Thinking Out Loud: Some Good and Bad
Vikram and Tod have been discussing the tax code and corporations. Some comments in both threads got me to thinking..
(edited correct an error)
The Good
(1) Mark Thompson points out that one of the problems in the existing corporation-regulation relationship is that there is a revolving door between them.
In the security perspective, this is a much bigger problem than the particular symptoms of mangling the tax code. Fixing the tax code is whack-a-mole. Addressing the relationship between regulatory and corporate entities is figuring out how to limit how many moles there are in the first place. Since both Roger and Scott (not exactly idealistic companions) saw merit in the point, I think it’s fair to say that this is a place where we can achieve some sort of common ground. Probably working at this point would be a good start.
So. Maybe we should make that a Symposium topic.
(2) Alan had what Jaybird referred to as a “corker of an idea”.
I’m not convinced that it will work, as originally proposed, but I think this is something seriously worth looking at. If nothing else it represents a truly outside the box thought.
Another candidate is goodwill (edited to fix a copy-paste error), trademarks, and brand value. (/edit) Proctor and Gamble held $2,976,000,000 in Assets in “Patents and Technology” in 2013. They held $31,053,000,000 in “Brand” assets, more than ten times as much. They held, by the way, $139,263,000,000 in total assets… which means about a quarter of the entire assets held by P&G isn’t factories or cash or anything, but simple brand loyalty, trademark protection.
I don’t see any particular reason why trademark protection and patent protection aren’t suitable candidates for taxation regardless of where a company plants its headquarters. It is recognized as a fiscal asset, and it’s an entirely legal construct. We don’t have to tax P&G on their income. We can tax them on their *property*. The brand “Tide” itself might very well be worth more to P&G than any individual account in cash or warehouse line or factory or distribution facility. They can move their income anywhere they want, but if they want the U.S. to recognize their trademark, then they have to admit it’s property, and property taxes are where we should hit them up for their contribution to the commonwealth.
The Bad
I’m going to simplify the arguments to their least defensible version in order to illustrate points, so don’t think that I’m addressing you directly if you’re the one that made one of these arguments. I just think that some of the arguments are based upon frameworks that everyone’s gotten a tad bit too comfortable with, so I’m trying to step back a pace.
(Argument) If we changed to (a consumption tax/a flat tax) this problem would go away!
(Rejoinder) There are reasons to modify your tax code. “Getting rid of shenanigans for all time” is not one of them, because it won’t work.
The problem with moving entirely to a consumption tax, or any one tax scheme, is that the people with the money will lobby to have the things they want to buy exempted from consumption taxes and by extension the stuff they don’t want to buy will have to pick up the load. This will start approximately two months before switching to a consumption tax: witness PPACA. Before the law was passed, all sorts of embedded interests has lobbied themselves into the concrete.
It’s not rocket science, folks. Basic security principles indicate that changing schemes doesn’t eliminate security vulnerabilities, it just moves them.
In a real sense, the same security vulnerability will be there regardless of tax scheme: it is in the best interests of the folks with the most money to lobby to change the tax code to make it advantageous for them, and they will do that regardless of whether you’re taxing income, land, capital, consumption, vices, whatever. One version of this is what Mark talked about and I already noted.
Over time, whatever method of taxation you choose, the tax code will get labyrinthine again and the loopholes for the least ethical folks will be engineered into the system, and everyone else who benefits will take it because, hey, nobody pays more taxes than they should, amirite? And then you have a vested interest arguing to protect their tax-advantaged status. It’s the reason our existing tax code is the way it is now, the income tax was pretty straightforward when it was implemented, no?
Now, there are reasons to “take off and nuke the entire site from orbit”. If you reset the entire tax code, by moving to one flat tax or any other brand new scheme, the process of embedding all these exceptions needs to start anew, battles for the poor and the rich and other normative guidelines need to be refought. Provided you can start from scratch, this is an advantage. Security is an ongoing process. To use an analogy, we’ll still be pushing a rock up a hill, but we’re choosing a different path and it will roll down differently tomorrow. We’ve learned some things from pushing rocks up hills.
But the fight to keep the tax code square and fair will be an ongoing one, and any advantage you get off of resetting the tax code will not be coming from “this is a better way to make people pay taxes but instead from “we changed the game and now the scofflaws have to engineer new ways to bend the rules”. If your revenues go up and your audit costs go down after changing to a consumption tax, this probably isn’t because consumption taxes are a better way to collect taxes, and twenty years from now changing *back* might be a good idea, because it was the act of *changing* that improved things.
If you want to make the argument that the income tax is particularly *easy* to engineer exceptions into, you can make that argument, but you’ve got a long way to go.
(Argument) Well, it would be cheaper to enforce!
