The brain dead GOP meets Obama’s 39.6%, and raises him 1.4%

If ever there was a political party that deserved to lose an election, it was the brain dead GOP of 2012.  The party that thinks the fact that 47% of the public pays no income taxes means that 47% of the public pays no income taxes EVER.  (Do these people not have 19 year olds in college, or 75 year old parents on Social Security?)

Now the brain dead GOP has shown its skill at high stakes poker by countering Obama’s offer of a 39.6% high rate, with a counter-offer of 41.0%.  Let’s put aside the fact that the brain dead GOP doesn’t even seem to know that Obama’s actually proposing a 43.4% top rate, which means the brain dead GOP counter is 44.8%, or 53% in Sweden err California.

The brain dead GOP CLAIMS to favor a flat tax.  A simple tax system with no loopholes and lower rates.  So why aren’t they proposing a $50,000 cap on deductions?  I think you know the answer.  The GOP isn’t just brain dead, it’s also corrupt.

The brain dead and corrupt GOP also claims to be the party of family values.  So have you seen any proposals to eliminate the marriage penalty?  Neither have I.

We are likely to end up with a much inferior tax system next year, and the Democrats and the brain dead GOP deserve equal blame on this one.

Oh and I forgot; how about Bush’s brilliant idea to make the 2001 tax cut temporary, knowing he could always go back and make it permanent next time?  How’s that workin out for ya?  And how about the brain dead GOP decision not to negotiate seriously in 2011, figuring they could get a better result after the election that Karl Rove and Dick Morris assured them they would win?  How’s that decision looking right now?

PS.  I got this link from Matt Yglesias, but I think he may have misinterpreted the NYT article.  The 41% rate comes mostly from the phase in of the 35% tax on all income.  This seems to involve a 5% phase in, plus another 1% to cover the phase in of the removal of the standard deduction (another stupid idea.)

PPS.  Did I remember to mention that the GOP is brain dead?

PPPS.  Here’s what a non-brain dead tax system would look like:

1.  No income or corporate income or death taxes.

2.  A 20% VAT with a lump sum rebate to each family, assuring that no VAT is paid on poverty level consumption.

3.  A steeply progressive payroll tax that has negative rates (EITC) for low wage workers over 18.  All income earned by workers in the financial industry is assumed to be wage income unless they can prove to the IRS that it did not result from their skill at allocating capital.  In other words average people like me with regular jobs would pay no tax on interest and dividends and capital gains on non-managed assets.

If you put a bunch of liberal and conservative tax experts in a room they could produce a tax system roughly as progressive as Obama is proposing and far more efficient within 10 minutes.  Other countries have done this. It won’t happen because America is a brain dead and corrupt country.

End of rant . . . Happy Thanksgiving!


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116 Responses to “The brain dead GOP meets Obama’s 39.6%, and raises him 1.4%”

  1. Gravatar of Jonathan Cast Jonathan Cast
    24. November 2012 at 14:51

    19-year olds in college and 75-year olds on Social Security both lean Democrat, relative to those same individuals at other times in their lives.

  2. Gravatar of Counterfactual Counterfactual
    24. November 2012 at 14:55

    I don’t know … if taxes really do have strong disincentive effect, it seems like we should have a high death tax. It’s the least a pro-life party could do.

  3. Gravatar of Major_Freedom Major_Freedom
    24. November 2012 at 15:02

    The establishment in the brain dead, corrupt GOP are pro-Fed, are anti-audit the Fed, and are financed by the banks that are first receivers of Fed money.

    Coincidence?

  4. Gravatar of Anders Larsen Anders Larsen
    24. November 2012 at 15:04

    Although the VAT is definitely preferable from an economic perspective I’m not sure that it is a good thing to introduce one in the US.

    From what I see in Denmark, the VAT carries a huge pro-government bias, since people tend to think of the “price of government” as what they pay in income taxes only. The VAT on the other hand is hidden, and thus the government will actually seem much cheaper than it really is. Even if people in Europe know that they are paying a VAT, they subconsciously ascribe the high prices to businesses exploiting consumers.

    Of course it is just a feeling, and I have nothing to back it up with.

  5. Gravatar of Aidan Aidan
    24. November 2012 at 15:06

    It’s hard to overstate what a terrible idea phasing in that rate on all income is.

  6. Gravatar of Don Geddis Don Geddis
    24. November 2012 at 15:06

    JC: wrong. Old people vote Republican, not Democrat.

  7. Gravatar of noiselull noiselull
    24. November 2012 at 15:10

    Out of curiousity, Scott, would you be cool with Hall-Rabushka?

  8. Gravatar of DavidE DavidE
    24. November 2012 at 15:12

    The Bush tax cut was temporary so that it could be passed under reconciliation. It had to be deficit neutral after 10 yrs. Without reconciliation, the Democrats would have filibustered it.

  9. Gravatar of Jon Jon
    24. November 2012 at 15:29

    Yes, I couldn’t believe it when I read that NYT article. If that happens as the compromise, I start agreeing with you that the GOP is stupid.

    As it happens, I’m pretty certain that the big losers from the bush cuts expiring are the democrats. Speaking of big lies, a big lie was always that the Bush cuts were especially helpful to the wealthy–au contraire–they provided for a massive expansion of the EITC and were mildly progressive in their impact to average tax-rates, which is one reason the share of taxes paid by the high earners went up.

    The most unfair idea of all is the one that says the low-earners should keep all of the goodies and just the high earners should pay more. The media never called the democrats out on this for ten years now.

  10. Gravatar of Steve Steve
    24. November 2012 at 15:44

    I thought the Republicons would do something smart, like offering a 17%/37% capgain/income tax rate, and making ‘bama come back with 18%/38%.

    This idea is awful. Doesn’t this plan mean that the MTR will be infinite at $400K, or perhaps 65% between 400K and 500K or between 300K and 400K depending on how they structure it? The plan is to push an astounding increase in MTRs onto these folks and claim it’s a “phase out”, not a Hollande style MTR.

    All of this is so they can preserve the low rates enjoyed by CEOs earning $10 million, by driving MTRs into the 50s, 60s, 70s+, for folks somewhere in the low or mid six figures.

    This should quell any doubts that the f*@+!ng Republicon party is all about the top 0.001%.

  11. Gravatar of JL JL
    24. November 2012 at 15:48

    I like your tax code, but instead of distinguishing between wage income and capital gains, I would tax all income at the same rate.

    To avoid double taxation I would allow people to defer taxation on investments through special savings/investment accounts, similar to 401(K)’s. Money put into the account is deductible: tax is paid when money is withdrawn. As long as capital gains are left within the account then those are not taxed either.

    Put a cap on the size of the account (in the range of 1 million), but allow parents to transfer money from their accounts to that of their children, tax-free.

    IMHO such a scheme would empower the masses to accumulate capital and compete with the superrich who now control most of the capital.

  12. Gravatar of Steve Steve
    24. November 2012 at 15:48

    Jon, good point about the Dems getting hurt.

    The Republicans could really pressure the blue states by advocating an end to itemized deductions of state income taxes. That would crush the economy in CA and NY, while leaving taxes virtually unchanged in TX. If the Republicans put this up as a bargaining chip, I’d like to see the Dems squirm.

  13. Gravatar of TravisAllison TravisAllison
    24. November 2012 at 16:16

    Scott, I read the NYT article, and I don’t see how Yglesias is wrong. Maybe you have another source?

  14. Gravatar of Mike Sax Mike Sax
    24. November 2012 at 16:27

    You got to understand that at this point the GOP is not playing for anything but pride-like the Ny Jets in the 4th quarter.

    They just want to be able to say they held the line on something or asserted their will on something. They’re not above even doing things the Democrats already support if they can spin it that they got something out of it.

    It’s like Bill Kristol said on Fox a few weeks ago. Elections have consequences. Kristol himself admitted the GOP is going to have to play to Obama’s tune a lot more during this second term-or face more defeats.

    At the end of the day they have to make a deal but they just want to be able to show that they got something out of it. So if they can say the refused to allow rates to rise to 39.6%, they kept them at 35% that’s good as long as they can declare a pr victory

  15. Gravatar of ssumner ssumner
    24. November 2012 at 16:50

    noiselull, Almost any reform would be much better than what we have.

    DavidE, Then get rid of the filibuster. I hate the filibuster, regardless of which party it happens to benefit at a point in time.

    Jon, Good point.

    Steve, Not quite. The 41% comes from the fact that the extra taxes owed are phased in at incomes above $400,000

    JL, But then people would still have to fill out complex tax forms. Better to just abolish the income tax entirely so people never have to fill out annoying tax forms. The tax incidence is the same either way.

    TravisAllison. He has to be wrong, otherwise where does the 41% rate come from? They even mention a similar 1% or 2% extra from the phase out of the standard deduction, which means there’s a 5% phase in of the extra taxes when you hit $400,000. I may be wrong, but it’s the only way the article makes any sense.

  16. Gravatar of Steve Steve
    24. November 2012 at 17:00

    Scott, I was assuming the NYT meant a 41% *average* effective tax rate for the portion of incomes above $388K or so, comprised of a 65% marginal rate bubble up to $500K or so, and a 35% marginal rate above $500K.

    One of the problems with NYT journalism in recent years is a tendency to write “Tax experts say” without providing an actual quote, source, or data. The reader is left guessing, which is just poor journalism.

  17. Gravatar of Mike Sax Mike Sax
    24. November 2012 at 17:05

    That’s one thing I can defintely give full throated agreement to: doing someting about the filibuster.

    There are other ways to reform it rather than total aboloition. I think you can argue it’s origninal purpsoe was good in giving the minority party some way of pushing back and being heard.

    Throughout most the country’s history it was used sparingly. In fact LBJ and his staff had assumed that they would pass Medicare with about 55 Senators-they never even considered the prospect of it being filibustered and it wasn’t even though many Republicans were bitterly opposed.

    Basically the filibuster throughout most of its history wasn’t abused. In the last few years it has been egregiously abused. Now we’re in a situation where even routine procedural votes requires a 60 vote supermajority to get anything done.

