Showing posts tagged tax policy

The Millionaire's Tax: Three Observations

letterstomycountry:

The expected proposal by the President to tax annual income above a million dollars may be too cute by half. It clearly looks like a “populist” initiative and clever political maneuver. By setting the threshold at $1,000,000 it boxes out almost all the Republican allusions to small business entrepreneurs and hits a number associated with wealth in popular culture (“So You Want To Be A Millionaire”, etc).

But, it looks so much like an “in your face” political challenge to his opponents, that may have evaporated all that talk about “constructive compromise” that popped up after the disgraceful debt ceiling debate. Markets sold off after the debt debate on fears that if a real national crisis were to erupt, both parties would continue to posture in partisan acrimony as the situation worsened. We’ll see if the new tax proposal re-ignites those fears.

Secondly, the tax proposal is being dubbed the Buffett tax since Mr. Buffett has long proclaimed that it is unfair and embarrassing that he pays taxes at a lower rate than his secretary. That could be instantly remedied by Mr. Buffett (or one of his accountants) by listing his income as ordinary income on his 1040A. Then he would be taxed at a rate equal to, or, more likely, higher than his hard working assistant.

Third, the proposal flies in the face of the lessons of history. According to the Tax Foundation, after the 1929 crash, Congress proceeded to raise the top marginal tax rate from 25% to 63% by the end of Hoover’s term (hat tip to the sharpeyed Mike Higley’s “By the Numbers”). As you may recall, hiking those rates may have made folks feel that rates were more equitable but it sure didn’t help the economy. Just a few thoughts.

It is perhaps no surprise that I disagree with the commentator, but I’d like to focus on the following paragraph for great justice:

Secondly, the tax proposal is being dubbed the Buffett tax since Mr. Buffett has long proclaimed that it is unfair and embarrassing that he pays taxes at a lower rate than his secretary. That could be instantly remedied by Mr. Buffett (or one of his accountants) by listing his income as ordinary income on his 1040A. Then he would be taxed at a rate equal to, or, more likely, higher than his hard working assistant.

Emphasis added.  I find this criticism of Buffet’s position to be extremely annoying because it’s intellectually dishonest to the point of being glib (no offense to Logicallypositve, for whom I would give my first born son and the right of Prima Nocta/Droit du Seigneur in event of marriage).  

Commentators who criticize Buffet on this ground are completely missing the point (knowingly, I suspect) of why Buffet criticizes America’s tax system.  He’s not arguing that it’s *personally* unfair for him to pay lower rates while his secretary pays more.  He’s arguing that it’s unfair that people who are rich enough, as a class of taxpayers, to make their money largely through the vehicle of Capital Gains have the option of paying a substantially lower rate than people who make their money largely through labor hour wages.  The system, as it is set up, rewards wealth over work.  If Buffet changed his personal filing methods, it wouldn’t make the system any more fair because 99% of taxpayers in his income bracket would still opt to pay a lower rate than their secretaries.  That defeats the purpose of why he criticizes the tax code.

If the tax code was amended so that people in Buffet’s tax bracket had to list their Capital Gains as ordinary income on their 1040A, Buffet would almost certainly support that reform.  He would also support a reform that, say, taxed all Net Capital Gains above a reasonable threshold as ordinary income.  But again, he’s not just talking about himself.  He’s using himself as an example of a larger class of taxpayers, not simply making a personal observation about his tax situation.

This “the system, as it is set up, rewards wealth over work,” seems so clearly in conflict with the pull your self up by your bootstraps mythology, that I would think it could be the winning argument. 

(Source: rigatonideology)

(Reblogged from letterstomycountry)
“
Oddly, one never hears Republicans praise those countries where people are lucky duckies — those where taxation is a small fraction of what it is here.

I’d Rather Be an Unlucky Ducky
Bruce Bartlett 

Equatorial Guinea: According to the Republican-leaning Heritage Foundation, those who live in this small country in sub-Saharan Africa are lucky duckies indeed. Because of recently discovered oil deposits, the citizens of Equatorial Guinea pay less than 1 percent of the gross domestic product in taxes. The comparable figure for the United States is 26.9 percent of G.D.P., according to Heritage.

