Initial thoughts on the deal
I have not been able to find any accurate press reports on the tax changes for 2013, and indeed I am quite confident that no such reports exist. Nevertheless, I will try to piece together various fragments of information, and provide guesstimates of the impact of the deal. My initial reaction is that the Dems won big, and the GOP was completely rolled (as expected.) However I should add that this assumes the GOP actually favors what they claim to favor. It seems equally likely that the GOP likes high tax rates, tax complexity, the marriage penalty, and big government spending programs, and merely claims to have libertarian leanings on economic issues. So when I say “GOP” I am referring to their alleged beliefs, not necessarily their actual beliefs. (Have you ever noticed that many ultra-conservative southern states have steeply progressive state income taxes, whereas Massachusetts has a 5.3% flat tax, and liberal Washington State has no income tax at all. Watch what they do, not what they say.)
Almost all of the press reports on the tax increases are wildly inaccurate. Taxes rates will rise much more than advertised, and not just on those making over $400,000. Here are some problems with the agreement:
1. The tax code becomes far more complex.
2. The marriage penalty becomes even worse.
3. There is no reduction in the maximum unemployment benefits, despite the recent fall in the unemployment rate. Every day that goes by a larger and larger share of the unemployed become structural, as our labor market becomes more “European.” I have heard several stories from different people I trust, who describe people they know who are enjoying a long vacation at Uncle Sam’s expense, and bragging about it. That’s not to say most unemployed are doing this, it’s just a minority. Maybe 1% of the workforce. But it is becoming an increasing problem as more and more people figure out how to game the system. Ivy league professors overlook this problem because they don’t socialize with the sort of modest income person doing a crappy job who is tempted by this option, and they can’t imagine anyone they know taking this route voluntarily.
4. There are virtually no spending cuts.
5. MTRs rise for almost all Americans, and by much more than advertised.
6. There is no “lower rates for less loopholes” deal, as had been discussed in the early stages of the negotiations.
Let’s take my case, someone making less than $150,000 a year. From the headline you might assume that I won’t have to pay more taxes next year. Yet the phase-out of the 2% payroll tax cut will raise my taxes by over $2000. Still, it might appear that my MTR will stay at 28%, as I make more than the maximum income threshold taxed for Social Security. In fact because I am married I’m not in the 28 % bracket; I’m in the 33% bracket. If I got divorced and kept living with my spouse I’d be in the lower tax bracket. One of my colleagues (with a wealthy wife) did this, and saved a huge amount on taxes. (We should tax everyone as an individual, as Sweden does.)
OK, but at least my combined married income only puts me in the 33% bracket, and those valiant Republicans were able to stop our evil President from pushing up our MTR on labor income (my main source of income.) Nope, my MTR will rise sharply. But first note than my current MTR on wage income is 35.9%, not 33%, because the 2.9% Medicare tax goes up to infinity.
But at least the GOP was able to stop Obama from adding another 3% points on top of that already high MTR, right? Yes, they stopped the 3% increase, and signed off on a 5% increase.
Here’s where I am going to have to make some guesses. The deal re-instates the phase-out of personal exemptions and itemized deductions from married couples making over $260,000. This link suggests the itemized deduction phase-out adds about 1.1% to MTRs for married couples making more than $260,000 (but not for couples “living in sin” and making more than $260,000.) I could not find info on the PEP phase-out, as it depends on the size of one’s family. We have three people in our family, and I assume that’s about average for married couples. The personal exemption will be $3800/person next year, so the tax savings are about $1250. These savings are phased out between $260,000 and $380,000, which implies an extra 1% MTR per exemption. But taxes are not my area, and this may be completely wrong.
In addition, the Medicare payroll tax on wage income rises from 2.9% to 3.8% next year, for those making over $250,000. So add the 1.1% itemized deduction phase-out, the three 1% MTRs for each exemption phase-out, and the 0.9% payroll tax rise, and I will see my MTR on wage income rise from 35.9% to 40.9%. Of course that doesn’t include state income taxes. Iowa Democrat Tom Harkin was so outraged that college professors like me will only see their MTRs rise from 35.9% to 40.9% that he voted against the agreement. He wanted even more.
And maybe people like me should pay more, after all, although my six figure income is quite modest in Newton Massachusetts, it’s way above the national average, and more than I “need.” My outrage is not directed at the amount of taxes I pay, but rather at three other morally indefensible aspects of our tax code, each of which gets substantially worse:
1. The marriage penalty
2. The complexity of the tax code, including the fact that the IRS itself is unable to answer questions when I call for advice. If they don’t understand their own code, how can the average person?
3. The taxation of investment income, which double taxes all income that is saved and then spent in the future, rather than spent today.
And the tax rate on investment income rises by even more than 5%. As far as I can tell the increase will be about 7.9% on people in my income bracket, and 8.8% on the very rich.
The GOP did get one minor victory; the dividend tax increase on the rich was scaled back from an absurd 28.4% to “only” 8.8%. It will rise from 15% to 23.8% on the rich. Recall that dividend income is triple-taxed.
Everywhere else they lost badly. As I predicted last year, the GOP made a huge mistake in refusing to do a deal with Obama back in 2011, and the entire country will now pay the price of their stupidity. Even worse, I doubt they even understand the full dimensions of their failure, or why it happened.
PS. I’m sick of explaining why the taxation of investment income is unfair, inefficient, and double-taxes wage income that is saved. If you don’t understand, take a course in public finance, or read Miles Kimball’s blog.
Update: Or my earlier post.
Tags:
1. January 2013 at 10:44
I think that the payroll tax needs to go. It’s a regressive tax and I don’t think it makes much sense. There are 3 major things in the spending side:
1. Health care: Costs are too high and need to be brought under control. Mainly, the incentives for doctors, hospitals, etc need to be changed. We want quality care, not more care. Stop paying people for regular care; pay them for quality, not quantity.
2. Social Security: This is a Ponzi scheme; it requires more people entering than leaving. It also encourages people to save less and thus reckless behavior with their money. This should at least be cut in half, if not phased out, over time.
3. Defense: The US spends more than the rest of the world combined on defense(it used to a few years ago, but I don’t know if it still does, either way it’s close) and this does not make us safer. You could easily cut this. Spending money on blowing other people up does not make us safer as a country and it certainly does not make us richer. It just takes a way resources that could be used to increase the capital stock or to build infrastructure, etc.
On the tax side, I think there are several things I’d like to see.
1. Reduce tax rates and simplify the tax code while keeping it’s progressiveness. Taxing income doesn’t really make sense, you’re taxing productivity and hard work. I’d even be in favor of repealing the 16th Amendment
2. Tax property and assets, especially financial assets, along with excess amounts of leverage. Financial assets are not productive and having gambling in financial assets does not make us richer. Also, we do not get richer by borrowing money from banks. The homeowner’s credit and things like that all support gambling in financial assets and reward leverage, we need a tax system that does the opposite.
3. Use the tax system to protect the environment. The environment is something we do not understand and we shouldn’t play with things we don’t understand. We just don’t accurately know the consequences. I think cap and trade is a good idea and I would be in favor of either that or a carbon tax.
1. January 2013 at 10:45
Contrarily, I don’t think there was a deal to be done with Obama in 2011.
But assuming there was, the country reelected the guy, enabling his true desires, now uninhibited by concerns for reelection, and will now pay the price of its (the country’s) stupidity.
1. January 2013 at 10:45
$1 in spending cuts for every $41 in additional taxes.
What a joke.
1. January 2013 at 10:52
The HR8 as amended by the Senate is available for more direct review: http://www.scribd.com/doc/118551686/Mat-12564
I do wish more of the media reporting on this would link to the source document for those curious/inclined and also to drive access to the source.
1. January 2013 at 10:53
What would a VAT that replaced payroll, individual income, and corporate income taxes look like? I think this would be the way to go if the goal is elimination of income taxes.
1. January 2013 at 11:26
“But assuming there was, the country reelected the guy, enabling his true desires, now uninhibited by concerns for reelection, and will now pay the price of its (the country’s) stupidity.”
Was the alternative really much better. I decided to take a look at one of Mitt Romney’s economic advisers. He wrote this book:
http://www.amazon.com/Dow-36-000-Strategy-Profiting/dp/0609806998/ref=sr_1_1?ie=UTF8&qid=1357067704&sr=8-1&keywords=Dow+36000
Here’s another one of Romney’s economic advisers:
http://www.youtube.com/watch?v=CaXNqGgIc-g
I can keep going here. Romney is not fit to be president. He traveled all around the world and stuck his foot in his mouth about 20,000 times already. Not to mention that he selected Paul Ryan as his running mate. Paul Ryan calls himself an Ayn Rand supporter when he’s very Christian and Rand thought Christians were idiots. Ryan calls himself for small government when he voted for the Iraq War, bank bailout, for Medicare Part D(which was the biggest expansion of Medicare in decades), and I can keep going. These guys call themselves for small government, but they have a worse record on spending than the Democrats and if they got in charge now, they’d ramp up spending tomorrow. The only reason they’re “against spending” is because they’re not in power. Paul Ryan is a straight-up crook. There’s really no other way to put it. This idiot also voted for the repeal of Glass-Steagall. What in the world would make someone think that the repeal of Glass-Steagall was a good idea. He also pushed for the reckless lending that happened in the housing boom years(this reckless lending was supported by both parties). The Republican Party today is full of idiots.
