Posted by: Doug Henwood | September 21, 2012

Matt Yglesias has a pleasant fantasy about investment

Inspired by Mitt Romney’s low tax rate, Matt Yglesias defends the principle of taxing investment income more indulgently than labor income. To make the argument, Yglesias spins a morality tale about two well-paid doctors, one a profligates who eats fancily and travels the globe, the other a prudent sort who builds buildings and hires people to work in them. It’s only fair, concludes our Slate pseudo-contrarian, that the prudent doc deserves a break from the tax code, since he’s doing so many other people favors.

Leaving aside the fact that the profligate supports an army of chefs and flight attendants, this is not how investment works in the world we actually live in. Most investments are in previously existing financial instruments. As Alan Abelson used to say in the old Barron’s ad, someone buys a stock because he thinks it’s going to go up—but the person he buys it from thinks it’s going to go down. Almost all corporate investment in real things like buildings and machinery is financed internally, through profits. For the last few decades, corporations have been generating more money than they know what to do with, so they’ve been shoveling out to shareholders. (See here for more.) In Romney’s case, Bain largely invested in existing corporations—turning some of them around (mostly with other people’s money) and bleeding others dry (at great profit to Bain partners).

Really, Matt, you didn’t know this?

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Responses

  1. Really, Matt, you didn’t know this?

    There are a few possible answers to that question. None of them reflect very well on Big Media Matt(as Atrios used to call him .. long before he was hired by Kaplan).

  2. Yglesias.

    There, I’ve given him all the consideration he deserves.

  3. I think Yglesias has in mind some sort of neoclassical story whereby tax rates on individual/household investment income influences the price at which investors are willing to hold stocks and bonds, which in turn for start-up companies influences borrowing costs and how lucrative the IPO cash out will be for venture capitalists, and for mature companies influences investment through some sort of tobin’s q channel. I believe DH criticizes that line of reasoning in his book, and of course I am not blaming him not going through all that in a blog post.

    But, what about a conventional Keynesian argument? If it were true that that lower taxes on capital made the rich more eager to direct their income into buying financial assets, then that would mean less consumer spending on luxuries and thus, if nothing else happened, lower GDP. Under ordinary circumstances the central bank follows some Taylor rule like practice, and would compensate by lowering short term interest rates. ST interest rates don’t have much of an effect on business investment in plant and equpment, but usually lower st interest rates induces some more investment in housing and commercial real estate.

  4. [...] credit derivatives or making bets off of where commodities might be priced in a year. To quote Doug Henwood: Most investments are in previously existing financial instruments. As Alan Abelson used to say in [...]

  5. Isn’t money in general a token of value produced but not yet consumed? By that measure, the profligate doctor then exchanges those tokens for pleasure, the investor doctor exchanges them for power, while the way to donate said value to society would be to take the money and burn it?

  6. The rationale for the “preferential” treatment of “unearned income” is as follows: stocks, corporate or municipal bonds, whatever are purchased with after tax income from salaries for the majority of people who hold investments. Because a) investment is theoretically risky, while wages from employment are contractually guaranteed, b) because capital gains are not indexed to inflation, and therefore a nominal gain can actually be a net loss terms of real purchasing power, and c) corporations are already taxed, and the value of that corporate stock you hold and any dividends that are paid out to you already have had a bite taken out by the corresponding corporate tax rate.

    Anyone who holds a 401k, IRA, or any asset at all (about 3/5ths of working adults) should be very suspicious of calls to raise the capital gains rate in order to soak the .001% super-wealthy who earn $10mil or more. You’d be shooting a hole in your foot and your retirement nest egg as well.

  7. Matt Yglesias has always been a right-wing (economic) shill spouting right-wing economic nonsense.

    That was apparently his job at ThinkProgress and CAP.

    He’s better suited at Kaplan, but by his own economic fantasies Kaplan would do better to outsource his job to India: They’d get more and better researched articles by hiring a team of Indians for the same price as the overpaid Yglesias.

