Why would we want rich people to throw lavish parties rather than creating future productive capacity?
Secondly, I do somewhat agree that we shouldn't disincentivize investment or saving up. I am not familiar with the US tax system, but in some countries you can defer paying taxes on what you put into a pension plan until the time when you collect your pension. If the interest you earn on your savings is more than the inflation, this is a win/win situation: You will earn interest on a larger amount, and society will collect tax on a larger amount in the end too. I could probably be convinced that it would be a good idea to make all investment and savings tax free provided that all dividends as well as any amount liquidated was taxed as income. Buy a house? Fine that's tax deductible. Sell a house? Get taxed on the entire amount as if it were income.
This is wrong because it focuses solely on imaginary numbers floating around. It's absolutely true that we can play any game we want with numbers in a bank computer.
However, a worker can either be building a new factory or they can be making a purse. The former is investment while the latter is consumption. If we encourage investment we get more of the former, while if we encourage consumption we get more of the latter. The constraint here is real resources, not money.
I could probably be convinced that it would be a good idea to make all investment and savings tax free provided that all dividends as well as any amount liquidated was taxed as income.
This discourages investment and favors immediate consumption. Again, read Scott Sumner: http://www.themoneyillusion.com/?p=28842
This also discourages re-allocating investments to their most productive uses.
So not only would a tax system based on consumption be hugely unjust from a social perspective, it also makes no sense from an economic perspective.
Again, think of real resources because thinking of money is confusing you. A worker can either do biomedical research (investment) or they can provide massages (consumption). This fact doesn't change no matter what games you imagine are happening with money.
But regardless, the intention behind your proposal still makes it a horrible idea. I can see that you will not be swayed by the argument that it is socially very unjust and would result a unimaginable inequality. But as I keep trying to tell you, consumption is the motor of capitalism. It is the demand part of supply and demand. Without consumption, there is no production. And production is what creates all the wealth. Everybody would be poorer.
Furthermore, while it's true the funding new ventures also contribute to wealth creation, and that lack of risk seeking capital would be a problem, it is simply not a problem that exists in our present condition as evidenced by the historically low interest rates. In fact there is an overabundance of capital in today's world. What is lacking is sound new ventures to invest in. If we were to further incentivize investment, we would only accelerate the formation of a catastrophic bubble.
Your understanding of macroeconomics is simplistic if you believe as you seem to do that more investing is always positive or that consumption is always negative.
A net investment in houses would involve more housing being owned than before. This would require more houses to be built, and this in turn would require people a shift of workers/materials/etc from other uses into housing construction. Present day consumption goes down in return for an increase in future consumption.
The result is that in the future, productive capacity has increased and more housing is available to consume.
If you want to see the result of a lack of real investment, look at SF. All sorts of games being played with money, but nominally wealthy people can't even afford a flat without roommates.
But as I keep trying to tell you, consumption is the motor of capitalism. It is the demand part of supply and demand. Without consumption, there is no production. And production is what creates all the wealth. Everybody would be poorer.
Why don't you explain the mechanism by which this occurs in real terms? I'm pretty sure you've wildly misunderstood Keynesian economics and are conflating the Keynesian cure for prideful workers (which we don't have now - full employment) for some sort of general growth prescription.
You were the one suggesting that investment should be exempt from tax. That requires a definition on the micro level of what constitutes investment, otherwise how do you determine whether or not some expenditure is to be taxed or not? From a practical point of view, how do you differentiate consumption from investment?
If you want to see the result of a lack of real investment, look at SF
Oh, so now there's more than one kind of investment, and only one is "the real kind"? As far as I can see, it doesn't get much realler than in SF: You've got risk seeking capital funding actual new ventures. As in actually creating new wealth. Provided of course that those new ventures succeed. Those rich people you talk of who can't afford to live there have the firstest of first world problems.
It's funny that you should mention SF, because it is a great example of what happens when there is an overabundance of capital and everyone is seeking to invest. You get investors taking on more and more risk to get a return on their capital and ultimately you get a bursting bubble. You see capital by itself does not magically cause value to be created, even when it is used to fund new ventures. If I build a house or a widget, or if I've performed a service, I've only created value, if that house/widget/service was needed in the first place. A man who invests in hotels on the South Pole or a sand selling business in the Sahara is actually destroying wealth. Just like everyone who invested in pets.com before the dot com bubble.