1. January 2013 at 11:43
Michael,
I don’t think a VAT is a good alternative to an income tax. It’s probably about as regressive as a tax can get. I think a better alternative if you were trying to get rid of the income tax would be to tax assets and property. I also think that taxes on destructive aspects to the environment and things of that nature would be a good idea.
I look at it like this, the primary function of government is protection of property, court system, law enforcement, national defense, etc. All of these things primarily benefit the rich and those with property for obvious reasons(99% of court cases involve businesses, law enforcement usually involves the protection of property which also highly benefits the wealthy) so it makes sense to have a progressive tax system. I may even tax derivative transactions too as they are not productive at all and there’s a lot of money to be taxed there.
1. January 2013 at 12:14
Shifting nearly the entire tax burden onto assets/wealth? We have a word for that: communism. And it failed.
In general, capital should e taxed lightly or not at all for reasons Scott has laid out 1000 times.
1. January 2013 at 12:15
Suvy,
What kind of property tax are you proposing? A Georgist land tax in principle might work, but most vulgar wealth tax proposals don’t account well for the possibility of moving wealth elsewhere. You say you’d rather not people borrow money from the financial system, but encouraging people to avoid saving too much (which is what a wealth tax would do) by definition encourages them to borrow more.
There are many ideas for a progressive consumption tax floating around. Robert Frank of Cornell has one: take your income from all sources, subtract out the amount you saved, and pay a progressive tax on the difference. You could make this much more steeply progressive than income or wealth taxes.
1. January 2013 at 12:17
Scott, good post, but a couple of thoughts:
1) I think you are wrong about Southern states vs. liberal states on progressivity. Most Southern and Midwestern states have progressive tax codes at very low levels of income, but essentially flat taxes from the middle and up. For example, SC has a progressive code below $14,000 and LA a progressive code below $50,000. These states give the working poor a strong incentive to work.
On the marriage penalty I noticed this footnote on a lot of red states: “For joint returns, taxes are twice the tax on half the couple’s income.” I.e., no marriage penalty in conservative states.
On the other hand, big liberal states like HI, CA, OR, MD, NJ, NY, CT, VT all have steep progressive tax rates at high incomes. MA and WA are political anomalies, and WA was actually contemplating an income tax in recent years. Just hope that MA doesn’t go progressive on you!
2) Unemployment benefits are tricky. If you are an UN-skilled worker, and ample jobs are available, I agree with you. On the other hand, if you are skilled and you lose your job, it’s a huge dilemma. Suppose you are an architect, civil engineer, teacher, or a financial analyst/broker and you lose your job. Do you wait for a recovery in your chosen field, or do you go back to school and learn how to become an man-nurse or web application programmer? Or if you are single and have no unemployment insurance, do you go flip burgers, and end up with a permanent career in fast food? That’s the Peter Diamond stuff. Ultimately, this is the human and structural costs of monetary recessions.
3) I agree that the marriage penalty is (slightly) unfair and was surprised that the $400K and $450K numbers were so close together. The caveat is that married people enjoy a built in safety net against unemployment, plus lower housing costs. If you tax everyone as an individual like Sweden does, you also need a better safety net like Sweden has, and better central bankers, like Lars Svennson. Hmmm…
4) I am one of the people taking a long vacation (but I do NOT get gov benefits). The high effective MTR tax interaction between wages and investments (overlapping social security and Obamacare taxes!), high cost of living near work, and diminished career prospects make “shadow” unemployment an attractive option.
1. January 2013 at 12:20
Just curious, what percent of people receive tax benefits due to being married as opposed to a penalty?
The answer wasn’t immediately obvious to me googling but it seems like the marriage “bonus” must be very common as well, especially in uppper income households. That’s not even counting all the ancillary benefits like collecting a spouses SS benefits or health care accounts.
1. January 2013 at 12:30
Not conclusive but this supports the view that in aggregate the tax benefits of marriage outweigh its negatives.
http://www.taxpolicycenter.org/briefing-book/key-elements/family/marriage-penalties.cfm
1. January 2013 at 12:53
The 33% bracket kicks in at $217,000 or so of AGI (not income). With a mortgage, charitable deductions, etc., the typical income for a married couple, one dependent, would be well over the $250,000 income threshold the current administration considers rich.
If you favor taxing everyone as an individual, will my lovely wife qualify for welfare? She has no income but for her share of mine.
I personally think it’s horrible policy but as good as can be expected given the many players involved. Putting tax policy aside to get to the spending decisions in two months seems like good politics as well. Obama has soaked the rich, so where is he going to get more revenue in two months? Higher rates than Clinton? $250,000 to $400,000 households? The middle class. None of those are nearly so popular as the Senate package.
You shouldn’t assume that existing tax policy, or any policy, necessarily reflects the views of any governing majority. My state’s deeply-conservative governor is attempting to move us over time to a no-income tax state, and it is a very difficult thing to do, even in a very red state. Better to have started there and fight to keep it (which does take a fight, in WA state at least), rather than have to fight to get there.
1. January 2013 at 13:00
Would it be legal for a company to implement a mandatory participation pro rata buyback scheme? Like a sinking fund equity plan. If such a company immediately splits the stock so that every shareholder retains the same number of shares as they did pre-buyback, then it would be equivalent to a tax-advantaged dividend. You would even get a tax benefit if you sell below cost!
1. January 2013 at 13:37
Suvy, A few good ideas, but the VAT is not really “regressive,” it is proportional to consumption. Income is a meaningless number and should never be used in discussions of taxes, welfare effects, etc. The payroll tax should replace the income tax, and be made highly progressive.
Brad, Thanks, but that’s exactly the problem. Just like an IRS tax guide, it tells you everything except the things you’d like to know. In other words it’s worthless.
Steve, You are not addressing the question I raised. Why do lots of conservative southern states have relatively high top income tax rates, when the GOP claims to be obssessed with lowering top income MTRs? Why don’t those southern states lower their top MTR to at least Massachusetts levels? And by the way, based on recent elections New Hampshire is now firmly in the “liberal” camp. It has no income or sales taxes.
Liberal voters in Massachusetts recently rejected a progressive income tax, and I seem to recall that Washington voters did so as well.
I agree that UI benefits is a tricky area. I’d prefer a self-insurance system with mandatory personal accounts.
You said;
“The caveat is that married people enjoy a built in safety net against unemployment, plus lower housing costs.”
The housing cost argument is flat out wrong, as I showed in several previous posts. If this was the justification they’d use “households” not married people. People living in sin would be forced to use the married schedule. Ditto for friends with the same address. But in any case revealed preference shows it’s wrong, as single people can and often do share an apartment to save money. When they don’t it’s presumably because their utility is higher living alone.
If I got divorced and kept living with my wife I’d save many $1000s in taxes. How is that fair? Indeed the government has no business even knowing whether I am married or not.
I strongly disagree with your views on the Swedish safety net. The US marriage penalty is one cause of poverty in the US. Low income people in America are much better off not getting married, as compared to the 1950s, and this explains some of the trends that people like Charles Murray obsess over.
DJ, You may be right (at least for married couples where only one works) but that has no bearing on my argument that the marraige penalty is outrageous. The government should ignore marital status, in which case it would be neither a handicap nor benefit.
Thomas, You asked:
“If you favor taxing everyone as an individual, will my lovely wife qualify for welfare? She has no income but for her share of mine.”
I’d say that her ability to get welfare should not depend on whether she is living with you as a married woman, or living with you as a mistress. Do you agree?
You refer to a 33% tax bracket, but as I said the actual rate is nearly 41%. My point wasn’t that people like me pay too much in taxes, Indeed I specifically said that one could argue we should pay more. Instead I called for the press to tell us the truth, which so far they are not doing. My normative arguments related to complexity, marriage penalty, investment taxes, etc.
As far as the deductions you referred to, those should have been eliminated–the income tax should be replaced with a progressive payroll tax.
Yes, the deal is about what we should expect from our current crop of incompenent/corrupt leaders, but since most other developed countries have more efficient tax systems, per dollar of revenue raised, shouldn’t we demand more? I see too much fatalism, we should be outraged.
1. January 2013 at 13:37
The NYT article had some good information but missed the mark in some places
– no mention the marginal rate impact of phase outs
– repeated unchallenged a quote from Obama that said top rates were irrelevant to economic activity according to unnamed top economists
– framed increasing the tax code progressivity/cutting lower tax rates as a win for republicans
– framed the deal as an agreement between Obama and the GOP when Obama was basically dropped from the negotiations due to his negotiating incompetence–this being the reason for his childish outburst on Sunday.
1. January 2013 at 13:54
The Treasury takes 20% of GDP seemingly regardless of rates and rules over time. This likely says something about the interaction of the federal gvmt and us economy.
Spending is the problem, and they only “govern by crisis”. So only either a GDP or debt crisis will lead to changes. Given how change goes these days, long authoritarianism, short constitution.
