Raising Taxes

[Alcoholic Actuary]

Nicely demonstrated.

However, what if we looked at the same scenario (at a 50% tax rate) over a 4 year period instead of 2? If my calculations are correct, the investor buys 4.5 widgets whereas the laborer buys only 4 - and the divide widens with each year thereafter. At 10 years the investor buys 256.5 widgets vs the 10 bought by the laborer.

aa

That is true, of course, but is it relevant? I chose the figures to give two people who were in the same position after 2 periods at 0% tax, and showed they were no longer in the same position if there was equal tax on all kinds of income.

At 0% tax, these people would no longer be in the same position after 4 periods or 10 periods, and the investor would be drawing ahead exponentially - so it is no surprise that that would also happen at 50% tax.

Well, any cutoff point is arbitrary, so...

The point I think you are missing, is why should an investor earn the same number, or greater widgets than the laborer (whose labor is also directly contributing to the investor's purchasing power)? If anything, he ought to be earning less (but only does so over a short timeframe). We can play games all day with the parameters of the mathematical model you are using. Eventually, the compounding of returns and deferral of tax payment will always eclipse simple interest (which is what annual taxes amount to).

aa

 

[fromderinside]

Medicine Man, if you said anything important I wouldn't know. You are the first person I've ever blocked. Nothing personal, but your formatting makes my eyes bleed. I'm only pointing this out because I started the thread.

Great idea! I'm doing it too.

Yet people like these go for the flashiest commercial, ad, or display* to pay as much as they can for stuff of which they know very little.

Good job Medicine Man. This forum is in dire need of some real circus style posts. They're a lot better than un-referenced assertions buried under other unsubstantiated assertions.

*^{_{An example of an unsubstantiated assertion just for those who wonder about such.}}

 

[EricK]

That is true, of course, but is it relevant? I chose the figures to give two people who were in the same position after 2 periods at 0% tax, and showed they were no longer in the same position if there was equal tax on all kinds of income.

It is relevant because it shows your result does not hold for different holding periods.

My "result" was merely a demonstration that something which appears equitable on the surface (taxing all forms of income equally) can be shown to be not equitable when the numbers are actually plugged in. I was not trying to show that these two people who had equal income after 2 time periods would have equal incomes if one of them changed their behaviour.

It is obvious that investing (at some constant positive rate of return) will eventually outperform earning at a constant rate. But so what? The post I was responding to was essentially making the claim that a certain amount of money should be taxed the same no matter how it was made. To see whether this is fair we have to look at two people who make the same amount of money (untaxed) in different ways, and see how the proposed tax affects it. We can then look at the outcomes and see if that fits in with our definition of fair.

[
At 0% tax, these people would no longer be in the same position after 4 periods or 10 periods, and the investor would be drawing ahead exponentially - so it is no surprise that that would also happen at 50% tax.

But suppose we adjusted the returns on investment so that the person who works for 1 period and invests for 3 in the 0% scenario has earned exactly the same amount after 4 periods as the person working each period to earn the money. If we tax income at 50%, then the "worker" ends up with half of what he had. To match this the investor who is taxed 50% of his first period's earnings still needs 0% tax on investment return to end up with half of what he had in the first scenario.

And that result is different at 2 periods or 12 periods.

The overall lesson is that there really is no tax scheme that either always achieves the desired outcomes or that is unaminously viewed as fair.

I wouldn't argue with that. But I am interested if Rhea, looking at my examples, thinks that particular proposed tax system is fair.

 

[Axulus]

If people focused on the things that they believe are undesirable and taxed those undesirable things, then I think we'd have a much more efficient and fair tax system.

Why do people dislike people holding onto a lot of wealth? If it is because they can influence the political system, then one must ask how they can influence it? Through campaign donations? If so, than tax campaign donations heavily. Though setting up PACs? If so, then tax contributions to PACs heavily. Through lobbying efforts? Then tax amounts spent on lobbying. Because they can buy things like luxury yachts, using up society's resources on frivolous things? Than implement a progressive consumption tax.

Worried about people and companies emitting carbon? Then tax it.