    One way that it could be reformed would be to tighten up the reconicliation process. Another idea suggested has been having one “superbill” a year that can’t be filibustered.

    As far as the Bush tax cuts go Bush and Rove thought they had gamed it perfectly: the beauty of a temporary tax cut is that no one ever wants to be the one to end it. So they never imagined the politics would turn.

    The key, of course, is the rates for the rich as opposed to other income levels. The Democrats never talked about ending all the tax cuts including the expnaded EIC, just the top rates and maybe the cap gains and dividents rate. The GOP tried to join the tax cuts for the rich to the others at the hip so that they all stand and fall together.

  18. Gravatar of Steve Steve
    24. November 2012 at 17:06

    If they phase out $30K of lower rate brackets, all between $400K and $500K, that’s an incremental 30% on top of the statutory 35% tax rate. So the republicons are in effect calling a 65% marginal tax rate bracket a “low rate phase out”. Depending on how incomes above $400K are distributed, that could result in an average effective rate of 41% for incomes above $400K, but an effective rate remaining near 35% for the seven figure incomes. At least that’s how I’m reading it.

  19. Gravatar of Steve Steve
    24. November 2012 at 17:08

    But who knows if the NYT “Tax experts say” are using a weighted average, arithmetic average, median, or whatever. Poor poor journalism.

  20. Gravatar of Jim Glass Jim Glass
    24. November 2012 at 17:14

    Here’s what a non-brain dead tax system would look like:

    1. No income or corporate income or death taxes.

    2. A 20% VAT with a lump sum rebate to each family, assuring that no VAT is paid on poverty level consumption.

    3. A steeply progressive payroll tax …

    I’ve been working with the tax system professionally my whole adult life, and nobody who lacks such hands-on experience with it can be as cynical about it as those of us who have it. (Bismark’s sausage makers themselves would be made sick to their stomachs…)

    But please. Your program there is utterly impossible as a proposal to deal with the fiscal cliff issue.

    Politicians have to do things they actually can do. One doesn’t get points by damning their notions as being “brain dead”, while saying if they had brains they should instead try something that is utterly impossible!

    I mean … really.

    If you wish to push your three-point program in this forum and others to gradually educate the voting public and the pundits who play to it about its merits — as you have so effectively regarding NGDP — so that over the long run some public support would develop for it, so it could then influence the course of future tax policy to at least some degree, that would be a very good thing.

    But to say that to be “brain alive” politicians have to immediately push programs that are politically utterly impossible, have zero public support, would totally fail, and result in their own political ruin …. C’mon, you can do better than that.

  21. Gravatar of SG SG
    24. November 2012 at 17:17

    Scott,

    Do we have any data about what kind of drag complex tax forms impose on the economy? I agree that it’s inconvenient, but i’m not sure that it’s really material.

  22. Gravatar of SG SG
    24. November 2012 at 17:19

    @ Jim,

    I think Scott condemns the GOP constituency just as much (if not more than) he condemns the politicians.

  23. Gravatar of Steve Steve
    24. November 2012 at 17:23

    Jim Glass,

    Here’s a feasible strategy:
    Boehner says Repubs will vote for 17%/37% cap gain/income tax rates, but if Obama wants 20%/39.6% we go over the cliff. Wait for Obama’s response.

    Obama could (1) agree — but he looks weak. (2) say no, it’s 20%/39.6% — but he looks unreasonable (3) propose 18%/38%– and he looks like a uniter not a divider.

  24. Gravatar of ssumner ssumner
    24. November 2012 at 17:40

    Jim, You said:

    “C’mon, you can do better than that.”

    Ummm, I did do better that that. Why focus on an offhand postscript, when in the main body of the post I suggested a $50,000 cap on deductions, which would be a great idea, and would be feasible.

    Steve, No, I think they are saying that the phaseout adds 5% to the MTR, which means it occurs over many hundreds of thousands of income. That’s what the “tax experts” were probably telling the NYT, which they could not understand. Even the brain dead GOP wouldn’t accept 65%, but 41% is quite possible.

    SG, I have to stop blogging during tax season, and find the forms incredibly annoying. They also cause me to change my behavior in all sorts of unproductive ways. Next to the drug laws, it’s one of the biggest deadweight losses in our socieity. Indeed much of our healthcare system waste comes from overexpenditure motivated by taxes.

  25. Gravatar of Steve Steve
    24. November 2012 at 17:44

    Scott, you might be right. If the extra taxes were $30,000 per head, and the phaseout added 6% to the MTR, then the phaseout would occur over an even $500,000 range, maybe from $388K to $888K. Above the lucky triple eights, your MTR would drop back to 35%. Still my criticism of the GOP supporting the seven figure incomes at the expense of the six figures would stand.

  26. Gravatar of JL JL
    24. November 2012 at 17:48

    Scott,

    So allow employers to directly deposit wages in the savings accounts and subject the withdrawals to the payroll tax. No income tax forms necessary.

    But your plan will still privilege capital while punishing labor and people are really getting pissed off at this status quo.

    Why should Paris Hilton, who never worked a day in her life, pay no taxes on the income her multimillion dollar inheritance produces, while a normal hard working person has to pay taxes on their wage income, just because we don’t want to double tax grandpa Hilton?

  27. Gravatar of Steve Steve
    24. November 2012 at 18:15

    Scott, the more I think about it, the more I think you are right.

    The GOP countered with a 41% marginal tax bracket on incomes from $388,000 to $888,000 and a drop back to 35% above $888,000.

    It uses completely round numbers, and fits with the Plutocrats First motto of the GOP. But I don’t see how the GOP ever wins another election if it abandons the entire six figure income crowd.

  28. Gravatar of Steve Steve
    24. November 2012 at 18:29

    The optics of this are just terrible. Republicans propose 41% tax bracket on married professionals, and 35% tax bracket on CEOs. This party really is going to crash and burn for an entire generation.

  29. Gravatar of ChargerCarl ChargerCarl
    24. November 2012 at 19:56

    I think we would do a lot better under a parliamentary system. That way brain dead parties wouldn’t be able to **** everything up negotiating.

  30. Gravatar of The Time Element of Romney’s 47% Comment « Problematic Knowledge The Time Element of Romney’s 47% Comment « Problematic Knowledge
    24. November 2012 at 21:08

    [...] post was prompted by a comment I saw in Scott Sumner’s excellent blog, “The Money Illusion:” If ever there was a political party that deserved to lose an election, it was the brain dead GOP of [...]

  31. Gravatar of Hugh Hugh
    24. November 2012 at 22:17

    I read the NYT article: it is not clear that this proposal comes from the GOP, it seems to have sprung, fully formed, from “negotiators”. I agree it’s an awful proposal.

    I think the GOP would be better off allowing the cuts to expire in this lame duck session, and then starting a proper reform process when the new Congress convenes.

  32. Gravatar of Greg Ransom Greg Ransom
    24. November 2012 at 22:44

    Are you smoking pot in Colorado?

    Romney is one man, he is not the GOP.

    Name a single Republica pn office holder proposing a flat tax.

    One.

    Waiting.

  33. Gravatar of Steven H. Noble Steven H. Noble
    24. November 2012 at 22:44

    I’m not quite sure I understand why the carve out for financial industry employees for the capital gains exemption. I appreciate that for them their labour creates larger returns so really it is much more like income. But that’s probably true for lots of people.

    Isn’t it easier to say that capital gains made below the risk free rate isn’t taxed and everything above is covered by the payroll tax. Any investment returns over the risk free rate must either be from taking on risk or from skilled investment. Both of which sound like income to me.

  34. Gravatar of Saturos Saturos
    24. November 2012 at 22:49

    Scott, when you say the 50 grand cap would be feasible – why are you so uncharitable to the politicians who actually had to sell the idea to voters, and apparently found it impossible? I think you have a bias toward blaming the politicians instead of the voters. Why don’t you resort to “culture” for explaining why America is so relatively dysfunctional, instead of a worse political system?

    Anyway, Ross Douthat wants to abolish the payroll tax: http://www.nytimes.com/2012/11/25/opinion/sunday/douthat-our-enemy-the-payroll-tax.html?hp&_r=0

  35. Gravatar of Saturos Saturos
    24. November 2012 at 22:52

    It’s hard to believe that GOP congresspeople honestly don’t get the point of marginal tax rates…

  36. Gravatar of Jon Jon
    24. November 2012 at 23:11

    “Scott, when you say the 50 grand cap would be feasible – why are you so uncharitable to the politicians who actually had to sell the idea to voters, and apparently found it impossible?”

    Saturos, why do you think it is impossible to sell? Most voters buy into a $50K cap right away. They either don’t itemize or do and don’t itemize that high. What didn’t sell in the last election was the claim about cutting rates and paying for it with a deduction cap. Although, I see some spin there too–it all depends on what you take to be the baseline. Romney’s math worked if you took the 2013 tax-rates as the baseline before the 20% cut and the 2012 revenue as the definition of balance…

    There is a small class of people who would probably hurt disproportionately: currently self-employed people get to make “401K” contributions as employee and employeer. So they can put away 45K/yr tax free. How would that be treated under a 50K cap?

  37. Gravatar of Jon Jon
    24. November 2012 at 23:11

    “Scott, when you say the 50 grand cap would be feasible – why are you so uncharitable to the politicians who actually had to sell the idea to voters, and apparently found it impossible?”

    Saturos, why do you think it is impossible to sell? Most voters buy into a $50K cap right away. They either don’t itemize or do and don’t itemize that high. What didn’t sell in the last election was the claim about cutting rates and paying for it with a deduction cap. Although, I see some spin there too–it all depends on what you take to be the baseline. Romney’s math worked if you took the 2013 tax-rates as the baseline before the 20% cut and the 2012 revenue as the definition of balance…

    There is a small class of people who would probably hurt disproportionately: currently self-employed people get to make “401K” contributions as employee and employeer. So they can put away 45K/yr tax free. How would that be treated under a 50K cap?

