The framing of “nobles” and “peasants” distracts me from your question; it implies connotations that you might want to clarify or endorse, or change your terminology.
Real-life nobles don’t produce 10,000x value; they extract value from peasants, by force of arms and law and custom. It makes no sense to redistribute wealth by taxing everyone’s income if the nobles get their income by taxing the peasants; just stop the nobles from extracting so much value.
Some of the modern super-rich do generate disproportionately high value, e.g. from high-risk bets they made to build innovative companies. But most of their income still comes from capital and owning the tools of production and all that (citation required). And this influences the moral calculus for a lot of people. The reason for taking some of their property (income) is not just that most people want to do it or that someone else would enjoy it much more, it’s that it shouldn’t be theirs to begin with.
A terminology of “nobles” and “peasants” implies to me the idea that most all of the nobles’ (the modern rich) income is extracted from from the peasants (everyone else), enabled by the same state that then taxes them. Did you intend or endorse this view? If not, or if you think it’s irrelevant to the thought experiment, do you think the framing of “nobles” and “peasants” distracts from the issue? It does for me.
Some of the modern super-rich do generate disproportionately high value, e.g. from high-risk bets they made to build innovative companies. But most of their income still comes from capital and owning the tools of production and all that (citation required). And this influences the moral calculus for a lot of people. The reason for taking some of their property (income) is not just that most people want to do it or that someone else would enjoy it much more, it’s that it shouldn’t be theirs to begin with.
This isn’t a post about social justice and wealth inequality in general. The moral calculus from the point of view of most people isn’t the point of contention here, it’s the point of view of the rich that’s being discussed.
That’s a good point. Then Wei_Dai’s question becomes more important: why don’t we see other coordination mechanisms in this space, besides forcible taxation? And why don’t rich people disproportionately vote in favor of more progressive taxes on themselves?
After all, if all we can learn from this post is that rich people don’t in fact have the posited preference, so this model doesn’t apply, then it’s not very interesting.
Maybe because there is value left on the table? You could apply the same logic to any new idea: “If it was so great, someone would have already thought of it and exploited it, so it clearly can’t be that great.”
Also, I would claim charity tax deduction already is such a coordination mechanism, allowing the rich to engage in philantrophy in ways they believe to be more effective than taxation (e.g. they would like more of their donations going towards foreign aid)
That doesn’t seem to be enough to explain the rich not voting in the past to increase the marginal tax (like a few of them are now calling to do). Many different tax bills have been proposed over history; this doesn’t seem like an idea nobody thought of until now.
It’s likely that the rich (or people in general) don’t trust the government with their money, don’t believe it would be spent nearly as effectively or beneficially as pure redistribution, and may entirely oppose some of the government’s uses of tax money and not want to fund them.
In that case, what we need is a bill that proposes a special tax on the rich whose proceeds go only and directly towards redistribution, or some sort of universal income which not sufficient to live on but also doesn’t count as ‘income’ for ordinary taxation and disqualifications for social services for the poor. And such a thing is plausibly hard to think of, draft, and get enough support behind.
Also, I would claim charity tax deduction already is such a coordination mechanism
It’s not a coordination mechanism; it doesn’t allow people to commit to giving money if and only if everyone else also gives money, as a tax does. Even if giving money was free (untaxed), the OP’s coordination problem would remain.
It’s not a coordination mechanism; it doesn’t allow people to commit to giving money if and only if everyone else also gives money, as a tax does. Even if giving money was free (untaxed), the OP’s coordination problem would remain.
Actually it is, just a bit contrived. The penalty for violating the “commitment” is having to pay extra taxes (lose the tax break). Just a matter of labels.
I don’t understand your point. Paying taxes or not is not related to whether and how much other people also make charitable deductions. Bezos donating less or more doesn’t influence Gates donating less or more. What is the coordination mechanism?
In the first case, to avoid the penalty of being fined, you pay taxes.
In the second case, to avoid the penalty of being taxed, you don’t donate.
If I allow you to donate without being taxed, it doesn’t follow that you will donate. Maybe you don’t want to donate to begin with, or not unless everyone else does as well. That’s the model the OP assumes.
Tax rates on non-donation gifts (= marginal income taxes of the non-rich) are “only” a few tens of percents. For the OP’s model to work, he had to assume a ratio of 1:1,000,000 between the value to a noble of keeping or donating money. That’s as if there was a 99.999,999,9% tax rate on donations! If there was such a tax rate, then making donations tax-free would certainly stimulate a lot of donations. But as it is, under the OP’s general assumptions, tax rates of ~~ 30% should not much matter.
