[awm]

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

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.

Raise the minimum wage. Require paid vacation and maternity leave. Eliminate direct government subsidies to businesses and most corporate tax breaks, using the savings to create a new business tax break which pays directly per (US resident, full time) employee. Fund a significant effort to modernize infrastructure (both physical and electronic) and unify/computerize record-keeping (both government and private) using public/private partnership where possible and direct government spending where not, expecting a short-term cost and jobs boost accompanied by longer-term savings from efficiency. End the transfer of government funds to private for-profit educational institutions (i.e. no Pell Grants for students at these places, no government money to for-profit charter schools, etc); profit motive in education often leads to scams and poor outcomes and producing a highly-educated workforce is essential to our future. Use the savings to improve education primarily in low-income communities (hazard pay for experienced teachers in these communities, money to improve school infrastructure, provide food for students, keep the school open after-hours for tutoring and extra-curricular activities, etc). Gradually expand Medicare and allow it to negotiate directly to reduce drug costs. Reduce military spending, especially focusing on Cold War-era activities (nuclear missiles, submarines, bases in Europe, etc) and use the money to improve infrastructure and hire/train more internal police/security forces; the latter jobs replace the military jobs lost (and often for the same people, as similar training will be valuable) while improving quality of life for the employees (they get to serve in the US and in a lower-risk occupation) and actually improving our security (since most threats are crime/terrorism and not global thermonuclear war).

All of these have the potential to create immediate jobs, redistribute wealth to working people, and improve our country's long-term prospects... for effectively no cost to the government. Businesses will see some immediate hit to their (currently record-high) profits from the first two items, but the resulting increase in demand (more people have more money) should compensate them shortly.

A few more: Make it easier for trained, employable immigrants to come to the US and stay here (pass the dream act, etc). Stop spending money enforcing immigration laws against productive members of society and use the savings to improve border patrols and enforcement of business-related laws (like minimum wage). Reduce spending on the counter-productive drug war (especially marijuana-related offenses) and use the money to better enforce corporate fraud/espionage laws (a more economically-dangerous offense where lucrative fines can often be enforced). Increase spending for the IRS (enforcing existing tax law is not raising taxes, and IRS funding pays off something like 10:1 by catching tax cheats and making them pay up).

[ArtK78]

mike777, on 2012-December-14, 22:36, said:

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".

Mike, with all due respect, do you have any idea what you are talking about?

I am a tax lawyer and I specialize in estate planning. Trust me, the definition of "what is an estate," as you put it, is quite clear.

As for tax lawyers being able to "pull much of your wealth out of your 'estate,'" I assume that you mean we can reduce your taxable estate through proper estate planning. Yes, that we can do, but it is not without its costs.

[blackshoe]

awm, on 2012-December-15, 10:37, said:

(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.

Perhaps the increased capital gains rate during prosperous times is because the government sees all those increasing capital gains during prosperous times as a source of revenue. Put it this way: when government sees somebody prospering, government want a piece of the action. Which they get by taking it (i.e., by raising the capital gains tax rate).

[phil_20686]

awm, on 2012-December-15, 10:37, said:

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?

The savings rate is not constant. It is upward sloping with interest rates: people save more when interest rates are higher. Of course, there are also many other dynamics, but the point is that reducing capital gains tax improves the risk adjusted returns on investments, so it increases demand for capital, which increases interest rates, and encourages more savings.

awm, on 2012-December-15, 10:37, said:

(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.

In something as complicated as an economy, you can get direct historical evidence for only the clearest of signals. At the end of the day, we will probably never have empirical evidence. Also, its clear that capital gains clearly has a bigger effect on risk adjusted returns at low interest rates than at high interest rates. So its a bigger issue now than in 1970.

awm, on 2012-December-15, 10:37, said:

(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.

Higher equity prices make it cheaper for companies to raise capital, either by issuing shares, or because a larger equity buffer lowers the risk premium on bond issues. Shutting down profitable businesses can often be best, if you have more productive ways to deploy that capital.

awm, on 2012-December-15, 10:37, said:

(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?

Lower capital gains would certainly lower labour share. I think I made this point? However, it will also improve productivity and lower prices. Wages have been falling for decades, yet its incontrovertible that we are better off than ever before despite this, as prices have generally fallen further.

awm, on 2012-December-15, 10:37, said:

(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!

I already said this? There is a difference between developing technology, and technology shocks. Slow technology development generally helps the owners of capital. Technology shocks hurt them. Think of the aristocrats during industrialisation. They were the old owners of capital (the land) but industrialisation made the land virtually worthless, suddenly more wealth could be created on very small plots through industrialisation. Factories were the new capital, the holders of the old capital mostly lost out. This is the story of the world, you get long periods of slowly increasing inequality, followed by a sea change in the economy, which destroys the old capital, and leads to a sharp fall in inequality. This is why falling gini coefficients are linked to strong economic growth, its just that its the strong growth which lowers the gini, not the other way around.

I generally agree that more education would be better, but my experience at university is that very few students actually benefit from being at university. Its mostly just signalling.

