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First of all, yes, consumption is almost always preferable to "letting your money work for you". Contrary to what you seem to think, most people who have more w

First of all, yes, consumption is almost always preferable to "letting your money work for you". Contrary to what you seem to think, most people who have more wealth than they need for consumption, don't use that wealth to fund new ventures. Instead they mostly just own assets that appreciate in value and/or pay a dividend. They do not create new wealth to any significant degree. While it is true to some extent that having money in the bank can help create new wealth, it makes no difference if it's one person putting a million dollars or a thousand people each putting one thousand dollars in the bank. The result in either case is that the bank can lend out a million dollars to someone starting a new venture. I mention this because when one person spends (consumes goods) a thousand dollars say, that money goes out if her bank account and into someone else's. The bank's ability to lend out money is unaffected. Meanwhile, thanks to the power of capitalism, money that is spent flows towards what society in aggregate deems most valuable, ensuring that more effort is spent on creating more of that valuable thing. This is in a nutshell why it's preferable for all, poor and rich, to prevent rampant inequality. Secondly, I do somewhat agree that we shouldn't disincentivize investment or saving up. I am not familiar with the US tax system, but in some countries you can defer paying taxes on what you put into a pension plan until the time when you collect your pension. If the interest you earn on your savings is more than the inflation, this is a win/win situation: You will earn interest on a larger amount, and society will collect tax on a larger amount in the end too. I could probably be convinced that it would be a good idea to make all investment and savings tax free provided that all dividends as well as any amount liquidated was taxed as income. Buy a house? Fine that's tax deductible. Sell a house? Get taxed on the entire amount as if it were income.

yummyfajitas 11y ago
it makes no difference if it's one person putting a million dollars or a thousand people each putting one thousand dollars in the bank. The result in either case is that the bank can lend out a million dollars to someone starting a new venture. This is wrong because it focuses solely on imaginary numbers floating around. It's absolutely true that we can play any game we want with numbers in a bank computer. However, a worker can either be building a new factory or they can be making a purse. The former is investment while the latter is consumption. If we encourage investment we get more of the former, while if we encourage consumption we get more of the latter. The constraint here is real resources, not money. I could probably be convinced that it would be a good idea to make all investment and savings tax free provided that all dividends as well as any amount liquidated was taxed as income. This discourages investment and favors immediate consumption. Again, read Scott Sumner: http://www.themoneyillusion.com/?p=28842 http://www.themoneyillusion.com/?p=28842 This also discourages re-allocating investments to their most productive uses.
- adamlett 11y ago
  As I tried to get across before, most of what we think of as investment, doesn't actually create value. Buying land does not create value, buying stock does not usually create new value (unless it's from a new offering). Owning assets that appreciate in value does not create new value. So tell me again why any of these kinds of investment is something we should go out of our way to encourage? On the other hand, consumption in a capitalist society really does create value, because consumption is the all important signalling mechanism that tells us where to direct our resources, ensuring that more value is created. Consumption is not without problems, but it is unquestionably valuable. So not only would a tax system based on consumption be hugely unjust from a social perspective, it also makes no sense from an economic perspective.
  - yummyfajitas 11y ago
    The issue isn't any individual act of saving (most of which are just reshufflings of investment assets), it's net investment. If the amount of money invested goes up, it buys more real investment resources. This means more workers and more physical resources are devoted to investment, and less to consumption. Again, think of real resources because thinking of money is confusing you. A worker can either do biomedical research (investment) or they can provide massages (consumption). This fact doesn't change no matter what games you imagine are happening with money.
    - adamlett 11y ago
      Yes, I probably am a little bit confused as to what exactly you mean when you talk about investment. Is buying a house an investment? How about a yacht? What about a vintage car? Stock? From a social point of view these are all more or less equivalent, as in they all result in money going out of your pocket into someone else's and some asset (which may or may not appreciate in value) being transferred to you. Depending on your point of view they can all be though of as both investment and consumption. This leads me to speculate if what you really mean is that it is spending that should be taxed and taking a profit that should be tax exempt? If not I would very much like to hear how you would define investment in such a way that it can unambiguously be separated from consumption. But regardless, the intention behind your proposal still makes it a horrible idea. I can see that you will not be swayed by the argument that it is socially very unjust and would result a unimaginable inequality. But as I keep trying to tell you, consumption is the motor of capitalism. It is the demand part of supply and demand. Without consumption, there is no production. And production is what creates all the wealth. Everybody would be poorer. Furthermore, while it's true the funding new ventures also contribute to wealth creation, and that lack of risk seeking capital would be a problem, it is simply not a problem that exists in our present condition as evidenced by the historically low interest rates. In fact there is an overabundance of capital in today's world. What is lacking is sound new ventures to invest in. If we were to further incentivize investment, we would only accelerate the formation of a catastrophic bubble. Your understanding of macroeconomics is simplistic if you believe as you seem to do that more investing is always positive or that consumption is always negative.

