Care About the Future? Then Lower Capital Taxes

Capital taxes are a disincentive to save, a disincentive to work and a disincentive to innovate.

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Deep inside a West Texas mountain, engineers are building a clock designed to tick for 10,000 years. This is no easy task, and it won’t be cheap.  Jeff Bezos, the founder of Amazon.com, has already sunk $43 million into this project. A reasonable person might wonder why.

According to the Long Now Foundation, which sponsors the project, the goal is to “foster long-term thinking and responsibility in the framework of the next 10,000 years.”  I’m all for thinking and responsibility, but there are better ways to advance them than building a clock.

Let’s start with the “thinking” part.  Here’s something to think about:  What do we actually owe to future generations?  That’s a question about moral philosophy, and I don’t know the answer.  On the one hand, it seems like a good thing to care — at least a bit — about distant strangers, and it’s not obvious that the distant strangers who will be born in the year 2512, say, are any less deserving than the distant strangers we share the earth with today.

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That suggests we owe them at least some consideration. On the other hand, those distant strangers will exist only because you, I and our neighbors have decided to reproduce.  Almost nobody believes that reproduction is a moral imperative, which means that almost everyone believes it’s perfectly okay to deny our descendants the gift of life. But if we don’t even owe them life, then how can we owe them anything else?

Personally, I’m convinced by both arguments, even though they reach opposite conclusions. (This happens to me a lot when I read philosophy, which is how I know that I wasn’t cut out to be a philosophy major.) If you care about this kind of thing, there are a lot of arguments and counter-arguments to study and dissect.  That’s hard work. I’m unclear as to how a 10,000 year clock is going to make it any easier.

But let’s suppose you’ve cleared through all that philosophical brush (or simply decided to bypass it) and decided that yes indeed, we’ve been shortchanging our future descendants and we ought to reform our behavior. Okay, then how do we get ourselves and our neighbors to do that? That’s a question about economics, and this one I can answer for you.

There are only three things you and I can do to make the future world a better place.  First, we can consume less, leaving more resources behind. Second, we can work harder, planting trees, building factories and writing poems that will live on after we’re gone. Third, we can innovate, advancing science and technology so that our children’s children’s children can make better use of the resources they inherit.

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As it happens, there’s one key policy variable that drives all three of these things, and that’s the tax rate on capital income (which includes interest, dividends, corporate income and capital gains). Capital taxes are a disincentive to save, and when people don’t save they consume instead. Capital taxes are a disincentive to work and a disincentive to innovate.

This is not a plea for lowering taxes in general, and it’s not a plea for making the tax system either more or less progressive. (If you want to soak the rich, there are plenty of things to tax besides capital.) As a matter of fact, this isn’t even a plea for lowering taxes on capital. It’s simply an observation that if your goal is to leave a better world for our descendants, then your best bet is to support lower capital taxes.

So if the clockmakers are out to get us to think harder about what we owe our descendants, they should be calling attention to the thoughtful philosophical arguments that have been made on both sides of this question. If they’re simply out to get us to leave the world a better place, then they should be lobbying for a zero tax rate on capital income (a policy many economists support for a great variety of reasons, as it happens). Either way, building a clock seems like rather a waste of time.

Steven Landsburg is a professor of economics at the University of Rochester and the author of The Armchair Economist, a revised and updated edition of which was published earlier this year. Learn more about the book at www.armchairecon.comLandsburg also blogs regularly at www.TheBigQuestions.com.

14 comments
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Michael Lauck
Michael Lauck

Many people find the fact that Landsburg doesn't use data that it discredits the entire article. Nothing Landsburg says, though, is completely outrageous. It's well understood if you tax something, people will do less of it.  The same is true of investing in capital. Do I need to cite a science page every time I say there are eight planets in the solar system?

Kevin Martin
Kevin Martin

Yes, agreed, but your mistake is assuming that it will benefit the overall economy.  Why just lower taxes on capital and not labor?  Both generate real wealth.  How about lower taxes for everyone and let people decide where to best spend or invest their money.

DrFriedman
DrFriedman

If you tax something, like capital, you get less of it.  If you subsidize something, like poverty, you get more of it.

Damien Samways
Damien Samways

Speaking of philosophy, on what moral grounds does one  suggest that income generated by investment should be taxed less than that produced by direct labor? The only answer you hear from conservatives, which for those with libertarian leanings is somewhat contradictory, is that the lower rate is necessary to offset the risk-associated disincentive to invest. (A contradictory - perhaps in some cases consciously duplicitous - position because for folk who argue less government intrusion in the market place, saying it's nevertheless necessary for government to manipulate economic incentives in order to tell us to save rather than, erm, actually work, doesn't quite follow, does it?)

I too find the flat tax on all income to be a compelling solution. I thought it was pretty well agreed by conservatives that government using the tax system as a tool for social engineering was unacceptable. The discrepancy between capital gains and labor income is as good an example as any of precisely this motive at work.

jessicamiller758
jessicamiller758

Everyone wants to secure their future and want to stay in the business world.  There factors needed to consider  before making any decisions.

Jessica Miller

Google voice fax 

 

KateNYC
KateNYC

Sheila Bair, a Republican and former chair of the FDIC argues against this in her interview with Bill Moyers.  She notes there is no evidenc that the current disparity between capital gains and income tax contributes to jobs at all.  She questions why a hedge fund manager should pay far less tax than a scientist working to cure disease.

http://billmoyers.com/segment/...

KateNYC
KateNYC

Sheila Bair, a Republican and former chair of the FDIC argues against this in her interview with Bill Moyers.  She notes there is no evidence that the current disparity between capital gains and income tax contributes to jobs at all.  She questions why a hedge fund manager should pay far less tax than a scientist working to cure disease.

http://billmoyers.com/segment/...

