Economic Quiz

Greg Mankiw has posted this great video on his blog. I think it bears repeating:

The Unadulterated Socialism of Warren Buffet

Read about it here.

Shock of the Week: Low Tax Nations Have More Money

The Business has a great article pointing out that of the top 20 richest nations, most of them are enclaves of low taxes.

What are the three richest countries in the world? You might be tempted to answer America, maybe Switzerland, or perhaps even Ireland. The right answer, however, is Luxembourg, Bermuda and Jersey in that order.

The Top 20 also includes: Equatorial Guinea, Guernsey, Ireland, the Cayman Islands, Andorra, Hong Kong, the British Virgin Islands, the Isle of Man, San Marino and Switzerland.

The wealth of some of those territories is striking. Luxembourg and Bermuda have a GDP per capita of $71,400 (£35,072, E50,250) and $69,000 respectively. By contrast, America, the wealthiest of the mainstream industrial economies, has a GDP per capita of $44,000. Even the worst-off low-tax nation, Switzerland, has a GDP per capita of $33,000. And Britain, despite the endless boasting from Gordon Brown about the brilliance of its economic record, ranks only 28th in the world, at $31,800.

Seems like there could be a lesson here.
HT Cato-at-liberty

French Think Too Much?

So says the French Government.

In proposing a tax-cut law last week, Finance Minister Christine Lagarde bluntly advised the French people to abandon their "old national habit."

"France is a country that thinks," she told the National Assembly. "There is hardly an ideology that we haven't turned into a theory. We have in our libraries enough to talk about for centuries to come. This is why I would like to tell you: Enough thinking, already Roll up your sleeves."

Apparently part of a policy initiative to cut taxes and raise productivity, the French President is also hoping to lure back some of the wealth that has fled along with its owners to low-tax countries.

In her National Assembly speech, Lagarde said that there should be no shame in personal wealth and that the country needed tax breaks to lure back the rich.

"All these French bankers" working in London and "all these fiscal exiles" taking refuge from French taxes in Belgium "want one thing: to come back to France," she said. "To them, as well as to all our compatriots who are looking for the keys to fiscal paradise, we open our doors."

Indeed, the idea of admitting one's wealth, once considered déclassé, is becoming more acceptable. A cover story in the popular weekly VSD this month included revelations that just a few years ago would have been unthinkable: the 2006 income of leading French personalities (€13 million, or $18 million, for the soccer player Zinédine Zidane, €8.75 million for the rocker Johnny Hallyday, €242,000 for Prime Minister François Fillon, €79,000 for Sarkozy).

It looks like at least one European politician thinks that taxing everything that moves within an inch of its life might not be the best wealth-creation strategy.

HT Cato at Liberty

Oldies but Goodies

Apologies for being stingy with posts lately. Here are some fun tidbits from the last few days:

• From Albany Times Union article (HT: Fark headline):

"In one test, TSA inspectors hid the components of a fake bomb in carry-on luggage that also contained a bottle of water. Passengers are prohibited from carrying containers holding more than three ounces of liquids, gels or aerosols through airport checkpoints. The screeners at Albany International confiscated the water bottle but missed the bomb."

• From Anchorage Daily News article (via Club for Growth post):

"'When you are chairman of a committee, you represent the whole nation; you don't represent one district, which is in my case is one state,' [Congressman Don Young (R-AK)] said. 'Earmarks are good for the country and good for the people you represent. That is the role of a congressman. If you can't get money for your district, you shouldn't be in Congress,' he said."

• From Slate article (via a Greg Mankiw's blog post):

"Alumni with kids are 13 percentage points more likely than alumni without kids to give in any year. The tendency to give rises slowly—by three more percentage points total—through kids' early teens... And, indeed, while giving declines after age 14 among parents of kids who do not go on to apply, giving rises from about 18 to 25 percentage points (above the level of the childless alums) for those whose kids do apply a few years later. The timing is certainly suggestive."

• From a Reason article:

"In theory, redistribution of wealth is supposed to benefit the least fortunate. In practice, it doesn’t necessarily work out that way. In a new study, Matthew Ladner of the Goldwater Institute and Paul J. Gessig of the Rio Grande Foundation crunch census data for the 1990s and find that the poor did much better in states with low taxes and low spending than in states with higher taxes."

