All About Taxation

I write this blog for folks who are looking to learn more about economics. And if you are in this group, you can’t help but have noticed that there’s been a bit of a brouhaha over taxes, both in the United States of America and in India.

ProPublica has obtained a vast trove of Internal Revenue Service data on the tax returns of thousands of the nation’s wealthiest people, covering more than 15 years. The data provides an unprecedented look inside the financial lives of America’s titans, including Warren Buffett, Bill Gates, Rupert Murdoch and Mark Zuckerberg. It shows not just their income and taxes, but also their investments, stock trades, gambling winnings and even the results of audits.
Taken together, it demolishes the cornerstone myth of the American tax system: that everyone pays their fair share and the richest Americans pay the most. The IRS records show that the wealthiest can — perfectly legally — pay income taxes that are only a tiny fraction of the hundreds of millions, if not billions, their fortunes grow each year.

https://www.propublica.org/article/the-secret-irs-files-trove-of-never-before-seen-records-reveal-how-the-wealthiest-avoid-income-tax

What exactly is income tax? And what is its history?

Well, the first question is simple to answer (to begin with): it is a tax on your income. Ah, but that then begs the (pardon the puny pun) million dollar question: what is income?

But a question remained: What would count as income and what wouldn’t? In 1916, a woman named Myrtle Macomber received a dividend for her Standard Oil of California shares. She owed taxes, thanks to the new law. The dividend had not come in cash, however. It came in the form of an additional share for every two shares she already held. She paid the taxes and then brought a court challenge: Yes, she’d gotten a bit richer, but she hadn’t received any money. Therefore, she argued, she’d received no “income.”
Four years later, the Supreme Court agreed. In Eisner v. Macomber, the high court ruled that income derived only from proceeds. A person needed to sell an asset — stock, bond or building — and reap some money before it could be taxed.

https://www.propublica.org/article/the-secret-irs-files-trove-of-never-before-seen-records-reveal-how-the-wealthiest-avoid-income-tax

As the article I have excerpted this from goes on to say, folks were warning us even back then that this was not going to end well (it is nowhere close to ending, and it is not going well). But this talks to us about the difficulty of defining income, about which more in a bit. Here’s a brief snippet about how the idea of income taxes originated:

The universal taxes of ancient times, like the one that brought Mary and Joseph to Bethlehem just before the birth of Jesus, were invariably head taxes, with one fixed sum to be paid by everybody, rather than income taxes. Before about 1800, only two important attempts were made to establish income taxes—one in Florence during the fifteenth century, and the other in France during the eighteenth. Generally speaking, both represented efforts by grasping rulers to mulct their subjects. According to the foremost historian of the income tax, the late Edwin R. A. Seligman, the Florentine effort withered away as a result of corrupt and inefficient administration. The eighteenth-century French tax, in the words of the same authority, “soon became honeycombed with abuses” and degenerated into “a completely unequal and thoroughly arbitrary imposition upon the less well-to-do classes,” and, as such, it undoubtedly played its part in whipping up the murderous fervor that went into the French Revolution.

Brooks, John. Business Adventures: Twelve Classic Tales from the World of Wall Street (p. 93). Hodder & Stoughton. Kindle Edition.

That… is not reassuring.

The chapter on income tax from this excellent, excellent book makes for great reading. As it turns out, it was the (surprise, surprise) Civil War that finally provided the impetus for the imposition of an income tax across the length and breadth of the nation1 And the imposition was celebrated! Well, at least by some:

“I am taxed on my income! This is perfectly gorgeous! I never felt so important in my life before,” Mark Twain wrote in the Virginia City, Nevada, Territorial Enterprise after he had paid his first income-tax bill, for the year 1864—$36.82, including a penalty of $3.12 for being late. Although few other taxpayers were so enthusiastic, the law remained in force until 1872. It was, however, subjected to a succession of rate reductions and amendments, one of them being the elimination, in 1865, of its progressive rates, on the arresting ground that collecting 10 per cent on high incomes and lower rates on lower incomes constituted undue discrimination against wealth.

