Capital's share of income is not rising very much when you factor in all depreciation

[Axulus]

Capital income is not growing unboundedly at the expense of labor, and further accumulation of capital in fact most likely means a fall in capital’s share of total income – refuting one of the main theories of economist Thomas Piketty’s popular book Capital in the 21st Century — according to a paper presented today at the Spring 2015 Conference on the Brookings Papers on Economic Activity (BPEA).

Existing studies that show an increase in capital’s share of income miss the growing role of depreciation in short-lived capital, in items such as software, says MIT’s Matthew Rognlie in “Deciphering the Fall and Rise in the Net Capital Share.” Rognlie subtracts depreciation in seven large developed economies (the US, Japan, Germany, France, the UK, Italy, and Canada) to get net capital income, and finds that the only long-term rise in capital’s share of income is in housing. Capital income elsewhere in the economy has grown moderately, but it is only recovering from a large fall that lasted from 1948 through the 1970s.

Piketty’s Capital argues that the role of capital in the economy, after falling during the Depression and two world wars, is set to recover to the high levels of the 19th and early 20th centuries. According to Piketty, wealth will accumulate amid slowing economic growth to push up the capital-to-GDP ratio in the economy, which will then cause an increase in capital’s share of income — and growing inequality.

In contrast, Rognlie finds that a rising capital-to-GDP ratio is most likely to result in a fall in capital’s share of income, since the net rate of return on capital will fall by an even larger proportion than the capital-to-GDP ratio rises. Outside of housing, postwar changes in the value of the capital stock have not led to parallel changes in capital’s share of income. In fact, the value of the capital stock relative to private income reached its highs in the late 1970s and early 1980s, when capital’s share of income was near a low.

Rognlie shows that the share of net income generated by housing has risen in all seven large developed economies since data became available. “Housing’s central role in the long-term behavior of the aggregate net capital share has… not been emphasized elsewhere…Observers concerned about the distribution of income should keep an eye on housing costs,” he writes.

http://marginalrevolution.com/margi...gnlie-on-piketty-net-capital-and-housing.html

 

[untermensche]

Piketty's main point was that gains in income from investment exceed gains in income from labor. And over time this allows capital to become more and more concentrated, as we clearly see.

I don't see any refutation here.

This is only saying that the gains in investment income MIGHT be a little lower than Piketty estimated.

It does nothing to his overall point.

 

[Loren Pechtel]

I have long realized that the share of income to capital must go up as the amount of tooling per worker goes up. I hadn't thought of depreciation as a separate factor but when you look at it obviously it is--many of those tools become obsolete much more quickly than the older, simpler tools did.

 

[arkirk]

I have long realized that the share of income to capital must go up as the amount of tooling per worker goes up. I hadn't thought of depreciation as a separate factor but when you look at it obviously it is--many of those tools become obsolete much more quickly than the older, simpler tools did.

Ever heard of a major tax write-off, Loren?

 

[Loren Pechtel]

I have long realized that the share of income to capital must go up as the amount of tooling per worker goes up. I hadn't thought of depreciation as a separate factor but when you look at it obviously it is--many of those tools become obsolete much more quickly than the older, simpler tools did.

Ever heard of a major tax write-off, Loren?

You don't understand the tax code. No company is going to do something simply to get a tax writeoff. Tax writeoffs return only a part of the money involved.

 

[arkirk]

Ever heard of a major tax write-off, Loren?

You don't understand the tax code. No company is going to do something simply to get a tax writeoff. Tax writeoffs return only a part of the money involved.

Correcto mister! The retool to do a better job of making money. Don't tell me that I don't understand the tax code, I have given you no reason to question my knowledge of this subject....though of course it is thicker than a few telephone books...and you really don't understand it either. You only understand what you choose to understand. The rest of it you just assume (again and again) must come from some hayseed that doesn't understand. Stop doing it Loren, it places you in a bad light...demeaning others.

 

[ksen]

Ever heard of a major tax write-off, Loren?

You don't understand the tax code. No company is going to do something simply to get a tax writeoff. Tax writeoffs return only a part of the money involved.

Hold on, I thought one of the major arguments against taxes from the Right was how much taxes affected behavior?

 

[coloradoatheist]

You don't understand the tax code. No company is going to do something simply to get a tax writeoff. Tax writeoffs return only a part of the money involved.

Hold on, I thought one of the major arguments against taxes from the Right was how much taxes affected behavior?

It is an interesting side question because Loren's right that if a person who understands tax code understands that when you buy something with a write off you get a discount on it, but I think many people do misunderstand what a tax write off is.

 

[Harry Bosch]

You don't understand the tax code. No company is going to do something simply to get a tax writeoff. Tax writeoffs return only a part of the money involved.

Agreed. However I do have clients who will purchase equipment that they anticipate needing in the future in December of each year to drive down profit through accelerated depreciation.

 

[Jimmy Higgins]

Ah... depreciation. That fake thing about how things lose value therefore they aren't worth as much. Like a drilling company that buys a new rig can say it depreciates in value in a couple of years, as if that depreciation in value reduces the capacity of that rig to generate revenue.