  38. Gravatar of ssumner ssumner
    25. November 2012 at 07:12

    JL, Two issues: Do the rich deserve to keeps lots of money after paying steeply progressive consumption taxes? I say yes. Do the rich have the right to refrain from consumption and allow worthless relatives to consume their fully deserved funds? I say yes. Which part do you disagree with?

    Be specific.

    Steven Nobel, Your proposal would be biased against risk takers, as there’s no subsidy for unusually low returns.

    Saturos, I clearly blamed the entire country at the end of the post. But in this case the politicans could easily put a $50,000 cap on deductions, as only a tiny percentage of voters would be affected. The real concern of the pols is the special interest groups like real estate that give them lots of money. The 1986 tax reform was even more disruptive to special interests, and it passed.

    Economics isn’t Douthat’s strength. We should do the opposite.

  39. Gravatar of Fonzy Shazam Fonzy Shazam
    25. November 2012 at 07:55

    I like the proposal and agree that just about any change toward simplification would be an improvement, but I have two quibbles. Isn’t a payroll tax an income tax? Why must the tax be steeply progressive?

  40. Gravatar of Michael Michael
    25. November 2012 at 08:19

    I think the payroll tax is a huge mess and distorts the whole debate in unproductive ways.

    The payroll tax is extremely regressive, such that the “progressive” element to the current income tax basically just cancels out the regressiveness of the income tax, leaving us with, more or less, an extremely loophole filled version of a flat tax. (see this comment from Mankiw: http://gregmankiw.blogspot.com/2012/11/the-us-has-flat-tax-in-effect.html).

    The 47% nonsense comes in part from this stupid way of collecting taxes. Of the $4 trillion in federal taxes, the personal income tax accounts for $1.1 trillion, and the payroll tax accounts for $900,000. Nearly as much, and payroll tax revenue has been used to fund government operations for as long as there has been a payroll tax.

    If we’re going to tax income, replacing the income and payroll taxes with one flat tax on all income above a given threshold could easily be made more “progressive” than our current system. A VAT would be another nice alternative.

  41. Gravatar of MikeDC MikeDC
    25. November 2012 at 08:35

    Why shouldn’t the Republicans basically refuse to negotiate at all, and let the entire “Bush tax cut” expire?

    That sounds preferable to more sausage-making, and it forces the Democrats to own tax increases on everyone (including Democrats).

  42. Gravatar of Saturos Saturos
    25. November 2012 at 08:58

    Scott, yes of course 50,000 is enough for most everyone. It really is about the lobbies here.

    Michael sounds about right to me though…

    Btw Mankiw has a great new piece in the NYT: http://www.nytimes.com/2012/11/25/business/a-liberal-obama-vs-a-moderate-obama-in-the-fiscal-debate.html

    Fonzy Shazam, because Scott’s a hard utilitarian.

  43. Gravatar of Mike Sax Mike Sax
    25. November 2012 at 09:01

    No the Democrats wont own the tax increases as people already have told the pollsters that if we go over the cliff they will hold the GOP responisble.

    Playing chicken is what got the GOP this far. If you think more of the same will get them out then…

  44. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    25. November 2012 at 09:10

    ‘Now the brain dead GOP has shown its skill at high stakes poker by countering Obama’s offer of a 39.6% high rate, with a counter-offer of 41.0%.’

    Where, in the NYT piece, does it say this is the GOP’s idea?

    As for the ‘temporary’ nature of Bush’s tax rate reductions, that’s because of the rules of ‘scoring’ over ten years.

    The filibuster is just one of many things our system has in place to insure that politicians will find it difficult to do anything at all. Wisdom from our Founding Fathers; they distrusted politics, and with good reason.

  45. Gravatar of Vivian Darkbloom Vivian Darkbloom
    25. November 2012 at 09:19

    “The brain dead GOP CLAIMS to favor a flat tax. A simple tax system with no loopholes and lower rates. So why aren’t they proposing a $50,000 cap on deductions? I think you know the answer. The GOP isn’t just brain dead, it’s also corrupt.”

    I would favor a $50,000 cap on deductions rather than an increase in marginal income tax rates designed to raise the same amount of revenue. And, please don’t exempt charitable contributions.

    Greg Mankiw has been gently pushing such a cap in his blog and in today’s NYT Op-Ed. Feldstein, who advised Romney, too, has also floated the general idea. Mankiw and Feldstein are not politicians, but they do seem to have the ear of a number of Republicans politicians. Therefore, I would not be so sure that Republicans are not pushing this, at least in behind-doors negotiations.

    That said, I fail to see how that proposal would result in “no loopholes” (I read that term to mean deductions, exclusions and credits) much less lower rates. I guess what we are suggesting here is a step in the right direction.

  46. Gravatar of Jon Jon
    25. November 2012 at 10:03

    Michael writes, “The payroll tax is extremely regressive, such that the “progressive” element to the current income tax basically just cancels out the regressiveness of the income tax, leaving us with, more or less, an extremely loophole filled version of a flat tax.”

    I found myself scratching my head at that post–what was Greg’s objective? Marginal rates look flat but average rates certainly do not.

    He also show nice charts which demonstrate that US has one of the most progressive tax systems (under Bush) in the world.

  47. Gravatar of dtoh dtoh
    25. November 2012 at 10:26

    Scott,
    Nice post, but your proposal needs more thought and refinement.

    1. The fewer taxes you have, the better. Tax preparation and legal and tax accounting work is an activity with no utility. Why have a wage tax if you don’t need it.

    2. Taxes always have expansionary creep. The rates always creep up and the scope of income covered expands. The only way to prevent this is to completely eliminate any taxes on any form of income. If you have a wage tax, the next thing you know legislators will want it to cover income on capital from some group of the population engaged in some out of fashion activity. You have to drive a stake through the heart of income taxes and completely kill them.

    3. As I continuously rant, even low taxes on capital will result in negative after tax expected returns if you have asymmetric returns (a few winners and a lot of losers). This applies to investment in human capital as well, e.g. going to law school, practicing basketball eight hours a day, grinding your way up the corporate ladder for 20 years, getting a Ph.D in economics. A progressive tax on wage income is a huge disincentive for many professions, will diminish growth, and will remain hidden for 10 or 15 years before the effects show up with long lasting damage to the economy.

    4. It is often very difficult to distinguish between wage income and capital income and incredibly easy to convert one form of income into the other. Case in point…. what’s difference between someone who invests cash in a business and hires a full time manager versus someone who gives up a lucrative job with higher wages, starts a business and invests sweat equity by managing it him/her self. Under your proposal the latter is penalized.

    5. Please drop your bias against fund managers and bankers. I know a lot of guys who have done this. You just hear about the successful guys you make a billion dollars. It is a really tough, very competitive, high risk business that requires a ton or hard work and sacrifice. Efficient capital allocation is incredibly important to the economy. You don’t want to discourage these guys. The way to deal with excess profits in the financial industry is to either get rid of the TBTF guarantee which is huge subsidy or to put in much higher equity reserve ratios on risky assets.

    6. Go with a sales tax that exempts business. It is functionally very close to a consumption tax and 100 times easier to implement and manage.

    7. I like your idea of a rebate on the consumption/sales tax, but personally I prefer issuing a card which exempts you on the first $15 or $20k of purchase. I think a lump sum payment is more likely to be mis-spent (I know this is horribly paternalistic).

    8. Tax housing consumption with a fixed assets/real estate tax. Use this as the primary revenue source for state and local government. Use the sales tax to fund the national government.

  48. Gravatar of DOB DOB
    25. November 2012 at 10:37

    Hi Scott,

    I also don’t understand the financial industry carve out:

    “All income earned by workers in the financial industry is assumed to be wage income unless they can prove to the IRS that it did not result from their skill at allocating capital.”

    Do you actually propose that there be a tick box on tax return saying “Do you work in the financial industry?”

    By the way, I would venture to guess that investment bank employees today are probably paying some of the highest effective tax rates in the country because most of their income is in wage income, there aren’t many people who make more than them without getting that from cap gains, plus NY city & state taxes are quite high.

    Would be interested to hear what case you’re trying to capture by this carve out.

    Also–when you have a chance–I still have an outstanding question for you here :)

  49. Gravatar of Thoughts on an Unconditional Minimum Income « KFonomics Thoughts on an Unconditional Minimum Income « KFonomics
    25. November 2012 at 10:43

    [...] direction. When even reading about related concepts on Mankiw’s (post of Nov. 18th) and Sumner’s blogs I knew it was time to write down some of my thoughts on it. But first, I decided to get [...]

  50. Gravatar of Jon Jon
    25. November 2012 at 10:45

    Btw Michael, the payroll taxes are most certainly not regressive. You pay into SS by your income but the benefit does not scale nearly so much.

    For Medicare you pay in by your income but everyone draws about the same in the end when they reach old age. This would also be true were Medicare to cover all ages–and if our medical costs were in line with Canada, the same pot of money would cover everyone.

  51. Gravatar of MikeDC MikeDC
    25. November 2012 at 10:46

    @ Mike Sax
    No the Democrats wont own the tax increases as people already have told the pollsters that if we go over the cliff they will hold the GOP responisble.

    I find this unlikely for a couple of reasons.
    1. Public opinion is meaningless.
    2. Of the “people” in question here
    A) A large subset of them are D constituents who will blame the Rs for everything no matter what. So the R party should and can safely ignore them in its calculations (Note that the R party appears to have reaped no rewards whatsoever from actually giving these guys a tax cut in the first place. They voted D before the tax cut, and they voted D after. On the other hand, forcing a D president to impose tax increases on a D constituency creates the prospect of turning off some members of that consituency.
    B) Of the remainder that are not D constituents, you have lots of little constituencies who on whom the effects will be mixed:
    - Social conservatives of moderate means will vote R no matter what.
    - Fiscal conservatives of moderate means will be dismayed by the tax increase but that will be partially offset to the extent the increases close the deficit, which is one of their key issues. It’s unclear to me why they’d blame Rs for this instead of a D President and D Senate who are clearly not going to reduce much spending.

