Taxing the Rich (how to)

Do you want to raise more taxes from rich people, dear Reader? I thought so. Then a read of Taxing the Rich: A History of Fiscal Fairness in the United States and Europe by Kenneth Scheve and David Stasavage is illuminating.

Apart from anything else, the historical data on top tax rates is fascinating. There have really only been two big moves in top income (and inheritance) tax rates: up, a lot, from the 1920s to around 1950; down, by half of a lot, mainly in the 1980s but drifting down subsequently. It is also interesting to note the contrast between the US/UK top marginal rates and the rest of the developed world – about 40% vs about 60%. As in so many areas, the fact that data and economic research are heavily US-centric has a distorting effect on economic policy debates elsewhere. Extraordinarily, the burden of total taxation on the highest income bracket in the UK reached 90.7% during the second world war (compared to 19.1% for the bottom group). Talk about progressive.

The book discusses the forces driving the trends in taxation of the rich. The authors’ main point is that war has been the principal driver, with the sense of fairness the result of the calls the state made on citizens at those times. It was at times when the government demanded immense sacrifices from the majority of the population that the effective social contract ensured the wealthy paid: “War mobilization changed beliefs about tax fairness. It created an opportunity for new and compelling compensatory arguments that increased support for taxing the rich.” In other words, while the arguments for taxing the rich have always relied on fairness, the notion of fairness has changed at different times. The book demonstrates that as wars created opportunities for profit for capitalists, thanks to wartime production, the demand they should shoulder more of the tax burden gained great traction.

The book challenges the previous consensus that the consensus in favour of strongly redistributive taxation, to compensate for the sacrifice of ordinary people, lasted for any length of time after world war two. And to the extent there was, it anyway steadily crumbled. The book agrees that globalization, and a new emphasis on incentives for economic growth, played a part in reducing tax rates on the rich as the 20th century wore on. But they argue that a more important factor was the weakening of the kind of compenstory arguments that had been available in wartime. “Different compensatory arguments can be made today, but they have a smaller impact. In today’s debates about progressive taxation, observers often fail to appreciate this fact.”

The book reports a representative survey of over 2000 Americans showing that the top marginal tax rate they select is in fact below today’s rate of 39.6%. There appears to be little support from this for higher taxation. To put it another way, Americans don’t see why Silicon Valley should be taxed because Wall Street was bailed out – although they oppose the bailout. The lesson is: ‘fairness’ is not an abstract concept. You have to find a fairness argument with traction, and the compensatory arguments being used by the left today do not have that. Looking back to the 19th century, before the era of global war provided a strong compensatory argument, the principles that enabled increases in taxes on the rich concerned equal treatment for all within the tax system: as existing taxes were raised on land, new mercantile fortunes were untaxed. So taxation was extended in its coverage. The authors suggest looking to the thickets of exemptions and special privileges rather than the headline-grabbing top marginal rates. Interestingly, this is something Jo Maugham emphasised this week. Maybe he had read this very interesting book. David Stasavage also spoke at this recent LSE Conference on inequality.

 

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Economic thought and its idiosyncracies

This weekend my reading was Economic Thought: A Brief History by Heinz Kurz. It really is brief, just 183 pages, starting with the Ancient Greeks and ending with behavioural economics and RCTs. So it sets out the broadest outlines of economics, with a strong bias towards macroeconomics and thinking about economic systems. Marxism is covered – indeed, gets a whole chapter of 14 pages – but industrial organisation is absent save for a bit of Schumpeter and a bit of new institutional economics.

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Within its self-imposed limitations of space and selectivity, the book does a decent job in outlining the key features of, say, classical thought and the marginalist turn – for example, Kurz emphasises the introduction of the emphasis on the flow of commodities produced each year in classical thinking. I learned a few new names: Hermann Heinrich Gossen, anyone? I hadn’t heard of him before, but learn here that he introduced the earliest version of marginal utility theory. I thought the discussion of utility theory is particularly good. Kurz writes:

“Compared with cardinal utility theory, ordinal utility theory – with its rejection of interpersonal comparisons – dramatically privileges the individual relative to society. In this perspective, the individual, one might say, is in principle attributed a right to veto public decisions that affetc his or her (subjective) well-being … As a consequence, economic policy seems unable to improve social situations. Since every policy alternative has some gainers and som losers, how could one ever judge the gains of the former against the losses of the latter, if interpersonal utility comparisons are prohibited?”

Very clear. There are a couple of other points where Kurz highlights interesting and deep methodological issues – another one, for instance, critiques Heckher-Ohlin-Samuelson in terms of its assumption of a single homogeneous ‘quantity of capital’. And in a short section on economic geography, there’s the point that in a constant returns to scale world assumed by so much of economics (including productivity accounting), “economic activity will be evenly distributed across a homogeneous plain, carried out by autarkic units of production and consumption.”

