Should effective altruists work on taxation of the very rich?

by Robert_Wiblin15th Feb 201618 comments

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A criticism effective altruism has faced is that, by encouraging individual donations, we weaken support for obligatory taxation on the rich to fund alleviation of poverty, public goods, and other valuable projects.

I think the criticism is misguided. While we encourage individual donations, the vast majority of us would also favour taxation to fund the same goals, inasmuch as we can hope the government would spend the money effectively. Indeed, if you become convinced that you have a duty to give your money to help others, wherever those others may be, and whether or not your peers are doing the same, you are surely more likely to think compulsory taxation would be justified to fund the same. It's not for nothing that 'myths about aid'' was one of the first and most visited pages on Giving What We Can's site.

The main exception here would be strict deontological libertarians - a small minority anywhere except libertarian conferences.

But it is the case that taxation of the wealthy has not been a major focus of our attention. Given the large amounts owned by the top 1% - in the US they receive 20% of all income and own about 35% of all wealth, an amount equivalent to 2 years of national output - perhaps this is an oversight.

What arguments could be made in favour of largely ignoring this issue - perhaps the most topical of all political questions over the last few years?

  1. Because the issue is so topical, it is not neglected - by the general public, politicians, or researchers. Effective altruists weighing in on the issue can therefore have little impact on the outcome.
  2. Governments spend much of their money on things that we regard as ineffective, or at least much less effective than the most valuable projects. This is because voters in the richest countries tend to vote for things that will benefit them (at best), and they are not the most needy groups. In some cases they even fund things we would regard as harmful, such as reckless military adventurism, excessive surveillance, or police brutality. Levying taxes on the rich may indeed raise a great deal of money, but if it is spent poorly, it will not do a commensurate amount of good.
  3. The very rich by nature have ample resources to fight against higher taxes, making the issue less tractable.
  4. The lack of international coordination which would facilitate higher taxes on the very rich, is very difficult to fix, because any one country can make money by defecting and becoming a tax haven. In the absence of coordination, raising tax rates on the very rich would raise much less, and instead simply distort where the very rich choose to live and invest, and what they consume.
  5. Because of the above, we are better off trying to persuade the very rich that they ought to give up their wealth to help others voluntarily - whether because they believe doing so is moral, exciting, entertaining or merely fashionable. This approach seems to have born some fruit already judging by the large levels of philanthropy among 'tech billionaires'.

I think the above makes for a somewhat persuasive case. On the other hand, what arguments might be fielded in favour of working on taxation of people with very high incomes?

