Ideas Matter

Not a bad idea but it would have to be a progressive tax on withdrawals from the investment account, ...

Right. That's what "tax deferred investment" means. Essentially, you pay the tax on any income that you don't account invest. This accounting is already common in the U.S. Most people don't account personally but rather hand money to a fund manager responsible for the accounting.

You're from Venezuala, right?

And, when you buy yourself a Picasso to hang on your wall…¿are you consuming or investing?

As a practical matter, common juries decide these questions. If I'm on the jury and the Picasso hangs in your private residence, it's consumption. If a jury finds otherwise, you must account for its disposition as such, i.e. if you ever exchange it for something else judged "consumption", you owe the tax then.

“a progressive consumption tax, essentially a progressive income tax with tax deferred investing and unlimited entitlement to invest. With deferral of the tax on investments and unlimited entitlement to invest, I don't object to marginal tax rates approaching 100% ”

Posted by: Martin Brock | Jun 23, 2008

Not a bad idea but it would have to be a progressive tax on withdrawals from the investment account, since otherwise all consumptions would occur in the informal and underground world and we would be opening new growth opportunities for the illicit part of the economy.

And, when you buy yourself a Picasso to hang on your wall…¿are you consuming or investing?

And, when you take that round the world cruise…¿are you consuming or are you investing in furthering your education?

It is important to connect the concepts of "idea power" to liberty, as Hayek did in his "Constitution of Liberty" (see quote below). As government takes over more and more of the economy of a country (as has been happening in Brazil), our liberty decreases as does the environment for new ideas to flourish. Our values are not our own when this happens.

When I was growing up, my parents always told me: go into the public sector, for in Brazil it was the only safe bet. These concepts -- idea power, liberty, values -- are all intertwined and determine the world outlook of a person. In a quasi-socialist state as I live in, it has been wrenching trying to break away from the old ideas and to let a new world view emerge from heavy reading of Hayek and the Austrians.

This breaking away has been wrenching because you wind up not being able to talk to people around you: they now think you are from another planet. It would be fantastic to spend a few years at a place like George Mason, where I am sure I would meet people whose ideas are much closer to what I now hold dear.

This process by which the new emerges is best understood in the intellectual sphere when the results are new ideas. It is the field in which most of us are aware at least of some of the individual steps of the process, where we necessarily know what is happening and thus generally recognize the necessity of freedom. Most scientists realize that we cannot plan the advance of knowledge, that in the voyage into the unknown -- which is what research is -- we are in great measure dependent on the vagaries of induvidual genius and of circumstance, and that scientific advance, like a new idea that will spring up in a single mind, will be the result of a combination of conceptions, habits, and circumstances brought to one person by society, the result as much of lucky accidents as of systematic effort.

Societies don't grant monopolies. Statesmen grant them, and they grant the rights for their own purposes. The rest of us make what we can of them.

Societies don't share in value either. Individuals do that too.

That said, I'll again pitch a progressive consumption tax, essentially a progressive income tax with tax deferred investing and unlimited entitlement to invest. With deferral of the tax on investments and unlimited entitlement to invest, I don't object to marginal tax rates approaching 100% myself. I do object to high rates at the bottom of the scale, but I expect majoritarian politics to take care of that.

The point of this scheme is not to centralize authority in some statutory body allegedly representing "society" but to leave less central authority where "society" directs it without empowering individual authorities to organize resources too much for their exclusive, individual consumption.

So there's a very specific, very realizable reform, highly precedented and hardly a hair's breadth from current law. What do you think of it?

Why do I expect no answer to this question?

Now you are getting into ideas on intellectual property rights, so, again:

If the society feels that they should award monopolistic IPRs that is ok with me but what I cannot understand is why the profits of someone who has been granted an IPR and into which defense society is or should be investing money should then be taxed at the same rate than someone who has not received any such support from the society.

Another way of looking at it is… should not the society have a fair share in the value of those ideas?… because of the cultural heritage it provided to foster those ideas?

I concede your prerogative to use words as you please.

Likewise.

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The mess of copyrights is the result of the "golden goose" syndrome.

Humans get 'stuck' to their income sources, that is, they don't want to let go of their current means of survival, and with the whole industry that crops up around something lucrative such as harry Potter, many people become 'interested' in using available means to protect that source.

Ah, human nature.

but doesn't only allowing a certain dollar amount of royalties assume that the cost to make all ideas practicable is the same?

I referred only to Rowling's books.

it might only cost $20,000 to generate one idea but $2,000,000 to generate another idea.

Copyrights don't protect ideas. They protect expressions, in theory. Some of the international copyright decisions, in European states, awarding damages to Rowling from sellers of books originally written in Russian and featuring similar characters, are incredible. Even if the characters are deliberately similar, the awards are still incredible. The Russians themselves may laugh at these decisions, of course, and I believe they should.

