Chris Hughes, one of the men who founded Facebook in a Harvard University dorm room, has a new book out, though I’ll decline to advertise it here. He can ask Facebook CEO Mark Zuckerberg to do that for him. There are four major ideas being advanced within the tome, and three of those ideas are simply wrong. The one that’s right, a universal basic income (with emphasis on “basic”), is just fine, we’ve only got to work out a way to pay for it. The other three, however, warrant criticism.
The first of these bad ideas is that top tax rates should increase to 50 percent. This won’t work because of that pesky Laffer Curve. It’s pretty obvious there’s a tax rate above which revenue collected falls — a 130 percent rate (something we had for one year in my native Britain) collects very little in the second year of the experiment. The argument is only over what that rate is.
The best research we have is from Peter Diamond and Emmanuel Saez. This is often read as suggesting the peak of the curve is roughly 80 percent, but that’s a misunderstanding. That applies in a tax system with no “allowances” and the definition of an allowance is very wide indeed. There’s no way the U.S. will ever have a tax system without at least some of them. With allowances, that top rate (the revenue maximizing one) is 54 percent. But this is for taxes on income— then add federal and state income taxes, anything for Social Security, plus any taxes paid by employers for employing people (think Medicare, or, Seattle’s now abandoned head tax.) Sure, the federal income tax rate alone is below 54 percent, but many people in higher tax states are already paying, in total, more than this 54 percent. We just don’t have the room, under the Laffer Curve, to be able to raise the Fed’s rate to 50 percent.
The second wrong idea advanced by Hughes in his new book is that capital gains should be taxed at the same rate as income. Standard economics says “no” to this one. Optimal taxation theory even says that capital incomes shouldn’t be taxed at all. Sure, we’re not going to do that, but the investment in a capital gain is more sensitive to the rate of taxation than labor income is. Put another way, the Laffer Curve peak is lower for capital gains than working for a living.
Hughes’s third idea, which is also wrong, is to tax tech companies’ use of our free data and give us all a dividend. The problem here is that people just aren’t doing the basic math. Facebook might gain $40 per user a year in revenue. A dividend of this much is going to make a difference? Will it even cover the cost of mailing out the checks? This, on top of the fact that the data, which we give for free, isn’t worth anything. That’s why we give it for free. The value is created by the tech companies — and all those server farms, bright programmers, and miles of cable — processing the data. It’s the processing that creates the value, not the raw data itself. Why shouldn’t the people doing the work that creates the value keep it?
The mistake Hughes is making here, and in fairness it’s not a rare error, is to miss that thousands of our brightest in each generation have, for hundreds of years now, been chewing over these same problems. Entire libraries are filled to the brim with the results of their discussions. As a result, we actually know some things about the design of useful and workable taxation systems, poverty alleviation schemes, and methods of reducing inequality. Yes, it’s quite right that giving everyone some money — a basic income — reduces both poverty and inequality. But total income tax rates over 50 percent do not work and capital returns should be taxed lower than labor incomes. We’ll also get more value created if those creating the value get to keep at least some of it, instead of having it all taxed away.
And those who proffer policies to change our society would do well to work out what their forbears have thought about and why certain schemes just won’t work. Why repeat mistakes we knew were wrong one hundred, or three hundred, years ago?
Tim Worstall (@worstall) is a contributor to the Washington Examiner’s Beltway Confidential blog. He is a senior fellow at the Adam Smith Institute. You can read all his pieces at the Continental Telegraph.
