How to tax the rich

The Economist Magazine published this article on how to tax the rich. Good reading.

How to tax the rich. The Economist magazine

 

 

 

 

 

 

 

 

 

DURING HIS lesser-known run for president, which began in 1999, Donald Trump proposed levying a wealth tax on Americans with more than $10m. He may soon find himself campaigning on the other side of the issue. That is because Democrats are lining up to find ways to tax the rich. Senator Elizabeth Warren, who wants Mr Trump’s job, has called for an annual levy of 2% on wealth above $50m and of 3% on wealth above $1bn. Alexandria Ocasio-Cortez, a prominent new left-wing congresswoman, has floated a top tax rate of 70% on the highest incomes.

In one way these proposals are a relief. Left-wing Democrats have plenty of ideas for new spending—Medicare for all, free college tuition, the “Green New Deal”—that would need funding. Mainly because America is ageing, but also boosted by Mr Trump’s unfunded tax cuts, the debt-to-GDP ratio is already expected to nearly double over the next 30 years. If a future Democratic administration creates new spending programmes while maintaining existing ones, higher taxes will be necessary.

If revenues are to rise, there are good grounds to look first to the rich. Mr Trump’s tax cuts are just the latest change to have made life at the top more splendorous. Between 1990 and 2015 the real income of the top 1% of households, after taxes and transfers, nearly doubled. Over the same period middle incomes grew by only about a third—and most of that was thanks to government intervention. Globalisation, technological change and ebbing competition have all helped the rich prosper in recent decades. Techno-prophets fear that inequality could soon worsen further, as algorithms replace workers en masse. Whether or not they are right, the disproportionate gains the rich have already enjoyed could justify raising new revenues from them.

Unfortunately, the proposed new schemes are poorly designed. Ms Warren’s takes aim at wealth inequality, which has also risen dramatically. It is legitimate to tax wealth. But Ms Warren’s levy would be crude, distorting and hard to enforce. A business owner making nominal annual returns of around 5% would see much of that wiped out, before accounting for existing taxes on capital. That prospect would squash investment and enterprise. Meanwhile, bureaucrats would repeatedly find themselves having to value billionaires’ art collections and other illiquid assets. Eight rich countries have scrapped their wealth taxes since 1990, often amid concerns about their economic and administrative costs. In 2017 only four levied them.

There are better ways to raise taxes on capital. One is to increase inheritance tax, an inequality-buster that, though also too easily avoided, is relatively gentle on investment and work incentives when levied at modest rates. Another is to target economic rents and windfalls that inflate investment returns. Higher property taxes can efficiently capture some of the astronomical gains that landowners near successful cities have enjoyed. It is also possible to raise taxes on corporations that enjoy abnormally high profits without severely inhibiting growth. The trick is to shield investment spending by letting companies deduct it from their taxable profit immediately, rather than as their assets depreciate. (Mr Trump’s reform accomplished this, but only partially and temporarily.)

What about income tax? Ms Ocasio-Cortez’s boosters point out that a 70% levy is close to the rate that is said to maximise revenue in one notable economic study. In truth the study is notable because it is an outlier—one that ignores the benefits of entrepreneurial innovation or of workers improving their skills. France’s short-lived 75% top tax rate, which was scrapped at the end of 2014, raised less money than was hoped. America’s top rate of federal income tax is 37%; higher is clearly feasible, but it would be wise to keep change incremental.

Although there is scope to raise taxes on the rich, they cannot pay for everything, if only because the rich are relatively scarce. One estimate puts extra annual revenue from Ms Ocasio-Cortez’s idea, which applies only to incomes above $10m, at perhaps $12bn, or 0.3% of the tax take. Ms Warren’s proposal would raise $210bn a year, her backers say—but they assume, implausibly, limited avoidance and no economic damage. Ultimately, the price of ambitious spending programmes will be tax increases that are also far-reaching. The crucial point about a strategy for taxing the rich is to realise that it has limits.