(Rejoinder) If you think monitoring a consumption tax for compliance is cheaper than the task the IRS does now of auditing income, you’ve got no idea of how many different ways I can pay you to do something for me without either of us having to track that cash flow. Now, I will say this: it’s a lot easier to do this on a small scale than a large one, so small Mom and Pop businesses will be able to cheat on their taxes a lot easier than IBM, but that doesn’t get rid of the problem of tax dodging, it just moves the easiest exception scenarios to a different group of beneficiaries.
Side prediction: if the U.S. moved to an all-consumption tax model, cash transactions would jump enormously in the next year, and within ten years we’d have politicians arguing that we really need to outlaw cash and move to a completely traceable currency.
Side-side note: establishing an NIT or minimal income in order to balance the regressiveness of consumption taxes requires folks to agree ahead of time not to mess around with NIT payments in the name of austerity or moral scolding. I don’t know that this is a better war to wage… I’d personally rather have a few rich dickheads bending the law and getting away with it than have a whole class of folks dependent upon a federal income level that could be held hostage every time a political party wanted to get something else done, but that’s just me. I love an NIT in principle, in practice I expect it to be a nightmare.
(Argument) Well, getting rid of the corporate income tax is still a good idea, because of fairness! Why should people who invest have to pay taxes on the same money twice?!?
(Rejoinder) Unless I’m grossly misunderstanding corporate income reporting rules, I do believe that it is entirely possible for every company in the United States to avoid paying any income tax under any income tax scheme you can envision right now.
Simply declare that all profits in any given year are to be disbursed to the stockholders as a dividend. Basically, whether they legally qualify as an S corp or not, they can act that way. That makes this payment of dividend a business expense, so they don’t have “profit” any more, the stockholders have income instead.
The corporate entity has netted zero income, and all of the folks who are stockholders in the company have that income as normal income and they pay taxes on that accordingly. The government has not taxed them twice, at all. (this is incorrect, but it doesn’t detract entirely from the rest of the comment. However, for the record, this is how I think it *should* be, dividends should only be taxed at the disbursement point).
Businesses don’t do that for several reasons, but what it boils down to is that it is to their advantage and the advantage of their shareholders not to do this.
The business is not, precisely, the stockholders. To the extent that corporations are people, they should be treated like people. To the extent that they are not people (but independent entities with their own agendas and legal existences), we treat them differently from people because of those differences, which are advantages. Taxing them on that basis is clearly a-ok from any one of a number of different perspectives.
Again, the mere fact that they don’t do this means that the corporations and the stockholders are gaining something from not doing it (otherwise, why wouldn’t they?)
So the “fairness” argument probably doesn’t apply at all… they most likely aren’t paying taxes twice. They’re not stupid. They’re paying taxes less than once, or they wouldn’t be doing it that way at all.
You completely misunderstand what Goodwill is on a balance sheet. Goodwill is consideration in excess of net assets from an acquisition. Since Tide is an OG P&G brand, the value of the Tide brand asset on P&G’s balance sheet is exactly zero. Also, a lot of what Goodwill is are things like the value of customer relationships, patents, labor relationships and consumer opinion. How do you tax or take away the fact that people have fond memories of the Mean Joe Greene Coke commercial.
Patrick you grossly misunderstanding corporate income reporting rules. A C corporation may not deduct dividends before taxes. This is part of the rationale behind a lower dividend payment and the rhetoric behind double taxation.Report
So if we withdrew trademark protection from the Tide, P&G wouldn’t lose any value?Report
Sorry, the copy-and-paste missed a line in there. I was including goodwill, intellectual property, trademarks. Those second two bits were lopped off.
Since Tide is an OG P&G brand, the value of the Tide brand asset on P&G’s balance sheet is exactly zero.
No, it isn’t.
Or rather, its impact on Goodwill is zero, but it’s certainly included in “TRADEMARKS AND OTHER INTANGIBLE ASSETS, NET 31,572 30,980”
(which is where the figure is from, I’ll note, the goodwill figure is ~55 billion. Apologies for inflicting confusion)
I made the change about C corp and dividend payments a couple of minutes after the post went up 🙂Report
@patrick That isn’t correct. You cannot capitalize your own trademarks. All of those trademark assets on their balance sheet came from acquisitions. FASB doesn’t allow you to capitalize anything more than the legal fees and costs related to registering those trademarks. So the value of Tide on that balance sheet isn’t even a rounding error on those assts. For acquired trademarks and patents and the like, you can value them as the fair market value of them. GAAP rules basically make it so that anything of intangible value that you create can only be valued at what it costed you to create it.
