Glad Tyler Cowen is the icon picture for this article. The most important idea I’ve learnt in my life is the primacy of economic growth and how growing at 3% and 3.5% per annum over a century is the difference between a rich country and a poor country.
Stubborn Attachments is one of the most important books ever written.
That's true. You have to have the courage to call for the bay area to be transformed into the American Tokyo and christened Bay City. That probably requires the sort of 'if we want to build over you, we house you' policy seen with developments like https://en.wikipedia.org/wiki/Roppongi_Hills_Mori_Tower to be viable.
Great article Crémieux. You should do more economics articles! I'd love to see articles from you for the whole list of potential reforms you listed here
Whether the tax on unrealised capital gains affected growth would depend on
1) whether the resultant increase in revenue would be use to reduce tax on, for example, realised capital gains, or income tax - or instead increased welfare spending. With a reduction in realised capital gains tax it might reapportion capital to those who are willing to actively work it from those who are largely collecting 'rents'
2) If there was a distinction made between increase in value of natural resources - such as a tax on increases in land value - and increases in value of a intangibles, which is largely what a service company is.
The beginning of the post should have made clear that you can think of an unrealized capital gains tax like an "Elon Divestment Tax" given his publicly traded companies, and then it becomes clear that its impacts should be extremely bad.
I also do not expect those proposing unrealized capital gains taxation to make the tax system much better in other areas. The current proposal tends to make things worse in other areas.
Sure, but lets just assume Harris would dump it into the same Eds and Meds government demand subsidization her party always dumps every marginal dollar into.
Economic growth is good, of course. But if it were, in fact, the whole ballgame in relation to outcomes like stunted growth in children, how come the US ranks below Estonia, Greece, Chile, Poland, Tonga, etc on that? I suspect other factors, like distribution and redistribution of wealth and income, also plays an important part.
However, it is important for your argument that there is a direct correlation between economic growth and good outcomes. Otherwise, who cares about economic growth for its own sake? So when you all but explicitly call out such a correlation, it’s worth questioning:
“Having 1 percentage point knocked out of growth each quarter, America becomes as poor as Tunisia by the modern day. To put America-as-Tunisia into perspective, consider that almost 10% of Tunisian children suffer from growth stunting…”
If there are other ways to get the good outcomes than single-minded focus on economic growth (e.g. by balancing growth with redistributive tax policies) then this argument against a tax on unrealized capital gains becomes much weaker.
I happen to be skeptical of such a tax myself, as I think we need to be far more creative in our design of a tax system for the 21st century. However, I’m also a bit skeptical about how we measure economic growth, as I think our measurements are getting further and further away from measuring real value, and give us a distorted view of the problem and potential solutions.
The preferential treatment of wealth and cap gains made sense when the country was investment deficient and needed tonnes of railroads factories etc. Now, with positive capital flows from everywhere else in the globe, and everyone else trying to boost their exports at the expensive of domestic consumption, the move from the US should be to make sure our consumers have enough cash on hand to buy all their cheap stuff, rather than giving the wealthy more money to bid up asset bubbles. Unrealized cap gains a good, pro growth, tax that also hopefully increases scrutiny and reduces gullability. Ideally, it reduces chances of wasted money in theranos etc, at the margin
Take baseless insults elsewhere. If you can't see why an unrealized capital gains tax is obviously extremely distortionary or why the arguments for it usually amount to better arguments against any capital gains taxation, then you just don't belong here.
The primary argument for the unrealized capital gains tax is that it reduces collection overhead because ownership of public stocks is legible to the federal government as a matter of course. "You have N shares? Cool, we'll reassign the ownership of floor(N/x) of those to ourselves in the federal database. No further action is needed from you."
I don't think this is the best way to do things, but so long as you have a federally regulated stock exchange, what is the disadvantage relative to making the insane move of trying to tax income?
So you’re saying we would have grown as mich as Mexico since 1980 or are you saying our GDP would be Mexico. I pointed out out GDP was higher in 1980 than Mexico’s is now
But nothing you have written here proves that taxing Musk and other for their unrealised gains will have such an impact. Few mistakes overall:
1. Musk isnt founder of Tesla, he came in after, sued the founders…
2. You dont contend with the actual challenge - you cant (and i think shouldnt) be taxed for your unrealised income for obvious reasons, but you can borrow against them.
3. People really dont like this situation
So instead of writing this article, why not try to find alternative policy solutions. For example, anyone who borrows against unrealised gains pays a certain tax to the treasury on top of its loan. Not even saying its a good solution. But u posed an issue (taxing unrealised gains). Then you claimed it would reduce growth (no evidence). Then you showed us what happens when different variables of growth are applied to US (all fine, agree). But those 3 arent connected. Tell me how you would solve the challenge of rich people using unrealised gains to get easy loans and equity money when no other mortal can. Then we talk.