1. January 2013 at 14:30
Scott, I looked up the 12 most conservative states and 12 most liberal states (based on Obama 2012 popular vote percentage) and looked up the top marginal income tax rate for these states:
The conservative states average top MTR is 4.5%
The liberal states average top MTR is 7.6%
Note that six 0%-ers (TX, FL, NH, NV, WA, AK) didn’t make the most liberal or most conservative lists.
state/Obama/top MTR
UT 24.9 5.0
WY 28.0 0.0
ID 32.6 7.8
OK 33.2 5.25
WV 35.5 6.5
AR 36.9 7.0
KS 37.8 6.45
NE 37.8 6.84
AL 38.4 5.0
ND 38.9 3.99
SD 38.9 0.0
TN 39.0 0.0
———–
ME 56.0 8.5
IL 57.3 5.0
NJ 58.0 8.97
CT 58.4 6.7
DE 58.6 6.75
CA 59.3 9.3
MA 60.8 5.3
MD 61.7 5.5
NY 62.6 8.82
RI 62.7 5.99
VT 67.0 8.95
HI 70.6 11.00
1. January 2013 at 14:31
“(Have you ever noticed that many ultra-conservative southern states have steeply progressive state income taxes, whereas Massachusetts has a 5.3% flat tax, and liberal Washington State has no income tax at all. Watch what they do, not what they say.”
Of course, many of those southern states only recently have had GOP leadership (NC first GOP Legislature was elected in 2010 since the Democrats’ race baited and ran on White Supremacy to knock out a Fusion Legislature in 1896.) So many of those ultra-conservative southern states had steeply progressive state income taxes– combined with right to work laws– brought in by Democrats. State income taxes seem to be tougher to repeal than to avoid instituting.
1. January 2013 at 14:34
I think that Obama made a huge success in refusing to do a deal with the GOP back in 2011. He kept shifting the terms of the deal in 2011 and intentionally sabotaged it, with the aimed of getting the GOP blamed. He never presented his own detailed plan, but attacked all plans, including those from the center.
He didn’t want a deal, because he believed that the failure to reach a deal would be blamed on the “intransigent GOP” instead of him. He knew that he would win re-election, and thus be in a stronger position. The only deal that the GOP could get in 2011 would have been equally bad, since Obama was in the position of strength.
1. January 2013 at 14:35
If you want to focus on the “Deep South” only (LA, MS, AL, GA, SC) the average top MTR is 5.8%.
The six “New England” states only (VT, NH, ME, MA, RI, CT) have an average top MTR of 5.9%.
So it’s basically the same by region, except it’s also kinda cherry picking to exclude TX, TN, and FL (all 0%-ers) from the South.
1. January 2013 at 14:36
The reporting of Woodward and the actions of President Obama make it clear that he did not want a deal. The tentative Boehner-Reid deal of 2011 would have been better for the GOP– but that’s exactly why the President came in late and torpedoed it, as Woodward reported.
Obama didn’t want a deal in 2011, because he wanted exactly this outcome. This has been my theory since before the negotiations in 2011 started, and I have only seen things that confirm it.
1. January 2013 at 14:38
If you include NJ and NY in the Northeast, and TX, TN, and FL in the South, suddenly you have this:
Northeast average top MTR: 6.7%
Southern average top MTR: 3.6%
1. January 2013 at 14:40
Even now, President Obama’s press conference seems to be baiting the GOP into voting against the deal before the deal is signed. I really feel like he wants the deal to fail, but the GOP to be blamed.
1. January 2013 at 14:50
Scott,
It doesn’t necessarily impact the merits of the position, but it’d be interesting if instead of hearing complains about the marriage penalty people started focusing their complaints on the “unfair” marriage bonus. It would be less effective rhetorically but more accurate(since it represents the more common scenario) if you focused on how “outrageous” the tax break is when one parent earns 100K and the other works part time making 15K (and typically takes the bulk of the child rearing responsibilities).
While this (plus presumably other marriage benefits like SS transfer) bother you just as much I suspect the typical conservative that expresses outrage about the penalty would be even more upset with your view if they fully understood the ramifications.
1. January 2013 at 15:40
Boehner was willing to raise taxes by $800B, but Republicans successfully got that down to $620B. Honestly, what did you think Republicans could get when they only control the House? This is a fantastic result … if it wasn’t for the lack of spending cuts. That mars the deal, but they should take the tax cuts and fight the spending battle later with the debt ceiling.
Sheesh, I think your expectations are way out of whack.
1. January 2013 at 15:50
Scott,
Happy new year!
You wrote:
“As I predicted last year, the GOP made a huge mistake in refusing to do a deal with Obama back in 2011, and the entire country will now pay the price of their stupidity.”
I understand, but actually, the entire country will pay the price for Obama and Democrat tax and spend policies – the policies are theirs and they’re winning by your and most other accounts. The GOP leadership are just stupid and ineffectual at stopping or negotiating policy, and/or possibly they are just Democrat-light as you pointed out . . . “the GOP likes high tax rates, tax complexity, the marriage penalty, and big government spending programs, and merely claims to have libertarian leanings on economic issues.”
The only real opposition to excessive spending and tax increases are the TEA party types who the press and elites seem to disdain and marginalize as extremists. Unfortunately they are too few to block passage in the House. The sequestration would have been less bad than what appears to be unfolding.
Any new thoughts regarding this PPPS comment from your September 15 post?
“Obama will be forced to adopt Simpson/Bowles-style austerity during his second term.”
http://www.themoneyillusion.com/?p=16251
Who will be forcing this?
1. January 2013 at 16:41
Scott, than you for this post!
As you say, no news outlets are covering the actual tax increases. It’s nice to see that at least some individuals do.
1. January 2013 at 16:54
Payroll taxes should be abolished? Really? And how do we fund medicare and social security? Frankly, the fact that we reduced payroll taxes in the face of a bankrupt entitlement system is ludicrous. Regressive, my ass. It’s the ONLY tax people in the bottom 50% pay. Raise the limit – sure. Means test. Maybe. But we must tax all Americans for these benefits. Or get rid of them.
Pay for Quality instead of Quantity in Medicine? I’m sorry, as the wife of a physician, I would like to strangle people who say such things. My husband has been in practice for over 25 years. He does not do procedures for the pay. He does them because it is the correct protocol for a patient. And he gets paid less and less for those procedures every year. He makes less today than he made 25 years ago for a 40% higher caseload. People who don’t know what they are talking about have been deciding medical policy for years. Let me tell you a few things.
Years ago, Hillary Clinton decided that the US had too many specialists. Cuts were made to specialty physicians that were deep. The intent was to push docs into primary care. The result ended up being a shortage of specialists. So because the hospitals were having trouble hanging onto docs, they started letting them buy into hospitals and take a cut of the facility fee. Which resulted in a huge building boom for specialty hospitals. It was grossly inefficient and it was the direct result of bad govt. policy. The govt. needs to get the heck out of policy making in medicine and let the markets fix the horrible cost problems that THEY created. And they need to put forth sane tort reform policies so that physicians don’t order that MRI they don’t REALLY think you need – which they are not ordering because their radiology friend needs the money, but because if they don’t order it, some lawyer is going to come back along and say they should have.
I have lived health care from all sides. I am an HR Director, managing benefits, cost and wellness. My husband is a doctor, and I have worked for a major health care system. Most of the cost overruns are a direct result of govt. interventions. Quality over Quantity. Bull.
1. January 2013 at 17:24
jknarr, The 20% number reflects the fact that we don’t have a VAT, and our gas tax is low, and our payroll taxes are much lower than in Europe. As long as that’s true, it will be near 20%, as you say. That would even be true with a 90% top MTR, as in the 1950s.
Steve and John, Those are all good points. I’d like to watch the deep south states over time to see if the newly dominant GOP is able to bring the top rates down below New England levels. I’ll keep an open mind on the question.
John, We’ve debated 2011 before, I think you misread Woodward. I’m told Boehner asked for the 2011 offer this time, and Obama said it was no longer on the table. That implies it was on the table in 2011. I recall the Dems moaning they they were offering big spending cuts for each tax increase in 2001, but the GOP opposed any tax increases, not matter how tiny. Now we get almost all tax increase, and no spending cuts. I’ll bet in 2011 they could have gotten a $1,000,000 limit on the tax increase (Schumer’s idea), and a permanent 35% death tax, for instance. Also some corporate tax reform–lower rates and less loopholes, which has support in both parties.
DJ, I agree, the average conservative would be horrified by my view that the government should pay no attention to whether people are married or not. But it would end the gay marraige debate, wouldn’t it?
Scott, You focus on how much we pay, but as I said in the post that’s not my criterion. I look at MTRs, marriage penalties, investment taxes, complexity. I’ll given them credit on the dividends, that’s a win, but otherwise it was a disaster. And no spending cuts either. But look, I did expect this, indeed I predicted Obama would get his way. The big mistakes were made after the Tea Party took over the GOP. I like their small government goals, but their tactics were stupid.
Primo, Government spending ballooned under Bush after falling under Clinton. If the GOP doesn’t understand that more spending leads to higher taxes, they are even more delusional than I thought. They are just as responsible as Obama for the higher taxes.
1. January 2013 at 17:28
Primo, OK, the S-B austrity is not here yet. But my PPPS was right about Mitt losing, and right that there won’t be any more fiscal stimulus. Recall how Dems like Yglesias insisted that raising payroll taxes would be a big mistaker? Well even the Dems in Congress favored a 2% jump in the payroll tax. I still think that in the long run the Dems are going to see the need for a simpler tax system with lower rates and fewer lopholes, but maybe I’m being delusional.