Real-life nobles don’t produce 10,000x value; they extract value from peasants, by force of arms and law and custom. It makes no sense to redistribute wealth by taxing everyone’s income if the nobles get their income by taxing the peasants; just stop the nobles from extracting so much value.
I think that redistribution by taxing still makes sense, e.g. if nobles effectively get their money by owning and controlling the land (by force or whatever) and taking a big cut from the people who work it. But I also agree that there may be easier and better things to do than raising taxes, it seems like a waste of effort for nobles to collect local taxes and then the king to collect taxes from the nobles and pay it back.
But most of their income still comes from capital and owning the tools of production and all that (citation required).
I think this probably isn’t right—e.g. capital income is a minority for the top 1% of earners in the US today, and the situation is even starker for global inequality.
A terminology of “nobles” and “peasants” implies to me the idea that most all of the nobles’ (the modern rich) income is extracted from from the peasants (everyone else), enabled by the same state that then taxes them. Did you intend or endorse this view? If not, or if you think it’s irrelevant to the thought experiment, do you think the framing of “nobles” and “peasants” distracts from the issue? It does for me.
In retrospect I agree it would have been better to use a different example.
(In retrospect people also didn’t like the big and unrealistic numbers, so I could have just made them 10 and 100 instead. I generally overestimated the extent to which readers would separate the simple quantitative point, which I wanted to make in the shortest way possible but didn’t think about that much, from other features of the scenario.)
I think this probably isn’t right—e.g. capital income is a minority for the top 1% of earners in the US today, and the situation is even starker for global inequality.
That’s surprising to me. Where does most of the income of rich people come from, then? Can you point me to some relevant resource?
One thing I would like to figure out is whether this can be explained by businesses restructuring so that some of the rich people who used to be owners getting dividends are now company executives getting salaries—but the salaries are still set mostly by themselves to benefit themselves, out of proportion to the value of their work to the company. Directors or board members often also get salaries, again for very little work in most cases.
These are things that might be colloquially called ‘capital’. Jeff Bezos has a total compensation of 1.6 million; that is indeed a tiny part of his net worth, but I still think of it as “Jeff Bezos is a capitalist who is making money from the successful business he owns”, not as “Jeff Bezos is being paid for his talents as a CEO”. I don’t care about the distinction from the income he gets from Amazon dividends, shares, or his salary as a CEO. But then I’m not an economist; perhaps these are really significant differences that I should care about.
(In retrospect people also didn’t like the big and unrealistic numbers, so I could have just made them 10 and 100 instead. I generally overestimated the extent to which readers would separate the simple quantitative point, which I wanted to make in the shortest way possible but didn’t think about that much, from other features of the scenario.)
For what it’s worth, I think the big, unrealistic numbers and framing of the example made this feel like a much more valuable intuition pump to me, so thanks! (Key point I took from it: It is actually perfectly reasonable to favour taxation while being unwilling to donate yourself, and there’s a big gap between these two thresholds)
The framing of “nobles” and “peasants” distracts me from your question; it implies connotations that you might want to clarify or endorse, or change your terminology.
Real-life nobles don’t produce 10,000x value; they extract value from peasants, by force of arms and law and custom. It makes no sense to redistribute wealth by taxing everyone’s income if the nobles get their income by taxing the peasants; just stop the nobles from extracting so much value.
Some of the modern super-rich do generate disproportionately high value, e.g. from high-risk bets they made to build innovative companies. But most of their income still comes from capital and owning the tools of production and all that (citation required). And this influences the moral calculus for a lot of people. The reason for taking some of their property (income) is not just that most people want to do it or that someone else would enjoy it much more, it’s that it shouldn’t be theirs to begin with.
A terminology of “nobles” and “peasants” implies to me the idea that most all of the nobles’ (the modern rich) income is extracted from from the peasants (everyone else), enabled by the same state that then taxes them. Did you intend or endorse this view? If not, or if you think it’s irrelevant to the thought experiment, do you think the framing of “nobles” and “peasants” distracts from the issue? It does for me.
This isn’t a post about social justice and wealth inequality in general. The moral calculus from the point of view of most people isn’t the point of contention here, it’s the point of view of the rich that’s being discussed.
That’s a good point. Then Wei_Dai’s question becomes more important: why don’t we see other coordination mechanisms in this space, besides forcible taxation? And why don’t rich people disproportionately vote in favor of more progressive taxes on themselves?
After all, if all we can learn from this post is that rich people don’t in fact have the posited preference, so this model doesn’t apply, then it’s not very interesting.
Maybe because there is value left on the table? You could apply the same logic to any new idea: “If it was so great, someone would have already thought of it and exploited it, so it clearly can’t be that great.”
