Christensen on Capital
I am pleased to see that Professor Christensen, whose work I discussed the other day, has written further on the question of “What to do as we throw everyone out of work?” His diagnosis – we have been investing our newly cheap capital in “efficiency” innovations (labor-saving technology) instead of “empowering innovations”, which create new industries. It contains some incoherence – what exactly does he mean by “Change the Politics”, without suggesting anything? However, he does have one idea I kind of like – restructuring capital gains based on time.
His proposal is brief, but it boils down to lower tax rates for investments held for longer periods of time. Today, we have income taxes for investments held for under a year, and if you hold them for over a year your taxes halve.* Why not change this so instead of a discontinuity at one year, you have a sliding scale? Asset owners reap greater rewards by hanging onto assets for a longer period of time. I like this idea mainly because it should remove some weird incentives, and because by having a “discount rate on capital gains taxes” instead of a “capital gains tax”, it makes it a lot easier to dial it up or down as economic circumstances may warrant.
However, I just don’t know if this will fix much for regular Americans even if it is a neat idea. I just don’t see how changing the capital gains tax structure will motivate someone to invent the next iPhone. To take the example I used the other day, the dramatic increase in capital efficiency enabled by driverless vehicles could enable someone to destroy FedEx and dramatically lower logistics costs. The capital gains tax schedule doesn’t change that – indeed, it makes it even more appealing to invest in it for the long run.
Then, is that an “empowering innovation” or an “efficiency one”? Super-cheap logistics operations make all sorts of new businesses possible, and can create wildly new types of enterprise. But at the same time, aggregate employment in the logistics business will be slashed to a tiny fraction of what it is today. The tax schedule on this investment doesn’t really matter – it’s a good idea because dramatic increases in industrial capital efficiency will yield massive returns for the investor, regardless of tweaks in tax law.
Changes in taxation don’t fix the real problem for the average citizen without highly specific skills, which is that more and more labor can be replaced by capital. Is there a way to create a workable economy without forced redistribution of capital?
*: Not anymore, because of a flat surtax in Obamacare.