[mycroft]

Thanks, Art. Sorry I was so flippant last time - I thought I truly was being at least reasonably clear, and got tripped up by jargon meaning of terms. It sounded, given that I didn't understand the jargon, that I was being told "it's meaningless to try to work out how much tax is actually being paid by the people who are in the top bracket, they'll never make that clear, it's fantasy to think otherwise". I wasn't. I'm sorry.

Yes, what I meant was "the top marginal tax rate is 35%. What rate is actually being paid on money in that bracket, by the group of taxpayers that are far enough above that limit that the money earned below that rate can be effectively ignored". Back in the day, they needed that rate at 90% to get 50%; so what's being paid on 35%?

I don't *really* have a problem with cheaper capital gains taxes (the argument that we want to subsidize real business growth is a good one); I do have a problem with the way things are determined to be capital gains rather than income (especially when it becomes "mandatory bonuses" or "stock options with 'guaranteed' payouts after vest" (by the board "revaluing" the options if they turn out to be valueless), or "money taken from a company is a capital gain even if the company is fatally harmed by it" - because it has nothing to do with business growth and everything to do with disguising income as capital gains. I have an issue with the fact that business buying (from the stock market up to some of the more - selfish - things that Bain Capital was doing) is so more favoured by the tax laws that money making things that get sold to make money is "a chump's game" compared to money making money.

[ArtK78]

mycroft, on 2012-December-14, 11:08, said:

Thanks, Art. Sorry I was so flippant last time - I thought I truly was being at least reasonably clear, and got tripped up by jargon meaning of terms. It sounded, given that I didn't understand the jargon, that I was being told "it's meaningless to try to work out how much tax is actually being paid by the people who are in the top bracket, they'll never make that clear, it's fantasy to think otherwise". I wasn't. I'm sorry.

Yes, what I meant was "the top marginal tax rate is 35%. What rate is actually being paid on money in that bracket, by the group of taxpayers that are far enough above that limit that the money earned below that rate can be effectively ignored". Back in the day, they needed that rate at 90% to get 50%; so what's being paid on 35%?

I don't *really* have a problem with cheaper capital gains taxes (the argument that we want to subsidize real business growth is a good one); I do have a problem with the way things are determined to be capital gains rather than income (especially when it becomes "mandatory bonuses" or "stock options with 'guaranteed' payouts after vest" (by the board "revaluing" the options if they turn out to be valueless), or "money taken from a company is a capital gain even if the company is fatally harmed by it" - because it has nothing to do with business growth and everything to do with disguising income as capital gains. I have an issue with the fact that business buying (from the stock market up to some of the more - selfish - things that Bain Capital was doing) is so more favoured by the tax laws that money making things that get sold to make money is "a chump's game" compared to money making money.

The "back in the day" comment is interesting. It is true that during WWII the top marginal tax rate reached 91%. But what is often ignored is that there was a 50% cap on compensation income (wages and salary income). So, the only income that could be taxed higher than 50% was income from investments - interest, dividends, capital gains, rental income, royalty income, etc. I cannot tell you whether capital gains had any preferential treatment back then. I do know that at one time within my memory (1960s? 1970s?) net long-term capital gains income was determined completely separately and then it was given a 60% discount before being counted as taxable income. So, if that were the case during WWII, even at a top marginal tax rate of 91%, the tax would be less than 40% of the realized capital gain.

By the way, the primary reason that capital gains is given a tax preference is not due to some public policy such as business growth or job creation (although the public policy reasons are often cited by advocates of reduced taxes on capital gains). The primary reason is that capital gains accrue over the course of a number of years, and it is deemed to be improper to tax multiple years worth of gain at the same rate as income earned within a single tax year. That is consistent with the distinction between short-term capital gains (taxed the same as any other income) and long-term capital gains (which are given a preferential tax treatment).

[barmar]

ArtK78, on 2012-December-14, 13:17, said:

By the way, the primary reason that capital gains is given a tax preference is not due to some public policy such as business growth or job creation (although the public policy reasons are often cited by advocates of reduced taxes on capital gains). The primary reason is that capital gains accrue over the course of a number of years, and it is deemed to be improper to tax multiple years worth of gain at the same rate as income earned within a single tax year. That is consistent with the distinction between short-term capital gains (taxed the same as any other income) and long-term capital gains (which are given a preferential tax treatment).

I always thought the policy goal was to discourage churn. Otherwise, what's wrong with taxing multi-year growth at the full rate? Why should the government get different tax on a $20 gain depending on whether it happened quickly or slowly?