Holding wealth in and of itself and not spending it, making that wealth available for capital investment, not getting involved in politics, etc. seems to be a positive thing for the economy. Why worry about that?

 

[SimpleDon]

Taxes are patriotic. (Joe Biden)

If you really mean it, Max, write the congress and ask them if maybe you can help out with a little more money. Taxes are perhaps the best way to redistribute the hoarded funds of the IDLE RICH. If they wish to dominate the economic system then they need to keep it running...hiring enough, building enough, producing enough and seeing to it the help can pay for the shit you make. An economy is a sub system in nature. It is society's method of coping with the physical reality in which it exists. The money grubbers and the money snatchers do things that tend to interfere with proper distribution of goods...including money.

Yes, taxes have many impacts on the economy. Redistributing the gains from the economy is one of them. Capitalism favors capitalists, surprise, when it distributes the gains from the economy. Taxes are a way of preventing the ever increasing accumulation of financial capital by the capitalists, far in excess of what the economy requires for investment in production facilities, and can redistribute them to others.

But taxation is not really the best way to accomplish a distribution of gains and resources that is more beneficial to the econony than you get by relying on what capitalism gives you. The best way is too restore more of a balance to the capital verses labor balance in the economy. Practically this means that we should do things to raise wages, the primary source of demand in the economy, and thereby reduce profits, the supply side of the balance.

We would do this by restoring some of the bargaining power of labor. The best way to do this is by reaching full employment, to use full employment as the measure of a successful economy, not a high stock market or low inflation.

Also we could restore some of the support for unions that we withdrew in the 1980's. The labor market is not by itself a fair market. But even this is not the best way to increase wages. It involves too much friction between labor and management in individual companies. Labor and management should work together, their interests in the success of the individual company is a shared one, it is much better if they cooperate rather than they fight one another.

The best solution is what is called sector wage negotiations where wages are negotiated to be the same for all of the workers in a certain job for all of the companies in a certain industrial sector. All of the assembly line workers in the automobile industry would have the same (minimum) wage. (Individual companies can pay more, they can't pay less.) It is not necessary or desirable to have to negotiate every wage for every type of job. Most categories piggy back on to the negotiated wages, a foreman or an operator might earn a wage set at 20% more than an assembly line worker earns. The janitor might earn 20% less. And so on through the factory.

The sector wide negotiations are between industry wide entities, associations of the automobile manufacturers and the national unions for example, moderated by the government as a neutral, although they can interject broader concerns, that is what is best for the nation, trade competitiveness for example.

 

[Loren Pechtel]

I believe that ALL INCOME whether earned by labor, by investment, by financial dealings or by inheritance, ALL INCOME should be taxed. And it should be taxed progressively such that the more you make, the harder it is to make it. Not by a lot, just by a little. Because if ALL INCOME, no matter how you get it, is taxed as income, then the civilization we build will be a stable one.

There is no "way of earning" that is somehow more honorable and hence less taxable than others. The data is unambiguous that tax breaks for non-labor income does not result in advantages for the overall economy. It gets hoarded. Let's stop encouraging that and just make it neutral. Not a flat tax, because that harms the economy, too. A progressive tax that only taxes that which is above subsistence, and increases the further you get from subsistence.

1) Your argument doesn't apply to inheritance as it's not income. It's money that was already taxed when it was earned.

2) There's a good reason for taxing capital gains lower than regular income--you have inflation losses. I would be happy with taxing capital gains as regular income if they were indexed for inflation.

 

[laughing dog]

1) Your argument doesn't apply to inheritance as it's not income. It's money that was already taxed when it was earned.

Wealth is potential income and it is certainly a form of income to the recipients.

 

[Axulus]

1) Your argument doesn't apply to inheritance as it's not income. It's money that was already taxed when it was earned.

Wealth is potential income and it is certainly a form of income to the recipients.

Yes, but why do we care if person A goes on a fancy vacation or person A gives money to person B so that person B can go on a fancy vacation? Why should scenario 2 be taxed more heavily than scenario 1?

 

[Alcoholic Actuary]

If people focused on the things that they believe are undesirable and taxed those undesirable things, then I think we'd have a much more efficient and fair tax system.

