The New York Times is unhappy with America’s tax code

Here’s the New York Times editorial page:

A logical way to help raise the additional needed revenue would be to tax capital gains at the same rates as ordinary income. Capital gains on assets held for more than a year before selling are taxed at about the lowest rate in the code, currently 15 percent and expected to rise to 20 percent in 2013. That is an indefensible giveaway to the richest Americans. .  .  .

Mr. Obama would be wise to instruct the Treasury Department to start work on tax reform now, exploring carbon taxes, both to raise revenue and to protect the environment; a value-added tax, coupled with provisions to protect lower-income taxpayers from higher prices, to tax consumption and encourage saving; and a financial transactions tax, to ensure that the financial sector, whose profits have substantially outpaced those of nonfinancial corporations, pay a fair share.  (emphsis added)

I really don’t know whether to laugh or cry when I read this sort of nonsense.  And keep in mind that this is a newspaper that likes to lambast conservatives for not understanding global warming and evolution.  Is it too much to ask that they hire at least one person who understands basic economics?

BTW, the cap gains tax is scheduled to rise to 23.8% in 2013, not 20%.

Bonus contest:  Let’s see if anyone can find a single news article or blog summary of the fiscal cliff deal, which reports all the tax rate changes accurately.  The fact that MTRs for the rich rose to 43.4%.  The fact that MTRs for the $250,000 to $300,000 crowd rose by about 4% points, from 35.9% to about 40%.  From $300,000 to $360,000 the MTRs rise about 5% to 41%.  The fact that MTRs for the lower and middle class rose by 2%.  Find one article that gets everything right, and you win the contest.  And don’t get cute and submit a link to this post, as I’m sure my data is at least slightly inaccurate.  It’s just less inaccurate than the average news article or blog post.  I’ll list the winner in an update.

Update:  Daniel seems to have found a fairly accurate article.  Can anyone confirm?


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62 Responses to “The New York Times is unhappy with America’s tax code”

  1. Gravatar of Ben J Ben J
    2. January 2013 at 20:37

    Struggling to find any examples of the actual effective rates. Finally found a website with a collection of people talking about rates. I noticed someone mentioned the real capital gains tax rate of 23.8%…

    …and they were quoting S.Sumner, Bentley University.

    http://blogs.wsj.com/economics/2013/01/02/academic-economists-react-shortfalls-of-fiscal-cliff-deal/

  2. Gravatar of Benjamin Cole Benjamin Cole
    2. January 2013 at 20:44

    Okay, I agree, the tax code is way, way, way too complicated, and may or may not be progressive, and surely does not tax consumption.

    Raising taxes, rather than cutting government, is a bad idea.

    But the tax complexity obscures everything, making it hard to really know what is going on. And it varies form family to family, or taxpayer to taxpayer.

    And what is AGI? And who are your accountants and tax planners? And when did a $500k one-time exemption for taxes on real estate gains become law? And who does the mortgage interest tax deduction most benefit?

    Fodder for several lifetimes of arguments where, none to resolution.

    I want a simple national sales tax, some PIGOU taxes, and not else.

    Okay–should not the same call for clarity, simplicity apply to monetary policy?

    I want to U.S. President to say,

    “Due to the weak recovery, I am instructing the Treasury Secretary to have the Fed (now part of Treasury) print money to buy federal IOUs, at a rate of $100 billion a month and rising by $20 billion monthly. This program will be sustained until we see nominal GDP rising at 8 percent or more for four straight quarters. You the public, can decide in 2016 if I have done a good job, and if my monetary policy is a good one. You can fire me and vote for another party in 2016, or retain my party in power. It will not be a collection of bankers and academics who pass judgement if my policy was correct, but you the people who actually work and live in the economy.”

    Simple.

  3. Gravatar of Jake Jake
    2. January 2013 at 20:46

    Scott, would it be possible at some point for you to add a shortlist of timeless posts somewhere on the blog’s main page?

    For instance, reading this post makes me want to go back and reread your argument on why income taxes disproportionately punish savers. I know you have made at least one detailed and excellent post explaining your position, but since I don’t know the post’s title or when it was written, my only options are to try to get lucky with a search or go digging through the archives.

    A shortlist could make for a good reference whenever someone new visits the blog and doesn’t know where to start. And it could probably save you from having to repeat yourself at times, because you can just point readers to an older post whenever you need to reiterate.

    Just a thought. Thanks and keep up the good work!

  4. Gravatar of Saturos Saturos
    2. January 2013 at 20:56

    “Is it too much to ask that they hire at least one person who understands basic economics?”

    Well, I dunno, they do have that Krugman guy…

    I capitulate on the news contest, can’t be done.

    Mr. Jake –

    If you care to inspect the right-hand side of this page, and scroll down, past “Recent Comments” and “Categories” then you will see, under “Quick Intro To My Views”, a link entitled “Links to key blog posts and papers”. Now if one such as yourself were to in fact click said link, one would discover the exact style of content aptly described in your comment above mine.

    (I think he should be putting more stuff on that page, it’s way old, but that’s a separate matter.)