MA used to have 5 capital gain rates, for <1-, <2-, <3-, <4-, and >4+ year holdings. What a PITA that was.

[mike777]

barmar, on 2012-December-14, 17:32, said:

I always thought the policy goal was to discourage churn. Otherwise, what's wrong with taxing multi-year growth at the full rate? Why should the government get different tax on a $20 gain depending on whether it happened quickly or slowly?

MA used to have 5 capital gain rates, for <1-, <2-, <3-, <4-, and >4+ year holdings. What a PITA that was.

Yes, the debate is do taxes affect behavior. If not ok.

If they do then what behavior do you want to encourage or discourage via tax laws.

As many posters and others point out perhaps what is more important is to use tax laws for fairness and social justice.


For example do you want to use tax laws to create a bigger social safety net or to provide incentives for risk taking?

As for the deficit in 2013 it seems economists/bbo posters dont even agree whether we should have a goal which decreases the projected 1000B deficit or to increase it.

[Mbodell]

If you want fairness, which I do, then you really need to look at wealth, not income. Unfortunately those calculations are hard, and income and wealth are correlated, so we tax income. Also the estate tax can be used as a method to tax wealth, since calculating wealth once a lifetime is more doable than each and every year.

The big money, in addition to higher rates, is in attacking the tax expenditures. These are more than one trillion dollars a year (I.e., you'd close the deficit just through eliminating these). Of course these are really popular - but due to the nature of the way they work they are generally regressive with the greatest gain going to the people with the most income (top 1% get 24% of tax expenditures, 66% go to top 20%, just 3% go to the bottom 20%). Some of the numbers include (these are 2008 numbers):

1. Exclusion of employers’ contributions for their employees’ medical insurance premiums and medical care ($131 B)
2. Net exclusion of contributions to and earnings of employer-provided and individual pension plans. These include 401(k) plans, Individual Retirement Accounts (IRAs), the savers’ credit, and Keogh plans. ($117.7 B)
3. The deductability of mortgage interest on owner-occupied homes. ($88.5 B)
4. For businesses the accelerated depreciation of certain types of machinery and equipment. ($55.9 B)
5. The deductability of nonbusiness state and local taxes other than on owner-occupied homes. ($49.1 B)
6. Deductions of charitable contributions to nonprofits. ($46.8 B)
7. For businesses the deferral of income from controlled foreign corporations. ($31.5 B)
8. Homeowners may exclude up to $250,000 ($500,000 for a couple filing jointly) of capital gains on the sale of their principal residence. ($30.0 B)
9. The deductability of state and local property tax on owner-occupied homes. ($29.1 B)
10. Taxpayers with one or more children under age 17 qualify for a partially refundable child credit of $1,000 per child. ($28.4 B)
11. The reduced tax rate on long term capital gains is the another large tax expenditure. ($24.2 B)
12. The step-up in basis of capital gains precludes assets from being taxed on any gains accrued, but not realized, at the death of the owner. ($21.5 B)

Some of the above we'd want as good policy (but there might be more efficient ways. Medicare is much more efficient than private insurance, so perhaps eliminate 1 and move people to a pure public model - and note the billions we spend above doesn't cover everyone as many with no jobs or with jobs with no health coverage don't get the benefit). But some is bad policy, like the ~$150 billion we give to encourage home ownership that helped to create the housing bubble, when in reality it is not at all clear that home ownership should be encouraged (recent research suggests we as society might be better off with more renting to help shift people geographically as jobs and other demographics suggest moves and as people change their housing needs through their lifetimes). Note also that this $150 billion a year is more than the budget of Department of Housing and Urban Development.

But regardless of if you like the policy or not, the fact that they are regressive in implementation, and once given really hard to cut (Grover Norquist wouldn't mind, and would probably cheer, if you cut the budget of HUD, but he'd scream bloody murder if anyone reduced the tax expenditures on home ownership or anything else) makes them a perverse form of spending.

[mike777]

Of course one problem with the estate tax is defining just what is an estate. Keep in mind tax lawyers can pull much of your wealth out of your "estate".


But once you state fairness is your goal, that will help define the rest of what you want to do regarding tax policy and who gets to have the power to make that policy.
It becomes more a discussion over power and less over policy.

[blackshoe]

The purpose of taxes should be solely to finance those necessary functions of government, if any, that cannot be funded in any other way. "Social justice" shouldn't enter into it, and "fairness" only insofar as everyone should pay his fair share of the necessary government revenue.