Why do people dislike people holding onto a lot of wealth? If it is because they can influence the political system, then one must ask how they can influence it? Through campaign donations? If so, than tax campaign donations heavily. Though setting up PACs? If so, then tax contributions to PACs heavily. Through lobbying efforts? Then tax amounts spent on lobbying. Because they can buy things like luxury yachts, using up society's resources on frivolous things? Than implement a progressive consumption tax.

Worried about people and companies emitting carbon? Then tax it.

Holding wealth in and of itself and not spending it, making that wealth available for capital investment, not getting involved in politics, etc. seems to be a positive thing for the economy. Why worry about that?

But taxing only those things we want to discourage is somewhat self-defeating. If our tax revenue base is generated primarily through taxes on cigarettes, what happens when everyone stops smoking? We need to have a relatively stable tax base that closely mirrors the general health of the economy while simultaneously remaining insulated from the variable whims of society. Income meets all of these criteria.

aa

 

[Axulus]

If people focused on the things that they believe are undesirable and taxed those undesirable things, then I think we'd have a much more efficient and fair tax system.

Why do people dislike people holding onto a lot of wealth? If it is because they can influence the political system, then one must ask how they can influence it? Through campaign donations? If so, than tax campaign donations heavily. Though setting up PACs? If so, then tax contributions to PACs heavily. Through lobbying efforts? Then tax amounts spent on lobbying. Because they can buy things like luxury yachts, using up society's resources on frivolous things? Than implement a progressive consumption tax.

Worried about people and companies emitting carbon? Then tax it.

Holding wealth in and of itself and not spending it, making that wealth available for capital investment, not getting involved in politics, etc. seems to be a positive thing for the economy. Why worry about that?

But taxing only those things we want to discourage is somewhat self-defeating. If our tax revenue base is generated primarily through taxes on cigarettes, what happens when everyone stops smoking? We need to have a relatively stable tax base that closely mirrors the general health of the economy while simultaneously remaining insulated from the variable whims of society. Income meets all of these criteria.

aa

If taxing the undesirable things is insufficient to raise enough revenue, then and only then do you begin to tax desirable activities, and you pick the least desirable among those activities.

Regardless, in so far as consumption is undesirable or less desirable than investment and labor (which produce things), you can tax it heavily enough and in a progressive manner to raise all the revenue you need.

 

[arkirk]

But taxing only those things we want to discourage is somewhat self-defeating. If our tax revenue base is generated primarily through taxes on cigarettes, what happens when everyone stops smoking? We need to have a relatively stable tax base that closely mirrors the general health of the economy while simultaneously remaining insulated from the variable whims of society. Income meets all of these criteria.

aa

If taxing the undesirable things is insufficient to raise enough revenue, then and only then do you begin to tax desirable activities, and you pick the least desirable among those activities.

Regardless, in so far as consumption is undesirable or less desirable than investment and labor (which produce things), you can tax it heavily enough and in a progressive manner to raise all the revenue you need.

"Undesirable things" you say...what about Wall Street Casino Winnings?

 

[Axulus]

If taxing the undesirable things is insufficient to raise enough revenue, then and only then do you begin to tax desirable activities, and you pick the least desirable among those activities.

Regardless, in so far as consumption is undesirable or less desirable than investment and labor (which produce things), you can tax it heavily enough and in a progressive manner to raise all the revenue you need.

"Undesirable things" you say...what about Wall Street Casino Winnings?

How is someone having "Wall Street Casino Winnings" harmful or undesirable? Do you make any distinction among the dozens of different trading activities that take place on Wall Street, or do you take a simplistic and unsophisticated approach and treat them all as one and the same? Why or why not?

 

[laughing dog]

Wealth is potential income and it is certainly a form of income to the recipients.

Yes, but why do we care if person A goes on a fancy vacation or person A gives money to person B so that person B can go on a fancy vacation? Why should scenario 2 be taxed more heavily than scenario 1?

Because if you are taxing income, you tax income. If you are specifically referencing inheritance taxes, inheritance taxes can have multiple rationales. For example, taxing inheritances heavily reduces the transfer of potential political power.