  1. If you want to steal money, you rob banks, because that is where the money is. If you want to raise money to fund valuable services, it is natural to think about how to tax the very rich, because they hold a large and growing share of all income and wealth. The top 0.1% own some 20% of all the wealth owned by Americans - literally tens of trillions of dollars. This amounts to 1-2 trillion dollars in annual returns on capital each year. While it is hard to know the appropriate comparison, this is obviously orders of magnitude larger even than all donations expected from Bill Gates, Mark Zuckerberg, Dustin Moskiwitz, and others. Annual inheritance flows amount to 10-15% of GDP and rising in France, where record-keeping is best, with well over half of all wealth having been inherited rather than earned through work.
  2. There is a precedent for improvements in public financing to transform society. The rise of fiat money, government bonds and the progressive income tax each allowed for a dramatic change in the scale and activities engaged in by governments. Though these dramatic shifts cannot be repeated for rich countries, where government spending already accounts for 30-50% of all spending, better taxation on the rich could still raise significant sums - vastly more than we are likely to move to charities. In the coming 60 years many rich countries will face major fiscal strains as they try to balance high pension and healthcare liabilities with slowly growing populations and productivity; better taxation of the rich could lower the risk of serious social unrest.
  3. Developing countries, which raise much less of their national income in taxation, could also benefit from better techniques for taxing their own wealthy (both now and in the future). Because of poor infrastructure for tax collection and weaker respect for the rule of law, large fractions of income in these countries received by the very wealthy is hidden in tax havens, ensuring the country sees none of the principal, nor any future returns on capital. These are the countries which can do the most good with further tax revenue, to fund health, education, cash transfers, and so on. The gains in some cases are also ill-gotten due to poor governance of income from natural resources, botched privatizations in the ex-USSR, etc. Some estimates of hidden wealth of this kind suggest it is a very large sum - 5-10% of global financial wealth.
  4. Various factors in the dynamics of capital accumulation, such as a growth in the global capital stock to income ratio over the last 70 years, the rise of very highly remunerated workers in business and entertainment, and the higher rates of return on capital received by the very wealthiest investors, suggest that a growing share of wealth and income will be held by the top 1%. The value of improving taxation of this group will therefore grow over time. Barring significantly higher taxes on them now, the political power of this group will also grow progressively over time, making it harder to make any changes that disadvantage them in the future.
  5. The very wealthy (those holding over $10 million) gain virtually nothing personally from owning more. If we could take that money away, it would do them almost no harm directly.
  6. A large number of people are in favour of changing taxation arrangements for the very wealthy because of the perceived unfairness of the current income and wealth distribution. Raising taxes on the very rich is perceived to benefit a majority of voters, an advantage for any proposal in a democratic country. Given that majority support is required for such policy changes, the exact time you want to get on board is when the issue has the most popular momentum.
  7. Even conceding that the majority of government spending is ineffective, some fraction of it is spend on valuable things (helping the homeless, foreign aid, important scientific research, preventing crime, and so forth). As a result, government spending may still be tolerably on the margin.
  8. Future changes in technology (e.g. atomically precise manufacturing or artificial intelligence) may leave most human labour with no market value at all. In the absence of an effective existing infrastructure for the taxation of capital incomes to fund e.g. a minimum income, almost all income may then be received by a tiny number of unimaginably rich people, while an outright majority face starvation (unless fortunate enough to receive private charity).
  9. Research into improving understanding of the impacts of different taxes on the rich, improving details of taxation law, strengthening international tax coordination, and so on play well to our technocratic skill set.

This makes for a moderately persuasive case in favour. On balance I don't have a strong view about this cause area one way or the other. If you're interested in working on this cause, the most promising topics to become an economic researcher or campaigner would be:

  • Tax avoidance in the developing world (including how this is facilitated by the developed world, which can profit from it).
  • How to better coordinate taxation between countries to avoid 'tax competition', or the very rich shielding their wealth from any taxation in offshore accounts.
  • How to levy better inheritance taxes, wealth taxes or progressive income/consumption taxes, with a focus on the rates paid by the very wealthiest. What negative impacts do they have? Which approaches will minimise harms, while raising public enthusiasm?
  • How can income and (especially) wealth inequality be better measured? (There is very little data on this in most countries.)

A final list of questions someone considering working on this cause should properly investigate:

  • How much of their wealth do the very wealthy ever actually spend on their own consumption? If the wealth simply accumulates and is never spent (or better, is given the charity) who owns it is less important.
  • Are the distortions created by high tax rates on the very wealthy sufficient to make them overall negative, at least in some cases (e.g. because they reduce the pool of saving available to fund businesses; discourage the most talented people from working; encourage even more aggressive tax avoidance; deter entrepreneurs or investors from attempting to start highly risky but socially valuable businesses)?
  • In which countries is it most valuable to have higher tax revenues? These would those that spend their money well on people in need and engage in little harmful violence.

Please note that this was written very quickly just to get my thoughts about this issue on the page, so apologies for any errors. Figures were mostly cited from memory. A good place for further reading would naturally be Capital in the 21st Century, the many reactions and reviews to that book, and a textbook on public finance .

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in the US they receive 20% of all income and own about 35% of all wealth

How does this 35% figure account for people in debt?