@fnord Market value? Yes. Asset value on the balance sheet? No. Figuring out the former requires a full on market auction. If you want to tax them, you have to use the latter, which means that P&G gets taxed close to zero.Report
@mo @Patrick
Mo’s on point here. When Lockheed Martin bought Loral, the goodwill on the BS for that transaction was 1 BILLION dollars. (might have been 10 B, but I can’t remember if the FS were in millions or K). You want to tax that? It has no real value other than to represent how much LMC over paid.Report
@Mo:
Believe it or not, I don’t actually care what the accounting rules for what is required to be put on a balance sheet. That the Tide trademark has value for P&G is an economic reality: they make money using that brand, and if they couldn’t use that brand, or couldn’t prevent others from using it, they’d make less money.Report
@mo
Hm, that’s not how I thought it worked. Ah, well, I’m hardly a corporate financial analyst.
Well, the point still stands on practical matters. P&G holds a quarter of their assets in intangible assets. Whether they are internal or acquired doesn’t matter; they’re on the asset sheet, yes?
It’s still entirely practically possible to construct a property tax on that property, and they can’t move that property somewhere else to avoid the tax, yes?Report
As a general note on irony, those of us who normally argue that it makes sense to legally treat corporations as persons tend to argue that corporations don’t actually pay taxes, but only people do, while those who normally object to the idea of treating corporations as person tend to believe that corporations actually pay taxes like actual people do.
I don’t know what to make of that, and it’s not a jab at anyone. I just find it both amusing and bemusing.Report
I had the same thought and laughed to myself, but I think it’s more in keeping with the priors and less ironic. I.e., the corporations-are-people people see what the corporations are doing (paying taxes), and see the people that the corporations are (and some that are not those corporations, but in any case, people) doing that. The how-can-you-say-corporations-are-people!?! people see corporations paying taxes, and think corporations, not people, are doing it. Because corporations aren’t people (sic).
Thing is, aren’t they both right in their way? Formally, the corporations are paying the tax, but the fallout falls upon the people in and out of the corporations. The corporation is just a formality to the Cs-are-P people, so it’s the people who pay the tax for all important purposes for them, but for the how-can-you-say people, the corporations are not people, so the formality of the corporation paying matters, even of the knock-on effects are real and important. But those are the effects of the tax, not the tax itself. I’m not sure which way one prefers to think of it matters all that much, but it probably matters a bit.Report
The thing, to me, is that a corporation is not just a formality.
It’s a packaged legal entity, intentionally separate from the stockholders, which massively reduces stockholder risk… this is a moral hazard problem that the Right generally never talks about, although they’re all over the moral hazard of welfare.
But that, too, is another one of those bemusing differences; moral hazard matters to the Right except when it doesn’t, and it matters to the Left except when it doesn’t.Report
I think getting rid of the corporate income tax is probably a very good idea, but not at all because of silly “double taxation” arguments. I reject those arguments completely. I just happen to think that the deadweight loss from crazy incentives is appallingly huge for a tax that generates so little revenue. The fact that I’d never have to hear a “double taxation” sob story again is just icing on the cake.Report
Hate to break it to you, and I don’t want to talk you out of bring on the right side of the issue, but you’d still hear “double taxation” for the capital gains and estate taxes. (I, too, reject the argument.)Report
Well, you’d hear it for estate taxes, but that’s because there are literally two transactions there…the dead guy pay taxes when he earned the money, and the guy who inherited earned the money.
Someone saying ‘My father paid taxes on this money when he earned it a decade ago, I don’t see why I have to pay taxes again’ is not projecting the greatest sob story. Everyone understands that’s how estate tax works. That’s the entire point of it.
Whereas they don’t understand how corporate income tax works, so are susceptible to a claim of ‘The corporation paid taxes on this money, and now has to pay taxes again.’. (It sure is interesting how the solution to not taxing employees twice was for just *them* to pay all the taxes(1), whereas the solution for not taxing owners twice was for the corporations and the owners to split the taxes.)
However, I’m confused as to how they claim ‘double taxation’ for capital gains. I don’t see where the money would be taxed twice if we got rid of the corporate income tax. A guy earns some money, let’s say, $100,000, he pays taxes when he earned it so he’s got $70,000 left, he invests that in a company, it earns $3,000 in dividends, then he sells the stock for $72,000, so he made a profit of it makes $5,000 total, he has to pay the capital gains only on the $5,000 (That’s why it’s a capital *gains* tax.). Without corporate income tax, I’m not seeing any money that got taxed twice during that.
Now, obviously, ‘double taxation’ is not a real thing anyway…all money is taxed an infinite amount of times. I’m just confused as to where you think they’ll be *claiming* it. The previous point that money got taxed is, as far as I can tell, sales tax. But whiners can’t use *that*, because that also cut into employee’s income, so if that makes capital gains ‘double taxed’, it also makes general income ‘doubled taxed’. So they can’t use it to argue capital gains should get a better rate than general income.