    That is, it’s my sense that many of these people have a preference ordering of
    1. Reduce Deficit by
    1A. Reduce Spending
    1B. Increase Taxes

    Not
    1. Reduce taxes
    2. Reduce Deficit
    3. Reduce Spending

  52. Gravatar of Jim Glass Jim Glass
    25. November 2012 at 10:58

    If you put a bunch of liberal and conservative tax experts in a room they could produce a tax system roughly as progressive as Obama is proposing and far more efficient within 10 minutes…

    They did put liberal and conservative and (libertarian!) economists in a room and they did come up with a list of improvements to the tax system they all agreed upon.

    Then they presented these proposals to a focus group of actual real-life average voters.

    And here is the result:

    http://www.npr.org/blogs/money/2012/10/26/163715697/episode-413-our-fake-candidate-meets-the-people

    Disaster.

    It won’t happen because America is a brain dead and corrupt country.

    No. It won’t happen because, as Churchill memorably put it, the strongest argument against democracy is a five-minute conversation with the average voter.

    And don’t idealize other countries’ tax systems. On the whole theirs are as bad or worse than ours, on average worse to a whole lot worse. Because the systemic problems of tax politics are universal. The grass ain’t greener.

    “The US is a brain dead and corrupt country” is a very broad and sweeping statement. Compared to whom? The long list of all those countries that have accomplished so much more and continue to do so much better?

  53. Gravatar of Michael Michael
    25. November 2012 at 11:13

    “Btw Michael, the payroll taxes are most certainly not regressive. You pay into SS by your income but the benefit does not scale nearly so much.

    For Medicare you pay in by your income but everyone draws about the same in the end when they reach old age. This would also be true were Medicare to cover all ages–and if our medical costs were in line with Canada, the same pot of money would cover everyone.”

    Payroll taxes are most definately regressive. You pay into SS by your income, but only up to about $110,000, after which you pay $0. And unlike the regular income tax system, there are no deductions/credits against one’s payroll liability (well, not until recently and those provisions seem likely to expire anyway). So, where there is a countless number of circumstances which can reduce ones income tax liability (having kids, a mortgage, student loan interest, etc.), there is basically nothing with regard to payroll taxes. Whether you are a college kid with a part time job or someone struggling at the poverty line, you pay the same payroll tax. Absolutely regressive.

    Now the SS benefit is a different story. On the face of it, much more generous for lower income workers. But that is just if you look at the monthly benefit. The actual money one collects from SS is equal to the monthly benefit X the number of months one is alive to collect it, and higher income workers tend to live a lot longer in retirement and thus collect more in benefits.

  54. Gravatar of Suvy Suvy
    25. November 2012 at 11:21

    I completely agree. Common sense and current American government do not go together.

  55. Gravatar of Mike Sax Mike Sax
    25. November 2012 at 11:42

    You say that public opinon is meaningless then you proceed to handicap what public opinon will say, breaking them into various subgroups.

    If you mean polls are meaningless, we heard that song from the Romney people all election. We see where that theory got them.

    If elections have consequences-as even Bill Kristol admits-then I don’t see how there will be a preference for spending cuts first and foremost. If there were then they would have elected Mitt Romney.

    Kristol also said that the GOP will have to capitulate much more the the President than they might want to believe right now.

    I think that the GOP will get the blame if there’s no deal and this is what people are telling the pollsters.

    If your fiscal conservative demographic were so strong they should have made sure Romney was elected.

    I think if the GOP plays the usual game of “our way or the highway” the Dems should take the highway this time and it’s not a tough choice.

  56. Gravatar of Vivian Darkbloom Vivian Darkbloom
    25. November 2012 at 11:58

    “Now the SS benefit is a different story. On the face of it, much more generous for lower income workers. But that is just if you look at the monthly benefit. The actual money one collects from SS is equal to the monthly benefit X the number of months one is alive to collect it, and higher income workers tend to live a lot longer in retirement and thus collect more in benefits.”

    It sounds like you’ve been drinking Krugman Koolaid. I would be interested in some data on this that demonstrates that *net benefits* of those with lower lifetime earnings are lower than the net benefits of those who have higher lifetime earnings. By “net benefits” I mean: Lifetime benefits minus lifetime social security taxes paid minus lifetime income taxes paid on social security benefits. With respect to Medicare you might also factor in the higher premiums higher income program participants pay for Medicare B and D. We’re not even counting the ability of lower income folks to opt out of Medicare for Medicaid–so-called dual-eligibles.

    You are probably regurgitating Krugman’s argument that because those in lower income groups have lower life expectancies, they get lower net benefits from Medicare and Social Security. Krugman cited, for example, a Social Security study that focused on *male* mortality rates rather than male and female mortality rates (an important distinction he, of course, failed to mention in his blog). Krugman then leads the reader to think that these programs are regressive without any further data to back that up.

    Here’s a summary of a peer-reviewed paper that came to the opposite conclusion: Medicare and Social Security are still progressive even when mortality rates per income group are taken into account:

    http://today.ucla.edu/portal/ut/PRN-op-ed-240456.aspx

    I’m open to persuasion, provided you come up with some convincing data, rather than just repeating the party line.

  57. Gravatar of Jim Glass Jim Glass
    25. November 2012 at 13:43

    Payroll taxes are most definately regressive. You pay into SS by your income, but only up to about $110,000, after which you pay $0.

    After which you get no benefits. What’s regressive about that?

    Benefits are tied to contributions. No contribution, no benefit.

    Is your private sector retirement plan “regressive” because your benefit from it is based on only your first $x,000 of earnings but none above it?

    That’s what the SS retirement benefit is, a defined benefit pension plan — visit SSA.gov’s history section to see how it was explicitly designed and created as such by FDR.

    Moreover, SS is a *progressive* defined benefit pension plan because the first dollars of earnings earn a larger benefit than the later dollars of earnings.

    I mean, please … for people on the left to say: “Social Security is a vitally progressive program, but the Social Security contribution is regressive” requires a good dose of cognitive dissonance.

    And “progressive income tax + progressive social insurance = regressive…” is the kind of arithmetic one finds only in politics.

  58. Gravatar of Floccina Floccina
    25. November 2012 at 13:47

    The Defense budget is badly bloated, SS and medicare are spent mostly on the rich and middle class, Medicare does very little to control costs so the Federal Government does not need more revenue.

  59. Gravatar of Steven H. Noble Steven H. Noble
    25. November 2012 at 14:05

    @ssumner it’d be biased against unhedged risk takers. I don’t see a problem with that. The point of zero capital gains is to not tax delayed consumption. That’s a problem because the delayed consumer isn’t actually richer (as you’ve explained before). The investor that takes on risk expects a higher PV than the investor who does not (hence sharpe ratios). I’m just saying that the additional PV looks more like getting paid than it looks like delayed consumption.

  60. Gravatar of Major_Freedom Major_Freedom
    25. November 2012 at 14:14

    Jim Glass:

    “It won’t happen because America is a brain dead and corrupt country.”

    No. It won’t happen because, as Churchill memorably put it, the strongest argument against democracy is a five-minute conversation with the average voter.

    It may happen. It would take the average voter to cease being brainwashed by the very intellectuals calling the country brain dead and corrupt. Central banking (socialist money production) is inherently rigid (e.g. 5% NGDP come what may) and cannot accommodate the dynamic requirements of the market (which may require fluctuating NGDP to stabilize vis a vis other country economies.

  61. Gravatar of Major_Freedom Major_Freedom
    25. November 2012 at 14:17

    All taxes are regressive in real terms. Even if you steal from the rich and give to the poor, it hurts the poor more than if the taxes did not exist.

    It’s the difference between trading with a wealthy person, or robbing a poor person.

  62. Gravatar of QW QW
    25. November 2012 at 15:49

    Could someone tell me which one is better (or less bad): corporate income taxes or dividend taxes? And why? I understand the argument for getting rid of both of these, but let’s ignore that for a moment (for the sake of enlightening me).

    My gut feeling tells me that dividend taxes would be the lesser evil since it would seem that corporate income taxes also tax profits that might be reinvested rather than given to the share holders as dividends. But on the other hand, the goal of investment is the ability to give out more dividends later. So does it make a difference whether one taxes before or after? I’m not an economist so this is a bit confusing.

    Does taking inflation or risk into account change the result?

  63. Gravatar of Bonnie Bonnie
    25. November 2012 at 15:57

    You’re right about brain dead. They don’t get how they kept control of the House while losing everything else – do they? Does the AMT still exist and are these rates based on that? From what I recall it was brutal and needed to be tweaked every year, even after the Bush tax cuts. I haven’t kept up on what’s up with that – I haven’t been concerned with it since the Great Recession hit.

  64. Gravatar of Michael Michael
    25. November 2012 at 17:02

    Jim Glass said:

    “After which you get no benefits. What’s regressive about that?

    Benefits are tied to contributions. No contribution, no benefit.

    Is your private sector retirement plan “regressive” because your benefit from it is based on only your first $x,000 of earnings but none above it?

    That’s what the SS retirement benefit is, a defined benefit pension plan — visit SSA.gov’s history section to see how it was explicitly designed and created as such by FDR.

    Moreover, SS is a *progressive* defined benefit pension plan because the first dollars of earnings earn a larger benefit than the later dollars of earnings.”

    This is somewhat correct. However, the big difference between a corporate defined benefit pension plan and Social Security is that the corporation itself is not the primary beneficiary of the defined benefit plan. A corporation with a defined benefit plan cannot use employees contributions (or even employer contributions on behalf of employees) to invest in new capital equipment, pay salaries, etc. That’s illegal. Having such a plan is a liability to a firm, not an additional source of funds.

    The money that we have paid in SS taxes has gone to the same place to fund the same exact same stuff as the money we have paid in income tax. So we pay a regressive tax (payroll tax) and a progressive one (income tax), and the result is a complicated and slightly progressive system. If we are going to tax income, we could achieve the same thing in a more straightforward way by replacing both payroll and income tax with a flat tax. (By this I mean two tax brackets, 0% and X%, so that all income above a given threshold is taxed at X%). This eliminates the disincentive effect of progressive taxation. Alternatively, replace income and payroll taxes with a VAT/rebate system.