 

[arkirk]

"Undesirable things" you say...what about Wall Street Casino Winnings?

How is someone having "Wall Street Casino Winnings" harmful or undesirable? Do you make any distinction among the dozens of different trading activities that take place on Wall Street, or do you take a simplistic and unsophisticated approach and treat them all as one and the same? Why or why not?

You think I have a hardon for a guy that invests in a productive business of some kind and makes a reasonable profit from it? Not so! About 12% of investments overall in the U.S. are related to production of actual goods and services. What I am pointing to are the "creative" investment products this sick market is flooded with that are merely speculation in money. This speculative money has as one its identifiable characteristics that it is not actually being put to good use, but rather being gambled. You know this money is there and most of it is a long way from either you or me. It is the bulk of the money the 1% own. This money is their option to use and intercede in any activity they wish creating for those who work for a living an environment that is arbitrarily controlled from the outside.

It is this speculative money that needs to be taxed at about 90%. Doing so would cause nobody to starve or suffer and put this improperly sequestered capital to work for what our society may need...

 

[Axulus]

Yes, but why do we care if person A goes on a fancy vacation or person A gives money to person B so that person B can go on a fancy vacation? Why should scenario 2 be taxed more heavily than scenario 1?

Because if you are taxing income, you tax income. If you are specifically referencing inheritance taxes, inheritance taxes can have multiple rationales. For example, taxing inheritances heavily reduces the transfer of potential political power.

But if a gift is to be treated as income by the giftee, then wouldn't the giftor have a reduction in income and thus have less income to report and have taxed?

Why not tax the exercise of that political power instead if that is what is undesirable? Why should those who have no desire to exercise any political power be taxed just as heavily as those who make every effort to use their wealth to maximize their political power?

 

[arkirk]

Because if you are taxing income, you tax income. If you are specifically referencing inheritance taxes, inheritance taxes can have multiple rationales. For example, taxing inheritances heavily reduces the transfer of potential political power.

But if a gift is to be treated as income by the giftee, then wouldn't the giftor have a reduction in income and thus have less income to report and have taxed?

Why not tax the exercise of that political power instead if that is what is undesirable? Why should those who have no desire to exercise any political power be taxed just as heavily as those who make every effort to use their wealth to maximize their political power?

So you think it is the payola in Wahington that should be taxed. Political contribution and sponsorship ala the Koch Bros., Goldman and the like pay back many multiples of the actual cost of buying a political office. My sense on this matter would be that it would not sufficiently tax these people if we only taxed their buying of political favor. Also, the favor they buy is TO NOT BE TAXED OR OTHERWISE INTERFERED WITH. You need to tax their PRIMARY OPERATION.

 

[Jimmy Higgins]

Taxes -> The new red herring?

The US currently spends roughly 14.5 boatloads more than it receives in taxes. A quick retort is, "Just cut spending." And that is usually said with a straight face. No seriously. They say "We need to have smaller government." Still... with a straight face.

Taxes are required to pay for the stuff the Congress/President says needs to be paid for through legislation (and the signing of the legislation). Should taxes be higher for the rich? Should the Middle Class™ pay less in taxes?

We aren't paying enough in taxes. We haven't paid enough in taxes in what, half a century? Spending won't be cut dramatically. That would require a massive cut back on the military, Medicare, or Social Security... today. Not 30 years from now. And if we recognize that Foreign Aid, earmarks, EPA all represent minor parts of the budget, we can move on from the whimsically ignorant idea that cutting discretionary spending (short of just eliminating it) will save our fiscal butts.

So that takes us to the point. We aren't paying enough in taxes and haven't been for several decades. Unless we substantially cut spending (not going to happen), taxes must be raised on everyone. The proportions to raise them would be subject to analysis and study to determine which would positively affect the economy verses negatively affect the economy.

 

[KeepTalking]

If people focused on the things that they believe are undesirable and taxed those undesirable things, then I think we'd have a much more efficient and fair tax system.