1) Yes, I’m aware that corporations pay various payroll tax, and I’m aware, in some way, it doesn’t really matter…taxes on a transaction are taxes on a transaction. But still, if you look at the division of taxes between corporation vs. employee compared to corporation vs. owner, it’s is *really* unbalanced. I don’t mean the amount of taxes, which also imbalanced in various ways, but the percentages of that amount that ‘each side pays’.
This has the interesting (and *surely* unintentional) side effect that we compare outgoing money incorrectly between owners and employees. It’s a good thing we don’t also do weird things with corporate executives compensation too, putting it things it’s hard to compare to, like stock options. Oh, wait.Report
Whether a consumption tax would be easier or harder would depend on how it was assessed. If assessed the way state income taxes are, I would expect it to be an enforcement disaster for the reasons you describe. The VAT boasts good collection rates, from what I understand. There are also ways to make the consumption taxes progressive, if we so choose.
One of the bigger issues for me that I haven’t figured out, and it’s probably a dumb question, is that if we switched from income to consumption, how do we avoid double-taxing current wealth. I mean, our bank account was taxed going in, and I don’t want it taxed again when we try to spend it. That’s serious double-taxation.Report
What was the tax on the way in if not an income tax? Presumably payroll taxes are a separate question from all of this.Report
I’m talking about the income that was taxed before the transition. Let’s say that starting in 2015, we have a consumption instead of income tax. In 2014, Bill earned $10,000 that he did not spend, or it would have been that much except that 20% of his income went to taxes and so it’s $8,000. Except that starting in 2015, his purchasing power has fallen another 20%, to $6,400.Report
Oh, I see. Duh. The reverse-grandfathered savings, as it were. (Like you pretty clearly said.) Presumably that could be accounted for with some retroactive provision going back a reasonable amount of time. (You can;t account for all taxes on wealth people can argue they still have from earnings from thirty years ago or some such… but maybe ten is reasonable?) If not, it would just have to get chalked up as “transition costs.”
The latter being potentially a deal-breaker for you. Which is fine; I’m not VAT enthusiast.Report
If your tax bill was 15k in 2014, and we switched to a consumption tax in 2015 yes you’d be double taxed on the existing money. But if your tax bill is still roughly 15k what skin is off your nose?
Granted, that’s an assume.Report
What difference does it make? It makes Bill a chump for not spending the money in 2014. Because the money earned wasn’t just taxed 20% anymore, it was taxed 36%. Two thousand taken when it was made, then $1,600 when it was spent. That’s significant! If it’s 15% rates on both ends, it was ultimately taxed at 28%.
This isn’t hypothetical for us. We’ve built up a nice little nest-egg. We already paid quite a bit of taxes for that money that we have left. Due to good fortune and a thrifty lifestyle, we have $x in our bank account. The transition to a sales tax would diminish that money. In no small way.
I don’t object to this in all ways and all instances. I mean, it’s the same dynamic if you move from Montana to Washington. But we’re talking about significantly different sums of money.
In our own case, we would probably throw a whole lot of our nestegg into a prepayment on the house. Otherwise, the transition literally costs us tens of thousands of dollars in taxing the spending of income that was already taxed it was made because we had the bad sense not to spend it when we made it. This is seriously no small thing.Report
The double taxation thing isn’t hard to mostly avoid for working people. Instead of this complete lunacy of switching from an income tax system to consumption tax as fast as possible, we simply ramp it up over a number of years, while ramping other taxes down.
I know it’s not exactly the consumption tax you’re talking about, but this is what astonishes me about the ‘Fair Tax’ people. Not only is it a stupid plan (Hey, look, rich people are now just sitting on their money), but every supporter I’ve ever talked to seems to think we can just *do it*, instantly.
Taxes should never instantly hugely change like that, at least not for every single person, many of which would have no way to compensate for the changes. (I know the *theory* is that their wages would instantly go up to counteract the consumption tax, but in practice, many employers would give a pay cut and claim ‘It’s the same amount of after tax income’, which is entirely true, and will remain true until they go grocery shopping and realize what level of sales tax they’re paying.)
Of course, in the end, there’s really no way not to tax a lot of money twice. You’re taxing money at a ‘later’ point, you’re going to be taxing stuff you weren’t before. And you *won’t* be taxing stuff you were before. (Like Scrooge McDuck’s money pit.)
But, then again, that’s just one of the least stupid parts of switching to a consumption tax. The main problem is it taxes exactly the thing we want to encourage, and would not actually solve any problems at all, and make a lot of them worse.
You *really* have to start enforcing border tariffs, for example. People would start buying untaxed goods right across the border and carrying them over. People would go on vacation and buy expensive pairs of shoes. Etc, etc.Report
Actually my assumption is that we want to encourage and incentivize production, investment, research, savings and profit. Eventually of course this is all leads to consumption. Taxing the former seems extremely counterproductive to me. It is like taxing ants in the ant and grasshopper story. Good way to get lots of grasshoppers and encourage the ants to find a new nest.