  5. Gravatar of Geoff Geoff
    2. January 2013 at 21:06

    Personally, I don’t waste my time with the NYT. I’ll otherwise be spending more time facepalming than learning.

    I read that which is more intelligent than I. It’s the only way to learn new things.

  6. Gravatar of Alexei Sadeski Alexei Sadeski
    2. January 2013 at 21:09

    Increasing taxes on cap gains will bring in hardly any revenue – or as some studies suggest, negative revenue.

    For entities such as the NYT, these sorts of tax discussions have nothing to do with making the world a better place and everything to do with punishing those fat cat bankers. That’s about as complex as the analysis gets for them.

  7. Gravatar of Geoff Geoff
    2. January 2013 at 21:18

    Taxes were raised to make the Treasury more attractive to bond investors, because without bond investors, the Treasury can only get money from the Fed, which would be too inflationary.

    The titanic is sinking.

  8. Gravatar of Geoff Geoff
    2. January 2013 at 21:24

    OT, but as rage inducing as the tax increase:

    http://oilprice.com/Latest-Energy-News/World-News/Why-did-a-Train-Carrying-Biofuel-Cross-the-Border-24-Times-and-Never-Unload.html

  9. Gravatar of Jake Jake
    2. January 2013 at 21:28

    Thanks Saturos. RIF :D

  10. Gravatar of Primo Primo
    2. January 2013 at 21:42

    How about this one? I like the table format.

    http://taxfoundation.org/blog/details-fiscal-cliff-tax-deal?utm_source=twitterfeed&utm_medium=twitter&utm_campaign=Feed%253A+TaxPolicyBlog+(Tax+Foundation+-+Tax+Foundation's+%2522Tax+Policy+Blog%2522)

  11. Gravatar of Daniel Daniel
    2. January 2013 at 22:26

    Jake—

    A piece Scott wrote on the Economist about taxes on capital income:

    http://www.economist.com/economics/by-invitation/guest-contributions/proper-tax-rate-capital-income-zero

  12. Gravatar of Daniel Daniel
    2. January 2013 at 22:35

    http://www.eagletribune.com/worldnational/x1525001926/Taxes-rising-for-most-despite-fiscal-cliff-deal

  13. Gravatar of Steve Steve
    2. January 2013 at 23:24

    I didn’t understand your choice of emphasis. Are you highlighting the contradiction between taxing capital and encouraging saving?

    I flip out more over the financial transaction tax. Most financial transactions are arbitrages, or at least relative value plays. If you tax them, they cease to be arbitrages or relative values, and therefore go away. Zero revenue raised, and less accurate pricing signals.

    Ultimately comparing the NYT to the WSJ is like comparing Charmin to Store Brand. The NYT feels a lot better, but both end up in the same place when you wipe.

  14. Gravatar of Saturos Saturos
    3. January 2013 at 00:46

    Well I think this one almost comes close: http://www.bloomberg.com/news/2013-01-02/ten-things-you-should-know-about-the-cliff-deal-so-far-.html

    Jake, sorry, don’t know what a RIF is. Unless – are you in fact a Rabid Inuyasha Fan? http://en.wikipedia.org/wiki/InuYasha

    Geoff, ok so what do you read? Besides this blog of course? :P

  15. Gravatar of foosion foosion
    3. January 2013 at 02:08

    Ignoring Social Security and Medicare taxes is a long tradition. For example, remember the Republican primaries in which there were many statements about those who don’t pay taxes, when they meant federal income taxes while ignoring the substantial Social Security and Medicare taxes paid, as well as state and local taxes, sales tax, property tax, etc.

  16. Gravatar of Benny Lava Benny Lava
    3. January 2013 at 05:42

    1. I thought this was a demand side recession. Wouldn’t taxing consumption hurt demand?

    2. Don’t we already tax consumption through sales tax, luxury taxes, etc.?

  17. Gravatar of J.V. Dubois J.V. Dubois
    3. January 2013 at 05:45

    Scott, your proposal may have some theoretical merit but it cannot be realized in praxis. Even countries like Singapore that advertise 0 tax on capital gains do tax even non-wage personal income. In Singapore:

    1) They have two tax brackets for corporate profits based on the size of the profit. One is 8,5% the other is 17% (for profits under/above 300,000 SGD)

    2) They have progressive personal income tax that goes from 0 to 20%

    - It is true that they do not tax dividends, but they do not have to. Dividends were already taxed by rate of 17% that is very close to highest marginal tax rate of personal income (20%)

    - The so-much advertised gimmick is zero tax rate for selling capital assets, that I think consists mostly of real estate. But most countries already have this one way or another, most often it requires one to live in/own real estate for some time after which it is exempt from taxation.

    - Singapore also has 7% VAT.

    So to sum it up, I daresay that the type of taxation that you would like to see, one that strictly differentiates what is result of labor (wage income) and what is result of capital investment – and that taxes capital with ZERO rate – is practically impossible. It would be hugely expensive to maintain and administer bureaucracy that would be reaquired to investigate all the income that taxpayers would claim as stemming from capital instead of wages.

