Taxing the Rich (how to)

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

[amazon_image id=”0691165459″ link=”true” target=”_blank” size=”medium” ]Taxing the Rich: A History of Fiscal Fairness in the United States and Europe[/amazon_image]

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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Going beyond GDP: walking the talk

Today I’m working on a talk for a conference organised by the Royal Economic Society, Royal Statistical Society and Institute for Fiscal Studies on the agenda for modernising economic statistics. The day’s programme covers a wide range of questions including regional statistics and measuring the digital. My contribution will be about ‘beyond GDP’. I was just reflecting that in the two years since my book, GDP: A Brief But Affectionate History was first published there have been enough other books on this issue to declare it a new genre.

Precursors were in 2009:

by Sen, Stiglitz, Fitoussi (the report of the Commission set up by former President Sarkozy)

[amazon_image id=”B00E32LW1C” link=”true” target=”_blank” size=”medium” ]Mismeasuring Our Lives: Why GDP Doesn’t Add Up by Stiglitz, Joseph E., Sen, Amartya, Fitoussi, Jean-Paul published by New Press, The (2010)[/amazon_image]

and in 2013:

by Marc Fleurbaey and Didier Blanchet

[amazon_image id=”019976719X” link=”true” target=”_blank” size=”medium” ]Beyond GDP: Measuring Welfare and Assessing Sustainability[/amazon_image]

Then:

by Diane Coyle

[amazon_image id=”0691156794″ link=”true” target=”_blank” size=”medium” ]GDP: A Brief but Affectionate History[/amazon_image]

by Lorenzo Fioramonti

[amazon_image id=”1780322720″ link=”true” target=”_blank” size=”medium” ]Gross Domestic Problem: The Politics Behind the World’s Most Powerful Number (Economic Controversies)[/amazon_image]

by Morten Jerven

[amazon_image id=”0801451639″ link=”true” target=”_blank” size=”medium” ]Poor Numbers: How We are Misled by African Development Statistics and What to Do About it (Cornell Studies in Political Economy)[/amazon_image]

Later:

by Dirk Philipsen

And new/forthcoming:

by Ehsan Masood

[amazon_image id=”1681771373″ link=”true” target=”_blank” size=”medium” ]The Great Invention: The Story of GDP and the Making (and Unmaking) of the Modern World[/amazon_image]

by Philipp Lepenies.

[amazon_image id=”0231175108″ link=”true” target=”_blank” size=”medium” ]The Power of a Single Number: A Political History of GDP[/amazon_image]

When this kind of thing happens, there is certainly change afoot.

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Power and economics

My esteemed colleague Adam Ozanne has written a very interesting, short book on the strange absence of the concept of power from mainstream modern economics. The book, , argues that the fact that economics ignores power in social relations has also affected other social sciences, especially political science, as they have adopted techniques and approaches used in economics.

[amazon_image id=”1137553723″ link=”true” target=”_blank” size=”medium” ]Power and Neoclassical Economics: A Return to Political Economy in the Teaching of Economics[/amazon_image]

What explains the lacuna? Adam dates it to, first, the marginalist turn in economics in the 1870s, which started the process of abstracting from the particulars of reality into formalism; and then to the ordinalism of the 1930s and Lionel Robbins’ insistence that ‘positive’ and ‘normative’ economics could be separated. The new welfare economics of the 1950s finished the job. Indeed, Arrow’s famous impossibility theorem seemed to conclude that we can’t say anything practical about social choice. As the book puts it: “It must seem strange to non-economists that economic and social choice theorists have dug themselves into such a deep hole (though a very tidy, immaculately constructed hole) that they cannot even distinguish between rich and poor, but that appears to be the case.”

However, as Adam points out, an alternative interpretation of Arrow is that the actual social ordering that emerges is a function of the exercise of power (and in a way Sen has made the same point in saying other kinds of information apart from individual utilities can enter the story). The book goes on to argue that the fact that mainstream economics has nothing to say about the distribution of income and wealth is an important part of the explanation for cynicism about the subject – both among the general public and students like our university’s active and enthusiastic Post-Crash Economic Society.

The final chapters of the book discuss how power might be incorporated into economics. It notes that there are signs of stirrings in the ‘New Political Economy’ of economists such as Tim Besley and Torsten Persson and the institutional economics of others such as Daron Acemoglu and James Robinson. Adam suggests an interesting definition of power in economics as an analogy with force in physics, a dynamic that moves the social outcome in the direction of specific groups. He reinterprets classic social welfare functions as ‘political economy functions’ in a way that means they can be used in conventional general equilibrium approaches. His approach can be incorporated into co-operative game theory, a bit of the toolkit economists should feel comfortable with.

The book concludes: “Most economists are in denial about the relevance of power to economics and their own ability to fully address, let alone answer, the For Whom question so long as they neglect power. This is reflected in the textbooks they write and the teaching they offer students, and has not changed even though the sub-prime and eurozone crises of recent years provide clear evidence of the failure of many of their models, in particular dynamic stochastic general equilibrium (DSGE) models. ….. [T]here are grounds for believing that students and the wider public are increasingly disenchanted by what is on offer.” He continues that the normative and the positive need to be distinguished but that economists cannot and should not ignore the former.