Raymond Chuang
Raymond Chuang

How about just go to a no-loophole flat tax like what Steve Forbes proposed in 1996? If we had such an income tax system now the American economy would be BOOMING and millions of jobs, thousands of factories and hundreds of corporate headquarters will be coming back to the USA. 

EVERYONE knows that the current tax code based on Title 26, the Internal Revenue Code, is completely economy-inhibiting. If President Obama were to announce we go to a 17-18.5% no-loophole flat income tax he'd win in a huge landslide.

lantee
lantee

I weep inside at the idea this man teaches Economics anywhere, let alone at a University.  I hope his superiors read this article and put him to work cleaning bathrooms.  He obviously has too much time on his hands, poor man.

HanoiVN
HanoiVN

We welcome total economic collapse.  The MCs with their "skill-sets," "paradigm shifts" and "turnkey" douche-mastery will driven like cattle :)

Ben IncaHutz
Ben IncaHutz

Did Mitt Romney write this fact-less "article"? Most Americans dont pay any capital gains taxes unless they sell a home. The fact is alot of Americans are losing their home and will not be in a position to have to pay the tax. Only people in very good positions pay capital gains taxes. Lowering them will not help the future at all. They need to be raised. People like Mitt Romney who make ALL THEIR MONEY from investments are not job creators. They do not want to pay people a good salary. They prefer to outsource to keep costs down.  You want job creators? Just look at Steve Jobs and Steve Wozniak.  

Austinite
Austinite

As an old manager used to say:  "In God we trust, everyone else bring data." 

And I see no data to support your premise in the article.  Makes for a nice sound bite, maybe, but as to "why" capital tax (already ridiculously low) is a disincentive to work/save/innovate, nary one piece of evidence. 

Might be great for a millionaire/billionaire to pay even less of a percent than they do now in taxes.  Which, btw, is already a much lower percent than what a working stiff like me has to pay.  But how, exactly, does that make it better for the rest of us?  Will it magically produce more jobs?  Will it somehow contribute to anything (other than to the rich person's bank account)?

Heck, even Reagan thought both working folk and non-working folk (aka rich folk who live off of interest) should pay the same in taxes. 

Fatesrider
Fatesrider

What bothers me about this particular article is that there are no justifications or facts to support a conclusion.  As a work on philosophy, it fails all tests for rational thinking.  There are no logical connections in it at all.  Remove capital gains and have a better future? 

Superman couldn't have made that leap.

And anyone with even the most basic knowledge of economics knows that cutting taxes for those who have to actually worry about capital gains does jack for the economy.  There aren't enough of these people spending enough money in enough places to stimulate a depressed economy (and though the "great recession" may not have been given the title "the Second Great Depression", it seems a moot point to the millions who have been out of work for years).  They take their capital gains and reinvest it to get richer.

Capital gains are made on monies that were invested.  Investments do not stimulate a depressed economy.  This much I can prove because investments don't directly enter the monetary flow in an economy.  That money is "warehoused" for lack of a better term.  Businesses MAY use it (that is, spend it) to some degree, but it's not being spent on goods and services.  It's being used to inflate profits and portfolios which are then largely reinvested.  In short, investments keep money OUT of the economy.

The LAST thing it's ever used for is to hire new employees - especially if there is no demand for the goods or services the businesses that have been invested in do.

The ONLY thing that simulates an economy is money flowing.  SPENDING IT.  That generates greater demand for goods and services, which, in turn, generates a demand for more workers to meet the demand which in turn leads to NEW JOBS.  Spending money is what stimulates an economy - especially a depressed one.

As an example of this proof, I point to Europe.  Most of the money spent in Greece came from a socialist government which didn't control revenue very well.  When the economy slowed, tax revenue slowed.  Investments didn't help.  Bank agreements aren't helping.  The reason?  The people aren't getting enough money to spend to stimulate demand to stimulate new job growth.  In fact, the government is cutting back on spending, exacerbating the problem.  The more the government cuts back, the less money is being spent, the worse the situation goes.

I'm not advocating for a socialist government.  I'm advocating for getting money out of warehoused "investments" and into pockets of people who spend money.

Once the economy is going, businesses will need more revenue from investments to meet the demand, making a capital gains tax less attractive.  But while the only people are making money THROUGH capital gains are the rich getting richer, the capital gains tax should be RAISED and the money redistributed through the system - in effect robbing from the rich and giving to the poor - to jump-start the economy.  Until that demand is generated by flowing money, we'll be in a stagnant condition with little to no growth while the rich get richer and the rest of us get poorer.

An economy is like a car.  It needs to be fueled, tended to, cared for and maintained.  Money is the gas that runs the car.  Investments are the oil that keeps it running smoothly.  What the article is saying is we need more oil to get the car started.  Last time I looked, cars run on gas and can actually go without oil for a little while.  We need a government willing to see both sides of this issue (raising taxes AND cutting them) in order to tend to this particular machine.  Given the desperation and animosity to which the vocal radicals on the left and the right cleave to their stupidity, I don't see that happening until AFTER the bullets stop flying.

Gary McCray
Gary McCray

One of the problems with people is that they see things through their own particular microscope.

Mr. Lansberg sees them through the microscope of traditional economics and he sees the solutions to human problems through the application of those principles.

A bigger view of human problems indicates that they are largely caused by the application of traditional economic principles.

The huge imbalance of our current excesses is not going to be solved by taxes.

Only total economic collapse has sufficient weight to allow the possibility of determining a new future where our survival is even possible.