Arnold Kling  

Libertarian Redistribution

Meltzer on the Labor Market... Various Articles...

In an essay called Bleeding-Heart Libertarianism, I sketch a system for using a consumption tax with a negative-income-tax feature to replace government-provided health care, education, and income security.

Does the bleeding-heart libertarian approach seem harsh? Actually, the Welfare State is worse. The Welfare State targets much more of its largesse to people who are less needy. Medicare pays for hospital bills for everyone over 65, including millionaires. The school districts with the highest per-pupil spending rates tend to be those with the wealthiest residents. Many of the elderly who receive Social Security are well-to-do.

See a related essay by Matthew Miller.

For Discussion. Does the bleeding-heart libertarian approach that I propose seem feasible economically?

COMMENTS (25 to date)
Brian Doss writes:

How would consumption be taxed in your model? Via a national sales tax?

Or the regular income accounting with a 100% deduction for any savings activity (savings accounts, mutual funds, CDs, bonds, etc)?

Mcwop writes:

>>Does the bleeding-heart libertarian approach that I propose seem feasible

Boonton writes:

I'm curious as to why consumption would be the only thing taxed? The economy needs both savings and consumption to function correctly. If the US suffers from a shortage of savings then market oriented economists should assert that the market will adjust its incentives to reward additional savings accordingly.

Eric Krieg writes:

I'm with Boonton on this one. Globally, if anything, there seems to be an excess of savings. There is overcapacity in every industry one can name. The ONLY thing keeping the global economy above water is US consumption. We are the market of first, last, and perhaps only, choice.

Essentially, the people of Japan, Germany, etc. are saving for us.

Now, maybe you think that this is a very dangerous situation, and perhaps one that is unsustainable. But the US has been a debtor nation since 1984. Don't you think that, if our debtor status was a problem, it would have caused a crisis SOMETIME in the last TWO DECADES?

David Thomson writes:

“Let’s compare that to a kid born into a household earning $80,000/year. However, the second kid is fat with poor athletic ability, and not so good looking. Does the poor athletic kid have that many more disadvantages than the fat kid? I would propose that they both have the tools, but each has choices to take advantage of them. Sure luck is a factor, but you cannot eliminate bad luck by legislation or policy.”

Exactly. This is why I strongly contend that the well meaning John Rawls did enormous damage. A viable society should emphasize making the rules the same for everybody. Excessive worry about “fairness” entices us down a path leading towards nihilistic frustration and dictatorship.

Heck, is it fair that Michael Jordan is a significantly better basketball player than myself? And since it is virtually impossible to bring me up to his level, what are we to do? Should we therefore break Mr. Jordan’s legs to even things up?

Mcwop writes:

David, I will take the "luck" discussion a step further. When looking at the biggest contributor to poverty it is evident that luck has little to do with it. The contributor is teenage pregnancy, and the single parent (basically young poeple starting families beyond their means) household. Last I checked, pregnancy is more choice than luck. Of course, some will argue that poorer children aren't lucky enough to have parents that influence better family planning decisions. I counter with - What would tax policy do to change that behavior?

The luck discussion is where Miller will lose potential conservative converts.

Mats writes:

"Actually, the Welfare State is worse" - No way. The Welfare State may seem too much of Big Brother, but is the only alternative for the long run. If free, people buy relative value goods (SUVs, breast implants) which make them keep up with the Joneses, but in the end does not make people better off on average. If free, people (on average) end up paying too little for healthcare insurance, and suffer needlessly from poor healthcare.

The question, I guess, boils down to the question if people should have to use - by law - safty belts when driving. You know my answer.

Mcwop writes:

Mats, I bet strippers and related industry types with implants make more money than those without.

Mats writes:

My point is that they wouldn't if everyone had.

Matt Young writes:

I judge you system based on the sweet spot, incomes between $50,000 and $90,000. These are the incomes that the working poor shoot for, and if these incomes do not suffer massive tax penalties, then the system works.

I would add a filthy rich tax for the extremely wealthy whose income is not dependent on earned, market based income. We would add this based upon the assumption that extreme, unearned income relies on the hidden hand of property rights enforced by government. The filthy rich tax should be based on the equivalent cost of private law enforcement for the protection of capital flows in an ideal anarchic society.

For example, if the government required Microsoft to pay for private intellectual property protection, what would Microsoft's cost be? Remember, Linux foreswears such government protection. I believe that Bill Gates gets an order more of magnitude personal protection from government than the middle class. Is he paying his full share for these extra services?

Look at forward deployed military forces providing trade security. Does this constitute a service to a smaller group of traders than say, border patrol offers? What is the equivalent private sector cost?

Look at the type of trade agreement negotiated? How much is this service differentially apply to various economic sectors. What is the equivalent private sector cost for these services?

Brian Doss writes:

Only individuals themselves can determine what makes them better off, either now or in the end. Saying otherwise is to substitute your subjective value judgements for theirs.

As far as the tax model goes, it seems OK in the 'static now', but I wonder what the long term will do to the relative tax burden and tax receipts for the non-Medicare&SSA&FederalEducation parts of the budget.