So the first question ought to be "what functions that government performs are 'necessary'?" Rand suggested there are only three: the police function, the (civil) court function, and the military function. Whether you agree with her or not, you have to admit that the more things government sticks its fingers in, the more it becomes about power and the less about "necessary functions".

[awm]

To take another tack, perhaps the goal should be to maximize economic efficiency and growth.

Perhaps fortunately, this might lead to some of the same conclusions as a more "fairness" oriented approach. Extreme wealth inequality is not good for the economy (it leaves a lot of people wanting/needing things without the money to buy them, while a small number of people have too much money to effectively spend). Children lacking good nutrition and education is bad for the economy (leads to a shortage of skilled workers and may indirectly increase crime). A large amount of government debt is not necessarily bad for the economy (short-term government spending may yield more of a boost than a balanced budget, especially when the government borrowing costs and inflation are low). Large amounts of pollution tend to be bad for the economy (for example we spend a lot of money fixing messes from hurricanes, flooding, oil leaks in the gulf, etc) and its probably better policy to tax or criminalize the externality than to pay for the cleanup.

[mike777]

If your goal is to maximize efficiency and growth then I would think you want to point tax policy towards incentives for investors to take risks with their capital.


Perhaps the biggest problem with govt spending/asset allocation decisions is the people making the decisions dont have skin in the game.

[Winstonm]

mike777, on 2012-December-15, 01:07, said:

If your goal is to maximize efficiency and growth then I would think you want to point tax policy towards incentives for investors to take risks with their capital.


Perhaps the biggest problem with govt spending/asset allocation decisions is the people making the decisions dont have skin in the game.

There is a distinct difference between tax policies that encourage business growth and blanket tax breaks. There is also no evidence to support the idea that the wealthy will do anything more than invest in treasury bonds with excess tax savings without enough demand to stir their interest in expansion.

As to the idea that the government makes poor investment decisions, I would say that claim is empty rhetoric as the government has produced such innovations as the interstate highway system, the Colorado river dam project (which created the conditions for Southern California to prosper), and Medicare (with its 3% administration costs compared to 18-20% in private health insurance).

[phil_20686]

Its hard to know what to do about the global elite. Its good macro economics to reduce capital gains to zero. In the end, saving your money rather than spending it on holidays is good for the economy. Ultimately, all savings are translated into investments, and investments make the economy more productive.

Ultimately, businesses invest when the (forecast risk adjusted) return on investment is better than the interest rate. The interest rates are set so as to match saving behaviour with investment preferences. The central bank can move interest rates a little around their natural rate to smooth consumption, but ultimately that is a second order effect. Interest rates are low because the world has a savings glut/lack of investment opportunities.

When interest rates are low, marginal technologies to replace labour become profitable, and labour share loses out to capital, which is to say, that lots of jobs are replaced by technology, as the economy channels savings into the most marginal of savings.

When you see it this way, you see that it is basically impossible for governments to counter this dynamics. Confiscating wealth amounts to capital destruction, in a very real sense, your business is funded out of someone's savings. If you tax it, and give the proceeds to the poor, they will spend it on consumption, and the result will be less investment, and lower overall productivity.

This might seem pessimistic, but in fact it is not. The key is to realise that inequality will fall with the next "technology shock". Technology shock is what happens when a new idea or product renders a large fraction of the current capital stock essentially valueless. It necessarily imposes huge losses on the current wealthy, interest rates rise to induce increases savings rate, to invest in the new technologies. Labour migrates rapidly into the new industries, the rising competition for capital (higher interest rates) means that replacing workers with technology is harder, and so labour share increases.

Predicting technology shock is a mugs game, but fwiw, my money is on automated distribution networks, ie. driverless cars, post delivered by fleets of self navigating quadrocopters.

=========================

The other thing that drives the interest rate dynamic over the long term is demographics. In a very real sense, inequality is a result of the baby boom generation + women entering the work force. The rapidly growing work force put capital investment in sufficient demand to drive double digit real interest rates, saving relatively modest amounts at those kind of rates of return, leads to extremely rapid wealth accumulation. That is why the baby boom generation has such relatively high rates of savings, and such large accumulated wealth. Similarly, when they are rapidly saving for retirement (now) they drive interest rates lower, and when the dis-save during their retirements, they will drive rates higher.

It should be obvious that a growing working age population leads to higher interest rates, but somehow many people don't seem to see it.

=========================

A lot of prominent people talk about the fed creating a boom by holding down interest rates during the long boom, and creating asset bubbles. It is important to realise that they are wrong. Interest rates fell because of declining returns to new technologies compared with the past, and because of the population dynamic, which created a perfect storm to drive real interest rates lower. The fed has no real control over the natural rate of interest, and sure, it can set interest rates, but only in a narrow band around the natural interest rate, otherwise you get either recession or inflation.