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Why house prices in global cities are falling

CENTRE POINT, a tower that looms over central London, was empty for so long in the 1970s that it lent its name to a homelessness charity. Recently it was converted from offices to flats. Half are yet to find buyers. So the developer has taken them off the market pending a clearing of the political fog over Britain. Its boss complained to Estates Gazette, a trade paper, of bids that were “detached from reality”. One-bedroom flats were on sale for £1.8m ($2.4m).

Property used to be thought of as an inflation hedge. But in recent years it has become a substitute for low-yielding Treasury bonds—a safe asset in which the globally mobile can store their wealth. After years of rapid price rises, houses in the most favoured markets are overvalued. Rising bond yields, tighter mortgage credit and shifting politics are now combining to push prices down.

Demand from emerging markets such as China and Russia has been growing. Buyers are willing to pay steeply to secure a safe place for their savings—or a bolthole for themselves. Cristian Badarinza of the National University of Singapore and Tarun Ramadorai of Imperial College London have shown that political trouble in Russia, parts of Africa and the Middle East predicts a rise in the price of prime London property.

Foreign demand has spillovers. If an oligarch buys a house, it drives up the prices of smaller properties nearby. A paper by Dragana Cvijanovic of the University of North Carolina and Christophe Spaenjers of HEC Paris finds similar effects in Paris’s property market. Foreign buyers, mostly from China, have been a force behind booms in the big cities of Australia and Canada.

The yield on Treasury bonds, the world’s benchmark safe asset, is rising. A tightening of credit standards on mortgages in Australia and Canada has squeezed housing in cities there. Uncertainty about Brexit has made London a place of political risk rather than a refuge from it. Meanwhile, capital is moving less freely. Governments are charier of Russian money. China is shaking down its super-rich for taxes and is zealous in its policing of capital outflows.

A corollary of stronger links between global cities is a kind of “waterbed” effect. For instance, when taxes were levied on foreign homebuyers in Vancouver in 2016, the market cooled, but Toronto took off. There are buyers who will compare prices in, say, Mayfair in London and Park Avenue, New York. They look for value. But it is vanishingly scarce. The market is turning. Those who bought at the peak, or are hoping to sell, will slowly adjust to a new reality.

Read the complete article on the Economist web site here.

Quantum computers will break the encryption that protects the internet

Quantum computers rely on the famous weirdness of quantum mechanics to perform certain sorts of calculation far faster than any conceivable classical machine. Their fundamental unit is the “qubit”, a quantum analogue of the ones and zeros that classical machines manipulate. By exploiting the quantum-mechanical phenomena of superposition and entanglement, quantum computers can perform some forms of mathematics—though only some—far faster than any conceivable classical machine, no matter how beefy.

In 1994 Peter Shor, a mathematician then working at Bell Laboratories, in America, came up with a quick and efficient way to find a number’s prime factors. The only catch was that for large numbers his method—dubbed Shor’s algorithm—needs a quantum computer to work.

Big quantum computers will have applications in fields such as artificial intelligence and chemistry. But it is the threat posed by Shor’s algorithm that draws most public attention. Large organisations may be able to get around the problem using so-called quantum cryptography. This detects eavesdroppers in a way that cannot be countered. But it is expensive, experimental and unsuitable for the internet because it must run on a special, dedicated network. For most people, therefore, the best hope of circumventing Shor’s algorithm is to find a bit of one-way maths that does not give quantum computers an advantage.

But translating a piece of maths into usable computer code and then delivering it to the zillions of machines that will need updating will not be easy.

Despite—or perhaps because of—the information-technology industry’s obsession with novelty, the internet resembles ancient cities like Rome and Istanbul, with modern structures built atop forgotten layers of old, unmaintained code.

Read the complete article in The Economist here.

 

After a year of #MeToo, American opinion has shifted against victims

Oct 15th 2018 by THE DATA TEAM

ONE year ago Alyssa Milano, an American actress, posted on Twitter: “If you’ve been sexually harassed or assaulted write ‘me too’ as a reply to this tweet.” Within 24 hours she had received more than 500,000 responses using the hashtag “#MeToo”. Ms Milano’s tweet came days after the New York Times and New Yorker had published detailed allegations of sexual harassment by Harvey Weinstein, a Hollywood producer. Mr Weinstein was the first in a long line of prominent entertainers and executives to be toppled by such investigations, which dominated the headlines throughout late 2017.