Future changes in technology (e.g. atomically precise manufacturing or artificial intelligence) may leave most human labour with no market value at all. In the absence of an effective existing infrastructure for the taxation of capital incomes to fund e.g. a minimum income, almost all income may then be received by a tiny number of unimaginably rich people, while an outright majority face starvation (unless fortunate enough to receive private charity).

I think this scenario deserves more analysis. As a reductio ad absurdum, why can't the "outright majority facing starvation" run their own parallel economy with no atomically precise manufacturing or AI? Even given atomically precise manufacturing, why shouldn't a destitute subsistence farmer in Africa be unable to continue subsistence farming and thereby avoid starvation? Perhaps a more realistic scenario is some AI trillionaire comes along and offers to buy the farmer's land, because they're running out of things to buy. In which case if the farmer is smart, the farmer only accepts a deal where they get enough money to live comfortably off of the dividends from that money if it's invested in AI stocks. So then the issue is people who are in debt around the time AI gets invented and don't have time to get out of debt before they lose their jobs, or people who manage their investments poorly or spend their nest egg. I'm not saying their is no issue here, I just think it deserves to be thought through further.

In a world where all material goods are essentially free, people who own dividend-paying AI stocks will either (a) not spend their money, which means it doesn't matter much who owns it or (b) use it to purchase non-material goods--that is, services that only humans can provide or are better provided by humans, such as therapy, tutoring, medical care, policing, etc. Many of the jobs with the most employment seem like jobs that an AI stock owner would be willing to pay extra for a human to do.

Re: developing countries. An alternative story I've heard is that many go through a flip-flopping pattern of alternately trying to attract foreign investors in order to grow the national economy, and then having the locals get fed up by the fact that foreigners own so much infrastructure and having the government nationalize the infrastructure. Obviously this scares off foreign investors, which contributes to economic stagnation until the cycle repeats. According to this story, the wealthiest countries are wealthy because they provide a stable, predictable, profitable environment for entrepreneurs and investors, and in order to make more of the world wealthy, we need to give more people the opportunity to live under such a stable economic regime.

Immigration from developing countries to developed countries is one way of doing this, but I worry that in the limit, adding immigrants from unstable regimes to a stable regime makes it unstable. I would rather find a way to create new stable regimes. If we don't have methods for creating new stable regimes, it seems sensible to be conservative with the ones we already have.

"How does this 35% figure account for people in debt?"

It doesn't need to - debt for one person is an asset for another. A debt for one person cancels out with the corresponding asset on someone else's balance sheet. This is then a share of total (net) wealth.

"Perhaps a more realistic scenario is some AI trillionaire comes along and offers to buy the farmer's land, because they're running out of things to buy."

Note that in this scenario the farmer owns land and so can earn money from it. However, the majority of people in the world own nothing, or next to nothing.

An accounting of net worth that doesn't have any special treatment of debt will be misleading. As explained in the article xccf links, America has 7.5% of the world's poorest decile but only 0.2% of the second decile. That's because those Americans have negative net worth. But it's definitely not true that a middle-class American with $50K of student loan debt has a lower standard of living than a villager in Kenya who lives in a thatched hut and earns $1 a day, so looking at net worth alone is misleading.

I understand the issue perfectly and have linked to that same article every year Oxfam releases their comparison of the top 1% to the bottom X% (e.g. https://www.facebook.com/robert.wiblin/posts/666590242695, https://www.facebook.com/robert.wiblin/posts/628116514355).

But my figure is not drawing a comparison with the bottom group (a huge fraction of which is in debt and so produces inflated figures). It is making a comparison with the total level of wealth owned (net of debts), including that owned by the rich.

That is, all the assets owned by Americans, minus all the liabilities they owe. That turns out to be a big positive number.

At the moment someone lends money to someone else, it changes none of the results here.