    The best real-world tax system is a mix of all taxes: VAT, and personal income/wealth taxes to fund public expenditure + pigovian/environmental taxes to offset externalities that cannot be internalized in any other way.

    And yes, we almost forgot existence of some forced savings schemes (either private or public) to maintain social cohesion and constructed to prevent free-riding on basic welfare transfers. Just make sure that politicians do not misuse these schemes for funding public projects, such as forcing private pensions to be spent on purchasing government bonds/invest into government owned companies, or directly taping social security revenue over what is just if a person would buy acrually fair insurance product.

  18. Gravatar of Brian Donohue Brian Donohue
    3. January 2013 at 06:07

    Scott,

    Of course, the NYT is clueless about answers, but I’m encouraged that they’re asking questions, that 2013 might be a big year in sorting long-term fiscal policy. The ideas that a VAT is on the table, e.g., is very good news, IMO.

    Also, the AMT is another layer of complexity that I don’t think you or anyone else has reckoned with here. My own MTR for 2012 (ignoring FICA) goes from 15% to 25% to 15% to 25%, before settling at 35%. If I made a couple hundred grand more, my rate would dip back down to 28% for a bit, then pop back up to 35%. All beacuse of the AMT, AFAICT.

    Also, my marginal rate on capital gains (federal only) for 2012 and the past few years is 22%, not 15%. Again, thanks to the AMT.

    I wonder how many people really have a good handle on their MTR and where the breakpoints are, so, other than for top marginal rate folks, I’m not sure how much impact it can have on incentives.

  19. Gravatar of Brian Donohue Brian Donohue
    3. January 2013 at 06:12

    In other words, to me, the next thing that has to happen is that the American people come to grips with a couple facts over the next few months:

    1. The shiny new welfare state y’all voted for? Yeah, it’s gonna cost ya.

    2. Oh, by the way, the moth-eaten old welfare state we been running? Turns out, y’all are several years in arrears in paying for that too.

    3. It would be great if we could just hand the bill for all this to the fat cats, but the math doesn’t come close to working. It’s not like the rich are more beloved in Europe, but take a look at how those countries finance their shiny welfare states.

  20. Gravatar of Tubulus Tubulus
    3. January 2013 at 06:23

    For the top marginal rate, you forgot about PEASE. Really has nothing to do with deductions and is just a 3% increase in marginal tax rate (ie from 39.6 to 39.6 * 1.03=40.8). So the net rate is 44.6%.

  21. Gravatar of ssumner ssumner
    3. January 2013 at 07:17

    Ben, Quoting me? That’s very worrisome.

    Jake, I added a link at the end of my recent “Initial reactions” post, just a couple posts back.

    Saturos, One of my new year’s resolutions is to completely organize my blog, so that everything is easy to find. Hopefully by March.

    Benny, You said;

    “I thought this was a demand side recession. Wouldn’t taxing consumption hurt demand?”

    No, but worth a blog post.

    JV, I’m pretty sure you are wrong. The big problem you noted is cap gains taxes, and I recall that some highly successful European countries have a zero cap gains tax (or did until recently). Can someone confirm?

    Brian, Yes, the AMT is a monstrosity. VAT is a great idea if used (with a progressive payroll tax) to abolish the income tax. It’s a disaster if added to the income tax.

    Love your second comment.

  22. Gravatar of johnleemk johnleemk
    3. January 2013 at 07:22

    J.V. Dubois, Singapore still doesn’t tax any form of capital gains. Surely that’s a huge point you’re glossing over. When I mentioned to Malaysians in finance the long-term capital gains rate I would pay in the US, they were aghast; day trading and churning are so common in the region because nobody pays any capital gains taxes.

    At the same time, note that corporate dividends in Singapore are only double-taxed. In the US, they are triple-taxed. When converting pre-tax income to post-tax income in our back-of-the-envelope estimates, my company (I work in the US) cuts profit down by over 1/3rd. That combination of federal/state corporate taxes alone exceeds the 20% personal income top tax rate in Singapore — and then our shareholders pay an additional tax on the remaining 2/3rds constituting net income after tax.

  23. Gravatar of ssumner ssumner
    3. January 2013 at 07:28

    Primo, It says the top rate rises to 39.6%, which is wrong. It rises to 43.4%.

    Daniel, It says income taxes only rise for people making more than $400,000–wrong.

    Saturos, Close, but wrongly claims that income taxes will only go up for the top 0.7%, which I presume is incomes above $400,000. Ignores the tax increases on the $250,000 to $400,000 group.

  24. Gravatar of Tyler Joyner Tyler Joyner
    3. January 2013 at 07:46

    How about this one from the Economist:

    http://www.economist.com/blogs/freeexchange/2013/01/fiscal-cliff-deal

  25. Gravatar of J.V. Dubois J.V. Dubois
    3. January 2013 at 07:49

    Johnleemk: this may be true. I just want to reiterate, that even in “socialist” Austria (my current country of residence), if you own real estate for 10 years it becomes exempt from any capital gains tax.

    Anyways, do not read too much into my Singapore example. That was just for an illustration. In my eyes, the most important reason why not to tax capital gains especially for long-term investment is the inflation. If you own a real that you want to resold, the owner would basically have to pay the capital tax from the whole property value every 20-30 years (based on inflation rate) even without any real gains.