I would recommend taxing consumption with an adjustment mechanism to ensure it is not regressive in nature. I would not tax wages or profit.Report
Making the transition over several years is something that I can live with, and it’s something I thought about at some point after I made the query. I’m not looking for the transition costs to be zero. As you say, I don’t think it can be entirely avoided. But this is an important thing that needs to be figured out.Report
@roger
Actually my assumption is that we want to encourage and incentivize production, investment, research, savings and profit. Eventually of course this is all leads to consumption. Taxing the former seems extremely counterproductive to me. It is like taxing ants in the ant and grasshopper story. Good way to get lots of grasshoppers and encourage the ants to find a new nest.
I suspect you’ve not been reading carefully, because parts of your list have very little to do with the actual tax changes being discussed her, which was changing from a personal income tax to a personal consumption tax.
That would alter nothing with production and research, which are, of course, done by *corporations*.
Additionally, I’m baffled as to why you think ‘profits’ are something that should be encouraged, or what that accomplishes. Profits *are* the encouragement of other behaviors, they’re not something that we need to encourage.
The only two things you listed that altering the tax structure in that manner would *actually* encourage is ‘savings’ and ‘investments’.
And, of course, saving cannot possibly ‘eventually lead to consumption’. Savings are, literally, the opposite of consumption. Consumption is spending money, savings is *not* spending money. Now, obviously, savings won’t stay saving *forever*, and will eventually get spent, but saying that savings lead to consumption is like saying that stopping a car leads to the destination.
This was, in fact, the *entire point* I was making about consumption taxes. People sit on money.
And trying to encourage ‘investments’ is nonsense. Assuming the proposal to shift taxes is revenue neutral, exactly as much money would exist in the hands of private citizens as before. It would just be less money in the hands of working people, and more money in the hands of the rich, so presumably they ‘invest’ more…but only because those working people *needed the money to spend*.
‘We should encourage investments’ is code for ‘we should give the wealth more money so that they continue to own all businesses’. It’s insane. It doesn’t help the economy at all. If money was less concentrated, other people could just *start their own business*, or buy stock, or whatever.
But, no, we need to give it to magical super-rich ‘investors’, who will later descend from their clouds to loan us that money as long as we promise to pay more of it back. Heaven forbid we just put the money in the hands of non-rich people, 1% of who will start a new business and the other 99% will now have the money to shop at.Report
People sit on money.
The Scrooge McDuck theory of wealth.Report
And, of course, saving cannot possibly ‘eventually lead to consumption’.
Yes it can. Saving and investment facilitate economic growth, which leads to more consumption in the long run. Think about all the investment that was needed to support the level of consumption we enjoy today. The factories, computers, infrastructure, vehicles—we have all of these things today because in the past some people decided to save money and invest it in capital goods rather than spending it immediately on consumption goods. This, combined with technological improvements (also due to savings, because you need to pay people to do R&D), is how growth happens.
But, then again, that’s just one of the least stupid parts of switching to a consumption tax. The main problem is it taxes exactly the thing we want to encourage
I assume you’re talking about consumption, as opposed to savings. Paul Krugman called this—the idea that consumption is always preferable to saving—vulgar keynesianism. The paradox of thrift is not a general phenomenon, but applies only under special circumstances.
‘We should encourage investments’ is code for ‘we should give the wealth more money so that they continue to own all businesses’.
Nobody is proposing “giving” the wealthy anything. It’s just a question of how much the government is going to take from them, and on what basis that sum should be calculated. Is it really too much to ask that you express your disagreements honestly?Report
By the way, most of the problems with a consumption tax can be eliminated by implementing it via a tax-deferred savings account, rather than a point-of-sale consumption tax. Basically, we remove all restrictions on IRAs (i.e., contribution limits, income limits, early withdrawal penalties). Then you’re taxed on your wage income minus any net contributions to savings, plus any net withdrawals from savings. Cash transactions? No problem (except paying wages in cash, which would be no more of a problem than it is now). Buying stuff in Canada or Mexico? No problem. This also makes it easier for states to enforce sales taxes on out-of-state purchases.
We could also solve the double-taxation problem by grandfathering current savings. Send the government proof that you had $x before the switch, and the first $x in withdrawals from your account are tax-free.
It can also be made progressive by keeping the current income tax rates in place. But nothing’s perfect.Report
Alternatively, the double-taxation problem could be solved with accounts modeled after Roth IRAs rather than traditional IRAs. That is, you pay taxes when you earn your income, but you can then put it in an account where growth and withdrawals are untaxed. This might be preferable since it frontloads the tax revenues (on the other hand, it’s probably a worse deal for the government in the long run since market investments tend to outperform government bonds). Politically it’s a nonstarter, though, since people who don’t understand math (i.e., most of them) will get all pissy about “tax-free” investment income.Report
@brandon-berg
Yes it can. Saving and investment facilitate economic growth, which leads to more consumption in the long run.
