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So the rich borrow cheaply, invest the money, and profit?



Those who dedicated their life to capital allocation, yes, they are allowed to borrow cheaply and profit. I thought about going into this in university, but there is something very soul draining about it. Too bad I discovered warren buffet later in life. More power to these folks. In fact, we shouldn't even be taxing them. We should just start taxing things like mansions, yachts, and super cars by 5x.


There's no logical reason not to tax investors. They aren't unique butterflies that make the economy flourish. Investment is just one component of a functioning economy. So is education, saving, consumption, etc. Too much focus on one is not a good thing. This is one of the reasons we have so many investor bubbles. Also, the wealthy have no other options than to invest their money. What else would they do with it, put it under their mattress? The ROI is the only incentive they need. All this does is increase income inequality.


"No other options" than investing one's savings? Go to Russia to find out some of those other options, or any other place where people don't count on their wealth not to be confiscated at an unpredictable moment. Basically the other option is "doing expensive stupid shit" and you'd be surprised how many variations of this one can come up with. Certainly society as a whole ends up waaaay less wealthy if "the wealthy" (or those with any sort of surplus, really) end up strongly preferring spending to investment.

Hence taxing yachts sounds to me like it could be smarter than taxing investment. (Not 100% sure, as usual with these things, just looks sensible at first glance.)


Imagine you have a business; Would you rather have a customer or an investor?


Imagine you're on a lonely island. Would you rather eat all you can or conserve food to the extent possible?

Earth is humanity's lonely island. (I realize it's more complicated than that because billions of men on Earth do not make decisions in the same way that a lonely man on an island does. All I'm saying is that it is still more desirable to invest than save when we can, at least past some point. The extent to which society depends on consumption, perhaps excessive consumption, today, and "how to get from here to there" I don't know. I am however certain that flogging savers badly enough with high taxes will result in people burning their savings in what "from humanity's point of view" are very wasteful ways; also in people saving less in the first place by working less in the first place, also not that great - "imagine you have a business, would you rather have a worker who wants to make as much as he can and save it, or work as little as needed to survive because he can't save?")


We are clearly discussing two different things.

You are saying overconsumption by the super rich is ultimately environmentally damaging. (which i don't disagree with)

I am saying underconsumption by the middle/lowerclass is immediately economically damaging.

Prioritizing investment over consumption leads to inequality and poor economic outcomes.


I dont distinguish between billionaires and middle class folks in this respect. Overconsumption by the middle class us likely much more environmentally damaging. Does it drive the economy? Perhaps; if so, it's a problem. And certainly the Russian middle class consumes more of what it makes than European or American because lacking reliable property rights they do not trust investments to pay off.


Seems to me like an argument for sustainable manufacturing, rather than anti-consumption

Curbing consumption is immediately damaging to the economy. The better solution would be to heavily tax unsustainable business practices, rather than try to curb consumption. If you go after consumption you give more power to the super rich, while simultaneously doing nothing to discourage environmentally unsound business practices.

Why is it better to continue producing products in an environmentally unfriendly way with lower consumption of goods, rather than lowering the production of environmentally damaging products, while raising consumption rates of sustainable products?

Go after the supply not the demand.


On the contrary, there is no logical reason to tax investors/savers. I strongly recommend this article by Scott Sumner, who works through the details carefully.

http://www.themoneyillusion.com/?p=28842

The key point is that taxes on investments create distortions while taxes on consumption don't. It's even worse if you tax different investments differently (e.g., interest vs cap gains, short term vs long term cap gains).


That article has too many flaws to go into, but the whole idea of all investments growing the economy are just false. Most of the investment dollars go to areas with little to no benefit. The (secondary) stock market, derivatives, commodity speculation, forex, etc. These produce almost no jobs, produce no goods/services, and do very little (aside from marginal liquidity) for the economy. An economy build on financial magic and imaginary money isn't sound.


That article has too many flaws to go into...

Such a cute - yet content-free - dismissal. It's also pretty clear from your "critique" that you didn't even read the article - while Sumner's examples do use a positive rate of return, his argument is independent of it.


Derivatives, commodity speculation, forex, etc, all allow organizations to hedge risks and make decisions that have higher expected economic returns.


I read it and I don't get it! Here, take a look:

> Suppose we want to raise revenue with a present value of $20,000...We could have a wage tax of 20%, and raise $20,000 right now.

OK, sure.

> In contrast, an income tax doubles taxes the money saved, once as wages, and again as capital income . So now it’s $40,000 consumption this year, and only $72,000 in 20 years ($80,000 minus 20% tax on the $40,000 in investment income), an effective tax rate of 28% on future consumption

So the line of reasoning is:

1. The government wishes to raise $20k NPV in taxes

2. A 20% wage tax or VAT will accomplish this exactly, but a 20% income tax will raise $24k NPV, which means it is an effectively higher tax

3. Therefore income taxes are worse than wage taxes or VAT.

But that doesn't follow at all. The correct conclusion is that an income tax raises the same revenue with a lower nominal rate. That doesn't by itself make an income tax better or worse.


The issue is that an income tax (which applies to both capital and wage income) taxes savers at a higher rate than spendthrifts.

I.e., if Steve blows all his money on hookers, he pays a 20% tax. However, if Sally judiciously saves her money for a rainy day or unexpected expense, she will be paying a 28% tax rate.


Since I sense (from the phrase "the rich") that you mean it as something bad: it's not. Just imagine whom would you rather lend your hard-earned money to: a wealthy investor with a proven track record, or a regular Joe. Well, that's exactly what the bank you keep your money it is doing.


Is the money the Fed lends out "hard-earned" or is it manufactured as a side-effect of fiscal policy (e.g. quantitative easing)? Does it seem right that public policy should so clearly benefit the wealthy by forcing money into the economy through private allocation experts?

There should be a way for entrepreneurs to tap into that money directly, avoiding the wealthy, gate-keeping middle-men. I resent those people, because the irony is that such people make money as money flows through them, thanks to fees, so even their wealth doesn't necessarily mean they are any good at allocation. Even if you take into account returns, in a growing economy when most bets are good bets. Money should flow through people who know how to make real things, not just make decisions.


But still: whom would you give your money? To people who are wealthy because a lot of money have gone through them, or to entrepreneurs?


To entrepreneurs, of course. Money doesn't beget money by magic; it needs to flow to someone who actually makes things and works, or the rate of return drops for everyone.


Yyyyup.

Which, by the way, is the entire point of the Fed reducing interest rates - to stimulate growth by encouraging increased spending (including investment) of cheaply-borrowed money.


Yes, at the very bottom (top?) of this food chain, you see banks taking a spread between their loan rates and the Federal Funds Rate. https://en.wikipedia.org/wiki/Federal_funds_rate




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