He also argues for narrowing the tax base and raising the rates, though that's probably not how he thinks of it:
I've argued often on this blog that given how much income is concentrated in the hands of the rich, you can cut taxes for the majority of the country, raise taxes on a small slice of wealthy Americans, and raise revenue, even as the average American's tax bill goes down. As Leonhardt argues, the relentless march of wealth accumulation -- the rich getting much richer, year by year -- made this truer in 2008 then it was in 2007, truer in 2007 then in 2006, and a helluva lot truer in 2006 then it was in 1993.
High taxes on a narrow base are about the opposite of optimal tax theory. This is not because economists are mean, cruel people who are primarily interested in serving their corporate overlords, but rather because the narrower the base, and the higher the rates, the more sharply the marginal returns to rate increases diminish.
Take an extreme example. The top 1% of households, about 1 million in all, have about 20% of national income. They've also experienced most of the income gains in the last twenty years. So let's say we want to fund federal operations entirely out of their pockets. Well, to do so, we'd need an income tax rate of 100%. Even ardent liberals will surely concede that at these levels, the supply-siders are right, and we'll soon end up with no tax base.
Even a less extreme example--make them pay half the tax burden--ends up with a 50% effective rate on high earners. And to get a 50% effective rate, you need an even higher marginal rate. The problem for people who want to load tax increases on these people while cutting taxes for everyone else is that if you actually succeed in shifting the tax burden this way, you'll rapidly end up on the wrong side of the Laffer Curve.
But Megan, I hear you cry, don't you spend all this time saying that the supply siders are wrong about the Laffer Curve? Well yes. But they're not wrong that the Laffer Curve exists; it's practically a tautology. You collect no revenue if tax rates are 0%, and no revenue if they're 100%, because people won't work. The curve must maximize somwhere in between. Where supply-siders go wrong is in claiming that we're to the right of that maxima, where cutting tax rates actually raises revenue. Empirical evidence indicates that we're still on the left. But that doesn't mean we can't end up on the right, if we screw up our tax policy.
Barack Obama's tax plans probably won't put us there, even with the partial lifting of the payroll tax cap. But Barack Obama's plans do nothing to close the really fairly gargantuan deficit we're staring down--he wants to use the money to fund new spending. (And also, to fund his tax cuts for other people, which is sort of a problem; like most politicians running for office, he seems to be planning to spend the same tax increase several times over.) We've got an enormous budget gap coming down the pike in the really not-very-distant future. And the next round of tax hikes, if confined to the rich, will almost certainly put us on the wrong side of the Laffer Curve--you're talking tax rates on them of 60% or more. Rich people have the most discretion over their incomes, the most room to cut back and consume more leisure instead of work. Not everyone will--I doubt the president of GM will decide to take up golf instead. But on the margin, some will, or they'll shift their income to more tax advantaged forms, or places. If we try to concentrate all our taxation on the rich, we will quickly reach the limits of our ability to tax.
There are also prudential reasons to be against this sort of system; people who vote for programs should not treat those programs as if they are free. Society has limited resources, and it should not allocate them without regard to the cost of using up scarce human, physical, or financial capital. I think that the tax system should be progressive--Warren Buffet sacrifices a lot less when he gives up 10% of his income than does his secretary when she gives up 10% of hers. But no one should be voting as if new spending were costless. Loading all the tax burden onto the rich practically guarantees that they will do just that.
I'd be fine with higher taxes if interest rates were to sky rocket to the point it made sense to pay down some national debt.
As an aside, a cautionary tale; I've now lived in Greece for a few years, and occupy one of the top tax brackets. At 30%, that's pretty low, but the mandatory national health payments put another 35% on top of that (despite my company having a subsidised health scheme). 30% tax may not sound unbearable, but 65% is punitive.
What I'm trying to say is that it's not just how much taxation is levied; it's how productively it's used that counts.
How has the GPD growth in Ireland been distributed?
How many large American corporations have moved their headquarters elsewhere for tax reasons?
Asking out of curiosity, not an agenda.
If you look at the bottom 50% of taxpayers, they pay in only about 3% of the income tax. Sure they get screwed on payroll taxes, but if liberals don't like that fact, take it up with FDR, that is how he wanted it.
Seems like a few liberals think that because we had high tax rates and a narrower base in the 50's, that doing so today would bring about the income distrabution of that era. JFK understood the idiocy of such a high income tax rate and worked to lower it.
As for corporate rates, even the high tax Euros are cutting theirs. It isn't always a matter of the evil US companies looking for a tax haven, often it is a Japanese or European company looking for a place to build a plant. If Canada is offering a more generous tax package, then those jobs could be offered to Ontario instead of North Carolina.
Raising taxes almost always has effects, people look for a cheaper cigarette when sin taxes go up, they sure as hell are going to look for a cheaper area if they are a huge operation
Actually, looking at the state of GM, I think that the CEO should just retire and play golf. At least he wouldnt make it any worse.
I think part of this debate has to do with people wanting to punish those who make life choices they don't agree with.
For example: you have two 28yo guys from the same college. Guy A makes 350k as a software salesmen. Guy B makes 40k as a bartender and plays in a band.
Guy A resents guy B for consuming so much leisure. Guy B resents guy A for being so much more successful.
Another question - in order to a nation to produce enough to be able to provide as much as possible for those less fortunate - don't we need to discourage people (who have the ability tio create wealth) from consuming too much leisure?
This is the kind of thinking Lawrence Summers would have I believe, and why I wish he would be chosen for VP; we might lose Megan to his Chief of Staff position.
Megan, do you have a source for the 60% figure for the peak of the Laffer Curve? Thanks!
Regardless of whether we are to the right or the left of the Laffer curve, taxing people at effective rates that will approach 50% of annual income (as in Obama's proposals) is simply wrong and profoundly unfair. No one should be forced at the point of a gun to pay half of their income to the "common good" - especially since the "common good" is defined by a gaggle of self-interested and often corrupt politicians who are primarily interested getting into and staying in office. This is my biggest problem with Obama - he seems intent on robbing Peter to buy Paul's vote.
What we really need is a flat tax, no deductions. Taking taxation out of the policy toolkit would go a long way toward improving our system of government.
More broadly, if some people make more money than the average Joe - so what? Why is this any business of the government? If we really cared about income inequality, we'd do something to fix our education system (beyond throwing more money at it). The government can and should help to guarantee some measure of equality of opportunity. But it cannot and should not try to impose equality of results through taxation.
Any time you look at the top 1% of US households having more of the wealth at time T+dT years than they had at time T, you have to realize the top 1% is not made up of the same people. There is turnover in the brackets.
So, it's not really right to say the rich got richer. Some got poorer. It's just some middle class folks got super rich in the meantime, as well.
per the Tax Foundation (http://www.taxfoundation.org/publications/show/250.html), the top 1% are currently already paying 40% of all federal income taxes.
Warren Buffet sacrifices a lot less when he gives up 10% of his income than does his secretary when she gives up 10% of hers
But we as a society lose out on a lot more by taking Warren Buffet's income than his secretary. He has shown that he can use that wealth to create vast amounts of wealth. His ROI is much better than what the federal government is going to get on it.
His secretary has never created jobs and wealth for others, like Warren has. Wouldn't we be better off as a society if Warren was able to keep his wealth to generate a bigger pie for us all, rather than trying to just take a slice of his and divvy it up among us?
Ireland's growth might also, just possibly, have something to do with the fact that the Catholic and Protestant populations largely stopped trying to kill each other.
Nah, it's cuz of corporate taxes, not the reduced risk of DEATH.
Ireland's growth might also, just possibly, have something to do with the fact that the Catholic and Protestant populations largely stopped trying to kill each other.
Are you confusing the Republic of Ireland with the six counties?
Brad - Huh?
It really undermines your case when you say things that make it clear you have no idea what you're talking about.
Brad (with posting at 2:45 PM):
You are thinking of Northern Ireland, which is a part of the United Kingdom (with England, Scotland and Wales). Megan is talking about the Republic of Ireland, which is an inpendendent country that has not suffered the violence you are talking about.
Two examples of how higher tax rates may hurt revenues or the common man:
1) After the 1992 election, Bill Clinton reluctantly concluded he could not make good on his pledge to reduce middle class taxes. Instead, taxes needed to go up. One of my clients reacted as follows: He decided to sell about $7 million of T-bills and buy muni-bonds. (T-bills produce taxable income. Muni-bonds do not.) He also decided not build a new warehouse he'd been planning to build. (He was in the business of leasing warehouse space.) The proposed project no-longer met his after-tax hurdle rate. My client, by the way, was a Democrat who had hosted a fund-raiser for Clinton.
2) While I was in school, I worked at a furniture mill. I was a manager of one of the crews and got to attend a weekly management meeting. At one of those meetings, the head salesman said we had an opportunity for a large contract, but only if we could deliver quickly on the contract. The production manager had worked up the figures and said we could meet the production schedule, but only if we worked the next four Saturdays. The owner listened to this and considered it for maybe 30 seconds before shaking his head, no. "I don't want to have to come in on Saturday," he said. I was making maybe $2/hr more than minimum wage and would have LOVED to work those Saturdays. So, too, would most of the 100+ workers in the mill. But because whatever profit the owner thought he'd make was not sufficient to lure him into the mill on four Saturdays, we didn't get the extra work. He didn't say taxes entered into the picture, but higher marginal tax rates would have made it less attractive for him to take on additional work. Lower taxes would make more work, on the margin, more attractive.
To a large extent, it's the rich who control how much work is available for us poor slobs. I'm not as poor as I used to be (just as much a slob), but even my decisions affect how much work is available for those poorer than me. Raise my taxes and I'll mow my own lawn rather than hire the kid down the street. Raise them too much, and I'll not remodel my home (like we're planning on doing). Maybe the tax system will be more "fair", but will the kid down the street and the construction workers I won't hire thank you?
For example: you have two 28yo guys from the same college. Guy A makes 350k as a software salesmen. Guy B makes 40k as a bartender and plays in a band.
I'm a younger software salesman, JMO, are you hiring?
Ireland might not be a good example. Delaware has a larger standing army. Their military spending is essentially zero. Operating costs are not comparable.
In reference to corporate tax rates, the U.S. could lower them to European levels if we were willing to pay 55% or more in taxes and fees(the median tax payer, not just the top 1%). Good luck selling that to anyone this side of the Atlantic(ocean, not magazine).