1. January 2013 at 18:02
If you evaluate based on the changes in law vs 2012 the republicans made out horribly, but if you evaluate vs the laws that are scheduled to go into effect if no bill is passed they did fine. I see as many left-wingers annoyed with the deal as right-wingers. Now if you want to say the repubs should’ve played ball last year and avoiding putting themselves in this position I completely agree.
It was clear all along that Obama wasn’t going to agree to spending cuts (even ones he seems to agree with like SS benefit calculations) unless he’s garunteed there will be no repeat of the debt ceiling debacle (among other things).
1. January 2013 at 18:04
Johnleemk,
I don’t really agree with the idea that saving causes more borrowing. I think there’s no limit to how much credit banks can issue; I think the loanable funds model is a poor model and I’m a believer in endogenous money. I don’t have a problem with credit, I have a problem with debt being used to finance the purchasing of assets. The role of debt is to facilitate a way for entrepreneurs to get capital. For example, if I run a business and I have all of these orders that others are asking for, but I don’t have the money to come up with the supply, I use credit and I have a cash flow to pay that money back. I only have a problem when debt is used to finance assets.
Also, I think that a progressive consumption tax would work. I’d be in favor of that. I think a federal propert tax and a tax on real estate, a tax on the purchasing of assets with leverage(like stocks, etc), and I would actually keep taxes on capital gains while getting rid of taxes on dividends. The most important thing in creating a rich society is to facilitate the creation of capital; that’s the only way we all get richer. I think that having a tax system that encourages this is actually the best way to reduce income inequality. I also think that as a matter of principle, only the rich(top 1%) should pay for government. I want to use government to fulfill social goals, but I think the best way to do that is to keep government small because large government almost always gets controlled and manipulated by a select few.
I would get rid of the mortgage interest rate deduction instantly; it’s just a way to encourage people to buy houses with leverage. It has the unintended consequence of creating poor lending practices. I think a tax on the size of banks and their OTC derivatives transactions is a really good idea–there’s a lot of sketchy things going on in those markets.
I just do not want to tax production and hard work. That is counter-productive to the creation of a rich society. We also want to reduce income inequality and that’s why I support taxes on land and assets. To add to that point, assets are inherently non-productive and people buying stocks with 15% margin doesn’t create wealth or produce anything.
1. January 2013 at 18:04
It is truly bizarre how you hold the Republicans in contempt for NOT blocking the policies you clearly despise but you seem to hold blameless the Democrats for proposing then passing those policies.
Even more bizarre you are even talking about the politics of it all. The policies are horrible. Whoever votes for it (watch what they do, not what they say) should be held accountable.
WPK
1. January 2013 at 18:04
1% of the workforce gaming federal unemployment insurance seems highly unlikely. Please enlighten us with numbers from these ‘guys you trust’.
1. January 2013 at 18:10
Scott,
I think you summarized well Bush era well here.
http://www.themoneyillusion.com/?p=11824
I agree with you. I also agree that “. . . the policy fiascos continue under Obama.”
Your analyses are objective, good and appreciated – nothing “delusional”. You “put a fork” in Romney in mid Sept. and I don’t recall any waivering afterwards. My question might have been better phased as rhetorical, a desperate plea for some spending control, not a challenge to your view.
As bad as Bush was, spending was around 20% GDP. Now under O it has been 24-25% GDP. I see absolutely no signs of pulling that back. I never would have guessed that I’d reminisce longingly for the Clinton – Gingrich era.
1. January 2013 at 18:38
“As bad as Bush was, spending was around 20% GDP. Now under O it has been 24-25% GDP. I see absolutely no signs of pulling that back.”
It shows no signs of pulling back because monetary policy is still way too tight. Consider whats behind most of the increase:
1) RGDP collapsed in 2009 and has grown only a little since then.
2) Automatic stabilizers kicked in while tax revenue dropped.
All bad stuff. But not exactly the bleak picture you paint, especially when we seem to be on the cusp of implementing an NGDPLT regime.
1. January 2013 at 18:41
Scott, one other point about state income tax rates.
Deep South states tend to have very very low property tax rates (not just dollar-wise, but percentage wise); these states prefer to tax laborers rather than landowners.
Best States for Property Taxes
1.Louisiana – 0.18%
2.Hawaii – 0.26%
3.Alabama – 0.33%
4.Delaware – 0.43%
5.West Virginia – 0.49%
6.South Carolina – 0.50%
7.Arkansas – 0.52%
8.Mississippi – 0.52%
9.New Mexico – 0.55%
10.Wyoming – 0.58%
1. January 2013 at 18:47
Worst States for Property Taxes
1.New Jersey – 1.89%
2.New Hampshire – 1.86%
3.Texas – 1.81%
4.Wisconsin – 1.76%
5.Nebraska – 1.70%
6.Illinois – 1.73%
7.Connecticut – 1.63%
8.Michigan – 1.62%
9.Vermont – 1.59%
10.North Dakota – 1.42%
1. January 2013 at 19:02
Scott, you write, “I’m sick of explaining why the taxation of investment income is unfair, inefficient, and double-taxes wage income that is saved. If you don’t understand, take a course in public finance, or read Miles Kimball’s blog.”
I understand your view, but I’d also be interested in your take on this paper, http://elsa.berkeley.edu/~saez/diamond-saezJEP11opttax.pdf, from Nobel Laureate, Peter Diamond, and John Bates Clark Medal winner, E. Saez.
1. January 2013 at 21:41
Scott, did you see this piece? http://www.washingtonpost.com/blogs/wonkblog/wp/2012/12/31/obamas-wrong-this-cliff-deal-still-raises-taxes-on-the-middle-class/
And I’m sure you didn’t see this tweet: https://twitter.com/vpostrel/status/286042611263881218
(You would have, if you’d been following me on Twitter *hint to other commenters hint hint*)
1. January 2013 at 21:58
Scott, sorry but you confused me midway through there. How come you’re paying “the three 1% MTRs for each exemption phase-out”? Aren’t those being levied on you and your wife as a couple? Or are you getting 3 exemptions each (3 for each family member)?
I’m not actually so worried by the MTR increases (of course if I had my way govt would be a lot smaller and funded with a 20-25% flat consumption tax), since apparently the “optimal” rate for rich people is something like 50% (70% according to Saez and Diamond, but they’ve gotta be wrong). What bothers me is the inability to restrain spending one bit; and even worse, the utter inability to make 98% of the American taxpaying public pay one iota more for the bills that they have already run up. It’s like being hooked on this apparently really easy credit plan. People just have no idea how much their government actually costs; it’s one thing to have the news blare figures at you, quite another to feel it in your own pocket. Norquist is wrong; we need taxes to rise in order to get a smaller government.
1. January 2013 at 21:59
And yes raising taxes on investment right now (or any time) is just so stupid.
1. January 2013 at 22:02
Also, since I don’t actually expect to get those Twitter followers, here’s a link to one of the most awesome Tumblrs I’ve ever seen. Presenting: Les Fiscal Miserables: http://lesfiscalmiserables.tumblr.com/
1. January 2013 at 22:07
ChargerCarl,
Thanks for the perspective. I will admit to being susceptible to pessimism. Can you point me to where I can learn more about these automatic stabilizers? There was a large stimulus in 2009. Seems like it reset the baseline.
From a high level, I struggle to understand why the Federal government requires twice the spending level now than just ~10 years ago. In 2000, outlays were $1,789 billion. In 2011, $3,598 billion. Inflation and population growth don’t justify the spending rise. What does? Why can’t expenditures be frozen for a few years while GDP and tax revenues recover?
Source: http://www.cbo.gov/sites/default/files/cbofiles/attachments/HistoricalBudgetData.xls
Steve,
One data point on TX and property taxes – I bought twice the house for half the price when I moved from SoCal to Houston area in 2004 – got lucky buying in TX and selling in CA at a good time. Property tax rates might be a fraction higher in TX, but my overall state tax liability is less (lower property value plus no state income tax). Suspect that is the case in aggregate statewide but don’t have the data.
From what I read, there seems to be a lot of higher income earner flight from CA to lower tax states. Suspect more soon following Nov. election results in CA. Hope those fleeing have sense enough to vote in future for candidates who keep regulations, taxes and spending sensible in their new home states.
1. January 2013 at 23:07
saturos, whats you twitter handle?
1. January 2013 at 23:27
I was very frustrated that the GOP let President Obama and Democrats get their full way on top MTRs on various types of income.
This study (which Tyler Cowen linked to recently)suggests that top MTRs on wages and various types of business income will now top 50% in some states and top MTRs on capital gains will top 30%. (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2176526)
I know many on the left don’t like it when it is said that their leaders and intellectuals pursue/push statist economic policies that are contrary to neoliberalism, but the evidence is stacking up against them.
Obama already has top MTRs over 50% in some states yet it is likely he will pursue even higher top MTRs in the future. This is not surprising since his economic advisors are telling him that high MTRs don’t really have an effect on the economy (a claim that is based on very faulty data and logic).
I am afraid that the modest pro market reforms that took place in the 1980s and 1990s are being slowly (or even quickly) undone.