  65. Gravatar of Max Max
    25. November 2012 at 17:37

    “After which you get no benefits. What’s regressive about that?”

    Right. Note that the AARP (no right wing organization) has always opposed lifting the SS tax cap.

    Now SS tax really is a tax on (labor) income. I mean, it’s not voluntary. So almost everyone is paying federal income taxes the entirety of their working life, but maybe not taxes net of expected benefits.

  66. Gravatar of Floccina Floccina
    25. November 2012 at 17:58

    On SS:
    If SS is not welfare, FICA is not a tax but a contribution. If SS is welfare, it is one perverse welfare program. I would like to see it welfarized no cap on earnings contributions and all retirees get the same minimal benefit. If you ask supporters why SS exists they say because some would be destitute in old age without it, so the program’s structure should reflect that.

  67. Gravatar of CMKnott CMKnott
    25. November 2012 at 18:20

    What about implementing a land tax?
    It taxes unearned rents, encourages efficient allocation of a scarce resource, and is progressive in that the rich typically own more land than the poor.

  68. Gravatar of Jim Glass Jim Glass
    25. November 2012 at 19:22

    What about implementing a land tax?

    Land tax in real world application is an Epic Fail, as noted here previously.

    People with idealistic-to-utopian “new” tax schemes should always ask themselves this basic question before becoming too enamored of them:

    Politicians tax *everything*, and I mean **everything** they can, often to far too far to self-defeating excess. So if this tax is so hugely beneficial, and easy to implement, and provides such big benefits that would give the community and its politicians a real competitive edge on all the others … why isn’t this tax already being used everywhere (or anywhere!) today?

    The answer always is that the purported great “new” tax really is an old tax that was tried and abandoned for very good reason.

  69. Gravatar of Jfield Jfield
    25. November 2012 at 19:47

    Scott:

    Your system is definitely near optimal IF capital is invested efficiently regardless of the distribution of that capital. I’m not nearly as certain that this premise holds as I was as an undergrad. In fact I suspect what actually happens is that capital allocation efficiency rises up to a certain level of concentration and then starts falling again (I’d guess the inflection is in the single digit millions per individual/couple somewhere). Main drivers behind this would be economies of scale (I can afford a lot more expertise when investing a million than a thousand dollars) and the ability to influence the legal/regulatory environment. The first makes it more efficient to have high capital concentration and the second makes it less efficient. If this is true then you want a system that aggressively promotes savings up to a point and then discourages it. Given the structure of your system, it appears you either don’t believe capital allocation efficiency is affected by capital distribution or you think the benefits of more capital outweigh the costs from it being highly concentrated. I’m curious which one of these views you hold or if you have a different reason for keeping the incentive to save constant regardless of wealth.

  70. Gravatar of ChargerCarl ChargerCarl
    25. November 2012 at 19:56

    http://www.foreignpolicy.com/articles/2012/11/26/the_fp_100_global_thinkers?page=0,14#thinker15

  71. Gravatar of Saturos Saturos
    25. November 2012 at 20:17

    ChargerCarl:

    YEEEEAAAAHHH!!!

    I totally f***ing called this! Called it! GO SCOTT GO!

    Everyone remember how I rhetorically asked whether Scott would make the FP top 100 back when the BusinessWeek article came out? I was only half-kidding.

    Links to this blog and everything. It mentions NGDP targeting. Unfortunately it’s a bit of a mischaracterization:

    “This means the Fed should keep up aggressive easing and inject money into the financial system until growth returns — inflation be damned. ”

    Great, that’s almost negative publicity. Obviously we stop easing as soon as NGDP threatens to pass the target level, regardless of whether it’s helped RGDP growth or not. I also don’t think it’s quite accurate to say that Scott was the one who swayed Bernanke by himself, that was probably more Woodford.

    The piece cites Cowen and Yglesias as inspiring the choice. Boy would I like to know who wrote it…

  72. Gravatar of Saturos Saturos
    25. November 2012 at 20:19

    Scott, did you give an interview?? You didn’t tell us! I didn’t know you liked Murakami, 1Q84 is awesome! … The Places in Between?

  73. Gravatar of Saturos Saturos
    25. November 2012 at 20:20

    But you really are one of the world’s top thinkers right now, Scott…

  74. Gravatar of Saturos Saturos
    25. November 2012 at 20:23

    That’s… a very interesting picture they have of you Scott. Couldn’t they get a photo? And I notice you sneaked in just ahead of Pussy Riot. Now that’s impressive.

  75. Gravatar of Jim Glass Jim Glass
    25. November 2012 at 21:16

    “Is your private sector retirement plan “regressive” because your benefit from it is based on only your first $x,000 of earnings but none above it?”

    “That’s what the SS retirement benefit is, a defined benefit pension plan — visit SSA.gov’s history section to see how it was explicitly designed and created as such by FDR.”

    “Moreover, SS is a *progressive* defined benefit pension plan because the first dollars of earnings earn a larger benefit than the later dollars of earnings.”
    ~~~~~~
    This is somewhat correct. However, the big difference between a corporate defined benefit pension plan and Social Security is that the corporation itself is not the primary beneficiary of the defined benefit plan.

    A corporation with a defined benefit plan cannot use employees contributions (or even employer contributions on behalf of employees) to invest in new capital equipment, pay salaries, etc. That’s illegal.

    Yes indeed, private sector executives would be in jail for doing such, and dedicated progressives would do well to fully consider this before signing on to ever more schemes that give politicians ever more control over ever more of the nation’s money flow.

    But it is a bit much to claim the “primary beneficiary” of Social Security has been the government. How “progressive” a program would it be then?! Only a quite modest portion of all SS tax collected has been “borrowed” for general revenue spending this way — and the program is on course to have much, much more flow the other way in the future, from general revenue into currently unfinanced benefits. And I’m not talking about the Trust Fund, which in the big picture is a quite small thing that *hugely* over-influences everybody’s thinking on both sides of the argument, just as it is yours.

    The money that we have paid in SS taxes has gone to the same place to fund the same exact same stuff as the money we have paid in income tax.

    Again, only a quite *small* portion of it, and that is now over *forever*, with the flow going the other way in ever increasing amount until it reaches 1.5% of GDP annually in coming years.

    But let’s take your argument at face value. Now you’ll have to man up and face the logical consequences. There are two consistent ways to look at Social Security:

    #1) The conventional way: It is a social insurance program standing apart from the rest of govt (“Actuarially sound and out of the Treasury forever”, in FDR’s words – if only he foresaw what they’d do to it) with its own separate source of funding in the form of contributions from its participants to pay its own expenses. Then the Trust Fund is a legitimate structure that is entitled to repayment of the money it has loaned out (though it doesn’t lower the cost burden to the taxpayer or national fisc at all), etc.

    In that case SS is a progressive organic contribution-financed separate entity — and if this separate entity, apart from the rest of the govt, as a whole is progressive, then you *cannot* say its contribution funding is “regressive”. Without it, it could not exist as a separate entity. (It’s rather like saying race horses would be even faster if they weren’t weighed down by all that deadweight in their legs).

    OR

    #2) The way you are sort of entertaining: Social Security is just another government spending program funded by taxes, and as such funding it only via with payroll tax imposed only on wage income, and only at lower wage levels at that, is particularly regressive.

    This is quite a reasonable view — Milton Friedman, no less, said this. He said we wouldn’t fund any *other* govt spending program, agricultural subsidies, fighting a war, whatever, with just regressive payroll taxes, so it is loopy to fund the SS spending program this way. And it’s even *more regressive* because it is driving the return on contributions to future participants negative, due to the fact that they must fund both their own benefits *and* the unfunded benefits of past workers exclusively thru their own payroll taxes. So today’s and future workers stand to *lose* over $20 trillion to SS. Be made poorer on a lifetime basis by that amount. The program is going to impoverish those it poses as helping! How much more regressive could it be?

    BUT in saying this Friedman pointed out it means the Trust Fund is a meaningless political sham (how does just another spending program get a “trust fund”?) and nobody is “getting their own contributions back” any more than farmers getting agricultural subsidies are, and the really progressive policy is to abandon the payroll tax mechanism *entirely*, add the obligation to past workers to the national debt (like the cost of WWII) to be covered by general revenue (progressive income tax hitting all income), thus freeing current workers to get *positive* returns on *smaller* contributions to *real* retirement programs that would pay them *more* than SS plans to do.

    That is, to repeal SS as we know it in its entirety right now, add its promises made to date to the national debt, and then give all workers today and going forward a much *better* real basic retirement program that will make them richer on a lifetime basis instead of poorer.

    Let’s say these are not popular ideas on the left! But Friedman was entirely right, this is what “Social Security is just another govt spending program, so the payroll tax is regressive” actually means.

    Now, you can choose either #1 or #2 with intellectual consistency. That’s up to you.

    But one can’t be among the many people on the left now running around choosing part of each — “SS is a progressive social insurance system entity, participant-contribution financed as per FDR, and we must preserve FDR’s vision for it, but it is also another govt spending program like any other, so payroll taxes paying for it are regressive” — without being a partisan hack or having been duped by partisan hacks.

    Personally I’m with Friedman on #2. You are certainly welcome to join us. But you’ll have to admit all the implications and consequences.

  76. Gravatar of John Thacker John Thacker
    26. November 2012 at 05:20

    Scott:

    While I hate to defend him, George W. Bush’s choice was between a temporary tax cut or none at all. Procedural rules in the Senate (the Byrd rule) meant that he could get a temporary tax cut with 50 votes but a permanent tax cut required 60. (The budget window is ten years.) He couldn’t “go back and make it permanent at any time,” not without the Democrats caving. The tax cuts passed a key vote with a slender 51 vote majority, though more Democrats voted for final passage once it was assured.

    If your complaint was simply that he should have settled for a compromise that could have gotten 60 votes so it would be permanent, then I understand.

  77. Gravatar of ssumner ssumner
    26. November 2012 at 05:50

    Fonzy, No a payroll tax is not an income tax—how much time do you spend filling out your payroll tax forms each year?

