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Who’s afraid of taxing the rich?

Summary:
There’s a Monty Python routine where a chartered accountant decides that he wants to be a lion tamer—until he discovers what that would actual entail. I’m reminded of it every time I hear politicians talk about taxing the rich. In previous posts, I’ve discussed the example of the ill-fated luxury tax of 1991, which went after expensive yachts, automobiles, jewelry, etc. Even though the tax was quite low (10% on the boats above 0,000) it was eventually repealed, partly because liberal Democratic politicians worried that it was costing jobs in the yacht building industry. In another post, I pointed out that New York City taxes many ultra-expensive condos at far lower rates than working class homes in Queens. And recall that New York’s mayor is quite left wing. Now

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There’s a Monty Python routine where a chartered accountant decides that he wants to be a lion tamer—until he discovers what that would actual entail. I’m reminded of it every time I hear politicians talk about taxing the rich.

In previous posts, I’ve discussed the example of the ill-fated luxury tax of 1991, which went after expensive yachts, automobiles, jewelry, etc. Even though the tax was quite low (10% on the boats above $100,000) it was eventually repealed, partly because liberal Democratic politicians worried that it was costing jobs in the yacht building industry.

In another post, I pointed out that New York City taxes many ultra-expensive condos at far lower rates than working class homes in Queens. And recall that New York’s mayor is quite left wing.

Now The Economist reports that things are getting even worse:

Donald Trump’s tax reform allowed individuals and companies to write off 100% of the cost of a new or used private jet against their federal taxes. For some plutocrats this has wiped out an entire year’s tax bill. For others, it has made buying a jet extraordinarily cheap.

The case for flying on a private jet is that it can save time for someone, such as a chief executive, whose time is extraordinarily valuable. Hence companies can offset the cost of these flights against their corporate-tax bills. In some countries the use of a private jet is a tax-free perk for executives. But a growing volume of research suggests that flying the boss privately is often a waste of money for shareholders. One analysis, by ICF, a consultancy, found that the jets are often used to fly to places where corporate titans are more likely to have holiday homes than business meetings, such as fancy ski resorts.

Even if there is a slight productivity benefit to flying in a private jet, it seems likely that the jet is also a sort of fringe benefit–consumption for the wealthy.  After all, even commercial jets fly at roughly 500mph, so the time saved is presumably mostly in faster boarding and security clearance.  And I see no justification for allowing private individuals to write off the cost, much less 100% of the cost.

I’m not sure why this tax benefit exists, but I suspect it is strongly supported by the producers of private jets.  More broadly, I see several factors at play in the failure of our society to effectively tax the rich:

1. Widespread belief in primitive Keynesian theories that producing luxury goods creates jobs, rather than merely diverting jobs from other industries.  (Note that I’m not blaming all or even most Keynesians.  For instance, new Keynesians generally avoid this fallacy.)

2.  The fallacy that “taxing the rich” is about getting rich people to write checks to the government, rather than reducing the consumption of the rich.  Any tax that does not reduce consumption by rich people is not taxing the rich. If Warren Buffett writes a big check to the Treasury and reduces his charitable giving rather than his consumption, then you have not taxed Warren Buffett.

3.  The political influence of producers of luxury goods.

There are much worse things than countries that bend over backwards to favor the rich, as we currently see in Venezuela.  So I don’t regard the lack of luxury taxes as a huge problem for America, in and of itself.

My biggest complaint is that our failure to tax the rich in a reasonably sensible way (by taxing high levels of consumption) will lead us to attempt to tax the rich in a highly inefficient and destructive fashion, say with a tax on capital income, and not even succeed in our objective.

Allowing 100% write-offs of private jets will force us to have higher tax rates on saving and investment.  Maybe not today or tomorrow, but when the bills come due for our current unsustainable fiscal path.  That’s the real problem will these tax breaks.

PS.  Corporate jets are also very bad for the environment.

PPS. The newest issue of The Economist reports on a proposal for a luxury tax on NYC condos valued at more than $5 million, but only if the unit is unoccupied.  Huh?

PPPS.  This NYC condo may be temporarily unoccupied.

Who’s afraid of taxing the rich?

Scott Sumner
Scott B. Sumner is Research Fellow at the Independent Institute, the Director of the Program on Monetary Policy at the Mercatus Center at George Mason University and an economist who teaches at Bentley University in Waltham, Massachusetts. His economics blog, The Money Illusion, popularized the idea of nominal GDP targeting, which says that the Fed should target nominal GDP—i.e., real GDP growth plus the rate of inflation—to better "induce the correct level of business investment". In May 2012, Chicago Fed President Charles L. Evans became the first sitting member of the Federal Open Market Committee (FOMC) to endorse the idea.

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