The bad supply side policies of the 1970s (or, for a more modern example, France of the 21st century) appear to be back in vogue in the USA.
I agree that monetary policy can help fix a lot of our problems when it comes to aggregate demand and premature “austerity”, but good monetary policy cannot offset bad supply side policies that lead to higher structural unemployment and lower RGDP.
2. January 2013 at 01:36
Raise retirement to 70.
Cut Defense, VA and Homeland Security/Civil Defense in half: Savings $500 billion a year. Not kidding, check it out.
Print money to pay off half of federal IOUs, about $5 trillion ($10 trillion roughly is outstanding, not owned by agencies).
It may take that much of QE to get off the zero bound ice.
Cut tax rates, wipe out ethanol.
Rock and roll!
2. January 2013 at 01:39
PS
Don’t you like the fact that the US tax code and budget are so complicated that you have experts saying Obaba won the fiscal cliff showdown, and others say the GOP won?
And monetary policy administration is so convoluted that perhaps 2 percent of the US public even understands it, let alone agrees what to do?
This is democracy!
2. January 2013 at 02:47
Scott:
First, VAT is a regressive tax. It is so because everyone has to consume basic food and sheltering. So at very low consumption levels VAT equals lump-sum tax and it truly is regressive.
Second, I completely agree with your arguments against taxing capital and that we should tax labor more etc – in theory. Unfortunately in real world it is almost impossible to differentiate between the two. If there is high wedge between taxation of labor income vis-a-vis taxing capital income, you will create huge incentives for tax avoidance.
Something similar is already seen in Europe as a result of governments trying to convince workers that social security is “closed system” and that it is only them who should feed older generations without any chance of having similar care when they will be dependent on it.
So governments try to force people to pay taxes masked as social insurance by inventing artificial definition of what labor income really is. The common denominator is that those with less job flexibility lose and they have to pay taxes. Winners are various consultants or any workers who may be outsourced, a trend coupled with explosion in self-employment.
If you for instance work as a programmer, why should you be employed and pay 50% or more in payroll taxes when you can found 1-man software company, employ yourself for minimum wage and get the rest of your income in form of dividend that your firm realizes by being one of the subsuppliers of your former employer?
There are various regulations, for instance if you work in office owned by employer, then you are considered as being employed, but with the trend of home-office for many types of jobs this ends-up hurting workers who have to operate machines shifting more and more tax responsibility on their shoulders by those workers who happen to have more freedom to mask their labor as capital gains.
2. January 2013 at 05:43
I, on the other hand, am completely exhausted by arguments that tax on investment income is a double tax and therefore unfair.
Just three points:
1. There are plenty of instances of double taxation in the world and for some reason those never rise to this level of prominence in the discussion. To wit: corporate income tax and all sales taxes in a system that also taxes income are double taxes. So what?
2. Let’s not pretend that carried interest is actually “investment income”. Let’s also open our eyes to the fact that many representatives of the so-called “investor” class are really investment professionals for whom there is no discernable difference between investment income and wages.
3. Lots of things in the tax system are “unfair” to different people. Tax systems are (or should be) goal-driven (what’s the most efficient way to accomplish a given goal of revenue) and not fairness driven. Once you get into fairness argumants, you pretty quickly get some cranky arguments about how taxes are unfair as a general matter and should therefore be abolished. Gah!
2. January 2013 at 07:38
DJ, The left wingers are annoyed because they are uninformed. They believe what they’ve been told. They believe that MTRs have not risen above 33% for the $250,000 plus crowd, whereas they have risen from 35.9% to 40.9% give or take a little. If the left was told the truth they would be happier.
I’d add that this isn’t a zero sum game. No one should favor more complexity, no one should favor the marriage penalty. Indeed well informed liberals like Miles Kimball even oppose taxes on investment income.
WP, The tax increases coming into effect were enacted by the GOP under President Bush. He’s the moron who opted for temporary tax cuts in the first place. And he’s the moron that bloated the Federal budget so much that tax increases were necessary. Why didn’t the GOP fight for closing loopholes? Why didn’t they fight for less complexity? Why didn’t they fight for ending the marriage penalty? The truth is that the GOP is not the “good guys.” We are not in this mess because the GOP doesn’t get it’s way; they controlled the government back in 2001.
I’d add that I get at least as many comments from Dems saying “how come you always bash the Dems but never the GOP.” I’m actually one of the few bloggers that bashes both parties equally.
JJ riverrun, I’ve only heard a few cases of abuse from people I know, but then I also don’t know all that many cases of non-abuse. I admit the sample size is too small to draw conclusions. But I never win the lottery, much less twice, and I’m pretty sure the examples I have heard about are not one in a million deals. Maybe you skeptics could explain why Western Europe’s “natural,” or structural rate of unemployment rose so sharply in the last two decades of the 20th century. I eagerly await your explanation.
Greg, Search under “Journal of Economic Propaganda” and you’ll find my post on their views.
Saturos, With 3 family members we get three exemptions. In other words we get $3800 times 3 taken off our taxable income.
I agree about investment income. As I said in the post, I wasn’t really complaining about the high labor taxes, just try to get truth in advertising. I think high labor taxes on the affluent are defensible, and don’t have strong opinion on exactly where to draw the line. But I hate complexity. It should be a progressive payroll tax.
John Brown, I’d add that in real terms the tax on TIPS is now over 100%. The dividends tax is also much higher in real terms.
JV, It’s not regressive, you need to stop thinking in terms of income and think in terms of consumption. Income is meaningless, and the concept should be abolished. VAT is proportional to consumption. It’s regressive in terms of income, but that’s as meaningless a statement as “it’s regressive in terms of toasters.”
JV, I have addressed you concerns about taxes elsewhere. I argued that most people (including me) have jobs where it’s easy to distinguish between capital and wage income. For the self employed, all income from their business should be viewed as wage income until they prove otherwise to the IRS. The self employed would not have to prove that income from bank accounts, stocks in other companies, etc, is wage income, that’s obviously capital income. But if it’s capital income in their own company, I’m fine with viewing that as wage income, unless they can prove investment took place, such as constructing a building using their own funds. Do that and I’ll never again have to fill out a 1040, and the same is true of 90% of Americans.
I’m not saying the system would have no complexity, but we already have different rates, so the IRS already has to deal with all these issues. It would be much simpler.
Alekseyev, See my response to JV.
2. January 2013 at 07:43
Scott, my point on income/tax brackets was just that your mention of your own income might lead a reader to the wrong conclusion about your household income.
You really didn’t provide an answer on the welfare question, because welfare eligibility looks at household income. Since you don’t think that’s a relevant criteria for tax purposes, why would you think it’s relevant for benefit purposes? Or do you think that it isn’t?
You have the 2011 budget negotiations wrong, because you are reading too much from people who ignore Woodward (and Republicans) on the subject. And you are wrong on what comes next, which is a debate over spending cuts. The differences between the parties will be made clear, which is unfortunate for the pox-on-both-your-houses-but-especially-the-stupid-GOP folks.
2. January 2013 at 07:58
Scott-
Complexity is a favority thing for the GOP. Most people hate taxes not so much per se as much as they hate filling out the tax return each year and you appear to be in the same basket. Yet, filling out the tax return is closely associated with paying taxes and the pain of one experience is easily transferred onto another in any sane person’s mind.
A simple tax code, one where tax filing is actually unnecessary (or where IRS does the calculations for you and you have a choice of either ticking the box “Agree” or another box “Disagree and here is the amended return”) is actually a favorite progressive hobbyhorse. Not least of all because people reasonably anticipate that both MTR and average TR would probably be higher under this simplified system making more available for social safety net programs.
2. January 2013 at 08:03
Prof. Sumner,
I am very sorry for nagging you. You are a hero and inspiration to me of sorts. Your blog–which I discovered via Yglesias–has been hugely enlightening.
But with all due respect, you haven’t quite answered my question. You have stated your position on what is “optimal”–that both emerging markets and wealthier countries should ideally experience moderate inflation (say, 2%) over the long run.
But you still have not explained why emerging markets tend to depart from “optimal.” Why do emerging markets tend to experience more rapid inflation than relatively wealthy countries?
2. January 2013 at 08:06
Saturos. They got the FICA increase, but not the increase on the upper middle class. This morning NPR said no tax increases for those making less than $400,000. Sigh . . .
Thomas, I thought I did answer the welfare question. I said wives of rich men who don’t work should be treated the same as mistresses of rich men who don’t work, and live in the same home. I.e. “marriage” should have nothing to do with the question of whether someone gets welfare.
In any case, I prefer to abolish welfare as we know it, and replace it with subsidies for low wage workers. If workers can’t find a job, give them a low paying government job like picking up trash along the highway. Then make low wage “real jobs” more attractive with wage subsidies. Very few would opt for the picking up trash option. If they can’t work then use a disability program, not “welfare.” I presume the rich wife you refer to is not disabled.
I’m open to the idea that someone should be disqualified if they live in a expensive dwelling, but marriage is not the issue.
I’ve read Woodward, and what he says is very different from what he implies. Republicans need to read him more carefully, he doesn’t say what he seems to say. The GOP in 2011 was not willing to accept any tax increases Period, end of story.