I say *savings* cannot lead to economic growth, you say savings *and* investment can, and then talk about how investment does, which you also call savings! The word ‘savings’ *can* include investments, and they’re interchangeable at times, and if I had used just the word ‘savings’ in my post I’d understand the confusion.
However, I talked distinctly about savings and investments, so I *very clearly* wasn’t including ‘investments’ under ‘savings’.
I stand by my comment that *savings*, as in *money stored in the bank*, cannot lead to economic growth. *Investments* I clearly address in the next paragraph. (I find it exceptionally weird that you combined them up like that in exactly the same post you gave a link to Krugman’s article about encouraging investments vs. savings!)
we have all of these things today because in the past some people decided to save money and invest it in capital goods rather than spending it immediately on consumption goods.
You’re asserting that *people* are buying capital goods? That that is a significant part of the economy? That rich people are personally buying smelting equipment?
Hey, wait a minute! People buying capital goods would be *discouraged* from doing so under a consumption tax. You just argued backwards!
We are talking about how to tax *people*. Whether we should tax *human beings* at income, or tax them at consumption. That is the topic under discussion. No one under discussion is buying capital goods, or doing research, or whatever.
I assume you’re talking about consumption, as opposed to savings. Paul Krugman called this—the idea that consumption is always preferable to saving—vulgar keynesianism. The paradox of thrift is not a general phenomenon, but applies only under special circumstances.
LOL. Krugman is arguing that, in actuality, investments are totally dependant on the Fed. (And, presumably, on people actually possessing money to invest, but that’s obvious, and would stay the same under any revenue-neutral tax change.) And he’s possibly right.
This, of course, renders Roger’s original point *totally moot*. He’s the one who wanted to tax consumption instead of income, because *he* claimed it would help investment.
I was just pointing out that ‘helping investment’ was a dubious policy goal, because assuming a revenue-neutral tax change, the money would exist in the hands of people *anyway*, who could still invest it. It would just be in the hands of *different* people.
And you come along, asserting that none of that has anything to do with investment at all. I’ll go along with that, you and Krugman are 100% right. Investment is not actually due to anything but the Fed. And now I win the stupid discussion with Roger, because you just shot out his sole remaining justification for changing the income tax to a consumption tax.
I knew trying to encourage investments, via making sure the rich had plenty of money, was stupid, because middle-class people invest too. (And the poor, while they don’t invest, just spend the money and it ends up in the hands of the investors that own the store, who then, tada, invest it.) I just didn’t realize it was quite *that* stupid in that it didn’t actually work in the first place!
Why, that’s a *much* better argument than what I was making, thanks. ‘We shouldn’t encourage investment via tax policy because we literally can’t encourage investment via tax policy.’ Hell, that one works against lower rates for capital gains tax, too!
Nobody is proposing “giving” the wealthy anything. It’s just a question of how much the government is going to take from them, and on what basis that sum should be calculated. Is it really too much to ask that you express your disagreements honestly?
Firstly, it turns out that I actually completely agree with you, and you did a nice job of pointing out how Roger was speaking complete nonsense, even more nonsense than *I* thought he was speaking.
Secondly, you’re trying to assert the correct way of looking at the situation is an assumption of no taxes, or that taxes aren’t part of the existing system. That people have money, and then have less money. And you can look at it that way if you want to.
It is just as valid to look at the the status quo of taxes as the starting point, and judge things based on the proposed alterations.
That is not dishonest.Report
@brandon-berg
By the way, most of the problems with a consumption tax can be eliminated by implementing it via a tax-deferred savings account, rather than a point-of-sale consumption tax. Basically, we remove all restrictions on IRAs (i.e., contribution limits, income limits, early withdrawal penalties). Then you’re taxed on your wage income minus any net contributions to savings, plus any net withdrawals from savings. Cash transactions? No problem (except paying wages in cash, which would be no more of a problem than it is now). Buying stuff in Canada or Mexico? No problem.
That’s not really a consumption tax. It’s an income tax with an infinite amount of tax deferral. (I actually was thinking of a similar thing, recently, although mine had caps.)
It can also be made progressive by keeping the current income tax rates in place. But nothing’s perfect.
Such a system would automatically fix some of the oddities and unfairness of the current progressive tax system, like the fact that someone who earns $35,000 one year and then $0 the next year paid more tax than someone who worked $20,000 each year.
Likewise, we could implement tax deductions directly…for some purchases, you can just pay out of that savings account. Or donate to charity straight from there.
