This seems incongruent to me, and I need for a neo-classical economist, or a Randian or Austrian School person to explain it. Your theory states that optimal economic performance is achieved if taxes are kept low, and that wealthy people should not be taxed at rates higher than anyone else. That way they invest their money and create jobs. [sic]
We have low tax rates now for very wealthy people, and learn that Mitt Romney has paid an effective rate of 13.9% in 2010, lower than anyone above EIC status. And yet he takes his money and stashes it in the Cayman Islands! What’s up with that? Why is he not reinvesting? Why is he not creating jobs? [sic]
Ingy? Budge? Gregg Smith? Craig? Eric? Perfesser?
[chirp]
Piece of Mindful 
I think you have a fundamental misunderstanding here. First, it is supply-side economists in the tradition of Jean-Baptiste Say that argue for low tax rates to stimulate investment. Rand made no such argument per se but based her ideas on tax policy on a moral construct. Austrians, on the other hand, make no moral objection to progressive taxes but hold out that government intervention does not – or at least has not been proven to – have a better utilitarian outcome than non-interventionist governments. One must keep in mind, however, that The Austrian schools is not fundamentally united in that view where Mises and Popper were substantially econo-anarchists compared to Hayek who endorsed such notions as minimum guaranteed incomes and basic pubic health care services.
As for Romney, isn’t it a fundamental mistake to think that his behavior is grounded in any deep intellectual understanding? Why would you propose that he is somehow representative of either Rand or any Austrian? is it not possible that he’s just a vanilla capitalist?
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One more thought. Regardless of where Romney puts his money it’s also a fundamental mistake to think that it does not constitute “investment”. This is true from almost any economic perspective. For example, virtually all Keynesians would concede that any money held in the from of savings does not create a “liquidity trap” (a reduction in money supply or velocity) as long as it’s not held in the form of currency hording (cash in the mattress.)
The better question is to ask why Romney doesn’t choose to employ his savings where they are more likely to be used for American investment where it might create domestic jobs.
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You certainly do a better job than most – I don’t recall anything that Rand ever said regarding taxes, but know that her devotees regard taxation as essentially evil. And neo’s and Austrians alike regard economies as self-correcting and stable without government interference. From this follows the notion that low taxation frees capital for investment and job creation.
The problem that I confront you with is personified in Romney – even in a low tax environment, he’s misbehaving. The incentives are there, and he’s being irrational. But it’s far more than that, and you surely know this: we are just coming out of the latest crash brought about by private debt and bubbled expectations, all of which goes on in low-tax circles. It’s not just Romney – it’s all of them. Unemployment is at crisis proportions, and a new crash is surely on the horizon.
People don’t behave as you say they do. You incentivize them to invest, and they don’t.
There’s far more wrong with all of it, of course – the very idea that money is a thing of intrinsic value is misleading, and the notion that having a few people hoard it somehow magically induces prosperity for all seems oddly to favor those who have hoarded it. The absence of evidence that there is actually a social benefit from low taxes [on wealth] seems not to matter.
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How is Romney being “irrational”? He has made his investments based on whatever he perceives to be the best risk/reward he cares to manage. Do you propose that his off-shore investments are the same as hording gold? Do you think that off-shore money is not intermediated at some level of yield? That, although possible, is highly unlikely.
Keynes wrote that AD = C + I + G. But in the 1930s people did, in fact, horde cash and gold thus “I” could be reduced to a sub-optimal contributor to demand. And although it may be true today that a small portion of the investment class is hording gold (Ron Paul & Glenn Beck) I’d be surprised if gold and cash hording make up more than 1% or 2% of all financial assets. So the “I” includes all money held for intermediation.
I think you also need to look at your assumptions of low taxes and bubbles. Spain, for example, had (and has) a bigger housing bubble than did the U.S which is crashing badly. And no matter what you can say about Spanish fiscal policy it can’t be said that it was a “low tax” environment. Although one would be foolish to ascribe any one reason for bubbles – because no one really knows – I think that it’s wise not to discount the effects of modern monetarism on bubble making.
Still, I have no idea why you hold out that Romney isn’t “investing.”
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The US housing bubble affected the entire industrialized world. Spain had one too? I doubt any of that would have happened without the misbehaving investing class in the US.
The housing bubble was merely the latest – this boom and bust started after the Reagan tax cuts with the stock market crash in 1987, and has succeeded in time with S&L, dot.com, oil, and the latest housing. It’s a phenomenon of too much private debt, fictitious money cashing after real assets. High marginal tax rates coupled with regulation of banks would 1) encourage investors to invest by penalizing them for not investing, and 2) keep investments safe.
You see, your world, or the one you present me with, is backward. Investors are looking for high-yield investments, and when there are not enough around, go chasing fictitious ones.
That, and the economy, unregulated, spins into a holy mess. It is not self-regulating and there is no equilibrium, ever.
I said nothing about gold. If I were to restate, I would use concentrated wealth instead of hoarding, as the problem. Wealth concentrated in a few hands is of no benefit to us, spread out over many, drives demand, and that is what creates jobs.
Romney did a very rational thing – he took his money and put it in the Cayman’s because he does not even want to pay a low tax on it. Rational is not good, there is no invisible hand.
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I didn’t give you my theory. I gave you someone else’s and didn’t endorse any of them here. Consider, perhaps, the influence of Greenspan over the period you mention. Is it not possible that monetary policy had an equal to or greater effect on international liquidity? What about the current account deficit flooding the third world with liquidity. It all looks far less binary to me than how you present it.
As importantly, as the Austrians would say, we don’t have enough information to know.
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Tru dat. Economics as we know it cannot explain the past, present, nor predict the future, The entire field needs new blood.
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I think that Mark’s under the assumption that there’s a big hole in the ground in the Caymans where all the money goes.
Then when an investor wants it back they send a couple guys with shovels out back to dig it up.
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Why did he offshore it, Ingy? Why? Straight answer please.
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There could be a host of reasons. Perhaps interest, taxed at ordinary tax rates here is taxed lower off-shore? Perhaps short term capital gains are taxed at lower rates there then here? Maybe the investment vehicles he wanted to buy required him to hold an account in that jurisdiction? Maybe he just wanted an excuse to go to the islands to check up on his money where he could right the trip off as a business expense.
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Better return perhaps?
Didn’t our Gov buy a pickup from ID cause he got a better deal?
How ’bout you Mark? Foriegn cars and Apple computers? Sending money overseas for a superior product at a reasonable price?
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There are no domestically made computers. I buy used vehicles, so country of origin is not an issue.
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BY the way, you’ve drifted far far away, so snap back to reality. The tax system is supposed to incentivize Mitt to invest in the domestic economy and create jobs [sic]. Why does he not behave as your model predicts – in facts, behaves exactly opposite as your model predicts?
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My theory? Your premise is flawed. Can’t help you understand when you build your argument on a fabrication.
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So you are not a flat taxer?
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Maybe this will help jog the suddenly silent right-wing minority — Ingy-style.
Offshore bank
From Wikipedia,
An offshore bank is a bank located outside the country of residence of the depositor, typically in a low tax jurisdiction (or tax haven) that provides financial and legal advantages. These advantages typically include:
– greater privacy (see also bank secrecy, a principle born with the 1934 Swiss Banking Act)
– low or no taxation (i.e. tax havens)
– easy access to deposits (at least in terms of regulation)
– protection against local political or financial instability
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