Everything distorts markets. The question is how to distort markets into providing the best outcome.
from [0]: "Harvard targets an annual endowment payout rate of 5.0 to 5.5 percent of market value. The University's actual payout rate has fluctuated over the past 10 years, from a low of 4.2 percent in fiscal year 2006 to a high of 6.1 percent in fiscal year 2010."
[0] https://www.harvard.edu/about-harvard/harvard-glance/endowme...
[1] https://www.irs.gov/charities-non-profits/private-foundation...
And we know now that the ultra-rich folks tend to take the money,windfall from lower tax, and hide it in Virgin-Island, Panama,Cayman Island and other offshore tax havens.
https://en.wikipedia.org/wiki/Trickle-down_economics#Critici...
"Mr. David Stockman has said that supply-side economics was merely a cover for the trickle-down approach to economic policy—what an older and less elegant generation called the horse-and-sparrow theory: 'If you feed the horse enough oats, some will pass through to the road for the sparrows.'"
It feels more honest that way.
It's a relatively well known fact that eg it doesn't really matter too much whether officially the employer or the employee is required to pay the employees income tax---the money comes out of the same pot.
Similar things happen for other taxes. Eg VAT in European countries seems to be paid for by the shops, but it wouldn't make a difference (apart from convenience in collection) if you'd levied it directly on the shoppers.
Any discussions about 'trickle-down economics' is incomplete without tax-incidence.
Much better to tax consumption.
But that would run counter to the neo-liberal narrative... After all, the rule of law serves to protect investments, not the peasant forced off his land.
Where was the rule of law to protect said peasants? Perhaps the rule of law isn't actually necessary for industrialization - as long as capital is protected, everything is all well and good. Unless you're a peasant.
I agree that the rule of law didn't protect peasants who were forced off their hereditary lands. You'll note that it wasn't the peasants who led the industrial revolution.
Like several major sectors of the US economy at the time (and later), Britain's "revolution" was utterly dependent on coerced labor, viciously enforced by the power of the government. But some people still like to think of those times as the good old days of "laissez-faire" and government "staying out of the market".
Now, you can argue that this was a "rule of law", just a brutally repressive one which systematically granted special rights to certain classes of people, but then you're on much shakier ground.
As a practical matter, consumption taxes can be made progressive by combining them with a low-income tax credit or a universal basic income.
Not necessarily.
"Apple (AAPL), Microsoft (MSFT), Alphabet (GOOGL), Cisco Systems (CSCO) and Oracle (ORCL) are sitting on $504 billion, or 30%, of the $1.7 trillion in cash and cash equivalents held by U.S. non-financial companies in 2015, according to an analysis released Friday by ratings agency Moody's Investors Service. That's even more cash concentration than in previous years, as these five companies held 27% of cash in 2014 and 25% in 2013. Apple alone is holding more cash and investments than eight of the 10 entire industry sectors." [1]
Also, the top 1 percent owns 90 percent of wealth in the US [2].
"First, economic inequality has worsened significantly in the United States and some other countries. The richest 1 percent in the United States now own more wealth than the bottom 90 percent. Oxfam estimates that the richest 85 people in the world own as much wealth as the bottom half of humanity.
The situation might be tolerable if a rising tide were lifting all boats. But it’s lifting mostly the yachts. In 2010, 93 percent of the additional income created in America went to the top 1 percent."
> As a practical matter, consumption taxes can be made progressive by combining them with a low-income tax credit or a universal basic income.
I agree that a consumption tax can be combined with other policy to prevent the regressive nature of a consumption tax alone. This requires wealth be taxed in various forms (ownership of investments, land, etc).
[1] https://www.usatoday.com/story/money/markets/2016/05/20/thir...
[2] https://www.nytimes.com/2014/07/24/opinion/nicholas-kristof-...
Nobody has a Scrooge McDuck cash vault, not Apple, Microsoft, nor anyone else. It's all invested - even money in a checking account isn't actually there, it's loaned out to someone who spends it.
> the top 1 percent owns 90 percent of wealth in the US
No, the government owns/controls most of it.
Here's even more: http://business.time.com/2013/02/05/the-federal-governments-...
As for how banks work, pretty much any book on how the banking business works will tell you that. Or you could watch that old movie "It's a Wonderful Life" where they give an accurate description at the end how banks work. And frankly, it's just common sense. Why would banks offer free checking? They're not charities. They need the money so they can turn around and loan it out. It's fundamentally how banking works.