Brad,
If you ask nicely, maybe Megan will pull your comment to cover up your ignorance.
The current version of Senator Obama's tax plan is a revenue loser, compared with current law, as the "middle class tax cuts" will cost more, in lost revenues, than the increased taxes on the rich. I guess the new programs will have to pay for themselves, no doubt out of the well-known increased efficiency when the government takes over areas formerly left to the market.
I'm no McCain fan, but isn't this just nuts?
Awwwwwww, I said something y'all don't agree with.
I hate to break it to you, but the Troubles played a role in Ireland proper's economic woes, too.
Tho you're right, I am ignoring the role played by membership in the EU.
European tax rates are so much higher because of all of the fully "nationalized" industries that are still comparatively "private" in the US: higher education and health care.
I'm no McCain fan, but isn't this just nuts?
The problem being that McCain want to cut taxes even further, and increase spending as well. I realize that he wants to "cut waste" but there is little waste to cut, compared to the size of the government. Whenever he's pressured on what this waste is, or somebody tries to get specific about it it's always "of course, I don't want to cut spending on that" To balance the budget we need to cut defense, medicare and SS spending. Cutting a few million dollars of earmarks out of the budget, is not going to do it. I just don't see any president or Congress having the guts to do any of that.
I think that the tax system should be progressive--Warren Buffet sacrifices a lot less when he gives up 10% of his income than does his secretary when she gives up 10% of hers.
Progressivity addresses one of the three goals of good tax policy: The tax should be efficient to collect and administer, it should be seen as fair by taxpayers, and it should not distort economic activity. By making a tax progressive, in general, it is seen as more fair. As Megan pointed out, an additional 10% of a rich taxpayer's income may cost less than 10% of a poor taxpayer's income. The tax increase may cause the rich taxpayer to save a few less dollars while the poor taxpayer may need to miss a meal or two to pay the tax. So, the goal of fairness may "require" an increasing marginal rate structure.
However, the same phenomenon that causes the rich to sacrifice "less" in response to a tax increase also causes the rich to be less interested in the next dollar of income. For a poor person, a 10% pay increase might make a very big difference in lifestyle. For a rich person, a pay increase might not affect lifestyle at all -- it would just show up as a larger bank balance. This means higher marginal brackets are going to have a LARGER influence on the rich taxpayer's economic decisions. If the rich are already less inclined to pursue that next dollar of income, taxing the next dollar at an even higher marginal rate will only make the rich even less inclined to pursue more income. That is, the goal that the tax NOT distort economic decisions might require a flat tax rate (or even a declining marginal rate structure).
Historically, we've chosen fairness over lack of distortion. I don't think that's a good trade off. Increasing marginal rates are not required for taxpayers to perceive the tax system as fair. The perception of fairness can be achieved by making the rules (relatively) simple and clear, by ensuring the same rules apply to everyone, and by a generous standard deduction. So, the two goals of fairness and lack of distortion do not need to be in conflict.
Besides, high marginal rates only make it more profitable for people like me to help our clients structure their affairs to reduce their tax exposure.
So, maybe we should be more interested in who will cut spending than who will improve tax revenues?
Give McCain's opposition to earmarks, I'm inclined to think that he would make more headway on reducing spending.
Megan says, "But no one should be voting as if new spending were costless."
I have yet to hear any liberal response to this. Is there one? Do liberals think it's a problem that 50% of the population thinks that new government programs are free because they pay little or nothing in income taxes? Or is that one of the goals of liberal policies (i.e., naked vote buying)?
Brad,
No, you wrote something that displayed a lack of knowledge- specifically, not knowing the difference between Ireland and Northern Ireland, and since you have earned no goodwill, we took great pleasure in pointing out just how ignorant you are.
David Walser:
First, how was the economy under Bill Clinton? Those tax hikes didn't tank the economy, did they? Second, while in theory you might be correct, in practice it is a different story. Is Warren Buffett going to retire if he pays 35% of his income in taxes as compared to 30%? Of course not. What about Larry Ellison? Or Teh Google guys? If you were to increase it from 30 to 70%, that would have an impact, but not from 30 to 35(I don't know what the exact percentages are in the US tax code, just using an example).
Megan~
Question about the Laffer Curve: have their been any studies that show what the optimum marginal tax rate is? In other words, where is the inflection point where you go from the right side of the curve to the left side of the curve? One would think with all the hot air that has been blown out discussing the Laffer Curve that someone might actually have tried to see if it has any useful meaning.
To charlotte's question about American HQ's, I don't know of any that have moved, but I know there have been quite a few American companies that have located labs and plants there. Some have also given credit to Ireland for upgrading their education system.
Other proposals aside, how does eliminating the cap on payroll taxes damage incentives? As far as I can see, the current system merely drops the marginal rate abruptly when you reach the cap. Getting rid of the cap should merely leave the marginal rate unchanged. Right?
Personally, I would also take the Social Security and Medicare taxes and apply them to all income, not just wages and salaries. Since we are effectively using them to fund all Federal operations, why not have everybody paying them?
And while we are at it, drop the distinctions between different kinds of income. Wages, salaries, capital gains, interest -- income is income, just tax it all the same way. In addition the the fairness angle, it also would make filing tax forms a bit easier.
Joe,
I do some consulting on the side and I have to make sure to put enough away to be able to make my quarterly estimated tax payment. As is stands now I put away 30% for federal, 14.7 for Payroll Tax, and 5% for MA state. That's 49.7%.
Bring the federal rate up to 35% and we cross that magical 50% barrier and I start to wonder if it's worth it...
It seems like a lot of this indicates that it would make more sense to tax consumption, or wealth, or something other than income. If you were designing the tax system from scratch and didn't have to worry about the politics of it, how would it look?
Mhm. I clearly said that the Troubles took place in Ireland proper, not that the resolution of hostilities played a role in its recovery.
But I know, I question your queen, you must try to defend her honor.
Will Wilkinson basically makes the opposite arguement.
http://bloggingheads.tv/diavlogs/13302?in=58:39&out=59:40
I'm a bit weary of McCain. He's gone all Global Warmmy and has no fear of regulating. Wreckless spending might subsidize something good, but regulating is sure to prevent good things from being done.
(I don't thing carbon accounting will be done by our current accountants/auditors/inspectors either. It will require people of more of an engineering stripe, the people whom we expect to develop the new technology we hope to incentivize to save us from CO2.)
The problem is that we need to have a tax system that makes sense.
You can't have a tax system that makes sense when rates get too high.
If you tax me, or a corporation, at a tax rate of 2% then I really won't fight too hard over whether certain items should be included in 'taxable income' or not.
If you set the tax rate to 95% then the tax payer will fight very hard over whether something is included in 'taxable income'.
I don't claim to know what the right level of taxation should be.
Personally, my choice is to widen the Federal tax base to include a significant tax on carbon, a property tax, a personal property tax on cars, planes and boats, a personal income tax, a tax on carry interest of hedge funds, a VAT, and a corporate income tax.
Obviously, with all those taxes, we could afford to lower all the tax rates. It would be hard to avoid all those taxes and, if the rate was low enough, you wouldn't bother to try.
One last point, it is impossible to define 'taxable income' for either a corporation or an individual in under 10,000,000 words.
Give it up, Brad- there is no way to save face on this one. A better man would just admit that he was wrong, and a smarter one would have just claimed he thought Megan was writing about Northern Ireland herself, but if you were either, no one would have taken pleasure in beating on you with a virtual two-by-four.
You and rickm, The Grammerian, are well suited for one another.
I'm with TW Andrews, the consumption tax would make sense. All your income goes into an account and at year's end, you tally what's left and the difference is taxed. Earn $100, save $30 and you're taxed on $70. Currently, we incent leisure spending and tax savings, but we should reverse that.
The best tax system is one solely focused on raising revenue simply and transparently. If you demand that the government subsidize parents over the childless, homeowners over renters and sole proprietors over the employed, oil companies over furniture manufacturers, then create another department entirely. You can have a Ministry of Favored Groups that doles out cash and vouchers. At least voters can see all the favoritism played by Congress instead of letting them hide it in the tax code.
I'm with TW Andrews, the consumption tax would make sense. All your income goes into an account and at year's end, you tally what's left and the difference is taxed. Earn $100, save $30 and you're taxed on $70. Currently, we incent leisure spending and tax savings, but we should reverse that.
The best tax system is one solely focused on raising revenue simply and transparently. If you demand that the government subsidize parents over the childless, homeowners over renters and sole proprietors over the employed, oil companies over furniture manufacturers, then create another department entirely. You can have a Ministry of Favored Groups that doles out cash and vouchers. At least voters can see all the favoritism played by Congress instead of letting them hide it in the tax code.
Personally, my choice is to widen the Federal tax base to include a significant tax on carbon, a property tax, a personal property tax on cars, planes and boats, a personal income tax, a tax on carry interest of hedge funds, a VAT, and a corporate income tax.
Neil, I know you're expressing a preference, but we should all keep in mind that the Constitution prohibits the federal government from collecting a property tax. So, there are some practical limits on how much the federal tax base can broadened.
Besides, a federal property tax would be very inefficient or manifestly unfair (maybe both). Unless the property tax is built on the existing tax system used by the various states, the tax will be very inefficient. If we are going to rely on the states to administer the tax, it's going to be unfair. Each state (and sometimes counties or cities within a state) has its own method for determining the value of what's being taxed. In California, the value of real property is determined when it's sold and not readjusted until it is sold again. In another state, the value of property might be adjusted annually to reflect market conditions based on sales within an area. The feds would either need to hire their own tax adjusters or citizens would need to put up with dramatically different ways of measuring the value of the property they are taxed on based on where they live.
I've no problem admitting when I'm wrong, Yancey, and I've all too much past evidence to document that claim. But I'm not wrong here, you are. Your desire to show me up is pushing you into a biased reading of what I wrote. But I'll definitely get bored of this first, so you go ahead and have the final word.
[The Republic of] Ireland's growth might also, just possibly, have something to do with the fact that the Catholic and Protestant populations [of Northern Ireland, a neighboring country] largely stopped trying to kill each other.
It's theoretically possible to read it that way, I suppose. It's not the first reading I'd go for, though.
Megan,
Please, at least do a little basic research before posting.