However, Equatorial Guinea doesn’t seem to be a very pleasant place to live. The people are poor and have little freedom. Heritage says that “persistent institutional weaknesses impede creation of a more vibrant private sector” and “the rule of law is weak.” This sounds suspiciously as if government is too small to do its job properly. But I’m sure that the citizens of Equatorial Guinea don’t mind having a dysfunctional government; after all, they’re lucky duckies.

Myanmar: The people who live in this small country in Southeast Asia are also lucky duckies, if not quite as lucky as those in Equatorial Guinea. According to Heritage, taxes in Myanmar are 3 percent of G.D.P.

Oddly, this also doesn’t sound like someplace one would want to live. Heritage says “longstanding structural problems include poor public finance management and undeveloped legal and regulatory frameworks.” Apparently, the government doesn’t protect property rights very well, the infrastructure is poor, and there is a lot of corruption. But at least the people get to keep almost all their earnings.

Libya: Why the people revolted in this North African fiscal paradise is a mystery. According to Heritage, government revenues are just 3.4 percent of G.D.P.

Chad: Heritage says the people of this African nation pay just 5.3 percent of G.D.P. in taxes. But for some reason, the nation is mired in poverty. Perhaps because, as Heritage says, “the efficiency and quality of government remain poor.” I wonder why.

Republic of Congo: The people of this country in Africa also pay 5.3 percent of G.D.P. to the government. But it is also very poor. Heritage says a key reason is “the government has failed to provide basic public goods and infrastructure.” This doesn’t really make much sense by the logic of Republican candidates, who seem to agree that all government spending is bad unless it goes to the Defense Department and that public works are nothing but worthless pork.

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(via manicchill)

This, to me, is pretty much a direct refutation of the Anarcho-Capitalist school of Libertarianism.  According to the popular wisdom of that school, minimal regulation and taxation should be causing these countries to thrive.  And yet their standard of living compared to 1st-world countries with strong central governments is abysmal.

With that being said: you could very reasonably make the argument that the minimal governments of these countries are nonetheless oppressive and larcenous, so what little wealth is accumulated in the market tends to be appropriated by the elites.  But the question then becomes *how* that wealth is being appropriated; is it through official channels?  Then it would show up as taxation.  Is it through thuggery?  Then how could the problem be solved without reverting to Somalia-style balkanization (which is better only when compared to the more awful government preceding it)?  

The question, then, is one of form: without a strong Constitution to limit government power, and an intellectually vibrant, Independent Judiciary to keep government in check, there is no way for the rights of citizens to be guaranteed as against their unscrupulous peers, and as against the government itself.  

Yet courts in of themselves are Government.  All of these mechanisms cost money.  A minimalist State can be just as dangerous to Liberty and freedom as an oppressive one.  Norway, whose government accounts for 40% of its GDP, nonetheless has a very libertine criminal justice system.  There can be no question that people in Norway are more free than even people in the U.S. (who live under the Patriot Act, the War on Drugs, and the Military Commissions Act).  Yet the U.S. government accounts for closer to 20% of GDP.

Does that mean government spending as a % of GDP is dispositive with respect to freedom?  Of course not.  Form matters.  But if you aren’t bringing in enough tax revenue to support the “right” form, then Bartlett’s observation is right: you end up with a government too weak to provide a mechanism for enforcing the rights of its own citizens (i.e. an independent and well-funded judiciary paired with an enumerated Constitution).

(via letterstomycountry)

(Reblogged from letterstomycountry)

The Payroll Tax Cut: A Stimulus That Progressives Should Oppose | Dean Baker

theamericanbear:

This is from July, but I am re-posting the link because it is still relevant, especially given the payroll tax cut provision in the American Jobs Act:

In principle, this would be a reasonable form of stimulus. The distribution of the tax cut is relatively progressive, albeit not as progressive as the Making Work Pay tax credit that it replaced. It gives workers a tax break equal to 2 percent of their wages up to the payroll cap of roughly $108,000. This means that the tax break going to Wall Street types will be no larger than what a senior firefighter might get.