• From Club for Growth post:

"With alarming contempt toward the U.S. Constitution and American taxpayers, Representatives David Obey (D-WI) and Barney Frank (D-MA) have introduced new legislation clamping down on political speech by outlawing all private expenditures from general elections for the U.S. House of Representatives. Ironically named the Let the People Decide Clean Campaign Act, the Obey-Frank legislation will publicly fund all general election House races with taxpayer dollars."

Redistributing Campaign Wealth

ScrappleFace has another hilarious piece, this one about Barak Obama and Hillary Clinton redistributing their campaign money to less fortunate candidates. Read it - it's short and sweet - a great way to start Monday.

HT: Club for Growth

Stipulations for All That Money

MarketWatch has an interesting article about trends concerning who attaches stipulations to assets that they leave to others in their will. Worth the read, if you're interested.

Even More Tax Competition

A year after the IMF published an analysis predicting that those countries that had a flat tax would transition back to "progressive" taxation, Montenegro is the latest to adopt truly fair taxation.
UPDATE: Russia just rejected a proposal to repeal their flat tax. So much for the IMF.

"Unearned" Wealth & Character

One of the things in this world that doesn't really affect me, but which I really hate on principal is taxation levied on inheritances in one way or another. The way I see it, the money has already been taxed when the person giving it away earned it and there is no justification for taxing it a second time (I know that the premise of that position would lead to having to object to sales tax and, for that matter, almost every other kind of tax; I'm fine with that, for the time being).

One justification I have heard is that it is not fair that some people simply get a ton of money dumped into their laps because their parents (or someone else) gave it to them. The logic is that that creates inequality because some people have a "leg up" so to speak that they didn't earn themselves. To this, I respond in the first place that I do not accept the premise that inequality of this kind (or any other kind, for that matter) is an essentially bad thing. After all, some people are born taller than others. Should we force them to undergo some sort of surgical procedure to make sure that everyone is the same height? Of course not.

Likewise, to use a more pertinent example, economic inequality between people begins the moment they are conceived - not the moment their benefactor dies and wills something to them. After all, the fact that the child of a millionaire receives a large inheritance upon the death of his progenitor(s) most likely has far less to do with the inequality between him and the child of a lower income family than the very fact that he was raised by wealthier parents and, therefore, most likely enjoyed certain advantages such as better education, better contacts, etc.

Thus, I do not accept the premise that inequality should be avoided even at the cost of government intervention.

Furthermore, as long as the argument is focusing on fairness, I feel compelled to point out that my main objection to inheritance taxes is that someone who has worked very hard their entire life and has, through sheer determination, hard work, and frugality, managed to accumulate a decent amount of money which they would like to leave to their children (or someone else) will be taxed to death (no pun intended) on money on which they have already been taxed because they dare to give it to their children instead of spending it on themselves. This seems to be the real injustice here.

Another argument I have heard in defense of inheritance taxes is that, when someone inherits a large amount of money and, therefore, does not have to work as hard/efficiently/well/etc. to obtain what they need or desire, their character is the poorer for it. While I am inclined to accept this line of reasoning, I hold that it is not the government's function to take away someone's money for the betterment of their character or the perpetuation of the "American Spirit". It is not the government's job to try to encourage innovation and invention by imposing hardships.

Another argument I have heard is that inherited wealth is unearned and, therefore, somehow illegitimate and should be taxed or otherwise taken away by the government. This to me is just absurd. Where is it written that all assets must be earned by the person who possesses them!? Remember, of course, that even inherited wealth was earned - just not by the person inheriting. If one were to object that wealth derived from capital gains or other investments are unearned even by the person willing them to another, I would respond:

(a) Define "earned". In my opinion, wealth from investments (which is usually what I hear referred to as "unearned") is in fact earned. After all, the person only received that wealth in exchange for the use of their capital for a period of time during which the person could not use it themselves. Thus, the person earned the resulting capital gain by means of delayed gratification - they earned it by having the self control to commit to not using it for a period of time.

(b) Even granting that wealth derived from non Wages/Salaries/Tips (can you tell that I recently did my taxes) sources isn't "earned", what does that have to do with anything? Why is unearned wealth somehow bad? Why does the government have the right to tax unearned wealth qua unearned? Is it somehow detrimental to society and therefore worthy of being discouraged by means of taxation? Absolutely not - quite the opposite.