Irelands growth was impacted by the low tax rates, and about 10 other things too. Ireland had huge transfer payments (read: subsidies from the EU) that were 4% of GDP over the time period, and speak English. It is not just low tax rates that caused this growth, and it is irresponsible to point to low tax rates as the primary cause of the growth. Ireland had many reasons as to why it was well poised for growth a few decades ago, and why it did grow over the period. Italy has much lower taxes than the U.S., why have they stagnated?
From Wikipedia:
"The causes of Ireland's growth are the subject of some debate, but credit has been primarily given to state-driven economic development: social partnership between employers, government and unions, increased participation in the labour force of women, decades of investment in domestic higher education; targeting of foreign direct investment; a low corporation tax rate; an English-speaking workforce, and crucial EU membership - which provided transfer payments and export access to the Single Market."
Something else to note is that Ireland has a low population of just over 5 million people. it isn't even as big as the Chicago metropolitan area. Lots of things work for small, heterogenous populations, for example the netherlands model has worked extremely well in setting a very high standard of living, despite their speaking an obscure language.
Plus, The laffer curve was plotted vertically, so supply siders would incorrectly think we are above the maxima, where in the real world, we are clearly below the maxima.
We have tried your tired trickle down economics twice in recent decades under Reagan and Bush II.
Guess what, it did not work. Under both examples the deficit soared and growth was at best mediocre and business investment especially was weak.
Moreover, you are making the same claims now that you did in the 1990s when Clinton implemented essentially the same policy Obama is advocating.
Guess what, the horrible things you predicted in the 1990s did not happen.
When are you going to give up on your fanasty that has no basis in reality and join the real world?
Someday you are going to have to get tired of the same tired excuses.
I'd like a good steep progressive income tax too of course. But as far as I can tell (and I know this is the type of thing I should be able to find hard data on but I'm lazy) the tax take is a bit more volatile up at that high end too. In CA we relied pretty heavily on it and so state revues went to heaven when times were good and crashed deep into the earth during contractions. So my impression is taxing us poor schleps at the bottom has at least some smoothing effect (granted it can't be so much since that's a smaller portion of the revenue).
You guys make the same arguments about every position no matter what the facts are. How on earth can you claim to be basing your decisions on anything but blind faith in your particular ideology? The same answer doesn't work for all questions.
On the Laffer Curve: It's important to note that tax hikes do damage even to the left of the Apex.
As you approach maximum tax receipts, you kill a lot of GDP dollars for every $1 of tax receipts.
For exmple: Assume that total receipts grow 5% when you raise the tax rate from 55% to 65%. If taxes did not reduce economic growth, then receipts would have shot up 18%. (=10%/55%)
This implies economic contraction of more than 11%. Higher tax rates yield a 5% bigger slice, though the total pie is now 11% smaller.
Key take-away: We are not to the right of the Laffer peak. But taxes are already high enough to seriously damage the economy.
Full disclosure: In my work and my wife's work, we both see a lot of good deals called off for tax reasons. Economic benefits never materialize. The government raises no revenue at all by charging a high tax on income that never happens.
Stephen W. Stanton said:
"In my work and my wife's work, we both see a lot of good deals called off for tax reasons. Economic benefits never materialize. The government raises no revenue at all by charging a high tax on income that never happens."
Yes, and another problem is that deals that make no economic sense do get done because they produce tax benefits. I think much of the growth in the late 1980s and after occurred because the '86 Act killed off most real-estate tax shelters, resulting in some of the freed-up funds from that going to actual profit-making ventures. But there are still too many tax-inspired transactions that just waste time and talent.
But there are still too many tax-inspired transactions that just waste time and talent.
What, like employer-provided health insurance?
Re: At 30%, that's pretty low, but the mandatory national health payments put another 35% on top of that
Given that even America's uber-expensive, hideously inefficient healthcare is only 16% of the economy, for the Greeks to tax income at 35% to pay for healthcare strikes me as astonishing-- for sure the Greek government must be doing a lot more with that money than paying doctors.
You know that the ROI's GNP is way below its GDP? Its GDP is flattered by the foreign corporations that book their profits there.
You realize that lax regulation(and enforcement of regulations) has gotten us the present financial/housing crisis, right?
Joe Klein's conscience - Is Warren Buffett going to retire if he pays 35% of his income in taxes as compared to 30%?
Warren Buffett may not be the marginal case.
We have tried your tired trickle down economics twice in recent decades under Reagan and Bush II. Guess what, it did not work...Under both examples the deficit soared
Because it was a bad economic policy or because of millitary spending?
You realize that lax regulation(and enforcement of regulations) has gotten us the present financial/housing crisis, right?
I don't realize that. I'm unaware of any particular set of reasonable regulations that, if only they existed or had been properly enforced, would have avoided the current scenario. What are those regulations?
I do think that the "wink, wink, nudge, nudge" guarantee of Freddie & Fannie has made it a whole lot worse, though.
Eliminate all deductions except one personal exemption equal to the income that is equal to the poverty level for an individual. Eliminate SS Tax.
ALL income counts: wages, dividends, interest, capital gains, etc. Calculate the rate (25% should do), to balance the budget. Add a higher marginal rate (40%?) for incomes over half a million (or if you are John McCain incomes over 5 million). Say the higher marginal rate will remain until the budget is balanced.
Then we can stop crying about tax policy. Some progressive taxation, simple and looks flatish. Only lawyers are unhappy.
Why are you simpering Bushpig sycophants even discussing this? Tax the rich Repiglicans and the problem is solved. All your silly little Laffer curves won't change the fact that literally millions of children are starving to death in the streets of this country every day because of your whiny little insistence on 'debating' every policy like there are two sides to it.
Kiran: The issue with taxing capital gains at the same rate as wages is that you would essentially be taxing illusory gains caused by inflation along with true economic gains on investments held for the long term. The cost of that is to encourage short term capital investments over long term investments. The same argument could be made that a component of interest and dividends is also compensation for inflation.
Isn't the one of the left's criticisms of capitalism is that it is too short term focused? Your solution would seem to encourage that fault.
SG - What are those regulations?
I'm not an expert on the subject, but some thoughts; Most financial crises involve overextension of credit with insufficient collateral. We should have forced the lenders, by law, to keep more money in their vaults to cover low-collateral loans. I believe this was done, but late in the game.
Similarly, various front-banks involved in lending via lines of credit, who then sold the loan to companies like Countrywide, should have been required to keep more cash on hand. Many went out of business, making it impossible for companies like Countrywide to force a buy-back after the fact.
It would be nice to require, by law, the appraiser to be some third, disinterested party or someone more financially interested in the solidity of the loans if the loans are to be bundled and sold as mortgage backed securities through Fannie and Freddie rather than relying on an appraiser who is almost owned outright by one of the lending parties. Occasional government audits and penalties for bad appraisals might have helped, also.
Higher collateral requiements wouldn't be bad either.
Better (up front, long before closing) disclosure laws on loans may have also helped. I've known a few good friends who got sub-optimal loans because of nievete.
And I agree that the Fannie and Freddie bailouts (which the investors should not have been able to profit from) did quite a bit of harm.
The problem is, a prediction was made(in fact, several predictions.) They were wrong. Remember when the same talking heads pushing this tripe also predicted that Clinton's '93 tax increase - billed as 'the largest increase, ever' - was supposed to trigger a ginormous recession? And how a lot of these guys staked their reputations on it? And how none of their predictions came to pass (I'm looking at you, Cato.) Then they come up with all sorts of reasons why, even though they were wrong, they were still right. And we see this pattern repeated time after time after time.
Here's the tru fax: when you make a prediction, you don't get do-overs. You don't get to Monday morning quarterback. Instead, you have to own up to the fact that you were wrong. It seems that a lot of 'conservatives' just don't want to do this. That doesn't make the people who point this out liberals, though possibly it does make them 'liberals'. It does give evidence to the notion that anybody who is still promoting these half-baked econ theories is little more than a dismissable ideologue. At best. A perhaps more accurate, less kind nomenclature would be 'useful idiot', like the CP types that we had back in the middle of the last century.
Another substantial problem is that very rich people have the ability to structure their income to take advantage of any tax system that is complex.
Warren Buffett is a good example, he pays himself a very low (for someone of his stature) salary of $100,000 annually.
However as chairman of Berkshire, he can do things like buy a corporate jet that he uses for travel and expense it to the company. He also earns substantial amounts of money trading in his personal account (the majority of which are accounted for by long-term capital gains and dividend taxes). Hence his claim that he pays a lower tax-rate than his secretary. If you raise the the income tax-rate to make rich people pay more, you will see more of this type of behavior.
The Google founders (Sergey and Larry) both have annual salaries of $1. They have, however, enormous amounts of Google stock which they are currently liquidating and paying long-term capital gains tax on.
If I were a CEO and you wanted to punitively tax my salary, that is fine. I will just give myself in the money options, long-dated options (and reduce my salary to a much lower level). Say with a strike price of $.01 and 50 year term. That way I can choose to pay the long-term captial gains whenever I want.
I will also run more of my personal expenses through the business.
I used to work for a large multi-national consulting firm. Since we had employees in Asia, Europe and America (all with very different tax regimes) but they wanted to equalize compensation in a tax-efficient manner, they provided different benefits for workers in different countries.
In Asia (where income taxes are low), compensation was primarily cash.
In Europe (where taxes were high), cash compensation was low, but all consultants were given a very nice company car to use (I believe it was an Audi A4). More senior consultants got to charge golf-club memberships and other assorted perks to the firm. Since these were expenses, the firm actually got a tax deduction for them.
Another substantial problem is that very rich people have the ability to structure their income to take advantage of any tax system that is complex.
Warren Buffett is a good example, he pays himself a very low (for someone of his stature) salary of $100,000 annually.
However as chairman of Berkshire, he can do things like buy a corporate jet that he uses for travel and expense it to the company. He also earns substantial amounts of money trading in his personal account (the majority of which are accounted for by long-term capital gains and dividend taxes). Hence his claim that he pays a lower tax-rate than his secretary. If you raise the the income tax-rate to make rich people pay more, you will see more of this type of behavior.
The Google founders (Sergey and Larry) both have annual salaries of $1. They have, however, enormous amounts of Google stock which they are currently liquidating and paying long-term capital gains tax on.
If I were a CEO and you wanted to punitively tax my salary, that is fine. I will just give myself in the money options, long-dated options (and reduce my salary to a much lower level). Say with a strike price of $.01 and 50 year term. That way I can choose to pay the long-term captial gains whenever I want.
