Tag Archives: Capital

Commentary

New paper on income inequality: Does taxing the rich hurt the middle class?

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Aparna Mathur (right)
Aparna Mathur (right)

Here’s an article by Indian economist Aparna Mathur.

She writes (in part):

In a recent paper that I co-authored with Kevin Hassett, we explored the effect of high corporate taxes on worker wages. The motivation for the paper came from the international tax literature (summarized by Roger Gordon and Jim Hines in a 2002 paper1) that suggested that mobile capital flows from high tax to low tax jurisdictions. In other words, in any set of competing countries, investment flows are determined by relative rates of taxation. The current U.S. headline rate of corporate tax is 35 percent. The combined federal and state statutory rate of 39 percent is second only to Japan in the OECD. With Japan set to lower its statutory rate later this year, the U.S. rate will soon be the highest in the OECD and one of the highest in the world. What effect do these high rates have on worker wages?

When capital flows out of a high tax country, such as the United States, it leads to lower domestic investment, as firms decide against adding a new machine or building a factory. The lower levels of investment affect the productivity of the American worker, because they may not have the best machines or enough machines to work with. This leads to lower wages, as there is a tight link between workers’ productivity and their pay. It could also lead to less demand for workers, since the firms have decided to carry out investment activities elsewhere.

Our paper was one of the first to explore the adverse effect of corporate taxes on worker wages. Using data on more than 100 countries, we found that higher corporate taxes lead to lower wages. In fact, workers shoulder a much larger share of the corporate tax burden (more than 100 percent) than had previously been assumed. The reason the incidence can be higher than 100 percent is neatly explained in a 2006 paper by the famous economist Arnold Harberger.2 Simply put, when taxes are imposed on a corporation, wages are lowered not only for the workers in that firm, but for all workers in the economy since otherwise competition would drive workers away from the low-wage firms. As a result, a $1 corporate income tax on a firm could lead to a $1 loss in wages for workers in that firm, but could also lead to more than a $1 loss overall when we look at the lower wages across all workers.

Following our paper, several academic economists substantiated our results, using different data sets and applying varied econometric modeling and techniques. Some examples of these studies include a 2007 paper by Mihir A. Desai and C. Fritz Foley of Harvard Business School and James Hines Jr. of Michigan University Law School, a 2007 paper by R. Alison Felix of the Federal Reserve Bank of Kansas City, a 2009 paper by Robert Carroll of The Tax Foundation, and a 2010 paper by Wiji Arulampalam of the University of Warwick and Michael Devereux and Giorgia Maffini of Oxford.3 A recent Tax Notes article that I co-authored summarizes these various studies and also the lessons from the theoretical literature on the topic. The general consensus from theory and empirical work is that while we may argue academically about the size of the effect, there is no disagreement among economists that a sizeable burden of the corporate income tax is disproportionately felt by working Americans. On average, a $1 increase in corporate tax revenues could lead to a dollar or more decline in the wage bill.

Conservatives and liberals have the same goal. We both want to help the poor. Liberals think that taking money from the rich and giving it to the poor helps, but all it does it cause the rich to move their capital and jobs elsewhere, leaving the poor poorer. Conservatives let the rich keep their money and encourage them to risk it trying to make more money by engaging in enterprises that create wealth – creating products and services from less valuable raw materials. In a socialist system, the rich get poorer, but so do the poor. In a capitalist system, the rich get very rich, but the poor also gain more wealth. That’s what happens when corporations like Apple make IPads out of junky raw materials. That’s how wealth is created – by letting people who want to make things keep more of what they earn. We all benefit from encouraging people to make new things and provide value for their neighbors.

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Videos

Richard Epstein explains why economic inequality is required in order to promote innovation

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My friend Matt, who blogs at The Conscience of  a Young Conservative, posted this on Facebook.

Epstein explains how the profit motive creates economic value that raises the standard of living of all people, who are able to exchange their money for valuable products and services that they did not create. He explains how wealth redistribution is wasteful and harmful to economic growth.

(Found here)

Now let’s look at some myths that Christians believe about economics.

We need to understand basic economics

Christian philosopher Jay Richards explains basic economics.

