
Optimal Taxation with Rent-Seeking (2011) - amelius
http://www.nber.org/papers/w17035
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fallingfrog
So the argument is: if we lower taxes on ownership of capital that can produce
"rents" (i.e. stocks, real estate, etc), the value of that capital flies
upwards so high that people are discouraged from buying in due to inflated
asset prices. So then we can have a relatively smaller more entrenched group
of people who controls all the productive assets.

Sounds wonderful. Long live the king.

~~~
a008t
Can you give an example of capital value flying upwards so high that people
are discouraged from buying in due to inflated asset prices?

~~~
jandrese
Southern California homes?

~~~
a008t
Are they really disconnected from rents in that area, as well as reasonable
expectations of future growth in demand - given low interest rates, which mean
you have to consider the performance of the asset far into the future?

In other words, if these assets were any cheaper, would they not be
underpriced vs their intrinsic value, making it a great investment with
someone with enough capital - thus bidding the prices back up?

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mijoharas

      One might be tempted to expect a similar result to apply to the more general two
      sector model when only rent-seekers are the top earners. In fact, since the top earners
      are all rent-seekers, rent-seeking imposes a negative externality, and the government has
      a desire to redistribute from high-earners to low earners, this seems like a clear case for
      high marginal tax rates on high earners, as discussed in the introduction. As Theorem 4
      demonstrates, however, this intuition is not complete. The key reason is the additional
      sectoral shift effect not present in a one sector economy: By lowering the marginal tax
      rate on the top earning rent-seekers, total equivalent effort E increases and thus wages
      in the rent-seeking sector fall. As a consequence, some agents now find it profitable to
      leave the rent-seeking sector and become traditional workers. Since the traditional sector
      is socially more productive, this shift is always welfare enhancing (S > 0)
    

This took me a fair while to grok. So I think the point is that a Pigovian tax
rate[0] is what you'd expect with a rent seeking sector and a non-rent seeking
sector (trying to minimize the negative externalities of rent-seeking).

Now if we have nothing but rent seekers in the top income bracket and try and
set their tax rate independently, you'd think that you should set it to the
rate which is the value of the negative externalities that that sector
produces, right?

The reason for the difference appears to be that in doing so, you make some of
the people who would have been rent seekers switch from rent seekers to non-
rent seeking behaviours, so to be pareto optimal, it "costs less" in taxes
than the pigovian tax, because the logical thing decreases the
"attractiveness" of being in the rent seeking sector, and the (logical) agents
move to the socially benificial sector, thus producing an outsized effect of
net good.

Is this right? can someone confirm whether I'm reading this correctly?

[EDIT] formatting

[0]
[https://en.wikipedia.org/wiki/Pigovian_tax](https://en.wikipedia.org/wiki/Pigovian_tax)

~~~
wahern
The way I understood it (by way of the paper's gold panning illustration) is
that with a progressive tax system based on total aggregate income (i.e. you
don't distinguish rent income from non-rent income), high marginal tax rates
result in a multitude of rent-seekers each collecting a fraction of the total
available rents. This is so because as their income for the year accumulates
and their marginal tax rate increases, the tax rate overcomes the collection
effort required. Once they've maximized their income they rest for the
remainder of the year. If they're not collecting rents that means someone else
can. The market in rent-seeking supports a larger number of rent-seekers,
which diminishes the base of people doing productive work.

By contrast, imagine if _all_ the rents went to a single rent-seeker. In that
situation only one individual is doing unproductive work instead of many.
Assuming that the rents were going to be collected regardless, then we're
better off if there's only one individual pursing that unproductive activity
than many.

How do you ensure there's only one rent-seeker? By creating conditions that
favor someone monopolizing the rent-seeking market. You can do so by taxing
high income earners _less_ than you might otherwise, preserving the incentive
for a single rent-seeker to collect all the rents. The lone rent-seeker is
taxed less, but that's okay because he's keeping everybody else out of the
rent-seeking market. Taxes on other high-income earners is less but that's
okay, too, because they're doing productive activity-- _generating_ wealth and
thus more taxable surplus--and now there's _more_ of them.

Like the Laffer Curve the devil is in the details.[1] But it's an interesting
point.

[1] I don't mean to impugn the paper by comparing it with the Laffer Curve and
the toxic political economics surrounding it. I just mean to say that the
quantitative values matter.

~~~
towelrod
Isn't there a fairly toxic political question buried in this paper as well?
Who is going to decide which behaviors are rent-seeking and which are
productive?

~~~
wahern
Yes, if pundits and lobbyists abuse this paper by relying on it to expound
policies that it can't actually support. (Maybe they already have?) But that's
a more general problem with how our political culture permits politicians and
pundits to abuse science in their rhetoric.

There's also a problem in academia where intense pressures to publish and to
be cited incentivize researchers to make radical claims, exaggerate the
practical utility of their findings, gloss over weak points, etc, ripe for
political fodder. I won't claim to understand all the technical details in the
paper but I didn't sense any of that in the paper. The authors seemed to
establish a fair analytical context, and they plainly articulated a limited
policy conclusion--"it _does_ _not_ _necessarily_ _imply_ that taxes should be
more steeply progressive". (Emphasis added.) Those don't feel like weasel
words; just true and straight-forward without inviting misinterpretation.

It's a cool paper that credibly does what it sets out to: explore what can
happen (in a formal and fair but, clearly, limited model) when you give rent-
seeking a first-class treatment and carefully analyze how it interplays with
the rest of the system.

By contrast, Arthur Laffer very actively advertised his research as justifying
policies that it simply could not. And he continues to do it--he actively
promoted the 2017 tax cut using the same intentionally misleading arguments he
always has.

------
padseeker
I've actually thought about this recently. The more equity that a smaller
number of elites acquire, the less value they place on their own money, the
more willing they are to throw money around and drive up prices for certain
items, such as real estate - this warps the market. It's almost as if the top
0.01% become an economic black hole consuming more and more resources to
acquire what's left.

~~~
nwah1
But notice, it doesn't affect random assets. You don't see people hoarding and
speculating on cars to a ridiculous degree, because cars depreciate.

Likewise, with real estate, the actual improvement values depreciate over
time. What can appreciate is the value of the land.

But there's other areas that see such influxes of cash desperately seeking a
return, like venture capital, ponzi schemes, cryptocurrency, and so on.
However, much of that is akin to gambling and the losing bets mainly just harm
the losers of the bets.

With land speculation manias, and related natural resource speculation manias,
everyone becomes a loser. Cost of living skyrockets, and so does the cost of
new production and hiring.

~~~
Eug894
Hurry, hurry! Ukrainians want to sell their land quickly (at least that is
what our imposed leaders tell us):

[https://voxukraine.org/en/land-prices-and-size-of-the-
market...](https://voxukraine.org/en/land-prices-and-size-of-the-market-what-
to-expect-for-ukraine-en/)

    
    
      Cost of living skyrockets,
      and so does the cost of new production and hiring.
    

Doesn't automation make wages diminishing? Also, please, read this:

[https://www.reddit.com/r/POLITIC/comments/7hqo7d/to_have_em_...](https://www.reddit.com/r/POLITIC/comments/7hqo7d/to_have_em_all/)

What do you think about the right for secession, if citizens were embezzled of
their land by unfair privatization process?

------
quantum_magpie
I'd wish to see an immensely large taxation on non-primary residence
properties; something like 15-20%/year. I'm not aware of any examples or good
studies on consequences of such action, but I'd expect the affordability of
actually owning your home to significantly increase and remove the exorbitant
rent cost.