I will also run more of my personal expenses through the business.
I used to work for a large multi-national consulting firm. Since we had employees in Asia, Europe and America (all with very different tax regimes) but they wanted to equalize compensation in a tax-efficient manner, they provided different benefits for workers in different countries.
In Asia (where income taxes are low), compensation was primarily cash.
In Europe (where taxes were high), cash compensation was low, but all consultants were given a very nice company car to use (I believe it was an Audi A4). More senior consultants got to charge golf-club memberships and other assorted perks to the firm. Since these were expenses, the firm actually got a tax deduction for them.
To a large extent, it's the rich who control how much work is available for us poor slobs.
It doesn't take a rich person to make jobs available. My dad was a self made man. Grew up dirt poor, but eventually started his own company that grew to something like 50+ employees at its peak. It was damned hard work creating something from nothing, or so I was told when I was young and my dad was still alive (which is one reason why I took the easier path of going to college and becoming an employee). Whatever taxes and regulations we have, we should keep in mind that jobs aren't given, they're created. If we make job creation not worth the effort then we've done something very wrong.
Please excuse the grammatical error in my previous post.
As to Ireland, the big fiscal policy change wasn't cutting taxes it was cutting government spending.
Remember Milton Friedman's rule: It is spending that counts, spending determines taxes ... it is impossible to cut taxes in real terms without cutting spending, while cutting spending cuts taxes automatically.
After its policy change in the '80s Ireland cut taxes by 10% but cut government expenditures by 33%!
Here's an NBER paper that covers the case of Ireland specifically...
http://www.nber.org/papers/w5730
... while also reviewing larger findings that alternative policies of cutting deficits by increasing taxes, or cutting taxes but not spending and thus increasing deficits, work a lot less well.
Jim, care to name any specific programs to be cut? Agricultural subsidies, perhaps? Military spending?
Regarding Obama's "tax increase", his advisors specifically said in the WSJ last week that he will cut taxes...
They go on to say that Obama will close the deficit, in spite of his tax cut, through the time-proved classic option of "cutting wasteful spending".
That leaves how he is going finance his universal health care program as a mystery for us all to ponder, as Paul Krugman is doing unhappily.
Jim,
To first order, I will agree with you, it's government spending that counts, not taxes.
However, at second order, the mechanism with which you raise the money to be spent can also make a big difference to your GDP growth.
You can raise your government revenue for spending in basically two ways: borrow or tax. When you tax, some of the dollars you tax would have otherwise been consumed, and some would have otherwise been invested. Investment makes your GDP grow. Consumption simply consumes your GDP. Most government spending is either consumption or transfer payments to groups with a very high marginal propensity to consume.
Roughly speaking, the US invests 15% of it's GDP, and the GDP grows about 3% per year as a result (roughly). This yields a return to GDP of about 20% for every dollar invested.
So if you tax a dollar that would have otherwise been invested, you get $0.20 less GDP next year, $0.44 GDP the year after that $0.72 the year after that, etc (compounding returns).
If you borrow a dollar, you will pay roughly speaking 4% real interest on it a year. Which means to hold spending constant, you have to come up with another $0.04 to pay the interest on that borrowed dollar.
If you tax a dollar that would otherwise have been consumed, you simply pass the dollar on to someone else to consume. There may be some dead weight loss, but no loss of investment driven growth, or interest costs.
So which is the smartest way to fund revenue, borrowing, taxing consumption, or taxing investment. I'd maintain that in terms of growth, your best bet is taxing consumption, your next best bet is borrowing, and your *worst* option is taxing investment.
Two more problems with trying to stick the whole tax cost of the nation on the top few percent by income...
(1) Their income is very volatile. It is profit sharing, stock options, bonuses, investment returns. Those things go down as fast as they go up. A half-million bucks from Bear Stearns today, driving a cab tomorrow.
When Klein says that rich get richer every year "truer in 2008 then it was in 2007, truer in 2007 then in 2006..." he forgets that it wasn't so true in 2003, 2002 and 2001, when the "top 1%" share of income plunged.
You tie your fiscal cart too closely to that horse and you are in for a bumpy ride.
It'll be an even worse one if you assume -- as the political spending interests always do -- that the best revenue years are "the norm" and so become the spending baseline. Then when the bad years come, POW!
California did exactly that with the revenue from the Silicon Valley zillionaires during the tech bubble, and when the tech bust arrived the revenue plunge created such a fiscal disaster it got the governor recalled and Ahnold elected. An actor! He's been trying to climb out of that hole ever since.
(2) Creating *really high* rates on the very richest just doesn't work, not because they'll quit to play golf but because it creates *massive* political incentives to create all kinds of exceptions to the rates in the tax code.
Remember that the deadweight cost of taxes rises not with the tax rate but by the *square* of the increase in the tax rate -- so greatly increasing rates creates literally *exponentially* increasing pressures to bust the tax code.
E.g., the late Nobel economist William Vickery was so far to the left (way beyond today's leading left-side economists) that he wanted to price control the entire US economy permanently to drive unemployment down below 2%.
But even *he* gave up on highly progressive income tax rates, concluding they could be no more than a sham, when he examined the tax distribution of the days of the top tax brackets of 70%-and-higher for the richest. He found that the real effective tax rates paid by those "richest" were always around 30% or less, and were in fact lower than the effective tax rates paid by the "less rich" under them on the income scale.
He concluded that the need for real investment rewards, profit sharing, etc., to direct ecomomic actitivity created *massive* incentives for politicians to create "loopholes" in the law to let such income escape the high "regular" tax rates. And when have politicians ever been immune to massive incentives?
So *that* created the Golden Age of Tax Shelters, which everyone was best without -- and which was wiped out by the 1986 Tax Reform that dropped the top tax rate to 28%. (Exponentially *reducing* the pressure for loopholes.)
IOW, someone should tell Ezra that while it may be nice to fantasize about imposing towering tax rates on the richest, the first rule of tax policy is that taxes have to be collectible both when times are bad and when times are good.
In bad times his tax base just won't exist, and even in the best of times effective taxes much above 30% have never been collectible, whatever nominal rates have been.
Jim Glass:
So what is your excuse for the 50's and 60's? Tax rates were a lot higher then. The country didn't repeat 1929.
quadrupole:
I'd maintain that in terms of growth, your best bet is taxing consumption, your next best bet is borrowing, and your *worst* option is taxing investment.
No disagreement with your best bet and worst option. But as to "borrowing" I probably didn't make Friedman's point clear, and I'm not sure how to read what you said, so I'll just explain a bit and leave it.
Friedman's point is that "spending = taxes" because the government has no other source of revenue to spend other than taxes. (Unless it is going sell off assets like national parks.)
Borrowing doesn't change this because interest on the borrowing must be paid with taxes -- and those taxes discount at present value to exactly the amount borrowed and spent. All borrowing does is defer the time of the tax collections, and add interest to them.
I.e.: Say the interest rate is 5% and the govt wants to spend $1,000. To finance the $1,000 it can...
a) Collect $1,000 of tax now and spend it, or
b) Borrow $1,000 and spend it, and collect $50 of tax each year from then on forever = $1,000 of tax present value.
It comes down to $1,000 of taxes either way.
Thus, a government saying it has "cut taxes" without reducing spending by increasing its debt is exactly the same as an individual saying he has "cut spending" by stopping paying with cash and running up his charge card instead. In the end the govt is going to collect the amount of tax it supposedly cut, and the individual is going to pay off the charge card amounts he supposedly didn't spend, or their credit ratings will be destroyed.
As to the "growth effects" of the tax cut -- alas, they are not enough to produce a free lunch.
Let's take for argument's sake your number of a 20% response. Say taxes are cut in year 1 by $1,000x, that results in the next period in extra growth of $200 but also, at 5% interest, extra tax of $50x. But every year's tax cut must be financed. In year 2 the extra tax is $100x, year 3 $150x, year 4 $200x (now offsetting the full $200x growth response) year 5 etc., ... out near year 20 the interest payment covers the full tax cut but is still going up indefinitely because the debt is still growing, as taxes apart from those funding the interest still equal spending - $1,000x.
Now consider the deadweight cost of taxes on the economy -- remember that it rises not with the rise of the tax rate but the *square* of the tax rate. This means any residual growth bonus remaining from the early years of the tax cut is going to be very quickly wiped out and *more so*, by the higher tax rates now -- the economy loses from the tax cut forever more, because spending wasn't cut with taxes.
That's a very simplistic arithmetic model, reality is probably worse for a number of reasons, but I think that makes the point.
Without spending cuts, tax "cuts" are just deferrals that become tax increases in the long term by arithmetic, and because the deadweight cost of taxes increases by the square of the increase in the tax rate, the end losses more than wipe out the early gains.
Anyone who doesn't believe Friedman (and me!) on this can believe the Bush Treasury!
It projects the Bush tax cuts will be stimulative of course... but....
~~~
The Treasury's main analysis assumes that lower tax revenue will over time be accompanied by reduced spending on government consumption.
But the report also shows what happens if spending cuts are not forthcoming. In this alternative scenario, a permanent extension of recent tax relief is assumed to lead to an eventual increase in income taxes. [Just what I was talking about!]
The results are strikingly different. Instead of increasing by 0.7% in the long run, GNP now falls by 0.9%.
Tax relief is good for growth, but only if the tax reductions are financed by spending restraint.
~~~~
If Bush's own tax cutters say it, you know it's true!
JKC,
You can account for the US's economic success of the 50s and 60s by the fact that we reduced Europe and Asia to bedrock in the 40s and it took them 20 years to rebuild.
That's hardly a repeatable strategy.
And Jim's point about collecting those high tax rates stands on its merits.
Jim Glass:
So what is your excuse for the 50's and 60's?
Ozzie & Harriet, and Ricky? Donna Reed? The Beaver?
I make no excuse for any of 'em.
Tax rates were a lot higher then.
Read the part of my comment about Vickery again -- this time for understanding -- and then consider whether you are still sure that is true.
The country didn't repeat 1929.
1929 had nothing to do with either tax rates or bad TV, so why would it?
all consultants were given a very nice company car to use (I believe it was an Audi A4). More senior consultants got to charge golf-club memberships and other assorted perks to the firm.
In the US, that is taxable compensation.
Jim Glass is absolutely right. I was a practicing tax lawyer when the top marginal rate (in theory) was 70%. I had one client who actually paid that. Everybody thought he was nuts. Many high earners paid nothing--they'd "invest" in worthless farms and motels, which generated massive if imaginary (in substance) deductions.
