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

[coloradoatheist]

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?

Sorry, it's cash accounting. You have cash accounting, IRS accounting, GAAP acccounting, and Activity based accounting. All have good and bad things. Which one depends on what type of decision you are making.

 

[coloradoatheist]

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?

Sorry, it's cash accounting. You have cash accounting, IRS accounting, GAAP acccounting, and Activity based accounting. All have good and bad things. Which one depends on what type of decision you are making.

The last one I think is the most important, but hardest to measure.

 

[Axulus]

This graph is interesting:

Also, more support for the idea of _net_ capital share when discussing inequality:

Although both gross and net income shares can be meaningful, net concepts are more relevant to the debate on inequality.

...

It argues that when interpreted properly, both gross and net measures are worthwhile, but the net viewpoint—much rarer among recent entries in the literature—is more directly applicable to the discussion of distribution and inequality, because it reflects the resources that individuals are ultimately able to consume.

Also, while the net share has increased, it's all because of housing:

Overall, the net capital share has increased since 1948, but when disaggregated this increase comes entirely from the housing sector.

Somehow when people discuss inequality and amounts going to capital owners, I don't think the idea that the change is due to amounts paid for housing rent springs to mind in the leftist narrative. Perhaps housing affordability and the factors that make housing more expensive should be taking a more prominent focus by those worried about inequality.

 

[Axulus]

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.

There's nothing fake about it - over time, rigs need to be either replaced or maintained/repaired, and, given enough time, become obsolete when new technologies are made available.

Furthermore, the article focuses especially on short-lived capital assets such as software, which tend to become obsolete much more quickly.

Depreciation related to loss of economic value is not to be confused with book depreciation or tax deprecation.

 

[Loren Pechtel]

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.

True, but it's equipment they still need.

No company is going to do something of no value to them in order to get a writeoff as the writeoff is always smaller than the cost.

 

[Loren Pechtel]

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.

Yet another who doesn't get it.

Depreciation has nothing to do with the ability of an asset to produce value. Depreciation is about the fact that things wear out over time. Depreciation is spreading the cost of a purchase over it's lifespan rather than allowing one to deduct the cost in the year it was paid.

 

[laughing dog]

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.

True, but it's equipment they still need.

No company is going to do something of no value to them in order to get a writeoff as the writeoff is always smaller than the cost.

Another one who doesn't get it. The writeoff lowers the cost of acquisition which may induce a company to purchase an item that it otherwise would not in the absence of the writeoff.

 

[Axulus]

So housing explains one key component of rising inequality and the rise in capital's share of income.

What about the share of household income devoted to debt and interest? Yes, this includes mortgage payments, which relates to housing affordability. But mortgage payments are not the only kind of debt.

So, a big key to the puzzle of rising inequality and rise in capital share of income seems to be the following:

1. Housing has become less affordable - part of this is due to nicer houses/larger houses, but too much of it is due to too stringent development code regulations (take a look at housing affordability in Texas vs. California, for example, and how long it takes to get a building permit in most cities in CA vs TX.

2. Households need to stop taking on so much debt (especially credit card debt).

 

[dismal]

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.

True, but it's equipment they still need.

No company is going to do something of no value to them in order to get a writeoff as the writeoff is always smaller than the cost.

For tax the write off is equal to the cost but spread out over time. And I think the IRS has some tests for people who try to jam a bunch of acquisitions in at the end of the year which I'm not particularly motivated to look up given the lack of overall importance. The MACRS schedules assume mid year purchases which on average is what you'd expect.

 

[Loren Pechtel]

True, but it's equipment they still need.

No company is going to do something of no value to them in order to get a writeoff as the writeoff is always smaller than the cost.

Another one who doesn't get it. The writeoff lowers the cost of acquisition which may induce a company to purchase an item that it otherwise would not in the absence of the writeoff.

It's a basic principle of taxation that you're not taxed on what it cost to make your money.

Depreciation is simply slowing down this process, not an advantage to the company.

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So housing explains one key component of rising inequality and the rise in capital's share of income.

What about the share of household income devoted to debt and interest? Yes, this includes mortgage payments, which relates to housing affordability. But mortgage payments are not the only kind of debt.