    Anyways, as for weak indirect support of this position I will lend this an excerpt from this publication http://www.pwc.com/en_SG/sg/tax-facts-and-figures/assets/tff200912.pdf :

    “Capital Gains Tax

    Gains that are of a capital nature are not taxed in Singapore. However, where there is a series of transactions
    or where the holding period of an asset is relatively short, IRAS maytake the view that a business is being carried on and attempt to assess the gains as trading profits of the company.”

    So there clearly has to be a difference between trading profit of a short-term nature and long-term capital gains – with tax law clearly favoring latter.

    And another factoid – I am currently residing in “socialist” Austria, and according to the law if you own real-estate property for 10 years it is exempt from capital gains tax (with real estate being the major form of capital gains for most of the citizens). In other neighboring countries there are similar laws, mostly varying in length of ownership required to get this tax exemption.

  26. Gravatar of J.V. Dubois J.V. Dubois
    3. January 2013 at 08:03

    And yet another example. Imagine that Singapore decided that they would like to increase marginal tax rates from 20% to 30%. How could they do that without making too much fuss about it?

    With 17% corporate profit rate you Just introduce personal dividend tax of 15% and suddenly, you have a total taxation of approximately 30% (1-0.17)x(1-0.15)=0,7 without any need to do anything else with laws. So any attempt of someone to change his wage income into “corporate profits” to gain tax advantage would be foiled. So it is no “double taxation”, it is just a measure to prevent tax avoidance.

  27. Gravatar of Tyler Joyner Tyler Joyner
    3. January 2013 at 08:05

    Never mind, the Economist is totally off.

  28. Gravatar of W. Peden W. Peden
    3. January 2013 at 08:13

    Benny Lava,

    Expenditure on investment is as much spending as expenditure on consumption. Not all demand is consumption.

  29. Gravatar of Doug M Doug M
    3. January 2013 at 10:12

    Benjamin Cole,

    “And when did a $500k one-time exemption for taxes on real estate gains become law?”

    I know this one! It was part of a Clinton-Gingrich Tax deal (1996?). Prior to this, all capital gains from the sale of a home were exempt so long as the gains were rolled into the down payment on a new peice of property within 6 months.

  30. Gravatar of W. Peden W. Peden
    3. January 2013 at 10:42

    Benjamin Cole and Doug M,

    That would appear to be a major increase in the incentive to invest in real estate, that happens to have been introduced during the investment boom that preceded the housing bubble. A coincidence, a causal relation or have I simply got my sums wrong?

  31. Gravatar of Mark A. Sadowski Mark A. Sadowski
    3. January 2013 at 11:11

    Tubulus has an excellent point.

    The Limitation on Itemized Deductions (known as Pease after the congressman who helped create it) reduced most itemized deductions by 3 percent of the amount by which AGI exceeded a specified threshold, up to a maximum reduction of 80 percent of itemized deductions. However, the 2001 tax act eliminated the limitation for 2010, and the 2010 tax act extended the repeal of Pease through 2012. The reductions will reappear in full in 2013 under the fiscal cliff bill.

    Pease would increase the marginal tax rate of affected taxpayers by 3 percent of their bracket rate. Thus 39.6 percent would rise to 40.788 percent.

    In practical terms, when one takes into account the reinstatement of the Pease limitation, and the “ObamaCare” surtax, the top federal marginal tax rate on:

    1) Dividends is now 25.0%, the highest rate since 2002.

    2) Capital gains is now 25.0%, the highest rate since 1996.

    3) Interest, rent and earned income is now 44.6%, the highest rate since 1986.

    P.S. For those who are interested, I estimate Romney’s 2011 average effective tax rate would rise from 14.1% to 20.6% under the fiscal cliff bill.

  32. Gravatar of Jason Jason
    3. January 2013 at 11:51

    I’m sorry, but economics is in no way at the same level of rigor or agreement as global warming research and evolution.

    If almost all economists said the exact same thing about the optimal level of marginal tax rates or whether monetary or fiscal policy was the appropriate channel of macroeconomic stabilization, then maybe you’d have a point.

    Until then, I don’t see a *fundamental* problem with the idea that capital gains should be taxed the same as labor income and other policies created to encourage saving and discourage consumption. Lower taxation of capital gains vs labor income is only one way to encourage saving, and only does so relative to labor income. The opt-out vs opt-in default on 401k contributions encourages higher savings without differential taxation (I do realize the 401k plan itself is tax-advantaged, but this opt-out vs opt-in concept works even if they were not). I’d bet there is another way to encourage saving that takes advantage of money illusion instead of status quo bias.

  33. Gravatar of Tyler Joyner Tyler Joyner
    3. January 2013 at 13:20

    No fundamental problem with taxing investment income? You tax things you don’t like. The capital markets allow savers to postpone consumption in the hope of greater consumption in the future, and borrowers to create products and services that otherwise wouldn’t exist. Taxing the capital markets discourages both of those things. That’s the fundamental problem.