[phil_20686]

Winstonm, on 2012-December-15, 07:37, said:

I would say that claim is empty rhetoric as the government has produced such innovations as the interstate highway system, the Colorado river dam project (which created the conditions for Southern California to prosper), and Medicare (with its 3% administration costs compared to 18-20% in private health insurance).

When talking about markets its important to realise their limitations. Markets are the best invention imaginable for channelling capital based on realisable profits. The problem with infrastructure, is that the best design does not generate any profits. It instead generates huge externalities. The government `loses' a huge amount of money on the highway, it simply hopes, in a vague sense, that the externalities, including "creating the conditions for buisness to prosper" plus even more vague benefits like "citizens like visiting their extended families more easily".

The same reason that markets channel money to companies that provide the minimal levels of environmental compliance, is the same reason they will never do sensible infrastructure planning: markets do not price externalities.

Any market where the externalities are more important than the profit incentives, are a bad place for markets.

[mike777]

Winstonm, on 2012-December-15, 07:37, said:

There is a distinct difference between tax policies that encourage business growth and blanket tax breaks. There is also no evidence to support the idea that the wealthy will do anything more than invest in treasury bonds with excess tax savings without enough demand to stir their interest in expansion.

As to the idea that the government makes poor investment decisions, I would say that claim is empty rhetoric as the government has produced such innovations as the interstate highway system, the Colorado river dam project (which created the conditions for Southern California to prosper), and Medicare (with its 3% administration costs compared to 18-20% in private health insurance).

Winston I never said the government makes only poor investment decisions but please if you are going to list success stories please list the failures also. You present only one side. Lets be clear when we use the word innovation or asset allocation.

In any case yes my point is still that the biggest problem is that those making these decisions dont have skin in the game.

I certainly agree with your point about blanket tax breaks but am surprised you did not bring up issues such as "too big to fail" or agency issues and moral hazard when it comes to tax policy.

[mike777]

"This might seem pessimistic, but in fact it is not. The key is to realise that inequality will fall with the next "technology shock". Technology shock is what happens when a new idea or product renders a large fraction of the current capital stock essentially valueless. It necessarily imposes huge losses on the current wealthy, interest rates rise to induce increases savings rate, to invest in the new technologies. Labour migrates rapidly into the new industries, the rising competition for capital (higher interest rates) means that replacing workers with technology is harder, and so labour share increases.

Predicting technology shock is a mugs game, but fwiw, my money is on automated distribution networks, ie. driverless cars, post delivered by fleets of self navigating quadrocopters."


Thus it is a crucial competitive advantage to encourage risk taking. To be open and embrace uncertainty and volatility.

If your money is on it, you got skin in the game. It means something to put your money on your predictions.

[y66]

Quote

anyone who invokes ONE TRILLION DOLLARS to make a point about the budget has no idea what he’s talking about.

[kenberg]

Those on the right tell us that we can cut taxes because the improvement in the economy will take care of teh deficit. Now from the left we hear that a one trillion dollar deficit is really no big deal.

I guess those of us who are concerned about a trillion dollar deficit just need to get with the program. Oh wait, were we not all told a while back that having a large number of people taking out no down payment adjustable rate mortgages on houses that they couldn't afford was no cause for concern?

[mike777]

The goodnews is in 2013 we have another projected 1 trillion deficit. 70% of it borrowed from Federal reserve bank and from "wealthy will do anything more than invest in treasury bonds with excess tax savings"


The bad news is this may be too small of a deficit for 2013.


"...If you ask me, it’s time for Washington to stop worrying about this phantom menace — and to stop listening to the people who have been peddling this scare story in an attempt to get their way"

http://www.nytimes.c...yt&emc=rss&_r=0

[kenberg]

As we know, the population of the U.S. is about one-third of a billion. One trillion is one thousand billion. So a deficit of one trillion comes to about $3000 per person, man, woman and child. That's 3000 this year, 3000 next year, and so on. It's really hard for me to see how this is sustainable.

Ever since the economy began its meager recovery I have been hearing that one reason it is meager is because people are scared and not spending their money. By "not spending their money" analysts do not mean "not spending their savings", they mean "not using their plastic to go back into debt". The level of credit card debt in the U.S. is coming down. This is, apparently, a Bad Thing.

It would be really, really nice if someone had a viable economic recovery plan that did not require either that people spend money that they don't have or the government spend money that it doesn't have.


