Being rich is awesome! – or- Maybe Harry Reid is on to something after all…
Our current tax code is a complicated affair, and our desires to make to more “fair” are even more so. What is “fair,” after all? Is it the rate you pay, or the total dollar amount? The only thing I can really say for certain is that whenever a tiny piece of reality makes itself known it never seems to fit into the neat and tidy narratives I’m told about the state of our economy.
One of the conversations we’re not having anymore thanks to the early Paul Ryan nod is “what do Mitt Romney’s tax returns really show that his people really don’t want us to see, anyway?” Harry Reid had suggested that we’d find that Mitt hadn’t paid any taxes at all, which – I must say – I had thought was ludicrous. My assumption was (and still is, in fact) that the “no-taxes” schtick was simply a ploy to bait Mitt into either releasing them, or paying a higher political price for not doing so. Low tax rates? Sure. No taxes due to no income declared? Of course. But no taxes at all even with ginormous income? That just seems a bit much to swallow.
Except according to data released by the IRS it turns out that such a thing is not only possible, it does in fact happen.
According to the New York Times, the IRS has just released the tax returns of the 400 highest income earners in 2009 – not the wealthiest or the ones whose wealth grew the most, just the ones with the highest actual declared income. The IRS has never, ever done anything like this before. To no one’s surprise, the tax rate that you and I pay is more than every single one of the 400. What is surprising, however, is how low a rate so many of them actually pay. Only 82 paid at least 30%. 89 paid between 10 and 15%. 27 paid more than zero but less than 10%, and – yes – six did not pay one dime in income taxes.
The average income of these top income-earners was $202 million.
I want to be very clear that from what the NYT article shows, none of the low levels of taxation paid by these folks reflect anything illegal or unethical. To a certain extent, the tax breaks they were able to take were a result of a bad economy that (presumably) made their incomes less than they might have been had the housing market never crashed. So know that I’m not looking to gather the villagers with torches and pitchforks. But despite the fact that legal and ethical mechanisms were properly used by the Upper Income Super Friends, this information is going to make Romney and Ryan’s message that the rich pay too much in taxes and need relief look really, really bad.
For one thing, it may actually turn out that Romney paid no taxes in at least a few of those years. I doubt this is the actual case, but I have to admit I now suspect that it’s probable that he paid a lot less than the 13% he quickly flashed when we threw him our beads early on in the election cycle. If his taxes are ever released and it turns out he paid nothing, or 2 or 3%, expect voter resentment to flare up to a very high degree.
But even if he doesn’t release those returns, I cannot think of a messaging scheme that will make the news from the Times, along with a promise from Romney that he won’t make the top wage earners pay more in taxes, go down well with voters. It is true, as I said above, that part of the tax mechanisms used to reduce rates were a result of the recession that lowered the 400’s 2009 potential income. But the country is full of people who felt the brunt of the housing market collapse, many of whom lost their homes and jobs. For a realtor or construction worker who was forced to work fast food to put a rental roof over their head, the Romney camp’s assurances that “those making $202 million deserved to be exempt from taxes because, hey, $202 million is so little for them” won’t resonate, especially when voters have been asked to pay the same tax rate with their new sh*t job that they paid with their old great job.
It’s also a good indication that out tax code in need of some serious overhaul.
Props to Obama, for getting the IRS to do that.
A deft play, and a timely one.
Romney may or may not have paid any taxes for ten years. But he will not release his taxes, and the people calling most loudly (including his own supporters!) are Mormons. I think I can draw a line there… can you?Report
Kimmi
I’ve heard that Harry Reid is a child molester from unnamed sources. Too bad Harry won’t prove his innocence or release his own taxes.Report
And if there was a longstanding norm of releasing one’s criminal records that Reid was violating, this would be a good analogy. Reid’s attacks are sleazy, but presidential candidates are (because of an informal but longstanding and respected norm) supposed to release their returns. Romney hasn’t done that, and he deserves to get smacked around for it.Report
Romney has released his tax returns just not as many as Barry and Harry want. Even then that still doesn’t justify Harry the molester.Report
This would be a decent argument if it asking for the rest of Romney’s returns were some sort of ad-hoc demand made by Barack Obama this year. But it’s not. Ordinarily, Presidential candidates disclose the financial information that Romney is keeping confidential. He’s entirely within his legal rights to do so, but it means that he’s not going through the normal process of running for President, which gives us a right to criticize him for it and wonder why he’s unwilling to do so.Report
So tell us then what is the informal standard and how is Mitt deficient? I think it is three years and has given two? That hardly justifies Harry the molester claiming he has not paid taxes.Report
Actually, it does.
If his only fault was paying 0% taxes, Romney would have no problem releasing his taxes.
No, no and no. His faults are much more unsavory than that.Report
As I said before, this is just more desperation from Barry to avoid talking about his failures.Report
It’s interesting that Romney is quite willing to reveal one tax return but not his previous returns. We do know Romney had at least one Swiss bank account and several offshore accounts.
Right about the time a rogue employee released the names of some Swiss account holders there was a mad rush on my tax attorney and his staff to file amended returns. So it makes perfect sense that Romney would release his last return but not the previous returns. Devil’s Advocate here, there’s nothing particularly illegal about a Swiss bank account. But taking the IRS amnesty would have been revealed in previous returns.
It doesn’t make sense, why one and not more. Obama doesn’t have to talk about Romney’s tax issues. Romney’s attracting more attention by not talking about it than his enemies could ever rouse up.Report
Really? How many news cycles has it taken up? How quickly could romney quash this simply by releasing them? I mean, after all, tax returns don’t make good news…Report
What should we make of your failure to know your own President’s name? That’d be considered high treason by True Patriots (TM).Report
My standard, which is to be understood as an educated, informed one, and by no means “what the masses think”, is that Mitt ought to release his 2009 tax returns.
That’s all.
There’s one specific provision in the tax code that I would like to know if he took advantage of.
$100 in cash is my wager (I’m open to others…) that Romney will NEVER release his 2009 returns.Report
Sorry all I care about is whether or not he has obeyed the law when he filled out his taxes. I could care less about how much he paid and in fact am a fan of anyone that legally arranges their taxes to pay as little as possible. I don’t have the silly Dem fetish for fairness.Report
Yeah we all know you’re a godless twit who condones stealing from the church collection plate.
I ask a question five times, you don’t answer? The sixth, you don’t get the benefit of the doubt.Report
Actually, part of the controversy started because he hasn’t yet released any. He has in fact released two partially prepared years returns, for 2011 and 2010. However, in both years he has asked for extensions – so the ones that he has released are not the ones he will eventually file.
Also, the informal standard over the past few decades is 8-10 years. None are required, of course, nor should they be. People should be allowed to keep that information as private as they wish to keep it.Report
Where are these two years of tax returns? My understanding is he has only released some of one year’s worth.Report
*snickers* not as many as his supporter, Huntsman wants, you mean. Or half a dozen other people on the right.
And many more Mormons. Again, i put it to you — can you draw the line? It’s not a terribly difficult cognitive leap — howevermuch cognitive dissonance it might cause you.Report
20 prominent Republicans who want to Romney to release more tax returns.
http://thinkprogress.org/election/2012/07/17/530121/15-prominent-republicans-who-want-romney-to-release-more-tax-returns-right-now/?mobile=ncReport
They are desperate if they call some of those folks “prominent.”Report
How about Huntsman Sr? I’m certain if anyone bothered asking we could get O’Neill in on the action too.Report
I am only midway through this fantastic post, but I had to scroll down to comment immediately because of this:
it’s probable that he paid a lot less than the 13% he quickly flashed when we threw him our beads early on in the election cycle.
Space awesome.Report
That gave me a visual I really did not want to haveReport
Keep in mind though that the tax code is very complicated. For instance losses are allowed to be carried forward or applied backwards so people can earn a lot of money in one year and not pay anything on it because they had huge losses the year before.
That said that’s an arguement for simplifying the tax code, not sympathizing with the wealthy.Report
I don’t think that’s particularly a problematic bit of the tax code.
Amnesty, on the other hand… *grins*Report
Wouldn’t it be great if everyone could do that?
“I made a lot of income in 2008, then was laid off in 2009; So I want a refund for the taxes I paid in 2008 to offset the loss of income I had in 2009. And to deduct my income loss in 2009 to the income I will have through 2013.”Report
You used to be able to. It was called “income averaging”, and was commonly used by, say, a writer who might spend two years between books.Report
And believe you me, it saved a TON of money for writers. Writers tend to get killed by current taxlaw. They get an advance, and then need to produce. The advance can be pretty large, but it’s basically one lump sum.Report
But how was it that middle income people lost their tax advantage, while rich investors kept theirs?
How the heck did that happen?
I bet it is one of those real complicated answers.Report
It’s one of those things you have to be a Job Creator to understand.Report
I dunno, I think it’d be an utter nightmare. Last thing we wanna do is make the tax code ~more~ complicated.Report
Anyone who has shitloads of money uses their resources to avoid the taxman.Report
Accountants are Cheap. So is reading the tax code. It’s kinda easy to be taxed 0% if you use a few income hedges. Well, I would say it gets harder if you’ve got more money, of course.Report
Burt –
Is that an argument for a simpler tax code, the case for a more muscular IRS or advice to just get over that fact that super rich people have it awesome?Report
Or that Liz Phair is bad ass?Report
Ding-ding-ding-ding-ding-ding-ding!Report
That’s a given. And Warren Zevon’s no slouch.Report
But Mitt’s not an Excitable Boy.Report
Meh, the whole tax thing is just a red herring from Barry to avoid talking about what a failure he has been. Doesn’t everyone want to pay as little as they legally have to?Report
Have you ever paid 0% on your income?
Just curious…Report
Do you pay more in taxes than you are legally required to?Report
No, but I’m not running for President.Report
I don’t think even people who are running for president should be scolded for not paying more in taxes than they have to. Or, if we go that route, then we should tell Warren Buffet to stop complaining about his tax rate being lower than his secretary’s and just overpay.Report
That’s why the issue is not scolding him for paying only what he’s required to, but rather having a public illustration of how much he legally has to pay, or had to pay in earlier years when took more actions that allowed him to pay less than he did in the last few years as he literally ran for president, since it’s a prime issue in the campaign. And that’s where he and Buffet don’t occupy the same space: they propose different policies, such that Romney proposes lightening the legal tax burden on people like himself and Warren Buffet, while Buffet wants to raise it.
Now, he’s entirely within his rights to deny the public the benefit of making that example of himself public, as the last (rich) Republican nominee did (notice a a pattern developing here?), but everyone else is within their rights to note and comment on this departure from convention, which is clearly a bid to change it for good.Report
Oh, I think the overall issue (how much the wealthy actually pay versus how much we think they should) is fair game. The fact that we should expect people to pay as little as possible is all the more reason for that not to be too little.Report
That’s Brin who does that, not me.
I’m certain that you pay more in taxes than you’re legally required to.Report
Scott,
You’re right, but the herring is very red indeed.Report
In more seriousness, I think the tax returns issue is pretty much a distraction, unless Romney did something actually illegal. If so, that’s pretty much an issue for the IRS to handle in a non-partisan way, per its customary rules for auditing tax returns.
Do I think presidential candidates should release tax returns for a given number of years prior to their run, perhaps with some redaction to protect the privacy of third parties? I lean toward “yes,” but I’m a little conflicted. How much privacy should a public official surrender? If presidential candidates ought to do it, how about HR reps or Senators? How about city councilors? Or mayors?
Maybe a better system would be for an automatic extensive IRS audit for the previous seven years of any candidate who makes the ballot in at least a majority of the states, and those results made public (again with redactions)?Report
Auditing isn’t the problem, sir.
The problem is the TAX CODE itself, in 2009, allowed folks to document illegal activity without punishment.Report
Then….the problem isn’t Romney’s refusal, per se, to release his tax returns.Report
My own feeling, fwiw PC, is that if a candidate wants to keep his tax returns private, that’s his business – but as it is a traditional act of transparency, he or she needs to be willing to take the lumps if they do refuse.
But I’d also add that in this particular case, they *are* a political issue because in part and indirectly Romney himself has made them so. He is running on a campaign platform that has lots lot of small moving parts, but two of those parts are this:
1. His wildly success track record as a business person that made a fortune is a reason to vote for him. (And I would agree that this is a point in his favor, in fact.)
2. That part of society that his opponent wants to increase taxes on already pay rates similar to everyone else.
If it turns out that he has paid almost no income tax, then I think for me it is a legitimate campaign issue – and I think it is entirely because, for me, Mitt has made it so.
It’s like the guy running for office that touts his private sector success that then cries foul if it’s reported his companies all went bankrupt – if you don’t want to deal with an issue, don’t make it a reason why I need to vote for you.Report
Tod:
Why is it relevant if Mitt legally minimizes the amount of taxes he has to pay?Report
Several reasons, though Tod did not limit the relevance of Mitt’s tax returns to the amount of taxes paid…
1.) If Romney argues that folks like himself already pay not only a lot, but too much, in taxes and his tax returns indicate that folks like himself, HIMSELF INCLUDED, pay less in taxes than the average person, as a percentage of his income, that seems relevant.
2.) If Romney argues that his success as a businessman qualify him to be President and his tax returns indicate that he has been less than successful as a businessman, that seems relevant.