(c) Again, even granting that wealth derived from non Wages/Salaries/Tips sources isn't "earned", and that unearned wealth is somehow illegitimate when inherited, all that means is that inheritance tax should be set up in such a way that only unearned wealth is taxed. I believe, though, that this would prove to be impossible in the real world.

To address once again the hidden premise that all wealth should be earned by the person who possesses it: this premise is so absurd I don't know if it is even worth addressing. Wouldn't accepting this premise necessarily lead to the taxation of teenagers for every dollar of benefit they derive from their parents? Food, shelter, clothing, education, rearing, etc. All of it is a form of wealth - much of it tangible and much of it such that they will continue to possess it even after they leave the nest - and not earned by them.

While I have been meaning to post on this topic for quite some time, the catalyst for this happening today was and article on TCS Daily entitled "The Perils of Unearned Wealth" in which the author sketches a brief outline of the problems that arise when people inherit wealth rather than earning it themselves.

To be clear: I am well on board with the idea that people who inherit most or all of their wealth early in life turn out the poorer (in terms of character) for it. I would tend to agree with the author:

"Scarcity is a tutor and when it is no longer there to restrain our appetites, only character remains. If character was never developed... well, just watch today's news and you'll see."

This detrimental effect of inherited wealth, however, is not a necessity but simply what seems to happen a large portion of the time. It seems to me, then, that, as with virtually everything (tangible and intangible), there are good and bad ends to which inherited wealth can be put and, as is more pertinent for this discussion, good and bad effect that it can have of itself. Given the fact that there are good - or at least neutral - effects that it can have, it seems that it should not be subject to regulation, just as kitchen knives, which can be used to murder people, are not regulated because they are primarily intended and used for perfectly legitimate purposes.

It seems obvious that society cannot accept the premise that, if something is potentially harmful, it should be regulated or forbidden. If society were to accept that premise, society would simply cease to function.

Thus, even though I would hold that it is the case that inherited wealth often has bad effects, I do not think that it should be punished in and of itself by means of a tax that applies to everyone regardless of their character and whether it would be adversely affected by it.

Also, I would like to point out that how one's character is affected by inherited wealth has to do with how one is raised and how one develops as a person before (at least logically if not temporally) the inherited wealth comes into the picture. I would hold that the root cause of detrimental character affects is not the inheriting of the wealth, but the prerequisite character flaws that occasion it. If that is the case, what the government should focus on affecting (assuming the government has a right to be involved in such matters in the first place) is the earlier character formation - not the amount of money a poorly formed character inherits later.

As an aside, I hold that the extent of the government's legitimate role is such things as character development would be ensuring a stable peace in society (primarily through law enforcement and civil defense) in which people can develop independent of government influence - precious little, if any, more.

Anyway! That was a very long post simply to say that I don't like inheritance taxes.

Choices and Wealth

TCS Daily has a great article entitled "Two Americas, Indeed" in which the author discusses the point that becoming wealthy is largely a function of a basic choice, namely, to live below one's means, and not simply a function of how much money one earns (which, itself is also partially a function of previous choices). Citing the book "The Millionaire Next Door", which I've never found the time to read, the author points out such facts as, among millionaires, most have not inherited their wealth and fewer than 20% have inherited 10% of their wealth.

A number of thoughts either contained in the article or evoked by it are 1) trying to "fight" income inequality via government intervention or any other measure won't necessarily have a big impact on wealth inequality since, again, wealth is not entirely a function of income, but rather of lifestyle choices; 2) I consider the purpose of saving, investing, growing wealth etc. not an end unto itself, but rather spending that wealth later, whether on myself or giving it away as I see fit. Thus, growing wealth is an exercise is delayed gratification. Thus, to a great extent, trying to close the wealth gap by taxing or otherwise punishing people who manage to accumulate a certain amount of wealth is, to a great extent, simply punishing the choice to enjoy the fruits of one's labor later rather than immediately, which seems an awfully arbitrary thing to do.

I encourage you to read the entire article.