Also, I would claim charity tax deduction already is such a coordination mechanism, allowing the rich to engage in philantrophy in ways they believe to be more effective than taxation (e.g. they would like more of their donations going towards foreign aid)
That doesn’t seem to be enough to explain the rich not voting in the past to increase the marginal tax (like a few of them are now calling to do). Many different tax bills have been proposed over history; this doesn’t seem like an idea nobody thought of until now.
It’s likely that the rich (or people in general) don’t trust the government with their money, don’t believe it would be spent nearly as effectively or beneficially as pure redistribution, and may entirely oppose some of the government’s uses of tax money and not want to fund them.
In that case, what we need is a bill that proposes a special tax on the rich whose proceeds go only and directly towards redistribution, or some sort of universal income which not sufficient to live on but also doesn’t count as ‘income’ for ordinary taxation and disqualifications for social services for the poor. And such a thing is plausibly hard to think of, draft, and get enough support behind.
It’s not a coordination mechanism; it doesn’t allow people to commit to giving money if and only if everyone else also gives money, as a tax does. Even if giving money was free (untaxed), the OP’s coordination problem would remain.
Actually it is, just a bit contrived. The penalty for violating the “commitment” is having to pay extra taxes (lose the tax break). Just a matter of labels.
I don’t understand your point. Paying taxes or not is not related to whether and how much other people also make charitable deductions. Bezos donating less or more doesn’t influence Gates donating less or more. What is the coordination mechanism?
The same way taxation is a coordination mechanism.
Taxation = social arrangement
Fines/prison sentence for tax evasion = enforcement mechanism
Charitable donation = social arrangement
Higher taxation = enforcement mechanism
I don’t see how that is applicable.
In the first case, to avoid the penalty of being fined, you pay taxes.
In the second case, to avoid the penalty of being taxed, you don’t donate.
If I allow you to donate without being taxed, it doesn’t follow that you will donate. Maybe you don’t want to donate to begin with, or not unless everyone else does as well. That’s the model the OP assumes.
Tax rates on non-donation gifts (= marginal income taxes of the non-rich) are “only” a few tens of percents. For the OP’s model to work, he had to assume a ratio of 1:1,000,000 between the value to a noble of keeping or donating money. That’s as if there was a 99.999,999,9% tax rate on donations! If there was such a tax rate, then making donations tax-free would certainly stimulate a lot of donations. But as it is, under the OP’s general assumptions, tax rates of ~~ 30% should not much matter.
I think that redistribution by taxing still makes sense, e.g. if nobles effectively get their money by owning and controlling the land (by force or whatever) and taking a big cut from the people who work it. But I also agree that there may be easier and better things to do than raising taxes, it seems like a waste of effort for nobles to collect local taxes and then the king to collect taxes from the nobles and pay it back.
I think this probably isn’t right—e.g. capital income is a minority for the top 1% of earners in the US today, and the situation is even starker for global inequality.
In retrospect I agree it would have been better to use a different example.
(In retrospect people also didn’t like the big and unrealistic numbers, so I could have just made them 10 and 100 instead. I generally overestimated the extent to which readers would separate the simple quantitative point, which I wanted to make in the shortest way possible but didn’t think about that much, from other features of the scenario.)
That’s surprising to me. Where does most of the income of rich people come from, then? Can you point me to some relevant resource?
I think it’s mostly wages.
Might be misreading, but see table III here (h/t Howie Lempel for the source). Looks like even the top 0.01% is still <50% capital income.
[Edit: though in the past the capital shares were higher, in 1929 gets up to 50% of income for the top 0.1%.]
There are various ways this data isn’t exactly what you want, but I still think it’s very unlikely that it’s more than half capital income.
Thanks, that’s informative.
One thing I would like to figure out is whether this can be explained by businesses restructuring so that some of the rich people who used to be owners getting dividends are now company executives getting salaries—but the salaries are still set mostly by themselves to benefit themselves, out of proportion to the value of their work to the company. Directors or board members often also get salaries, again for very little work in most cases.
These are things that might be colloquially called ‘capital’. Jeff Bezos has a total compensation of 1.6 million; that is indeed a tiny part of his net worth, but I still think of it as “Jeff Bezos is a capitalist who is making money from the successful business he owns”, not as “Jeff Bezos is being paid for his talents as a CEO”. I don’t care about the distinction from the income he gets from Amazon dividends, shares, or his salary as a CEO. But then I’m not an economist; perhaps these are really significant differences that I should care about.
For what it’s worth, I think the big, unrealistic numbers and framing of the example made this feel like a much more valuable intuition pump to me, so thanks! (Key point I took from it: It is actually perfectly reasonable to favour taxation while being unwilling to donate yourself, and there’s a big gap between these two thresholds)