    I think Scott broke it down pretty well in the post he linked to earlier in the comments. Suppose John Doe gets a $100 after-tax paycheck, and invests $20 of it in a zero coupon bond that pays him back $25 dollars in five years. The present value of that bond is $20. There is no reason why he should be taxed on the extra $5. $25 in the future is worth $20 now, hence the price of the bond. There is no reason to punish John Doe for consuming later, particularly since his decision to do so allows the bond issuer to use that money to create more goods and services.

    To break it down even more Barney-style, suppose that John Doe took $20 and bought an apple tree seedling, which after five years makes apples for him to eat. He consumes those apples (see what I did there?), but noone suggests that he should be taxed because an apple tree is now worth more than the seedling he bought. John gained a lifetime supply of apples for the rock bottom price of $20 (and five tantalizing years watching the tree grow), but where is the furor demanding that he pay his fair share of apples?

  34. Gravatar of Bababooey Bababooey
    3. January 2013 at 16:01

    In trying to cite the highest possible tax rate that might apply, I think you are not communicating conventionally. Consider why you list the capital gain rate at 23.8%– there’s also a 25% cap gain rate and a 28% cap gain rate (for certain, rare assets). You could say the highest cap gain rate is 31.8%, but you would confuse rather than communicate by reason of unconventionality.

    Most people in the highest tax brackets derive most of their taxable income from wages, which means they are, conventionally speaking, going to pay at 39.4%, not 43.8%. They will also pay social security (which phases out), medicare (which has increased), Unemployment Insurance, sales taxes, state income and payroll taxes, excise taxes and so on.I think that’s how most people conceptualize it.

    My last pedantic point is that no one anywhere will actually pay taxes at 39.6 or 43.8 on their taxable income. $1,000,000 of taxable income will not result in a $396,000 tax liability because a lower rate applies to the first $400,000.

  35. Gravatar of Josh L Josh L
    3. January 2013 at 18:31

    Should they really need an economist to find the flaw in that? I’d hope most people could see the issue with a proposal to decrease cigarette taxes while also asking for a tax system which discourages smoking.

  36. Gravatar of Saturos Saturos
    4. January 2013 at 00:11

    So David Henderson has another post on the deal, disagreeing with you: http://econlog.econlib.org/archives/2013/01/thoughts_on_the_5.html

  37. Gravatar of W. Peden W. Peden
    4. January 2013 at 01:07

    “a financial transactions tax, to ensure that the financial sector, whose profits have substantially outpaced those of nonfinancial corporations, pay a fair share.”

    What a really weird justification. I can’t begin to formulate a half-sensible principle that could be at work here.

  38. Gravatar of Saturos Saturos
    4. January 2013 at 01:43

    Just in case Scott doesn’t have time to check MR today, I thought he should see this NYT op-ed Tyler linked to: http://www.nytimes.com/2013/01/03/opinion/the-new-tell-all-fed.html?_r=0

    W. Peden, that was Peter Singer’s logic too, when he appeared on Australia’s Q&A television forum.

  39. Gravatar of W. Peden W. Peden
    4. January 2013 at 02:27

    Saturos,

    I can at least following the reasoning of, “Corporations that make a lot of money should pay a lot of tax.” That’s the argument behind progressive corporation tax rates.

    To talk about a sector of the economy as if it was a single firm and to ignore the fact that higher profits imply higher tax burdens in a progressive tax system boggles my mind. It’s terrible reasoning.

    Naturally then, it doesn’t surprise me that Peter Singer used it! ;)

  40. Gravatar of ssumner ssumner
    4. January 2013 at 08:06

    Thanks Mark, Very informative.

    Jason, There most certainly is the same level of agreement on the basic principles of public finance as there is about global warming. Economists tend to disagree over empirical issues, or normative issues of where tax rates should be set, whether capital should be taxed. etc. But not the basic principles of public finance taught in econ 101.

    Bababooey, I’m confused on the top rate for wages being 39.6%, why isn’t it 43.4%? After all, for each extra dollar of wage income the top earners pay 43.4 cents to the government. I think as soon as the Medicare tax included investment income (which was 3 days ago) it became (de facto) and income tax.

  41. Gravatar of Tyler Joyner Tyler Joyner
    4. January 2013 at 08:44

    The 3.8% medicare surtax is for Net Investment Income, which previously was not subject to a medicare tax. The medicare tax on wage income, which already had a medicare tax, has increased by 0.9% depending on your MAGI.

    So 43.4% is an impossible figure to attain (except via short term capital gains), because you’re combining the wage income tax rate with the investment income medicare surtax.

  42. Gravatar of Tyler Joyner Tyler Joyner
    4. January 2013 at 08:47

    Actually I’m wrong. The link below would indicate that you can pay the 3.8% surtax on your wage income over the MAGI threshold, provided it’s less than your Net Investment Income. Why is this system so complex? Ridiculous.

    https://www.fidelity.com/viewpoints/personal-finance/new-medicare-taxes

  43. Gravatar of J.V. Dubois J.V. Dubois
    4. January 2013 at 09:19

    From reading the comments, it seems that there may be some confusion about what labor (wage) income, corporate profit and capital gains.

