Scott Sumner's Optimal Tax Regime Part 1

     He peevishly had declared in his post complaining about the fiscal deal just passed and again kvetched about how unfair it is to tax investment income-dividends, capital gains that he wasn't going to "again" explain what's so unfair about taxing investment.

    http://diaryofarepublicanhater.blogspot.com/2013/01/scott-sumner-is-not-happy-camper-about.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+DiaryOfARepublicanHater+%28Diary+of+a+Republican+Hater%29

     However, someone uncovered a post he wrote back in 2010. Still just because he's made the argument doesn't mean it's everyone else's fault if they don't buy it.

     http://www.themoneyillusion.com/?p=7091

     "And now, finally, my post on the optimal tax regime. It will be nice to finally get this off my chest, as you can’t imagine how enraged I get reading progressives talk about the “principle” that all forms of income should be taxed equally (which is like a “principle” that all fruit should sell at the same unit price.) Or when they discuss Gini coefficients of inequality based on meaningless income data (not to mention ignoring the fact that the economic incidence of a tax is totally different from its legal incidence.)"

     He then proceeds to describe various  economic scenarios with two brothers and then demands to know if there's inequality in this society-not to give you a cheat sheet or anything but the answer's always no.

     "Suppose 2 brothers both make $100,000 a year. One spends his income on watermelon, and the other spends it on blueberries. Would it make sense to decry the inequality of this society, merely because the blueberry eater got to consume a larger number of “fruits” (because their unit price was lower?) Clearly not, and for two very good reasons.

    "1. They are each free to buy either type of fruit."

     "2. The higher unit price of watermelon indicates they are more highly valued (per individual fruit.)"

     See, I don't think it's nearly so cut and dried. Truth is we don't have enough information about this very idiosyncratic society. I mean is a society with exactly two people in it still a society? Is it still an economy? I'm just saying. If they are not the only two members in the society then it would be quite premature to declare that it makes no sense to talk about inequality in this society for these two reasons...

     However, assuming that they are the only two members-which is probably what Sumner wants us to assume, certainly we're not supposed to think about anyone else un-named-then even then I don't know. What if the one who eats watermelon has to as he's allergic to blueberries. Now whether or not this is a "social injustice" it certainly sucks for him. Then again, you may say that one "chooses" to eat blueberries, the other "chooses" to eat watermelon but do we really choose our taste? Do you choose to like apples or is that just a given?

    Of course this doesn't necessarily mean that it;s either possible or even desirable to make blueberries and watermelon worth the same amount but I don't see how this proves that it never makes sense to discuss inequality. Here is another social scenario for Sumner:

    "Now assume it’s possible to invest income at a real rate of interest that allow one to quintuple one’s wealth between age 25 and 65. (Say a 40 year zero coupon real bond yielding around 4%.) In this example let both brothers consume nothing but blueberries. One brother chooses not to save at all, the other saves 40% of his income. One eats $100,000 worth of blueberries today; the other eats $60,000 today and saves $40,000. After 40 years the thrifty brother gets to eat $200,000 worth of blueberries. Both also get some social security at 65. Here’s my question: In this society is there any economic inequality?"

     "I don’t see how anyone could say there is. Both have exactly the same wage income at age 25. Yes, they do different things with it, but that’s their choice. At age 65 one has zero income outside social security, and the other has $160,000 in capital gains, which is generally considered “income.” But nonetheless there is complete equality for two reasons:

     "1. Both are free to choose whether to save or not, so we have no evidence that one brother had more utility than the other."

    " 2. In present value terms their total lifetime consumption of blueberries is identical.
The mistake is assuming that blueberries in 40 year are the same thing as blueberries today. Future blueberries only cost 1/5th as much, as they are much less valued than current blueberries. They are different goods just as much as watermelon and blueberries are different goods. That $160,000 gain is not “income” in the way most people think of the term, i.e. as some sort of goodie available for spending. Rather it reflects deferred consumption. The $200,000 received at 65 is exactly equal in present value to the $40,000 saved today. Indeed it is the very same wealth, simply measured at a different point in time. It is nonsensical to say the thrifty brother has income of $100,000 today plus another $160,000 at age 65, you’d be counting the same income twice."

     First of all, see what I said regarding the first scenario where one liked watermelon and one blueberries. Are these two brothers society's only members? Because we'd probably presume that two people who make the same lifetime income are roughly equal. That's not the question that this hated progressives look at when their looking at the Gini. He wants to show us a society that is already equal-at least between the two brothers who make the same money and then show how any difference between them is solely due to the better choices that the thrifty one made vs. the "spendthrift" one.

    Still I think that this is a good analogy as far as this is how anti-Keynesians like Sumner really do see economic inequality. He chides the progressives for inappropriately moralizing economic inequality while he himself clearly sees the outcomes of society as being morally correct. His complaint is that he thinks the unfettered free market gives us already ethically optimal outcomes.

     However, to give us a society where you can't criticize inequality he has to give us a society where there actually is no economic equality. Note that he even has them both "on the dole" collecting Social Security benefits. Of course no progressive ever said that anyone who made $100,000 during his working life and collects adequate SS benefits is a victim of inequality.

    I find a lot that's confusing or at least misleading about Sumner's two brother society. He says they make $100,000 per year for 40 years-never more or less. Obviously that's not the real world. Is it that they end up with effectively making $100,000 per year between the age of 25 and 65? IN reality it wouldn't be the same amount every year. As he notes when you get the money can make a big difference too.

     Sumner complained yesterday that liberals can't accept that sometimes people are in a bad situation because of their own choices. My sense is that conservatives like Sumner can't accept that not everyone who is in a bad situation is there due to their own choices.

    In the post he wrote yesterday about the tax deal he said that some people on UI take advantage-but then he said it's only about 1%. If this is correct why punish the 99% who don't abuse the system-why make it all about the 1%? That he sees it this way shows that while he uses what he thinks are economically sophisticated arguments, at the end of the day, it's a moral preoccupation for conservatives like Sumner as well.