3.) If Romney argues that investing in America’s future is a justification for lower taxes on capital gains and his tax returns indicate that he has sent much of his money overseas, that seems relevant.
If folks just want to get up in arms about how much Romney made, how much he gave to the Mormon church, and how much he did (or didn’t) pay in taxes… well, that is much less relevant, to the point of looking worse for his critics than himself. I do think Romney’s poor handling of the matter has not deserved him, which itself is highly relevant.Report
Why? That’s always the Dumb Question. It would be entirely relevant if the Mittster illegally minimised them, then took the IRS amnesty. We already know Bain was dealing with Panamanian shell corporations, the usual route to tax avoidance and money laundering in those days. We know Bain had Cayman Islands accounts specifically set up for tax avoidance.
Romney’s got doo-doo on his heels and you know it. That is relevant. If the man had nothing to hide, he’d release his returns and he won’t. Now you ‘splain Why we shouldn’t think that’s relevant.Report
For me? It’s relevant because we’re in the middle of a debate about who should shoulder what burden during an economic downturn. Mitt tells me it shouldn’t be people in his income range because they’re already paying a rate comparable to what I am.
If this is the case, than it does two things: it helps convince me that Mitt is honest (something I’m currently on the fence about) and it is a bit of data necessary in trying to decide who should pay what.
If this is not the case, than it helps convince me that Mitt is not honest (something I’m on the fence about) and it is still a bit of data to consider when deciding who should pay what.
Honestly, if honesty in government and getting he deficit under control are important I can’t figure out why it wouldn’t be relevant to you. (Mind you, prior to the NYT piece I didn’t think it was relevant to me.)Report
Everyone might want to pay as little as they legally have to looking only at that side of the ledger. But not everyone would necessarily take just every single action necessary to actually pay that minimum amount. It’s legitimate to form opinions about taking a particular action, or another, or fifteen of fifty or a hundred others, considered separately or in conjunction, in order to lower the amount of taxes paid to the U.S. federal government. Simply because an action has the result of lowering the amount of tax a person owes to the U.S. government doesn’t make that action immune to political or simply subjective evaluation.Report
Well, you’re always free to make the argument. Conservatives are free to argue that Buffet and the like are hypocrites for demanding higher taxes while paying as little as possible. I don’t generally find these arguments very convincing.Report
You or they actually don’t know what actions Buffet or others who advocate higher compulsory tax rates for themselves don’t take which they could which would lessen their tax bill. It’s not in evidence, as far as I can see, that anyone in particular actually does pay as little as possible.
Now, I’m sure Buffet does take actions designed to lower his tax burden. I don’t know if this makes him a hypocrite. What he says is he doesn’t think it’s right that what he is required to pay is a lower rate than what is secretary is. Everyone who thinks this fact of the law is not right while observing it is a hypocrite? I guess I don’t really care enough to figure out whether that’s true or not.
Al I was saying is that nothing about a particular action’s having the effect of laowering someone’s tax bill makes immune to having people form opinions about it. This opinion formation rarely takes the form of argument that is either sound (i.e. someone who isn’t inclined to, but who is intelligent and honest, must acknowledge it to be right). I’m just saying that all that’s going on here is people are saying, ‘Mitt Romney’s not making as much of his financial history public as most candidates have, and if he did and I brought it to your attention, I’m betting you wouldn’t like what you saw.’ That’s not really even an argument; it’s just a political prediction. And if they were public, the argument would be: “Look! What do you think of that?” Again, not an argument. You just think what you think. All I’m saying is people can think what they want to think about this, i.e. less of someone once they see what they’ll do to avoid paying taxes. And I think a lot of people do (until they get rich).Report
I don’t really disagree with any of this. My initial response was actually thinking that you said what you were saying in a different context.Report
There are some things that are legal, and others that are illegal.
2009, the year Romney won’t/can’t/shan’t release, has some quite interesting
things in the tax code.Report
Startling. Also the way a columnist at Reuters put it:
The fact that “[t]he effective federal income tax rate for the 400 taxpayers with the very highest incomes has declined by nearly half over the past two decades” also deserves attention (CBPP).
So, time for a wealth tax then?Report
Capital gains Tax is the fucking wealth tax. just put it up to standard income and we’re DONE. Folks, really. This isn’t terribly hard.Report
Capital gains tax is not a wealth tax. It taxes SOME increases in wealth. A real wealth tax is too unamerican to appear in our national debate. I would prefer, in order of best to worst, a tax system based on (1) excess consumption, (2) wealth, (3) changes in wealth, (4) labor income, (5) labor and capital income, (6) labor income and some capital income, and last (7) some labor income and some capital income. We of course have an awful version of (7) due to historical reasons and a measure of corruption.Report
Overall, the top 400 paid an average income tax rate of 19.9 percent, the same rate paid by a single worker who made $110,000 in 2009. The top 400 earned five times that much every day.
The great thing about “five times that much” and “20 percent” is that they cancel each other out and we see that the government got $110,000 every day from each of these 400 people.
I suppose that the columnist assumes we should be upset that they aren’t paying $165,000 every day? $220,000 every day?Report
Correct. Yet, the absolute number means an awful lot in this instance. Also, half a million a day and 20% tax rate when the idea of the top rate of (federal income) tax in the US is 35%, that’s pretty sweet deal for this group.
Obviously there are loads of caveats one can responsibly put in here, even with soaking the rich, one doesn’t solve the various budget woes of the US, and so on and so forth. And yet, I mean, half a million a day – it’s a very twisted tax system that claims more proportionally from Buffet’s secretary than it does Buffet.Report
I do what I can to rectify that by screaming for Buffet’s secretary to pay less. She shouldn’t have to pay more than 10%.Report
Tell Paul Ryan. The one he thinks needs his taxes cut further is Buffett.Report
Let me know when Buffet tells Berkshire Hathaway to pay its outstanding tax bill.
On that day, I will believe him when he talks about the importance of paying even more in taxes.
(Please note: This is not the “if he wants to pay more in taxes, he can just write a check” argument. This is the “his company should pay the bill everybody agrees it has” argument.)Report
Actually this appears to be the “fiduciary duty to shareholders isn’t paramount to the officers of a corp” which seems like dangerous ground for you to tread.Report
Why? Will they put a hit out on me?Report
As I have pointed out numerous times, that 20% tax rate is pure accounting fiction. For Johnston to say, “Overall, the top 400 paid an average income tax rate of 19.9 percent,” with no footnotes or qualifiers about corporate income taxes or inflation or the implicit taxes due to the taxation of the principal, the impairment of compounding, or the lower returns of “tax-free” bonds, is extremely shoddy journalism.
David Cay Johnston once sent me an unsolicited e-mail suggesting that I buy his book. I replied back that I had never before received spam from a Pulitzer winner. He objected to this characterization.Report
Inflation? in 2009? What world are you living in again????Report
Isn’t it only a good deal for someone who makes $100m/yr to pay $20m in taxes if they cannot make the $100m somewhere else (say, an equally lovely place to live) while paying less? I don’t see good reasons why govts do not and should not compete for rich people to relocate to their tax jurisdictions.
It does happen, ie rich people do sign private tax agreements with foreign govts and relocate. It does not, so far as I know, happen in the US however.Report
It does, however, happen with corporations all the time, on the state and municipal level.Report
And I think it’s a good thing!Report
“But despite the fact that legal and ethical mechanisms were properly used by the Upper Income Super Friends, this information is going to make Romney and Ryan’s message that the rich pay too much in taxes and need relief look really, really bad.”
What the “rich” pay in taxes is a silly class argument. End all corporate welfare, tax breaks and subsidies — both parties resist this. That’s the goal, though, that should be put front and center.The adult argument is whether what we pay as a total is enough to support the government we need. We are paying more than enough for the government we need. You can’t say that 1% paying 40% is somehow unfair — so that argument is a diversion. The fundmentaal problem is that our government spends way too much money on a broken, highly inefficient welfare/warfare State.Report
End the warfare state, if you can. The welfare doesn’t take much at all (unless you’re talking SS, which is rather dishonest/imprecise verbiage).Report
The phrase was Corporate Welfare, which is libertarian for the things he mentioned after that – tax breaks and subsidies. MFarmer may well want to end welfare for individuals as well but this isn’t what that comment says.Report
thxReport
Why did the IRS take the unprecedented step of releasing this info in this election cycle, where the Obamans are making an issue of Romney’s tax returns?
That’s the important part, one that the press will not investigate—using the IRS as a partisan tool is a grave misuse of power, and far more important than this chickenspit about tax returns. In the least, the IRS should be asked for an explanation for this unprecedented action.Report
My understanding is this is part of the regular release of statistics on taxation from the Statistics of Income Division of the IRS.
http://www.irs.gov/taxstats/index.html
http://www.irs.gov/taxstats/article/0,,id=203102,00.htmlReport
So you’re saying it was unprecedented, except for last year and the year before that and the one before that…Report
Yeah, I’m on board with this. Specifically, did the IRS attach the names to the returns, or were they anonymous? If they were just anonymous, then I don’t have a huge problem with it because it’s just information about how our system works, and that’s legitimate, election advantage or no election advantage. If names were attached, that’s kind of a violation of privacy, and even the super rich deserve some privacy. In other words, as a policy issue it’s my business what the wealthy are paying, but it’s none of my business what Richie Rich makes.Report
I had the same thought when you first read this that you did Tom, but the more i think about it the more I’m of two minds.
On the one hand, I think it is amazingly sleazy that this was released for obviously political reasons.
On the other hand, it seems like this is the kind of thing which we should all know about, regardless of the election.
So I kind of want to simultaneously condemn and applaud it.Report
For what it’s worth, I see no conflict here. You wouldn’t be condemning and applauding the exact same thing.Report
Further investigation: No names are revealed*. However, there’s an inherent ideological slant to the way the info is drawn up: “The richest 400,” an arbitrary figure—just as there would be if a GOP admin had the IRS put out this map of tax burden:
Top 1%
36.73
Top 5%
58.66
Top 10%
70.47
Top 50%
97.75
Bottom 50%
2.25
I’d like to know when and where and by whom the orders to the IRS to release this info were given. [The Reuters op-ed says it’s an annual thing, and it could be. I’d like to know, is all. Hard to believe the list was first commanded by a GOP admin, for obvious ideological reasons.]
*http://www.irs.gov/pub/irs-soi/09intop400.pdfReport
It’s my understanding that this isn’t the 400 richest, it’s the 400 highest incomes declared.Report
It seems like it started in 2003 with subsequent updates.
http://www.irs.gov/pub/irs-soi/00in400h.pdfReport
Fishing Socialist Kenyan and his fishing Marxist time machine!Report
A bleg, then, Tod, as I don’t see the purpose of this form. Seems to me the controversy boils down to whether capital gains should be taxed at the same rate as regular income. This particular arbitrary selection of the 400 top incomes [correction acknowledged] seems designed to make some point. [Did the Bushies start it to argue that the rich pay enough? I’m not getting the reason for its existence in the first place]
A question I’m agnostic on, as I am agnostic on most questions of tax “fairness” one way or the other. Whatever works, whatever’s not so confiscatory or stupid that people spend their time avoiding tax instead of creating wealth.
At this point, I’m just scratching my head.Report
Here’s the problem in a grossly deficient nutshell: it comes down to the accounting. When it comes to attracting capital, the country with the lowest capital gains taxes often gets the investment capital. But not always. A well run society can afford to charge higher capital gains taxes, exactly as a community can get away with charging higher property taxes: the good schools bought with those property tax dollars keep the real estate prices high.
Dollars earned in the form of a pay check get spent. Capital gains earnings usually don’t get spent: they turn into other investment assets. Accountants and tax guys carefully plan the movements of such capital to shelter it from taxation. The people who really get hurt by capital gains taxes are old people who’ve invested all their lives and now need the money. Reform that process and we can start talking seriously. The economy doesn’t benefit if dollars don’t get spent. Money tends to flow upward, into investment vehicles. The sad fact is, it’s more profitable to buy other people consumer debt and mortgages than to invest in factories or suchlike: the returns are better. If we can address that issue….
Forget fairness. It’s a weak and screechy little word. To make this country run, people need to spend money they earned. All that money stacked up, feeding the Consumer Debt Monster, is doing this country no good and a great deal of harm.Report
> To make this country run, people need to spend
> money they earned. All that money stacked up,
> feeding the Consumer Debt Monster, is doing
> this country no good and a great deal of harm.
+1Report
This is an interesting, suggestive rant. But you seem to gloss over a few things – first, rich people control the savings. That’s largely true. Much of the accumulation of capital is reinvested into capital. Agreed. Some savings are lent to fund consumption, which is fundamentally not productive (but does fund some consumption after all). Yep. But why do you say that the returns are better? Aren’t the returns lower?
As for fairness, I hear you. Much of the tax discussion focuses on fairness, which is how we like to think as a people, but really the tax choice is about politics and what kind of society we want. And the biggest choice is NOT about where the tax burden lies across income segments, but WHAT is taxed. Whatever you tax, you get less of. And our society chooses to tax REPORTED income and capital gains! And the fairness crowd’s favorite tax – the inheritance tax … by which our ultra rich can spend lavishly on whatever luxury goods they want, reallocating real resources and people to satisfy their personal whims, but cannot pass accumulated capital in a productive enterprise to their descendants without paying a big cut to the govt coffers.Report
It is more profitable to invest in consumer debt than to risk capital on building a factory. There are two ways to consider any investment. The first is the standard buy low – sell high proposition, taking a one-time profit. The second is to purchase a revenue stream.