Even as these stories broke, it was #MeToo that resonated most on social media, as millions of women shared their experiences of abuse, intimidation and discrimination. In the past 12 months, the hashtag has been tweeted 18m times according to Keyhole, a social-media analytics company. The phrase has come to encapsulate the idea of sexual misconduct and assault. In recent months American journalists have used the hashtag in their articles more frequently than they have mentioned “sexual harassment”, according to Meltwater, a media analytics company.

Yet surveys suggest that this year-long storm of allegations, confessions and firings has actually made Americans more sceptical about sexual harassment. In the first week of November 2017, YouGov polled 1,500 Americans about their attitudes on the matter, on behalf of The Economist. In the final week of September 2018, it conducted a similar poll again. When it came to questions about the consequences of sexual assault and misconduct, there was a small but clear shift against victims.

Read the complete article on The Economist here.

Big Mac Index 2018

The Economist’s Big Mac index gives a flavour of how far currency values are out of whack. It is based on the idea of purchasing-power parity, which says exchange rates should move towards the level that would make the price of a basket of goods the same everywhere. Our basket contains only one item, but it is found in around 120 countries: a Big Mac hamburger.

If the local cost of a Big Mac converted into dollars is above $5.28, the price in America , a currency is dear; if it is below the benchmark, it is cheap. The average cost of a Big Mac in the euro area is €3.95, or $4.84 at the current exchange rate. That implies the euro is undervalued by 8.4% against the dollar.

THE Big Mac index was invented by The Economist in 1986 as a lighthearted guide to whether currencies are at their “correct” level. It is based on the theory of purchasing-power parity (PPP), the notion that in the long run exchange rates should move towards the rate that would equalise the prices of an identical basket of goods and services (in this case, a burger) in any two countries. For example, the average price of a Big Mac in America in January 2018 was $5.28; in China it was only $3.17 at market exchange rates. So the “raw” Big Mac index says that the yuan was undervalued by 40% at that time.

Burgernomics was never intended as a precise gauge of currency misalignment, merely a tool to make exchange-rate theory more digestible. Yet the Big Mac index has become a global standard, included in several economic textbooks and the subject of at least 20 academic studies. For those who take their fast food more seriously, we have also calculated a gourmet version of the index.

This adjusted index addresses the criticism that you would expect average burger prices to be cheaper in poor countries than in rich ones because labour costs are lower. PPP signals where exchange rates should be heading in the long run, as a country like China gets richer, but it says little about today’s equilibrium rate. The relationship between prices and GDP per person may be a better guide to the current fair value of a currency. The adjusted index uses the “line of best fit” between Big Mac prices and GDP per person for 48 countries (plus the euro area). The difference between the price predicted by the red line for each country, given its income per person, and its actual price gives a supersized measure of currency under- and over-valuation.

Link to the Interactive Currency-Comparison.

What to do about China’s “sharp power”

China is manipulating decision-makers in Western democracies. The best defence is transparency

WHEN a rising power challenges an incumbent one, war often follows. That prospect, known as the Thucydides trap after the Greek historian who first described it, looms over relations between China and the West, particularly America. So, increasingly, does a more insidious confrontation. Even if China does not seek to conquer foreign lands, many people fear that it seeks to conquer foreign minds.

Australia was the first to raise a red flag about China’s tactics. On December 5th allegations that China has been interfering in Australian politics, universities and publishing led the government to propose new laws to tackle “unprecedented and increasingly sophisticated” foreign efforts to influence lawmakers (see article). This week an Australian senator resigned over accusations that, as an opposition spokesman, he took money from China and argued its corner. Britain, Canada and New Zealand are also beginning to raise the alarm. On December 10th Germany accused China of trying to groom politicians and bureaucrats. And on December 13th Congress held hearings on China’s growing influence.

This behaviour has a name—“sharp power”, coined by the National Endowment for Democracy, a Washington-based think-tank. “Soft power” harnesses the allure of culture and values to add to a country’s strength; sharp power helps authoritarian regimes coerce and manipulate opinion abroad.