And, on top of that, we can do clever tricks like implement retirement savings *within* that. I.e, you get over 65, and you get to withdraw up to $X a year from it without paying tax on it.
Of course, then we run into the problem of trying to collect the tax at death, which would probably be politically unpopular. And it would be pretty unfair to apply progressive tax rates to that entire lump sum…but we can’t choose not to tax it, or we’re going to have jack up rates, because previously we were taxing that money as it came in.
And that raises the interesting problem: What about income that it *isn’t* possible to put in the tax deferred account? What happens when someone earns stock, for example?
This also makes it easier for states to enforce sales taxes on out-of-state purchases.
Well, yes, because what you’re really proposing is that the federal government would just pay states some money, instead of states actually collecting sales tax. That would, indeed, be easier…but that would cause all sorts of weird political issues. For example, now you’re talking about per-county rates of income tax on residents.Report
@roger Although I’m generally in agreement with you on this issue, I don’t love this phrasing:
Actually my assumption is that we want to encourage and incentivize production, investment, research, savings and profit.
I apologize if I’m explaining something you already know and just phrased inelegantly, but there’s a lot of confusion on this point in general, so I want to clarify: A consumption tax does not encourage saving. That is, while an income tax (specifically a tax on investment income) penalizes savings, a consumption tax is neutral and does not distort incentives in favor of savings.
The current tax regime discourages saving. A consumption tax would end that, but it would not actually encourage savings.Report
@davidtc That’s not really a consumption tax. It’s an income tax with an infinite amount of tax deferral.
They’re mathematically equivalent. You’re taxed on the money you spend, when you spend it.
Such a system would automatically fix some of the oddities and unfairness of the current progressive tax system, like the fact that someone who earns $35,000 one year and then $0 the next year paid more tax than someone who worked $20,000 each year.
Yes, that’s right, although it still doesn’t address the problem of doctors paying a higher rate than they should due to backloading of their incomes, since there’s no way they can shift the consumption forwards.
Of course, then we run into the problem of trying to collect the tax at death, which would probably be politically unpopular.
Unless you’re specifically talking about the estate tax, there’s no reason to collect at death. The heirs would just have their inheritance deposited directly into their own tax-deferred accounts. and it would be taxed as they spent it. If you are talking about the estate tax, then that’s no different from what we have now.
And that raises the interesting problem: What about income that it *isn’t* possible to put in the tax deferred account? What happens when someone earns stock, for example?
Where’s the problem? You keep the stock in your account. Dividends from the stock go the account, as do proceeds from selling it. That’s how IRAs work now.
Well, yes, because what you’re really proposing is that the federal government would just pay states some money, instead of states actually collecting sales tax.
What I had in mind was that states would know about income (as they already need to for state income taxes), and they would get a report on net deposit to or withdrawal from the tax-deferred account over the course of the past year. Then they would calculate state tax liability based on that.
The beauty of this approach is that all the infrastructure we need is already in place. and it allows us to eliminate point-of-sale tax collection. It doesn’t have any problems that don’t already exist in the current income tax system, because it is the current income tax system minus restrictions on IRAs. The only basis on which it could be opposed is that one believes that we should in fact have a tax system that privileges consumption over saving.Report
Granted, our existing economy is rather heavily dependent upon consumption, but the idea that we want “more” (or even “our current”) level of consumption is kinda crazy.
We want people to consume what they need, of course. We want people to have enough extra that they can consume some luxuries, yes, that too. But if one of the consequences of a consumption tax is that people buy a $80 knife that will last them thirty years if they get it sharpened every once in a while by a professional knife sharpener rather than a $13 set of ginsus that they’re going to throw away in 18 months that need to wind up in a landfill, I don’t see that as a loss.
Right now, all of the incentive is to buy the cheaper thing that you can throw away without thinking about it. Moving some of that to durability and quality might have all sorts of interesting and beneficial side effects on the sorts of goods that we consume, by default.Report
@brandon-berg
We could also solve the double-taxation problem by grandfathering current savings. Send the government proof that you had $x before the switch, and the first $x in withdrawals from your account are tax-free.
This is an interesting idea. Actually I’m rather a fan of your proposed system design here:
Then you’re taxed on your wage income minus any net contributions to savings, plus any net withdrawals from savings.Report
Unless you’re specifically talking about the estate tax, there’s no reason to collect at death. The heirs would just have their inheritance deposited directly into their own tax-deferred accounts. and it would be taxed as they spent it. If you are talking about the estate tax, then that’s no different from what we have now.
As I said, in theory we removed a point of revenue, so rates have to go up in theory. Let’s just imagine there’s no estate tax, to keep it simple:
Right now, when someone earns money, they pay income tax{1} on it. When someone else inherits it, that someone else pays income tax{2} on it also. (Barring various exceptions.) Two places the money was taxed.