Banks aren’t interested in your house. They don’t want to let your mortgage get yellow and crumbly in their safe for thirty years. They want to make money on points and fees. They want their profit now. To them, you’re just a fee-payer. They sell that mortgage. Same goes for credit card debt, student loans, anything of that sort. It’s all packaged up and sold.
But other investors want the revenue stream. They’re not interested in the mortgage, they want hundreds of people to pay them every month. The returns are excellent, especially when the bank set up the loan to pay a high interest rate. That means the stream will continue to flow for far longer.
This forms a circle. Money flows into mortgages, the mortgages are sold, revenue streams are thus created, increasing the available capital for more loans. Carried to extremes, we call it loan sharking, but we don’t call securities dealers gangsters. Well, some people do, who understand the business well enough, but that’s how both gangsters and securities dealers make a great deal of money.
It’s fairly obvious how to break this cycle. We force these over the counter operators into the open, make them deal on open markets, where their cumulative risk exposure can be calculated. These crappy securities they’re selling aren’t regulated. They’re just untidy bundles of debtor-signed paper.Report
Ok – I think I catch your drift.
Agreements
– there’s little difference between unscrupulous lending by someone in a suit compared to unscrupulous lending by someone with a bat
– investors seek returns and are not interesting in collecting things for fun
– there is a societal interest in lower the cost of information, esp in financial markets
Disagreements
– creating businesses has so far (meaning the last couple hundred years) had higher returns and higher risk-adjusted returns than buying asset-backed securities, even credit card debt. Maybe this will change, but I’d bet it doesn’t (and with 10y rates below 2%, I sure hope I’m right)
– if lending is not coercive, then I’m fine with it. I believe in individual choice, including the right to suicide, buying the pet rock, and living paycheck to paycheck while maxing out your credit cards and being miserable. My parents were poor and they were well-off – what they taught me was that people who have make more than the spend, no matter how small, tend to be happy while people who spend more than they make, no matter how much their income, tend to be unhappy. Still seems true a couple decades later.
– I don’t think that creditors, even creditors of consumers, are gangsters. I do think that creditors and the people who work for creditors represent a class interest, much as in the Marxist critique of capitalism. As such, we should be worried about cooption of the laws by creditors. There is ample evidence that this has occurred over time. I would like to see us deconstruct some of those legal corruptions.
– Not only are asset-backed securities, as well as the underlying credit card and mortgage debt, highly regulated, but I’d argue that their entire existence is due to govt laws. In a free market I truly believe that no one would have ever, ever, ever purchased a subprime RMBS mezz CDO squared. When I first became aware of what AAA RMBS was, around 2004, I was just utterly confused at how such securities were bought and held as investments. The truth, as we now know, is that the buyers were driven by earning high returns on regulatory capital, which the govt decided would be a function of ratings assigned by govt-chartered rating agencies which were paid by the banks arranging the deals to make arbitrage profits. So the whole damn thing was private banks backed by govt-insured-deposits buying assets created by govt regulated securities dealers, themselves created from loans which were originated by other govt and state regulated lenders, on the basis of ratings assigned by govt-charted private for-profit companies, which was only the case because other US and international financial regulators had mandated that the amount of private equity capital required to support such risk would be a function of such ratings. I imagine you are not happy with this situation either. I would only ask that you remember that the failure here was not one of unregulated free markets; the failure came from the most regulated and govt-impacted sectors of our economy. Greed is a given, but such govt intervention and folly need not continue.Report
That level of detail would be considered too high for release in New Zealand, even if it was anonymous.Report
They’ve done this every year since the early 80s. They always publish the average income and tax burden of the top 400 earners.
And, no, there are no names attached.Report
What’s so partisan about releasing statistics, anyhow???Report
To clarify something above, the 400 richest (i.e. highest income) taxpayer thing is a longstanding practice of the IRS, I’ve seen them tabulate that for a few years now, well into the previous admin (and I’m prety sure they have *not* changed their methodology on how they’ve been determining this). The only thing new is “that six of the 400 paid no federal income tax.” Before the data has been entirely aggregated – total taxes paid, average taxes paid, total income, total AGI, etc. No data on any individual tax return (which ‘paid no taxes’ is, even if the payee is still anonymous) has ever been released.Report
That’s not true either. At the link below (which is the 2006 report), they break out by effective average tax rate (second to last page). What they likely meant is that never before (since the report started) have 6 people paid no taxes. The losses in 2008 and 2009 were likely so anamolous that it would be almost impossible to completely wipe out all gains.
http://www.irs.gov/pub/irs-soi/06intop400.pdfReport
Cheers, Mr. Kolohe, for the info. The NYT had called the release “unprecedented.” I should have used scare quotes around “unprecedented” but I trusted The New York Times. Old habits die hard.
It was the “unprecedented” that raised me hackles. My hackles are mostly assuaged, but the addition of
The only thing new is “that six of the 400 paid no federal income tax.” Before the data has been entirely aggregated…
is the key to the NYT’s tie-in to Harry Reid’s charge [for which he’s offered zero proof] that Candidate Romney paid no taxes for 10 years. On the whole, if General Electric could pay zero tax*, that some zillionaires slipped the noose is hardly a revelation. There isn’t much of a story here, that Harry Reid’s [again, unproven] allegation is technically possible.
http://www.nytimes.com/2011/03/25/business/economy/25tax.html?ref=butnobodypaysthat
Then again, it’s the NYT. FactCheck.org somewhat disputes this @ 2012/04/warren-ge-pays-no-taxes/, but we’re on the event horizon of our epistemological black hole.Report
Tom, you should read the article. The part that they describe as unprecedented is, in fact, unprecedented.Report
Not for nothing, but a couple of my first posts on NaPP discussed high-earners who don’t pay taxes. As with water in Oregon, there is sometimes more to the story. (I do note that you said that they didn’t necessarily do anything illegal or unethical).
The second link is looking at the 7,000 that made over a million and didn’t pay any taxes. The long and short of it is:
(The NYT article may have mentioned this, but I’m not going to use one of my precious NYT article-views to find out. Forgive me if I’m just repeating what it said.)Report
“high medical expenses (especially for those who self-insure)”
Howzzat again?
Millionaires who have medical bills are deducting them from their taxable income? So John Q Lunchbucket is covering the tax bill for Richie Rich?Report
I’m open to saying that medical expenses should never be deductible, though we shouldn’t do it just to get Mr. Richie Rich. And I can’t say that I necessarily envy what got them their tax break, even if it perhaps should be eliminated.Report
I wonder how many of these millionaires are the same ones going around harumphing about how they are self-made men, rugged individualists who never took nothin from nobody unlike all those looters and moochers on Medicaid.Report
Dunno, but there is a difference in my book between tax-deducted medical care that you pay for and Medicaid, regardless of whether we should tax-deduct medical expenses.Report
True to a degree; but when someone pays that medical bill, and deducts the cost, they don’t pay the tax on it; so the taxpayers are hit with the loss of revenue on that money.
If we wanted to be churlish about it, we could ask them to pay the full cost and tax, then turn around and send them a check stamped “FROM THE UNITED STATES TAXPAYERS TO DEFRAY THE COST OF YOUR HERNIA OPERATION”
Sort of the way they do with government chees or something. You know, so they feel the full weight of shame and humiliation for their shiftlessness.Report
We could, of course, go a step further. Send everybody a letter reminding them that they could have taken all of their money, but instead generously left them a bunch. YOU’RE WELCOME!Report
tax deductions are a form of wickedness?Report
Think of the people we could have helped with the money from those deductions. Think of the education supplies we could have bought.Report
I’m just pointing out that these people received a benefit from the taxpayers that they did nothing to earn. Not really any different than a SNAP card.Report
Are we allowed to say that people on SNAP did nothing to earn it, now?
I’ll let my Aunt Gladys know, she’s been irritated that she can’t point that out for a couple of decades now.Report
I still consider there to be a difference between “We will let you keep money that you earned” and “Here is some money.” I don’t uniformly approve of the former, or disapprove of the latter, but I do actually see them as different.
I don’t think a sales tax that excludes unprepared food is the same thing as subsidizing unsubsidized food purchases.
At its heard, it implies that the government has a moral right to as much as it wants to take, and anything it chooses not to take is therefore a gift or a subsidy. At the very least, I think it’s more complicated than that.Report
“I’m just pointing out that these people received a benefit from the taxpayers that they did nothing to earn. Not really any different than a SNAP card.”
what if you’re a government employee? you’re working on behalf of the people to earn your wages – from those same people – and presumably paying part of your own salary as well. are their deductions more or less earned? i could see more, as they’re “devoted to public service” or however you’d like to phrase it; alternately, even less, as they’re drawing money from taxpayers at least twice – once at salary, once at tax time come deductions – and depending on their position may very well be not adding all that much to the commonweal.Report
To be blunt, it often seems like the end-game of this thinking is that no matter who you are, you have benefited from the government and therefore you can’t really complain that others seek government benefit*.
I suspect that if you actually work for the state, you are triply-forbidden from being anything other than a grateful subject of the crown. This has been mentioned expressly a couple times as it pertains to the military.
My own view is that context matters a great deal and that somebody who went through public schooling, or someone who actually works for their government paycheck, is in a different position than someone that is accepting checks. Somewhere in between are SSDI beneficiaries and those who accept checks temporarily until they get back on their feet (which, to be fair, is or at least used to be most people who accepted traditional welfare).
* – Unless you’re complaining about rich people wrongly profiting from the government.Report
Well you don’t know, so it’s probably best not to make any assumptions.Report
Few. But the few who are are remarkably loud and persistent. And duplicitous, and a few other colorful words I might use.
Most millionaires are self-made men, who don’t consider themselves rich (they call$6million rich, which sounds about right). And they’re quite well aware that giving money back means more in their pocket in the long run.Report
Dude, you can do that too. Seriously, doesn’t anyone READ the tax code?
Those credit cards with prepaid “use this for medical expenses” are a NICE way to avoid audits…Report
So, basically, this is the same as “poor people pay no taxes!” only from the opposite direction.Report
Well yeah…except for the ummmm facts and causes.Report
There is one simple way to make sure that everyone’s taxed at exactly the same rate: A consumption tax.
Leftists generally oppose this because they think it will tax the rich less than they’re taxed now. This is hard to square with their claim that the rich are currently taxed more lightly than the rest of us.Report
That was supposed to be under the OP, not under Duck’s comment. I’m pretty sure there’s a bug in the threading.Report
Even the proponents of the so-called “Fair Tax” admit a consumption tax is regressive. That’s why they had to include a “pre-bate” in their proposal.Report
Yah, Rod’s right. The poor spend/”consume” every dollar they got. The rich hide them in mattresses, in massive piles of gold in their cellars they roll around in and go NyahNyahNyah!
I really am agreeing with Rod about the consumption tax, mind you. The problem with high capital gains taxes on those with a few pennies left over is that investing it carries risk—put heavy taxes on top of those returns, and it begins to make more sense to sit on top of your pile than to put it into play for others to use.Report
I hear that Romney has a giant money vault full of cash that he swims in.Report
Or as has repeatedly been asked- Where is the inflection point of the Laffer Curve?
http://capitalgainsandgames.com/blog/andrew-samwick/1883/go-find-me-peak-laffer-curve
In other words, where is the point at which tax rates maximize revenue?
No one has ever been able to answer, other than “Lower still, please”Report
An inflection point is a solution for the second derivative of a function. The maximum is the solution for the first derivative.Report
Nitpick: an inflection point is where the sign of the second derivative changes. Its value being zero is necessary but not sufficient (consider f(x) = x**4 at 0.)
Since the Laffer Curve is always assumed to be concave down everywhere (which makes intuitive sense: higher tax rates have diminishing returns), it has no inflection points.Report
Obligatory Martin Gardner Neo-Laffer Curve reference.Report
Ah, you’re right. That would be a solution but not an inflection point. Thanks.
I agree that the Laffer curve probably doesn’t have an inflection point on the left side, but it might have one on the right side.Report
I don’t think anyone knows where the Laffer Curve is. It exists somewhere, but I suspect somewhere considerably higher than present tax rates. It’s also likely dependent on the structure of marginal tax rates.Report
It’s probably all sorts of little waves and peaks and expectations and disappointments.
I don’t know that the function of taxation ought be to figure out the most effecient way to make sure that the government gets the most money.
The left doesn’t think that. Why should the right?Report
The Laffer Curve is everywhere. It’s a curve, not a point. I’m not just being pedantic—my point is that the location of the maximum isn’t the only salient feature of the Laffer Curve. What really matters is the slope, and it matters wherever we are. The slope tells us how many dollars of deadweight loss we’ll have to accept for each dollar of additional tax revenue.Report
One of many problems with the Laffer Curve concept is that there are lots of other relevant variables which render the idea of tax revenues being a function of tax rates as hopelessly partial. There is so much tax optionality for the wealthy due to the structure of the tax code that expectations of future taxes play a big role.Report
Conservatives have been studying tax rates for 50 years or more.