The West needs to respond to China’s behaviour, but it cannot simply throw up the barricades. Unlike the old Soviet Union, China is part of the world economy. Instead, in an era when statesmanship is in short supply, the West needs to find a statesmanlike middle ground. That starts with an understanding of sharp power and how it works.

China has a history of spying on its diaspora, but the subversion has spread. In Australia and New Zealand Chinese money is alleged to have bought influence in politics, with party donations or payments to individual politicians. This week’s complaint from German intelligence said that China was using the LinkedIn business network to ensnare politicians and government officials, by having people posing as recruiters and think-tankers and offering free trips.

Bullying has also taken on a new menace. Sometimes the message is blatant, as when China punished Norway economically for awarding a Nobel peace prize to a Chinese pro-democracy activist. More often, as when critics of China are not included in speaker line-ups at conferences, or academics avoid study of topics that China deems sensitive, individual cases seem small and the role of officials is hard to prove. But the effect can be grave. Western professors have been pressed to recant. Foreign researchers may lose access to Chinese archives. Policymakers may find that China experts in their own countries are too ill-informed to help them.

To ensure China’s rise is peaceful, the West needs to make room for China’s ambition. But that does not mean anything goes. Open societies ignore China’s sharp power at their peril.

Part of their defence should be practical. Counter-intelligence, the law and an independent media are the best protection against subversion. All three need Chinese speakers who grasp the connection between politics and commerce in China. The Chinese Communist Party suppresses free expression, open debate and independent thought to cement its control. Merely shedding light on its sharp tactics—and shaming kowtowers—would go a long way towards blunting them.

Read the complete article on The Economist magazine web site.

A prosecutor of Klansmen captures Jeff Sessions’s old seat, as the Republicans’ Senate majority shrinks

Roy Moore watching results

INITIALLY the mood at Doug Jones’s election-night party was genial but uneasy. Guests knew Mr Jones was closer to winning one of Alabama’s Senate seats than any Democrat in a quarter-century; they also knew that Mr Trump won the state by 28 points, and the last two Republican Senate candidates won 63.9% and 97.3% of the vote. So they smiled, and made all the right hopeful noises, but around the corners of their eyes you could see them bracing for disappointment.

Mr Jones’s victory was narrow—he took 49.9% of the vote to Mr Moore’s 48.4%, with the remaining 1.7% going to write-in votes—but decisive. He flipped every one of the counties that Mr Trump won by 10 points or less last year, banking large numbers of votes in the counties housing Alabama’s five biggest cities, and running up sizable margins in Alabama’s majority African-American “black belt”.  Mr Moore, meanwhile, underperformed Mr Trump’s results from November 2016 in every one of Alabama’s 67 counties, faring especially poorly in those with large numbers of educated voters.

At a rally in south-eastern Alabama the night before the election, Steve Bannon, Mr Trump’s former chief strategist and the architect of his presidential campaign, headlined a motley crew of far-right Republicans who offered a cavalcade of bilious, resentment-filled speeches promoting Mr Moore while pandering to Alabamians’ prickliness. “Nobody comes down here and tells Alabamians what to do,” said Mr Bannon, a Virginian, speaking after a Texan and several Midwesterners. Other speakers attacked George Soros, Islam and “the lynch-mob media”. No name got longer and more sustained boos than Mr Shelby’s. Two days before the election he went on a prominent talk show just to say, “I wouldn’t vote for Roy Moore…The state of Alabama deserves better.” Mr Moore’s wife defended her husband against charges of bigotry by revealing that “one of our attorneys is a Jew.”

White evangelicals—Mr Moore’s core supporters—comprised a smaller share of the electorate this year than in past elections. Some of them stayed home, or even voted for Mr Jones, despite vehemently disagreeing with his pro-choice position on abortion. Rushton Mellen Waltchack, a Christian and lifelong Republican from Birmingham, compared Mr Moore to “a televangelist who falls from grace,” and said she could not bring herself to vote for him. “He makes statements that to me don’t represent Jesus in the Bible…What does it say about us as a party if we continue to choose policy over character?”

Read the complete article on The Economist magazine web site.