There is nothing misleading about it as an indication of who is earning returns on capital that can be taxed, which is where I then take it.

Yes, consumption (ideally including the value of public services in the relevant locale) is normally a much more appropriate metric than net worth.

Net worth might be reasonable to use if we could properly account for the value of human capital, but that seems very difficult.

Appropriate metric of what? It is a measure of how many resources can be taken away from someone that year.

But it is not of where the 1/3rd of GDP that goes as returns to capital is being paid, which is the topic of this post.

Agree with that. I should have been clear that I think your post is one of the cases where looking at wealth works pretty well.

Thanks, I think this is a good question and a good preliminary overview.

How much of their wealth do the very wealthy ever actually spend on their own consumption? If the wealth simply accumulates and is never spent (or better, is given the charity) who owns it is less important.

Yeah, I really want to know the answer to this. Distribution of consumption levels is much more important than distribution of wealth levels in terms of understanding the real opportunity costs of inequality.

Of the issues you mentioned, rich people in developing countries moving their money out of the country legally or illegally is particularly damaging. Here is a good resource for that: http://www.taxjustice.net/2014/01/17/price-offshore-revisited/

I agree; so much so I actually linked to that exact thing in the OP!

Interesting piece. Improving taxation (particularly of large/multinational companies) in the developing world is interesting and possibly neglected. It'd at least be interesting to see how tractable it is and how one would go about working on it. It fits well with the fact that EAs are typically more radically cosmopolitan than the leftists who criticise them for ignoring domestic taxation and wealth inequalities, and could provide a good comeback to these.

If we could tax the owners of companies suitably, we could probably stop taxing large companies directly at all.

I'm sympathetic to that position in the domestic context. But what about when the owners of companies (e.g. multinationals or shareholder-owned companies) are in the developed world yet make many of their profits in the developing world? We might well want developing countries to capture some of that tax.

If you ever edit that article, I suggest you rephrase this part:

"If you want to steal money, you rob banks, because that is where the money is. If you want to raise money to fund valuable services, it is natural to think about how to tax the very rich, because they hold a large and growing share of all income and wealth."

I don't know if that juxtaposition is intentional, but it all but implies "taxation is theft" and doesn't fit into an otherwise politically neutral piece.

If I thought taxation was theft (or cared if it was) that might have come up somewhere else in the post.

The reference is to this story:

"In a famous apocryphal story, Sutton was asked by reporter Mitch Ohnstad why he robbed banks. According to Ohnstad, he replied, "Because that's where the money is."

"doesn't fit into an otherwise politically neutral piece."

It probably looks politically neutral to you because you support taxing the rich and believe it is not theft. In fact being unpolitical is pretty impossible in this area.

As someone who didn't get the reference, that section struck me as odd as well, though mostly because my immediate reaction was 'That's not true. Most thiefs don't rob banks, they rob people in the street or occasionally shops instead, i.e. they go for the 'tractable' rather than the 'high-value' targets.'

Interesting post. It seems to intertwine multiple issues:

  1. Should the tax structure be changed so the wealthy pay a different share of taxes, or pay them in different ways?
  2. Should the overall level of taxes be changed?
  3. Should the distribution of government spending be changed?

The three questions above should be addressed separately, then brought together into a more coherent view. I wish a presidential candidate would actually do that and relate it to their policy preferences, but I doubt most will.

I'm cautious about arguments to simply increase taxes to spend more on good causes because governments tend to implement ineffectively. I'm also cautious about arguments to increases taxes for the rich or corporations, as they usually don't address the potential for higher taxes to create a drag on broader economic growth.

I was happy to mix 1 and 2 - I didn't intend to do more than allude to question 3 here. I don't have a strong view on the answers - the question is whether they are important, neglected and tractable enough to be worth specialising in.

It's reasonable to be cautious about the distortions created by some taxes, but no reason to assume the costs exceed the benefits before checking. Creating a less distortionary tax mix is part of the project.