Yet no one can answer a simple question-
If 100% tax generates 0 revenue, and 0% tax generates 0 revenue, and 50% tax generates X revenue;
then logically, there is a tax rate which will generate the maximum revenue either more or less than X.
In all these years, after all this study, no one has addressed this?
Wouldn’t generating the maximum revenue be a useful tool when we are shrieking about the Deficit Monster?
Or is the simple fact that the Laffer Curve was a hoax, intended to cover the real agenda, which is to cut tax rates, regardless of whether that generates revenue or leads to ginormous deficits, which we have now?Report
Do you seriously doubt a 100% tax rate would have a deleterious effect on earning and therefore earnings taxed? If you don’t doubt that, then you agree that there is an optimal point or a curve of some sort. If you do doubt that, well, I don’t know what to tell you.
The reason we don’t know where it is is that it’s not exactly something you can run controlled experiments for.Report
the simple fact that the Laffer Curve was a hoax,
Ah, some folks on the other side use the Laffer curve in a mindlessly ideological fashion, so therefore it has no reason at all. Or it’s appropriate for your side to respond in a mindlessly ideological fashion, too. Or something. However you slice it, this isn’t one of your more thoughtful comments.
Intellectually you’re assuming there is an a priori determinable revenue maximizing rate, but there are at least two errors built into that. First, following Hayek’s critique of socialist planning, the efficient price is not mathematically predictable, but is discovered through the process of setting prices (a tax is a price, of course). Because there is no true economic equilibria, and multiple factors affect willingness to pay, it may not be possible to pinpoint the precise maximizing rate. As well, different activities may have different maximizing rates.
I’ve never shied away from mocking conservatives who seem to think any tax rate above zero is on the wrong side of the curve. But likewise I’ve never shied away from mocking liberals who think that we can tax up to 100% without affecting economic activity. And if you say, “well of course we can’t go that far,” then you’ve admitted that you know the Laffer curve isn’t a hoax.Report
If we keep this up, people will start thinking that we’re the same person.Report
We are the Borg; we have a hivemind.Report
Supply and Demand don’t work the same way for Goods as they do for Assets. That’s why I trade commodities futures and generally shy away from equities. The price of a stock can go to zero. The price of a commodity will not.
Hayek was correct about prices, but only for Goods. It doesn’t work for Assets, things people purchase as investments. When asset prices rise, that rise creates demand, leading to to the infamous Bubbles about which the Libertarians are constantly screeching. They screech because they do not understand markets half as well as they think they do, which is exactly true, since they’re exactly half right: the right half being Goods. On Assets, they’re completely wrong.
Economic activity rises when there’s money being spent. How that money comes to be in people’s wallets, actual money on deposit, ( not credit card debt, which comes all packaged up for sale as an Asset ), that’s the real story of taxation, a short ‘n sweet story of someone deciding to make a purchase and thereby paying a tax.Report
Thanks for demonstrating that you don’t understand Hayek.
Hayek’s argument wasn’t that higher prices lead to less demand. His argument was that the price/quantity demanded was revealed by the market. What you describe of assets is a price/quantity demand being revealed by the market.
If you were less eager to declare everyone who’s not you wrong about everything, you wouldn’t so frequently walk into this type of error.Report
The market in Assets as we understand them today was completely beyond Hayek’s wildest dreams. Nothing he ever said encompassed markets like EUREX or NYMEX or CBOT. Hayek understood markets in Goods. Assets were beyond him, entirely.Report
So asset prices/quantities aren’t discovered by the actions of the market? The proper future prices/quantities could be determined by a supercomputer tabulating all current prices/quantities?Report
No they are not. Asset prices are based on returns. We can look at those returns on a short term or long term basis.Report
And those returns aren’t determined by the market?Report
No, James, they are not. They are priced on the basis of risk. Bebby Jeebus, am I going to have to give you a whole education on how securities work here?Report
And the market doesn’t determine how much risk will be accepted and at what price?Report
No, James. Assets become asset-based securities. Asset-based securities are packaged up and they are bought and sold by programs, some of which I’ve had a hand in writing.
Now a market of this sort trades risk away in exchange for cash today. You don’t really think a bank is going to hold onto some 30 year mortgage, do you? Good Lord, you didn’t just fall off the turnip truck, surely you recognise the obviousness of this proposition.
These instruments don’t trade on markets as Hayek would have understood the word. Hayek got as far as inflation creating the illusion of prosperity, thus creating a market for risk. What he didn’t envision was a world where risk could be backstopped with a swap, where it was more profitable to trade in consumer debt than to build factories, where prosperity was completely dependent on consumers and governments taking on ever more debt and investors taking on ever more risk, feeding the cycle, leading to ever more speculation until investors are betting on people’s credit ratings.
Supply and Demand don’t encompass risk of this sort. The drought progresses, the price of corn rises, the petroleum industry has a bad spot what with a pipeline down and a refinery fire, that’s all fine and good, Hayek’s conclusions still hold water. But let SS Hayek sail out of the harbour onto the high seas of risk markets, the sharks will eat you.
A casino is not a marketplace.Report
So, I asked: And the market doesn’t determine how much risk will be accepted and at what price?
And at first you say, “No, James.
But then you say, “Now a market of this sort trades risk away in exchange for cash today.
That sounds an awful lot like, “yes, James.”
Come on, Blaise, you know there’s a market at work there. And in a market, lots of people are making decisions about whether to buy or sell. Whether they’re buying or selling eggs or risk, they’re each making individual decisions about what price they’re willing to pay or willing to sell at. And the information created by the aggregation of all those individual decisions is what Hayek was talking about.
Hayek got as far as inflation creating the illusion of prosperity,
I’m talking about something completely different; the socialist calculation debate. If you think Hayek’s argument there doesn’t apply to securities, then you have to think that the proper future prices/quantities of asset sales could be determined by a supercomputer tabulating all current prices/quantities. If you think that scenario is horseshit, then you’re in agreement with Hayek, like it or not.
But I’m beginning to think you’re not familiar with his work on the socialist calculation debate.Report
Just stop. A casino isn’t a marketplace.
It’s like a religion, this obsession with Hayek. Fact is, economics has moved on and nobody takes him seriously, except a few cranks. Now I’ve been as nice as I can trying to explain how risk markets are dependent on underlying assets, which rise and fall in price according to their speculative value and their ability to create income based on derivatives thus created.
I’ve been far too nice, trying to shoehorn what little truth is left of miserable old Hayek into this debate with you. I’ve read Hayek and I reach very different conclusions. Now lay off this nonsense about how Hayek understood the nature of risk: that market didn’t exist in his time. Hayek couldn’t have possibly had an opinion on them. The Road to Serfdom is a masterpiece of idiocy, all this nonsense about how government regulation could only get in the way of progress. A lot of people were making that kind of noise, right up until Bear Stearns went kablooie. It’s been a few years. Time for you to catch up.Report
You know, Blaise, you’re a funny old coot. You think I have an obsession with Hayek because I’m trying to get you to understand one particular point of his, that you’re obviously quite unfamiliar with. I’m no big fan of Austrian economics. Took the course in grad school, wasn’t that impressed. Hell, you can forget all about who actually wrote the critique of socialist calculation, doesn’t have to be Hayek, and just focus on the critique.
Ah, but it’s easier for you to pretend it’s about obsession with a man than to actually take the effort to learn about the socialist calculation debate. And accusing your opponent of obsession with a crazy old Austrian allows you to go your merry way without having to ever question your own blinding brilliance, whereas stopping to think about what Hayek wrote about the socialist calculation debate might cause you to realize you don’t know quite as much as you think you do.
Just stop.
Come now, Blaise. Haven’t you learned I just laugh when you try your dominance routine?Report
Of course it’s after midnight and I need to get some shuteye. You may win by default. Sweet dreams, Blaise, don’t let the bitterness devour your soul.Report
Yeah, I probably am a funny old coot. When I confront something I don’t understand, I start in with a bunch of questions. Back when I first arrived here, I asked for some substantive reading and I was given many useful suggestions.
But I’d read Hayek and went back to re-read as much of him as I could find, especially Road to Serfdom. I put in a shitload of time and effort into getting up to speed on Libertarian thought.
I watched around here as the Libertarians of various stripes made various assertions, especially Jason, who was the author who first piqued my interest. If he’s any gauge of what’s become of Libertarian thought, it’s gotten considerably more robust than the nonsense I’d heard from the old Objectivists back in the day. They were horrible people, all of them. Some of them are still around. It’s good to see the Evolved Libertarians give them the stiff arm.
But Hayek? The Libertarians still cling to him and they still damn the Keynesians. They haven’t evolved enough. Oh, to be sure, they’ve mostly concluded von Mises was a crank, which he was. But Hayek was right about quite a few things, enough for me to continue reading. I’ve been at this for over a year.
My dominance routine arises from mastery of the material. I encounter a language I don’t know, I start learning it. I encounter a concept I don’t know, I start reading. I evolve, you see. I’m at least honest enough to know where I’m ignorant.
Well, I’m not ignorant of Hayek any more. I earned the right to say that. The Libertarians are honest people, as far as it goes. They just need to master the facts about markets and how to effectively wield their own swords, fighting the dragons of Force and Fraud, still the battle cry from the days of the their forebears, the unlamented Objectivists.Report
Mastery? In repeated conversations–not just this one–you’ve given no evidence you know what I or others are talking about when we talk about Hayek’s critique of the socialist calculation debate. This is what’s really funny about this–this began with me mentioning Hayek’s argument in that one specific issue, then you running off on a tangent that you wrongly thought was a refutation, me trying to bring you back to the socialist calculation debate, then you running off about how you know all about Hayek without quite grasping that Hayek himself isn’t really the issue–it’s the critique of socialist calculation, and how that extrapolates to the question of whether we can mathematically determine the maximum revenue point on the Laffer curve. Both you and Hayek (extending his socialist calc critique) think we can’t, yet you think with all your tangents you’re somehow refuting him, even though nothing you’ve said actually rebuts his critique of socialist calculation at all.
If you understood his critique, you’d get that. But because you don’t know it, you’re unaware of how randomly you’re running around. It’s kind of funny, kind of sad, but it’s anything but mastery. Anyway, I really must off to bed now.Report
Gold, we are assured, is not a Good in your dichotomy…Report
James,
The asset market gets way way out of whack All The Time. It runs on Optimism and Panic — and the Greater Fool.
This is partially merely the nature of things — one invests based on one’s conclusions about the Future, not the Present.
But even then, it’s still crazy.
And the market can get really opaque — or sparse, in a hurry.Report
Kimmi,
Groovy, but I never said different, because how well the asset market does or does not work isn’t even related to what I’m talking about. Factual correctness: 10. Relevance: 0.Report
This was quite humorous to read.
Just a question for Blaise – why do you say that supply and demand don’t work the same way for Goods and Assets? Clearly goods are not assets, so pls don’t explain to me how assets are different from goods. I’m just wondering if you are saying that demand and supply don’t work the same way – you may be thinking that the demand for assets is somehow a function of the trailing returns of the asset, so there can be herding and bubbles and so on. I would’t describe that as supply/demand not working the same way, but perhaps that is what you mean.
As for Hayek, perhaps his argument is subtle, namely that without market prices economic calculation is impracticable. But it is a sound argument, does not depend on any distinction between goods and assets, and certainly admits the possibility of herding and bubbles and irrationality and pluralism and idiocy. Now some Hayek-lovers may give the impression that they consider mkts infallible and above reproach, but that is not what Hayek wrote or believed.Report
@BobbyC: yeah, without rehashing this tedious argument, that’s pretty much exactly what I’m saying. And thank Jeebus I don’t have to explain why a good isn’t an asset.
Hayek was a man of his times. The markets in risk were crude by our standards. Hayek asked good questions about complexity. His answers were not as good as his questions and he could not foresee the mathematical advances which would render his notions about complexity irrelevant. He was completely wrong about spontaneous order, for example. Hayek sorta reminds me of Tycho Brahe, who wanted all that data for computing horoscopes. It took his assistant, Kepler, to give us Kepler’s Laws.Report
However you slice it, this isn’t one of your more thoughtful comments.
Eh…Report
Back in the dark ages when I was taking economics, everyone believed in the Phillips Curve. What was the last time you heard any talk about that? Years ago, and it’s because it was far too simplistic: there are many more components to the economy than the unemployment rate and the inflation rate.
What the Laffer curve states is that, if you hold everything else constant, tax revenue will be determined entirely by the tax rate. That’s also simplistic: first, because you can’t hold everything else constant, and second, because there are lots of other inputs to how hard people work and how likely they are to invest or start new businesses. If you don’t believe that, compare the business climate now to what it was in the mid-90s, when tax rates were higher.
I will grant you that tax revenue will be 0 at both extremes of the curve. Is it a useful tool for describing the effect of taxation in the middle range? That’s an empirical question, not a logical one.Report
Arguing that the Laffer Curve is overly-simplistic and thus not terribly useful has its merits. I think of it more as something to keep in mind (that there reaches a point where higher tax rates do not improve and may diminish revenue) rather than a hard rule (since we can’t, after all, nail down where it is).
I believe it safe to argue that whatever those tax rates are, they are below what they were during the Clinton years. We can afford for taxes to go up to some degree, at least, without worrying about lost revenue.