I am not an economist. I am aware of my many shortcomings, and surely this is one of them. But a while back the high schools introduced a course in financial management. I considered suggesting a course outline:

Day one: Don't spend money you don't have. Class dismissed.
Day two: Review the material from day one.
etc.

[awm]

phil_20686, on 2012-December-15, 07:58, said:

Its hard to know what to do about the global elite. Its good macro economics to reduce capital gains to zero. In the end, saving your money rather than spending it on holidays is good for the economy. Ultimately, all savings are translated into investments, and investments make the economy more productive.

Not only do I disagree with this statement, but it seems to contradict itself. The following points can be made:

(1) If ultimately all savings are translated into investments (regardless of the capital gains rate) then how is it good macro economics to reduce capital gains rates to zero? Reducing capital gains rate cannot increase investment if all savings are investments regardless?

(2) There is no actual evidence in the historical record that reducing capital gains rates helps the economy. Virtually all the most prosperous times in US history were when the capital gains rate was significantly higher than it is now.

(3) In fact there are other arguments against reducing capital gains rate. Currently a great deal of effort is put forward to "convert" wages into capital gains, often using accounting tricks (like carried interest). This effort doesn't help the economy, but it does help very wealthy people reduce their taxes. Much of what goes on in investing is a zero-sum game, where one investor "wins" and another "loses" and the companies they are investing in see little to no effect. Because of inflation and a generally growing economy there are more "winners" than "losers" so it's better than the casino in that sense but I don't see this really driving economic growth. In fact we have "lost" a great number of smart and talented individuals to the financial sector, where they are doing things that do not help our economy (and arguably some that hurt, like the type of thing Bain Capital does shutting down profitable businesses), because it's easier to make more money and pay lower taxes in this sector. If I'm a business owner I may well have a choice to operate my business (receiving business profits taxed as wages) or liquidate my business (receiving a one-time big capital gain) and the lower capital gains taxes are relative to wage taxes the more likely I am to do this... to the detriment of my employees and quite possibly the local economy in general.

(4) The claim that it is "better for labor" if capital gains rates are low is highly dubious. Right now capital gains are sucking up a higher percentage of corporate profits and labor is getting a lower percentage. Would reducing taxes on capital gains (so they are more appealing) help this? Suppose the government is going to spend $1B to employ more people; how could it be more efficient to spend this money reducing taxes for investors (who don't work for a living and are already well off) than to spend this money directly employing people? Sure, maybe the investor will invest the money rather than stashing it under a mattress, and maybe that investment will be the type that creates jobs at a reasonable rate rather than just playing the "wall street poker game" against other zillionaires, and maybe those jobs will be created in this country instead of somewhere else... but surely it is more efficient to just create jobs directly?

(5) In fact technology is often a driver of increasing wealth inequality. Many formerly important jobs are no longer necessary. We need far fewer people working assembly lines because of robotics, we need far fewer paralegals because of expert systems, we will need far fewer taxi drivers if self-driving cars become safer and more popular. This allows the revenues from the assembly lines to be returned to ownership or investors rather than working people, the revenues from the law firm to go to the partners, etc; in other words the already-wealthy get a greater share of the pie and the working poor may find themselves the no-longer-working poor. Hoping that developing technology will solve the problem by itself is futile. And wealth inequality is a problem, because while technology may not create jobs, what it does is to replace lower-skilled and less-productive jobs (taxi driver) with higher-skilled and more-productive jobs (self-driving car programmer); arguably there are fewer of these new jobs but they exist and we need to have the people to fill them. The high degree of wealth inequality means a high percentage of the population cannot afford the sort of educational opportunities that would qualify them for the high-skill jobs; despite the genuinely horrible employment conditions many high-tech companies (mine included) are desperate for highly qualified employees!

[onoway]

kenberg, on 2012-December-15, 10:27, said:

Ever since the economy began its meager recovery I have been hearing that one reason it is meager is because people are scared and not spending their money. By "not spending their money" analysts do not mean "not spending their savings", they mean "not using their plastic to go back into debt". The level of credit card debt in the U.S. is coming down. This is, apparently, a Bad Thing.

It would be really, really nice if someone had a viable economic recovery plan that did not require either that people spend money that they don't have or the government spend money that it doesn't have.

We have just had several banks and credit unions downgraded by Standard & Poor apparently because Canadians are suddenly found to be carrying too much credit card debt, and it supposedly needs to come down. So it would appear that the money people, whoever they are, are working it both ways. Seems a little like a shell game from here.