So, a big key to the puzzle of rising inequality and rise in capital share of income seems to be the following:

1. Housing has become less affordable - part of this is due to nicer houses/larger houses, but too much of it is due to too stringent development code regulations (take a look at housing affordability in Texas vs. California, for example, and how long it takes to get a building permit in most cities in CA vs TX.

2. Households need to stop taking on so much debt (especially credit card debt).

To a considerable degree that graph tracks the housing market. It would be much more informative if it were separated into housing and other.

How long it takes I have no idea but California is better than Texas about passing on the infrastructure costs to the homebuilders.

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True, but it's equipment they still need.

No company is going to do something of no value to them in order to get a writeoff as the writeoff is always smaller than the cost.

For tax the write off is equal to the cost but spread out over time. And I think the IRS has some tests for people who try to jam a bunch of acquisitions in at the end of the year which I'm not particularly motivated to look up given the lack of overall importance. The MACRS schedules assume mid year purchases which on average is what you'd expect.

But the advantage of the writeoff is only the $ * their marginal tax rate--which never exceeds 35%.

 

[dismal]

But the advantage of the writeoff is only the $ * their marginal tax rate--which never exceeds 35%.

Yes, this is true. The writeoff is the cost. The cash benefit of the writeoff is 35% (or whatever the relevant tax rate is) of the cost spread out over time.

If you're going to buy something anyway there can be some time value benefit of doing it at the end of Year 0 versus the beginning of Year 1. But even then the IRS limits the ability to do this. (Looked it up...)

If you put >40% of your property into service during the 4Q they force you to adopt a mid-quarter convention.

http://cs.thomsonreuters.com/ua/fixa/cs_us_en/calc_depr/mq_conv/hidh_vatd_mq_diduno.htm

 

[SimpleDon]

This is an interesting thread and paper. I can't believe that I missed it when Axulus first presented it.

I have to finish my taxes so for now I will just bump it up to where I can return to it.

Just a few random thoughts.

The main confusion is based on the meaning of the word "capital."

The paper really doesn't do much to refute Piketty’s Capital in the 21st Century. Unfortunately Piketty used the word "capital" when he was talking about wealth and wealth inequity.

The paper says that the capital share of income isn't growing as fast as it appears to be because modern capital, capital with an upper case "K," money that buys things needed to produce products for consumption, depreciates faster today. He proposes that we consider "net income" to capital as profits minus depreciation.

That we recognize that most of the gains in capital has been in housing, which produces nothing.

But housing is included most definitely in wealth, what Piketty is calling capital.

And yes, Axulus, housing is artificially inflated in value by regulations, but not largely because of building codes or approval delays, but, as you learned when you read the whole paper, mainly by exclusionary zoning regulations. Zoning creates artificially high housing valuation by excluding cheaper forms of housing from certain areas.

So zoning regulations are the golden fleece and the Holy Grail for conservatives and libertarians, an example of improper, evil government regulations that cost the economy by making housing much more expensive and forcing it to misallocate resources.

Apparently they don't teach anything about the Cambridge Capital Controversy to graduate students at MIT. This is not too surprising because MIT was the Cambridge that lost the debate.

The essence of the Cambridge Capital Controversy is that profits can't be considered to be the income earned by fixed amount of capital required for the production because to a large degree profits produces capital. The valuation of an installation is not determined so much by how much it cost to build, but by how much profit it makes. You have a circular relationship, A is defined by B and B is defined by A.

Also, profits turn into capital. Again, the more profits, the more capital you have. The more capital you have, that is the higher the valuation is, the more profits must be earned. There is no equivalent for labor. Wages turn not into more workers or more capital, wages turn into more demand for products.

We aren't talking about accounting, the differences between cash flows and accruals. We are talking about economy wide aggregates.

If the concept of capital is defined as a certain cost per item produced then it is no different than the costs of raw materials or the electrical power consumed. Then capital is a straight cost, easy to account for but hardly worthy of share of the profits for all of the time that the company exists. Then capital is nothing more than a loan that is paid back in full with a reasonable interest and then is done.

Depreciation doesn't erode the valuation of the installation. It doesn't reduce the profit expectations of the owners. It is a matter of temporal accounting and taxation, nothing more.

This thread is capable of showing many of the flaws of neoclassical economics. Sadly, no one seems interested in that discussion. It is an uncomfortable one, requiring all of us to come from behind the safety of our ideological ramparts and to face the possibility of being wrong.