Here is a fascinating series of four articles.
It starts with Paul Graham’s recent essay Economic Inequality. (Many readers of this blog will know Graham from his many fascinating essays, including Why Nerds Are Unpopular, What You Can’t Say and The Age of the Essay; and from his excellent book Hackers And Painters [Amazon US][Amazon UK].) Graham is broadly in favour of inequality as he sees it largely an honest signal of different ability and willingness to create value for society.
Whenever one talks of raising taxes and increasing benefits, a lot of people have this quite understandable reaction: “Why should people who work hard to earn money give it to people who don’t?”
But there is a good reason that every civilised country in the world has a progressive tax system — one where people with high incomes pay a higher proportion of that income in tax. It is that, other things being equal, there is a tendency for rich people to become richer and poor people to become poorer — and progressive tax systems are intended, at least, to ameliorate that tendency and prevent it from running wild.
But why does this tendency exist?
In his recent blog-post The pillars of tax wisdom, Tim Harford (author of The Undercover Economist) discusses “James Mirrlees — now a Nobel laureate — who tried to figure out what could be said about optimal income taxation. One of his conclusions, surprising to him as much as anyone else, was that an optimal income tax might impose flat or even falling marginal tax rates.”
Last month, I argued the point (admittedly at rather more length than necessary) that GDP does not measure what we’re interested in. I’m currently reading Tim Harford’s fascinating book The Undercover Economist [amazon.com, amazon.co.uk] — which, by the way I highly recommend — and I was pleased to discover that he agrees with me.
Suppose I buy a share in Microsoft from you at $400. Microsoft do well, and it increases in value to $500. At that point, I don’t want to push my luck any further, and sell my share for $500. It just so happens thatyou are the buyer.
In this scenario I have made $100 by “playing the markets”. But you have lost $100: you received $400 and paid $500, and ended up holding the same share that you started with. In effect, I have taken $100 from you. (Thanks!)
That was a zero-sum transaction, because your loss exactly cancelled out my win.
My question: is the whole stock-market zero-sum?