2. January 2013 at 08:13
Travis, My mistake, I did answer but it was in a comment that was accidently deleted, so you never saw it.
The answer is fixed exchange rates combined with hte Balassa-Samuelson effect.
2. January 2013 at 08:15
Scott: As for VAT what I meant is that it is regressive in any way you want to think about it. Maby the best way to explain it is that that everybody has some basic needs for consumption. Obviously this will vary based of how much goods and services are provided by government and charities for free and based on individual, but I think you can concede that there is such a sum for each individual. The fact that taxation of this subsistence consumption is unavoidable makes it regressive.
The opposite side of this is that any consumption over this basic, subsistence consumption is subject to choice. After your basic needs are satisfied, you are free to choose between more consumption, or more saving to increase future consumption or even leisure. What VAT does is that it robs people with low incomes of this choice by forcing them to spend more on basic needs.
And just to conclude, I am all for VAT – it has broad base, easy administration etc. But it is needed to hold in mind that it really is regressive. Every increase in the consumption tax rate needs to be analyzed so that its regressive impact can be calculated and compensated. That is all I am saying.
2. January 2013 at 08:32
Scott: As for capital/labor distinction, I really do not know what you have in mind. Imagine that you are small company owner who has 5 employees. You are skilled salesman and you are able to buy their labor for $10 a hour, pay additional expenses worth another $10 per hour and sell it for $40 an hour. You also happen to provide them with some tools and place where they conduct their labor.
So now, are you entrepreneurial who smartly invested and now enjoys profit from it, or are you skilled manager/salesman and the profit is result of your hard managerial/salesman work? Or do you need to have shares in company where you do not work in order for that income to be considered a profit as opposed to wage? No problem, if you happen to have partner in your company, just split it into two separate companies where you will have share in a company the other guy officially works and vice versa. Both of you will work for minimum wage and will have income stream from shares in company some other people work for. It seems like a lot of fuss just to evade taxes – but remember, we are talking about difference between no tax and 50% tax. That is pretty hefty sum to come up with some really innovative stuff.
2. January 2013 at 09:15
“PS. I’m sick of explaining why the taxation of investment income is unfair, inefficient, and double-taxes wage income that is saved. If you don’t understand, take a course in public finance, or read Miles Kimball’s blog.”
I’m really sorry, I followed the link and read Kimball’s blog, but I still don’t understand. Kimball’s blog contrasts taxing money spent on consumption vs investment, but the consumption issue is a confounder. My question is on the tax rate on return from investment in work vs capital.
Say we have two matched individuals, A and B, who both work full time jobs and both save $10,000 to invest. A invests in some capital instrument. B uses it to put herself through weekend plumbing school. Then B works weekends plumbing.
At the end of the year, both A and B have similar $1500 return, reflecting the free market value chain of what they did. But A’s return is taxed at lower capital rates than B. B’s income is not only “double-taxe(d) wage income that is saved” but is also taxed at a higher rate than A.
Other commenters say this has been covered 1000s of times but I still don’t understand it. I need help on seeing why it is ethical or efficient for the tax code to enforce a relative subsidy on A and a relative penalty on B.
2. January 2013 at 09:17
Considering that corporations don’t pay payroll taxes on their income, it seems appropriate that their earnings (when realized by the investors) be hit with payroll taxes to bring their taxation in line sole-proprierterships and personal income. Anything over that level is double-taxation.
How do you guys feel about speculative gains on things like futures trading? When the price of a stock rises, it’s fair to assume that money is either being earned by that company (or is anticipated to be earned) and thus, taxes will be paid. On the other hand, if I buy a few acres of land and then resell them in a couple years for twice the price, the only work that was done was my own improvements or wheeling-and-dealing so shouldn’t I pay taxes on the profits? It escapes me how this work should be taxed at a lower rate than income derived from breaking rocks in the hot sun.
2. January 2013 at 09:35
Here are two more good pieces: http://www.bloomberg.com/news/2013-01-01/senate-passed-deal-means-higher-tax-on-77-of-households.html
http://www.cnbc.com/id/100348808
2. January 2013 at 09:38
Ssumner, If you are sick of discussing certain topics, then put your best ideas in one folder and put a link to it!
Regarding the “Marriage Penalty”, I see it as a marriage tax break. At least it is a tax break if you are part of the “real houswives” / country club set, with investment banker husband and dilittante wife.
The income schedules for married / single come from a time when a we had a lower percentage of two income households, and was considered a gift to families. Since the distribution of two income households changes with income, perhaps there should be some “progresivity” to the marriage schedule. e.g.
Income level
Individual Married
50K 1.8x 90K
100k 1.6x 160k
200k 1.4x 280k
2. January 2013 at 09:38
I suppose that Scott will also dismiss this as meaningless: http://thehill.com/blogs/blog-briefing-room/news/275197-poll-6-in-10-voters-favor-across-the-board-spending-cuts?utm_campaign=briefingroom&utm_source=twitterfeed&utm_medium=twitterfeed
2. January 2013 at 09:41
Doug, have you checked the sidebar?
2. January 2013 at 09:55
Some good comments here as well: http://blogs.wsj.com/economics/2013/01/02/wall-street-economists-react-full-fiscal-cliff-not-avoided/
2. January 2013 at 10:09
[…] Rodgers → Fiscal Cliff Deal: An Overview Posted on January 2, 2013 by admin Scott Sumner breaks down the key points: Almost all of the press reports on the tax increases are wildly […]
2. January 2013 at 10:15
” I have heard several stories from different people I trust, who describe people they know who are enjoying a long vacation at Uncle Sam’s expense, and bragging about it. That’s not to say most unemployed are doing this, it’s just a minority. Maybe 1% of the workforce. But it is becoming an increasing problem as more and more people figure out how to game the system. Ivy league professors overlook this problem because they don’t socialize with the sort of modest income person doing a crappy job who is tempted by this option, and they can’t imagine anyone they know taking this route voluntarily.”
As someone who has been on unemployment-I’m not currently and hopefully won’t be going back on it- I don’t see how you can be tempted. How can you afford a vacation solely on $133 a week?
There is no way. However, even if we take the premise that 1% are living a great life on $133 a week, wny should the other 99% be punished for that? Why must preventing a couple of bad apples be more important that the 99% aren’t but are struggling and need help?
As for the deal I agree the Dems cleaned their clocks. As they should have: like neconservative Bill Kristol admitted on Fox they week after the election “elections have consequences.”
2. January 2013 at 10:17
comments are now moderated?
2. January 2013 at 10:28
[…] –My outrage is not directed at the amount of taxes I pay, but rather at three other morally indefensible aspects of our tax code, each of which gets substantially worse: 1. The marriage penalty 2. The complexity of the tax code, including the fact that the IRS itself is unable to answer questions when I call for advice. If they don’t understand their own code, how can the average person? 3. The taxation of investment income, which double taxes all income that is saved and then spent in the future, rather than spent today. And the tax rate on investment income rises by even more than 5%. As far as I can tell the increase will be about 7.9% on people in my income bracket, and 8.8% on the very rich. The GOP did get one minor victory; the dividend tax increase on the rich was scaled back from an absurd 28.4% to “only” 8.8%. It will rise from 15% to 23.8% on the rich. Recall that dividend income is triple-taxed. Everywhere else they lost badly. –Scott Sumner, Bentley University […]
2. January 2013 at 10:38
As to the expiring payroll tax cut, I agree it’s going to raise the taxes of workers, however, this was what the GOP wanted. The payroll tax cut was Obama’s idea and I assume he figured he couldn’t get it into this on -the GOP would oppose it, and there’s only so many things you can fight for in one deal. Even in 2012, the GOP was against extending it until they got a lot of political blowback.
Just shows they don’t like all tax cuts just certain kinds. I also seem to remember you never liked the payroll tax holiday either though you thought that an employer side holiday might have some value.
So that has nothing to do with a higher rate on people making over $450,000.
2. January 2013 at 10:45
[…] -My outrage is not directed at the amount of taxes I pay, but rather at three other morally indefensible aspects of our tax code, each of which gets substantially worse: 1. The marriage penalty 2. The complexity of the tax code, including the fact that the IRS itself is unable to answer questions when I call for advice. If they don’t understand their own code, how can the average person? 3. The taxation of investment income, which double taxes all income that is saved and then spent in the future, rather than spent today. And the tax rate on investment income rises by even more than 5%. As far as I can tell the increase will be about 7.9% on people in my income bracket, and 8.8% on the very rich. The GOP did get one minor victory; the dividend tax increase on the rich was scaled back from an absurd 28.4% to “only” 8.8%. It will rise from 15% to 23.8% on the rich. Recall that dividend income is triple-taxed. Everywhere else they lost badly. -Scott Sumner, Bentley University […]
2. January 2013 at 12:08
[…] can also say that I’m not as critical of the deal as Scott Sumner or Steven […]
2. January 2013 at 12:34
It would be nice if Scott Sumner actually used facts when discussing unemployment insurance benefits instead of using meaningless second-hand anecdotes about people cheating the system. Then throws a guess amount of the number people doing it. Hard to take anyone serious when they do that.
2. January 2013 at 12:37
You think 35.9% is an absurd MTR? Try having an income a bit below $100k… 28% tax bracket plus self-employment tax of 15.3% means I’m paying a 43.3% MTR. And not even Obama would say I’m rich.