If savings are exempted, there is a heavy incentive to save (to lower tax burden and/or get the bleedin' boon). High income individuals could save even more than usual, lowering the total receipts and statistically shifting the "burden" onto the poorer quintiles (even though, all things remaining equal with the poor, nothing will have changed and they keep getting yearly checks up to $20,000 or so).

Not only would there be a budget crisis again (lower tax receipts in the short term), but there'd be political traction for taxing savings, or means-testing the savings tax, putting in extra tiers, etc etc., and before long the tax code is as complicated as before.

Or would capital gains and other taxes on productive & saving behavior remain under the national consumptive tax regime?

Also, what would happen to lower income households that get into massive credit card debt (consumptive debt)- they're essentially consuming more than their income, and each additional credit card purchase raises their tax rate (or, essentially, for each dollar they charge, they lose $1 until the exemption is gone, then $0.40 every additional dollar). The opposite, of course, is true for savings, with every $1 saved giving you $0.40 back in eliminated taxes.

The nightmare scenario (politically), even in a case where one is giving almost literally the per-capita income to the poor, that on the margin poor and middle class folk (who have highly debt-ridden lifestyles) would be paying more and rich folk would be paying less. In the capuchin monkey world of illiberal politics and "instinct for fairness", that's definitely a recipe for flung poo.

Matt Young writes:

I have heard the argument that government should have some bias over savings vs consumption before and don't quite understand it. I always go back to the ideal anarchic model and try to figure out what folks would do in the absence of government pursuassion.

In an anarchic model, folks would save money or other valuable commodities to reserve the right to consumption in larger amounts in the future. The collective actions of the market would eventually price current consumption vs the risks and price of future consumption.

Government should collect the cost of supporting current consumption, but it also can collect the future cost of government services by taxing saved income. But why would government favor taxing future consumption costs today? The free market has already allowed the citizen to distribute his consumption between the current and the future, the government should follow along.

Matt Young writes:

Debt is future income negatively saved for current consumption. Government should tax the cost of providing consumption services as they are incurred. When the debt is paid back in the future, it is not taxed.

Mcwop writes:

>>Matt Young wrote: "Remember, Linux foreswears such government protection."

Boonton writes:

Actually Linux is being threatened by the courts, it is SCO that is attempting to use the courts to reap an Intellectual Property windfall. If you think about it Linux's only benefit from 'enforcement' of its open source license is to prevent any company from capturing Linux as their property.

In other words, if some company violated the open source license...say by altering the source code and making it proprietary, the Linux community would have no financial incentive to take them to court. The primary purpose of the open source license would be to prevent that company from trying to shut down all the other Linux users/suppliers. On the other hand, Microsoft has a clear financial value in being able to go after an outfit that starts selling pirate copies of XP or Office.

Mcwop writes:

Boonton, the courts are just a ring where the rules are interpreted, SCO is the plaintiff. No matter how you spin it, the GPL is a license just like any other software license. The only difference is in its terms and purpose. Here is a quote from Richard Stallman himself:

"Hence their campaign to persuade us to abandon the license (GNU GPL) that protects our community, the license that won't let them say, 'What's yours is mine,and what's mine is mine.' They want us to let them take whatever they want, without ever giving anything back. They want us to abandon our defenses," (quote in reference to MSFT)

Sounds to me as if the GPL provides the means to seek redress through the courts if needed.

In fact the Open Software Foundation has been to court before to defend the GNU Public License. One example is the MySQL AB case: Here is another quote:

"We don't expect to have any problem enforcing the GPL in this situation," says Bradley Kuhn, FSF's vice president. Normally, he says, the Free Software Foundation conducts private enforcement of GPL violations on software that it holds the copyright on.

Link to above quote article:

The open source community may not have financial incentives, means, or other reasosn to go to court in defense of the GPL, but they certainly have something at stake, which can be protected by the existence of the GPL and defended through the courts and copyright law.

See this FSF page for more:

It is a good thing that there is a system in place to defend the GPL.

Matt Young writes:

Who benefits the most from copyright license enforcement, Linux or Microsoft?

Go back to the anarchic model where there is no copyright enforcement or law by government, everything must be done by private contract, agreement to private courts, and enforceble by private force.

Linux would be faced with Microsoft stealing part of the source code, changing it to incompatability, and adding a valuable funtion. This is in fact how Microsoft got started. The Linux community responds by taking the added funtion and creating a duplicate in open source. This is Linux's model.

Who would spend the most funds to protect their product?

Once the Microsoft product was copied, Microsoft would have to enforce a privately funded lawsuit, with a private contract court, for any of numerable groups that may be legally copying their product, but violating a private contract twice removed from Microsoft's control. Microsoft could economize by joining a large consortium of publishers and pay a yearly fee to the equivalent of Pinkerton Private Police. The fee would be substantial, as any 19 century railroad company will testify.

The Linux community, on the otherhand, need merely demonstrate their private license by revealing all source code. And hijackers will either have their source code incorporated into the Linux community, thus by definition, joining the Linux community; or the hijacker is identified as not being Linux in virtue of some hidden code. A simple test for any user.