(From a personal standpoint, and it’s somewhat aside from this conversation, I do tend to get annoyed when people act as though tax rates don’t affect behavior. That nobody in their right mind would work less with higher marginal tax rates. I know this to be false. It’s just that we have some ways to go before enough people do this that we actually lose tax revenue. The intermediate step is lost human capital.)Report
The Phillips Curve. Gosh, there’s a blast from the past. Full employment does tend to lead to inflation in a closed system. A fresh egg cost a dollar in the gold mining camps f’rinstance.
Smets-Wouter has been around a while. It’s a dynamical model built of many smaller models.Report
“Arguing that the Laffer Curve is overly-simplistic and thus not terribly useful has its merits. I think of it more as something to keep in mind (that there reaches a point where higher tax rates do not improve and may diminish revenue) rather than a hard rule (since we can’t, after all, nail down where it is).”
The thing is, it doesn’t need a special name. Does Art Laffer deserve to get his name tacked onto a bog standard revenue curve that everyone learning in high school Econ because he changed the x-axis to tax rate instead of price? The middle is the only interesting part of the curve.Report
Wait- Did I advocate a 100% tax? My point was that a 100% tax generates zero revenue; as does a 0% tax.
So the ideal tax rate is somewhere between 0% and 100%.Report
Do all tax rates from 1%-99% inclusive return the same revenue?Report
Let’s do this in order. First, demonstrate that tax revenue is purely a function of the tax rate. Then we can argue about the nature of that function.Report
Sorry, but I already said it wasn’t solely a function of the rate, so you’re not actually correcting anything. That said, the rate surely has an independent effect. Multi-causality does not require multicollinearity.Report
You still have to show that a change in tax rates of the size that’s being discussed has an effect that isn’t swamped by other issues. Otherwise, you can’t even measure the effect, much less try to predict it.Report
Mike,
I never argued that the change in tax rates we’re discussing would have a big effect. I think we’re on the upslope of the curve. As I said above, I mock conservatives who think we’re on the far side of the peak. I’m just responding to claims that there’s no such thing as the Laffer curve, or that it has no meaning at all.
I like Mo’s point that the Laffer curve wasn’t really a novel idea, that it’s just a standard revenue curve, basic economics. Both liberals who try to pretend it’s not real and conservatives who think it has massive effects at every increment are missing the boat.
Me, I’m on record as supporting a return to Clinton era tax rates (along with serious budget cuts, particularly in the military). I think the evidence of the past decade shows that returning to those rates would increase revenue.Report
James,
Guess that makes you a “liberal” on fiscal matters. But as liberals have been saying for a while, fiscal conservatism is OUR province. 😉Report
Kimmi,
I’m a deficit hawk. I care less about how we reduce it than that we reduce it. The best solution is for both sides to give in. Unfortunately liberals aren’t willing to give in on spending, so, no, they’re not fiscal conservatives, either.Report
Argh. The false equivalence, it burns.Report
What’s your reasoning for wanting the deficit reduced?
If it’s all the same to everyone involved, I’d rather do it when we can afford to do it (Gore’s plan), rather than trim sails when we’re running headlong into a worldwide depression.Report
The problem with high capital gains taxes on those with a few pennies left over is that investing it carries risk—put heavy taxes on top of those returns, and it begins to make more sense to sit on top of your pile than to put it into play for others to use.Report
There is definitely some truth to this. If I lose 100% of my losses, but only get 50% of my winnings, that’s going to have an effect on how much I invest.
(Not that we are presently close to losing 50% of our winnings.)Report
Massively phrased & clarified, WillT. Props.Report
not on how MUCH you invest, but HOW you invest. Hedge funds ring a bell?Report
If you live in Manhattan and cannot claim the “we are the 99%” banner, then I think your marginal tax rate is right around 50%.Report
Kimmi, you are correct to a degree. Hedge funds maybe, but bonds maybe instead. More conservative, though, that’s for sure.
Bobby, but capital gains are a separate thing, no? So their capital gains are not necessarily being taxed at that rate. Change that and you might change the way that I invest. probably would, to be honest, even though ideologically I do like the idea of treating capital gains as plain old income.
But seriously, though, I think the degree to which investment taxes would alter my behavior would actually happen somewhere before wage taxes would. Then again, I may be abnormally conservative about such things.Report
I definitely think that liquid financial assets are very tax sensitive. If you’ve ever looked at a large public company it is stomach turning to see how many different legal entities exist in one company. That’s all deadweight loss in my view.
I was just responding to the note were you seemed to suggest that marginal tax rates are still far from where the disincentives to invest are relevant. Interest income is taxed as ordinary income. Dividends and long-term capital gains are taxed at 15% – that’s relevant here and I agree that work effort is weakly influenced by tax rates (arguably the wealth effect is bigger, ie if I had 10x the net worth, I may spend more time at leisure, but my response to higher tax rates on labor income is not to work less). But short-term invesment risk-taking is still subject to the marginal rate on ordinary income. I don’t trade stocks for instance, and I do think such a game makes no sense for individuals at current tax rates unless you are very very good at it (and then you should get paid to manage other people’s money anyway). The net of that is that you have lots of liquidity provision done by corporations and capital pools filled by offshore and US non-taxable investors. The fact that US pensions and university endowments are tax-exempt is a very interesting and impactful thing. It’s a big competitive advantage for them and absolutely matters for what they do and how they do it. All a mess.Report
It has been addressed, many times. Here’s how it works. For any government to collect taxes of any sort, money has to move in the economy. The Supply Siders hoped (in vain as it turns out) that those with the money would recirculate their earnings through taxable windows.
The Laffer Curve is bunk, from top to bottom. There is no optimal taxation rate: there are more types of taxes than Carter has Liver Pills: sales taxes, income taxes, estate taxes, corporate taxes, fees, interest, customs and duties and the like. If the economy’s doing well, more taxes of all sorts are collected. If it’s doing poorly, lowering taxes won’t help. The two are almost completely disconnected. The only way the Laffer Curve would work would be in Flatland, where everyone does the same job and there’s only one tax, which is nonsense.
If we wanted to address the Government Debt, the smartest approach would be to increase the economy’s power, thus filling the tax coffers with appropriate sums to support the infrastructure required to keep that economy strong. We would thus view taxation as an investment in our society, determining where we might get the most payoff. Surprisingly, the best approach to investing in society is to inject that money as low in the food chain as is practical: the poor spend money, a good deal of which is recaptured via taxation on its way up the food chain. Tax cuts for the wealthy don’t put money back into the economy the way giving money to the poor does.
Now I don’t propose a socialist solution to America’s problems here, I’m just pointing out how the only effective taxation strategy must be guided by the economic strength of those exposed to that taxation.Report
The Laffer Curve is bunk, from top to bottom.
So a 100% tax rate wouldn’t affect your work effort?
If you’re willing to work for no income, you’ve got some mighty low opportunity costs.Report
Don’t be silly. I don’t give a shit what the taxes are, as long as I can make a living. I think of them exactly like I do any other expense in my life.Report
James,
I know a few people who work for no income. They enjoy what they do — a lot.Report
Hanley: “So a 100% tax rate wouldn’t affect your work effort?”
BlaiseP: “I don’t give a shit what the taxes are, as long as I can make a living.”
That sounds an awful lot like yes, James.Report
When I say I don’t care, I don’t care, monkey-boy. Taxes are a cost of doing business. I look at my tax implications and set my rate up accordingly, as does any merchant.Report
So you don’t care.
…as long as you can make a living.
Which means you do care.Report
You create an argument that the Laffer Curve exists on individual types of taxes, not that it doesn’t exist at all. It is usually used with regard to the income tax. Some variation of it would apply to sales taxes as well, though. Tax something enough, people will alter their behavior (which is sometimes the point!) in ways to pay less of the tax.Report
The Laffer Curve works well in Flatland, as I said. There, we can determine the zenith of the Laffer Parabola. Elsewhere, the only viable calculations start looking like Bernoulli’s Equations of Flight: lift, drag, etc.Report
The fact that the calculations are beyond us (a point I made above*) doesn’t mean the curve is bunk.
__________________________
*Except that the problem isn’t the difficulty of the calculation, but that the point is revealed by individual choices. C.f. Hayek.Report
Yes, I’m afraid it does mean the Laffer Curve is bunk. Economies cannot be reduced to some silly little Euclidean parabola. Money concentrates into larger and larger piles as it leaves the world of mortal men, buying and selling bags of lettuce and onions, into the world of Assets, reduced to numbers in a spreadsheet. Once it gets there, earning interest, that money stays there, in the Land of Assets.
Capitalism is breaking down, James. To make capitalism work, we need people to go to work and earn a pay check, translating human effort into money so it can move through the economy and propel that economy forward and upward. That’s how taxes get collected. When the economy sucks, tax revenues go down and vice versa, when the economy does well, more taxes are collected. Those are dynamical equations, not pitiful little high school graphing exercises.Report
Economies cannot be reduced to some silly little Euclidean parabola
So you do agree with Hayek.
(What’s up with all that bit about capitalism breaking down? Did anyone ask that question?)Report
Oh just stop it, James. Hayek was a fine thinker, for his times. Just not our times.Report
No, Blaise, I’ll not take your advice. If you actually understood what I was saying about Hayek’s work on the socialist calculation debate you’d realize it wasn’t an argument relevant for a particular time and place. I’m sorry you don’t know the argument, and I encourage you to study it.Report
Shrug. I’m the one teaching you how the securities market works. If you’d read any more economics than Hayek, you’d know why I’m telling you Hayek works for Goods and Services and why he doesn’t work for Assets and the derivatives thus created.
As for Dubai, follow your dream. Helps to speak passable Hindi there, that was my observation. Forget Arabic, nobody will ever speak it to you but the drones in that hive of scum and villainy may not speak English. But they will speak Hindi.Report
No, Blaise, you’re the one ducking the question, as usual. And I’m enjoying your pretense of superiority, as usual. (There’s a particular irony in two people both condescending to each other–they can’t both be right about their superiority, but they could both be wrong.)
As to Dubai, just about all the teaching is in English, so professionally I wouldn’t need any other language. And as to all the drones speaking Hindi, well, Indians abound, to be sure (they have a longer history there than most other ethnic groups), but Hindi’s not a common language among the multitudes of North Africans, Chinese and Filipinos.Report
Yeah, me and my pretences of superiority. Your contract cities though, they’re an interesting notion. Complete nonsense of course. But interesting. You want to recreate ancient Greece’s polis system. Even the medieval city-states had more structure.
And every summer, the hoplites would go out for a bit of recreational battle.Report
You want to recreate ancient Greece’s polis system
Oh, yeah, the Greeks totally had free entry and exit. (rolls eyes).Report
Exit from the Greek polis was called ostracism, a tactic used with troublemakers of various descriptions. But people did move around from city to city, Alcibiades as a case in point. Starts out in Athens, spends a while in Sparta, goes over to the Persians for a fair chunk of time, back to Athens. He wore out his welcome everywhere he went and he went everywhere.
But really, what you’ve proposed is nothing less or more than a polis of sorts, with a few minor variations. Probably more akin to what the Greeks called apoikia, we might use the word “colony” but that word isn’t what’s meant in Greek, these were city states in their own right. The Greeks had another sort of colony, the emporion, a trading post, from which we get the old-timey word for a store, an emporium.Report
And, it’s worth pointing out again, one can believe that there is a Laffer Curve but that our taxes are presently so low that we are so far away from running into it that it shouldn’t be a factor in our policy debate.Report
That may well be. Taxes are too complicated, that much is true. With complexity comes confusion. We do pay an awful lot of taxes, most of which we don’t realise we’re paying.Report
I brought up the Laffer Curve only as a response to Tom’s comment which was the standard “Oh noes, if we raise the capital gains tax, rich folk will not invest!” which is the Arthur Laffer call-and-refrain we have been hearing for 30 years.Report
Liberty, well, that’s a bit different from the Laffer Curve – or at least an earlier point in the spectrum. The point at which you have to worry about people modifying their behavior in undesirable ways comes earlier than the point where enough people do so to actually lose tax revenue. As I say below, that’s hard to pin down because everybody is so different and it involves tradeoffs that are subjective in nature.
Apply a 50% capital gains tax and I don’t stop investing, but I do start becoming a lot more conservative in my investments. Whether that’s a good thing or a bad thing depends on whether you’re a start-up wanting my money.Report
Tom’s argument is patently local (as I put it, timely), and should be dismissed as such. You didn’t need to bring in the Laffer curve at all.Report
I agree that tax cuts, eg the payroll tax holiday, for the poor feed directly in to current period demand via consumption – they just have massively higher marginal propensity to spend than rich folk do. But I wouldn’t call that “investing in society” … it’s more of an efficient attempt at Keynesian counter-cyclical fiscal policy (as opposed to things like allowing corporations to repatriate offshore funds, which is just inefficient Keynesian policy, or in other words an attempt by lobbyists the tax bill of the rich using a specious argument).
As for Flatland, couldn’t we get close to that by having govt funded via taxes on excess consumption (ie a flat consumption tax above a deductible)? As I understand it the standard criticism of this is that it cannot be collected, but I think technology has made that argument fall down.Report
As I understand it the standard criticism of this is that it cannot be collected, but I think technology has made that argument fall down.