2. January 2013 at 12:44
Let’s be clear:
1. The American people voted for higher taxes and higher spending. Obama made no bones about coming after the wealthy. So you should not be surprised, and if you voted for Obama, you got what you deserved and what you expected.
2. I hardly know what you expected Republicans to do on yesterday’s vote. Would you have preferred the fiscal cliff? Would you have considered that a Republican victory? What’s your Plan B?
3. This tax package hardly makes a dent in the deficit. The Administration will have to come back to the with a wider net, twice more.
3a. Further tax increases may be difficult to implement; further spending cuts will not be forthcoming. So we’re now on the express train to a financial crisis. This is entirely similar to Hungary post 2000, when a conservative government ran up a big deficit prior to an election and lost, and then the Socialist government ran with that deficit for the next two terms. The most recent chapter is the rise of fascism in Hungary.
4. What would you have the Republicans do now? Should they make a stand on the debt ceiling and use it to bring spending down? Or would you prefer to see your taxes go up again by a similar amount? Where should the Republicans draw the line?
5. If only Bush had made the tax cut permanent? What? You think the difference between you and a lower tax rate is a permanent tax cut from Bush? It’s not. What’s driving your tax rate is a trillion dollar deficit, and what’s driving that is entitlement spending.
6. Oh, and it gets worse. At Bentley, some 70% of students are on financial aid or some other form of support. The nature of financial aid is such that it essentially sweeps all free cash from the parents’ household budget. (I can tell you this from experience). Now, if the tax obligations of these parents go up, they will have little recourse but to transfer this burden to the school in question–it’ instrinsic to the nature of financial aid. So expect Bentley to see a kind of crisis in student funding come the fall. And some of that pressure will make it down to you. (This is worth a post all of its own.)
7. Finally, let’s not kid ourselves. You are mad that you’ll have to pay a good bit more in taxes. I know that tone. I’ve used it myself. A lot, recently.
2. January 2013 at 12:46
I think the Repubs did pretty good in this deal.
GOP Wins:
* They got a permanent income tax for most people (starve the beast)
* They take no political blame for “fiscal cliff” B.S.
* Spending fight is only postponed 2 months
* Loopholes are now more valuable.
* They keep issue of fighting for lower rates on small business.
GOP Losses:
* Tax cut will be called “Obama” cuts
* Obama’s wording on debt ceiling hints he will use the “execution on budget trumps debt ceiling” rule
2. January 2013 at 13:00
“If only Bush had made the tax cut permanent? What? You think the difference between you and a lower tax rate is a permanent tax cut from Bush? It’s not. What’s driving your tax rate is a trillion dollar deficit, and what’s driving that is entitlement spending.”
Ummm, no. Whats driving that is tight monetary policy.
2. January 2013 at 13:44
Scott, what do you think about the asset markets’ reaction to the deal? My guess is that the Fed was not expected to wholly offset the impact of the fiscal cliff; additionally, the fact that a deal was reached may be a signal that partisan, hyper-polarized politics is less important in Washington that we used to think.
2. January 2013 at 14:24
“3. The taxation of investment income, which double taxes all income that is saved and then spent in the future, rather than spent today.”
Here’s a suggestion to mitigate this problem: abolish the mortgage interest deduction.
If someone saves by paying off debt, then the ‘yield’ he gets in form of reduced interest payments is not taxed, as long as the interest payments weren’t tax deductible. Alas, mortgage interest is deductible, so the reduction of interest payments does get taxed and mortgage is a very common form of debt for normal people.
There’s a ton of other reasons too for getting rid of this deduction anyway.
2. January 2013 at 14:45
Don:
“They got a permanent income tax for most people (starve the beast)”
Higher taxes is not consistent with starve the beast. It is the exact opposite.
In this deal, the Dems got what they wanted. More taxes and hardly any drop in spending.
2. January 2013 at 15:35
Everyone, Here’s where I explain the folly of taxing investment income:
http://www.themoneyillusion.com/?p=7091
2. January 2013 at 16:24
Scott,
Your post doesn’t answer the question: why should someone who derives their incomes clicking buttons on a computer selling assets be taxed at a lower rate than someone who derives their income by breaking rocks in the sun.
It is rather mendacious to frame the argument in terms of retirement income since retirement income is generally exempted from capital gains taxes via retirement investment vehicles like IRA and 401k accounts. So really all you’ve done is evade the question posed: why do you hate laborers and love hedge fund managers so?
2. January 2013 at 17:12
Benny lava, I’m pretty sure Scott has come out in favor of eliminating the carried interest loop hole.
2. January 2013 at 17:36
Saturos, Even the good pieces are filled with errors. And yes, that poll is meaningless. Do they want to cut Medicare? I doubt it. If so, which granny do they let die?
Mike Sax, As usual, I don’t see any connection between your comment and my arguments. As I recall the max UI was about 39 weeks in 1992 when Clinton was elected and unemployment was in the sevens. I think 52 weeks would be reasonable for this year. So if I’m a horrible person, what do you make of Clinton?
If you can’t imagine anyone taking advantage of UI, you don’t have much of an imagination. I have met many people during my life that would easily be willing to abuse the system. And you need to think at the margin–this is an econ blog.
Brian, If you read my comment threads you’ll find naive people who can’t imagine anyone doing something so awful. They haven’t been exposed to the real world. If you want scientific studies you can find plenty that show UI reduces employment. This is a blog, I don’t feel a need to cite those studies every time I post.
BTW, I’m actually a “liberal” on this, the conservatives think almost all of the unemployment is due to stuff like UI. I think it’s mostly lack of AD. But some people just can’t handle reality, and prefer to live in a fantasy world where the victims are never ever at fault.
sjp, You said;
“You think 35.9% is an absurd MTR? ”
Did you not learn how to read in school? I said I was not complaining about paying too much in taxes. When I say something in a post, it’s there to be read, not ignored. And the rate is 40.9%, BTW.
Steven Kopits, You said;
“Finally, let’s not kid ourselves. You are mad that you’ll have to pay a good bit more in taxes.”
Actually I won’t have to pay much more–I’m near the cutoff. And I’m doing great financially. And I’ll retire soon. My only complaint is having to do my own taxes. And you are a jerk. But unlike sjp, at least you read my post; you simply assumed I was lying. But I wasn’t, indeed I don’t ever recall lying in a post–it’s not my style.
anon, I presume the market was relieved that there was a deal, and liked the drop in the dividend tax from 43.4 % to 23.8%. The markets don’t care about some of the issues that bother me (marriage penalty or benefit, complexity and frustration, etc.) But the big drop in investment income taxation helps the market.
Benny, The income of hedge fund managers should be taxed as labor income, as I’ve indicated many times.
2. January 2013 at 17:37
Chargercarl, My witness! Otherwise he would have accused me of lying, as Steven did.
2. January 2013 at 17:37
Just kidding Benny.
2. January 2013 at 17:46
The stock market is up significantly today. DOW: +300 Nasdaq +93. So not everybody is upset.
I guess given this dysfunctional government this outcome is pretty good. And Warren Buffet’s secretary will still pay a higher tax rate than Warren. I mean what’s not to like?
Why anyone would expect actual tax reform to come out of something like this is a complete mystery to me.
Since we are going to be going through this all over again in about two months,I am looking forward to hearing the Republican plan for cutting spending. Haven’t heard it yet. But I am stocked up on popcorn so I can munch while I wait.
As far as I am concerned cutting medicare/medicaid/social security spending is just as much a tax increase as what just occurred, though on different folks.
I know for myself, I’ve planned for years on being covered by Medicare and receiving social security. I’ve payed in thousands and thousands and to not receive these benefits would be a serious breach of promises between the United States government and its citizens. Apparently the Republicans do not understand this or do not care.
After all they successfully fought to keep the estate tax from increasing even though they could not get themselves to vote for aid to help repair the devastation of Hurricane Sandy.
2. January 2013 at 19:14
I don’t think that Sumner’s argument that a VAT would not be regressive holds very much water. Yes, rich people consume more, but there is a limit to just how much one can consume, while there is not a limit on how much wealthier one can be than their peers.
Rich people could easily have a greater multiple of wealth than that of what they are able to consume compared to poor people.
2. January 2013 at 21:19
I need more than an imagination to know how $133 a week is going to give someone high living.
It’s not about imagination but simple math. You claim that my comments have nohting to do with your post then you talk about being an horrible person-which had absolutely nothing to do with my comments.
Again, even if there is the 1 percent that is somehow able to live a life of luxury from unemployment benefits why should the 99% of people you admit are honest have to pay for it? Why should a few bad apples mean you scrap the whole thing.
2. January 2013 at 21:25
Re: regressive VAT: pay out a refund equal to the expected tax paid on basic needs.
2. January 2013 at 22:09
Scott, here’s David Henderson’s reply to this post, makes a good point: http://econlog.econlib.org/archives/2013/01/constitutions_m.html
Mike, $133 (Australian) per week without work seems very tempting to me (and Perth has a fairly high cost of living).