    So imagine that you found a company and bought property for $ 1 million. Now you rent it making profit of $50.000 a year (after depreciation). This will be counted as corporate profit and it will be taxed by going corporate profit tax rate. But I can as easily see that somebody says that it is not corporate profit. It is profit you made as buying the house in bulk and selling it in monthly packages. This income is thus a result of your labor as salesman.

    Imagine that after 10 years the value of the property rose to million 1.2, which is the price you sold it for. So on top of the rent you now have capital gains of $200,000, that is potentialy subject of capital gains tax. As it happens inflation is 2% a year which amounts to cca $200,000 over 10 years. So capital gains tax is not unfair because some double taxation effect

    So one has to clearly differentiate between short-term “capital gains” and long-term capital gains. If I buy a house, then work for a month to fix it and sell it at profit – am I selling my “house fixing services” (labor), or am I realizing “capital gains”? If I buy a house and then spend next month searching for next buyer to sell it at profit then again – am I realizing capital gains, or am I really selling some “right buyer search services”? It is almost impossible to tell.

    So my point is, that buying and then selling something is also labor. It is not only “transforming something physically” that is a labor. I will just borrow Arrow-Debreu definition: the same good sold in different time and/or place is different good.

    Or imagine that you have a labor contract formulated in a way that you will be paid share of value of assets of the company
    at some time. You just tied value of your labor to “capital gains” of all the company owns. You no longer can distinguish what part of your labor is the act of transforming some distinct inputs into outputs and what part is a result of some mystical “capital gains” process. To just say that the value of labor is what “laborer” was paid is circular logic. In the very same way you may say that capital gains is in truth the value of labor you made when you were searching for buyer (either personally or via intermediary)

    So to end this, all I am saying is that the boundary between income from labor, profits and capital gains is in truth fuzzy. If we are talking about some normative aspects, like “taxing capital gains is double taxation and thus unfair”

  44. Gravatar of Vivian Darkbloom Vivian Darkbloom
    4. January 2013 at 09:54

    “I’m sure my data is at least slightly inaccurate.”

    I think so, too, and here’s an example:

    Married couple with one spouse having $230K wages and jointly they have $30K in investment income. (You need to adjust that wage amount slightly to account for personal exemptions, standard or itemized deductions to get back to $230K).

    If one spouse (either spouse) earns an additional $1 of wages, here are the consequences at the margin:

    39.6 percent income tax on the wage
    1.45 percent normal Medicare tax on the $1 wage (employer share not included)
    0.90 percent ObamaCare Medicare surcharge on the $1 wage
    3.8 percent ObamaCare Medicare surcharge on the investment income due to the $1 wage driving up “modified adjusted gross income” by $1 and therefore subjecting $1 more of investment income to that 3.8 percent surcharge.

    The MTR is 45.75 percent within this “bubble”.

    Stated differently, I think that $1 of additional wage income can result in 3.8 percent plus 0.9 percent Medicare surcharges in addition to the normal 1.45 percent levy, for a total of 5.15 percent. If we were to include the employer portion, it would even be 1.45 percent higher on that additional $1.

  45. Gravatar of Tyler Joyner Tyler Joyner
    4. January 2013 at 10:23

    Vivian: The 0.9% surtax is for earned income (not MAGI) above the threshold, which in your example is $250,000 for a married couple filing jointly. So they would not pay that portion at all.

    You’re also adding all of the percentages together, but I don’t think there is a situation in which they are all applied to the same dollar of income. The medicare surtax can be agnostic to type of income (if MAGI above the threshold is less than Net Investment Income), but other taxes do distinguish between the two. So an additional dollar of income would never be taxed at 45.75%. It would be either 43.4% for wage income, or 23.8% for investment income.

    Bababooey was correct to point out that most people earning, say, $1 million a year are mostly going to have more wage income than investment income. So if a CEO of company X is making $950,000 in wages and $50,000 in investment income, his MTR will not be 43.4%.

  46. Gravatar of Vivian Darkbloom Vivian Darkbloom
    4. January 2013 at 10:35

    I just realized that I worked out the above example before the fiscal cliff compromise. After the compromise, where the 39.60 normal income tax rate kicks in at $450K for married couples, this “bubble” will disappear. The ObamaCare of 0.9 percent surcharge continue to kick on on wages over $250 (married) and on the lesser of net investment income or “modified adjusted gross income” over $250K.

    Thus, in the above example, the 39.6 percent rate is 35 percent, but the rest is the same. The total MTR is therefore 41.15 percent on $1 of additional wage income. Above $450K the MTR on an additional $1 of ordinary investment income becomes 39.6 percent plus 3.8 percent for a total of 43.4 percent.

    Of course, it’s not that easy. The effect of the PEP and Pease phaseouts (kicking in at even different thresholds) makes it much, much more difficult to calculate the MTR, but the effect is to increase it somewhat. Our tax system should not make it this difficult to determine how much one gets to keep. I doubt any news outlet is going to get this straight because it depends too much on individual circumstances.

