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Wealth and taxes — Overview

Summary:
I thought that "wealth and taxes" would be a short blog post. It turned in to a 5 part series. Here's an overview, or table of contents in case the whole thing looks a bit indimidating. The most important one, really I think is Part V, "it's all political." The others build bit by bit, ...

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I thought that "wealth and taxes" would be a short blog post. It turned in to a 5 part series. Here's an overview, or table of contents in case the whole thing looks a bit indimidating. The most important one, really I think is Part V, "it's all political." The others build bit by bit, well, this can't be the answer and that can't be the answer, so what is the answer, and Part V finds it.

In Part I we met the fact that "wealth" is measured as "capitalized income," Y/r. But only some kinds of income Y and with discount rate choices r that blew up measured wealth inequality. I review the  Smith, Zidar and Zwick paper that finds huge overstatements of inequality because wealthy people have a higher r than you and me.

In Part II we learned that a big reason wealth inequality widened is that interest rates fell and asset prices rose.  If r falls, Y/r rises, but it's the same Y.

In Part III  we noted the distinction between consumption, income and wealth inequality. Wealth is beyond badly measured as a measure of lifestyle. The computations ignore taxes and transfers, wildly blowing up measured inequality and rendering it a "problem" that ipso facto cannot be solved. Why concern ourselves with pre-tax wealth inequality, especially given that most wealth is reinvested in businesses that produce things and employ people?

In Part IV, we met the wealth tax. If the question is, how do we raise revenue for the government, either to spend or to transfer it, the wealth tax is a terrible idea, as it distorts the economy and leads to an evasion industry. A consumption tax is a much better idea.

In  Part V I read Saez and Zucman's opeds, which finally tell us what the question is to which the wealth tax is the answer. Saez and Zucman want to confiscate billionaires' wealth, because they think billionaires have too much political power, billionaires all got their money unjustly, and somehow though big government cronyism is the problem, bigger government is the answer.  The wealth tax is not designed to raise revenue -- it succeeds if it raises no revenue (after perhaps a one-time wealth grab) because the wealth it taxes has vanished. Well, at least it is a consistent view, decide if you buy the premises. 
John H. Cochrane
In real life I'm a Senior Fellow of the Hoover Institution at Stanford. I was formerly a professor at the University of Chicago Booth School of Business. I'm also an adjunct scholar of the Cato Institute. I'm not really grumpy by the way!

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