ChargerCarl, it’s https://twitter.com/_Srijit. You can see some details by clicking on my posting handle above my comments, takes you to my Gravatar page, dunno if anyone’s tried that. Saturos was taken, so I had to use my real name. Funny how the most random invented names end up taken on sites you’re trying to join, hey? In fact there’s a great Australian comic who has a skit on that: http://www.youtube.com/watch?v=o605DTjj7HU
2. January 2013 at 22:13
Mike, whoops, my bad, though that was daily! Yeah that’s probably too low even for me. Still, like Scott said, think on the margin.
2. January 2013 at 22:20
Yep that’s right I’m self-dyslexic.
3. January 2013 at 06:18
Yeah Saturos I was gonna say. Maybe $133 Australian dollars gets you a lot more than American…
I’ve gotten the $133 from UI-there’s no way you can live on it in NY for sure. I lived in Mass prior to NY-no way that’s happening either.
Unless you have another inome source. I knew someone who admitted she wasn’t looking for work but she had prior savings from work and a boyfriend who spent money on her Pluas she was getting a little more as her job had paid more.
Still if you are broke-like I was it’s not possible.
If you have prior savings then it’s meaningluess. It’s like when Romney joked about being “unemplyed”. With $250 million in the bank he could certainly live with a $133 check every week. But at that level he’s certainly not “lving on $133 a week”
3. January 2013 at 07:08
As far as I can tell this passion for making the tax code “less complex” just means making it flatter which of course is “simpler” but more regressive.
True Herman Cain managed to propose a flat tax-9-9-9-that was actually very complicated when you got into it.
Scott I get that you want to “close loopholes” and lower rates but that’s what Romney ran on and I think the people spoke. You may not think public opinon matters but that’s how democracy works, People are elected on votes not just what Right wing economists think makes sense.
3. January 2013 at 07:32
“The tax increases coming into effect were enacted by the GOP under President Bush. He’s the moron who opted for temporary tax cuts in the first place.”
Why was that though? To get it passed. At the time there was a lot of criticism of them as blowing up the budget and wasting the surpluses. To make the picture look better he made them temporary.
Actually it wasn’t a bad strategy-they lasted 10 years. He had thought that what happened at the end of 2010 would happen every time: the GOP just had to tie the tax cuts for the rich to everyone else’s and in the end they would be permanent-effectively at least.
However, now Obama was able to split them up. Game set match. By the way, people’s taxes are up becasue of the end of the payroll holiday not because taxes have risen on those making over $450,000.
3. January 2013 at 11:22
[…] except the things you'd like to know. In other words … … Read the rest here: TheMoneyIllusion » Initial thoughts on the deal ← Accountancy Training: What Is Income Tax? Accounting Course Guru Custodial Parent […]
3. January 2013 at 11:31
Mike Sax, No, the election was not about closing loopholes, polls show the public supports a system with lower rates and less loopholes. And no, simplifying the tax code has nothing to do with regressivity, as even many progressives have pointed out. And no, there are millions of people living on UI right now, so you are wrong about that too. Do you not even know that there are millions of people living on UI? If you do know, how can you say it’s impossible? And if you say they have outside income, doesn’t that prove my point? Sometimes I wonder whether you even bother to think before you write.
I mentioned that most people were affected by the end of the payroll holiday, but apparently you didn’t read my post.
And now you repeat the charge that I want to eliminate UI, even though I just replied to you that I favored a higher number of weeks than under Clinton (for 2013.) Do you even read?
lxm, The stock market responds to new information—the lower dividend rate and the end of fears of the fiscal cliff. It has nothing to do with the things I complained about, which would not be expected to affect the stock market.
3. January 2013 at 11:42
“Mike Sax, No, the election was not about closing loopholes, polls show the public supports a system with lower rates and less loopholes. And no, simplifying the tax code has nothing to do with regressivity, as even many progressives have pointed out. And no, there are millions of people living on UI right now, so you are wrong about that too. Do you not even know that there are millions of people living on UI? If you do know, how can you say it’s impossible? And if you say they have outside income, doesn’t that prove my point? Sometimes I wonder whether you even bother to think before you write.”
If you say the public supports closing loopholes and lowering rates then they should have voted for Mitt Romney. Obama was never shy abobut the fact that he planned to raise rates on the rich. Polls have consistently showed the public-even Republican voters support that.
3. January 2013 at 13:02
Scott –
I am sorry to be a jerk. If you like, I am happy to call you in person and apologize. Or call me, if you like, and you can take it out on me in person if you prefer.
Having said that, the tone of your post struck me as irritable.
I can understand outrage at having one’s MTR rise from 33% to 40.9%. That seems to me a legitimate reason to be unhappy.
On the other hand, I suppose I find it difficult to empathize with someone who can take an 8% tax increase with equanimity, but develops moral outrage over the fact that you need H&R Block to do your taxes. It’s the way I do it, and it’s not that big a deal, although it’s not cheap, either. So perhaps we are simply constituted differently.
I would also note that every time Tyler has linked you in recent times, I have popped over–as I think you’re a very interesting commentator and well worth reading. And every time, your posts, from my perspective, have reflected a high degree of irritability and stress which I do not recall from earlier times. Perhaps I incorrectly attributed this stress from this past post to increasing taxation, for which I apologize.
And perhaps I was projecting my own stress. My income is a bit higher than yours, and if I read correctly, you have a working wife. So do I. So we’re in about the same tax bracket.
But I am not retiring. I have three children in private schools on financial aid. And with the nature of financial aid, I will face the choice of essentially pushing the tax increase directly on to the schools or pulling one of the kids. So that’s my world. It’s not without its own stresses, and perhaps I was guilty–as Tyler Cowen might say–of mood affiliation.
3. January 2013 at 13:05
[…] a lot from thoughts of others who are usually my political allies. Most of the criticisms that Scott Sumner and Steven Landsburg make are ones I share. So I’m not judging the tax bill to be good. […]
3. January 2013 at 13:40
One more thought on tax “fairness”. Why is the assumption that fairness is based on a function of income or even consumption? Why not base fairness on the value derived from government. Governments primary purpose is to defend the property rights of people. Why not tax based on the value of the property? The more you own the more value you get from government the more you pay.
You kind of get it with the “land tax” idea, but having a copyright for 100+ years has lots of value thus non-real property should be taxed too. Stick with your ideal tax schemes and avoid any argument on the fairness of tax rates on carried interest cap gains,….
3. January 2013 at 18:38
From Mr. Sumner’s account, this is entirely negative for the nation. So remind me again–just what did the Democrats win?
Some weeks ago Rand Paul said he’d sign off on anything the Dems wanted to do. It looks like he got his wish.
3. January 2013 at 20:16
My lame attempt to explain why a consumption tax is better than an income tax:
Why Tax Consumption
Other reasons to tax consumption rather that income
A Progressive Consumption Tax
3. January 2013 at 23:17
“We’ve debated 2011 before, I think you misread Woodward. I’m told Boehner asked for the 2011 offer this time, and Obama said it was no longer on the table. That implies it was on the table in 2011.”
How does it imply that? It seems a necessary premise to the implication is “Obama always tells the truth.” But Obama is the person who has enshrined and legalized the Bush surveillance state, and who e.g. pretended to oppose the extension of the NDAA provisions to US citizens while actually forcing it through. This is public information, and should bother you as a supposed libertarian and supporter of Gary Bauer in the last election.
3. January 2013 at 23:41
Sorry Gary Johnson.
4. January 2013 at 09:20
Good points, one quibble:
Have you ever noticed that many ultra-conservative southern states have steeply progressive state income taxes
Well, some of those states were always socially conservative, but not so much economically, which is why they had so many Blue Dog Democrats in Congress: gov’t spending okay, gay marriage not okay. That was typically how things went at the state level too. And though that has changed somewhat since 2010, it’s really hard to cut state income taxes, as state and local spending has risen very fast since WW II.
But I agree there’s a definite split in the GOP between the so-cons and the fiscal-cons, such that it’s not always clear where the party stands. They were much more fiscally conservative from 1994 to 2000, then Bush got elected as a “compassionate” so-con. Then we got the Obama spending mess, so since 2010 things have been swinging the other way.
4. January 2013 at 12:25
Mike, Obama favor foreign aid programs. Obama was reelcted. So according to your logic this shows the public favors foregin aid programs.
Steven, Don’t worry about it, sometimes I overreact. Sorry to hear about your own stresses. But I get worn down by people constantly questioning my veracity and motives. I say what I believe. That’s why I sometimes overreact to commenters.
As far as H&R Block, I know someone who just got ripped off by a different tax preparer. They said their tax liability was $12,000, when it was obvious to me it was zero. (And we later learned it was.) So I don’t see tax preparers as the answer. I find April to be one of the most annoying months in my life. I recently switched to TurboTax, but even that has all sorts of aggregations–for no purpose.
Money is the least of my problems—complexity is the worst.
4. January 2013 at 14:15
No worries. Thanks.
5. January 2013 at 19:48
[…] Scott Sumner and Steve Landsburg are none too […]
5. January 2013 at 20:03
[…] Thoughts on the New Budget Deal Posted on January 6, 2013 by admin ==> Scott Sumner and Steve Landsburg are none too […]
8. January 2013 at 21:04
[…] Scott Sumner on the fiscal cliff bargain […]
20. April 2017 at 03:06
[…] http://www.themoneyillusion.com/?p=18429#comment-217250 […]