That argument never had any validity at all. A consumption tax can easily be implemented with the income tax infrastructure we already have. First we remove all restrictions on contributions to traditional IRAs, and eliminate the early withdrawal penalties. Then we levy (say) a 25% tax on all income. When tax day rolls around, you deduct any contributions to your IRA and add any withdrawals to your taxable income. You then owe a 25% tax on your income net of IRA transactions. This is mathematically equivalent to a consumption tax.
It also has the effect of grandfathering in any savings which have already been taxed. Since they’re not being held in the IRA, you can spend grandfathered savings without incurring an additional tax hit.Report
Lots of economists have taken a run at estimating where the peak of the Laffer Curve falls, using a fairly wide variety of approaches. A (surprisingly) large majority of them get a number in the 65-70% marginal tax rate range. As you say, considerably higher than current top tax rates.Report
That strikes me as something that could be right. The more interesting question to me is when we start losing human capital even if we aren’t losing tax revenue (Joe quits, but since we’re taxing Jack more, the government is still making more money). That’s an even harder thing to pin down because it’s going to vary so much.Report
And the objective of taxes is not optimizing government receipts. It is optimizing welfare of the citizens….right? This is a factor of how much citizens get to keep, how well taxes are spent, and most importantly the effects on incentives. I’ve seen studies that when long term growth is included, the optimal tax rates are below twenty.Report
the objective of taxes is not optimizing government receipts. It is optimizing welfare of the citizens….right?
Are you asking that from a normative or a positive perspective? 😉Report
Isn’t the objective of taxation whatever the public decides it is? So usually the objective is to fund the desired level of government spending in the manner most respective of our interests in efficiency and fairness. But sometimes the objective is to discourage undesireable behavior, to encourage behavior we like, to simply redestribute income, or what have you.Report
didn’t you want marginal in here somewhere?
I don’t think the last 10 years have been examples of ANYTHING being put towards long term growth.
And this is WITH current capital gains below 20%.
Can I call foul? Or can we talk about the realities on the ground, and make them functional before/alongside us fuckign with tax rates?Report
Don,
And the reason we are discouraging undesirable behavior, encouraging desirable behavior, and redistributing income is what exactly?
This takes us from the Laffer Curve to the Rahn curve.Report
Roger,
Because the electorate wants to, basically. Because using sin taxes or Pigovian taxes to fund the government is more efficient than funding it through taxes on things that we want to encourage, like work or investment. Generally speaking when we redistribute income we do it because we’ve decided that we don’t like widespread poverty (i.e. the EITC).Report
Don – if the objective of taxation is whatever the public decides it is then rich people are in big trouble. The coming fiscal debates will tell us a great deal about where power in American society really sits.Report
Don,
I’m not sure where we are disagreeing. I used the term maximizing welfare, and you use the term what the “electorate likes.” Granted your term may be the better of the two.
I am not arguing that the public does not want redistribution. Of course those getting aid want aid, those wanting others to give aid want others to do so, and those that want to contribute aid to others can like doing so.
My point is simply that whatever this collective vision is, very few individuals outside of government itself desire bigger government for the sake of bigger government. Right? Even the most extreme liberal doesn’t argue for optimizing the size of government and maximizing societal tax rates for the sake of optimizing tax rates. Right?
The optimal tax rate is the one that leads to the society which most closely matches up with what the electorate wants. Right?Report
My guess is that the Laffer Curve is like the Phillips Curve. There are an infinite number of them, and their union fills up the entire rectangle.Report
You mean vertex, not point of inflection.Report
A consumption tax only appears regressive when you look at a short-term snapshot, like a single year. This is because income is much more volatile than consumption. For example, suppose you make $60,000 one year and then get laid off and don’t have a job the next year. Suppose you spend $30,000 per year, and pay a 25% consumption tax. That’s $7500 each year.
If you look at it as though it were an income tax, things get weird. You paid a 12.5% tax the first year, and an infinity-percent tax the next year. And then you find yourself saying ridiculous things like “Flat consumption taxes are regressive! The poor pay infinite taxes!”
But the reality is that you’re paying a 25% consumption tax, not a 12.5% or infinity-percent income tax. And in fact you’re paying taxes equal to 25% of your total income over those two years.
There are only so many things you can do with income. You can spend it, in which case you pay the consumption tax. You can donate it to charity, in which case you won’t be taxed, and shouldn’t. Or you can save it for later, but that’s just kicking the can down the road. Eventually you’ll spend it or give it away. If you die before you do either, then your heirs will spend it or give it away. Every single penny you earn and don’t give away will eventually be taxed at a rate of 25%, no matter how much or how little you make.Report
Right, if you treat savings and borrowing as time-shifted consumption instead of some kind of alternative to consumption, you conclude a consumption tax is flat, not regressive.Report
Right. It’s only regressive if you consider short periods like lifetimes.Report
You’re right. For example, suppose there’s a 25% tax on consumption. If you make $4 million over your lifetime and spend $2 million yourself, leaving the other $2 million to support your deadbeat son, then you—you dirty, rotten tax cheat—pay a mere 12.5% tax on your income, while your poor, overtaxed son pays twice the rate on half the income. You bastard.Report
The law in its majesty allows both the rich and poor alike to spend only half their incomes, leaving the other half to their estate.Report
What’s more important, the tax revenue or the tax incidence? If the revenue is gained, does it really matter whether it’s paid by Sr. or Jr.?Report
In the case of inheritance, I think the incidence matters more than usual, since we have a policy interest in discouraging hereditary fortunes.Report
we have a policy interest in discouraging hereditary fortunes.
Respectfully disagreed.Report
And here we are again with our normative disagreements about taxation. Suck it, economists.Report
Siding with Smith on this one. Inheritance goes to the conformists, the people who refuse to take risks. The people who don’t add value under any circumstances.
Much better to cede the money back to the middle class,a nd see who rises…Report
And here we are again with our normative disagreements about taxation.
Agreed that it’s normative. That’s why I left it at just noting respectful disagreement rather than bothering you with an argument that would be based on assumptions you wouldn’t agree to. Maybe on the League’s next opposite day we can write up each other’s arguments on the issue. 😉Report
I’m not sure you guys picked up on the reductio ad absurdum there. The point is that the father managed to pay a tax of 12.5% of his lifetime income only by virtue of the fact that he only consumed half of that income. If he had consumed all of it, he’d have paid a tax equal to 25% of his income. But consuming less than he earned wasn’t some kind of devious tax dodge. The government gets its cut eventually, with interest (I left that out of the example for simplicity, but obviously in the real world the son would have more than $2 million to spend due to investment income).
Meanwhile, the son wasn’t a victim of a regressive tax system; he was just a guy who got to spend $1.5 million that he never earned.
The point is that income confers no material advantage—and costs the rest of us nothing in terms of real resources—until it’s consumed. Someone who earns more than he consumes is basically giving a gift to the economy. Conversely, someone who consumes more than he earns is getting a gift from the economy. The tax should be levied on the receiver, not the giver.Report
My god, the idiodicity it burns…
Wealth, assets that are not consumed is a GREAT way to buy influence. It is also a great way to better yourself.
Wealth is like a snowball. Not taking the money out of the snowball until it is consumed is only incentivizing the snowball.Report
What about a deductible? Do you still dislike a flat consumption tax if you put a sizable deductible on it? Aside from practical concerns, what is the normative objection to that??Report
This is a remarkably timely argument.
Please understand that is not merely a compliment, but also a criticism.
During periods of inflation, you would be stupid to NOT invest, even at high tax rates.
And I don’t think that 30% is a high tax rate. 90%? Yeah, that’s high.Report
30% is still plenty high for some of our smartest people to be employed as tax lawyers … which has to be one of the least socially useful professions ever … at least bankers can talk about capital markets and the real projects that depend on finance … what can a tax lawyer possibly tell his children that he does? Reallocate wealth to rich people for a fee?
I don’t think that is a dispositive argument for lower tax rates, but it’s a significant factor in my thinking, ie high tax rates introduce real frictions beyond incentives and fairness and such.Report
There is one simple way to make sure that everyone’s taxed at exactly the same rate: A consumption tax.
But that just begs the question of whether everyone should be taxed at exactly the same rate. And even more pertinently, whether everything should be taxed at the same rate.
I take the standard libertarian meme that one should be entitled to the full fruits of one’s labor seriously. More seriously, it often seems, than many self-professed libertarians. Because I would completely un-tax labor*; zero, zip, nada.
On the other hand, Land is no one’s product and the value of land is completely determined by competition for scarce resources and enabled by the legal privilege of government-enforced exclusion. IOW, you may have built your home, but the land it’s sitting on… you didn’t build that. And when the selling price of your suburban home doubles, it’s not normally because of anything you, the owner, did to enhance the value (excepting any particular capital improvements) but because competition for living in your neighborhood has increased. Rise or fall, most changes in real-estate values are something that happens to you, not by you. Since such increases in value are the result of the general advance of the surrounding society, they are properly owed back to society. It should also be noted that any competent economist will admit that taxes on land carry no dead-weight loss. Since Land isn’t produced by anyone, taxing it can not affect the supply.
Capital gains are more complicated. Here I think we need to distinguish between active and passive gains. On the one hand, you have the entrepreneur who, through innovation and hard work, builds a business from the ground up and then later accepts an attractive offer to sell. Those proceeds are genuinely “fruits of one’s labor.” But the “investor” who buys a few shares of stock and later sells at a higher price? Not so much. At least no more so than the gambler at the horse track. The problem here is that our language of economics conflates the two. Since any genuine investment carries with it the twin elements of risk and hope of reward, any transaction involving money that carries those same elements is similarly labeled investment. But since any wager at a casino can be similarly described we need to de-conflate those two activities. We need to distinguish between genuinely productive investment and fancy gambling activities.
* In the first iteration this would include all wages and salaries. However, it’s questionable whether much of the salaried compensation of high-level corporate executives is really a competitively-determined wage. With all the incestuous relationships between inter-locking boards of directors and CEO’s and good-old-boy backscratching I see a lot of economic rent. Not sure how to square that circle.Report
I am thinking that I like this comment.Report
Rod and Patrick,
“Here I think we need to distinguish between active and passive gains. On the one hand, you have the entrepreneur who, through innovation and hard work, builds a business from the ground up and then later accepts an attractive offer to sell. Those proceeds are genuinely “fruits of one’s labor.” But the “investor” who buys a few shares of stock and later sells at a higher price? Not so much. At least no more so than the gambler at the horse track. The problem here is that our language of economics conflates the two. Since any genuine investment carries with it the twin elements of risk and hope of reward, any transaction involving money that carries those same elements is similarly labeled investment. But since any wager at a casino can be similarly described we need to de-conflate those two activities. We need to distinguish between genuinely productive investment and fancy gambling activities.”
This is absolutely ridiculous. There are several HUGE differences between passive investments and gambling. Gambling is a form of entertainment, at best, thus a form of consumption, at worst it is a zero sum game.
Passive investments are sources of capital for investments into new ideas and improvements that can potentially lead to enhanced productivity. Investments are critical to human prosperity as they delay consumption and invest it in future potential for productivity.
PS, when do we get the Georgist OP, Rod? I am still waiting to hear the details.Report
Does this also apply when you’re not playing the house? I’d say options are exactly the equivalent of a horserace. You win if your bet turns out right, you lose if it doesn’t.Report
The “passive investor” is also delaying consumption; that’s one of the reasons for justifying the reward.Report
Do you have a reason beyond some kind of self-denying, Calvinistic moralism for making that statement, James? Why do you assume that delaying consumption is a priori, everywhere and at all times, virtuous? When did consumption become something that we should “punish” with taxation while encouraging as much investment as possible?
Consider: The whole point of production is consumption. Therefore, the whole rationale for investment is to increase production to allow for greater consumption. And, therefore, the whole reason for delaying consumption is to enable investment to increase production capability to enable increased consumption. At first glance, this would appear self-defeating but it’s not so bad when you realize that real economic investment is itself a kind of consumption–just not by… you know, consumers.
Where it gets out of whack is when we have policies–tax policies, in particular–that encourage too much investment vs. consumption. Then, instead of flowing to producers in order to fulfill consumer demand, investment dollars migrate to speculative bidding of assets. The stock market and land (real estate) in particular. The economy gets all bubbly and boomey and crashey. Keynes described it as a liquidity trap and we’re deep in the middle of one right now. Corporations are sitting on piles and piles of cash that they don’t know what to do with because consumers don’t have enough money to buy whatever they’re selling.
Brandon’s preferred taxation schema may be appropriate for a country deliberately pursuing a mercantile policy of export-led growth (See: China, ca. ~1970 to present), assuming you ever consider it appropriate, but it’s wholly inappropriate for a fully-developed economy like the U.S.Report
Rod,
If we all consume all our income right away, wealth can’t grow, so we can’t be better off tomorrow. Calvinism’s got nothing to do with it for this anabaptist free willer (*grin*). It’s all about thinking it’d be nice if each generation was a little better off than the generation before it.Report
Why is everything always so binary with you guys (by which I mean libertarians)? I said, “Where it gets out of whack is when we have policies–tax policies, in particular–that encourage too much investment vs. consumption.” And then you reply with, “If we all consume all our income right away…”
Where the hell did I suggest that we all consume all our income right away? That’s called a strawman, you know? You’re better than that.
