The ideas are interesting, but there is one really big suggestion: "we should instead make capital gains regressive over time" - this is the single best idea I've heard recently!
It would encourage self-sustaining growth instead of fly-by-night profits, made in the present at the expense of the future - ie let the market sort out which sectors are more likely to bring better long term outcomes, considering the current focus on short-term is a negative externality that should be fixed by government intervention.
The author also properly acknowledges that increasing tax on the top 1% will only be redistributive, and increase consumption - which might certainly have better effects on consumption than leaving that money to the top 1% who might keep saving it while there is no current shortage of capital.
But that is only a mechanical property of the progressive tax scheme (lower tax for lower incomes), which makes the redistributed money more likely to be spent instead of saved (or paid in tax) - yet as the author points out trading consumption for consumption is pointless given the current state of the economy.
It's quite a interesting time.
It seems like the current situation is not just a demand shock which can be treated with Keynesians stimulus, but a new kind of shock based on a slowdown of the progress of technology - especially of the "empowering kind".
I wonder how this will make us reassume the traditional models such as Solow (technology drives long term growth) or Romer (technology and education), since it now seems there are different kind of technology and education that we should invest in - and some that we should consider as negative externality (like humanities - I have nothing against such studies, but they should not be on the taxpayer dime)
I don't really see a slowdown in technology - not even the empowering kind. The most obvious example for me would be drones - the military is notoriously slow to adopt new technology, and yet drones have gone from nonexistent to core infrastructure in what, six years? Personal computing had a slow move from desktops to laptops, then a fast move from laptops to smartphones, a faster move from phones to tablets, and now Google is showing off its Glass project - five years after the iPhone and three after the iPad. Saas has exploded in recent years, etc., etc.
The problem I see is that none of this needs to employ many people anymore. How many people does Microsoft or IBM or Oracle employ? Compare that to Google or eBay or Yahoo! - and that to Facebook or Dropbox. Even for physical products, what does it take to "make stuff" anymore? Does anyone think that if Telsa gets to selling as many cars as Ford, they'll employ anywhere near the same number of people? Or have a supply chain that extends to hundreds of thousands/millions of workers?
Technology is constantly replacing human work, but for a long time it was slow enough for people to adapt and find other work. These days I'm less and less sure that's the case.
Yes he addresses this. If all you do is make things more efficient then you have no where for the displaced to go. That's why transformative innovation is needed and is currently missing. Transformative innovation needs a longer time to grow so it needs longer term investing before seeing a payout hence a retooling of our tax system that favors investment for the longer term.
We know there is a problem related to new job growth, he mentions that its taking longer for our economy to recover from the last recessions. And, he points out exactly what is missing from that economy too.
> this is the single best idea I've heard recently!
Taxes aimed at changing behaviour are generally considered to be bad taxes.
Firstly, you may not like the outcome. Changing the entire time-and-capital structure of an economy is Serious Business and is going to be utterly unpredictable (if it were predictable things would be more stable. They're not).
Now, suppose it turns out to be a dumb decision. For example, say that some unforeseen feedback loop pops up between overdraft facilities and capital now sitting long-term because of tax changes. Suddenly overdrafts become even more difficult for small businesses to obtain and voila, new cash crunch.
Even if it does more harm than good, you've created a powerful constituency for it. Bond market funds, index funds etc are now all in favour of the new tax rules and will lobby with great vigour to keep it.
Now, this is true of every tax ever. But the reason economists counsel against taxing for non-revenue policy purposes is because every tax has externalities that are unrelated to the direct incidence of the tax. You want to minimise those as much as possible.
Incidentally, the tax system already has consequences. For tax reasons that I simply don't understand, Australian corporations tend to be keen on paying healthy dividends and American corporations focus more on driving up the stock price.
> But that is only a mechanical property of the progressive tax scheme (lower tax for lower incomes), which makes the redistributed money more likely to be spent
The Australian experience has been that instead of spending the money, Australians are using it to pay down debt. Fine as far is it goes, but hardly the pump-priming that everyone was hoping for. There has been a seismic shift in debt/spending preferences across the population.
