Joe Stiglitz Today

I\’m not a great fan of this particular Nobel Laureate, it must be said. But I do have to admit that he\’s not normally logically wrong. He starts from a different ethical position perhaps, which is what leads to his different conclusions, but that\’s another matter.

Until I see this paragraph.

The world needs to rethink the sources of growth. If the foundations of economic growth lie in advances in science and technology, not in speculation in real estate or financial markets, then tax systems must be realigned. Why should those who make their income by gambling in Wall Street\’s casinos be taxed at a lower rate than those who earn their money in other ways? Capital gains should be taxed at least at as high a rate as ordinary income. (Such returns will, in any case, get a substantial benefit because the tax is not imposed until the gain is realised.) In addition, there should be a windfall profits tax on oil and gas companies.

Firstly, we need to point out that while science and technology are important for economic growth they are not the (only) foundation of it. The Soviet Union had lots of both but they didn\’t have the other part: voluntary exchange. This matters in two ways, firstly, that it is that movement of a resource, from a lower to a higher valued use which is the creation of wealth: that is, the definition of growth. The second is that only by such voluntary exchange, by trade, can we actually find out what science and which technology is indeed contributing to growth.

As to capital gains, there\’s two points here. The first is that those who are investing in companies see the profits from such taxed at the company level first, only then do they receive their share. We could argue all day about whether this means that captial gains are already taxed as the same rate as income or not, but we do need to remember that point: the capital gains tax rate is not the only tax being paid upon those investments.

The second is that in fact our tax system does in fact recognise that science and technology\’s the (part) foundation of growth. That\’s the very justification for capital gains tax rates being different from income tax ones. We\’ll tax you less if you attempt to create the better mousetrap, cure cancer or reduce the price of solar cells: precisely and exactly because we recognise that such are good things for you to be doing so we\’ll encourage you to do so.

Finally, what is it with these windfall taxes? Are we trying to say that profit margins in those industries are "too high"? Leave aside the appalling thought that bureaucrats and politicians will determine what is the "appropriate" level of profit and look at this list.

Profit rates (depending upon how you measure them) are higher at Apple, Accenture, 3M and Coca Cola than they are at Chevron. So the justification for taxing Chevron more heavily than the others is what?

Perhaps I\’m naive or something, but I do expect better from a Laureate.

8 thoughts on “Joe Stiglitz Today”

  1. I may well be wrong about this, but I thought the phrase “windfall tax” implied… well, you know… a windfall. A company getting a huge profit without putting much in. Often used to describe large profits made by recently privatised ex-nationalised industries, where all the companies owners have done is buy some shares off the Government. Also used to describe the 3G licences from the Treasury’s point of view: the Government did nothing to create that income, but things just happened to pan out in such a way that they found themselves in a position to get their hands on it. Is that really an appropriate description of oil companies, who only get so much money out because they’ve invested gazoolions in pipelines and rigs and tankers and technology?

  2. He’s half right half the time.

    I thoroughly agree that there is too much speculating in land (anybody who buys at overvalue in the hope they will rise further is speculating), but the best way to fix this is land value tax, not capital gains tax (or any other transaction tax such as Stamp Duty or Inheritance Tax).

    As to capital gains on shares, there is no reason to tax them at all. Businesses pay enough tax already and one man’s gain is another man’s loss – unless he suggests giving people tax relief for capital losses as well (to even things out).

  3. The fundamental problem with oil prices is that there is not enough investment in production, for a number of reasons.

    A windfall tax would reduce the money available for reinvestment. Clever huh.

  4. The first is that those who are investing in companies see the profits from such taxed at the company level first, only then do they receive their share.

    This doesn’t work if, as I’m fairly sure you’ve claimed here before, most of the burden of company taxation doesn’t fall on investors but on customers and employees.

    (agreed that the windfall tax on oil and gas companies is bloody stupid, obviously)

  5. It ain’t a real Nobel prize he got, Tim, only the quasi-Nobel for Economics. Perhaps it should be called the Notbel Prize?

  6. I don’t think taxing capital gains income the same as that income from labour is an inappropriate idea. I say that as someone that would seek to abolish corporation tax and thus justify that it should be taxed only once and at an equal amount.

  7. Governments didn’t do anything to earn the profits of the companies, so they shouldn’t get a slice.

    Tax property (ie. the right to exclude others) and thus discourage rent seeking, not the wealth created by comparative advantage.

  8. Governments didn’t do anything to earn the profits of the companies, so they shouldn’t get a slice.

    Mrs Thatcher in her autobiography argues that as government policy of high interest rates led to bank profits, they were ripe for a windfall tax. One could make a similar argument with oil – govermnent policies have constricted supply and boosted demand (that of the Opec governments and Chinese respectively, admittedly).

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