I very much liked the book – ie. warmly agree with the general argument. Surely one of the longer-term outcomes of the crisis will be – must be – to turn economics back to political economy. I’ll be thinking more about the specific means of incorporating power in economics that the book suggests; it certainly looks promising.

My one (quite major) reservation about this book is its price (currently ). The publicist explained to me that it’s a series intended to be read as e-books, but the Kindle price is still £30, and this for a 110 page book. Piketty’s 700-page is less than £20 in hardback! So come on Palgrave, do your bit for economics by reducing the price and testing the elasticity of demand. Meanwhile, everyone will have to order it from the library.

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Better than (Karl) Polanyi

There was some debate on Twitter yesterday about Karl Polanyi’s . Noah Smith linked to this post reporting some research (can’t say it sounds very rigorous) taken to indicate that economists don’t read this book. Summary finding:

“All in all, 66 persons responded (25 percent). This isn’t at all bad, considering that these were cold calls. Approximately 3 percent of economists at elite departments have read Polanyi (assuming that those that did not reply have not read him).”

Hmm. Not sure about that assumption. Anyway, Noah’s response was that economists tend to read new books. Dani Rodrik said: “Polanyi is a hard read and hard sell for economists. But he’s been incredibly influential for my own work.” I got some (very) mild Twitter stick for saying I had read it but wouldn’t set it for my students.

[amazon_image id=”080705643X” link=”true” target=”_blank” size=”medium” ]The Great Transformation: The Political and Economic Origins of Our Time[/amazon_image]

There are several reasons for this. Above all, the book is historically inaccurate – Deirdre McCloskey is the latest of many people to point this out in her new book, . So if one reads it, it needs to be from a history of thought perspective. Secondly, it’s about social relations and culture, so not central for economics students even though I wholeheartedly agree that economists in general need more hinterland in other areas of social science and history.

It’s also a dense read, and there are better books to recommend to students to introduce them to the social context of markets. I’d say the original Albert Hirschman books have aged better – for one – and aren’t marred by inaccuracies like The Great Transformation. Of more recent vintage, I think John McMillan’s James Scott’s and Michael Sandel’s cover the territory better.

[amazon_image id=”0674276604″ link=”true” target=”_blank” size=”medium” ]Exit, Voice and Loyalty: Responses to Decline in Firms, Organizations and States[/amazon_image] [amazon_image id=”0393323714″ link=”true” target=”_blank” size=”medium” ]Reinventing the Bazaar: A Natural History of Markets[/amazon_image] [amazon_image id=”0241954487″ link=”true” target=”_blank” size=”medium” ]What Money Can’t Buy: The Moral Limits of Markets[/amazon_image] [amazon_image id=”B00DO8SACA” link=”true” target=”_blank” size=”medium” ]Seeing Like a State: How Certain Schemes to Improve the Human Condition Have Failed (Yale Agrarian Studies) by Scott, James New Edition (1999)[/amazon_image]

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Manchester, Marx (and Engels), and Me

Yesterday I was in the magnificent Chetham’s Library in Manchester with Colm O’Regan, recording a radio programme featuring the desk at which Karl Marx and Friedrich Engels studied for 6 weeks in the summer of 1845. The librarian Michael Powell set out for us the yard of books the two had read during that visit, saying they were very dull including for example William Petty’s .

A yard of reading by Marx and Engels

A yard of reading by Marx and Engels

Well, be still my beating heart! As the author of a brief (but affectionate) history of I was delighted to find it had been one of Marx’s early economics texts. Here I am holding the very copy that K.M. read (no marginalia, unfortunately). Rooting around on Google Scholar this morning, I find that Marx emphatically considered Petty to be the founding father of political economy, in citing Petty’s description of capital as ‘past labour’. (Bizarrely, Google said it had witheld some search results because of data protection law – ??)

Me holding Petty

Me holding Petty

Here is Colm, metaphorically scratching his head about one of the other books, a super-dull history of trade since ancient times, in three volumes. More information about our podcasting project in the weeks ahead.

Colm O'Regan dipping into the history of trade

Colm O’Regan dipping into the history of trade

Marxian economics is a chasm in my education, although I did try to read Capital when young. The is good and stirring stuff of course, and sitting in the Chetham’s Library, which could have served in a Harry Potter film, you understand why they had spectres in mind. However, for me Engels’ book, , is one of the finest pieces of analytical economic reportage, and a true call to arms.

[amazon_image id=”0199555885″ link=”true” target=”_blank” size=”medium” ]The Condition of the Working Class in England (Oxford World’s Classics)[/amazon_image]

Update: the entire list of books read that summer by Marx and Engels, kindly provided by the librarian Michael Powell, is:

Aikin, John                                 Description of the country from thirty to forty miles around Manchester (London, 1795)

D’Avenant, Charles                     Essays on peace at home and abroad (London, 1794)Discourses on the publick revenues and on the trade of England (London, 1698)

Eden, Frederick Morten                The state of the poor, 3 vols. (London, 1795)

Gisbourne, Thomas                     Inquiry into the duties of men in the higher ranks and middle classes of society in Great Britain (London, 1795)

Macpherson, David                     Annals of commerce, manufactures, fisheries and navigation, 4 vols. (London, 1805)

McCulloch, John Ramsay            The literature of political economy (London, 1845)

Petty, William                               Essays in political arithmetick (London, 1699)

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