 

[Harry Bosch]

Ah... depreciation. That fake thing about how things lose value therefore they aren't worth as much. Like a drilling company that buys a new rig can say it depreciates in value in a couple of years, as if that depreciation in value reduces the capacity of that rig to generate revenue.

I don't know much about drilling companies. However I do know that when equipment ages, it loses value, and isn't worth as much. Any company that ignored this cost of business won't last long!

 

[coloradoatheist]

Ah... depreciation. That fake thing about how things lose value therefore they aren't worth as much. Like a drilling company that buys a new rig can say it depreciates in value in a couple of years, as if that depreciation in value reduces the capacity of that rig to generate revenue.

though all it's really doing is trying to match the expense of the item over time instead of when it's bought.

 

[Harry Bosch]

though all it's really doing is trying to match the expense of the item over time instead of when it's bought.

The problem is that most people don't understand the matching principal and only recognize true cash expenses.

 

[coloradoatheist]

though all it's really doing is trying to match the expense of the item over time instead of when it's bought.

The problem is that most people don't understand the matching principal and only recognize true cash expenses.

I think people do both, but there are many ways to decide what depreciation is, cash, tax, GAAP, and practical use. They are all different.

 

[dismal]

Ah... depreciation. That fake thing about how things lose value therefore they aren't worth as much. Like a drilling company that buys a new rig can say it depreciates in value in a couple of years, as if that depreciation in value reduces the capacity of that rig to generate revenue.

Er, things generally do depreciate in value. Drilling rigs certainly do anyway. The government's tables aren't likely to get the depreciation timing exactly right, but that does not mean depreciation is not a thing.

 

[Harry Bosch]

I think people do both, but there are many ways to decide what depreciation is, cash, tax, GAAP, and practical use. They are all different.

Mike: depreciation is a non cash expense. Btw: accrual based accounting is a far greater measure of "cash flow" than cash basis accounting. A very common mistake that I see is companies with trading drivers (AR, AP, Accured) relying on cash basis that unexpectedly run out of cash.

 

[coloradoatheist]

I think people do both, but there are many ways to decide what depreciation is, cash, tax, GAAP, and practical use. They are all different.

Mike: depreciation is a non cash expense. Btw: accrual based accounting is a far greater measure of "cash flow" than cash basis accounting. A very common mistake that I see is companies with trading drivers (AR, AP, Accured) relying on cash basis that unexpectedly run out of cash.

As a business you need to worry about both. But things matter in several situations. You want to know when you are spending the cash. You want to know what the tax requirements for what you buy, but you also need to think about about the exact cost is per use of something. They can all be different. If a machine costs $1000 to buy you and it can make X things for example you need to understand the $1000 costs you a thousand to buy, that the IRS says it might cost you $250 per month but from a use expense, you need to calculate $1000/divided by X.

 

[laughing dog]

Ah... depreciation. That fake thing about how things lose value therefore they aren't worth as much. Like a drilling company that buys a new rig can say it depreciates in value in a couple of years, as if that depreciation in value reduces the capacity of that rig to generate revenue.

though all it's really doing is trying to match the expense of the item over time instead of when it's bought.

Bookkeeping depreciation is a simplified procedure for tax and accounting purposes. The economic loss of aging equipment is the loss of production over time. In theory, that is the change in the market value of the equipment. However, use of that measure is fraught with difficulties. The National Income and Product Accounts differentiates between depreciation (the bookkeeping concept) and capital consumption allowances (the change in the economic value of the equipment).

 

[coloradoatheist]

though all it's really doing is trying to match the expense of the item over time instead of when it's bought.

Bookkeeping depreciation is a simplified procedure for tax and accounting purposes. The economic loss of aging equipment is the loss of production over time. In theory, that is the change in the market value of the equipment. However, use of that measure is fraught with difficulties. The National Income and Product Accounts differentiates between depreciation (the bookkeeping concept) and capital consumption allowances (the change in the economic value of the equipment).

Let's take a simple example. 7/11s slushy machine. Let's just say it costs $1000 to buy. Cost accounting says its a $1000. The IRS may say the rule is that it depreciates over 3 years so according to the IRS it might be $333 a year. GAAP might say 4 years so $250. But the real depreciation might be the number of slushes it can make. So for an owner of 7/11 it should be the cost per slushy.

 

[ksen]

Bookkeeping depreciation is a simplified procedure for tax and accounting purposes. The economic loss of aging equipment is the loss of production over time. In theory, that is the change in the market value of the equipment. However, use of that measure is fraught with difficulties. The National Income and Product Accounts differentiates between depreciation (the bookkeeping concept) and capital consumption allowances (the change in the economic value of the equipment).

Let's take a simple example. 7/11s slushy machine. Let's just say it costs $1000 to buy. Cost accounting says its a $1000.

No it doesn't.

The IRS may say the rule is that it depreciates over 3 years so according to the IRS it might be $333 a year. GAAP might say 4 years so $250. But the real depreciation might be the number of slushes it can make. So for an owner of 7/11 it should be the cost per slushy.

Which is what LD said, so?