If we accept the premise that taxing something discourages* that activity, then taxing any of consumption, labor, or investment will reduce the level of that activity and distort the natural workings of the economy. It will introduce a deadweight loss and consumption taxes are no exception. In addition, for lower income people, who simply have little choice but to spend all or most of what they earn, consumption taxes are effectively income taxes anyway. What difference does it make me if you tax it going into my pocket or coming out?
Ad valorem land value taxation is the only exception to that rule because, by definition land is not produced by human action. Taxing land value therefore carries no deadweight loss. In addition, it improves economic calculation by converting an implicit opportunity cost into an explicit periodic expense. By shifting the burden** of taxation from property (buildings) to the underlying land, landholders are incentivized to put the land to the best and highest use without tax penalty. You want to see some urban renewal? Shift to LVT. Vacant lots and old inefficient buildings will very quickly become construction sites (generating a gob of good-paying jobs, BTW).
It’s not a panacea; that’s a fool’s errand and I scoff at peddler’s of utopia. But it’s a hell of a lot more rational system than the crap we’re arguing about here.
* Note: NOT punish. That implies intention that’s simply not present.
** Pure LVT taxes only land and not improvements, i.e. buildings. Personally, I would still favor levying a small property tax to cover the costs of police and fire protection. But that would also essentially be a user fee, rather than a tax, per se.Report
James, why are you being such a religious nutbag and making all these fallacious arguments?Report
We’ve seen this before, back in the ’20s and ’30s. Were we fully-developed then? Were we just plumb out of productive investment opportunities? Well…sort of. But it was a transitory state, not an end point. There was a period of reorganization, and then people figured out what to do with all that capital, and we had another eighty years of growth.
This is nothing new. It’s happened before, and it passed then, as it will pass this time, and when it does, we’ll need capital to exploit the newly-discovered opportunities.Report
+1, BB.Report
This is absolutely ridiculous. There are several HUGE differences between passive investments and gambling. Gambling is a form of entertainment, at best, thus a form of consumption, at worst it is a zero sum game.
This is partly my bad. Active vs. Passive doesn’t really capture the difference I’m talking about. (So sue me; it was late, I banged it out, called it good, and went to bed [shrug].) The key is your next comment: Passive investments are sources of capital for investments into new ideas and improvements that can potentially lead to enhanced productivity.
To the extent that your description actually holds true, then I agree. The problem is that not all investments actually fit that mold. Let’s take stocks for example. When a company issues an IPO, they get a huge infusion of cash that they can use to invest in plant, equipment, personnel, etc. But subsequent sales of outstanding stock on the open market don’t put a penny in the company coffers. You’re just buying the shares from some other investor. At best, bidding the price of stock up will positively affect the book value of the company which allows it to borrow money (corporate paper) at more favorable rates. But then the actual investment funders are the purchasers of that debt, not the purchasers of the stock. Kimmi’s comment above is spot on. Options are even more abstracted from actual investment.
Just ask yourself, “When I buy this investment vehicle, who gets the money and what gets done with it?” The answer to that question will tell you whether it’s an actual productive investment or not. Whether it makes you money personally isn’t really germane to that question.
PS, when do we get the Georgist OP, Rod? I am still waiting to hear the details.
That post was most of it in a nutshell. Well, the thoughts on capital investment aren’t orthodox Georgism, but hardly anyone actually holds to verbatim Georgism anyway. (Henry George was an economist in the same way the Al Gore is a climatologist. I.e., not really, but good at popularizing the ideas.)Report
Just ask yourself, “When I buy this investment vehicle, who gets the money and what gets done with it?”
I have been asking myself that, and it seems to me that you’re stopping at the first exchange. You buy a stock certificate from me and your money goes to me instead of to investment in a firm, and there you stop. But what then? What actually does get done with that money? That is, what do I do with it? And the truth is that you don’t know, so you can’t say that it doesn’t go into an “active” investment. Or if I use it just to buy some other stock instead, what does that person do with the money? We don’t know. They could use it to build a house, to buy a car, to pay for a wedding, to buy other stocks (starting the round of questioning all over again), or they could put it into a startup firm. We just don’t know, so theories based on the assumption that we do are likely to be inaccurate.Report
Precisely, James. And the viewpoint–call it the financial capitalist view–that all financial investment is ultimately, through whatever round-a-bout chain of events, directed to productive investment, is guilty of making that kind of presumption.
I see no reason to concern ourselves with the ultimate destination once it’s passed from our hands. I pay my taxes based on what I do, and you pay your taxes based on what you do.Report
But isn’t that what a consumption tax would do? I get that you prefer a land tax, but just as far as what a consumption tax would do, wouldn’t it suffice for your last sentence?Report
It seems like a land tax punishes wealth, and a consumption tax punishes spending.Report
Insofar as that goes… sure. But it’s not the only thing I’m looking at.Report
Kimmi,
You’re buying into one of the most toxic memes spread by the right in my lifetime, and that’s saying something. The idea of taxes as “punishment.” Fines are punishment. Penalties are punishment. Taxes are supposed to be a contribution for public goods. A coerced contribution to be sure, but the primary intent isn’t punitive, “sin” taxes being the exception that proves the rule.
A land tax doesn’t tax wealth, per se, since land is only one component of wealth. And it’s seen by Georgists as more of a user fee. We often speak of “collecting the rent.”Report
There’s no presumption. When the price of a particular firm’s stock is bid up, this increases the amount of money the firm is able to raise in subsequent stock offerings. When the price of stocks in general is high, this increases the amount of money that new firms are able to raise through IPOs. It may also drive some investors into the bond market, lowering interest rates.
Sure, it’s possible that the guy you bought the stock from will cash out and spend the money on a vacation. But he was going to cash out anyway, in which case you prevent the supply of capital from falling, rather than causing it to rise. In either case, the supply of capital will be slightly higher than it would have been if you’d spent that money on personal consumption.Report
There’s no presumption. When the price of a particular firm’s stock is bid up, this increases the amount of money the firm is able to raise in subsequent stock offerings. When the price of stocks in general is high, this increases the amount of money that new firms are able to raise through IPOs. It may also drive some investors into the bond market, lowering interest rates.
I realize all that, and stipulated as much when I said, “…bidding the price of stock up will positively affect the book value of the company which allows it to borrow money (corporate paper) at more favorable rates.” You said more, but it’s all basically the same idea.
But he was going to cash out anyway, in which case you prevent the supply of capital from falling, rather than causing it to rise.
Explain to me how someone cashes out without someone else purchasing the stock. Your sentence seems to be a tautology.Report
He doesn’t cash out without someone else purchasing it; he cashes out with someone else purchasing it. Specifically, someone other than you, possibly purchasing it at a very slightly lower price than you would have paid for it. If you place a market order to sell a stock, it will sell, no matter how low the price has to fall.Report
Brandon,
You seem to be arguing in favor of Greenspan’s bubble-licous economy. Why is a higher asset price necessarily better from a macro-economic perspective? Assets can be over-priced too, you know.
Again, you want to punish consumption, which is, after all, the whole point of production in the first place. Why?Report
Higher stock and bond prices mean that firms can obtain capital more cheaply. Projects which are unprofitable with high cost of capital may be made profitable when the cost of capital is lower. It’s not entirely clear to me what causes bubbles, but low cost of capital in and of itself is not problematic, and is generally beneficial.
It may be relevant that bubbles are usually characterized by the inflation of a specific asset class relative to other asset classes, rather than by a general inflation of all asset classes.
I don’t want to punish consumption; I want to stop punishing saving. The combination of an income tax plus a capital gains tax distorts the trade-off between consumption and saving, making saving relatively less appealing than it would be under a tax-free regime. A consumption tax doesn’t do this. Under a consumption tax, the trade-offs between present consumption and future consumption are exactly the same as they would be under a tax-free regime.Report
“When a company issues an IPO, they get a huge infusion of cash that they can use to invest in plant, equipment, personnel, etc. But subsequent sales of outstanding stock on the open market don’t put a penny in the company coffers.”
You are assuming a stock certificate with no resale value would generate the same price as a certificate with resale value In addition you are ignoring the effect of stock price as a feedback mechanism to the owners. I pretty much disagree completely.
Options also serve purposes in finance, including those related to risk mitigation.
Investing is not like gambling. One serves to stoke the fire of human prosperity. The other is a form of entertainment or addiction.Report
You are assuming a stock certificate with no resale value would generate the same price as a certificate with resale value
Where is Rod assuming that? He’s saying that a transfer of stock from one owner to another doesn’t transfer any value to the issuing company, and that’s 100% true. It does play a part in determining the company’s value. So does eating at Fanelli’s instead of Toscana.Report
You are assuming a stock certificate with no resale value would generate the same price as a certificate with resale value
No… you’re reading too much into what I’m saying. All I’m saying is that when you call up your broker and put in an order for 100 shares of XYZ, those shares will almost certainly be purchased from some other investor, rather than directly from XYZ Inc.
Options also serve purposes in finance, including those related to risk mitigation.
You mean like credit default swaps? That worked out well, didn’t it?
Investing is not like gambling. One serves to stoke the fire of human prosperity.
Oh, gag! Could you possibly wax more poetic? It’s instrumentally useful; necessary, even. But it’s not particularly noble or anything. It’s just a way to make money.Report
Investing is not like gambling.
Gambling at least gets you free drinks.Report
Comps!Report
Rod and Mike,
You are both missing the point. If I issue stock with no flexibility of resale, then I would have to offer it at a lower price. Thus the resale value of the stock is part of the original value to the original firms. Thus your argument collapses. Investing is investing, and separating first investors from others just a rhetorical trick that ignores the overall dynamic of the market.
Your snark on CDS’s was irrelevant to the topic. You are just changing the subject, or answering an easy question instead of wrestling with the tougher one at hand.
My gag comment was intentionally over the top, yet strangely true, just the same. Instrumentally useful and necessary is good enough for me. But yes, I will say that in general investing is morally superior to gambling. It benefits humanity. Yes it is a way to make money, but it is a way to make money by serving others. Invisible hand and all.Report
If I issue stock with no flexibility of resale, then I would have to offer it at a lower price.
Then it’s a good thing no one suggested that.Report
Yes, excellent comment. I’m also of the opinion that corporations should be taxed at a much higher rate than individuals. The legal fiction of personhood has a price. If you want certain risks/liabilities limited, you should be prepared to pay for that privilege.Report
You guys are making a lot of sense tonight.Report
I’d kind of worry about our international competitiveness at that point. Aren’t our corporate taxes already considered pretty high and putting us at a disadvantage?Report
Our rates are quite high, but our code is so complex and riddled with deductions that the rates our corporations actually pay are below-average.Report
Bear in mind that corporations aren’t people, so they don’t consume. The cost of a corporate taxes are borne by people, and it’s far form clear that the owners of the corporation are the ones bearing that burden.Report
Capital upgrades? Corporate expenses?Report
Bear in mind that corporations aren’t people
The Supreme Court feels otherwise.Report
No, they don’t. This is one of the dumber memes to come out of the left in recent years, and that’s saying quite a bit.Report
“Of course we believe in corporate personhood, but stop saying that we believe corporations are persons!”
Libertarians are so cute when they’re condescending and dishonest at the same time.Report
Corporate personhood is a metaphor, and a very limited one at that. It means that the law treats corporations as analogous to inidivduals in specific, limited ways, usually for the sake of legal convenience. For example, if you want to sue a corporation, you can sue it as if it were an individual, rather than suing each of its shareholders individually.
Corporations are not in general recognized or treated as individuals for legal purposes, nor should they be, because they aren’t. For example, corporations do not have fifth-amendment protections against self-incrimination.
Citizens United actually had nothing to do with corporate personhood. It’s nowhere in the decision. The First Amendment says simply that Congress may make no law abridging the freedom of speech or of the press. Nothing in there about individuals.
More generally, when we talk about the rights of corporations, this is shorthand for the rights of the shareholders. You can’t seize a corporation’s property without due process, because that property belongs to the shareholders, so you’d be seizing their property without due process. This doesn’t mean that corporations are people—it means that shareholders don’t stop being people when they form a corporation.Report
While that’s generally correct, I’d question the “very limited” characterisation of a legal entity. Citizens United has loads of precedent, going back to Buckley and long before: the entire case hangs on what was established in Buckley, that corporations have First Amendment rights.Report
Santa Clara County v. Southern Pacific Railroad:
“The court does not wish to hear argument on the question whether the provision in the Fourteenth Amendment to the Constitution, which forbids a State to deny to any person within its jurisdiction the equal protection of the laws, applies to these corporations. We are all of the opinion that it does.”
Pembina Consolidated Silver Mining Co. v. Pennsylvania:
“Under the designation of “person” there is no doubt that a private corporation is included
I’ll say it again: The Supreme Court feels that corporations are people.Report
The Supreme Court feels that corporations are people in the same way that antiabortionists feel that fetuses are people.Report
in the same way that antiabortionists feel that fetuses are people
With all their hearts and souls?Report
Saying it again doesn’t make it any less wrong. In Southern Pacific, the part you quoted (which was actually a paraphrase by a journalist and didn’t appear in the opinion) was the only thing said on the question, and it doesn’t say that corporations are people, only that the equal protection clause applies to corporations.