I've never heard of a Scrooge McDuck cash vault outside of a comic book. Have you? (There is Fort Knox, but that's the feds, and it's not cash.)
https://money.howstuffworks.com/personal-finance/banking/ban...
But the foreign assets issue is a peculiarly US problem, resulting from the US being almost unique in the world in the extent to which it imposes taxes on income earned in other countries. (The other such country is Eritrea, and the US voted in favour of a UN security council resolution condemning the Eritrean tax regime.)
I'm unwilling to wait until the end of civilization while citizens of the richest country in the world go hungry [1], go without shelter [2], and die due to not being able to put $50 together for their insulin [3].
[1] https://www.worldhunger.org/hunger-in-america-2016-united-st...
[2] https://en.wikipedia.org/wiki/Homelessness_in_the_United_Sta...
[3] https://tonic.vice.com/en_us/article/ezwwze/the-high-price-o...
If you can build wealth around being active rather than just reaping the benefit of interest of interests then that should be encouraged rather than just grabbing and keeping.
They would still make money if they kept them it would just be less beneficial than it is now. No long term capital gains as an example.
People with little money consume everything they have already, they have no choice, no retirements no nothing.
>> You would force people to consume?
That's a complete misreading of the comment
Only in the most inefficient way possible. The 'problem' is banks are limited in what they can do with this money which ends up creating investment bubbles and other market distortions which hurt the economy overall. If you slowly transitioned banks so they could not invest this money over say 100 years the net result would not be harmful.
In the end money is not actual wealth, it's simply a representation of wealth. Anything that turns money into more money needs an intermediary where some cash flow is generated. And those intermediary's are often harmful see in excess like pay day loans.
Um, no. The type of investing you suggest includes the risk of losing the money. This doesn't work with commercial banks because they are insured by the federal government, i.e. the taxpayer. When people put money in the bank they expect it to stay safe. That's why the concept of a bank exists in the first place. If there was the risk of it evaporating due to bad investments, that would basically be more of "privatized gains, socialized losses."
I am saying if your raise that percentage to 11% cash on hand not much changes. Then next year that becomes 12% cash on hand... until banks can no longer lend money.
At no point in this process is physical wealth destroyed only shifting how loans are created.
Of the deposit account, they keep 10% in the vault/Fed, and loan out 90%. Of that 90%, they keep 10% in the vault (9%), and re-loan 90% of it (81%). Of that 81%, they keep 10% in the vault (8.1%) and re-loan 90% of it (72.9%). Sum the series, and the effect on the money supply from loans and the reserve requirement is to divide the vault cash by the reserve requirement to get the bank account totals.
Raise the requirement from 10% to 11% and the circulating money supply drops from 10 x vault cash to 9.1 x vault cash. Raise it again to 12% and that drops to 8.3 x vault cash. To keep things steady, you have to print extra money for the express purpose of putting it into reserves.
The de jure impact of the reserve requirement on the money supply isn't "not much"; it's actually huge. But that is only down to the point where it goes below the de facto requirement imposed by normal bank operations. You drop the requirement to 0%, and banks will still keep cash on hand to cover their own needs. It is certainly possible to raise it all the way to 100% (or even higher, by requiring that banks freeze some of their own cash when accepting a deposit). But that would have to be done very slowly and cautiously.
Further, the velocity of money is important which reduce the multiplier in practice.
However, if your taking this seriously yes you need a curve which is why I said 100 years, but only listed 90 years worth of changes.
A world where people don't need loans seems like a pretty good world, honestly. I've been fortunate enough that my parents were able to finance my college education out of their savings, and I rent my apartment because I don't want a big mortgage, and my life is I think better compared to people I know with student loans and mortgages. A world where everyone has the same access to resources that I had is a worthy goal, and if we can fund that by banning loans, seems fine.
(I asked another question here but decided I'm having a hard time reading or composing standard written English today so, some other time!)
I simply feel banks have conflicting goals as they need to be 'good at' customer service and making loans. This creates a lot of poor incentives and economic distortions.
The difference is people fronting money for loans would need to take on real risks without FDIC protection or have safe deposits but need to pay for bank services.
Often the capital for many bank issued credit cards does not come from depositors at all.