Since most of the money will go to middle-income and low-income people, it is likely that a large portion will be spent. This makes it much better stimulus on a per-dollar basis than the extension of the Bush tax cuts.

However, there is a serious political problem with tying the tax cut to Social Security. While the deal is that the trust fund will be unaffected by the tax cut, the question is what happens when the extension ends. Several Republicans in Congress have already publicly said that they would oppose restoring the payroll tax to its former level, since that would be a tax increase. And increasing taxes is the most deadly sin for many Republicans.

This raises the possibility that Republicans will try to keep the lower Social Security tax rate in place indefinitely. If there was a commitment to permanently replace the program’s shortfall with general revenue, the loss of the payroll tax revenue would not matter. However, there is no such commitment.

Obviously the Republicans want to reduce Social Security’s revenues so that they can turn the fictional Social Security crisis into a reality. If the program were to permanently lose the revenue from 2 percentage points of the payroll tax then Social Security would first face a shortfall in a bit more than a decade, rather than the quarter century of full solvency currently projected by the Trustees. And the size of the projected shortfall would be instantly doubled.

This scenario would not be a problem if President Obama had demonstrated a firm commitment to Social Security and indicated his willingness to go to the mat to protect the program. But he has done just the opposite. He has told the world that he is such a reasonable guy he is prepared to make major cuts to Social Security.

I was, and am, uncomfortable with this portion of the stimulus plan. If it were coupled with lifting or at least raising the social security cap it might be reasonable, but as it stands it just seems a means of damaging the long term stability of our most successful programs.

(Reblogged from pieceinthepuzzlehumanity-deacti)

23 Separate Polls Show Heavy Majorities Favoring Tax Increases As Part Of A Deficit Reduction Plan.

letterstomycountry:

My earlier comments notwithstanding, who does the GOP honestly think they’re kidding?

(Reblogged from letterstomycountry)

The U.S.: Still Well To The Left Side Of The Laffer Curve

letterstomycountry:

Yglesias pulls a quote out from a recent paper by Peter Diamond and Emmanuel Saez that all Progressives should read if they really want to understand the economic case for progressive taxation, rather than relying solely on valid-yet-vague ideas about social justice and fairness:

When a tax system offers tax avoidance or evasion opportunities, the tax base in a given year is quite sensitive to tax rates, so that the elasticity e is large, and the optimal top tax rate is correspondingly low. Two important qualifications must be made. First, as mentioned above, many of the tax avoidance channels such as re-timing or income shifting produce changes in tax revenue in other periods or other tax bases—called “tax externalities”—and hence do not decrease the optimal tax rate. Saez, Slemrod, Giertz (2011) provide formulas showing how the optimal top tax rate should be modified in such cases. Second, and most important, the tax avoidance or evasion component of the elasticity e is not an immutable parameter and can be reduced through base broadening and tax enforcement (Slemrod and Kopczuk, 2002; Kopczuk, 2005). Thus, the distinction between real responses and tax avoidance responses is critical for tax policy. As an illustration using the different elasticity estimates of Gruber and Saez (2002) for high income earners mentioned above, the optimal top tax rate using the current taxable income base (and ignoring tax externalities) would be τ*=1/(1+1.5 x 0.57)=54 percent while the optimal top tax rate using a broader income base with no deductions would be τ=1/(1+1.5 x 0.17)=80 percent. Taking as fixed state and payroll tax rates, such rates correspond to top federal income tax rates equal to 48 and 76 percent, respectively. Although considerable uncertainty remains in the estimation of the long-run behavioral responses to top tax rates (Saez, Slemrod, Giertz, 2011), the elasticity e=0.57 is a conservative upper bound estimate of the distortion of top U.S. tax rates. Therefore, the case for higher rates at the top appears robust in the context of this model.

For those unfamiliar with the Laffer Curve and its impact on tax policy, see my post on the subject here. 

