Economics

It seems like Robert has been reading too many books on economy again. Or rather, has failed to apply the necessary simple sanity checks to what he has been reading.

Authors on books on economy like simplifications and words like “equilibrium”. For example, they might discuss an equilibrium governing the hourly wages and claim that absent any floor on wages, they will find a level where everyone who wants to work is employed. The sanity check for the is the great depression period: no floor, but widespread unemployment. Conclusion: something is seriously wrong with the model or the assumptions.

Robert this time brings us this gem: “The tax on capital gains is a burden on investing. The tax lowers the returns on investment, thus discouraging investment below where it would be in equilibrium [...]“.

First simplification: “equilibrium”. We do not live in a static world so assuming an equilibrium is not reasonable. Why should there be one?

Second simplification: assuming the potential investor has a choice between investing or not investing, presumably in some stock. In reality, someone with spare (or borrowed) cash has multiple choices: investing [high return; high risk], stuff the mattress [no return; sore back], put in bank [low return; high tax], etc. Notice the total lack of “not investing” as a choice. The general assumption is that the would-be investor does what is optimal (whatever that means). I don’t buy the argument that a capital gains tax makes people put more money in the mattresses.

Third simplification: the government is also not faced with a choice of imposing the tax or not imposing it. Really. Those two choices do not come with the same revenue, obviously, and the real choice is thus more between imposing the tax and not imposing combined with not building this or that highway. Or taxing elsewhere. Or borrow the balance. Or whatever. The historically aware reader will recall that lowering taxes while hand-waving and saying that revenue would go up as a consequence was proven wrong last time.

Fourth simplification: “The tax lowers the returns on investment.” That is true, but incomplete. The tax works on the loss side too and thus also lowers the risk of an investment which, presumably, encourages investment.

The conclusion of that is that we have a partial proposal whose effects have been judged by a hopelessly oversimplified model. Hence predictions on the effects are meaningless.

For the record, my income is primarily classified as capital gains. I would actually stand to make a killing if the capital gains tax went away. I am just the mouse who wants to know the price of that yummy cheese before I eat it.

Comments are closed.