Brooks, John. Business Adventures: Twelve Classic Tales from the World of Wall Street (p. 96). Hodder & Stoughton. Kindle Edition.

Back, as it were, to the future. Anand Giridharadas wrote an article in the New York Times about the ProPublica report:

Mr. Buffett is almost the perfectly made billionaire for this moment in which, at last, many Americans are beginning to question not only corruptions of the system but the matter of whether billionaires should exist at all. He doesn’t do the things the worst of them do. He isn’t in it for what they’re in it for. He clearly must care about money, but he also kind of doesn’t care about money. Even in his generosity, he has avoided the imperial lording over that others cannot resist.
And this is what makes him so troubling, because through him we are tempted into believing that a system can be defended that allows a man to accumulate more than $100 billion while people are sleeping, in hock to him, in his mobile homes, shortening their lives with the beverages he’s invested in, scampering around the warehouses whose nonunion status has redounded to his money pile.
It can’t. And who keeps us from seeing that simple, stark truth more effectively, more perniciously, than the Good Billionaire?

https://www.nytimes.com/2021/06/13/opinion/warren-buffett-billionaire-taxes.html

The second card in my three card trick is a response to this essay, from V Ananta Nageswaran2:

So, notwithstanding Anand Giridhardas, we can still think about the manner in which incomes and capital gains & dividends are taxed. I see three issues, at my level.
There needs to be a discussion on unrealised capital gains and dividends. Dividends are avoided and companies buy stocks back to avoid dividend tax. What if the tax policies take away that choice?
Second, even if we accept that only realised capital gains are to be taxed, why are they taxed at much lower rates than tax on wages?
Third, even if we accept this logic (which, in addition to the above arguments, is also a reflection of who made those laws, their incomes and wealth status, etc., over time and across the world) of the primacy of capital, for the sake of argument and hence accept the conclusion that capital gains will be treated differently from regular labour income, then the question is one of defining short-term and long-term. Why should short-term be just one year? In economics, anyone’s definition of short-term is not one year but a business cycle, i.e., minimum three years. Extending the definition of ‘short-term’ to 36 months from 12 months will earn more revenues.

https://thegoldstandardsite.wordpress.com/2021/06/19/the-inequity-of-the-tax-system/

That is, the author is saying that that are indeed problems with capital being taxed the way it is, but (as he points out elsewhere in the blog) the way forward is evolution, not revolution.

Which brings me to the third card: TALISMAN.

The truth, as always, lies somewhere in the middle – and that, of course, is the point of the excerpt above too. On the spectrum of Current System Bad:::Current System Good, reasonable people can and should argue about the “sweet spot”.


And if you are a student of economics (and especially public finances), where do you go to learn more before trying to figure out where you should be on this spectrum?

  1. Please read the chapter on income taxes from the book Business Adventures
  2. Read this essay by Tim Taylor (and note that it was written before the ProPublica report came out!)
  3. Farhad Manjoo, a while ago, on abolishing billionaires (and the response to that essay)
  4. Gulzar Natarajan on this issue
  5. And for a theoretical understanding – always a good idea for an issue as complex and important as this one – Chapters 20 and 21 from Stiglitz’ Economics of the Public Sector.
  1. do read the entire chapter, though. The snippet about the experiment in Rhode Island is fascinating.[]
  2. note that I am excerpting the outline of the argument, please visit the blog to read it in full[]

Veritasium on YouTube

Via Shubhneet Arora (thanks, Shubhneet!)

#hencethename on Twitter

#hencethename

Twitter Handle: @indiaves

And just one of many, many, many examples possible:

Faculty Internships. But Why Not?

What stops the world from inviting teachers and professors to work for a while in industry?

We need to make education more relevant to the demands of the workplace – most people would be in complete agreement with this. The question is how to go about doing this. Sure, one could rejig the syllabi, and get feedback from alumni and industry – and this has been happening for years in many colleges and universities.

But how many industry professionals have spent a semester seeing what is taught to students? How many professors have spent a couple of months observing what work happens within a corporate set-up? Would the world be better off if more of this happened?