    It should be steeply progressive for utilitarian reasons. People get very little extra utility after the first $100,000,000 million in consumption.

    dtoh, I like your idea too–I think mine is more politically feasible.

    You said;

    “Please drop your bias against fund managers and bankers.”

    I’m practrically the only blogger who says finance is not overpaid, who says they deserves the greatly increased share of national income they’ve been getting. I don’t want to tax their bone fide earnings from capital, just wage income disguised as capital income.

    DOB, See my previous answer to dtoh.

    JField, I don’t think the government is capable of distinguishing between efficient and inefficient allocation of capital.

    Saturos, You can be sure that Tyler Cowen had a hand in this. They never asked me for a photo. I like the drawing better anyway.

  78. Gravatar of DOB DOB
    26. November 2012 at 06:56

    Scott,

    “wage income disguised as capital income” -> Why would that disguise be easier to put on in the finance industry?

    Isn’t it easier for a baker to underpay himself and let his bakery appreciate, than for a banker who works for a large institution?

    Or are you implying that some guy who just sits at home and buys/sells stock should declare some of is trading profits (and losses) as wage income?

  79. Gravatar of Jon Jon
    26. November 2012 at 08:22

    Dob writes: Isn’t it easier for a baker to underpay himself and let his bakery appreciate, than for a banker who works for a large institution?

    No, the bakery is illiquid and either pays passthru taxes or corporate taxes. Now suppose the second part is dealt with somehow–e.g. converting wages into dividends is a potential stretgy because it avoids SE tax. The IRS watches small businesses very closely on the one. So yes it happens but it is easier for the bank to hide it with equity…

    Not equity in the bank, equity in a fund that has low initial value ( that grant of equity counts as wage income) but can payoff–a bonus. This would only work well if the equity was fungible.

    A small business is not fungible and commonly would be sold at discount to book–indeed, this touches upon a common tax avoidance strategy: take an asset deed it to an LLC then let your heirs inherit the LLC. This can knock 20% off the value of an estate…

  80. Gravatar of JL JL
    26. November 2012 at 08:24

    Scott,

    I admire you for remaining reasonable and rational, even though you get flak from both the left and the right.

    You asked:

    Do the rich deserve to keeps lots of money after paying steeply progressive consumption taxes?
    Do the rich have the right to refrain from consumption and allow worthless relatives to consume their fully deserved funds?

    0 – I object to moral terms such as ‘deserve’ and ‘rights’ when talking about redistribution. I want to know if it’s justifiable on utilitarian, pragmatic grounds.

    1 – There will always be money that hasn’t been taxed yet, either because it was grandfathered in or because of cheating. Without a tax on capital, society loses the opportunity to tax this money.

    2 – Taxing different types of income at different rates creates an opportunity to cheat by misrepresenting income and imposes costs on society to detect and punish cheating.

    3 – I consider a society with 1000 millionaires objectively better than one with 999 working poor and 1 billionaire. Since free markets tend towards the type B society, a Pigovian tax on excessive capital holdings (e.g. above $1M) is necessary to achieve the type A society.

  81. Gravatar of Brian Brian
    26. November 2012 at 09:13

    It would be wise to apply the VAT to estates. Otherwise, you’d just wind up with people making purchases with living wills or promised inheritances rather than buying things outright. “Hey Mr. Contractor son of mine, I’m 90 years old and if you build me a house for free, I’ll will it to you.” Get the house tax-free and write off the cost on the business side? What a dream.

  82. Gravatar of Vivian Darkbloom Vivian Darkbloom
    26. November 2012 at 09:16

    “So why aren’t they proposing a $50,000 cap on deductions? I think you know the answer. The GOP isn’t just brain dead, it’s also corrupt.”

    Here’s Republican Senator Bob Corker writing in the Washington Post:

    “I have shared with House and Senate leaders as well as the White House a 242-page bill that, along with other agreed-upon cuts that are to be enacted, would produce $4.5 trillion in fiscal reforms and replace sequestration. While I know this bill can be improved, it shows clearly that we can do what is necessary, today, with relatively simple legislation. The proposal includes pro-growth federal tax reform, which generates more static revenue — mostly from very high-income Americans — by capping federal deductions at $50,000 without raising tax rates.”

    http://www.washingtonpost.com/opinions/sen-bob-corker-a-plan-to-dodge-the-fiscal-cliff/2012/11/25/0e237712-3586-11e2-9cfa-e41bac906cc9_story.html?wprss=rss_on-innovations&tid=pp_widget

  83. Gravatar of Greg Ransom Greg Ransom
    26. November 2012 at 09:21

    Still waiting.

  84. Gravatar of Michael Michael
    26. November 2012 at 09:41

    “#2) The way you are sort of entertaining: Social Security is just another government spending program funded by taxes, and as such funding it only via with payroll tax imposed only on wage income, and only at lower wage levels at that, is particularly regressive.

    BUT in saying this Friedman pointed out it means the Trust Fund is a meaningless political sham (how does just another spending program get a “trust fund”?) and nobody is “getting their own contributions back” any more than farmers getting agricultural subsidies are, and the really progressive policy is to abandon the payroll tax mechanism *entirely*, add the obligation to past workers to the national debt (like the cost of WWII) to be covered by general revenue (progressive income tax hitting all income), thus freeing current workers to get *positive* returns on *smaller* contributions to *real* retirement programs that would pay them *more* than SS plans to do.

    That is, to repeal SS as we know it in its entirety right now, add its promises made to date to the national debt, and then give all workers today and going forward a much *better* real basic retirement program that will make them richer on a lifetime basis instead of poorer.”

    I think this is quite accurate. The only flaw is that – as bad as SS may be – there isn’t anything better right now. I’m sure it is possible to have a better system, but there certainly isn’t one now. The 401K “system” is one of the best examples of a market failure (people collectively spend massive amounts in fees for subpar returns) that I’m aware of. And there are many unknowable (how old will you be when you die) or uncontrollable (where do the peaks and valleys of the business cycle fall relative to your working years) variables that affect how much one needs to save in order to afford an adequate retirement.

    Surely, there must be some type of system that 1) everyone can participate in with no requirement for being a finance expert, etc. and 2) can offer better results than SS. But we have nothing like that today.

  85. Gravatar of Sean Sean
    26. November 2012 at 11:07

    Scott: I love this blog but the ads on the sidebar are out-of-control annoying. They jiggle so much that I sometimes struggle to focus. I’m not sure how much you can do about this but I wanted to raise it.

  86. Gravatar of Readings for November 26, 2012 | The Investor's Path Readings for November 26, 2012 | The Investor's Path
    26. November 2012 at 11:18

    [...] The brain-dead GOP meet’s Obama’s 39.6%, and raises him 1.4% [...]

  87. Gravatar of Brian Brian
    26. November 2012 at 11:33

    Michael,

    I’d prefer to take it off budget and treat it like a real pension fund with an indexed, diversified investment portfolio and a Fed-like manager. In other words, take it away from congress and let somebody with a brain run it. Give them the power to automatically adjust contribution levels to target X number of years of funding, and the program might even still be there in a few decades.

  88. Gravatar of Doug M Doug M
    26. November 2012 at 12:51

    Are payroll taxes income taxes? This is what SCOTUS has to say.

    “Title VIII imposes an “excise” tax on employers, to be paid “with respect to having individuals in their employ,” measured on the wages, and an “income tax on employees,” measured on their wages, to be collected by their employers by deduction from wages.”

    Jim Glass,

    I have to take interpretation 2. SS taxes are taxes, they are paid into the general fund. Payroll benefits are a welfare benefit, they are not the property of benficiary. Congress has the power to change the quality of the benfit at their discression.

    Social Security is not insurance. And, the question that the Supreme Court has dodged multiple times, Can Congres compel the people to buy insurance? remains open.

  89. Gravatar of Rich Berger Rich Berger
    26. November 2012 at 13:27

    “And how about the brain dead GOP decision not to negotiate seriously in 2011, figuring they could get a better result after the election that Karl Rove and Dick Morris assured them they would win? How’s that decision looking right now?”

    You may be remembering an alternate version of history. As late as summer 2012, the CW was that Obama was unbeatable. Doubts as to that view did not begin to crop up until September/October of this year.

  90. Gravatar of Laurent Laurent
    26. November 2012 at 13:40

    It is difficult to enforce payroll taxes without corporate taxes. The latter are an incentive for corporations to declare wages to the government (the higher the wages, the lower the profits, and thus the lower corporate taxes). More resources might be necessary to fight tax evasion.

  91. Gravatar of dtoh dtoh
    26. November 2012 at 14:54

    Scott,
    Thinking politically, the only way to move to a consumption tax it so call it a progressive consumption tax. You have to start pitching it that way.

    Using a card makes it easier to have a progressive consumption tax. With a rebate, you can only have two rates, zero and another rate.

    Please drop the wage tax. A consumption tax will get you enough revenue.

    Bankers are overpaid. I know. I was one. They are overpaid because they get subsidized capital through the implicit TBTF guarantee. If you gave me free capital, I could make a ton of money too.

  92. Gravatar of Jim Glass Jim Glass
    26. November 2012 at 17:02

    @ dtoh

    Thinking politically, the only way to move to a consumption tax it so call it a progressive consumption tax.

    It would be easy to get a consumption tax both administratively and politically (all political difficulties being relative) by creating a “super IRA”-type account that accepts unlimited contributions, as tax professionals have long noted and I’ve mentioned here before.

    All savings would be tax deferred right there, as long as they remain as savings. If the goal is to free capital and investment from tax, this does it. As simply as removing the contribution limit from the proven, working, familiar mechanism of the IRA.

    The political deal is to eliminate the favorable tax rate on capital gains (makes the left happy) in exchange for making investment returns fully tax-free as long as they are reinvested (makes the right and economists happy.) Hedge fund managers throwing $10 million dollar parties for themselves using 15% tax income entirely disappear, as does Buffett’s very dubious posing “my tax rate isn’t high enough” argument.

    This doesn’t eliminate the marginal rate complexity riddling the current tax code — but you will never get rid that toxic nonsense with any “progressive” system.