When the 1986 act reduced the top corporate rate (while broadening the base), a lot of Europeans read about the rate change and asked if it was now a good idea to invest in American corporations. The answer, of course, was no; the real rates went up. Talking about rates alone is meaningless; you have to talk about rates and the tax base to make sense.
Jin Glass's comment Vickery's work reposted in blockquotes for Joe Klein's conscience and reading comprehension:-) The facts behind the quote can't be emphasized enough.
High income tax rates have one consistent trait. They alway have a greater negative impact on those trying to become rich, not those who are actually wealthy..
The wealthy always have options to shelter their income or they just can just quit working.
High tax rates kick people coming up the ladder in the teeth and cut a lot of potential competition for those at the top of the ladder right off at the knees.
Sigh. Iow, Glass et al simply won't let the facts get in their way. I think that at one point he claimed to be an economist. I suggest that this is one reason why people don't have much respect for economists as a group. And why they don't classify economics as a science.
ScentOfViolets,
Are you going to post anything that provides information (facts) or are you just going to wave your arms around and sling insults while accusing other people of doing the same thing you just did?
As a matter of fact, I've tried to post various tables compiled over at Angry Bear by Cactus. Unfortunately, they are being held by approval by the blog owner. Megan, hard worker that she is, probably won't get around to passing them on until Monday. The short story is that anyone who says lowering taxes is good for the economy is simply wrong. I'll try to post them again.
I've tried multiple times to post data and links, three times in last couple of minutes alone, but they don't seem to be getting through. Anybody else having the same problem?
ScentOfViolets
While the administrators try and beat the server squirrels into submission you might try posting your links as plain text without the w w w or h t t p that might be offending the spam catchers.
Jim Glass makes the most important point- nominal rates are not the things to look at. Actual taxes paid are the true measure of tax rates.
Over the last 75 years, the federal government has taken up about 20% of GDP- a rate that has varied little despite vast swings in the nominal tax rates on the "rich". Tax the already wealthy too much, and they invest more in tax free returns. In addition, they are not politically powerless- they just buy new loopholes. It is like herding cats.
The top rate must not be onerous in order to be collectible. What is onerous? Poll after poll of actual people indicate that 25-33% is the cutoff. However, you still get people like Klein who simply see no reason not to try to take 70%. With an attitude like that, I don't see any real reason they don't advocate 100% for everyone, with a government stipend mailed back monthly. Really, if you are going to make someone labor 70% of his time for others, then why not 95%?
We've had some really good comments. Here are a few comments of my own:
1. I believe that, in some states, the aggregate tax take is already approaching 60%. This includes Federal Income Tax, state and federal excise taxes, State Income Tax, State Sales Tax, FICA, worker's comp, some 'benefits' which are involuntary, property tax, vehicle taxes, cap gains taxes, dividend taxes etc. I file 21 tax returns each year for my immediate family.
2. The Laffer curve may well be a relationship which is effective separately for each bracket. Thus a taxpayer in the most 'progressive' segment may already be past the point of diminishing returns. It doesn't matter what the 'average' rate is if you tax policy prevents capital formation.
3. Taxes at these levels inhibit capital formation. Capital formation precedes job formation. While payers at the top end of the system may be able to avoid excessive taxation by redeployment of their capital, they may not be able to do it in a way which leads to a healthy economy and the generation of jobs. Buying state and federal tax exempt bonds funds government projects, like bridges to nowhere, but fails to fund startup companies or permit American companies to expand abroad. Anhauser-Bush was taken over by foreign competitors because they had a superior capital pool. Buy Bud Belgique!
Good idea. Here's one comparing annual growth in GDP (per capita) and annual change in taxes as a percent of personal income:
angrybear.blogspot.com/2008/01/dynamic-scoring-two-simple-graphs-tell.html
This is just straight data, no funny noodling to make the results look right.
We've had some really good comments. Here are a few comments of my own:
1. I believe that, in some states, the aggregate tax take is already approaching 60%. This includes Federal Income Tax, state and federal excise taxes, State Income Tax, State Sales Tax, FICA, worker's comp, some 'benefits' which are involuntary, property tax, vehicle taxes, cap gains taxes, dividend taxes etc. I file 21 tax returns each year for my immediate family.
2. The Laffer curve may well be a relationship which is effective separately for each bracket. Thus a taxpayer in the most 'progressive' segment may already be past the point of diminishing returns. It doesn't matter what the 'average' rate is if you tax policy prevents capital formation.
3. Taxes at these levels inhibit capital formation. Capital formation precedes job formation. While payers at the top end of the system may be able to avoid excessive taxation by redeployment of their capital, they may not be able to do it in a way which leads to a healthy economy and the generation of jobs. Buying state and federal tax exempt bonds funds government projects, like bridges to nowhere, but fails to fund startup companies or permit American companies to expand abroad. Anhauser-Bush was taken over by foreign competitors because they had a superior capital pool. Buy Bud Belgique!
wGraves:
So what were the problems during the Clinton years? Taxes were higher on the rich then. Face it, the Republicans have the reverse Midas Touch. Everything they touch turns to shit. The latest example being the Fannie and Freddie bailouts.
My other submissions were calling on the Google calculator, let's see if this fixes it. Here's another post with some links to data and spreadsheets. Hopefully this one will get through.
If you follow these series, it's pretty obvious that by any measure, the low-tax, low-regulation pro-business administrations have done worse than those who did not label themselves as such.
Joe Klein's conscience:
Clinton dropped the cap gains rate from 28% in 1996 to 20% in 1997. In this, he followed the historical lead of a Democrat named Kennedy. The Kennedys are rumored to have enough money that they know how this all works. Capital formation was enhanced by this move.
As noted by others above, the high marginal tax rate inhibits capital formation by those who aren't rich yet, not those who are already rich or those who control larger corporations. Corporate moguls can pay themselves one dollar of income, and pipe everything through the company, delaying compensation to an indefinite later period, when taxes might be lower.
High cap gains rates do inhibit useful capital formation by channeling capital into relatively unproductive uses, like bridges to nowhere. That bridge was, by the way, a Republican pork project. It and projects like it are why there is now a Democratic majority.
Graves, theory is nice and all, but at some point, you've got to produce the observations that confirm it, and have a plausible explanation for the observations that refute it. For example, your assertion that the decrease in the rate of capital gains simply doesn't appear to be true:
I don't know how many times I have to keep repeating this, but facts _always_ trump theory.
I'd like to respond to David Walser's and Joe Klein's Conscience's comments:
David gave some anecdotal evidence that higher tax rates may slow productivity with a story about a furniture factory that refused an order because of the increased labor costs. First of all this has nothing to with tax policy-- but rather the cost of labor.
Secondly, the order for furniture will get filled... elsewhere. Perhaps it is better for the economy over all if we have more than one furniture factory, especially if the one we have is overburdened with orders.
I love all these people who yap about the flat tax and getting rid of all deductions.
I work for a living. I get a W-2.
I make investments. I get a bunch of 1099's.
End of income.
I deduct my mortgage interest, property taxes and state taxes. I get forms telling me exactly how much I can deduct.
I have to calculate my contributions.
Then I am done.
OK, I am not done because I have an AMT problem but TurboTax does all the calculations for me.
Look, I know that when I travel for business that my employer pays for certain things. None of it is taxable to me.
I know that I make 401k contributions and I get life and health insurance provided by my employer and I probably get a few other things I am forgetting about. However, they don't show up on my tax return.
I lead a simple life and my tax return is simple.
Now, if I really wanted to I could do a lot of complicated things and I might end up saving a few dollars for a few hundred hours of work. It ain't worth it to me.
Now, I know that if I were self employed then things would be a lot more complicated.
But before you get on your high horse about the flat tax.
Riddle me this.
I want to get my sink fixed and I call someone to fix it. he says $500. Now I could write him a check for $500 or I could borrow about $1.5 million for a single day and pay him $500 in interest. Since my credit isn't good enough to borrow that much money then the plumber could keep the money as collateral for the loan. I apy the $500 for a single days interest and he fixes my sink for free.
So now, I am out $500 and the plumber gets interest income of $500 instead of ordinary income of $500.
Are you still sure you don't want to tax investment income?
Joe Klein's Conscience made a comment about the Google guys or Warren Buffett not being affected if they paid 35% vs 30% tax.
That might be true, but the Obama plan calls for a rise in tax rates for households making $250,000, which frankly is much closer to middle class than one can imagine. In fact two professional married people can easily make that much income, and all of a sudden they are taxed at the same rate as Buffet and Alex Rodriguez!
Another issue is the dividend tax rate. Most very high income earners get a larger percentage of their income from dividends, which are taxed at a lower rate. Why is passive income taxed lower than earned income? It is a disincentive to work for a living. Okay, they're "taxed twice", as GWB reminded us ad nauseum in 2000... so eliminate the corporate piece of dividend taxes and make the recipient pay full income tax on them.
I would argue further that someone making $200,000 per year earns it more than someone making $20 million or someone $20,000. Hear me out. The lowest paid people are making minimum wage and for the most part, someone on this planet would likely do the job for a lot less if given the chance, but the minimum wage puts a false floor on the value of the labor provided by minimum wage workers.
The very highly compensated folks, bank CEO's, athletes, entertainers are paid at ridiculous rates of pay. CEO's are often beneficiaries of cronyism from board room buddies. Only in the US is such a system tolerated. Is GM's CEO really worth eight figures, or John Thain at Merrill who lies regularly about the financial status of his company? These guys make horrendous decisions and reap no ill effects. Therefore, they should be taxed at 70%. Period. If they don't like it, then Alex Rodriquez or John Thain can gop work at a car wash.
The professional making $200,000, however, is usually highly trained and sought after and has taken as much or time and risk attaining the knowledge base for his/her job. Whether it's attorney, doctor or plumber, if they are making $200,000, then they likely put in longer hours than average and provide more value for society. No employer or customer is going to pay someone $200,000 without getting their dime's worth. That type of salary is market driven and not propped up by a minimum wage or cronyism (except maybe labor unions in some cases). Furthermore, if that professional cuts back on their workload, then society will suffer by not having the benefit of their doctor, accountant or other highly trained professional. Therefore, they should pay reasonable tax rates... and the progressivity should increased only after a really high salary, say, $600,000.
