Compounding Interest 2
Welcome to another edition of “Compounding Interest” where I’ll share a few short notes about recent stories and links that shed light on some issue dealing with capitalism. If you are enjoying the Exploring Capitalism substack, please consider sharing it with others and helping me build the audience.
More Insight on Inequality
Last week I shared some initial thoughts about how to escape the endless debates about income and wealth inequality. I briefly noted that the central distortions and source of so much confusion came down to basic measurement issues. For those who might want to dig in more on those issues, the always insightful Scott Lincicome published a helpful piece earlier this year. Appropriately titled “Lies, Damned Lies, and Inequality Statistics,” Lincicome gathers a wealth of useful links to more specialized studies that debunk many of the distortions I mentioned. The detailed piece covers how we define income (pre- or -post tax, including government transfers), how to calculate the share of national income going to labor, and how the movement of actual people from one abstract category of income to another during their lifetimes affects these measures.
As he sums up: “Whether it’s income, the ‘labor share,’ or wealth, numerous studies by respected academics rebut the scary headlines and beltway conventional wisdom about rampant inequality in the United States.” Though this is comforting, of course, it is little solace if the knowledge is lost in translation from the academy to the halls of power. He notes two real dangers of the continuing use of inequality to justify new interventions into the economy. First, these “government efforts to target and reduce market‐based inequality could actually backfire by lowering living standards and fomenting class envy and cultural strife.” Second, the studies highlight how increasing transfer payments to the lowest income households has a direct depressing effect on their labor-force participation rate. “We can—and should, I think—be concerned about a system in which government payments represent a large and increasing share of poorer Americans’ income—and how such payments affect Americans’ life and work decisions. But this is the reality we have, and it’s especially important to portray it accurately, given that inequality is so commonly used to argue for an even more progressive distribution of taxes and transfers and even more government meddling in the market.”
An Accurate Portrayal?
Speaking of the desperate need for accurate portrayals, we should pause for a moment to consider the other half of the inequality debate—namely, the tax debate. If you think the measurement issues around how much income people earn is clouded by intentional obfuscation, try dipping into the question of how much people pay in taxes. Consider the following piece by Jonathan Chait that recently made the rounds. The headline confidently declared “No, the Richest One Percent Don’t Pay 40 Percent of the Taxes.” Chait apparently has grown tired of people citing what he calls “the stat” as a way to end debates about increasing taxes. Of course, we only need to get to the third paragraph to discover “The Stat is literally true” [emphasis in the original].
Yes, you read that correctly. Chait concedes that it is in fact true that 1% of income earners pay 40% of the income taxes in the United States. He’s upset because he thinks this is misleading. Why? Because income taxes are only one component of the entire tax system, and others taxes are not as progressive as the federal income tax. He complains that sales taxes and the payroll taxes are regressive, and therefore “the stat” gets people focused on the wrong thing. He cites a study in support of this point. Despite the policy conclusions of the study that call for more taxation, the clear picture is that the top income levels pay more in total taxes (federal, state, local) than the lower levels—just not as much as people think.
Chait’s conclusion is one that points to the real issue—which is exactly the one he doesn’t address. “A great deal of evidence,” he notes, “supports the notion that the tax system could increase the burden on the very rich with little or no economic drag.” In other words, every tax should be made more progressive. Let’s hold off for the moment about the conflicting evidence on both sides of that question and consider a more fundamental question that Chait doesn’t raise. Thankfully, President Biden, in asking for significant tax increases, pointed out the issue recently when he told those who make a million or a billion dollars “all I’m asking is you pay your fair share.” But here’s the problem: no one is bothering to define or even question what a “fair share” is. I’d suggest that we re-examine that question. Instead of wrangling over (and distorting) exactly how much the rich pay, or how inefficacious it would be to increase their tax rates, we need to focus on interrogating the original justifications for our tax system. I’ll have more to say on that in an upcoming post.
The Antitrust Zombie Returns
As I noted a few weeks ago, the Biden administration is pushing for increased enforcement of existing regulations and creation of new regulations to better “control” the economy. A large part of this is new antitrust enforcement. As Marc Jamison at the American Enterprise Institute ominously notes that a recent Federal Trade Commission memo has shifted priorities from “fixing” problems after they arise to commanding the economy and “preventing” problems from happening. “If the memo’s roadmap is followed,” he notes, “there isn’t much in the US economy that the FTC won’t oversee. Khan’s vision is for an agency that prescribes outcomes and processes for the economy.” Jamison rightly notes that this is a major shift. In the past, antitrust enforcement by both the Justice Department and the FTC aimed at eliminating, constraining, and breaking up big businesses on the (incorrect) premise that they were inefficient and worked against the interest of consumers. Under this new approach, the FTC would anticipate business practices that in fact lead to success and preemptively define them as “unfair” in order to enjoin their widespread adoption. We should “expect to see regulations that crush many Americans’ dreams of starting successful businesses, working for world-leading tech companies, or simply using the best tech services the world can offer.” As Joshua Wright notes in the Wall Street Journal, this shift in approach at the FTC also includes deferring some judgments about mergers to the European Commission. This not only increases the bureaucratic burden on businesses, but effectively eliminates many of the legal advantages of doing business in the United States.