  8. [...] that the economics literature tells better stories, but obviously the just-so story presented here is so tendentious as to be self-refuting. Sure, if you 1)accept the premise that reducing or eliminating capital gains taxes will result in [...]

  9. I’m not inclined to argue mechanically for the role of material conditions, but Yglesias and others like him remind me, perhaps with scant evidence, of the role that social and historical circumstances can play in shaping people’s consciousness. Yglesias is the grandson of the decidedly radical novelists Jose and Helen Yglesias, both of whom had more than a passing relationship with the American Communist Party in the early part of their careers as they emerged from working class families. (Jose was briefly a film critic for the Daily Worker.) Jose and Helen’s son, Rafael, attended two tony prep schools before dropping out in the tenth grade to write and publish a well received, autobiographical novel that portrays a struggling adolescent in New York City during the social and political tumult of the late 1960s. For a long while he made a presumably lucrative career as a screenwriter, producing Hollywood scripts for the likes of Peter Weir, Roman Polanski and the Hughes brothers. More recently, he published “A Happy Marriage,” a highly acclaimed novel based on his thirty year relationship with his now deceased wife.

    I have no personal knowledge of or relationship to anyone in the Yglesias family, which certainly limits the assessment of Matthew’s politics that I am about to make. However, his views generally match those of other folks I know of the same generation who have similar, upper middle class, left-wing backgrounds. These people are the product of far greater privilege than their grandparents and came of age in a period of prolonged conservatism when radical ideas were largely marginalized. They inherited their families’ broad opposition to exploitation and injustice, but cautioned in their minds by dark side of far left history, have leavened that opposition with what from their perspective is a more practical and sober world view: a savvy, principled liberalism that accepts but seeks to mitigate the enduring power of capitalism. They view themselves much more as crusading individuals than as potential members of transforming social movements.

    Now, however, social and historical conditions have changed. Liberal and left-liberal analysis seems much less appropriate or even practical in the wake of the Great Recession. How this will affect Yglesias and others like him remains to be seen. In his case I am not particularly optimistic, but one never knows, do one?

  10. burghardt, that also sounds like isabel allende

  11. If we are looking to improve the lot of workers, wouldn’t it make sense to not tax labor ( “income” )? The loss could be made up by taxing resource extraction for example: timber, mining, oil, gas, etc.. and even capital-extraction through trading. I would like to read your thoughts, Doug.

  12. Whether they are being taxed through payroll charges, or whether they are being taxed on distributed profit, corporations are being taxed anyway. It is just that it is much more difficult to evade payroll taxes, than profit taxes, which is exactly why the state gets a lot of its money from labor taxes. Reducing the tax on employing labor makes sense in a depressed economy, because it makes it easier to hire labor. Increasing the tax on dividends usually has very little effect on the real economy. But why would the rich people who control the US government vote to tax themselves more? It is simply not in their interest. It would happen perhaps, only if the whole economy came to a standstill.

  13. Can’t the state create investment through credits in bank accounts (‘money printing’ sort of), or some time of public or cooperative baking system ?

    Once the sagacity of private investment is legitimized it’s hard to avoid giving fealty to our ‘job creators’.

    Romney’s aren’t necessary.

    As an aside, B Russell has a nice ode in ‘defense of leisure’ for our profligate doctor.

  14. It’s certainly possible for the federal govt and the federal reserve to create extra credit money by various routes and indeed they have been doing that (e.g. “quantitative easing”). But both Democrats and Republicans agree the public debt should be reduced – in the case of the Democrats, by increasing taxes and cutting expenditures, and in the case of Republicans, principally by cutting expenditures – they feel the tax burden should not be raised.

    Behind that are serious disagreements about what you actually have to do to promote economic recovery, and what the best strategy is for the long term.
    Thus, nobody can really agree on what policy to follow, leading to “lame duck” policies (temporary ad hoc and halfway measures, such as tax breaks and tax concessions, or temporary social security grants) which postpone tough decisions on public finance. The”fiscal cliff” is reached on 31 December, but depending on how the US elections go, it is likely that the big decisions will be delayed even more.