> but a new kind of shock based on a slowdown of the progress of technology
The long term trend of American GDP is stunningly linear[1] (edit: log linear -- actually exponential, I fail graph-reading forever); the only real deviation in the past century has been the Great Depression and WW2, a pair of connected economic earthquakes. We're talking about the 120 year period which included the widespread use of radio, television, highway systems, air travel, computers, the internet, modern medicine including antibiotics ... the list of literally revolutionary changes that quickly become blasé is very long indeed.
Yet what we see today as monstrous fluctuations are within trend. Perspective matters (cue someone talking about the past 5000 years ...).
The answer I gave indirectly was: economists. Taxes introduce externalities, often have indirect incidence and so on. The "ideal" tax is one that raises revenue without distorting behaviour.
Taxes are sometimes used for policy purposes. The classic example is "sin taxes" to deter smoking, drinking etc. But in general, if you want to modify behaviour, the tax system is a problematic way to do it.
But, doesn't our current system have negative externalities that distort behavior? Or is this just some academic test that is impossible to ever really attain?
I don't think with the [1] graph that use a LINEAR LOG SCALE for the Y axis we can talk about a LINEAR growth of GDP per capita as you do.
It's more like an EXPONENTIAL increase!!
Also, if you look at the trend, the recent decline is totally unprecedented - except maybe just before the great depression (the small cut over 1914) and during the great depression.
Considering the decline happened even with a very strong stimulus - and was NOT fixed by the stimulus, I guess we have many reasons to be worried about this slowdown in the pace of growth (and technology).
A tax change may not usually be a good idea - just like a keyneysian stimulus looked weird and was even initially though to be damaging during the great depression.
Desperate times call for desperate measures. We are not there yet, but at least having a refreshing new proposal (regressive tax based on the duration investment spending is kept) is IMHO valuable, if only to have another tool we can use besides the traditional "progressive tax+redistribution to increase consumption".
BTW the Australian example you give is quite interesting. May I ask you for some links ?
> Firstly, you may not like the outcome. Changing the entire time-and-capital structure of an economy is Serious Business and is going to be utterly unpredictable (if it were predictable things would be more stable. They're not).
I already don't like the outcome of the last change to the "entire time-and-capital structure of [the] economy," which wasn't that long ago, and is due to expire anyway.
Not being intimately familiar with US politics, I can only assume this is somehow connected to income tax schedules (which I understand is a hot topic there).
The thing is, however, that tinkering with capital is more important than income. Why? Because capital dwarfs income.
In fact, the more advanced an economy is, the deeper its structure of production is. That is, the more of it is involved in capital instead of income.
Income is the golden river for taxation purposes because it is what is left once capital has done its thing. It is easily identifiable, easily to calculate and easy to extract . It also exercises people's political instinct because most folk, being wage-earners, are far more personally familiar with income and expense than asset and liability.
But that doesn't change the fact that fiddling with the capital structure of an economy is, in the long run, probably the bigger deal.
It would encourage self-sustaining growth instead of fly-by-night profits, made in the present at the expense of the future - ie let the market sort out which sectors are more likely to bring better long term outcomes, considering the current focus on short-term is a negative externality that should be fixed by government intervention.
The author also properly acknowledges that increasing tax on the top 1% will only be redistributive, and increase consumption - which might certainly have better effects on consumption than leaving that money to the top 1% who might keep saving it while there is no current shortage of capital.
But that is only a mechanical property of the progressive tax scheme (lower tax for lower incomes), which makes the redistributed money more likely to be spent instead of saved (or paid in tax) - yet as the author points out trading consumption for consumption is pointless given the current state of the economy.
It's quite a interesting time.
It seems like the current situation is not just a demand shock which can be treated with Keynesians stimulus, but a new kind of shock based on a slowdown of the progress of technology - especially of the "empowering kind".
I wonder how this will make us reassume the traditional models such as Solow (technology drives long term growth) or Romer (technology and education), since it now seems there are different kind of technology and education that we should invest in - and some that we should consider as negative externality (like humanities - I have nothing against such studies, but they should not be on the taxpayer dime)
Introduction to Solow model : http://en.wikipedia.org/wiki/Neoclassical_growth_model
Introduction to Romer model : http://en.wikipedia.org/wiki/Endogenous_growth_theory