Furthermore, if that professional cuts back on their workload, then society will suffer by not having the benefit of their doctor, accountant or other highly trained professional.
We had these same professionals taxed at that rate before, and it didn't seem like it made them not work. I have a feeling that they'd need much higher tax rates before they stop working. Professionals are also more likely to be doing a job they enjoy, so it's not entirely about the money.
Other than that I agree with the rest of your post. Especially the part about passive income, it does bother me that doctors get taxed more than hedge fund managers because they can't structure their income as capital gains. It also bothers me that interest from banks is taxed at normal income. It's almost like the lower capital gains tax has nothing to do with providing capital to the financial system and everything to do with enriching the already wealthy furtther.
Not all government spending is the same. Some is wasteful pork. Investing in transportation systems, alternative energy sources, education, and health care brings back real returns.
But there is a lot of wasteful spending, both on the federal and state levels that should be eliminated. The costs of prohibition laws; enforcement costs, judicial costs, and jail costs could all be eliminated, we don't need to be the world's premier jailer. And I would go after farm subsidies, particularly for large industrial farms. We could also stop invading foreign companies (since that's so last century, according to McCain,) and treat terrorism as an international law-enforcement effort instead of a military effort (John Kerry had it right).
But I say these things as someone who got a tax increase, not a tax cut. I started a small business, and because I fell into the alternative-minimum tax bracket, could not deduct my costs. I don't mind paying taxes when they go to schools, good health, and environmental sanity. But paying to drop dirty bombs on foreign countries? Paying to support a justice department that puts political-party interests above the rule of law and voting rights? Paying for a government bent on consolidating more power to the Unitary Executive? It makes me sick to my stomach.
I've sat in enough state-level legislative hearings to know the voices that shape our government, and it's generally not Jane and Joe Citizen. Sure, they need thriving businesses to supply them with jobs and goods. They need access to capital to start their own businesses. But everything I've seen and heard has taught me that their interests and aspirations fall by the way side as well-heeled corporations twist law and rule making to gain a competitive edge.
So I'd say let's be selective; tax payments to lobbyists from corporations 100%. Stop making war. Stop our prohibition mentality. And invest in infrastructure that will improve our lives.
Tony-The very highly compensated folks, bank CEO's, athletes, entertainers are paid at ridiculous rates of pay.
I agree that there's probably cronyism among CEOs and board members. But the injured party there is the shareholders, not the American people. And if that's the problem, why not just fix that problem instead of using it as a justification for higher taxes? If the argument is that 30% of a group of multi-millionaires are corrupt and that's used as justification for upping the taxes on multi-millionaires, who is most likely to pay the tax; the folks who are willing to cheat to get ahead or those who are willing to play by the rules?
Therefore, they should be taxed at 70%.
Good luck making it stick without wrecking our economy.
Also, I really don't see what standard we'd use to judge an athelete or actor as being paid a "ridiculous" amount. If an actor starring in a movie increases sales by several million then the person's work is demonstratably worth several million to those making the movie.
So what were the problems during the Clinton years? Taxes were higher on the rich then.
Again, it's the spending, not the taxes. Spending was kept under control during the Clinton adminitration, while it's exploded under the "conservative" Bush. This seems to be a better argument for gridlock than for Democrats.
Ryan says, Good luck making it stick without wrecking our economy.
I doubt Alex Rodriguez taking a year off would "wreck the economy." My larger point is that nobody is worth that much income. Period. And Obama addresses this to some degree by increasing the tax rate on those making $9 million.
Shareholders may be aggrieved by high CEO pay, but being a shareholder is voluntary--- they can sell their stock or become more activist within the company structure. Caveat Emptor. I see no problem taxing very highly compensated individuals more.
Jordan says, "I have a feeling that [professionals would] need much higher tax rates before they stop working."
They may not stop working altogether, but they may be less available if their marginal tax rates are climbing. Why work 60 hrs per week when 40 hrs per week will get a very similar income? Then the community has to go out and find another cardiologist to pick up the slack.
This is admittedly a matter of degrees of "wealth." (Another peeve of mine is equating wealth with income, whereby a young busy talented and necessary doctor may have a decent income, but hardly is wealthy, as he/she may have six figures of school debt and a young family that has deferred many necessities for several years. Yet, the young doctor gets nailed with taxes as much as Warren Buffet, if not more. That's another issue altogether.)
As for professionals "enjoying their job"-- OMG, I hope this is not a justification for raising someone's taxes!!! I'll just pretend this topic was not even brought up.
Empirical evidence indicates that we're still on the left.
Megan, serious question: can you source this? It would seem, naively, that if true, the tax cuts not long ago would have been followed by a decrease in revenue; the opposite occurred. I realize that the increased revenue came because the ecomony turned around, but that would seem to be exactly the prediction made in the tax cut's favor.
And how a lot of these guys staked their reputations on it? And how none of their predictions came to pass (I'm looking at you, Cato.) Then they come up with all sorts of reasons why, even though they were wrong, they were still right. And we see this pattern repeated time after time after time.
One of the really frustrating things about economics, as a mathematically sophisticated reader, is that this applies to pretty much every economic faction: you can invariably find predictions on all sides of any possible question, and when the actual results are known, you can invariably find explanations from each faction on why they really were right after all.
You wouldn't accept a tarot readerwho had that kind of record, why do we trust economists?
Jim,
Just to be completely clear, I think we both agree that our best option is to cut government spending. I've just grown so jaded about the possibility of that that I've frankly given up, and fallen back to the trying to lay out the least destructive way to feed the beast.
Let's take for argument's sake your number of a 20% response. Say taxes are cut in year 1 by $1,000x, that results in the next period in extra growth of $200 but also, at 5% interest, extra tax of $50x. But every year's tax cut must be financed. In year 2 the extra tax is $100x, year 3 $150x, year 4 $200x (now offsetting the full $200x growth response) year 5 etc., ... out near year 20 the interest payment covers the full tax cut but is still going up indefinitely because the debt is still growing, as taxes apart from those funding the interest still equal spending - $1,000x.
Jim... you take the compounding of the borrowing here, but not the compounding of the growth. Taking your 5% number for real interest rates (a bit high, but much easier math):
In year 0 we borrow $1000 dollars to allow an additional $1000 of investment.
In year 1 we get $200 of growth and incur $50 in interest. We decide to borrow another $1050 to pay the interest and leave an additional $1000 for investment in year 1. So to summarize at the end of year 1 we have ($2050 = $1000 + $1000 + $50) in debt, and ($2200 = $1000 + $1000 + $200) in investment paid for by that debt.
In year 2 we get $440 of growth ($2200*20%) and incur $102.50 in interest ($2050*5%). We decide to borrow another $1102.50 to cover the interest and leave an additional $1000 for investment in year 2. So to summarize, at the end of year 2 we have ($3152.5 = $1000 + $102.50 + $2050) in debt, and ($3640 = $2200 + $1000 + $440) in investment paid for by that debt.
If we carried this forward into year 3 and beyond you'd see that we consistently are better off. The reason should be pretty clear, we are borrowing at lower rates to pay for investments that return at higher rates. As long as the cost of money is less than the return on the additional investment, we are better off borrowing than taxing investment.
Tax relief is good for growth, but only if the tax reductions are financed by spending restraint.
Please note, I'm not arguing for tax relief above (or spending cuts, though I favor both as you do in concert). I'm pointing out that if one is given, a priori and immutably, a level of spending, that the *most* destructive way to finance it is to tax dollars that would otherwise be invested (please note, *not* dollars that are the gains from investments, but dollars going *into* investments). Even borrowing is less destructive.
The final point is this: while excess government spending is destructive, one can significantly moderate that destruction by ones choice of source of revenue for that spending (not eliminate, just moderate). All revenue sources are not created equal.
neil wilson
I want to get my sink fixed and I call someone to fix it. he says $500. Now I could write him a check for $500 or I could borrow about $1.5 million for a single day and pay him $500 in interest. Since my credit isn't good enough to borrow that much money then the plumber could keep the money as collateral for the loan. I apy the $500 for a single days interest and he fixes my sink for free.
So now, I am out $500 and the plumber gets interest income of $500 instead of ordinary income of $500.
Are you still sure you don't want to tax investment income?
Your example is false... where is the plumber getting the $1.5 million dollars to loan you? If he has it, he's forgoing the $500 in interest to loan it to you, if he doesn't have it, he's paying $500 in interest to get it to loan to you. In either case, his gain is $0.
However, while your example is false, the kind of chicanery around credit you are reaching for is real. Let me construct a different example for you.
Imagine that I want to buy a car. The car is $20000. Normally I'd pay 5% for a car loan. The dealer will sell me the car for $10000 if I get a one year note from him at 105% (just keeping the numbers simple, I'm sure in reality it would be done over a number of years). I'm sure you are thinking that this would provide a means to dodge the consumption tax on $10000 worth of the cars cost, right? Well, it would, if the folks writing the consumption tax were particularly naive. But if you read the only *actual* bill for a national consumption tax (the FairTax), they aren't.
The case above under the FairTax, the interest above the going market rate would be taxed as a financial intermediation service, since clearly you are receiving something of value for it beyond the use of the money (I won't go into the mechanics here of how one determines how much is that financial mediation service, but it's in the FairTax bill).
So in both your example (which doesn't do what you think it does) and in my example (which does try to do what you were trying to do) you don't get away with anything under the only consumption tax bill on the table, the FairTax.
Furthermore, if that professional cuts back on their workload, then society will suffer by not having the benefit of their doctor, accountant or other highly trained professional.
We had these same professionals taxed at that rate before, and it didn't seem like it made them not work. I have a feeling that they'd need much higher tax rates before they stop working. Professionals are also more likely to be doing a job they enjoy, so it's not entirely about the money.
Other than that I agree with the rest of your post. Especially the part about passive income, it does bother me that doctors get taxed more than hedge fund managers because they can't structure their income as capital gains. It also bothers me that interest from banks is taxed at normal income. It's almost like the lower capital gains tax has nothing to do with providing capital to the financial system and everything to do with enriching the already wealthy furtther.
Jordan T,
We had these same professionals taxed at that rate before, and it didn't seem like it made them not work.
Not to precisely argue with you... but I've noticed that *none* of my doctors work more than a 4 day work week... and a few have started cutting back to 3.5 days a week... I've always wondered *why*...