Excerpt:

THE ZERO-SUM GAME MYTH.

There are three kinds of games: win-lose, lose-lose, and win-win. Win-lose games, like basketball, are sometimes called “zero-sum games.” When the Celtics and the Bulls compete, if the Celtics are up, then the Bulls are down, and vice versa. The scales balance. It’s a zero-sum.

Besides lose-lose games, which most of us avoid, there are positive-sum, or win-win, games. In these games, some players may end up better off than others, but everyone ends up at least the same if not better off than they were at the beginning.

Millions of people think that the free trade in capitalism is a dog-eat-dog competition, where winners always create losers. This is the zero-sum game myth, which leads many to think that the government should somehow redistribute wealth. While some competition is a part of any economy, of course, an exchange that is free on both sides, in which no one is forced or tricked into participating, is a win-win game. When I pay my barber $18 for a haircut, I value the haircut more than the $18. My barber values the $18 more than the time and effort it took her to cut my hair. We’re both better off. Win-win.

THE MATERIALIST MYTH.

A similar myth leads people to think of the economy as some fixed amount of material stuff—money in safes or gold bars in a vault. Since two firms competing for one customer can’t both get the customer’s money, we might think the whole economy looks that way: wealth itself isn’t created, it’s merely transferred from one party to another.

A common image of this “Materialist Myth” is a pie. If one person gets too big a slice, someone else will get just a sliver. To serve it fairly, you have to slice equal pieces.

This isn’t how a free economy works, however. Over the long run, the total amount of wealth in free economies grows. We can create wealth that wasn’t there before. The “pie” doesn’t stay the same size. Under capitalism, someone can get wealthy not merely by having someone else’s wealth transferred to his account, but by creating new wealth, not only for himself, but for others as well.

THE GREED MYTH.

Friends and foes of capitalism often claim that it is based on greed. Writer Ayn Rand even claimed that selfishness is a virtue (see the accompanying feature article). But greed is one of the seven deadly sins. If capitalism is based on it, then Christians can’t be capitalists.

In truth, Adam Smith and other capitalist thinkers did not believe this “Greed Myth.” Rather, Smith argued that capitalism, unlike static economies, channels even greedy motives into socially beneficial outcomes. “In spite of their natural selfishness and rapacity,” Smith wrote, business people “are led by an invisible hand…and thus without intending it, without knowing it, advance the interest of the society.”3

Rather than inspire miserliness, capitalism encourages enterprise. Entrepreneurs, including greedy ones, succeed by delaying their own gratification, by investing their wealth in creative but risky ventures that may or may not pan out. Before they ever profit, they must first create.

In a fallen world, we should want an economic system that not only channels greed into productive purposes, but unleashes human ingenuity, creativity, and willingness to risk as well.

I think Christians who don’t understand economics really need to make the effort to understand the basics. I recommend Robert Murphy’s “The Politically Incorrect Guide to Capitalism” and Thomas Sowell’s “Basic Economics“. If you want to see how economics works together with Christianity, then you also want Jay Richards “Money, Greed and God” and Wayne Grudem’s “Politics According to the Bible“.

Commentary

Kevin DeYoung: where do jobs come from?

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From Kevin DeYoung, posted at the Gospel Coalition. This is a must-read. (H/T Mary)

He lays out the general case for why employers hire workers in four points.

Here is point #2:

(2)The employer must believe that spending his money on new employees will be good for his business. We may wish that employers hired people just cuz. But that’s not the way the world works. When employers want to be charitable they give to church or to their alma mater. But with their business they know they need to make money. Consequently, they hire new workers only when they believe that paying more people will eventually be offset by making more money.

Ah, this is nice. And it goes on and on like that. Click here and read this sweet, sweet post!

This is Mr. Moo. He is a businesscow. He's going to work.
This is Mr. Moo. He is a capitalist business owner.

But I have to steal this story about a capitalist cow who starts a business:

Mr. Moo sells milk. He charges $5 a gallon. Everyone in town wants milk so everyone pays Mr. Moo $5 a gallon. But Mr. Moo wants to make even more money. Maybe he’s greedy. Maybe he wants to give more to his church. Maybe he wants to buy a new car. Maybe he just had a new baby that needs food and clothes. Maybe he wants to bet on horses. No matter the reason, Mr. Moo (like almost everyone) wants to make more money. What should he do?

