consumption is bad... Show me a non-highly stratified investment driven economy that you would call a success.

When did I say that lower consumption is bad, or that we should even have an investment-driven economy?

The goal of the model I cited is to maximize consumption in the long run -- but to actually do that, it's necessary, in some cases, to reduce it in the short run, because savings (deferred consumption) is what actually increases capital accumulation, TFP, etc. and leads to future increases in consumption.

Consumption is and always will be a considerably larger portion of GDP than investment. I never suggested that it shouldn't be -- but only that investment is far more volatile than consumption, and thus the predominant cause of recessions.
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4/25/2015 8:44:19 PM
Posted: 1 year ago
At 4/25/2015 8:34:30 PM, ResponsiblyIrresponsible wrote:
At 4/25/2015 8:23:56 PM, bluesteel wrote:

I don't think the Depression even represents that point at all. The Depression initially resulted from overly tight monetary policy, because the Fed decided to contact the money supply considerably from 1929 to 1932 to prick a stock-market bubble -- it was driven by a decline in *investment* spending.

You can't honestly posit a single cause for the Great Depression like that. Scholars don't agree on the cause, and aggregate demand was a huge factor in why investment declined, as were trade protection battles that made aggregate demand in other countries a non-factor in our economy.

But you just agreed with me, lol. You said that aggregate demand fell -- investment is a *component* of aggregate demand (11 percent, in fact), and that resulted from a stock-market bubble, tight monetary policy, and subsequent deleveraging.

I'm still not clear on how a consumption tax doesn't affect agg demand. It depends what the actual alternation is in effective tax rates. If there's no alteration, you've done nothing. If you do alter the incentive structure, the reduction in consumption incentives could outweigh the 11% referenced above.


It's true that there's debate over what ultimately made the Depression as bad it was -- deleveraging or tight money -- but almost no one would deny that a fall in autonomous spending was what made both the Depression and Great Recession as bad as they were.

The least risky businesses to invest in are the ones who earn so much in profits that they don't need investment funds. The most risky are the ones that need cash infusions, and disincentivizing consumption doesn't alter an investor's risk profile.

It isn't a matter of discentivizing consumption -- but of removing discentives on savings. Via basic IS-LM, an increase in savings leads to a lower discount rate, and thus higher discounted cash flows and a higher NPV, which is used to weigh whether investors ought to consider a project, even adjusting for the risk of that project.

In other words, a lower cost of financing -- or you could even say a lower opportunity cost of investing -- actually makes more risky projects attractive.

I still don't get your point though about how investment in projects doesn't trade off with investment in risky vehicles like junk securities (but AAA rated!). Securities are easier to find in large quantities. You can't just throw money at any business; you gotta review business plans. Otherwise, you just have another dot com bubble.


WPA = government. Infrastructure is a collective action problem if you expect it to be done by the private sector. This has nothing to do with a consumption tax, unless the tax raises the total tax rate, which you could do with an income tax as well.

Is =/= Ought; I was giving you an example of a profitable investment project. Surely there are many, though infrastructure -- and perhaps education -- are easily amongst the most profitable at the moment. I could foresee some sort of public-private partnership in funding infrastructure projects.

That's not really is-ought, unless there's a viable way to have private investment in those things in the current system. Private investment in education are horrible (see any report on for-profit colleges). You know what a collective action problem is, and why government is necessary to solve it. I don't see how you sidestep that with an *ought.* You can't fiat collaboration, unless the government directly takes over.

So lower consumption is bad... Show me a non-highly stratified investment driven economy that you would call a success.

When did I say that lower consumption is bad, or that we should even have an investment-driven economy?

The goal of the model I cited is to maximize consumption in the long run -- but to actually do that, it's necessary, in some cases, to reduce it in the short run, because savings (deferred consumption) is what actually increases capital accumulation, TFP, etc. and leads to future increases in consumption.

Is the goal for all consumers to defer their consumption until they're older? There's psychological reasons that doesn't work, something the field of Econ essentially ignores.


Consumption is and always will be a considerably larger portion of GDP than investment. I never suggested that it shouldn't be -- but only that investment is far more volatile than consumption, and thus the predominant cause of recessions.
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4/25/2015 8:44:48 PM
Posted: 1 year ago
At 4/25/2015 8:30:02 PM, bluesteel wrote:
All of his earnings come from capital investment. If he paid it to himself as a salary, he'd be taxed at the highest income tax rate, which is much higher than the capital gains rate. He doesn't earn a salary as CEO, pay income tax, and then reinvest it in Berkshire. He just earns money directly from his investments.

But his salary -- the initial funds -- didn't magically emerge from nowhere; they were a function of deferred consumption which, per my example, is available to everyone. The point is, under this system, Buffet would have paid a fair higher tax when he earned those dollars as wage income -- perhaps as high as 50 or 60%, and that would have encouraged him to save in lieu of invest.

What's interesting, also, is that he would be subjected to the highest marginal tax rate under this system. You could even say we're jacking his taxes up.

So how does a higher savings rate matter if you don't fix agg demand?

Great question -- it doesn't, but if we don't fix aggregate demand, nothing works. We may as well pack our bags and move to Greece.

I don't think fiscal policy has any role in actually ameliorating aggregate demand, but the point is that stabilizing demand, in an environment of flexible interest rates, would also equate savings and investment: if savings is higher than investment, the economy sucks; if it's lower, we're overheating, so stabilizing demand can actually fix the savings-investment imbalance.