    And the idea that the current income tax system can ever be fully replaced by any kind of VAT or payroll consumption tax is just wrong — it is utterly impossible politically and even more utterly impossible arithmetically for the fisc, which is a tough combination to overcome.

    @ Laurent

    It is difficult to enforce payroll taxes without corporate taxes….

    Not true at all. The huge majority of businesses in the USA today pay no corporate level tax (as nobody uses the traditional “C corporation” legal entity anymore unless they are or intend to soon be a public corporation traded on a stock exchange).

    They all pay payroll taxes. Employees like to be paid on a payroll, that’s the only way they get all the benefits that go with it. And business owners want them paid on a payroll, otherwise their pay isn’t deducted by the business and the amount is taxed to its owners *personally* — which is even *worse* for them than having it taxed to a C corp they own.

    @ Doug M

    Jim Glass, I have to take interpretation 2. SS taxes are taxes…

    I and Milton’s ghost welcome you to the bright side.

    @ Michael

    I think this is quite accurate. The only flaw is that – as bad as SS may be – there isn’t anything better right now.

    You’ve got to be kidding. The SS Trustees and Actuaries guarantee that today’s and future workers will take a $20 trillion loss on their contributions over their lifetimes. It is the arithmetic of SS financing, there is no way around it.

    Investment markets can be up-and-down risky, especially in the short run, true — but it takes a government to guarantee that entire generations will suffer a loss on their investments over the horizon of their entire lives.

  93. Gravatar of ssumner ssumner
    26. November 2012 at 17:41

    DOB, All the income earned by the bakery should be wage income, but investment get expensed.

    Maybe I’m wrong about finance–I had read that hedge fund managers disguised wage income as capital gains. If not, then nevermind.

    JL, Fine but that’s a very different argument from the Paris Hilton doesn’t deserve it argument. I’ve addressed that elsewhere, for instance a one time wealth tax at the point the new system is implemented.

    Sean, The ads should not move at all. They don’t on my screen. Not sure what the problem is.

    Vivian, Glad to hear that Corker is not brain dead. Proves my point that it’s not a pie in the sky idea. So they should just do it.

    Laurent, You said;

    “More resources might be necessary to fight tax evasion.”

    There would be plenty of resources after we abolish the personal and corporate income taxes, which use up lots of resources in enforcement.

    dtoh, I do call my plan a progressive consumption tax. You have to have a payroll tax as part of the package. No one will tolerate a athlete making $20,000,000 and paying zero taxes. That’s just the way it is.

  94. Gravatar of dtoh dtoh
    26. November 2012 at 18:51

    Scott,
    Under a progressive consumption tax, I think you would be surprised and see a lot of top income earners paying more taxes than they currently do. You would certainly see a lot of wealthy people pay more than they do. I think you can make a good political argument that someone who produces a lot of income and puts it all back into a business or the economy shouldn’t be taxed. Romney and the GOP have making this argument ad nauseum and there has been no attempt at a substantive counter-argument by the democrats.

    Second what is the difference between the following scenarios.

    1. Baker pays himself a $200,000 salary.

    2. Baker pays himself a $100,000 salary and a $100,000 dividend.

    3. Baker hires a manager, pays the manager $100,000 and pays himself a $100,000 dividend.

    4. Baker takes no salary, the bakery accumulates $1,000,000 after 5 years, and then the baker sells the company for $1,000,000.

  95. Gravatar of buddyglass buddyglass
    26. November 2012 at 20:42

    I’d be interested to hear someone critique (harshly is fine) this back-of-the-napkin plan, which starts from a clean slate (i.e. no federal taxes):

    1. Treat all income the same (capital gains, interest, dividends, wages, gifts received, etc.)

    2. Every filer (or filing couple) gets a savings account that works like a standard IRA but without any contribution limit and without a penalty on early withdrawals (except that they’re taxed as income).

    3. Allowed deductions: a. standard deduction, b. charitable contributions, c. gifts. Filers no longer required to give up the standard deduction in order to claim charitable contributions and gifts.

    4. Set the standard deduction fairly high and increase it slightly with each dependent. A household at poverty level should pay no (or very little) tax. So $25k ballpark.

    5. Tax income at a flat rate. (Which would need to be fairly high.) No EITC.

    The idea would be to tax “luxury consumption”, i.e. income that isn’t saved for the future or given away and that exceeds the nominal level needed to survive.

  96. Gravatar of Jim Glass Jim Glass
    27. November 2012 at 09:36

    Scott Sumner wrote:

    DOB, All the income earned by the bakery should be wage income, but investment get expensed.

    How can business income be “wage income” when it is not received as a wage?

    Perhaps this is why, in spite of being a tax professional for more decades years than I’d want to admit, I still don’t understand the facts of what your proposal is.

    Isn’t one of the complaints about the MMTers that they keep making up their own terminology and definitions that conflict with the rest of the world’s?

    Do you mean: all income, business and personal, should be taxed at the same rate? (Of 0%??)

  97. Gravatar of dtoh dtoh
    27. November 2012 at 10:29

    Buddyglass,

    The concept is fine, but you can do the same thing with a consumption tax that exempts the first $20 or $25k or consumption. The cost would be a tiny fraction of what is needed for doing the same thing with the income less savings approach, which you have proposed.

  98. Gravatar of Jim Glass Jim Glass
    27. November 2012 at 12:38

    The concept is fine, but you can do the same thing with a consumption tax that exempts the first $20 or $25k or consumption.

    With a VAT-type consumption tax? To replace the current system? (Instead of being added on to it?)

    There’s not a chance, not a chance at all, not a prayer of a chance, in either theory or practice.

    OTOH, simply removing the contribution limit to already existing IRAs (so Warren Buffett could put all his investments in one) is an entirely practical way (relative to *all* alternatives) of effectively converting the current tax system to a consumption tax — as the community of tax professionals has noted for years.

    (That would be if there was any public demand to convert the current tax system to a consumption tax, which there isn’t.)

  99. Gravatar of buddyglass buddyglass
    27. November 2012 at 12:57

    I’m familiar with the “exempt the first X amount of consumption” approach, and it’s appealing (mostly because it simplifies the tax code even further), but the idea of cutting every household a check seems problematic. Not to be paternalistic, but some people can’t handle that amount of money all at once. So you’d want to make it a monthly or bi-weekly thing (like a paycheck). If there were still a payroll tax in existence then employers could be instructed to simply reduce the amount of pay withheld by the amount of the consumption tax credit. But I was hoping to get away from a payroll tax altogether (in the spirit of “tax the things you want less of”; I don’t want less employment).

  100. Gravatar of Richard Gadsden Richard Gadsden
    27. November 2012 at 13:06

    One clever way to restrict the filibuster would be:

    Cloture can pass by simple majority on anything other than the final vote on a bill or a treaty (yes, all confirmations, including judicial, can pass by simple majority).

    Cloture on a bill or a treaty, the length of the post-cloture debate depends on the majority that the cloture motion passes by. If the majority is just a single vote, or the VP’s casting vote, then the debate is 120 days. If the majority is 60-40, then the debate can be as short as the majority wishes.

    That way, the smaller your majority, the fewer things you can get done without the agreement of the minority.

  101. Gravatar of dtoh dtoh
    27. November 2012 at 13:59

    BuddyGlass,
    Scott likes the cut everyone a check approach, but, for the very reasons you cite, I prefer giving everyone a “credit” card for $20k that exempts you from consumption tax until you’ve used up your $20k of “credit”.

    JimGlass,
    Why not. It gets you enough revenue. With a progressive consumption tax you could get political consensus for a system that doesn’t tax producers but requires those living a lavish life style to pay more. On top of that, using a “credit” card system would be administratively very simple. Being a former tax professional though, I can see why you might object. It would do away with your profession :).

  102. Gravatar of ssumner ssumner
    27. November 2012 at 17:53

    dtoh, You said;

    “Under a progressive consumption tax, I think you would be surprised and see a lot of top income earners paying more taxes than they currently do. You would certainly see a lot of wealthy people pay more than they do. I think you can make a good political argument that someone who produces a lot of income and puts it all back into a business or the economy shouldn’t be taxed.”

    Under a progressive consumption tax no one is taxed on what they put back into the business.

    As I recall if you let businesses expense all investment, and then tax business income, you have a consumption tax.

    Jim Glass, Wage income is money received for doing work, whether you are paying others, or a self-employed entrepreneur paying yourself.

  103. Gravatar of Jim Glass Jim Glass
    27. November 2012 at 17:56

    JimGlass, Why not. It gets you enough revenue.

    Does it?

    What’s the largest amount of national GDP collected by any VAT in the world? What’s that VAT rate? (Hint: In 2008 the average VAT rate in Europe was 19.5% and produced 6.8% of GDP in revenue.) What happens to VAT systems when govts try to push the rate up higher than that? (They’ve tried.)

    Now factor in the fact that here in the USA much (in some cases most) of that maximum tax base is already consumed by state and local consumption taxes (sales tax) that would have to be folded into the system. Subtract that amount from the potential VAT revenue to the Feds.

    Of course, “enough revenue” depends on how much one wants to shrink federal spending. By 60%? 70%?

    Given that plain fiscal impossibility, I won’t dwell on the many political impossibilities.

    (But one example: The AARPers & Friends, who are so effectively squashing SS reform and driving Medicare/Obamacare expansion, would never stand for it, as they have made very clear. They say they have spent all their lives saving after-income tax and now intend to spend their savings tax-free … and that now eliminating the income tax on everyone else while hitting them with a consumption tax on all their lifetime savings would be blatant double-taxation of them. And they are right! So … how do you modify your proposal to get around *that* politically?)

    Combining simple arithmetic fiscal impossibility with political impossibility creates quite a hurdle to jump.

    OTOH, eliminating the contribution limit to nondeductible IRAs is something that could be done very easily and practically, given a desire to do it (if there were any political desire in the electorate to convert to a consumption tax system, which there isn’t.)

    The fact that a policy is actually *possible* to do is something to be held in its favor!