I think that wealth inequality is something we have to live with. I don't see any genuinely reasonable solutions. I think wealth inequality will continue to rise for as long as interest rates continue to fall.

For example, it is self evidently true that that a wealth tax will lower wealth inequality, but in most plausible models it does so by liquidating assets and turning it into consumption. However, by liquidating investments you must be reducing overall production, and you cannot buy more than the total production, so the increased spending just leads to inflation.

Of course, this might not be true, there might instead be foreign buyers happy to come in, and so investment is not lowered in the US, it is just lowered in other countries instead, which is not an ideal situation. Now you might argue, perhaps correctly, that moving this money means the economy changes to produce more of the stuff that poor people want, and fewer luxuries for the uber rich, but I don't really believe this will happen.

Striving for inequality of consumption is clearly a better goal than wealth inequality. To a large extent it is even achievable:
Focusing on wealth inequality is the wrong goal imo.

[phil_20686]

awm, on 2012-December-15, 11:23, said:

(stuff)

You forgot the main one: stop appointing idiots to the fed board.... NGDP level targeting would have made this crash much less severe the world over. Anyone who things fiscal policy is the right action is just saying that the Fed didn't do its job of stabilising demand. Clearly, the fed can just print money and buy whatever the government was going to buy, so printing money is equivalent to fiscal policy.

It has a much smaller downside though. Osborne in the UK seems to understand this, its why they have appointed the `rock star' of central banking to head the BOE, and he has already said that he things the case for NGDP targeting is strong in the current climate. Osborne as also said he would be happy for the treasury to drop its inflation target infavour of "more pro-growth policies".

NGDP targeting: coming to a central bank near you....

[VMars]

awm, on 2012-December-15, 11:23, said:

A few more: Make it easier for trained, employable immigrants to come to the US and stay here (pass the dream act, etc).

Go further than the Dream Act, which not only affects people that were brought here as children, it also caps it at 30. I don't see why it needs to be capped at all.

[awm]

blackshoe, on 2012-December-15, 12:42, said:

Perhaps the increased capital gains rate during prosperous times is because the government sees all those increasing capital gains during prosperous times as a source of revenue. Put it this way: when government sees somebody prospering, government want a piece of the action. Which they get by taking it (i.e., by raising the capital gains tax rate).

I don't think history actually supports this. Most times when capital gains rates have gone up, rates on wages go up also (and similarly when rates go down) so it's usually not an attempt to redistribute wealth. Further, as inequality has increased the lobbying/political power of the super-wealthy has also increased and capital gains rates have gone down (when your theory might imply they should go up).

[awm]

Without summarizing everything Phil said, I will just repeat the following point.

We have some set of smart, educated, motivated people in this country. These people would like to make a lot of money and be generally successful. Our government policies should be such that we encourage them to do so, but also such that the manner in which these people succeed is good for the country as a whole.

Our current system with very low capital gains rates and higher taxes on wages, combined with high levels of deregulation in some industries and significant near-monopolies creating high cost-of-entry in other industries does a poor job of this, and moving further in this direction will make it worse.

To be more clear, a lot of these smart, educated, motivated people currently gravitate towards the financial sector and the legal profession. These professions allow you to make money primarily by screwing over other people. Gains made in this way are taxed at very low rates (capital gains) and losses are often backed up by the government (either directly through bailouts or indirectly through the cover of corporate bankruptcy and liability laws). Even violations of law in these sectors are often not punished (no one went to jail for the 2008 crash despite many actions of questionable legality by big financial firms).

The alternative path of starting a business that actually makes some innovative product is much riskier. Profits won will be taxed at the higher "wage" rate. Big multinational companies will try to push you out of business, or if that fails will simply offer you money (capital gains again!) to sell out your business and retire (and your innovative product may well be shut down using the patent laws rather than put into production by the big corporation). You will spend a lot of time in court over patent rights too. You can see why the investment sector is appealing.

Yet from the economic standpoint, we would much rather have these smart and hard-working people succeed through innovating and starting new businesses than have them succeed by designing new high-speed trading schemes or hostile takeovers that suck the money out of the retirement accounts of less savvy investors and into their own. The former creates economic growth, the latter just redistributes wealth upward.

And the supply of smart, educated, motivated people isn't static either... dealing with poverty and health and education in a better way will increase our supply of these people!

[mike777]

I am a tax lawyer and I specialize in estate planning. Trust me, the definition of "what is an estate," as you put it, is quite clear.

As for tax lawyers being able to "pull much of your wealth out of your 'estate,'" I assume that you mean we can reduce your taxable estate through proper estate planning. Yes, that we can do, but it is not without its costs
---------------

Actually I do know quite a bit about estate planning and trust me the definition of a taxable estate changes all the time over the decades. I am a Certified Financial Planner and have the Chartered Financial Analyst Charter(CFA) along with an MBA in finance. I went to law school, long ago, but dont practice as a tax lawyer or any type of lawyer but my family has several well known ones.

and of course estate planning has costs, I agree with you there.

Given you are a tax lawyer and specialize in estate planning I can understand why you would be in favor of a wealth tax.