Always love to see a post promoting economic growth, but if you do more in the future, would highly recommend using the inflation adjusted metrics, the gdp per capita numbers you're using are nominal. We are not 7 times richer than we were in 1980, it's a little over 2x per capita in terms of real wealth. Here's the link the to inflation-adjusted series.
Where exactly is quality of life actually being adressed in your article? If you don't offer a metric for QoL that can be accepted or rejected, you're only arguing that economic growth leads to higher GDP which is trivial.
I'm very open to discussions whether "free time", absence of violence, "happiness" does or does not imply better QoL, but you need something beyond GDP with or without PPP. If for example I chose the Human Development Index growth rate (arbitrary, controversial yadayada) to compare say Germany and the US, I get:
Avg real GDP annual growth 2010-2022
USA 2.4%
GER 1.6%
Avg annual HDI growth 2010-2022
USA 0.1%
GER 0.2%
This means that the US is becoming ever more wealthy while Germany is becoming ever more developed than the opposite. Again, Quality of Life can be defined in such a way that any one country comes out on top. But isn't this a big part of what your article is supposed to cover?
I see this is presented in per capita GDP, which makes a bit more sense. GDP growth by itself is easy. Increased private indebtedness, government deficits, or population growth all increase GDP without improving individual debt servicing capacity or standards of living.
Most proposals to 'grow the pie' are in fact proposals to grow GDP, and generally they involve debt and immigration.
I don't think we want to be like Mexico or Trinidad, but Italy or Finland doesn't sound so bad. Better food and more free time with family in the first case, less risk if you lose your job and less crime in the second.
This seems to be more of an argument for 'we can tolerate slightly lower growth' rather than 'growth is paramount'.
Small differences in long-term growth are important, but because being as poor as Mexico was never plausible for the US, it is reasonable to assume that there is a relatively limited range of plausible scenarios that can be brought about by differences in policies, assuming that things like Soviet central planning are out of the question.
Given that NW Europe is the point of comparison for the US, probably the worst-case scenario for the US would be to have the same GDP per capita as the UK, France and Canada, which are the poorest NW European/NW European-founded countries. Most NW European countries are between these three and Switzerland, the US and Denmark, which are the richest of the bunch, and are also among the NW European countries with the highest GDP per capita per hour worked. Of course, the US is probably unique among NW European countries in having benefited from both selective immigration and benefits of scale.
My guess is that the reason for this limited range is that the vast majority of policies like perhaps taxes on unrealized capital gains have both positive and negative effects on economic growth that balance out in the long-term. However, something like land restrictions that prevent construction seem to be more of an exception, in that they probably have a large net negative effect, even if still within the range of plausible scenarios.
Regarding growth in general, one thing that many people don't realize is that one of the great advances of the Industrial Revolution was allowing countries to accumulate growth instead of losing them in recessions, which is not to say that recessions no longer existed, but only that recessions did not wipe out the years of growth, so the explosion in GDP per capita of the last few centuries was due to the accumulation of what may seem like small amounts of growth.
Are you familiar with Donut Economics? It's the idea that countries should try to balance the environment for people with economic needs and wants? https://www.youtube.com/watch?v=Rhcrbcg8HBw
It's pretty silly. At around 9:50, she starts saying growth is not the solution to the problems that come with development, but it absolutely is. She is completely in the wrong.
If you go to their website they have ranking of where countries fall within the donut and it seems like past a certain level of growth people do not seem to get much happier or healthier though...
Glad Tyler Cowen is the icon picture for this article. The most important idea I’ve learnt in my life is the primacy of economic growth and how growing at 3% and 3.5% per annum over a century is the difference between a rich country and a poor country.
Stubborn Attachments is one of the most important books ever written.
I wondered why it wasn't Robert Lucas.
The problem is most people support Yes In Other People's Backyards, not I'm their immediate area.
That's true. You have to have the courage to call for the bay area to be transformed into the American Tokyo and christened Bay City. That probably requires the sort of 'if we want to build over you, we house you' policy seen with developments like https://en.wikipedia.org/wiki/Roppongi_Hills_Mori_Tower to be viable.