  47. Gravatar of Tyler Joyner Tyler Joyner
    4. January 2013 at 10:45

    My firm has a paper for our clients that has what looks to be an accurate summary of the tax changes, but I can’t post the link here for some reason. Whenever I do, I press submit and the page refreshes with no new post.

  48. Gravatar of Vivian Darkbloom Vivian Darkbloom
    4. January 2013 at 10:51

    Tyler,

    “Vivian: The 0.9% surtax is for earned income (not MAGI) above the threshold, which in your example is $250,000 for a married couple filing jointly. So they would not pay that portion at all.”

    Yes, you’re right—the 0.9 percent is on earned income above $250K for married couples. I was trying to work out the example that $1 of earned income would result in * *both* the additional 0.9 percent surtax on wages and kick up MAGI above $250 for the investment income. So, wages would have to be $250K plus $1, not $230K plus $1. But, under that example, I think under the formula any investment income on top of that would be subject to the 3.8 percent tax already (tax is on lesser of excess of MAGI over $250K or net investment income).

    So, as Eliot to Pound: “Il miglior fabbro”.

  49. Gravatar of Tyler Joyner Tyler Joyner
    4. January 2013 at 11:02

    Vivian,

    That’s a pretty obscure reference! Thanks to you and wikipedia, I just learned something new and interesting.

    It’s a pretty confusing system, particularly since all this silliness is simply to calculate how many dollars get that extra 3.8% tax. I was also interested to learn that although the medicare surtax was enacted to offset the increased expenditure from Obamacare, there is nothing that says it has to be spent on healthcare.

    Of course, saying that it does have to be spent on healthcare would be hocus pocus anyways, since an additional tax dollar there means one free to be spent elsewhere, but it does ensure that even in the unlikely event that we curb (or, gasp, reduce!) healthcare spending, that tax isn’t going anywhere.

  50. Gravatar of Bob Bob
    4. January 2013 at 11:19

    My suspicion is that a non-trivial part of the outrage on the left about capital gains taxes comes from the loophole it opens: How, in the financial industry, one can be paid for a job in a fashion that the IRS qualifies as capital gains instead of regular income. If all capital gains were real gains from normal investment, we’d see a lot less trouble there.

    It all comes down to the fact that, even in the simplest tax code, there are ways to minimize taxes while maximizing the utility of someone’s wealth. And when wealthy people get to live large without paying, the left will always get mad.

    Once you know what the conclusions are going to be, the argument made to reach them is not really that important. Neither the left or the right has a monopoly on starting with a conclusion and figuring out the argument later.

  51. Gravatar of Vivian Darkbloom Vivian Darkbloom
    4. January 2013 at 11:34

    Tyler,

    At one point, I looked it up and discovered that a portion of the ObamaCare Medicare tax surcharge goes to Medicare and the rest to general funds. I don’t recall the exact split, but my recollection is that most goes to the general fund. If I find it again, I’ll pass it along.

    Now, here’s my revised example of the “double tax” on the additional $1 of wage income:

    $250K wages
    $30K investment income
    $30K adjustments to income
    $250K AGI

    Taxpayer earns $1 of additional wages.

    Is it not true that that $1 is subject to the 0.9 percent surcharge and that same $1 bumps up (M)AGI to S250K plus $1 so that $1 of investment income is also subject to 3.8 percent Medicare tax? So, isn’t the total Medicare surcharge 4.7 percent as a result of earning another $1?

  52. Gravatar of Tyler Joyner Tyler Joyner
    4. January 2013 at 11:55

    I can’t find a solid answer to that, but I suspect you may be right. If you try googling “medicare 4.7″ there isn’t much to go on.

    As Bababooey pointed out, though, most people have more wage income than investment income, so the the situation where a family 1) has MAGI greater than $250k, 2) has more investment income than wage income, such that they pay a 4.7% medicare surtax on their MAGI in excess of the threshold, is going to be pretty rare.

    It will be even more rare that their MAGI in excess of the threshold (but still less than investment income) is great enough that they might be significantly adversely affected by the extra 0.9% tax that they pay for having that extra money in wages rather than investment income.

    Unless I’m missing something.

  53. Gravatar of Doug M Doug M
    4. January 2013 at 11:58

    Professor,

    Have you see some of the posts on John Cochraine’s page regarding the marginal incentive to work at the bottom end of the pay scale?

    Essentially, as a person’s annual income increase, they lose their eligibility to receive benefits. For every dollar in increased income they are losing 80+ cents in benefits.

  54. Gravatar of Vivian Darkbloom Vivian Darkbloom
    4. January 2013 at 11:59

    I think the example holds. It’s not the norm, but not so terribly unusual.

    Apropos that, if you like obscure quotes, I drew my inspiration from this one:

    “If my mind changes, I change the facts. What do you do, sir”?

  55. Gravatar of Aidian Aidian
    4. January 2013 at 12:16

    The fact that MTRs for the rich rose to 43.4%. The fact that MTRs for the $250,000 to $300,000 crowd rose by about 4% points, from 35.9% to about 40%.

    An income of $250,000 a year makes one rich. Even in NYC or SF.