So, some nice insights. I did find myself wondering what audience the author had in mind as he wrote. He tries to explain some concepts – indifference curves, Keynesian aggregate demand, Hicks-Kaldor compensation and Skitovsky’s rebuttal – in a couple of pages at most. Economists reading this book wouldn’t need the explainers. Normal people reading it will find these far too condensed and impenetrable. As one of the former group, I’d have traded off the attempts at explanation of basic concepts for some more of Kurz’s critique of the ideas he is covering. Still, this would be a useful book for students just starting to get into the history of thought – one step beyond The Worldly Philosophers, and a prelude to a bigger book like Saadmo’s excellent Economics Evolving.

 

The health of the publishing industry

Yesterday the Publisher’s Association put out the press release on its 2015 figures  with the headline ‘Strong Year for UK publishing industry.’ Total revenues increased by 1.3% (or about £100m) to £4.4bn. With inflation around zero last year, this is a real terms increase. The release highlighted the increase in physical book sales (and particular non-fiction – but I don’t know if this category includes the depressing proliferation of adult colouring books); and the first recorded decrease in digital sales.

You have to buy the statistics, so I’ve only done a few sums on the figures in the press release. This is not helped by the fact that the author of the release was a bit hazy about the difference between millions and billions, so there was a bit of guesswork involved. Revenues from physical book sales were up 0.4% to £2.76bn (an increase of around £12m). Revenues from digital sales were down 1.6% to £554m. Interestingly, then, physical sales continue to be much larger in scale.

And what about the gap? There is a line stating: “2015 was a great year for learned journals sales and demonstrates the strength of academic publishers in driving new innovative business models that contribute towards maintaining the UK’s position as a hub of global research excellence.” Piecing together the figures, it looks like a 5% (or approx £50m) increase to £1.1bn in sales of academic journals.

Export sales were down slightly – the rest of Europe accounts for 35% of the UK industry’s sales. As far as I can tell, the export figures are included in the above three categories (physical, digital, academic journals).

So all in all, yes a good year, pleasing for those of us devoted to physical books. But most pleasing of all to the publishers of academic journals (and not so good for taxpayers and students who fund the library purchases).

Timely advice for voters?

Here’s a timely new book that arrived at Enlightenment Towers this week: How to Choose a Leader: Machiavelli’s Advice to Citizens, by Maurizio Viroli.

It’s a small book, which Viroli frames for an American readership choosing a new president later this year. He points out that Machiavelli was an important influence on John Adams and others of the Republic’s Founding Fathers, because of his emphasis on government without tyranny. While we always think of The Prince, Discourses on Livy and The Art of War were also highly influential.

Each chapter addresses and explains a quotation from Machiavelli, such as “I love my country more than my soul,” or “It is the common good which makes republics great.” (‘Machiavelli invites citizens to use their reason to evaluate political and social matters.’ Riiiiight.) Then Viroli gives some modern examples of rulers who did – and didn’t – follow the relevant advice.

I haven’t read it properly, just paged through, but it looks great for dipping into. Very handsomely produced little book, too.

Surviving disruption through paranoia

Joshua Gans’s new book The Disruption Dilemma is aimed at business readers. It takes the famous Clayton Christensen analysis The Innovator’s Dilemma – a change in the competitive landscape that even a well-managed business might not survive – and sets out the possible strategies the defensive firm might successfully deploy. In doing so, Gans argues that the original disruption story is too simplified, and there are different kinds of challenge, some more threatening to incumbent survival than others.

As Gans points out, ‘disruption’ has become an over-used term, so he is specific about addressing fundamental shifts in the landscape. Where Christensen and many of his successors have focused on defences against the demand side of disruption where a new entrant offers a product to a niche group of customers, Gans is interested in the supply-side, when the disruptions  use an entirely new technology or approach to production. For this means the incumbent businesses find it very hard to respond. To do so effectively means completely redrawing the fundamentals of how they produce their product or service. The book advisers readers not to worry about ‘demand side’ disruptions but to focus their efforts on how to prepare for a ‘supply side’ event

Counter-intuitively, one of Gans’s defensive strategies is to run a highly integrated organisation that is in the habit of working on a sequence of innovations – which runs contrary to the usual advice to ‘disrupt yourself’ with some kind of skunk works. This is the dilemma of the title: if you run a highly integrated business, then you can’t try the independent unit option. The other strategies are: ensure you have some unique complementary assets (something John Kay has always emphasised); and don’t tie your corporate identity to your technology.

This all seems sensible advice and the case studies cited are very interesting. I have to say, though, that although Gans concludes than Andy Groves overdid the paranoia – “academic research and market experience demonstrate that the fear of inevitable and imminent disruption is unfounded” – I’m not so sure. Or at least, labelling management in a time of technical change as ‘disruption’ might well be exaggeration, but it doesn’t meant the job of managing a business is easy. Stuff happens all the time, and the really difficult decisions need to be made when the stuff has started happening but your business is still doing fine. Paranoia seems the right attitude.

Even for the non-paranoid and possibly over-relaxed, this is a nice, concise overview of the disruption debate and possible responses. It is firmly rooted in proper research, the best kind of business book.