And if your answer to that question is yes (and this is very much true in my case), then why are we not trying to make more of such “internships” happen?


  • When a firm visits a campus for placements, also have the firm explore the option of asking professors if they would like to tag along for the duration of the internship
  • No money need change hands – the college will pay the professor their monthly salary (and if need be, an additional stipend to cover living expenses)
  • Students get a mentor on site, which means lesser work for the employees of that firm
  • The professor gets a peek into what is going on in the corporate world:
    • Which are the tools in use, versus the ones being taught in college?
    • What is the work pressure like, and are students being adequately prepared?
    • How important are the changes in the style of writing and speaking?
    • Is what is being taught in college relevant?
    • Are corporates missing out on tricks that the professor can help them out with?
  • And the firm gets an insight into how the professor has been teaching. Even better, while at this faculty internship, the professor can attend training sessions that have been organized in the workplace, meet with departmental heads across the firm, and perhaps even meet some of the clients.
  • If the professor can actually get involved in a project, nothing like it. Sure, you’ll need to sign NDA’s and all of that, and sure this might not be possible in all organizations for all projects – but surely some projects in some organizations should be possible?
  • And if a firm is willing to make the investment, why not have industry professionals spend a month in a university? Maybe conduct a course, or a part of a course – but really more like a scholar in residence. The ability to interact in a more relaxed environment with students, to guide them, to mentor them, maybe collaborate with them – surely there is merit in the idea?
  • I do not know if there are colleges/universities in India that already do this. If you know of any, please do let me know.
  • But especially if you don’t, please do one of these two things:
    • Help me understand the potential downsides to such a scheme
    • If you think there to be no potential downsides, help me try and get this off the ground? Bridging the gap between academic ideas and real world problems1 is a great problem to try and solve, and I think this idea has some serious merit.
  1. if you know, you know[]

About Innovative Question Papers

The typical exams, at least in Indian universities, tend to be really dull, drab affairs. I cannot speak about how good (or bad) they are in other countries, but partly by design, partly due to inertia, they follow the same old template in most Indian universities.

You’ll get your fair share of “State briefly”, a sprinkling of “Explain why”, and the very occasional “In your opinion”. But for the most part, it needs rote memorization to respond and “do well” in these examinations. Take home essays, reflective essays and anything that is even remotely innovative are not welcome.

But in a world where such a thing was possible, what might question papers look like?

Tyler [Cowen] once walked into class the day of the final exam and he said. “Here is the exam. Write your own questions. Write your own answers. Harder questions and better answers get more points.” Then he walked out. The funniest thing was when a student came in late and I had to explain to him what the exam was and he didn’t believe me!

https://chrisblattman.com/2012/08/15/best-exam-question-ever/
https://chrisblattman.com/files/2013/01/1-Introduction.pdf

I can’t find it online right now, but I seem to remember that some of Prof. Blattman’s papers included the additional condition that you needed to submit the cheat sheet, and it too would be evaluated for what you chose to put in it (and implicitly, what you chose to leave out).


I had once asked a very small development economics class to teach some of their peers – those who hadn’t taken Dev Eco – the Solow Model. The non-math version, of course. And then those who had been taught had to take a small multiple choice question test. The marks they scored would become the grades for the “teachers”. Stuff like this will never work for a larger class, will never work for a semester end exam, but it still was a lot of fun to do!

The point is that it is all too possible to have examinations be fun, and be about learning. But so long as examinations are about signaling how much you’ve scored, rather than allowing you to reflect on how much you’ve learnt, they’ll have to be standardized, which means they’ll have to continue to be boring.

If you’d like them to be fun, you need to try and live in a world where examinations (and therefore colleges) aren’t about signaling.


But that is a tall order, no?

In Memoriam: Robert Mundell

Robert Mundell passed away earlier this week. Most macroeconomics students will know of the Mundell-Fleming model, of course, while a lesser number may have heard of his work on optimum currency areas.

