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Consistency about elasticities, revisited

Summary:
From Ross Rheingans-Yoo, the content is all his, I will not do a double indent: If marginal wealth is taxed an additional 0.5%/yr at the high end, then fewer people will amass and invest that much wealth—some will instead disperse it among a wider number of family members, donate it to charitable or political causes, or spend it on expensive consumption. (Saez and Zucman, in their potential-revenue analyses, assume that this effect is quite small, and that the wealthy will mostly accept lower returns on wealth.) Similarly, if the marginal opportunities to invest became worse by 0.5%/yr, fewer people would chose to invest, by the same token. Additionally,the effects should be the same size, as it’s the same decision-makers facing the same incentives! But if pushing on the price (read: rate

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From Ross Rheingans-Yoo, the content is all his, I will not do a double indent:

  • If marginal wealth is taxed an additional 0.5%/yr at the high end, then fewer people will amass and invest that much wealth—some will instead disperse it among a wider number of family members, donate it to charitable or political causes, or spend it on expensive consumption. (Saez and Zucman, in their potential-revenue analyses, assume that this effect is quite small, and that the wealthy will mostly accept lower returns on wealth.)
  • Similarly, if the marginal opportunities to invest became worse by 0.5%/yr, fewer people would chose to invest, by the same token. Additionally,the effects should be the same size, as it’s the same decision-makers facing the same incentives!
  • But if pushing on the price (read: rate of return) has little effect on the quantity of investment, then pushing on the quantity of investment should have a large​ effect on the price! (Unless we’re at some magic kink in the supply curve for unspecified reasons…)
  • So a small amount of additional capital competing for investment opportunities should quickly reduce the competitive rate of return.

What’s the practical upshot? Well, if the authors’ assumptions about revenues are right, then Piketty’s r>gr>g “wealth spiral” can’t proceed unchecked, since capital simply can’t accumulate without competition quickly reducing the average rate of return back below gg.

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Tyler Cowen
Tyler Cowen is an American economist, academic, and writer. He occupies the Holbert C. Harris Chair of economics as a professor at George Mason University and is co-author, with Alex Tabarrok, of the popular economics blog Marginal Revolution. Cowen and Tabarrok have also ventured into online education by starting Marginal Revolution University. He currently writes the "Economic Scene" column for the New York Times, and he also writes for such publications as The New Republic, the Wall Street Journal, Forbes, Newsweek, and the Wilson Quarterly.

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