California has anti-displacement policies like that, unless I misunderstood you. https://www.yimbylaw.org/right-of-return
Great article Crémieux. You should do more economics articles! I'd love to see articles from you for the whole list of potential reforms you listed here
Whether the tax on unrealised capital gains affected growth would depend on
1) whether the resultant increase in revenue would be use to reduce tax on, for example, realised capital gains, or income tax - or instead increased welfare spending. With a reduction in realised capital gains tax it might reapportion capital to those who are willing to actively work it from those who are largely collecting 'rents'
2) If there was a distinction made between increase in value of natural resources - such as a tax on increases in land value - and increases in value of a intangibles, which is largely what a service company is.
The beginning of the post should have made clear that you can think of an unrealized capital gains tax like an "Elon Divestment Tax" given his publicly traded companies, and then it becomes clear that its impacts should be extremely bad.
I also do not expect those proposing unrealized capital gains taxation to make the tax system much better in other areas. The current proposal tends to make things worse in other areas.
Sure, but lets just assume Harris would dump it into the same Eds and Meds government demand subsidization her party always dumps every marginal dollar into.
Economic growth is good, of course. But if it were, in fact, the whole ballgame in relation to outcomes like stunted growth in children, how come the US ranks below Estonia, Greece, Chile, Poland, Tonga, etc on that? I suspect other factors, like distribution and redistribution of wealth and income, also plays an important part.
The post does not contain the argument that all outcomes only depend on a given country's level of economic growth.
You’re right.
However, it is important for your argument that there is a direct correlation between economic growth and good outcomes. Otherwise, who cares about economic growth for its own sake? So when you all but explicitly call out such a correlation, it’s worth questioning:
“Having 1 percentage point knocked out of growth each quarter, America becomes as poor as Tunisia by the modern day. To put America-as-Tunisia into perspective, consider that almost 10% of Tunisian children suffer from growth stunting…”
If there are other ways to get the good outcomes than single-minded focus on economic growth (e.g. by balancing growth with redistributive tax policies) then this argument against a tax on unrealized capital gains becomes much weaker.
I happen to be skeptical of such a tax myself, as I think we need to be far more creative in our design of a tax system for the 21st century. However, I’m also a bit skeptical about how we measure economic growth, as I think our measurements are getting further and further away from measuring real value, and give us a distorted view of the problem and potential solutions.
Yes but you have to make the argument that the unrealized cap gains tax will be bad for growth. It might not be. A little bit more pressure to seek out positive investment (https://www.barrons.com/articles/why-warrens-wealth-tax-could-be-good-for-investors-51614983213) . A little bit more countercyclical relief if there's a stocks downturn ( https://x.com/GRoditiD/status/1827788959998771202?t=uGjmR-m1_MkV1K8CRdGhDQ&s=19) . A little bit more redistribution from rich to poor improves domestic demand ( https://t.co/Fp0HB7U4Av)
The preferential treatment of wealth and cap gains made sense when the country was investment deficient and needed tonnes of railroads factories etc. Now, with positive capital flows from everywhere else in the globe, and everyone else trying to boost their exports at the expensive of domestic consumption, the move from the US should be to make sure our consumers have enough cash on hand to buy all their cheap stuff, rather than giving the wealthy more money to bid up asset bubbles. Unrealized cap gains a good, pro growth, tax that also hopefully increases scrutiny and reduces gullability. Ideally, it reduces chances of wasted money in theranos etc, at the margin
Take baseless insults elsewhere. If you can't see why an unrealized capital gains tax is obviously extremely distortionary or why the arguments for it usually amount to better arguments against any capital gains taxation, then you just don't belong here.
The primary argument for the unrealized capital gains tax is that it reduces collection overhead because ownership of public stocks is legible to the federal government as a matter of course. "You have N shares? Cool, we'll reassign the ownership of floor(N/x) of those to ourselves in the federal database. No further action is needed from you."
I don't think this is the best way to do things, but so long as you have a federally regulated stock exchange, what is the disadvantage relative to making the insane move of trying to tax income?
Can you explain your math?
Mexico GDP per capita is 11k right now. The US GDP per capita is 76k right now and was $13k in 1980. So with 0 growth we’d still be ahead of Mexico .
This just takes 1pp out of whatever the quarterly growth was.
GrowthRate = (GDP / lag(GDP)) - 1
Then
first(GDP) * cumprod(1 + GrowthRate - 0.01)
So you’re saying we would have grown as mich as Mexico since 1980 or are you saying our GDP would be Mexico. I pointed out out GDP was higher in 1980 than Mexico’s is now
The use of quarterly rather then annual growth rate changes makes your entire post exceedingly confusing for no reason.
I could use a 'wacky' pp change and receive the save comment. If confused, read closer, ask questions, etc.