The proposal only seems to work if it lowers the effective tax rates paid by the middle class significantly and offsets it with much steeper consumption taxes on the upper class.

That would be the end result, actually, though I don't think that's by any means necessary -- that would stipulate that it only works insofar as it stimulates consumption amongst the middle class and the poor, which isn't the end goal. If anything, it eliminates tax distortions in the existing code that levee a much higher rate on savings.

This is effectively equivalent though to tax cuts for the middle class under the current system, and raising the income tax on the top 1%.

Indirectly, I guess you could say that -- but that would only, honestly, be the case for absurd amounts of wage income.

Not to mention, the private sector doesn't exactly have full reign over investing in infrastructure projects; maybe it should have some ability to do so, though.

Heck, I think some liberal writer from the Nation supported that, and then Ken Rogoff advocated for it. I could endorse that, lol.
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4/25/2015 8:56:19 PM
Posted: 1 year ago
At 4/25/2015 8:44:19 PM, bluesteel wrote:

Lol, dude, I was still responding to your last post as the notification for this one came in...

I'll respond to this one, but after I really need to go write this paper -- so I'll be back to derail Mikal's thread after that's done.

I'm still not clear on how a consumption tax doesn't affect agg demand. It depends what the actual alternation is in effective tax rates. If there's no alteration, you've done nothing. If you do alter the incentive structure, the reduction in consumption incentives could outweigh the 11% referenced above.

It could, ceteris paribus, impact *consumption* levels insofar as the increase in savings amongst the affluent outweighs the increase in consumption amongst the poor and middle class, but because savings are channelled to investment, anyway, it won't impact overall demand.

And, not to mention, it couldn't possibly impact demand because of monetary offset (a topic for another day, lol).

It's true that there's debate over what ultimately made the Depression as bad it was -- deleveraging or tight money -- but almost no one would deny that a fall in autonomous spending was what made both the Depression and Great Recession as bad as they were.

The least risky businesses to invest in are the ones who earn so much in profits that they don't need investment funds. The most risky are the ones that need cash infusions, and disincentivizing consumption doesn't alter an investor's risk profile.

It isn't a matter of discentivizing consumption -- but of removing discentives on savings. Via basic IS-LM, an increase in savings leads to a lower discount rate, and thus higher discounted cash flows and a higher NPV, which is used to weigh whether investors ought to consider a project, even adjusting for the risk of that project.

In other words, a lower cost of financing -- or you could even say a lower opportunity cost of investing -- actually makes more risky projects attractive.

I still don't get your point though about how investment in projects doesn't trade off with investment in risky vehicles like junk securities (but AAA rated!). Securities are easier to find in large quantities. You can't just throw money at any business; you gotta review business plans. Otherwise, you just have another dot com bubble.

It does trade off -- what you call investing in securities I call "savings," lol. You could even cross-apply my earlier example, though I doubt we'd be using a discount rate from a junk security (though who knows?). But the money allocated toward savings, again, actually tends to turn into investment opportunities , so there isn't a long-run trade off unless there's an imbalance, which the Fed should handle.


WPA = government. Infrastructure is a collective action problem if you expect it to be done by the private sector. This has nothing to do with a consumption tax, unless the tax raises the total tax rate, which you could do with an income tax as well.

Is =/= Ought; I was giving you an example of a profitable investment project. Surely there are many, though infrastructure -- and perhaps education -- are easily amongst the most profitable at the moment. I could foresee some sort of public-private partnership in funding infrastructure projects.

That's not really is-ought, unless there's a viable way to have private investment in those things in the current system.

There is, though. I'm sure there's been research on public-private infrastructure projects, and I'm pretty sure it's been tried before historically -- particularly in the UK -- but I'm blanking; I'll dig something up when I'm not drowning in homework.

Private investment in education are horrible (see any report on for-profit colleges).

I haven't seen any evidence that it's necessarily "horrible," but even I accepted that, there are surely plenty of other worthy projects.

You know what a collective action problem is, and why government is necessary to solve it. I don't see how you sidestep that with an *ought.* You can't fiat collaboration, unless the government directly takes over.

I know what a collective-action problem is, but I don't see how this would result in one, especially when infrastructure problems are a direct boon to businesses in the vicinity.

So lower consumption is bad... Show me a non-highly stratified investment driven economy that you would call a success.

When did I say that lower consumption is bad, or that we should even have an investment-driven economy?

The goal of the model I cited is to maximize consumption in the long run -- but to actually do that, it's necessary, in some cases, to reduce it in the short run, because savings (deferred consumption) is what actually increases capital accumulation, TFP, etc. and leads to future increases in consumption.

Is the goal for all consumers to defer their consumption until they're older? There's psychological reasons that doesn't work, something the field of Econ essentially ignores.

Not necessarily until their older, and of course we're discounting infinitely lived persons -- though they're, wrongly, included in various intertemporal models of optimization.

It's less of a "let's have all workers defer consumption" issue, then it is an attempt to account for exceptionally low savings rate, which most if not all economists readily acknowledge is a problem.


Consumption is and always will be a considerably larger portion of GDP than investment. I never suggested that it shouldn't be -- but only that investment is far more volatile than consumption, and thus the predominant cause of recessions.
~ResponsiblyIrresponsible

DDO's Economics Messiah