I don't oppose copyright, and I have no problem with differing copyright standards for different forms of expression. Subjecting a novel to the same copyright standard as a computer source code, for example, is also incredible. In terms of resources invested, the computer source code may be far more costly, but the computer source code may have a far shorter shelf life.

IP law could also require the claimant to account somehow for the magnitude of the investment and allow a tenfold return or something. This standard also differs from the blanket 120 year threat and might also diminish income inequality.

the first idea might only have a $1,500,000 value to society while the second idea might have a $100,000,000 value to society. if you cap their royalties below the cost, how do we create the incentives to develop the more valuable ideas?

I doubt that writing any novel costs more than a million dollars these days, but making a motion picture often does. All the more reason to grant the monopoly based upon the cost of production and a limited yield rather than a limited duration.

i realize this is the standard argument for patents for ip, but it seems to me that any dollar cap would be more arbitrary than a time cap, though i admit time caps might be/are set too high.

My point has more to do with the presumptions of the topic than with the utility of any particular reform of IP law. It's simply ridiculous to say that "the market" alone accounts for Rowling's billions. Whether or not one wants Rowling entitled to organize billions of dollars worth of resources as a consequence of the popularity of her children's books, particular forcible proprieties have this effect, not simply the market.

The same is true of the incomprehensibly complex system of forcible propriety more generally, of course.

Ron Muhlencamp's 1990 open letter to his congressman:

AN OPEN LETTER TO MY CONGRESSMAN:
Dear Congressman:

I am disturbed by the current state of affairs in Washington, D.C. You and your colleagues in Congress are addressing issues important to the future of our nation and our economy. Here are my thoughts on these issues:

Congress and the executive branch maintain that our biggest problem today is the budget deficit. The deficit has two parts - taxes and spending. Many would like to shrink the deficit by raising taxes, but we've tried that and it doesn't work. During the 1970s, we allowed inflation to raise effective tax rates to the highest level in our nation's history. People quit working and the result was 10% unemployment and 10% inflation. I'd like to make several points about taxes:

First, the focus seems to be on taxing the wealthy by raising income tax rates. Income is not wealth; wealth is assets. When you tax income, you tax those who are trying to become wealthy, not necessarily those who already are.

Second, a simple definition of wealth versus poverty is that the wealthy have more options. There would be no point in trying to become wealthy, through concentrated time and effort, if it did not increase your options.

Third, in the final analysis the payment of taxes is voluntary. You can tax my income, but you cannot force me to earn it. Much of the political and economic dialogue of the past decade concerned the maximum tax rate at which people are encouraged to earn the most and, not incidentally, to pay the most taxes. Two of my offspring received their first real paychecks this year, and judging by their reactions to the amount withheld for taxes, we're pushing the limit. I know you're pushing my limit! If you raise my tax rates, I'll do less work. Even a mule will quit if you load him too heavily, and most people are smarter than mules.

If income taxes are too high, the wealthy will simply buy municipal bonds, or they'll buy farmland and get paid not to grow food. Doctors will defer income or play golf. Businesses will be managed to minimize taxes rather than to grow and to create new products and new jobs. This isn't hypothetical; we saw all of the above in the 1970s. They gave us 10% inflation and 10% unemployment. Do we really wish to return to those circumstances?

Among all income taxes, the most voluntary is capital gains. The truly wealthy, having the most options, can live off their dividends and interest.They have no need to sell appreciated assets.

Ronald Reagan knew that people work harder and produce more if you lighten the tax load. (Maybe it was his experience with horses.) So he lowered tax rates and people went to work, creating over twenty million new jobs. (Politicians don't seem to understand how jobs are created. Jobs are created when one person can benefit or profit from hiring another. If you tax away the profit, you tax away the job.) They also paid more in taxes. By 1990, federal tax receipts exceeded 1980 receipts by more than $240 billion per year, adjusted for inflation. In your wildest dreams, you've never imagined a "peace dividend" of $240 billion per year. Yet we have a "growth dividend" of $240 billion per year in tax receipts! Surely that's enough. But no, federal spending has grown even more.

Congress makes noises about cutting spending, but I see no real effort to do so. In the current year, each appropriations bill that went through the House was loaded with pet projects and pork barreling. Not one bill was held to the overall budget limits! In your recent newsletter, you said you voted to limit spending on a number of provisions in these bills, but you never mentioned whether any actually passed. One was a provision to limit subsidy payments to farmers earning over $100,000 per year, hardly a draconian cut. The provision failed in the House by a 2 to 1 margin. This says to me that Congress is not interested in cutting subsidies, even to the wealthy. You said at a recent town meeting that the effect of special interests in Congress is limited because you must get 218 Representatives on the same side to pass anything. Yet experience shows that when a Congressman adds pork to a bill, it stays in. No Congressman has an incentive to delete another's line items, and the President isn't allowed to. The result is in an inherent bias toward spending, which I've encouraged you to remedy by supporting a fine-item veto.