    Popular economic reform proposals typically start off five parts or more “good idea on general principles” to one part “practical reality”, which is why so few go very far past talk on the Internet and in opinion columns.

    But in the tax world especially, the rubber hits the road of hard practical reality screeching hard and fast.

  104. Gravatar of Jim Glass Jim Glass
    27. November 2012 at 18:26

    Jim Glass, Wage income is money received for doing work, whether you are paying others, or a self-employed entrepreneur paying yourself.

    No offense, but to a tax professional that’s like saying “GDP is NGDP” to an economist.

    As a self-employed entrepreneur tax lawyer with a master’s education in related economics, I can say there is no sense whatsoever in which I “pay myself”. (Why would I have paid myself losses in my loss years?)

    You apparently are talking about earned income, I think. If I write a book that gives the magic missing formula for perfect and popular tax reform in it and collect a million dollars as a result, plus an endless stream of royalties into the future, that’s all income to me but in no sense is it “wage” or “payroll” income, words that have well-specified definitions in the tax world for good reason.

    If when you talk about “payroll tax” you mean tax on all kinds of income other than capital income, now I understand why I don’t understand it. Payroll income is just a fraction of that income.

  105. Gravatar of Max Max
    27. November 2012 at 19:52

    If you allowed unlimited tax-free savings, how much would tax rates have to go up?

  106. Gravatar of dtoh dtoh
    28. November 2012 at 00:17

    JimGlass,

    Total consumer spending is roughly 10 trillion. Federal tax revenue is roughly 3 trillion of which 1.8 trillion comes from income and corporate taxes. A 35% average consumption tax rate before rebate/exemption generates 3.5 trillion gross. Exempting $5,000 per person ($20k for a family of four) times 300 million people reduces revenue by 1.5 trillion leaving you 2 trillion….more than enough to make up for the elimination of personal income and corporate taxes.

    Nobody has been able to push VAT about 20% but that analysis is for countries that also have personal income/corporate taxes.

    Deal with seniors by giving them a bigger consumption tax exemption.

    State and local governments could piggyback on a national consumption tax and/or elect to rely on property/fixed assets taxes (primarily a tax on housing consumption).

    If you could get political consensus (big if) to convert to a consumption tax, why would you elect to do so with an income less savings approach which imposes huge administrative costs on the economy when you could have an a low cost consumption tax only system which is functionally equivalent.

  107. Gravatar of Vivian Darkbloom Vivian Darkbloom
    28. November 2012 at 03:45

    “Nobody has been able to push VAT about 20% but that analysis is for countries that also have personal income/corporate taxes”.

    I can’t think of a single country in the world that raises revenue solely from VAT or a similar consumption-type tax. The VAT rates in Europe are, on average, about 20 percent (perhaps higher). And yet, they have very significant corporate and personal income taxes, real estate taxes, very high gasoline and other excise taxes (generally a consumption tax on top of VAT), wealth taxes, etc.

    Based on this experience, I think one needs to ask why no government has thus far managed to survive solely on a consumption tax, and many countries in Europe are having trouble staying afloat with VAT north of 20 percent.

    One big reason is that it has nothing to do with taxes…..

  108. Gravatar of Vivian Darkbloom Vivian Darkbloom
    28. November 2012 at 07:46

    If there ever was a country that could, as a matter of political feasibility, raise all its tax revenue from a consumption tax, it would be Cuba (as far as I know, the leaders there are not subject to a lot of political constraints).

    Instead, Cuba plans to implement a new tax code that introduces *nineteen* new taxes, including an income tax system under which rates start at 15 percent for income over $200 and top out at 50 percent for income over $2,000 year. I guess they really do want to be just like us. Those new taxes should keep quite a few government workers gainfully employed.

    On the other hand, if the Obama proposal is adopted, that 50 percent rate would be lower than a marginal 56.7 percent rate in California (albeit kicking in at a much, much higher threshold). Perhaps it won’t be long before a reverse migration trend begins.

    http://www.cnbc.com/id/49989684

  109. Gravatar of Major_Freedom Major_Freedom
    28. November 2012 at 08:45

    The new marginal tax rate proposal for the wealthy under Obama’s war on income, and the effective after loophole tax rate for the wealthy under Truman’s and Eisenhower’s war on income in the 1950s, are roughly equal.

  110. Gravatar of dtoh dtoh
    28. November 2012 at 10:26

    Vivian,
    You say, “Based on this experience, I think one needs to ask why no government has thus far managed to survive solely on a consumption tax, and many countries in Europe are having trouble staying afloat with VAT north of 20 percent. ”

    I will give you two answers. The first is that a flat consumption is neither politically viable nor will it raise sufficient revenue, and until now there has not been good technology for implementing a progressive consumption tax.

    The second answer would be better answered by the Sheriff of Nottingham and his ilk, which is that it is the nature of government to confiscate as much income as can be had without fomenting a rebellion of the people. If it’s there, they will take what they can get.

  111. Gravatar of dtoh dtoh
    28. November 2012 at 10:36

    MF,

    Do you have a good source for the data on effective tax rates for the Truman/Eisenhower years. Krugman has recently been using the high tax rates of that era to argue there is no disincentive on production from high tax rates. I tend to agree with your analysis but would like to see data. I also believe that the shape of expected returns has a big impact on incentives and disincentives….highly asymmetric pre-tax returns will generate negative after tax expected returns….more certain pre-tax returns will have less impact on expected after tax returns. The economy in the Truman/Eisenhower era was characterized by investment in basic industries (steel, automotive, construction), where the returns are relatively more certain and risk free. Thus there was less need to reward successful risk takers. This is not rocket science, the Soviets in the 20s and the Japanese in the 30s proved you could get economic growth with little private incentives simply by stuffing a lot of labor and capital into basic industries.

  112. Gravatar of Vivian Darkbloom Vivian Darkbloom
    28. November 2012 at 11:52

    “Krugman has recently been using the high tax rates of that era to argue there is no disincentive on production from high tax rates.”

    That would only be part of the equation. “Disincentives on production” is certainly one relevant factor to *production*; but an equally relevant factor is whether they bring a disincentive to the maximization of *revenue*.

    The first response to a higher income tax rate is a visit to one’s tax advisor to figure out a way to (legally) avoid paying more tax. The higher the marginal tax rate, the greater the incentive to avoid the tax. Tax advisors can be quite good at avoiding tax, particularly when the Code is filled with possible deductions, exemptions and credits (“loopholes”, properly defined, on the other hand, are relatively rare things). There was plenty of opportunity and incentive to avoid those high marginal rates in the Truman and Eisenhower eras (before Kennedy wisely chose to dramatically decrease the rates).

    One does not need a sophisticated tax advisor to figure out that the most effective way to avoid tax is to avoid a “realization” and “recognition” event (tax experts will know what I mean by those terms) is to simply avoid selling an appreciated asset, or to otherwise indefinitely defer income. How do you think Warren Buffet got so rich?

    To get an understanding of the true effect of reducing marginal rates and (somewhat) reducing possible deductions (which happened in the TRA’s of 1982 and 1986) is to look at the share of federal income taxes paid by the top echelon of taxpayers by income. That percentage has gone up tremendously. Remember, that “income” as reported on one’s tax return and the “income” that is most often reflected in these studies represents the amount that rich taxpayers for the most part *choose* to realize and have recognized such that tax is paid. When the rates are prohibitively high, the choice is easy. When the penalty is not so high, people tend to make those decisions based on how best to allocate their capital rather than how best to avoid the tax collector.

    Warren Buffett is the world’s best allocator of capital and nothing he has suggested as far as tax reform is concerned will affect *his* continued accumulation of wealth because almost all his wealth is concentrated within the corporate solution. The marginal individual income tax rate is meaningless to *him*. Not only that, Buffett had the genius of doing all this within an insurance company, taking advantage of the loss reserves available to shelter his insurance company’s investments made by use of the capital of others and the premiums (also deferred to some extent for tax purposes) paid by those insurance customers. So, in a sense Buffett may prove Krugman’s point about “incentives to production”, but he would certainly be the outstanding exception and this is an entirely different matter from “incentives to pay tax”. As to the latter, Mr. Buffett has shown absolutely no inclination.

  113. Gravatar of dtoh dtoh
    28. November 2012 at 14:01

    Vivian,
    I don’t disagree. The only things I would say are: a) that there are real limits to tax avoidance, and b) tax rates have a huge impact on economic activity…especially investment and new business formation.

  114. Gravatar of Vivian Darkbloom Vivian Darkbloom
    28. November 2012 at 23:30

    dtoh,

    As far as a) is concerned, John Cochrane refers us to a very recent article in the UK’s Telegraph:

    “Almost two-thirds of the country’s million-pound earners disappeared from Britain after the introduction of the 50p (percent) top rate of tax, figures have disclosed.

    In the 2009-10 tax year, more than 16,000 people declared an annual income of more than £1 million to HM Revenue and Customs.

    This number fell to just 6,000 after Gordon Brown introduced the new 50p top rate of income tax shortly before the last general election….

    It is believed that rich Britons moved abroad or took steps to avoid paying the new levy by reducing their taxable incomes. ”

    As far as b) is concerned, from that same article:

    “Mr Osborne argued earlier this year that the 50p rate was deterring entrepreneurs from coming to Britain.”

    Never underestimate one’s incentive or ability to avoid high taxes.

    It’s a good thing the United States has strengthened its border fences to keep millionaires in with the beefed-up expatriation tax rules.

    http://www.telegraph.co.uk/news/politics/9707029/Two-thirds-of-millionaires-left-Britain-to-avoid-50p-tax-rate.html

  115. Gravatar of dtoh dtoh
    28. November 2012 at 23:42

    Vivian,
    I’d already seen the article.

    You said,

    It’s a good thing the United States has strengthened its border fences to keep millionaires in with the beefed-up expatriation tax rules.

    Right… much better that they give up and do nothing productive in the U.S. rather than moving somewhere else where they can be productive.

  116. Gravatar of Silly Robot Silly Robot
    29. November 2012 at 20:05

    fairtax.org

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