Here is a relatively old article about him from the New York Times:

”In the very short run, I’m a Keynesian,” he said. ”In the intermediate run, I’m a supply-sider, and in the long run I’m a monetarist.”

https://www.nytimes.com/1986/01/12/business/eccentric-economist-robert-a-mundell-supply-side-s-intellectual-guru.html

And here is a summary by The Economist on the impossible trilemma:

HILLEL THE ELDER, a first-century religious leader, was asked to summarise the Torah while standing on one leg. “That which is hateful to you, do not do to your fellow. That is the whole Torah; the rest is commentary,” he replied. Michael Klein, of Tufts University, has written that the insights of [[international macroeconomics]] (the study of trade, the balance-of-payments, exchange rates and so on) might be similarly distilled: “Governments face the policy trilemma; the rest is commentary.”

https://www.economist.com/schools-brief/2016/08/27/two-out-of-three-aint-bad)

Here is Paul Krugman, first rhapsodizing about the Optimum Currency Area1:

First up, Mundell, whose classic 1961 paper argued that a single currency was more likely to be workable if the regions sharing that currency were characterized by high mutual labor mobility. (He actually said factor mobility, but labor is almost surely the one that matters). How so?

https://krugman.blogs.nytimes.com/2012/06/24/revenge-of-the-optimum-currency-area/

.. and then rhapsodizing about Robert Mundell and his early theoretical work:

Those of us who work on international monetary theory have been wondering for a decade when Robert Mundell would get his richly deserved Nobel Memorial Prize in Economic Sciences. Mundell’s work is so central to that field, so “seminal”–an overused term that really applies here–that on many disputed issues his ideas are the basis for both sides of the debate. But a layperson might be confused about exactly what Mundell and his prize are really about.

https://slate.com/business/1999/10/o-canada.html

This is the NYT obituary:

In his 2006 interview, he said that winning the Nobel “was particularly pleasing to me as my work has been quite controversial and no doubt stepped on a lot of intellectual toes.”
He added: “Even more than that, when I say something, people listen. Maybe they shouldn’t, but they do.”

https://www.nytimes.com/2021/04/05/business/economy/robert-mundell-dead.html

And finally, the Washington Post’s obit:

Dr. Mundell gave one of the more unusual — and crowd-pleasing — acceptance speeches in the history of the Nobel Prize. He ended his remarks by singing a few bars of the hit Frank Sinatra song “My Way,” an allusion to the independent-minded approach that he brought to his life and work.

https://www.washingtonpost.com/local/obituaries/robert-mundell-dead/2021/04/06/36793d92-96d4-11eb-b28d-bfa7bb5cb2a5_story.html

RIP.

  1. This essay, along with the tables, used to be freely available on the NBER website. No longer, and I don’t know why. My apologies[]

Sylvia Plath’s Food Diaries

Seems like such a mundane tweet, unless you know who Sylvia Plath was, of course. The entire account is just “Everything Sylvia Plath ate, according to her journals, her letters, her poems, The Bell Jar, and other miscellany” It has been lovingly curated.

So who was Sylvia Plath?

Sylvia Plath was one of the most dynamic and admired poets of the 20th century. By the time she took her life at the age of 30, Plath already had a following in the literary community. In the ensuing years her work attracted the attention of a multitude of readers, who saw in her singular verse an attempt to catalogue despair, violent emotion, and obsession with death. In the New York Times Book Review, Joyce Carol Oates described Plath as “one of the most celebrated and controversial of postwar poets writing in English.” Intensely autobiographical, Plath’s poems explore her own mental anguish, her troubled marriage to fellow poet Ted Hughes, her unresolved conflicts with her parents, and her own vision of herself.

https://www.poetryfoundation.org/poets/sylvia-plath

Here is her bibliography on Wikipedia, and here is NY Times coverage of Sylvia Plath.

Via the truly excellent splainer.in

(I am anything but an expert on poetry, and you should keep that in mind!)

Neil Gaiman: Make Good Art

This is a really old video, but always worth watching.

Neil Gaiman, ladies and gentlemen:

Pre and Post Nuclear Bomb Steel

I had referred to Patrick Collison’s “Yes, and” rather than “No, But” approach to Twitter earlier this week.