I've noticed that your town meetings are well attended by people who receive checks from the Federal government. Invariably they want more, and certainly not less. My wife characterized the theme of a recent meeting as "gimme". After attending a number of these meetings, I can understand why members of Congress believe they are elected to spend more money. Nevertheless, at election time the taxpayers have sent clear signals for over a decade that they're carrying as big a load as they're willing to carry.

So you're faced with a dilemma: How to keep your promises to the recipients of federal programs without raising taxes? The answer is - you can't! You've promised money you don't have, and you've promised money the taxpayer is unwilling to pay. For a decade we've made up the difference by borrowing, but we've exhausted our credit.

One of the great dangers of the current circumstance is that the dichotomy between taxpayers and recipients has become inter-generational. While taxes are paid by working people, sixty percent of Federal outlays go to senior citizens and retirees. And the percentage is still climbing! In a recent debate, a spokesman for a senior group said that "Other than cost of living (adjustments), Social Security benefits to a retired individual haven't been raised since 1972.11 1 don't know why these raises should exceed the cost of living in the first place, but as an individual worker my Social Security taxes have tripled in real terms since 1972. I'm 46, and I've already paid more in Social Security taxes than someone who retired 5 years ago. At the same time, anyone, rich or poor, who has been retired for five years has already received more from Social Security than they ever paid in, again adjusted for inflation. Enough already!

Entitlement program such as Medicare, farm subsidies and Social Security are always justified based on the financial need of the poorest participants. But the benefits paid out are not determined by need. As a consequence, the benefits go disproportionately to those who are not needy. The bulk of farm subsidies go to wealthy farmers. Wealthy retirees pay only 25% of the cost of their Medicare benefits. Five hundred thousand millionaires will receive Social Security benefits which exceed five times what they paid in. Taxpayers pay the rest - how is this equitable? Congress is trying to cope with the intergenerational problem; in it's own way. At the insistence of a group of senior citizens, Congress passed the Medicare Catastrophic Coverage Act of 1988, and provided that it be paid for by Medicare participants. Once they saw the cost, a larger group of senior citizens immediately got the bill repealed.

Several years ago, Tip O'Neill proposed taxing 85% of Social Security benefits. At the time, I wondered how he came to the 85% number. He used a study that concluded that the average Social Security recipient would receive benefits roughly seven times what he paid in. Or, put another way, of the benefits received, only 15% represented personal contributions. Tip proposed taxing the other 85%. The proposal went nowhere, but the idea was again floated at the recent budget summit. Taxes would have been progressive, affecting only those retirees earning more than $25,000 per year. But at the first whisper of "tax Social Security" a great hue and cry shot the idea down. So the summiteers turned to Medicare. I'm embarrassed at how long I thought Medicare was for poor people. Then I learned that Medicaid is for poor people. Medicare is simply for people over 65, rich or poor. Today, these people directly pay 25% of the cost of their Medicare. The budget summit proposed raising this to 30% through higher deductibles and co-payments. Again the great hew and cry! I can sympathize with the complainers; I don't like paying the cost of medical insurance either, but I don't expect you to tax them to subsidize me.

I don't object to subsidizing the needy. But, as currently run, "entitlement" programs tax me and my children to subsidize people who are better off than we are, simply because they've reached a certain age. A senior citizen told me he counted on Social Security and Medicare to provide a cushion to prevent his being a burden to his children. Someone should tell our seniors that the biggest financial burden their children have is paying for Social Security and Medicare!

martin,

but doesn't only allowing a certain dollar amount of royalties assume that the cost to make all ideas practicable is the same? it might only cost $20,000 to generate one idea but $2,000,000 to generate another idea. the first idea might only have a $1,500,000 value to society while the second idea might have a $100,000,000 value to society. if you cap their royalties below the cost, how do we create the incentives to develop the more valuable ideas? i realize this is the standard argument for patents for ip, but it seems to me that any dollar cap would be more arbitrary than a time cap, though i admit time caps might be/are set too high.

The U.S. government now grants copyrights for 120 years. Earlier in the republic, the duration was much shorter, though the cost of distributing the works then copyrighted was then much greater. In fact, the cost of this distribution (for authors) in electronic form has fallen practically to nothing.

Politicians gave all sorts of justification for extending the duration as it grew over the centuries. The former entertainer turned politician, Sonny Bono, championed the last extension, arguing (circularly) it right and proper that proprietors of intellect property should bequeath the right to their heirs.