Asset Bubble

The Motley Fool has a fascinating article about the "Asset Bubble" - the idea that assets of all kinds: stocks, bonds, real estate, precious metals, other commodities, etc., are overvalued and that the situation constitutes a bubble. You should read the entire article but here is a small clip to whet your appetite:

"For 50 years following the end of World War II, the ratio of assets to gross domestic product stayed pretty constant at around 3.8-to-1. That means the market value of all assets held by households in the U.S. -- stocks, real estate, bonds, cash, tangibles, and the like -- roughly equated to 3.8 times one year of GDP. So if the economy grew, so did the market value of assets held, roughly by the same ratio, over all those years.

Then, in the latter part of the 1990s, something started to happen. The market value of the assets held by households started to rise more quickly than the gains in GDP. That 3.8-to-1 ratio jumped to 4.8-to-1 in 1997, 4.95-to-1 in 1998 and 5.27-to-1 in 1999, where it peaked. From 2000 to 2002, it came down, hitting a low of 4.54, but it has been on the rise again and is back up around 5.0."

You should read the article to get the actual analysis of the situation.

More Tax Emigration

One of New Zealand's richest individuals has left for Tasmania to avoid the taxes of her home country. Jan Cameron, founder of the Kathmandu chain of stores, had sold her business and was looking forward to donating the interest from her investments to charity, but the "progressive" NZ taxes prompted her to relocate.

Follow-up: Two Measures of Wealth

I received a very well crafted set of thoughts from Dane regarding my post, Two Measures of Wealth. I would like to address those thoughts in a new post because:

1. Dane's comments are quite good and I want everyone to see them.
   
2. Both Dane's comments and my response are quite long and I think it would be a bit awkward carrying on the entire discussion in a comment thread.
3. I concede a point to Dane and don't want to hide that fact.
   
4. I hope this encourages others to comment as well.

Before reading my response below, one should read Dane's comments.

My response:

Dane, I agree with your first point regarding what is most important to consider in these matters. I agree with your second point that the first consideration begs the second - whether one's lot is improving.

By the way, thank you for not mentioning the obvious philosophical issues with my use of the word "absolute" in the post. As I hope everyone understands, I meant the word in a very specific, economic context.

Anyway! Back to your comments: As to your third consideration, i.e., whether one class or group is improving as quickly as another, I will partially recant and agree that it is not a foolish thing to consider in, say, an academic way. I do, however, maintain my position regarding its ridiculous, deceitful current use in politics. Since, though, you did not address that statement, I will assume that you do not take issue with that unless you state otherwise.

With regard to your analogy regarding a child's height, I have some thoughts: it is going to be very hard, if not impossible, to hammer out what we should consider stunted, normal, or above average economic growth rates for the various strata of society. This is because, to come up with averages and the like, one needs historical records pertaining to similar situations. I would maintain that our current socio-economic situation is unique in human history (by the way, I would probably argue that most socio-economic situations specified by time and geography are unique). Thus, I think it a Pandora's Box to try to engage in discussions of whether "the poorer economic class(es) in America in 2007 are experiencing stunted, normal, or above average growth."

Thus, I circle back and agree with you that what really matters in these discussions are whether or not people are capable of living humane lives, not whether the growth rate for their economic class is not as phenomenal as that of richer classes nor whether their growth rate is, for lack of a better word, "poor" compared to what "it should be", i.e., the average.

Update: See CAPRE DIEM's article, Economic Growth, for more regarding historical growth rates.

More on Relative Wealth

An interesting article in the New York Times by Tyler Cowen, Incomes and Inequality: What the Numbers Don’t Tell Us, addresses the causes of inequality. It also touches on the more important question of why and if we should worry about it.

"Happiness, possibly the most relevant variable for a study of inequality, is also the hardest to measure. Nonetheless, inequality of happiness is usually less marked than inequality of income, at least in wealthy societies. A man earning $500,000 a year is not usually 10 times as happy as a man earning $50,000 a year. The $50,000 earner still enjoys most of the conveniences of the modern world. Even if more money makes people happier, it appears to do so at a declining rate, which places a natural check on the inequality of happiness. . . .

The broader philosophical question is why we should worry about inequality — of any kind — much at all. Life is not a race against fellow human beings, and we should discourage people from treating it as such. Many of the rich have made the mistake of viewing their lives as a game of relative status. So why should economists promote this same zero-sum worldview? Yes, there are corporate scandals, but it remains the case that most American wealth today is produced rather than taken from other people."