-------------


But back to really my main point if taxes do not affect risk taking, ok.

The theory being that risk taking, risk taking with your own money, time, human capital is the only road to sustainable GDP growth.

[mike777]

"...Yet from the economic standpoint, we would much rather have these smart and hard-working people succeed through innovating and starting new businesses than have them succeed by designing new high-speed trading schemes or hostile takeovers that suck the money out of the retirement accounts of less savvy investors and into their own. The former creates economic growth, the latter just redistributes wealth upward.."

"...To be more clear, a lot of these smart, educated, motivated people currently gravitate towards the financial sector and the legal profession. These professions allow you to make money primarily by screwing over other people. Gains made in this way are taxed at very low rates (capital gains) and losses are often backed up by the government (either directly through bailouts or indirectly through the cover of corporate bankruptcy and liability laws). Even violations of law in these sectors are often not punished (no one went to jail for the 2008 crash despite many actions of questionable legality by big financial firms..."


Sad commentary to divide the world into 2 camps, suckers and those who focus on the payoff but there is much wisdom in your comment.

[mike777]

"And the supply of smart, educated, motivated people isn't static either... dealing with poverty and health and education in a better way will increase our supply of these people! "

Another good point but when does govt spending, the govt making these spending decisions, on these issues become counter productive or is there no limit?

The concern is at some point the goverment is not dealing with poverty, health and education in a "better way" that increases the supply of these people but in fact harms the supply.

But I do strongly agree with you if goverment people are better at these decisions it makes sense.

[phil_20686]

Also, it seems to us that finance is not a very productive way to spend ones life, as it does not particularly add to our well being. However, we live in a world where 4/5 of it does not enjoy the wealth of western nations, and one of teh primary reasons for this is that they lack capital. One of the key drivers of growth is directing capital to bring these far flung corners of the world into line with at least middle income territory. For example, indonesia is a country of 200 million people, and its stock market has grown by 450% in the last decade. Capital is being directed there as it transitions into a reasonably stable democracy. They are making the same transition that Japan, China, south Korea and others made with the help of western finance.

Without capital markets to direct money and technical know-how, it would have been almost impossible for these countries to make the transition.

[blackshoe]

awm, on 2012-December-15, 13:50, said:

I don't think history actually supports this. Most times when capital gains rates have gone up, rates on wages go up also (and similarly when rates go down) so it's usually not an attempt to redistribute wealth. Further, as inequality has increased the lobbying/political power of the super-wealthy has also increased and capital gains rates have gone down (when your theory might imply they should go up).

I didn't say it was an attempt to redistribute wealth - at least not in the normal sense of "take from rich, give to the poor". More in the sense of "take from the rich, and spend it on whatever gives us more political power". And I was responding to the assertion that capital gains rates go up in prosperous times. If you're saying they go down, even in prosperous times, when "inequality" increases, well, okay, if you say so, but I wasn't addressing that. I will say that government (or politicians') greed isn't the only factor in operation.

[y66]

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

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.

Who said this?

Quote

Over the long run we have to have fiscal responsibility. In good times you want to run surpluses. In bad times you want to run deficits. These are bad times.

a) kenberg
b) Joseph Stiglitz
c) Paul Krugman
d) John Maynard Keynes
e) passedout
f) Bill Clinton
g) hrothgar
h) awm
i) all of the above

[kenberg]

Krugman, I imagine, but I probably agree with him so it could have been ken berg

Probably this comment gets widespread agreement. The linked column had a "What, me worry" quality to it however

[hrothgar]

y66, on 2012-December-16, 09:52, said:

Who said this?


a) kenberg
b) Joseph Stiglitz
c) Paul Krugman
d) John Maynard Keynes
e) passedout
f) Bill Clinton
g) hrothgar
h) awm
i) all of the above

Sounds like me...
I certainly agree with it

[blackshoe]

IMO running deficits in bad times is fine - but when the good times roll, it's time to pay down the debt.

[kenberg]

I would put it as:

Running a deficit is one thing
Running a trillion dollar deficit is another thing
Running a trillion dollar deficit this year, last year and next year and.. is still another thing.

I learned to swim when I was eleven and shortly after that some friends and i came across a somewhat swampy lake while out exploring. I was new at swimming but it was a small lake. We decided to swim across and walk back around the edge. I made it across. The other side was a mass of muck and slime and the plan to walk along the edge had to be scrapped. Oops. Oops. I am getting this same oops feeling about the debt.


PS I made it back. Backstroking takes a long time but it it can be a lifesaver for a novice swimmer. I'm looking for a backstroke out of the debt problem. Adam had some good suggestions.

[ArtK78]

Everett Dirksen was reputed to have said "A billion here, a billion there, pretty soon, you're talking real money." Perhaps we should revise his quote by replacing billion with trillion.

[blackshoe]

kenberg, on 2012-December-16, 17:54, said:

PS I made it back. Backstroking takes a long time but it it can be a lifesaver for a novice swimmer. I'm looking for a backstroke out of the debt problem. Adam had some good suggestions.

Sidestroke is easier.