The Linux license was designed, as Stallman implied, to protect the open source industry from having their code incorporated the government enforcement system. It is the threat of government protection that Stallman fights. In fact, Stallman pays twice, once to support government copyright laws in his taxes, and once again to avoid them with legal fees.

No contest, it is Microsoft that has gained the overwhelming advantage by government copyright services, hence a special monopoly tax is entirely appropriate.

Lawrance George Lux writes:

Consumption taxation will always bring reduction in Production levels and Inflation, as determined by Third-Generation analysis. It is consistently progressive, until such taxes are abandoned. lgl

Lawrance George Lux writes:

Comments on Arnold's article:

1) Why is there a need for a personal exemption in the first place? It automatically leaves $2 trillion untaxed for no apparent reason. The higher Incomes need a personal exemption as much as millionaire SS beneficaries. A negative tax formula could repay extraordinary costs to lower Incomes.

2)Standards of Health Care and Education would have to be maintained, along with Food Preparation; so Welfare State aspects are not easily eliminated.

3)Dependence on Consumption will defeat Consumer Demand, spur Inflation, and defeat long-range redistribution.

4) A more-fitting tax would be a low tax on Aggregate Individual wealth. This would allow the Poor to be paid a negative tax, find easier borrowing terms, and defray some expense by debt load. All Incomes would be taxed equally, without need of tax credits; elements which are nothing but preferments under any evaluation. Those of more aggregate Wealth would be spurred to invest and guide the Economy, as the tax would tax their Aggregate whether it was making a Profit or Loss.

Matt Young writes:

OK, pre-tax future consumption.

Add a 10% tax on yearly deposits into savings and add a 30% tax on yearly cash withdrawals.

David Thomson writes:

"David, I will take the "luck" discussion a step further. When looking at the biggest contributor to poverty it is evident that luck has little to do with it. The contributor is teenage pregnancy, and the single parent (basically young poeple starting families beyond their means) household. Last I checked, pregnancy is more choice than luck. Of course, some will argue that poorer children aren't lucky enough to have parents that influence better family planning decisions. "

Absolutely. John Rawls essentially ignored the aspect of merit. He was tacitly, if not even explicitly, a determinist. I am utterly convinced that Rawls, perhaps inadvertently, is greatly responsible for the recent “everybody is a victim” nonsense. It’s the logical result of his philosophical underpinnings. Please note that I go out of my way to be fair towards this man. He may be the quintessential example of a warm hearted person who unwittingly caused enormous harm.

Some people will try to tell you that John Rawls cannot be that important because few people have ever heard of him. This is foolish for as John Maynard Keynes once said:

“"The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed, the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back. I am sure that the power of vested interests is vastly exaggereated compared with the gradual encroachment of ideas…. But, soon or late, it is ideas, not vested interests, which are dangerous for good or evil…"

(This above quote was found on Brad DeLong’s website)

Steve writes:

Economically sound, yes. Politically, no.

The primary reason is the unbounded hatred of the rich by almost everyone, especially the intellectual elite and rich liberals.

But even they might like the concept if there were caps on income (both earned and investment) - e.g., all income over $x is taxed 100%. And, I would suggest, they would listen to a proposal that adjusted the cap upwards to the extent contributions were made to legitimate charities, foundations with charitable charters and other such noble pursuits.

Lawrance George Lux writes:

A tax on Aggregate Wealth would not be a pre-tax on future consumption. Aggregate wealth would be determined by Total Assets minus Debt ratios and liabilities. What would be taxed would be an Individual's economic position. A 3.1% tax rate would cost $3100 per $100,000 of Aggregate Wealth, $31,000 per Million dollars. Individuals would be determined by economic participants alone, so Corporations, Partnerships, and Sole Proprietorships would be equally taxed as economic participants. Business and Individual Households would each pay an appropriate tax, without any effect on Consumption decisions.

Matt Young writes:


I presume this 3.1% tax is a yearly tax on the (estimated) $120 trillion in American private wealth, including cash, treasury bonds, savings, foreign bank accounts, tractors, washing machines, home equity, and anything else having a consumption life greater than one year, minus depreciation.

I don't quite know what to say. Each year, 3.1% of America must be put on the open market and sold for government use. Absent productivity growth, asset prices would be under pressure, so current prices would have to rise by 40% to recover losses. You might just end up with an indirect consumption tax.

Lawrance George Lux writes:

You place difficulty where none appears. Actual taxable Assets would only equal something over $100 trillion, as Living Expense and Short-term Products would not be evaluated. Nothing would be bought or sold through the Process, simple payment through Profits, Earnings, Wages, or the acquirement of future Debt; which would reduce future Aggregate Wealth.

The Tax would not be relatively higher than at present, with one great benefit. The placement of the Tax burden squarely on Those able to pay, would insist on rapid, effective control on Government expenditures. I think you would agree that cutting Government expenditure in half is a desirable goal. It may never be realized, but my Tax plan is the best avenue to reduce Government expenditure.

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