Oh... and I myself have turned down work in an area where I was narrowly specialized ( a couple of dozen folks running loose qualified to do it) because after tax it just wasn't worth my time. We could agree on a number that would have worked for both of us in the absence of the tax drag, but not one that worked in the presence of the tax drag. Just my little anecdote to add to the pile.
Sigh. Guys. It doesn't matter what your personal anecdotes are. The facts are that the claims being made for lower taxes are demonstrably false. Looking at the charts and then saying "Yes, but in my personal experience . . ." is just some sort of bizarre denial mechanism.
As for professionals "enjoying their job"-- OMG, I hope this is not a justification for raising someone's taxes!!! I'll just pretend this topic was not even brought up.
I didn't offer it as justification, no idea where you got that from my post. You had a hypothesis that professionals will work less if their tax rate goes up by a few percent. I'm saying that their tax rate was at one point that high, and it didn't seem to make professionals work 40 hours a week. Did professionals work less in the 80's and 90's when tax rates were higher? They still put in long hours for whatever reason, to keep their job, the extra bit of money is significant to them or they enjoy their work. Not every reason for working comes down to dollars and cents.
Not to precisely argue with you... but I've noticed that *none* of my doctors work more than a 4 day work week... and a few have started cutting back to 3.5 days a week... I've always wondered *why*..
Have you asked them why?
Tony -
I doubt Alex Rodriguez taking a year off would "wreck the economy."
My point was that in order to make a 70% tax rate stick (i.e. actually get close to 70% of someone's income) in practice you'd have to institute some other draconian measures alongside it. They couldn't be nuanced, since nuances tend to favor lobbyists and loopholes, allowing the cheaters to succeed while the honest suffered. You'd have more work for barter and similar inefficient measures to avoid the burden. You'd have more business trips to Hawaii in liu of pay. All kinds of corruption and inefficiency would likely develop in response and some of this we have now.
My larger point is that nobody is worth that much income. Period.
And my point is that this seems like a gut reaction rather than something objective that you can calculate and prove or even test. What objective standard are you using to determine how much value a person generates?
Shareholders may be aggrieved by high CEO pay, but being a shareholder is voluntary
I can certainly understand the logic of that view (though I don't entirely agree with it.) But it shoots in the foot your argument for high taxes on CEOs. If CEOs make as much as they do via voluntary agreements, then the market has determined that they are, in fact, "worth it."
ScentOfViolets - was supposed to trigger a ginormous recession? And how a lot of these guys staked their reputations on it? And how none of their predictions came to pass (I'm looking at you, Cato.)
Then they come up with all sorts of reasons why, even though they were wrong, they were still right.
It's often a true saying that the market can stay irrational longer than we can stay solvent. The economy was in a bubble and measures of productivity at that time were clearly inflated. So people thought they owned more of value than they actually did, spent more than they had, and had a recession later.
Of course "x policy will cause an immediate recession" is a different assertion than "x policy does not work." I don't know Cato's exact assertion, but if they claimed that a recession would follow immediately after the increases they were wrong. The recession was delayed and may be mostly or entirely unrelated to tax policy. But all that's disproved is Cato's particular assertion (assuming you've represented their stance accurately.)
Sounds like a terrific reason to avoid wars, too.
If CEOs make as much as they do via voluntary agreements, then the market has determined that they are, in fact, "worth it."
Or, boards like to give CEOs high pay because it helps determine their own pay in executive positions and if and when they become a CEO, justification for higher pay as well. Sure the CEOs of Fannie and Freddie are worth their 20-30 million. They only ran those companies into the ground.
Or, boards like to give CEOs high pay because it helps determine their own pay in executive positions and if and when they become a CEO, justification for higher pay as well. Sure the CEOs of Fannie and Freddie are worth their 20-30 million. They only ran those companies into the ground.
Sounds like you haven't been listening to your CNBC indoctrination. ;-)
Tony -
I doubt Alex Rodriguez taking a year off would "wreck the economy."
My point was that in order to make a 70% tax rate stick (i.e. actually get close to 70% of someone's income) in practice you'd have to institute some other draconian measures alongside it. They couldn't be nuanced, since nuances tend to favor lobbyists and loopholes, allowing the cheaters to succeed while the honest suffered. You'd have more work for barter and similar inefficient measures to avoid the burden. You'd have more business trips to Hawaii in liu of pay. All kinds of corruption and inefficiency would likely develop in response and some of this we have now.
My larger point is that nobody is worth that much income. Period.
And my point is that this seems like a gut reaction rather than something objective that you can calculate and prove or even test. What objective standard are you using to determine how much value a person generates?
Shareholders may be aggrieved by high CEO pay, but being a shareholder is voluntary
I can certainly understand the logic of that view (though I don't entirely agree with it.) But it shoots in the foot your argument for high taxes on CEOs. If CEOs make as much as they do via voluntary agreements, then the market has determined that they are, in fact, "worth it."
ScentOfViolets - was supposed to trigger a ginormous recession? And how a lot of these guys staked their reputations on it? And how none of their predictions came to pass (I'm looking at you, Cato.)
Then they come up with all sorts of reasons why, even though they were wrong, they were still right.
It's often a true saying that the market can stay irrational longer than we can stay solvent. The economy was in a bubble and measures of productivity at that time were clearly inflated. So people thought they owned more of value than they actually did, spent more than they had, and had a recession later.
Of course "x policy will cause an immediate recession" is a different assertion than "x policy does not work." I don't know Cato's exact assertion, but if they claimed that a recession would follow immediately after the increases they were wrong. The recession was delayed and may be mostly or entirely unrelated to tax policy. But all that's disproved is Cato's particular assertion (assuming you've represented their stance accurately.)
JordanT - Or, boards like to give CEOs high pay because it helps determine their own pay in executive positions and if and when they become a CEO, justification for higher pay as well. Sure the CEOs of Fannie and Freddie are worth their 20-30 million. They only ran those companies into the ground.
If you read back through the conversation I was having, you'll see I already acknowledged this situation you describe and took it as my own position. That's why I explicitly said; I agree that there's probably cronyism among CEOs and board members. But the injured party there is the shareholders, not the American people. And also I can certainly understand the logic of that view (though I don't entirely agree with it.)
My point through all of this was that the logical response to the situation (cronyism among CEOs and board members) was to deal with the problem directly rather than to simply use it to justify taxes on those with high incomes across the board.
Ryan W, I mostly agree with your sentiments and will not address your comments in toto. Rather, I will say that you are correct, the metrics for determining when professionals decrease workload do not exist. Anecdotal information about such a topic-- "my doctor works 3.5 days a week"-- is worse than useless.
But you know, I could say the same thing about all economics and tax policy particularly. Why do we choose the cut offs for the progressive tax brackets where we do? Is there some science behind it?
The fact is that we need taxes to support the many and growing federal programs, and nobody wants to pay more than their perceived fair share. Therefore, we all say the higher tax bracket should start $5,000 above what WE currently make or plan to make. That's human nature.
Obama's plan is not dissimilar from McCain's which is not dissimilar to the current tax structure. The idea of progressive tax will not go away regardless of who is president-- it's all just a matter of degrees. I can argue that Pigou taxes and consumption taxes make more sense, or that we should eliminate tax deductions for kids (mainly because I don't have any), but these are not based on any metric evidence. They are merely my opinion. And the current tax structure is based on someone else's opinion. Unlike physics, economics is not an exact science.
I know a lot of people that make more money than I do, and for the most part I feel they are overpaid. I cannot help my feelings. I cannot fathom what one person can do in a 12 month period that would be worth, say, $50 million, yet there are people making that salary and they are in the exact same tax bracket as I am! Unbelievable (to me.)
You're a smart guy. Thanks for the sparring. I am agreeing with you.
"Another question - in order to a nation to produce enough to be able to provide as much as possible for those less fortunate - don't we need to discourage people (who have the ability tio create wealth) from consuming too much leisure?"
BINGO. Great question.
I know a lot of people that make more money than I do, and for the most part I feel they are overpaid. I cannot help my feelings. I cannot fathom what one person can do in a 12 month period that would be worth, say, $50 million, yet there are people making that salary and they are in the exact same tax bracket as I am! Unbelievable (to me.)
Interesting. I know people that make a lot more money than I do, yet the conclusion I always draw is that I'm being underpaid. I want to make more money, not for them to make less. No offense, but wanting the government to take more money from the more successful just seems so petty.
As you say you can't help how you feel, and I'm not going to try to convince you otherwise. This just seems like one of those "There are two kinds of people" situations.
For those interested, here is a very good paper analyzing taxes and income over the period of 1979 to 2002. It demonstrates very well that total federal tax rate is largely stable despite major changes in the code. It also demonstrates that the major factor in increased revenue is from capital gains realizations- the turning of appreciated assets into income, and that the major increases in this form of income arise from two changes in the tax rates for such income- the lowering of the rates in 1986 and 1997.
The paper also shows that income tax progressivity is increased from 1979, even with large drops in the nominal tax rates for the wealthy during this time. The only way you get to less progressivity over any of the income ranges is to include the payroll tax, but for most people the net lifetime payroll tax will start dropping towards zero on retirement- you have to die young in order to not recover what you paid in.
Yancey, if you'd look up above, you'll see that this simply isn't true:
The conventional knowledge seems to be that there are one-time gains, but the evidence for these gains appears to be awfully thin on the ground. If you've got some actual evidence, let's see it.
SOV,
I cited my source for 1986, a much more dramatic lowering of capital gains rates. If you don't want to read it, just say so. As for 1996, one might examine the stockmarket values. If memory serves, 1995 had the S&P rising 34% (and after a nearly flat 1994) while it rose only 20% in 1996. An actual rise in stock price is just as necessary a condition to cause one to sell as a lowering tax rate. The paper I cited just points out that after the 1997 change, the upper income groups' effective tax rate dropped while their income rose- effects that disappeared once the tax law change had been fully implemented.
However, one point does need to be made- a low captital gains rate's main salutary effect is not to increase tax revenues by a one time bump in capital gains- it is to encourage the accumulation of additional capital by making it more attractive with regards to consumption, or the liquidation of relatively non-productive capital. The beneficial effect of this (from the government's point of view) will be higher tax revenues from all sources.
And there you have it, folks, snideness right from the get-go.
Yancey, I made a quite civil post, I pointed out that at least one data point had already been addressed (goes to reading the thread before replying), and that you were factually wrong in at least that one instance. Nothing I said merited your response.