Why? Well, that’s explained in Pembina, which I quoted at length below, rather than just the cherry-picked sentence you quoted. The answer is because they’re associations of people who jointly and severally are entitled to equal protection of the laws. Note that in the very same decision the Court explicitly denied that corporations are entitled to the protection of the privileges and immunities clause.
And again, the Court does grant corporations the Fifth-Amendment privilege against self-incrimination. If the Court actually believed that corporations are people, they would. They’d also allow them to vote, and require them to be counted for representation purposes. And allow them to run for public office. Of course, they don’t, because they do in fact understand that corporations aren’t people.
The source of your confusion is the fact that the Court rightly recognizes that individuals do not forfeit their personal constitutional rights when purchasing shares in a corporation.Report
It’s not only true, but there’s nothing recent about it. Look up Pembina Consolidated Silver Mining Co. v. Pennsylvania or Santa Clara County v. Southern Pacific Railroad sometime.Report
The court ruled in Pembina that corporations are entitled to Fourteenth Amendment protections because they are associations of individuals, not because they are persons as such. The court ruled that:
Nor does the clause of the Constitution declaring that the “Citizens of each state shall be entitled to all privileges and immunities of citizens in the several states” have any bearing upon the question of the validity of the license tax in question. Corporations are not citizens within the meaning of that clause.
With respect to the equal protection clause of the Fourteenth Amendment:
The inhibition of the amendment that no state shall deprive any person within its jurisdiction of the equal protection of the laws was designed to prevent any person or class of persons from being singled out as a special subject for discriminating and hostile legislation. Under the designation of “person” there is no doubt that a private corporation is included. Such corporations are merely associations of individuals united for a special purpose and permitted to do business under a particular name and have a succession of members without dissolution….The equal protection of the laws which these bodies may claim is only such as is accorded to similar associations within the jurisdiction of the state.
That is, corporations are not citizens, but are treated as persons in the specific context of the equal protection clause, just as any other association of individuals would be, precisely because they are associations of individuals.Report
Corporate personhood is a legal fiction, which to say it’s not true but the law treats it as if it is to achieve some purpose.
Corporations have rights by proxy, if restricting a corporation from doing something would impinge on the rights of its owners, the corporation is treated as having rights. Which is why corporations are granted free speech rights (otherwise the free speech rights of the corporation’s owners would be affected), but not the right to vote (voting isn’t performed cooperatively so there’s no reason to let corporations do it).
None of this changes the fact that corporations don’t have utility functions because they don’t have brains. Any benefit of the money they earn accrues to someone else.Report
Not allowing corporate management to contribute money to political campaigns would impinge on the rights of the stockholders. Sorry, I’m not seeing it.Report
Is the management doing so against the wishes of the shareholders? If not, then yes it would. If not, then the problem is corporate governance, not corporate speech, ad should be dealt with as such.
In any event corporate management is likely to be a better steward of shareholder interests than the Federal Government.Report
Is the management doing so against the wishes of the shareholders?
Who knows? The state of corporate governance nowadays is that thee isn’t any.
In any event corporate management is likely to be a better steward of shareholder interests than the Federal Government.
Wouldn’t it be pretty to think so.Report
Shareholders have much more control over management than does the federal government. Neither may be particularly good agents, but at least if management annoys you you can sell your shares. If the federal government is bothering you, your options are far more limited. And do bear in mind Citizens United was about a corporation explicitly set up to engage in the political speech that it was engage in.Report
Thanks, J.B. I’m of two minds on that question. On the one hand, it’s been estimated (not sure by whom, but I read it in Peter Barnes’ Capitalism 3.0) that taking a company public increases the value of that company by about 30% on average. So there is indeed tangible value to the limited liability privilege.
On the other hand, I’m not sure how to equitably tax that or if taxing the value of that privilege away is really the best option. Perhaps the best way is to just eliminate the legal privilege of limited liability, but I don’t know if that’s really feasible.
FWIW, I’m on record here (on Tom’s blog) of favoring eliminating the corporate income tax and just making dividends and capital gains fully taxable as ordinary income (with the basis for CG’s appropriately indexed for inflation). Of course, that doesn’t address Brandon’s objection, but I’m not convinced his (and Landsburg’s) analysis and framing is correct.Report
some ETFs do this already. it’s a tremendous pain in the ass.Report
Perhaps the best way is to just eliminate the legal privilege of limited liability, but I don’t know if that’s really feasible.
Liability insurance is an option. I suspect that the value of limited liability is vastly, vastly overstated. First, the value of limited liability for debts is roughly zero, because the risk of default is priced into loans. When you lend money to a corporation, you do so knowing that you won’t be able to collect from shareholders in the event of bankruptcy, and you charge an interest rate appopriate to that risk.
That leaves liability for torts. How often are corporations bankrupted by tort judgments? Offhand, I’d say very, very rarely, at least for large corporations. It might be worth more for smaller corporations.Report
I suspect that the value of limited liability is vastly, vastly overstated.
By libertarians. That’s where I got the argument from.
Just sayin’…Report
Limited liability raises the value of shares, which would be far less attractive if they carried the risk of losing more than their value.Report
I take no responsibility for the beliefs of other libertarians. In particular, there’s an anti-corporate camp of libertarians who seem to believe that big business is evil and that limited liability is the root of all big business. I very strongly suspect that this is backwards and that limited liability is of greatest value to small businesses.Report
Eliminating limited liability would likely result in a world where capital ownership was consolidated in the hands of a very small, wealthy elite. Limited liability exists because it is a social good.Report
It already is. Oh, sure, we have our IRA’s and 401k’s, but something like 80% of stocks are owned by the top 5 or 10%.
Probably the largest spur to stock ownership among the lower quintiles has been the innovation of mutual funds. Many would include the holdings of pension funds as “belonging” to the worker classes, but that only lasts until some outfit like Bain capital raids it.Report
This doesn’t sound right to me. In addition to the reasons I pointed out above, most investors are heavily diversified via index or mutual funds, so even if we discount the possibility of a liability insurance market, the vast majority of investors would simply not have a high enough percentage of their net worth invested in any one stock for liability to be a major issue.Report
This is a cool comment. I love the line about land and “you didn’t build that.” I think that is the core truth of critics of private property – initial endowment is unfair from a certain viewpoint (the birth lottery viewpoint, which at least as a father of two young boys is not how I view my children by the way – “hey you entered a lottery and you got me!”).
Some disagreeing:
– I am no “competent economist” but I don’t see the case that land taxes don’t create deadweight losses. Say you taxed land at 40% of it’s last purchase price and there were projects that could make 20% returns using that land. Wouldn’t those projects not happen? If the argument is that land cannot be destroyed, so deadweight losses are impossible, then that is specious. The deadweight loss can be that lower return projects not involving land get done while the high-return-land-using project goes undone. Am I misunderstanding something?
– You attempt to make a distinction about HOW capital is used to make returns. I think it falls down. I would cite to Bastiat’s Capital for my basic objection – http://bastiat.org/en/capital_and_interest.html
As for the rampant economic rent, I wholeheartedly agree. I often work with bankrupt companies and see the management teams of defaulted firms get sickening, egregious payments. It is too often expedient for the creditors to pay out the former team in order to take legal control more smoothly. The solution to such atrocities is important though – we need to create a framework where such corruption is less effective (either by improving the laws or enforcing them as the case may be). I detest attempts to offset illicit corrupt gains in our free enterprise system by taxing at higher rates. In whose mind is it sufficient to take someone who is scamming the system to make $10m/yr and tax them at 60% instead of 35% and call that victory?? You have to fix the system so that everyone who makes $10m/yr is just doing awesome stuff for our economy and society, as voted by our citizens with their own free choices, not someone who is extracting rents from a corruption of the law.Report
No, because you owe the land value of tax whether you’re making money off the land or not. The only way to avoid the tax is to sell the land, but then the buyer is liable for the tax, and you will end up getting less of the land then you would if the tax wan’t in place.
What ends up happening is that land values drop when the tax is implemented. This makes everyone who owns land at that time worse off, but after that things go on as if nothing happened.Report
My example was really poorly defined. But I still think the land-tax-doesnt-cause-deadweight-losses argument is wrong.
I’m unsure the specific tax rule we are analyzing, but roughly, if one is taxing the returns from land then I will allocate capital to other projects with higher risk-adj after-tax returns, like designing iPhone apps as opposed to building another office building. If the argument is that you fix land values once and for all, and charge a fixed annuity off of that, then (1) that’s weird and (2) that is not a feasible way to fund govt because it doesn’t grow over time. I see that as having nothing to do with land by the way – the govt could just as well have a one-time tax on iPhones and use the proceeds to self-fund thereafter. That’s more absurd, but I don’t see that there is anything wonderful about using land as a tax base. I guess it is easier to collect than some schemes, and if one considers the land mkt narrowly then it is a vertical, quantity-fixed supply curve (so deadweight losses are impossible!). But this mistakes a tax source for a tax system. Land can be a tax source, but it’s just a special type of wealth tax; if one devises a system where govt is financed via land taxes, I think that system will involve deadweight losses viz a tax-free system.Report
In particular, I think that heavily taxing land would lead to underutilization of land and an inefficient amount of building up rather than out. Building tall buildings is expensive, but heavily taxing land makes it much more appealing since the alternative is using more land and paying more taxes. Building up becomes privately efficient but socially inefficient.Report
I see it this way too – a few people are making the argument that because of the nature of land, somehow land taxes don’t lead to deadweight losses. I think it does lead to a deadweight loss when compared to a tax-free land situation. Perhaps the more mature perspective is that if one assumes that an anarchist free market can provide all goods and services demanded, then any imposition of govt will introduce deadweight losses vs that benchmark. Of course, one can question the assumption that a system without a govt sector can function with the economic efficiency assumed in normal market clearing approaches. I’m of the view that govt can provide goods and services and thereby raise economic efficiency, so that the proper question when choosing a tax system is to minimize the efficiency costs of such choices. It’s not clear to me that land taxes are a good choice at all. My intuition is that given my preference / values, raising revenue from excess consumption will lead to the best societal outcome.Report
Consumption taxes tend to be regressive, because the poor spend more of their money than the rich do.
Also, wealth is maldistributed with regard to income, and consumption taxes would only worsen that…
Social mobility (particularly upwards) is a net social good. I’ll fight for it.Report
So to sum up:
The government budget deficit is a terrible thing that will kill us all;
the people with the highest incomes are contributing very little in revenue;
We MUST do something, anything, about this terrible deficit that will kill us all;
SOLUTION! Lets eradicate Medicare!Report
the people with the highest incomes are contributing very little in revenue;
Pretty sure they’re contributing quite a bit more than you or I.Report
Nonsense.
What they contribute measured against what they consume is miniscule. If the USA were an business, and sent an itemized bill to taxpayers for their services the tax bill for the 1% would be vastly larger than it is:
Your portion of military and police defense of your property, real and personal;
Your portion of the TARP bailout
Your portion of transportation infrastructure utilized by your businesses;
Your portion of education for your workers;
Your portion of medical assistance to treat your workers so they can get back to working for minimum wage;
And so on.
They not only didn’t build that- they didn’t pay for it either.Report
You didn’t say proportionally, you said they contribute very little, period, which is wrong, period.
That said, I’m pretty sure you’re wrong about proportionality, as well. Perhaps you could show me the actual accounting you’ve done?
Certainly we can agree, for example, that the lion’s share of the benefits of education go to the students themselves? And medical care, as well? And we as consumers benefit quite a bit from transportation infrastructure, do we not? What is the fair share of the rich for these things? Please show your work.Report
So what you are saying, is that everyone benefits from a society in which we share costs since there is no way to properly segregate one from another?
You sure you aren’t a liberal?Report
Of course I’m a liberal
So what you are saying, is that everyone benefits from a society in which we share costs since there is no way to properly segregate one from another?
For certain public goods, sure. But you don’t seem to believe this. You seem to have a pretty good idea of how much the rich should pay for each of these line items, or else you would not be able to state with some confidence that they aren’t paying their fair share. I’d just like to see the math behind all this.Report
“It’s a scandal that the poor aren’t paying any taxes!”
“Neither are a lot of very rich people.”
“That’s a red herring!”Report
Lib60:
Does the gov’t need more money to waste? Here is one example.
http://www.foxnews.com/politics/2012/08/11/ig-report-ag-dept-spent-2m-on-internship-program-that-resulted-in-just-one-hire/Report
What- you could only come up with one example of government waste? and only to the tune of 2 effing million dollars?
Seriously?? Are you doing a Colbert on me, and trying to make conservatives look foolish?
I can name a dozen without a pause, in the billions of dollars (thats 1,000 times as large as your example) and thats only in the Defense Department!
Yet this is the same wasteful squandering of money that Ryan and Romney promise to protect and enl;arge.
So to answer your question, YES, the Republicans DO think that the government needs more money to waste.
Be a fiscal conservative- VOTE DEMOCRAT!Report
No that was just the most moronic and wasteful example I could quickly find.Report
I assumed everyone knew the photo was a mock-up, but the caption made me wonder. To clear the record, here’s Snopes: http://www.snopes.com/politics/romney/money.aspReport
Money’s Romney’s codename, isn’t it?
Whomever did that is probably having a bit of fun.Report