The capital gains argument
Former George W. Bush speechwriter David Frum makes what Paul Krugman today calls a “good example” of how “smarter conservatives” will argue to keep the capital gains tax rate low. Frum basically argues that a high capital gains tax will discourage transfers of capital assets to more efficient owners and society will therefore lose.
Although not well supported by historical evidence, it’s a plausible intellectual defense as long as the argument stays firmly bounded “within the box”. It plays to our micro sense of efficiency and succeeds as long as we stay firmly planted on the micro playing field. If we expand the view to a macro level though and consider the reality of today’s broader world, the case falls apart.
Frum is making a micro efficiency argument and the best way to counter it, in my opinion, is to address macro efficiency. How efficient can a system be that consistently directs almost all financial rewards to a very select few? One in which the bottom 80% of the population control just 7% of financial wealth and receive just 39% of income. This strikes most people as unfair but, critically, it’s also highly inefficient. With the bulk of the distribution going to the very top, most production is necessarily oriented toward their pleasure. The system objectively fails to allocate production based on the needs or desires of the majority and is therefore not serving their interests efficiently.
But it’s deeper than that. Mass production capitalism depends crucially on unending recirculation and widely distributed purchasing power. Significantly unequal distribution inevitably brings stagnation, unemployment, and crisis. Who, after all, will purchase the commodities that are the very lifeblood of the system? And how can one expect significant levels of investment when the potential for profit is so constricted? There’s little hope for improvement either, given the reality of ever expanding automation and technology that’s near certain to continuously erode the pool of decent jobs. Unequal distribution is inescapably so inefficient it makes Frum’s micro concerns seem ludicrous.
So, staying within the broader “box” of capitalist relations, how should a “smart liberal” respond? Can there be anything more obvious? The liberal should stay focused on the macro and demand heavily progressive taxes that are redistributed to the broad majority along with recognition of the true potential of fiat currency. A significant tax based on total wealth plus a near 100% estate tax would seem highly efficient. It wouldn’t discourage the sales of businesses since the tax would apply regardless and it would eliminate the gross inefficiency of unearned inherited wealth. Surely, following his own argument, Frum would agree on micro grounds that there’s little chance the inheritors of great fortunes are likely to be the most efficient owners. Like any tax, there would be technical issues needing to be resolved, but they could no doubt be worked out in a reasonably efficient way.
This is all basic original Keynes and Abba Lerner and they weren’t radicals in their time; it’s near Marxian today. We can count on mainstream liberals not to make an effective case against Frum and any changes arising from this “debate” will therefore be immaterial. The global economy will continue downward as ever greater numbers face declining living standards, insecurity, and poverty; all in the name of efficiency.