In a world in which there was a “Yes, and” Society, and a Pune chapter for this hypothetical (but much needed) society, I’d have voted for Navin Kabra as Lifetime President. Today’s twitter thread of choice is one of many reasons why:

Recommended pairing: The Life and Times of the Thunderbolt Kid, by Bill Bryson. The whole book is a delightful read, but I have the pages where he speaks about America’s fascination with the atomic bomb in mind.

What does the future look like, and how should you think about the answer to that question?

I came across this tweet a while ago, and found it quite funny:

I have asked this question myself while interviewing candidates, and the reason I ask it is not because I want to get a definitive answer from the student. Prediction is a mostly pointless activity. It is because I want to understand what factors the interviewee includes in her analysis.

And the reason I begin with this in today’s post is because two really and truly excellent pieces worth reading were gifted to us earlier this week.

First, Noah Smith interviewed Patrick Collison.

N.S.: So, what are the three things that excite you most about the 2020s?

It’s hard to restrict to three! But here are the first that jump to mind:

First, the explosive expansion in access to opportunity facilitated by the internet. Sounds prosaic but I think still underestimated. Several billion people recently immigrated to the world’s most vibrant city and the system hasn’t yet equilibrated. When you think about how YouTube is accelerating the dissemination of tacit knowledge, or the number of creative outsiders who can now deploy their talents productively, or the number of brilliant 18 year-olds who can now start companies from their bedrooms, or all the instances of improbable scenius that are springing up… in the landscape of the global commons, the internet is nitrogen fertilizer, and we still have a long way to go — economically, culturally, scientifically, technologically, socially, and everything in between. I challenge anyone to watch this video and not feel optimistic.

Second, progress in biology. I think the 2020s are when we’ll finally start to understand what’s going on with RNA and neurons. Basically, the prevailing idea has been that connections between neurons are how cognition works. (And that’s what neural networks and deep learning are modeled after.) But it looks increasingly likely that stuff that happens inside the neurons — and inside the connections — is an important part of the story. One suggestion is that RNA is actually part of how neurons think and not just an incidental intermediate thing between the genome and proteins. Elsewhere, we’re starting to spend more time investigating how the microbiome and the immune system interact with things like cancer and neurodegenerative conditions, and I’m optimistic about how that might yield significantly improved treatments. With Alzheimer’s, say, we were stuck for a long time on variants of plaque hypotheses (“this bad stuff accumulates and we have to stop it accumulating”)… it’s now getting hard to ignore the fact that the immune system clearly plays a major — and maybe dominant — role. Elsewhere, we’re plausibly on the cusp of effective dengue, AIDS, and malaria vaccines. That’s pretty huge.

Last, energy technology. Batteries (88% cost decline in a decade) and renewables are well-told stories and the second-order effects will be important. (As we banish the internal combustion engine, for example, we’ll reap a significant dividend as a result of the reduction in air pollution.) Electric aircraft will probably happen, at least for shorter distances. Solar electricity is asymptoting to near-free, which in turn unlocks other interesting possibilities. (Could we synthesize hydrocarbons via solar powered atmospheric CO2 concentration — that is, make oil out of air — and thereby render remaining fossil fuel use-cases carbon neutral?) There are a lot of good ideas for making nuclear energy safer and cheaper. France today gets three quarters of its electricity from nuclear power… getting other countries to follow suit would be transformatively helpful in averting climate change.

There’s lots more! New semiconductor technology. Improved ML and everything that that enables. Starlink — cheap and fast internet everywhere! Earth-to-earth travel via space plus flying cars. The idea of urbanism that doesn’t suck seems to be gaining traction. There’s a lot of good stuff on the horizon.

https://noahpinion.substack.com/p/interview-patrick-collison-co-founder

I know I say this every other day, but please – pretty please with a cherry on top – do read the whole thing. And subscribe to Noah Smith’s Substack, and follow him on Twitter, and follow Patrick Collison on Twitter, and read the page titled Advice on his website.1

There are many, many, many things to appreciate about Patrick Collison, but the thing that has stayed with me the longest is a tweet of his, that helped me understand how to approach Twitter (and therefore life):

Wonderful advice, and I’ve taken it to heart.