Why don't you explain the mechanism by which this occurs in real terms?
I'm not entirely sure what you mean by real terms? I can say it simpler terms if you like. It's not complicated: Imagine a supermarket. As people buy stuff, the shelves are gradually emptied. The shelves that are emptied first are the ones holding stuff that is most important i.e. valuable to people. Luckily the empty shelf is a great signal to whomever makes the stuff that gets sold in the supermarket to produce more of that stuff. There is of course a pricing component of that mechanism also, but that's basically how that works. If the producer of stuff is unable to keep up with the demand, then that's an opportunity to invest in a new factory that makes the same stuff. Of course not everything sold in supermarket is essential, but I'm sure you would agree that that doesn't mean it is without value. But if we were to tax everything sold in the supermarket heavily (and we would need to if we abolished other forms of tax), we would disincentivize buying anything except the bare necessities. If I understand you correctly, this is more or less the point. This then means that it becomes much harder selling anything other than the bare necessities, and as a consequence lots of businesses must close. Sure, there may be a tiny market selling motorized lawnmowers, but since everything becomes so expensive, most people will get by with a manual lawnmower. But this again means that people will have to spend more time mowing their lawns, and will have less time to do something else that could be valuable. And so on.
Look, I'm not saying that more consumption is always better. Clearly there comes a point at which people buy shit they don't need, and there is also a very real sustainability issue. It's a good idea to tax things like fossil fuels and cigarettes. But most of everything that's valuable gets produced because someone is willing and able to consume it.
Consumption is differentiated from investment in that consumption is stuff you intrinsically want, while investment is things you don't want except because it gives you other things later.
Again, standard economic terms.
Imagine a supermarket. As people buy stuff, the shelves are gradually emptied. The shelves that are emptied first are the ones holding stuff that is most important i.e. valuable to people. Luckily the empty shelf is a great signal to whomever makes the stuff that gets sold in the supermarket to produce more of that stuff.
How can they produce more? They haven't devoted any physical resources to building that new factory or otherwise upgrading their productive capacity.
But if we were to tax everything sold in the supermarket heavily (and we would need to if we abolished other forms of tax), we would disincentivize buying anything except the bare necessities. If I understand you correctly, this is more or less the point.
This is completely NOT the point. Read the Scott Sumner link I provided above. Here it is again: http://www.themoneyillusion.com/?p=28842
The point is that a capital income tax penalizes consumption in the future relative to consumption today. A consumption tax treats them equally.
That’s fine, but as I've argued previously, almost any purchase can be argued to fit either description. People do actually buy e.g. fine wine as an investment. How will the IRS determine if a purchase is an investment or consumption?
How can they produce more? They haven't devoted any physical resources to building that new factory or otherwise upgrading their productive capacity.
Presumably they make a profit from selling the stuff. And maybe they produce less of the stuff that doesn't sell well. But how do you even get that from what I wrote? Consumption is not antithetical to investment. I am not arguing against investment. It's not clear to me if you understand that investing does not automatically create a market. All those Chinese ghost towns we hear about are the result of investing in something for which there is no market.
This is completely NOT the point.
In that case I apologize for misunderstanding you. Still, it's an empirical fact that taxes act as a disincentive. And you would need to tax consumption very heavily if it were to replace current forms of tax. A large part of the population would simply not be able to afford anything but the bare essentials (if that) let alone have any money left for investment.
Read the Scott Sumner link I provided above.
I enjoy our discussion, but I am not interested in reading someone else make your argument for you.
The point is that a capital income tax penalizes consumption in the future relative to consumption today. A consumption tax treats them equally.
I am sure that's true, but so what? It's such an arbitrary point to make. It doesn't point towards any real world problem that we are having. The economic challenges that faces us today are not caused by people consuming too much today and saving too little for the future. Quite the opposite in fact. There is also no indication at all that there's any lack of risk seeking capital. It's never been easier to get funding for a new venture. In fact there are sign that it's become almost too easy, and that investors are taking on too large risks in order to get a return.