@mattyglesias @arindube As promised, optimal capital taxation in 7 tweets! Simplifying a lot, but here is the core logic. How much you (e.g., the government) want to tax anything (a given asset, or income from a capital asset or labor) depends to a first order on 2 factors:
1. How much you value transfers to the people who own this asset or income. Value them more? You should tax it less. Often, (but it's a matter of social judgement), societies value $1 given to a lower-income person more than $1 to a higher-income person.
2. How strongly people who own the asset or receive the income will react to taxes (e.g, will they save less? work less? how much less?). The stronger this reaction, the less you can tax it.
The data can tell us who owns each asset or gets each income flow (part of factor 1)
The data can tell us who owns each asset or gets each income flow (part of factor 1)
and how strongly each will react to a tax change (factor 2). But, deciding how much we, as a society, value transfers to and money in the hand of different people is ultimately a social and political choice that the data alone cannot make for us.
Eg, one may decide to not tax financial assets because “They react very strongly to taxes by disappearing abroad!” (could be checked in data) &/or because “Individuals with financial wealth are job creators & deserve to keep their money!” (deservingness is a matter of judgment).
Or, you may decide to not tax housing despite the fact that is is very immobile & slow to react to taxes, because it's owned more broadly including by lower-income people & you don’t want to take away from them.
It’s good to be clear, when arguing for one tax change or another, whether you are making an efficiency argument about the reaction to taxes or expressing a social value judgment. These tend to often be blurred in the debate.
