Writing for the New York Times, Matt Bruenig proposes an idea to fix America’s ‘Massive Inequality Problem’. Noah Smith goes further and argues that Bruenig’s not only solved inequality but has also found “a way to insure the American middle and working class against technological change.”
So what’s Bruenig’s idea?
“It’s called a social wealth fund, a pool of investment assets in some ways like the giant index or mutual funds already popular with retirement savings accounts or pension funds, but one owned collectively by society as a whole. One that paid dividends not to the few, or even just to the shrinking middle class lucky enough to have their savings invested, but to everyone.
“The federal government would create and run a new investment fund, and issue every adult citizen one share of ownership. The fund would gradually come to own a substantial and diverse portfolio of stocks, bonds and real estate. The investment return that the fund generates would be paid out to each citizen in the form of a universal basic dividend, and the shares would be nontransferable to preserve the institution’s egalitarian purpose.”
Bruenig suggests that this could be funded through raising income tax, by swapping shares for government assets, raising taxes on the wealthy or simply printing the money. But, let’s put the funding to one side. Because there’s a more important point to make.
Bruenig’s proposed policy is, as the Tax Foundation’s Scott Greenberg points out, indistinguishable from a tax on business cash flow. And that’s not a bad thing.
Taxing cash flow is far superior to our existing system of taxing corporate income. As I’ve argued before, we can turn corporation tax into a cash flow tax with two simple tweaks. First, allow firms to deduct the cost of investments from their taxable income up front. Second, allow firms to carry forward the true tax value of past losses. As Sam Bowman points out, allowing firms to expense their investments up front could substantially increase rates of investment leading to higher wages and economic growth.
Gavin Ekins, also at the Tax Foundation, explains why full expensing is the equivalent to the government investing in an index fund (that covers the whole economy) with a neat example.
“Assume that each time a business purchases equipment or a building, the government purchases a portion of the equipment. For example, a bakery purchases a $1,000 professional oven for baking bread. The government tells the baker it will purchase $350 of the oven and the baker must provide the remaining $650. In return, the government receives a 35 percent stake in the oven, which gives the government 35 percent of all the capital income from the oven.
"After paying for all the flour, utilities, facilities, and labor costs, the oven makes $200 per year for 10 years, at which point the oven must be retired. Each year the baker returns to the government $70 for its stake in the oven, and the baker keeps $130 for herself. Both the baker and the government receive 20 cents per year for each dollar they spent on the oven. Not a bad return for both investors."
“If the government did not purchase the 35 percent share, the baker would have to pay the entire $1,000 for the oven. The baker would still receive $200 per year, but could keep it all for herself. Just as before, the baker receives 20 cents per year for each dollar spent. The baker receives the same income per dollar per year as she would with the government as a co-investor but has laid out $350 more than if the government were a co-investor.”
“Full expensing has a similar effect to the government directly investing in a portion of the equipment or building purchased by businesses. Assume the government has a 35 percent tax rate on business income along with full expensing. When the baker purchases a $1,000 oven, she can deduct the expense from her taxable income, which reduces her taxes by $350. This effectively returns to the baker $350 when she files her taxes.
“Just as before the baker makes $200 from the oven each year. The baker pays her taxes, $70, and keeps the remaining $130 for herself. In both cases, the baker receives $130 after-tax per year for an investment of $650 after-tax rebate. Similarly, the government receives $70 per year but loses $350 initially. As such, full expensing with a tax is equivalent to an investment by the government without a tax.”
Full expensing is an idea that’s growing in popularity, is included temporarily in the Tax Cuts and Reform Act passed by the Senate, and was the key feature in Paul Ryan’s A Better Way plan for tax reform.
In a way, Ryan’s plan is more radical than Bruenig’s. Bruenig wants to compensate firms for their shares, Ryan simply takes his cut of their income without compensation. The only parts missing are Bruenig’s suggestion to print money, raise income taxes and dole out extra spending.
Why then go to all the effort of setting up a investment fund and coming up with creative ways to fund it? When you could just spend the money raised through higher income taxes and money printing directly. Will Wilkinson’s suggestion is probably why.
“The structure of rights and interests is radically different, which is why the politics are radically different, which is why there's basically zero chance that a real-world SWF would fund the same flow of transfers as a cashflow tax on privately held capital income.”
Or as Scott Greenberg puts it:
“It's almost as if someone got tired of arguments about the government "spending taxpayer money" and "taking money away from hard-working businesses" decided instead to call it "government ownership of equity".