Under this system, when someone earns money, they don’t pay taxes on it. When they die, it transfer to someone else, who also doesn’t pay taxes on it. And then that someone spends it, and pays taxes{1} on it. One place the money was taxed.
To work the same as the current income tax system, the money should be taxed as it leaves the first person, aka, when it’s ‘spent’ by the first person. (In addition to landing in the tax-free account of the second person and thus being taxed later when removed.) This is *before* any hypothetical estate tax.
If you just let people pass around money between tax-free accounts (Upon death or otherwise), you’re cutting out a point of revenue from the current system. (And, yes, I know that’s how IRA work in the current system, but right now IRA aren’t expected to hold a huge amount of money.)
Actually, thinking about it, I just rendered my hypothetical complaint of people moot: I forgot we had a *ton* of exceptions to income tax for inheritance. So most people wouldn’t be affected, and the government could just tax the remaining money on the way out the door.
Where’s the problem? You keep the stock in your account. Dividends from the stock go the account, as do proceeds from selling it. That’s how IRAs work now.
Oh, you mean this is like an *actual* IRA? Right, sorry, wasn’t paying attention, I was thinking just cash account for some reason.
What if you inherit a *house*?
Yes, I know that, under certain circumstances, real estate can be in an IRA, and that doesn’t really give you any access to it…but you just know if we leave it *possible*, someone is going to set up an IRA that lets you direct them to buy real estate and then *use* that real estate as if you own it.
That’s rather circumventing the entire idea of ‘paying taxes when you spend the money’.
You’ve just made me realize that, if we do this, we’re going to have make some serious restrictions on what can be in that account. Basically, nothing that accrues any benefit to you, except via earned income. They can’t be, for example, private stock in a company that owns a private jet and lets owners timeshare it for free, which the IRA then happily passes that right on to you.
What I had in mind was that states would know about income (as they already need to for state income taxes), and they would get a report on net deposit to or withdrawal from the tax-deferred account over the course of the past year. Then they would calculate state tax liability based on that.
That still makes sales tax dependent upon where you live, instead of where you spend the money.
I don’t have any real objection to this, but some places certainly *will*. Tourist places that attempt to make their tax revenue off of visitors, for example.
The only basis on which it could be opposed is that one believes that we should in fact have a tax system that privileges consumption over saving.
Do you want to know the *political objections* such a system will face? Well, that’s easy:
You’ve included no way to tax rich people’s investments less than poor people’s income (Aka, you have no version of a lower capital gains tax.), and hence rich people will not go for it.
And, as such, it is a political non-starter.
A few actual difficulties with the system I can think of:
1) If you move sales tax into this, you’ve increased the gains from operating in a off-books economy. There is more incentive for people to be paid in cash. Probably not much, though.
2) My point above how we need to make really sure that things people use don’t end up owned by their IRA.
3) We need to fix some of the charitable donations and exemptions, because this opens the door for somewhat wider abuse. Before, you could only abuse them to the amount of income tax you would have paid that year. Under this, you can abuse them however much money you own.
4) How on earth does this work internationally?Report
@Patrick
You said: “Over time, whatever method of taxation you choose, the tax code will get labyrinthine again and the loopholes for the least ethical folks will be engineered into the system, and everyone else who benefits will take it because, hey, nobody pays more taxes than they should, amirite? ”
So, assuming this is the case, and I agree that it is, is not the better solution to minimize this impact by having as little taxes as possible? One cannot corrupt a system if the system has such a minor impact on people’s lives as it’s not worth the expense to avoid the taxes in the first place.Report
There’s two ways to look at this.
One: Yes, tax as little as possible. Well, optimally, in any taxation system, of course you’re going to want to only tax what you need to provide the governmental services you’ve agreed you want. (the bugger of course is that people always want more services than they want to spend money on, which is why governments at all levels typically operate in the red).
Two: Transaction control and audit exists as a potential problem regardless of whether or not you’re talking about taxes or buying goods or contracting services. It’s the cost of doing business. Or, like Bruce Schneier always says on his blog, “Security is a tax on the honest”. Viewing it as a particular problem to taxation is bad optics.Report
I think your thoughts on removing to corporate income tax misses the mark. You don’t need to switch to some entirely new tax system to remove the CIT; just eliminate the CIT, pay for it by eliminating the exemption on capital gains taxes (that’d actually probably more than pay for eliminating the CIT mind) and then repurpose all of the IRS’s resources that are currently being wasted on the CIT towards policing people who try and pull the whole “I am a personal corporation” scam nonsense (which wouldn’t work anyhow). The rest of the tax code could be left relatively unchanged, you’d eliminate an enormous amount of economic distortion and you’d probably end up making more money than you lost. Also you’d eliminate an enormous incentive for corporations to lobby government.Report