He could charge more for his milk, but he realizes that at $6 a gallon some of his customers will drive to the next town where milk is only $4.75. So instead he tries to lower his costs. He needs $4 to make a gallon of milk, but he’d like to do better. So next month he replaces his milkmaids with new milking machines. This requires a substantial up front investment, but within a year the milking machines have paid for themselves. Without having to pay milkmaids, his milk only costs $3 to produce. Now he charges $4.25—a savings to his customers and more profit for him.

This simple example shows how productivity fuels profits. Mr. Moo found a way to make the same thing for less money.

But, you ask, how is this good for anyone but Mr. Moo? Well, as the other farmers purchased their milking machines their costs went down too. So they started to lower prices, hoping to attract more customers. Mr. Moo did the same. Even if he is now getting richer, his customers are too. They save 75 cents on every gallon of milk (paying $4.25 when they used to pay $5.00). Now they have the same milk as before but more money. The economy has expanded.

And that’s not all, with more money in his pocket Mr. Moo goes out to eat more, which helps the local burger joint hire one more cook. And all the new machines need servicing, so the local repairmen hires an apprentice. The grocer spends less on milk so he can add another bagger. The doctor, who is saving money on dairy, has more money to spend so he donates to the local art museum which can afford to purchase two new paintings from an aspiring artist. No one knew Mr. Moo’s machines would help so many people and create so many jobs. No one really notices either, but it happens.

But what about the poor milkmaids? True, they are out of work. Their lives, at least in the short run, are worse because of the new innovation. Those dreaded milking machines seemed to have ruined everything. In fact, the mayor almost outlawed them. Others wanted to institute a new milking machine tariff to discourage farmers from buying them and to help save milkmaid jobs. But none of this happened. Instead farmers kept buying milking machines and milkmaids kept losing their jobs. Which was really hard on the milkmaids and their families.

And yet, that’s not the end of the story. Some of the milkmaids went to work for Mr. Pump who manufactures milking machines. His business was booming. He needed more workers to help make more machines. So he hired a few milkmaids. And remember, as the price of milk dropped, so did the price of cheese and pizza and yogurt. Everyone’s grocery bill was less. The whole town had the same stuff but more money. So Mr. Wall and Mr Mart decided to open a new thrift store. Mrs. Lovejoy, who started watching busy Mr. Wall’s and Mr. Mart’s kids during the day, decided to open a daycare. She hired some former milkmaids to help, as did Mr. Wall and Mr. Mart. A few of the married milkmaids decided they didn’t have to work anymore because groceries were cheaper than they used to be and the family could get by on less. It was hard and humiliating to lose their jobs, but five years later the whole town is better off because Mr. Moo bought his milking machines. There are more jobs. Families are able to purchase more things. And there is more ice cream for everyone.

Yes, I know cows are girls. Shut up!

I love it when conservative pastors step into areas outside of theology and knit together a full Christian worldview spanning patches from all areas of life. It’s especially good when they use evidence from the sciences, economics and history.

I find it alarming that the best people who do this are all Calvinists, though. Mark Driscoll, Wayne Grudem and Kevin DeYoung. Grrrr. Oh well. The bottom line is that we need pastors like this to be encouraging us to know how the world works, so that we can think about how we can read our Bibles and achieve the results that were are supposed to be achieving intelligently, instead of being tossed to and fro by our emotions, intuitions and intentions. (For example, what do you think lowers unemployment for the poor, young, minority workers? Raising the minimum wage, or lowering it? Click here to see why it is important to understand economics in order to help the poor with real results, instead of just feeling good while you hurt the poor)

If people who read these practical theologians could send me practical posts that they write where they encounter evidence from the real world, I can post them. I don’t know of many famous non-Calvinist theologians who I respect on economics and politics. I like Jay Richards, but he’s Catholic.

Click here for more on Christianity and economics from Dr. Ron Nash and Dr. Jay Richards and Dr. Wayne Grudem.