COWEN: Here’s a real softball question.
What’s the optimal rate of tax on capital income?
[laughter] SUMMERS: Closer to the tax rate on other income
than to zero would be my answer to that. A fair amount of capital income reflects rents
of one kind or another. Capital income is substantially held by those at the high end.
There’s a fair amount of what’s really capital income in the form of unrealized capital
gains that never gets taxed. So I think the right aggregate capital income
tax rate is closer to what would go with a comprehensive income tax than it is to the
alternative idea that capital income taxation is just a way of taxing future consumption,
and therefore you should tax future consumption and present consumption at the same rate and
the tax rate should be zero. COWEN: If we think about the 1980s, there
are a lot of models from that time — some coming from your research — where you
have an infinite horizon model with a zero tax rate on capital income. At some point,
enough capital accumulates so that even wages are higher. And there’s a steady-state long-run
argument that still the number should be zero. What has changed that makes those models less
applicable? Is it that we think the elasticity is different, or is it some other variable?
What’s changed in our knowledge or your understanding?
SUMMERS: At the technical level, there’s been some mathematical work showing that some
of the results that you’re referring to from the 1980s were mathematically wrong.
That’s one part. The second and more consequential part is
that the premise of those models was essentially that the supply of capital was infinitely
elastic. Whatever the tax rate, you would drive capital to the point where the after-tax
rate of return was some fixed number. That now looks like a very poor description
of reality. We’ve seem real interest rates fluctuate substantially, and we don’t see
that when real interest rates are higher, savings is lots higher, and when real interest
rates are lower, savings is lots lower in the way that many people, including me in
the early 1980s, would have expected. So in the absence of that kind of evidence, the
argument is very much attenuated. COWEN: What if someone said, “Well, for
the special 20-year period we lived through Bernanke’s East Asian savings glut, so there
was always enough capital, real rates were very low. Arguably, for demographic reasons,
that’s starting to end, and we’ll end up back in an era where, actually, the supply
of capital with respect to the rate of return will be high again.”
Is that possible, unlikely, too far away to matter?
SUMMERS: First, one word one should never use in economics is never. I don’t want
to preclude any possibility completely. Second, you uncharacteristically made an analytic
conflation there. You conflated the idea that the savings rate would fall for a variety
of reasons with the idea that the savings rate would become more elastic, which is a
separate issue. I don’t see any reason to think the savings rate will become more elastic.
With respect to the savings rate falling, my reading of the evidence would be different.
I think that the structural factors driving low interest rates, including longer life
expectancy — which makes people save more — increased insecurity, more inequality,
are more likely to be semipermanent than they are to prove transient.
I think a variety of the factors holding down investment — the demographic factor,
the fact that you can buy an enormous amount of capital for a very low cost, think about
my iPhone — all of that I think operates in the direction of meaning that we’re likely
to have this phenomenon of low real interest rates and secular stagnation for quite a long
time to come.