I'm sick and tired of this. Into the virual killfile bin you go.
Megan says, "But no one should be voting as if new spending were costless."
I have yet to hear any liberal response to this. Is there one? Do liberals think it's a problem that 50% of the population thinks that new government programs are free because they pay little or nothing in income taxes? Or is that one of the goals of liberal policies (i.e., naked vote buying)?
Posted by DBL
Ah, but Republicans have the Grand Fairy Tale they have been pushing since Reagan's era.
Also known as the "Supply Side Voodoo Story"
You see, as Dubya and Grover Norquist of the cancerous Club For Growth explain ....the more you lower taxes on the rich...the more tax revenue magically appears to replace receipts lost on fatcat's tax cuts!! Honest!!
And anticipating those truckloads of money, Reagan can sign off on entitlement increases and Bush can increase government spending by 40%...
===================
I believe most Americans will opt for fairness over the theories that the wealthiest are best not taxed at all - only the workers - because that "best frees up investment money to create wealth and 'exciting new jobs' for all those employees losing out to globalism."
Members of the "John Galt Fan Club" would love to keep the discussion on income tax and "oppression" of the Doer-Owners, as Bush once called them - and ignore total taxes and gov't fees on each dollar an Ameican earns.
After bare living necessities income is factored out, the discretionary dollars remaining have "the government's cut" left to take out, and the truth is that the poor, middle class, and especially the 2-income works lots of OT upper middle class pays more in the "government cut" of each dollar they make than the truly wealthy. (Who have the advantage of flat gov't fees, regressive taxes, FICA, and low capital gains taking much less of each dollar they get...without even getting into the worst abuses of the rich in shelters, trusts, and deducting most personal expenses and vacations as business-related).
Warren Buffett and his secretary who pays 40% more in taxes on each dollar she earns than Warren is the most famous example.
And with a shrinking American middle class, widening disparities in wealth, news that upwards mobility in America is behind Europe and Asia - the idea that a hedge fund manager pays 18.79 dollars to the government on each 100 they make while a nurse working overtime pays 42.36 in total government takeaway on each 100 bucks she makes is simply unacceptable.
Bootlickers to the rich can cry "communist!" "class envy!" all they want, but it doesn't mask the fact that the very rich have been making the rules for 30 years in both Parties, and the system is skewed against most Americans.
Here's the issue that I think only a few people mention. All of the tax rates you guys are talking about are merely federal income tax rates. Let's not forget those who live in high-tax cities like New York, where one pays both state and local income taxes. In New York City, if I remember correctly, a family of four making $300K per year pays over 50% in taxes. And anyone who has lived in Manhattan knows, with a 2 BR apartment averaging now over $1 million and most public schools in shambles requiring many to send their kids to private schools, a family of four making $300K is not swimming in luxury.
In the UK, for example, the highest rate anyone pays on any income, is around 50%. This includes income taxes, the NHS taxes, etc. In the US, in cities like New York, the highest rates top out at well over 50%. So the idea that somehow, we're a low tax society compared to those tax-and-spend Europeans, is utter rubbish. Now let's throw nationalized healthcare into the mix. I can see total tax burden for those in the highest brackets (and remember, these are not all people making $10 million per year) going to 65-70%.
Ireland has about 4-5m people. This makes it about the size of Greater Boston (where in the 1990s, it was possible to get college-educated Irish laborers to build a porch or paint a house ... but don't ask for a green card). They have other advantages: they are generally educated, speak a language that resembles American, and are the closest European country to the US East Coast.
Maybe they could cut their 30% tax as a percent of GDP to 20% like Mexico, then they could have an economy as good as Mexico's.
Maybe we should look at some bigger countries and see how we can copy Chinese and Russian tax policy since they seem to be doing so well.
Re: Now let's throw nationalized healthcare into the mix. I can see total tax burden for those in the highest brackets (and remember, these are not all people making $10 million per year) going to 65-70%.
If you're going to take that step then you need to include the fact that right now we are already paying for our current healthcare system, we just don't call those payments "taxes" (except for the Medicare payroll tax). And even if you think your employer is paying for your health coverage, in reality those premiums are coming out of your pocket.
What amazes me in this sorts of discussions on taxes and disincentives:
1) That with all this talk of how "taxing something discourages it" that it somehow never gets mentioned that taxing capital gains at a lower rate than rate for people who actually work for a living and earn a paycheck is actually discouraging people from working and earning a paycheck because hey, you're taxing working more - so what, are you all trying to discourage people from working?
I suspect the real reason this isn't mentioned is that they know that most people who work for a paycheck have no choice, regardless of taxes - because it is either work or starve. While those who live on capital gains will never starve, so they are free to do what they want. And they also control the government.
2) The rank dishonesty of talking about "income taxes" and comparisons in them between the top and bottom of the economic ladder while always leaving payroll taxes out of the equation - when they are the primary income tax paid by most people. I've actually had discussions on this with various GOP people who think this is perfectly ok because hey, "payroll" taxes aren't labeled "income taxes" (even though they are a tax on income) so they really aren't being dishonest. Which makes me just want to come back and say that ok, we'll just add a 10% tax on the upper 1% of earners on their income, but we'll call it the "Daffy Duck tax" so they can't complain that they are paying higher income taxes. Even better, let's just relable all taxes on income paid by anyone in the top 1% as "Daffy duck taxes" and then we can claim with a straight face that the bottom 99% pay all of the income taxes while the top 1% pays none of them.
The label doesn't matter. Income is income. Taxes on income are income taxes, no matter what the "official" label is. So you HAVE to include payroll taxes (and all other taxes on income) when you talk about what each portion of the population pays in taxes, or else you are just blowing smoke. If you just leave it to "income taxes (tm)" then you are giving a deliberately false picture, cutting out almost all of the income taxes paid by the lower income people and ignoring the fact that some of those payroll taxes cap out, making them regressive.
I haven't read all the comments, so maybe someone has pointed this out already.
Ireland was able to drop the corporate tax rate to 10% (now 12.5%) because its corporate sector was so small and beleaguered that the tiny revenue hit was easily overcome by the great big volumes of tax flows that eventually arrived in the form of multinationals who located here. In other words, Ireland sacrificed a higher rate on a small amount of income for the opportunity to charge a lower rate on a much larger amount. Already wealthy industrialized countries can't do this because the tax base depends too much on the money coming from the very large and successful corporate sector. Basically, if the US (or Germany or France) decided to start charging corporation tax at a third of present levels, it wouldn't incentivize nearly enough in terms of additional activity and/or location decisions to offset the lost revenue.
Anyway, this is a trick countries can pull just once. Ireland is currently looking for a new trick now that multinationals are finding it too expensive to pay staff in this newly rich country of ours.
Payroll taxes are different from Income taxes in that they are dedicated to paying SS benefits and cannot be used for general revenue. Yes, the surplus is borrowed by the treasury but it must be paid back in future.
2) The rank dishonesty of talking about "income taxes" and comparisons in them between the top and bottom of the economic ladder while always leaving payroll taxes out of the equation - when they are the primary income tax paid by most people.
If you believe the rhetoric behind FICA, payroll taxes aren't taxes, they're more like mandatory bond purchases. The money withheld is returned later as benefits, with the return directly tied to the amount withheld. If you accept this argument, then it may make sense not to treat payroll taxes the same as income tax.
I personally don't like this argument and think the payroll tax should be abolished. Social Security should be turned into welfare (i.e., means tested) for the elderly and paid for out of the general fund. But since that's not happening anytime soon, we're stuck with payroll taxes.
Warren Buffet sacrifices a lot less when he gives up 10% of his income than does his secretary when she gives up 10% of hers
As someone mentioned before, the 10% of Warren Buffet's income that the government takes could create a lot more wealth in his hands vs. the Feds. This creates more jobs, which means there are more secretaries employed making decent earnings versus unemployed secretaries making nothing.
1) That with all this talk of how "taxing something discourages it" that it somehow never gets mentioned that taxing capital gains at a lower rate than rate for people who actually work for a living and earn a paycheck is actually discouraging people from working and earning a paycheck because hey, you're taxing working more - so what, are you all trying to discourage people from working?
The reason what you cite never gets mentioned is that earnings and capital gains are completely different forms of income generation. Earnings are derived (obviously) from labor, whereas capital gains are income appreciation.
Unless you inherited a ton of money from someone, or sued someone for all your funds, at some point one would have to have earnings in order to have capital gains. How else can you drive capital appreciation without..ya know...capital? You're right: people who work (earn) for a living have to in order to meet their daily demands. The question isn't whether we should be taxing those who invest in the capital markets at the level of those who solely earn their income. The question is why are we taxing those who earn at double the rate of capital appreciation? We should be taxing earnings LESS so that these individuals are incouraged to invest in fixed-income or equity markets, which does a whole lot more good for them and the markets than does more money for the government.
So that's my desire: 15% tax rate for all.
"As someone mentioned before, the 10% of Warren Buffet's income that the government takes could create a lot more wealth in his hands vs. the Feds. This creates more jobs, which means there are more secretaries employed making decent earnings versus unemployed secretaries making nothing."
Posted by matt
By this logic, the government should only tax the poorest citizens, leaving them with only subsistance after-tax income, and leave the wealthiest citizens completely untaxed. Sounds like the conservative ideal I suppose.
By this logic, the government should only tax the poorest citizens, leaving them with only subsistance after-tax income, and leave the wealthiest citizens completely untaxed.
Your proposal holds promise, but is incomlete. It's a truism that you get less of what you tax and you get more of what you subsidize. Ergo, we should tax the poor and redistribute their income to the rich. That way we could get rid of poverty once and for all...
CEO's are often beneficiaries of cronyism from board room buddies. Only in the US is such a system tolerated...
I never understand why there is all this outrage from the left about how much CEOs get overpaid, but none at all about how much Hollywood people get overpaid, (Kevin Coster in Waterworld -- where was the revolution?), or over how much media stars get overpaid (How much is Katie Couric getting paid to produce even worse ratings than Dan Rather?)
Well, I do understand it, Hollywood and media stars donate to Democrats.
But where is the political outrage over over-paid pro athletes???
My God, I used to sit in bars with blue collar beer drinkers watching Mo Vauhgn get paid $15 million a year to hit on the Interstate and lose ground balls under the wheelbarrow he used to carry his belly. Blue collar beer drinking Mets fans!
If that didn't bring on the Revolution, nothing ever will. Forget it.