(Reblogged from letterstomycountry)
theamericanbear: Income inequality is bad for rich people too | Yves Smith One of the major fights in the debt ceiling battle is how much top earners should contribute to efforts to close deficits. Australian economist John Quiggin makes an eloquent case as to why they need to pony up: My analysis is quite simple and follows the apocryphal statement attributed to Willie Sutton. The wealth that has accrued to those in the top 1 per cent of the US income distribution is so massive that any serious policy program must begin by clawing it back. If their 25 per cent, or the great bulk of it, is off-limits, then it’s impossible to see any good resolution of the current US crisis. It’s unsurprising that lots of voters are unwilling to pay higher taxes, even to prevent the complete collapse of public sector services. Median household income has been static or declining for the past decade, household wealth has fallen by something like 50 per cent (at least for ordinary households whose wealth, if they have any, is dominated by home equity) and the easy credit that made the whole process tolerable for decades has disappeared. In these circumstances, welshing on obligations to retired teachers, police officers and firefighters looks only fair. In both policy and political terms, nothing can be achieved under these circumstances, except at the expense of the top 1 per cent. This is a contingent, but inescapable fact about massively unequal, and economically stagnant, societies like the US in 2010. By contrast, in a society like that of the 1950s and 1960s, where most people could plausibly regard themselves as middle class and where middle class incomes were steadily rising, the big questions could be put in terms of the mix of public goods and private income that was best for the representative middle class citizen. The question of how much (more) to tax the very rich was secondary – their share of national income was already at an all time low. And the fares of the have versus the have-nots continue to diverge. A new survey found that 64% of the public doesn’t have enough funds on hand to cope with a $1000 emergency. Wages are falling for 90% of the population. And disabuse yourself of the idea that the rich might decide to bestow their largesse on the rest of us. Various studies have found that upper class individuals are less empathetic and altruistic than lower status individuals. This outcome is not accidental. Taxes on top earners are the lowest in three generations. Yet their complaints about the prospect of an increase to a level that is still awfully low by recent historical standards is remarkable. [read more] View high resolution

theamericanbear:

Income inequality is bad for rich people too | Yves Smith

One of the major fights in the debt ceiling battle is how much top earners should contribute to efforts to close deficits. Australian economist John Quiggin makes an eloquent case as to why they need to pony up:

My analysis is quite simple and follows the apocryphal statement attributed to Willie Sutton. The wealth that has accrued to those in the top 1 per cent of the US income distribution is so massive that any serious policy program must begin by clawing it back.

If their 25 per cent, or the great bulk of it, is off-limits, then it’s impossible to see any good resolution of the current US crisis. It’s unsurprising that lots of voters are unwilling to pay higher taxes, even to prevent the complete collapse of public sector services. Median household income has been static or declining for the past decade, household wealth has fallen by something like 50 per cent (at least for ordinary households whose wealth, if they have any, is dominated by home equity) and the easy credit that made the whole process tolerable for decades has disappeared. In these circumstances, welshing on obligations to retired teachers, police officers and firefighters looks only fair.

In both policy and political terms, nothing can be achieved under these circumstances, except at the expense of the top 1 per cent. This is a contingent, but inescapable fact about massively unequal, and economically stagnant, societies like the US in 2010. By contrast, in a society like that of the 1950s and 1960s, where most people could plausibly regard themselves as middle class and where middle class incomes were steadily rising, the big questions could be put in terms of the mix of public goods and private income that was best for the representative middle class citizen. The question of how much (more) to tax the very rich was secondary – their share of national income was already at an all time low.

And the fares of the have versus the have-nots continue to diverge. A new survey found that 64% of the public doesn’t have enough funds on hand to cope with a $1000 emergency. Wages are falling for 90% of the population. And disabuse yourself of the idea that the rich might decide to bestow their largesse on the rest of us. Various studies have found that upper class individuals are less empathetic and altruistic than lower status individuals.

This outcome is not accidental. Taxes on top earners are the lowest in three generations. Yet their complaints about the prospect of an increase to a level that is still awfully low by recent historical standards is remarkable. [read more]

(Reblogged from pieceinthepuzzlehumanity-deacti)