23 Sep 2010

Scott Sumner Doesn’t Know What Income Is

Economics 11 Comments

No, I’m not saying he doesn’t know what his income is. I’m saying, Scott Sumner doesn’t know what the concept of income is. Check it out:

Income: A meaningless, misleading, and pernicious concept

And I bet you thought I was exaggerating.

No need to pick apart this post right now; it deserves a full-scale assault on Mises.org. In addition to the above quote, you might also like the following excerpts:

Unlike most libertarians, I think a progressive payroll tax is desirable for simple utilitarian reasons.  I don’t buy the “I worked hard for it, it’s my money” argument, for two reasons…

Because of diminishing marginal utility, it’s better to share your wealth with one other person…

The beauty of the progressive consumption tax is…

By all means, follow the link to see if I’m quoting Scott out of context.

11 Responses to “Scott Sumner Doesn’t Know What Income Is”

  1. Jeremy says:

    I thought income was property.

  2. Silas Barta says:

    scott_sumner’s general point there isn’t that outlandish: it’s saying mixing up interest, capital gains, and wages, into the category “income” for purposes of taxation is fundamentally confused, because taxing interest and capital gainst effectively double-taxes wages. Yes, he mixes in a whole other bunch of liberaltarian stuff, but he’s not saying, as your post implies, that “hey, what’s this whole ‘income’ thing, anyway, man… who cares if they tax that?”

  3. Fascist Soup says:

    And now, finally, my post on the optimal tax regime.

    Taxes are dumb.

    The End.

  4. Robert says:

    I would second Silas’s comment. Sumner’s main point was that capital gains tax should be abolished; the progressive tax he endorses is a secondary point.

    Furthermore, I think you are trying to take his quotations out of context somewhat.

    “The beauty of the progressive consumption tax is…” it doesn’t punish people who invest and its simpler to pay than the current system. No income tax would be better still, but his points are still valid. He is arguing why his system is better than the current system, not better than no income tax at all.

    “Because of diminishing marginal utility, it’s better to share your wealth with one other person…”. This quotation is about leaving money to your children, and why inheritance tax should be abolished. Unless you support inheritance tax, I cannot imagine why you object to him saying people should be allowed to leave money to their children.

    I don’t think you took his first quotation out of context: that was fair.

    I thought the factual claims he made (rather than ones about whether progressive income tax is good) were pretty reasonable, so look forward to reading why you say “Scott Sumner doesn’t know what the concept of income is”.

    • Ricardo Cruz says:

      «“The beauty of the progressive consumption tax is…” it doesn’t punish people who invest»

      Uh? A consumption tax will simply take your money when you go to spend it, instead of when you cash out the stock. Of course it punishes savings, and it punishes work too.

  5. Yancey Ward says:

    I will third Silas’s point.

    I think that comment quote is taken out of context.

  6. bobmurphy says:

    OK, I have read all of your defenses of Sumner, and after further review…the play stands. Sumner is goofy.

    1) Silas, all of those things are income–interest, capital gains, and wages. I’m sorry if you and Sumner don’t see why. And no, I wasn’t saying that Sumner said, ““hey, what’s this whole ‘income’ thing, anyway, man… who cares if they tax that?”” You added that just to make me look dumb. I said that Sumner didn’t know what income was, and I still stand behind that. In the comments he acknowledged to me that he knew the definition I had proferred, but that he thought it was a pointless definition.

    So, at best, we can say, “Scott Sumner knows what economic theory says ‘income’ is, but he doesn’t understand why it’s a useful concept.”

    2) Robert, yes I know what Scott’s main point was, and no of course I’m not in favor of inheritance taxes. But the arguments Scott used to reach those conclusions were goofy. He wants to abolish taxes on capital gains and interest because they’re not “really” income the way wages are; that’s nonsense. And he says it’s good to give money to your kids because if you distribute wealth, that raises total utility since the marginal utility of a dollar to a rich dad is less than the MU of a dollar to his (initially penniless) heir. That’s nonsense.

  7. Silas Barta says:

    “Scott Sumner knows what economic theory says ‘income’ is, but he doesn’t understand why it’s a useful concept.”

    The post was mainly about why it’s not a useful concept *as a taxation category* that includes interest and capital gains. This is because (as Landsburg hard argued a few days before), the relevant measure we want to look at for purposes of calculating the effective tax rate is the *reduction in consumption*. Therefore, any positive rate of taxation on interest income will reduce consumption strictly more than one of the same rate on wages.

    And I’m sorry for the caricature, but you said so little in the post, and didn’t show much assimilation of the theses he presented, so I didn’t quite know what you found outlandish, other than the leftie, you-didn’t-earn-it stuff.

  8. Dan says:

    I think the point is that because Sumner doesn’t understand what income is or it’s importance, that it leads him to make absurd claims. He might blindly fall into a correct statement but since his premise is so flawed it leads him to make a flawed argument. If he really understood what he was talking about he would favor a repeal of all taxes.

    It would be like someone saying we need to get out of Iraq, but then followed up with “so we could focus our efforts on Iran”. If your premise is faulty then you will come to the wrong conclusion even if you do stumble into a correct statement or two.

  9. bobmurphy says:

    OK Silas fair enough; I have to remember that you guys aren’t mind readers. And if I flip out over Sumner’s vague remarks, then I can’t be surprised when you guys flip out over mine.

    But really, if you look in the comments where Sumner and I go back and forth, you’ll see that he explicitly says the concept of “income” as used by economic theorists is useless (or at least, he asks me what good it is).

    Robert, just to clarify, my problem with Sumner is interpersonal comparisons of utility. He is saying a dollar means more to a poor guy than to a rich guy. In terms of the economic theory that I learned at NYU (not even in Human Action), that is sheer nonsense. It’s pop psychology, not economics.

    Dan, I think your analogy is too kind. It would be more like saying, “What does the concept of ‘terrorism’ even mean? Of course we shouldn’t have a war with terrorists. I don’t even know how you could identify such a person.”

  10. Current says:

    It’s interesting that the classical economists created income distribution theory in large part to understand the effects of taxation. It’s accepted by virtually everyone that taxation has different effects on capital, interest, profit, rent and wages, it has been since Ricardo. Saying that this make “income” a useless category is nonsense. What are we supposed to call goods, money or assets that people earn without the word income?