But nothing you have written here proves that taxing Musk and other for their unrealised gains will have such an impact. Few mistakes overall:
1. Musk isnt founder of Tesla, he came in after, sued the founders…
2. You dont contend with the actual challenge - you cant (and i think shouldnt) be taxed for your unrealised income for obvious reasons, but you can borrow against them.
3. People really dont like this situation
So instead of writing this article, why not try to find alternative policy solutions. For example, anyone who borrows against unrealised gains pays a certain tax to the treasury on top of its loan. Not even saying its a good solution. But u posed an issue (taxing unrealised gains). Then you claimed it would reduce growth (no evidence). Then you showed us what happens when different variables of growth are applied to US (all fine, agree). But those 3 arent connected. Tell me how you would solve the challenge of rich people using unrealised gains to get easy loans and equity money when no other mortal can. Then we talk.
Always love to see a post promoting economic growth, but if you do more in the future, would highly recommend using the inflation adjusted metrics, the gdp per capita numbers you're using are nominal. We are not 7 times richer than we were in 1980, it's a little over 2x per capita in terms of real wealth. Here's the link the to inflation-adjusted series.
https://fred.stlouisfed.org/series/A939RX0Q048SBEA
Where exactly is quality of life actually being adressed in your article? If you don't offer a metric for QoL that can be accepted or rejected, you're only arguing that economic growth leads to higher GDP which is trivial.
I'm very open to discussions whether "free time", absence of violence, "happiness" does or does not imply better QoL, but you need something beyond GDP with or without PPP. If for example I chose the Human Development Index growth rate (arbitrary, controversial yadayada) to compare say Germany and the US, I get:
Avg real GDP annual growth 2010-2022
USA 2.4%
GER 1.6%
Avg annual HDI growth 2010-2022
USA 0.1%
GER 0.2%
This means that the US is becoming ever more wealthy while Germany is becoming ever more developed than the opposite. Again, Quality of Life can be defined in such a way that any one country comes out on top. But isn't this a big part of what your article is supposed to cover?
I see this is presented in per capita GDP, which makes a bit more sense. GDP growth by itself is easy. Increased private indebtedness, government deficits, or population growth all increase GDP without improving individual debt servicing capacity or standards of living.
Most proposals to 'grow the pie' are in fact proposals to grow GDP, and generally they involve debt and immigration.
I don't think we want to be like Mexico or Trinidad, but Italy or Finland doesn't sound so bad. Better food and more free time with family in the first case, less risk if you lose your job and less crime in the second.
This seems to be more of an argument for 'we can tolerate slightly lower growth' rather than 'growth is paramount'.
Small differences in long-term growth are important, but because being as poor as Mexico was never plausible for the US, it is reasonable to assume that there is a relatively limited range of plausible scenarios that can be brought about by differences in policies, assuming that things like Soviet central planning are out of the question.
Given that NW Europe is the point of comparison for the US, probably the worst-case scenario for the US would be to have the same GDP per capita as the UK, France and Canada, which are the poorest NW European/NW European-founded countries. Most NW European countries are between these three and Switzerland, the US and Denmark, which are the richest of the bunch, and are also among the NW European countries with the highest GDP per capita per hour worked. Of course, the US is probably unique among NW European countries in having benefited from both selective immigration and benefits of scale.
My guess is that the reason for this limited range is that the vast majority of policies like perhaps taxes on unrealized capital gains have both positive and negative effects on economic growth that balance out in the long-term. However, something like land restrictions that prevent construction seem to be more of an exception, in that they probably have a large net negative effect, even if still within the range of plausible scenarios.
Regarding growth in general, one thing that many people don't realize is that one of the great advances of the Industrial Revolution was allowing countries to accumulate growth instead of losing them in recessions, which is not to say that recessions no longer existed, but only that recessions did not wipe out the years of growth, so the explosion in GDP per capita of the last few centuries was due to the accumulation of what may seem like small amounts of growth.
Are you familiar with Donut Economics? It's the idea that countries should try to balance the environment for people with economic needs and wants? https://www.youtube.com/watch?v=Rhcrbcg8HBw
It's pretty silly. At around 9:50, she starts saying growth is not the solution to the problems that come with development, but it absolutely is. She is completely in the wrong.
Well, growth can be a solution to problems but need not be. It's a bit reductive to view growth as panacea.
There is literally no other solution
If you go to their website they have ranking of where countries fall within the donut and it seems like past a certain level of growth people do not seem to get much happier or healthier though...
Mexico is more violent than the USA was when the colonies were founded. Is that really due to a lack of growth?
Anyone know of any reviews of the economic literate on the most effective policy for promoting growth