Cafe Hayek notes that the marginal value of money falls rapidly after a certain point. This means that taking $100,000 from Bill Gates and giving it to me will not make Bill any less happy, but will significantly improve my state in life.
However, "given that Bill Gates almost surely has a greater talent for contributing to the happiness of humankind than I have [evidenced by his wealth], it's especially important that he continue to confront keen incentives to continue contributing to that happiness. Precisely because an extra dollar in Gates's wallet means less to him the more dollars he earns, he needs to earn ever-more dollars per year in order to keep keen his incentives to innovate and produce and sweat the details of satisfying consumer demands."

Which leads to the interesting thought that Windows Visa sucking can be blamed on taking a large portion of the money Gates would have made, which removed "his incentives to innovate and produce and sweat the details of satisfying consumer demands." If you want a flawless, less broken OS, let Gates keep the money.

The Two Measures of Wealth

There are two ways you can look at almost, if not, everything: absolutely and relatively. That is, you can talk about something in terms of how it is in and of itself or you can talk about something insofar as it relates to another thing. For instance, when describing someone, I can talk about their height either in terms of feet and inches (absolutely) or I can talk about their height insofar as it is more or less than someone else's (relatively).

This pair of perspectives also applies when talking about wealth (or standard of living, for that matter). We can talk about how well off someone is either absolutely or relative to someone else.

To illustrate, think of a young teenager who has spent his summer delivering newspaper and saved $250. During the same summer, the neighbors next door earned a total of $10,000. Thus, the neighbors earned 40 times as much as the boy. The boy spent his money on things like games, movies, etc. The following year, the boy spent the summer mowing lawns for neighbors (including the neighbors in questions) and, thus, saved up $500. His neighbors also did better, earning a total of $25,000, meaning that they earned 50 times as much as the boy. The boy, again, spent his money on things like games, movies, etc., but still had money left over when the summer was over since he had more to begin with.

Question: was the boy better or worse off in the second year? Well, it depends whether you consider absolute wealth as more important than relative wealth. That is, in absolute terms, the boy was much better off (100%, in fact) in the second year. (I'm glossing over the issue of inflation because, even if there were an unusually high inflation rate, the boy would still come out with somewhere north of 90% additional purchasing power.) On the other hand, if you care about relative wealth, than the boy was actually worse off the second year because his neighbors (those to whom we are comparing him) went from earning 40 times more than him to 50 times more than him. Thus, the boy was not "keeping up with the Joneses".

Question: Does it matter that someone else's earnings increased at a faster rate than the boys? Does this affect his purchasing power? No. The boy can still purchase much more than he could in the previous year regardless of the purchasing power of his neighbors (or employers).

To put it a different way, if someone were to ask the boy whether he would rather earn $500 while his neighbors earned $25,000 (a 50 fold difference) or earn $300 while his neighbors
earned $13,500, what do you think he would say? Of course, he would take the $500 since the ratio of how much the neighbors made to how much he made is irrelevant to him (except, perhaps, insofar as them earning more could lead to them paying him more for services rendered or giving him additional opportunities for work for which they would otherwise not have been willing to pay). Meaning, a wealth gap, might actually be an indicator of good economic prospects for him rather than an indicator of his economic demise.

The boy would simply not care that the "wealth gap" was widening between him and his neighbors. What is important to him is his own actual situation.

This issue of a "wealth gap" has come up in the politics recently, as TCS Daily points out. Apparently, Democrats are currently focusing on relative wealth, while President Bush is focusing on absolute wealth. I don't want to focus here on issues being disputed by the political parties because I don't want to become an apologist for either party. What I want to focus on is that some politicians are focusing on relative wealth, while others are focusing on absolute wealth. In case you haven't figured it out already, I think it is absolutely foolish to focus on relative wealth. When the standard of living and amount of disposable income for most of the population is at incredible highs, it seems to be a ridiculous, deceitful tactic to try to describe the middle class as dying out simply because a bunch of CEOs happen to be raking in enormous salaries, thus making the gap between their incomes and those of the average American wider.

The article is worth reading.