Economists, like everyone, should admit to their mistakes and correct them. That’s what this post is for.
The argument against taxing capital income runs like this:
1) Current and future consumption should be taxed at the same rate.
2) A tax on capital income is equivalent to a tax on current consumption coupled with a higher tax on future consumption.
Conclusion: Capital income should not be taxed.
I made this argument several years ago in a talk at the Cato Institute. I recently got a complimentary note from someone who had just watched the video of that talk, which caused me to go back and watch a few snippets to remind myself of what I’d done to earn this compliment. And I was mortified to see myself stating not point 1) above, but this far more general point:
1′) All things should be taxed at the same rate.
The status of 1′) is complicated. It is true that in an ideal world, all things including leisure would be taxed at the same rate. But in a world where you can’t tax leisure, the ideal tax system is far more complicated, with the optimal tax on each consumption good varying according to various elasticities and cross-elasticities of demand and supply. So 1′) is true in an ideal world, but surely false in our world, where leisure is very difficult to tax.
Fortunately the full generality of 1′) was not needed for my argument; all I actually used was 1). But in the video, I very clearly stated 1′) as if it were gospel, and even devoted an entire slide to it. This mistake doesn’t overturn the conclusion, but it’s still surely egregious enough that if, say, Paul Krugman had made a mistake like this, I’d have been all over him.
So: Mea culpa.
A subsidiary point: The word “should” in these statements can be interpreted in (at least) two ways — from the point of view of efficiency and from the point of view of fairness. In the few paragraphs above, and in the bulk of my Cato talk, I was using the word “should” in the first sense. But I also tried to address fairness issues in the Cato talk, and from that angle, I’m less sure that 1′) is wrong.
1) and 1’) seem to be distinction without a difference. You consume leisure, so then how is “Current and future consumption…” different from “All…”
I am unsure of the assumptions under which it would be difficult to tax leisure.
For most people, the government knows how much time they spend working, so can’t you assume they spend the rest of the time not working?
The idea that more capital is better doesn’t necessarily apply in a post-industrialist, capital-lite service economy where the working-age population is declining.
If the marginal return on productivity-enhancing capital investments is zero or negative (it necessarily becomes negative at some point along the curve), then increasing savings further is not beneficial.
In practice, detrimental effects likely occur substantially earlier – once low returns on useful investments lead to the diversion of savings into massive speculative real estate bubbles (Japan in the 1980s, the US and the EU in the 00s, China for the last decade+).
I’d argue that especially in the US, capital concentration creates a further problem. There’s a lot of unmet capital need where people can’t afford an education, a move to a more promising job market, to repair their means of transport, to bridge a period of illness, to found a small business. Because of frictional costs, capital accumulated at the top of the income pyramid often cannot efficiently meet these needs.
Guys–you realize he posted that stuff on April 1, right?
The Big Questions, 1/2022: “A Bit of a Screed”
nobody.really: [B]itcoin mining is an entirely arbitrary, man-made process for managing the expansion and allocation of bitcoin currency. Since it’s arbitrary, it would be nice to imagine some different method for managing this currency that didn’t consume so many resources–or, at least, that had more salutary effects than just burning electricity.
Landsburg: [W]hat’s lacking, of course, is a concrete proposal. You need a problem that is parameterized by the contents of the current block and the hash of the last block [in order to provide proof that the work of finding another Bitcoin was accomplished].
I am pretty close to sure that only purely mathematical problems fit the bill….
Another option is to abandon proof-of-work entirely but as far as I understand the state of affairs, there is nothing else on the horizon that promises as much security.
nobody.really: [A]t least one source concludes that most bitcoin mining occurs in China. While China has a lot of hydropower, it also burns a lot of coal…. [I]t’s not crazy to imagine that the marginal watt-hour is being generated by coal, not hydro–that is, that bitcoin mining is likely contributing to climate change.
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China (among other nations) opposes bitcoin mining–but that Texas welcomes, or will welcome, it…. [T]he arrival of bitcoin miners would provide the demand (and consequently the revenues) to justify building more generators–and … these miners could be persuaded to discontinue consuming electricity during emergencies. Ergo you add more supply during most of the year without adding more demand during the crunch periods.
Sounds like a plan to me–assuming that miners really can economically suspend operations on short notice. It’s just computers, right? So is there any reason you can’t power down computers and power them up again later?
NYT’s Peter Coy, 4/20/2022: “Bitcoin Mining Is a Tax on Our Electrical Grid”
“Pressure on Bitcoin to switch to a less energy-intensive approach is coming from several directions. Ethereum, the No. 2 cryptocurrency, is switching from proof of work, which Bitcoin uses, to proof of stake, which requires much less computing power and therefore does less damage to the environment. Briefly, you prove your work by doing those quintillions of calculations. You prove your stake by pledging cryptocoins that you own. As in a company’s shareholder vote, the people with the most coins have the biggest say.
The difference in energy consumed per transaction between the two systems is like the difference in height between the world’s tallest building and a single screw…. Once Ethereum makes the switch, Bitcoin will be the only one of the most highly valued cryptocurrencies using proof of work.
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Because Bitcoin miners can rapidly turn on or off, they are stabilizing the electrical grid in places such as Texas by throttling back when other demand is high and cranking up consumption when other demand is weak, advocates argue. Some of the electricity that Bitcoin uses is from energy resources that nobody else can easily access, such as overbuilt hydroelectric power plants, they say. (There’s some truth to this, but Bitcoin mining still contributes to global warming.)
Another Bitcoiner argument is that its proof of work method is more secure than proof of stake or other protocols.”