  56. Gravatar of Vivian Darkbloom Vivian Darkbloom
    4. January 2013 at 12:25

    Here’s the skinny on how the funds from the Medicare surcharge are applied:

    ““The biggest tax hike from the health care law has a bit of mystery to it. The legislation calls it a “Medicare contribution,” but none of the revenue will go to the Medicare trust fund. Instead, it’s funneled into the government’s general fund, which does pay the lion’s share of Medicare outpatient and prescription costs, but also covers most other things the government does.
    The new tax is a 3.8 percent levy on investment income that applies to individuals making more than $200,000 or married couples above $250,000. Projected to raise $123 billion from 2013-2019…”

    http://www.businessweek.com/ap/2012-12-25/health-care-tax-hikes-for-2013-may-be-just-a-start

    I looked it up before—how those funds are applied was specifically written into the ACA. The 0.9 percent surcharge in wages, on the other hand, goes to the HI trust fund.

    But, by reading the Wonkblog at the Washington Post one would come away with the impression that *all* those extra taxes shore up the Medicare trust fund. That’s simply not true. Well, the trust fund is meaningless anyway, but still, talk about false advertising in that bill and even worse reporting…

    http://www.washingtonpost.com/blogs/wonkblog/wp/2012/12/19/three-obamacare-tax-changes-start-in-12-days/

    We really do need a better press corps, and not just when it comes to tax rates.

  57. Gravatar of ssumner ssumner
    4. January 2013 at 18:03

    JV, For most people (like me) the boundary is not fuzzy. I agree there are difficult cases, and they should be handled pragmatically, as they already are. (We already face this problem!) I’d probably be even tougher on some of those cases than the current tax code. But where it’s clearly capital income, like the earnings on stock investments for someone with a full time job in a completely separate industry, it should not be taxed. Ditto for interest on a bank account, or interest on a bond you hold. Obviously if I don’t work for Apple, any profit I make on Apple stock is investment income, not labor income. Let’s at least stop taxing those obvious cases.

    Doug, Yes, I’m aware that America’s poor often face the highest MTRs.

    Aidian, I agree that people who make $250,000 can be considererd rich. But I’d warn you that if you refer to someone making $250,000/year in SF or NYC as rich, other people will laugh at you. Not saying you are wrong, just warning you.

    Everyone, Lots of good points, but I don’t really know enough to comment.

  58. Gravatar of TheMoneyIllusion » People are missing the point on taxes TheMoneyIllusion » People are missing the point on taxes
    4. January 2013 at 19:24

    [...] recently had a contest asking commenters to find an article or blog post on the fiscal cliff deal that did not contain [...]

  59. Gravatar of Negation of Ideology Negation of Ideology
    5. January 2013 at 10:30

    Is this contest still open?

    http://economy.money.cnn.com/2013/01/02/taxes-fiscal-cliff/

    It doesn’t specifically mention the top rate of 43.4%, but it mentions the 39.6% and the additional 3.8% tax on investment (I’m assuming the reader can add.)

    Also, here’s a handy chart to see how much more on average people in different income groups will pay:

    http://money.cnn.com/2013/01/03/news/economy/fiscal-cliff-taxes/index.html

  60. Gravatar of Jason Jason
    5. January 2013 at 12:46

    Scott, you said “There most certainly is the same level of agreement on the basic principles of public finance as there is about global warming. Economists tend to disagree over empirical issues, or normative issues of where tax rates should be set, whether capital should be taxed. etc. But not the basic principles of public finance taught in econ 101.”

    Global warming is a good case to compare. I wasn’t saying there was only widespread agreement among scientists on the principles of global warming (CO2 traps heat) but that there is almost unanimous agreement on the empirical and normative issues involved (it is caused by fossil fuel consumption, it will cause mass extinctions, most of the estimates over the next 100 years are within 5% [dK/K] of each other, we should set targets on the maximum CO2 between 350 and 450 ppm). You say yourself that economists disagree over the empirical and normative issues of where tax rates should be set and the taxation of capital.

    This is also the rigor with which the principles are known; the fact that CO2 traps heat is extremely well founded over a broad scale of application from quantum physics to atmospheric science.

    The idea that a progressive consumption tax encourages saving better than a progressive income tax may be widely believed among economists, but the empirical results are fairly uncertain and no actual experiments have been done even in a mirco environment AFAICT.

    I don’t mean this as a slight against economics — it’s difficult! Chemistry and thermodynamics are much easier when it comes to establishing facts, but their facts are much more established.

  61. Gravatar of ssumner ssumner
    6. January 2013 at 11:29

    Negation, I consider the first link to be misleading, and the second is incorrect–the tax increases will be larger than estimated there.

    Jason. I certainly don’t object to the NYT advocating taxes on investment income, and that has no bearing on my claim that they are making stupid conceptual errors in their analysis. They literally don’t know what they are talking about.

  62. Gravatar of People are missing the point on taxes | Brucetheeconomist's Blog People are missing the point on taxes | Brucetheeconomist's Blog
    8. January 2013 at 18:48

    [...] are missing the point on taxes Posted on 01/08/2013 | Leave a comment   I recently had a contest asking commenters to find an article or blog post on the fiscal cliff deal that did not contain [...]

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