But you need the “No, but” approach in life too. Not so much to disagree with other people, but to constantly ask yourself how you might be wrong, and to think about what needs changing for the better.

And a wonderful essay that speaks about precisely this came out this week as well:

The Decadent Society came out in hardcover about three weeks before Italy’s hospitals were overwhelmed by the coronavirus and lockdowns began to descend across the Western world. So it was probably not the ideal time to bring out a book arguing that our era is defined by drift, stalemate, boredom and repetition, that Francis Fukuyama’s “end of history” is still with us thirty years after he declared its advent, that our society is more likely to glide slowly toward dystopia than to leap forward toward a renaissance or plunge into catastrophe. Surely here was something new, here was history come again, here was the shock, the crisis, the un-simulated Reality, the hinge from one age into the next. Surely the pandemic meant the end of decadence, whatever else it meant.

In the Zoom interviews with which I finished up my book tour, I usually half-conceded the point. Yes, this was a real crisis, death taking off its masque amid the partygoers, stalemate giving way to disaster, Reality Itself suddenly pushing fantasy and simulation aside. But at the same time, nothing about a temporary crisis necessarily alters long-term patterns. Plagues can open new chapters in history, but it all depends on how people respond to them, what kind of responses are possible, and which pre-existing trends they accelerate or blunt. Would our decadent institutions, when tested, crumble, taking us deeper into crisis, closer to collapse? Would the shock of pandemic spark a new era of technological innovation, or midwife a new age of political reform? Or would stagnation reassert itself, or even deepen, in the aftermath?

https://douthat.substack.com/p/the-pandemic-and-the-decadent-society

I haven’t yet read Ross Douthat’s book, but he refers to the four horsemen of the decadent society in his essay: stagnation, sterility, sclerosis, and repetition.2

And this essay is a larger examination of the same question: where do you see the world in the future, but now viewed not through the prism of sunny optimism that imminent technological advances can bring you, but also through the prisms of institutional, cultural and demographic pessimism.

This point, in particular, stood out for me:

Lyman Stone recently calculated that there would be 5.8 million more babies if the U.S. had just maintained its pre-Great Recession birthrates; the pandemic is likely to subtract at least several hundred thousand more, with similar trends in Europe.

Yes, it’s possible to hope that the optimistic economic scenario described above will speed a fertility rebound. It’s possible to look at developments in U.S. family policy and see our political system slowly, slowly coming round to taking those issues seriously. Maybe there’s a big turnaround waiting to happen here: Maybe in a Biden boom there will be a battery-powered minivan in every driveway, piloted by a remote-working parent, and simply stuffed with kids.

But to the extent that the fertility collapse is connected with the struggle to transition to adulthood, the struggle to form stable romantic partnerships, it’s also easy to see how the coronavirus’s negative effects could linger — how a lost period for courtship and marriages, a retreat from physical reality and real-world intimacy in crucial years for both, could reverberate through the next decade and beyond.

https://douthat.substack.com/p/the-pandemic-and-the-decadent-society

I sincerely hope he is wrong about this, and I genuinely think that he is, but is it a point worth thinking about and a factor worth including in your analysis of the future?

Absolutely.


Reading both essays will absolutely not help you get the answer to the question of what the future will look like. Nothing will, because the future will remain resolutely unknowable. But both essays will help you get started on which factors you might want to use in your analysis of the question. And will be very informative about why the people who helped make both essays happen think the way they do.

And therefore I’d recommend that you read them. Multiple times over, preferably.

  1. I’ve linked to it before, and I’ll gladly link to it again, it’s that good[]
  2. It is fascinating to me how in the excerpt above, he refers to this quartet as drift, stalemate, boredom and repetition. The first three words have changed, and if you ask me, for the better. The fourth is, well, repeated. I would love to ask Ross Douthat if that was deliberate – and if so, well played, sir![]