What? Who ever said that is the reason for taxation? The reason for taxation is for society as a whole to pay for those things that society as a whole needs in order to be a functioning society. Things like infrastructure, common defense, and law enforcement to name a few. The fair way to do this is for those who have more money, money which they were enabled to make by living in a functioning society, pay more taxes. It is not fair to expect those who are barely keeping their heads above water to shoulder most of the tax burden, while those with significant excess pay less and less as they make more and more.

Why do people dislike people holding onto a lot of wealth?

I don't dislike people holding on to wealth. That is not what it is about. The problem is, if I make $100,000 a year, and end up paying out $25,000 a year in taxes, I would expect the guy making $100,000,000 a year to pay $25,000,000 a year in taxes, but he isn't paying anywhere near that. He is maybe paying $15,000,000 a year at most, more likely paying far less.

If it is because they can influence the political system, then one must ask how they can influence it? Through campaign donations? If so, than tax campaign donations heavily. Though setting up PACs? If so, then tax contributions to PACs heavily. Through lobbying efforts? Then tax amounts spent on lobbying.

No. If it is bad for society for people to use their wealth to do these things, you make it illegal for them to do these things.

 

[Axulus]

What? Who ever said that is the reason for taxation? The reason for taxation is for society as a whole to pay for those things that society as a whole needs in order to be a functioning society. Things like infrastructure, common defense, and law enforcement to name a few. The fair way to do this is for those who have more money, money which they were enabled to make by living in a functioning society, pay more taxes. It is not fair to expect those who are barely keeping their heads above water to shoulder most of the tax burden, while those with significant excess pay less and less as they make more and more.

I never said it was the reason for taxation. However, if we must tax, we should focus on the most undesirable things first. I never said anything about whether or not we should tax those who have more income more heavily. Rather, we should focus the taxes on the most undesirable behavior of those who make the most income: consumption. It is possible to have a progressive consumption tax and therefore raise the most revenue from the biggest hogs in society accordingly.

I don't dislike people holding on to wealth. That is not what it is about. The problem is, if I make $100,000 a year, and end up paying out $25,000 a year in taxes, I would expect the guy making $100,000,000 a year to pay $25,000,000 a year in taxes, but he isn't paying anywhere near that. He is maybe paying $15,000,000 a year at most, more likely paying far less.

Except what you describe isn't holding onto wealth. What you are describing is income earned, which is different. I was specifically referring to people who save their income instead of spending it, which many posters have described as bad/undesirable.

No. If it is bad for society for people to use their wealth to do these things, you make it illegal for them to do these things.

That seems pretty totalitarian to cut off people from engaging in the political process that way. I don't think we need to go to such extremes. Especially when it potentially abridges people's freedoms.

 

[Axulus]

Taxes -> The new red herring?

The US currently spends roughly 14.5 boatloads more than it receives in taxes. A quick retort is, "Just cut spending." And that is usually said with a straight face. No seriously. They say "We need to have smaller government." Still... with a straight face.

Taxes are required to pay for the stuff the Congress/President says needs to be paid for through legislation (and the signing of the legislation). Should taxes be higher for the rich? Should the Middle Class™ pay less in taxes?

We aren't paying enough in taxes. We haven't paid enough in taxes in what, half a century? Spending won't be cut dramatically. That would require a massive cut back on the military, Medicare, or Social Security... today. Not 30 years from now. And if we recognize that Foreign Aid, earmarks, EPA all represent minor parts of the budget, we can move on from the whimsically ignorant idea that cutting discretionary spending (short of just eliminating it) will save our fiscal butts.

So that takes us to the point. We aren't paying enough in taxes and haven't been for several decades. Unless we substantially cut spending (not going to happen), taxes must be raised on everyone. The proportions to raise them would be subject to analysis and study to determine which would positively affect the economy verses negatively affect the economy.

What are you basing the "not enough collected in taxes" assessment on? A debt to GDP ratio of 60%-80% is sustainable, and we haven't gone over that range until recently. It is also starting to go back down again.

Also, why do you discount the value and ability to make significant cuts?

This module is a useful exercise that demonstrates that cuts and changes can make a significant difference (although it needs to be updated for 2015)

http://www.nytimes.com/interactive/2010/11/13/weekinreview/deficits-graphic.html?_r=0