yummyfajitas 11y ago

it makes no difference if it's one person putting a million dollars or a thousand people each putting one thousand dollars in the bank. The result in either case is that the bank can lend out a million dollars to someone starting a new venture. This is wrong because it focuses solely on imaginary numbers floating around. It's absolutely true that we can play any game we want with numbers in a bank computer. However, a worker can either be building a new factory or they can be making a purse. The former is investment while the latter is consumption. If we encourage investment we get more of the former, while if we encourage consumption we get more of the latter. The constraint here is real resources, not money. I could probably be convinced that it would be a good idea to make all investment and savings tax free provided that all dividends as well as any amount liquidated was taxed as income. This discourages investment and favors immediate consumption. Again, read Scott Sumner: http://www.themoneyillusion.com/?p=28842 http://www.themoneyillusion.com/?p=28842 This also discourages re-allocating investments to their most productive uses.

adamlett 11y ago
As I tried to get across before, most of what we think of as investment, doesn't actually create value. Buying land does not create value, buying stock does not usually create new value (unless it's from a new offering). Owning assets that appreciate in value does not create new value. So tell me again why any of these kinds of investment is something we should go out of our way to encourage? On the other hand, consumption in a capitalist society really does create value, because consumption is the all important signalling mechanism that tells us where to direct our resources, ensuring that more value is created. Consumption is not without problems, but it is unquestionably valuable. So not only would a tax system based on consumption be hugely unjust from a social perspective, it also makes no sense from an economic perspective.
- yummyfajitas 11y ago
  The issue isn't any individual act of saving (most of which are just reshufflings of investment assets), it's net investment. If the amount of money invested goes up, it buys more real investment resources. This means more workers and more physical resources are devoted to investment, and less to consumption. Again, think of real resources because thinking of money is confusing you. A worker can either do biomedical research (investment) or they can provide massages (consumption). This fact doesn't change no matter what games you imagine are happening with money.
  - adamlett 11y ago
    Yes, I probably am a little bit confused as to what exactly you mean when you talk about investment. Is buying a house an investment? How about a yacht? What about a vintage car? Stock? From a social point of view these are all more or less equivalent, as in they all result in money going out of your pocket into someone else's and some asset (which may or may not appreciate in value) being transferred to you. Depending on your point of view they can all be though of as both investment and consumption. This leads me to speculate if what you really mean is that it is spending that should be taxed and taking a profit that should be tax exempt? If not I would very much like to hear how you would define investment in such a way that it can unambiguously be separated from consumption. But regardless, the intention behind your proposal still makes it a horrible idea. I can see that you will not be swayed by the argument that it is socially very unjust and would result a unimaginable inequality. But as I keep trying to tell you, consumption is the motor of capitalism. It is the demand part of supply and demand. Without consumption, there is no production. And production is what creates all the wealth. Everybody would be poorer. Furthermore, while it's true the funding new ventures also contribute to wealth creation, and that lack of risk seeking capital would be a problem, it is simply not a problem that exists in our present condition as evidenced by the historically low interest rates. In fact there is an overabundance of capital in today's world. What is lacking is sound new ventures to invest in. If we were to further incentivize investment, we would only accelerate the formation of a catastrophic bubble. Your understanding of macroeconomics is simplistic if you believe as you seem to do that more investing is always positive or that consumption is always negative.