On the other hand, all the financing needs will be covered by other means. These “non-banks” will have to obtain capital as equity and debt, maybe even loans from other non-banks, but certainly not as deposits.
What was the problem that we where trying to fix anyway?
Risk of financial collapse. Banks are risky because they have a lot of leverage, people more directly loaning money may take a 20% hit after a housing collapse, but that's not such a big deal.
And one of the reasons for the crisis was “shadow banking”, because many home loans were not really given by banks (some were directly created by other institutions, some were first created by banks but then packaged and sold). The subprime crisis would not have happened, at least to the same extent, if loans had been kept in the balance sheets of banks.
Including the United States' largest savings and loan association, until its collapse in 2008: https://en.wikipedia.org/wiki/List_of_bank_failures_in_the_U...
I suspect, but can't prove companies that need to demonstrate comptitence in lending to gain access to capital would be better at making loans than companies who gain capital by doing other things and then suddenly have access to a lot of capital and need to find a use for it.
Consider tech companies like Apple/Google/Microsoft have access to vast amounts of Capital yet does not really effectively use it for much.
We could also take the route of the Federal Reserve purchasing up equities (The Bank Of Japan does this [1]), issuing deposit accounts to citizens directly (trivial for the Federal Reserve to support this [disclaimer: I work in the financial services industry, and feel qualified to make this statement]), and providing UBI to those accounts using the Federal Reserve as an intermediary/conduit (lookout Blackrock and Vanguard! there's a new index fund manager on the block!).
Voilà, Citizen's Dividend.
EDIT: The Federal Reserve operates independently of the US government, and does not require Congressional or Presidential approval to perform this "monetary policy". [2]
"Although an instrument of the U.S. Government, the Federal Reserve System considers itself "an independent central bank because its monetary policy decisions do not have to be approved by the President or anyone else in the executive or legislative branches of government, it does not receive funding appropriated by the Congress, and the terms of the members of the Board of Governors span multiple presidential and congressional terms."
[1] https://www.bloomberg.com/news/articles/2017-07-18/boj-s-etf...
Are you proposing their equity also be taxed "at rest"? How would that work?
Same way property is taxed. A taxing authority sends you a bill (based on duration of ownership), with the tax rate set by legislation. In this case, the custodian of your equity would send you your bill, with a copy sent to the IRS. I don't believe who accepts the payment needs to be defined at this time (although sending payments directly to the IRS or through your custodian are both trivial matters).
When you have trillions you just need a bigger mattress, like Ireland, for instance.
It is, because storing money under a mattress is equivalent of investing in money itself. As OP said too, it is like you lent your money to all the other investors in the economy (because you taking that money out of the economy reduces the prices of capital goods, which means they can now acquire it for cheaper). This results in wealth creation, which you benefit from when you take the money out from under the mattress.
This of course, can only work as an active investment strategy if you have a fixed or predictable money supply. For an inflationary currency such as any fiat currency, you will just get screwed.
This works great for cryptocurrencies for instance, people keep talking about how nobody has any incentive to invest in Bitcoin projects if just holding it will make it go up. Well, when bitcoin holders hold bitcoin, bitcoin economy still grows, and the purchasing power of their bitcoin goes up.
If the central bank wants banks to have more reserves for loans, it buys assets from banks in exchange for newly created reserves. Money markets are a command economy.
Of course, someone still has to decide whether to consume now or invest. Or whether to invest in economically efficient ways, or in ways that are only economically efficient because of weird tax arrangements (but are actually less productive).
Taxing wealth encourages investment because you have to turn a yearly return in excess of the wealth tax to not have your wealth shrink.
The incentives to be wealthy will never disappear. Taxing wealth just makes it harder and makes sure that those who are wealthy work for it.
IOW you should explain why “market distortions” are inherently a bad thing.
EDIT: Can't comment ("You're posting too fast, blah blah blah"). Here are some replies to the comments bellow:
> It's encouraging people to make their money be productive instead of stashing it under a mattress.
When you have money in the bank, you're effectively lending most of it to other people. Your money is "productive", which is encouraged by the interest.
> Everything distorts markets. The question is how to distort markets into providing the best outcome.
Neutral tax (https://en.wikipedia.org/wiki/Optimal_tax) doesn't. But of course, market distortion is not the only or primary factor in policy decision-making.