Tyler Cowen: belief

Transcript context

…Closer to the tax rate on other income than to zero would be my answer to that. A fair amount of capital income reflects rents of one kind or another. Capital income is substantially held by those at the high end. There’s a fair amount of what’s really capital income in the form of unrealized capital gains that never gets taxed. So I think the right aggregate capital income tax rate is closer to what would go with a comprehensive income tax than it is to the alternative idea that capital income taxation is just a way of taxing future consumption, and therefore you should tax future consumption and present consumption at the same rate and the tax rate should be zero. If we think about the 1980s, there are a lot of models from that time — some coming from your research — where you have an infinite horizon model with a zero tax rate on capital income. At some point, enough capital accumulates so that even wages are higher. And there’s a steady-state long-run argument that still the number should be zero. What has changed that makes those models less applicable? Is it that we think the elasticity is different, or is it some other variable? What’s changed in our knowledge or your understanding? At the technical level, there’s been some mathematical work showing that some of the results that you’re referring to from the 1980s were mathematically wrong. That’s one part. The second and more consequential part is that the premise of those models was essentially that the supply of capital was infinitely elastic. Whatever the tax rate, you would drive capital to the point where the after-tax rate of return was some fixed number. That now looks like a very poor description of reality. We’ve seem real interest rates fluctuate substantially, and we don’t see that when real interest rates are higher, savings is lots higher, and when real interest rates are lower, savings is lots lower in the way that many people, including me in the early 1980s, would have expected. So in the absence of that kind of evidence, the argument is very much attenuated.…

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