    The point about corporate taxes is this: because all workers officially pay payroll taxes on their wages, it looks like they all have a stake in the state. And, formally speaking, they do. But in reality the taxes on labor are paid for by the employer, and it is a cost to him – it is effectively, economically, not the worker who funds the payroll tax, but the employer. From the point of view of the employer, therefore, the employer is paying a lot of tax, namely tax in respect of the workers he hires.

    What is really needed in the US – as in many other places – is a radical overhaul of the whole tax system, because it is, as experts acknowledge, in many respects cumbersome and inefficient (meaning it often costs a lot to collect the tax, and the tax legislation is very complex), and it promotes tax evasion. An intelligent tax reform could do much to promote economic recovery. However, the IRS don’t even have sufficient staff to do their work properly. All the senior politicians know that situation. Tax is a “nerve centre of bourgeois morality”, and tax policy is a political hornet’s nest.

    In order for a comprehensive tax reform to occur, you require a broadbased mandate and broad political support. That precondition doesn’t really exist, and so only some piecemeal reform occurs. No radical tax reform or any other sort of economic reform can really occur, unless there was some kind of political landslide, so that one party had a clear majority. But even if they had it, there is still a lot of confusion and disagreement at the federal level about what you would actually have to do to create a better tax system, and that aside, different state governors have very different ideas about what policy to follow.

    It’s not really in the interest of working people to pay more tax, unless they get out of the state what they put into it. But unfortunately the way it seems to be going, is that workers get more tax costs, and get less back in terms of state services.

  15. Does Yglesias realize that he is reusing an anti-Keynesian argument made by Henry Hazlitt in the notorious Economics in One Lesson?

  16. I was thinking of a Michael Hudson view of creating government credit, and hiring directly, rather than QE as it exists now, seemingly dumping money into banks who then play with it.

  17. @purple: yes that is possible, but that sort of deficit-financing idea is proposed also by Paul Krugman and all kinds of post-Keynesians. Politically though it would mean a total reversal of US govt policy, since what they have been doing over the last ten years is whittling down the public service. There is a strong belief among a large part of the bourgeoisie that the state interventionism of the post-WW2 era sapped the will of people to look after themselves, and be self-reliant. If the fed. govt would create public works jobs, what it would effectively be doing, is paying or subsidizing corporations to organize those jobs to be there and hire unemployed people, and the question then is, why the corporations aren’t creating the jobs themselves.

  18. [...] and corporate owners are a superior breed of being runs deep in the Repub psyche. This article concludes that cutting taxes on investment doesn’t actually produce miracles of economic growth. LGM [...]

  19. If markets were perfectly efficient, all the good done by the money invested would be returned to the investor, so there is no social benefit from his investment. Since markets are not perfectly efficient, this is not entirely true*, but then also it becomes nearly impossible to distinguish between the good done by the investor doctor (hiring people) and the spender doctor (causing people to be hired to meet his needs), since neither stream of benefits flows entirely to the originator, in both cases there can be social benefits (as well as negative externalities). It might be argued that the jobs created for the spender doctor will end the day he stops spending, but likewise the jobs created by the investor doctor end (or at least, the crown shifts to someone else) the day he sells or pulls his investment out. And we might also ask where this surplus for investment and/or luxury comes from. From gouging patients? Many working people don’t have much left after basic necessities.

    (*Unfortunately, operators like Romney make investment markets more efficient for the investors by breaking social contracts, so investment markets have been tending in this direction, though with the benefit accruing mainly to people in the finance industry rather than individual savers.)

    It seems to me likely that the spending will be less efficient to the originator, and therefore more beneficial to the rest of society. (It’s also likely to have a higher Keynesian multiplier.) However, it really and importantly does depend on what the spending doctor is spending on, and how the investing doctor is investing. Neither activity is inherently better than the other, the devil is in the details, especially when we have massive negative externalities like Global Warming. It might be more crucial to look at how much CO2 will be released as a result of the planned spending or investment, for example.

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