Instead of a duration of time, suppose the U.S. granted authors a limited sum of money for a work, so Rowling's copyright for a Harry Potter book expires when she has earned a million dollars in royalties say, or her entitlement to any royalty ceases when her total royalties reach a million dollars. Thereafter, she may continue selling her work however she pleases, but the state threatens to harm no one copying it. This standard denies Rowling nothing but statutory threats of harm to others, but it presumably decreases income inequality.

I agree that legal standards are typically codified. They're also definitively forcible. A legal standard is an idea with these attributes, and most ideas lack these attributes.

You may say that "standard" describes the codification itself or the enforcement itself, but I intended something else. I agree that the point is semantic. I concede your prerogative to use words as you please.

Yes but bad ideas matter even more! Just look at that crazy thought that we could avoid financial risks in the financial system by following like lemmels the advice of some credit rating agencies…it led us to the subprime mess… where will it lead us tomorrow?

The idea in your column -- that ideas matter -- is such an important one that I hate to see it hobbled by a paragraph (immediately after the Keynes quote) that suggests that farmers are to blame.

Now is a terrible time for us to be mixing up the issue of protectionism with the separate issues of the benefits and disadvantages of a more agrarian economy.

I didn't say they were manifestations of all ideas.

Legal standards are codifications laid down in print. They are the products of ideas such as standardization, fairness and justice (we hope), hierarchical organization, etc.

All ideas are not legal standards, but all legal standards are ideas.

I decided to comment even though I do not find much reward in arguing semantics with Martin.

Legal standards are not ideas, they are manifestations of ideas.

"For example, my parents taught me, among other things, to resist being envious of other persons' successes."

I find it strange that your mother was concerned about your potential for enviousness. I've found that people who rush to warn others against some normal human emotion are probably looking in the mirror and giving themselves needed advice. Were you more prone to envy as a youth than any other kid? And I find it equally strange that you've have to rekindle her admonition over the last 50 years every time a feeling of envy welled up inside you. Better to remember her for something more uplifting and less moralistic. Since your mother's lesson on the evils of envy stuck with you until now, I'm mildly surprised that you are such a cheerleader for an economic system that is driven to a large extent by greed and envy. What would your mother say? That it's wrong to be resentful and envious of the envious who drive your favorite economic system? If you can't beat them, join them? Have you ever know anyone who only talked about money and material things? They may be a success by pustulate American cultural standards, but they're always a tiresome and tasteless bunch that make for poor company. It used to be the case that the U.S. was the envy of the whole world (so I've been lead to believe). Would you or your mother have come down hard on them for their envy? When an inner city black youth said he wanted to be like Michael Jordan, should he have been smacked down for being unrealistic and envious? When a poor kid dreams of going to Harvard or Yale some day, shouldn't she be let down gently rather than given false encouragement about her chances? The biggest and most imfamous piece of nonsense that kids are mistakenly lead to believe is that the economic system rewards hard work above all else. It doesn't do any such thing. Just ask Cindy McCain and her $6,000,000 annual paycheck for looking in the mirror vainly several times a day. Farm subsidies are a minuscule problem compared to the Cindy McBushes of the world. Until you realize that fact, you are swim upstream trying to convince me about any other economic fact of life.

Obviously, all legal standards, including all forcible property rights, are ideas. Market capitalism requires these ideas. I don't know that a particular standard in a particular farm bill is any more or less useful than a particular provision in an international treaty on intellecual property (or the pension of a tenured state university professor), but I do know that all of these forcible standards are ideological.

I swim in a sea of these forcible constraints, and I don't take seriously the endless chants of "freedom" and "liberty" from the ideologues championing them. The freest state is the state of nature, where men don't enforce ideologies. Nature is not the wealthiest state in modern human terms, so artificial proprieties are valuable, but the nobility of individuals enriched by them is always an ideological construct. That's true of subsidized farmers and CEOs and media superstars and university professors alike.

Is J. K. Rowling so wealthy because she writes books so attractive to children or because the state will harm children who copy the books without her consent? Copying books, even on a massive scale, is now child's play. Obviously, the answer is "both". There is no wrongful wealth, only rightful wealth, because statesmen define "rights", and rights beget wealth. Yeah, I figured that out a long time ago.

The problem is that the great values that your mom taught you are 'micro' values, and these seem to be shared by a large portion of the population, probably due to the fact that they arose spontaneously through centuries of individual interactions. However, it's the 'public choice' and 'macro' values were the conventional wisdom goes wrong. Individuals have interacted in small bands and tribes for more than a hundred thousand years, while their experience in living in large open societies is at most a couple hundred years old.