Friday , November 16 2018
Home / Project Syndicate / Taxing the Intangible Economy

Taxing the Intangible Economy

Summary:
With a slowdown in productivity growth hurting Western governments' ability to deliver goods and services, new forms of revenue generation are needed. One possible solution is to tax capital gains at the same rate as other income. LONDON – Some very clever people, including the president of the European Central Bank, Mario Draghi, and Andy Haldane, chief economist at the Bank of England, are expressing concerns over the slowdown in productivity growth. And, given that productivity (measured as GDP per hour worked) is the ultimate driver of increases in living standards, they are right to be worried. For most people in the West, wages and living standards have stagnated for decades. If you were a factory worker in the north

Topics:
Roger Farmer considers the following as important:

This could be interesting, too:

Paul Krugman writes Why Was Trump’s Tax Cut a Fizzle?

[email protected] (Cyril Morong) writes Pre-market societies could sometimes have alot of violence

Menzie Chinn writes Wisconsin Employment Declines, Previous Revised Down

Mark Thoma writes Links (11/15/18)

With a slowdown in productivity growth hurting Western governments' ability to deliver goods and services, new forms of revenue generation are needed. One possible solution is to tax capital gains at the same rate as other income.

LONDON – Some very clever people, including the president of the European Central Bank, Mario Draghi, and Andy Haldane, chief economist at the Bank of England, are expressing concerns over the slowdown in productivity growth. And, given that productivity (measured as GDP per hour worked) is the ultimate driver of increases in living standards, they are right to be worried.

For most people in the West, wages and living standards have stagnated for decades. If you were a factory worker in the north of England in 1970, for example, odds are good that your children will earn less in real terms than you did 50 years ago. The same is true for workers elsewhere in Europe and in the United States, an economic reality that is partly responsible for the rise of populist politics.

The trajectory has been trending down for years. As Figure 1 shows, average annual productivity growth in five OECD countries – France, Germany, Japan, the US, and the United Kingdom – was 2.4% in the 1970s. During the decade after 2005, it was 0.6% in those countries. And, although the “Great Recession” that started in 2007 contributed to the decline, the average had been falling well before the financial crisis began.

Taxing the Intangible Economy

Lower productivity growth has meant reduced living standards for many, but not all. For a financial analyst on Wall Street or in the City of London, life isn’t so bad. And for the independently wealthy – especially those with a majority of income derived from a stock portfolio – standards of living have actually increased in recent decades.

But it’s worth asking how much of this increased prosperity was paid in the form of taxes, because the answer – not as much as if income had been in wages and salaries – is one reason why so many economists are so worried.

Consider that capital gains for top earners in the UK are taxed at 28%, and the ceiling in the US is 20%. By comparison, the top rates for income tax are 45% and 39%, respectively. In other words, when high-tech companies pay their workers with stock options, as many are increasingly doing, the gap in taxable revenue is significant – 17% in the UK, and 19% in the US, to be precise. With an ever-greater proportion of national wealth being channeled into stock appreciation, the lost revenue will need to be found in other places.

The disparity is even more striking in other parts of Europe. Figure 2 illustrates the difference between the top marginal income-tax rate and the tax rate on capital gains in nine Western economies (including the US and the UK). In Italy and Belgium, residents pay no capital gains tax; a rich Belgian who receives all of his or her income in the form of stock options can avoid paying income tax entirely. Among Europe’s biggest economies, Germany is the only exception; there, capital gains are treated as ordinary income, so there is no loss to the government when income is received as stock appreciation as opposed to dividends.

Taxing the Intangible Economy

Digital music, mobile apps, Google, and Twitter – these and other “intangible” technological miracles have changed our lives. But the many benefits of modern innovation have not been reflected in standard measures of GDP. As Jonathan Haskel and Stian Westlake point out in their new book, Capitalism without Capital, one explanation is that the measurements themselves are inadequate.

Roger Farmer
ROGER E. A. FARMER is a Distinguished Professor of Economics at UCLA and served as Department Chair from July 2008 through December 2012. He was the Senior Houblon-Norman Fellow at the Bank of England, January-December 2013.

Leave a Reply

Your email address will not be published. Required fields are marked *