Thursday, September 28, 2017

Tax Reform

I read with interest the Unified Framework for Fixing our Broken Tax code. The bottom line is a cut in the corporate tax rate to about 20%, roughly the world average. It also proposes an end to the estate and gift tax.These are small steps in the right direction. It's not a once-in-a-generation clean-out-all-the-junk tax reform.

As an economist I am most saddened by what is missing. Tax reform, designed to support long term growth, should have two main characteristics:

1) Lower marginal rates, by broadening the base. This reduces the disincentives to work, save, invest, start businesses, while raising the same revenue.

2) Simplicity, stability, transparency, and consequent evident fairness. (By fairness I mean each of us knows the others are paying taxes too, and do not suspect that lobbying, political connections, and clever tax lawyers are getting others off the hook.)

These two are essentially missing from the document. The left has seen the tax code pretty much entirely as a vehicle for subsidy and redistribution for a long time. This Republican document, sadly seems to have bought that view.  The goal is to
"put more money into the pockets of everyday hardworking people."
Well, without changing government spending, that means less money in someone else's pocket.



I searched for the word "incentive." Here are its occurrences:
"Ending incentives to ship jobs, capital, and tax revenue overseas. ..puts an end to the incentives for shipping jobs overseas...It ends the perverse incentive to keep foreign profits off shore" 
"retains tax incentives for home mortgage interest and charitable contributions"
"the framework explicitly preserves ... tax incentives [for]: research and development (R&D) and low-income housing." 
Fixing profit repatriation and the incentive to move your business overseas is a good idea, though don't count on it to unleash a wave of investment in the US. I have no idea how it affects "jobs." The second two are the opposite of tax reform. "Marginal" appears once,
Domestic manufacturers will see the lowest marginal rates in almost 80 years. 
To be fair, it does say
"Broadening the tax base and providing greater fairness for all Americans by closing special interest tax breaks and loopholes. "
But it does not say which tax breaks and loopholes, other than to say that mortgage interest, charitable deductions,  and low income housing are off the table. (With the failure to so much as move Medicaid to a block grant, I don't have much hope for the other big one, the tax deductibility of employer-provided group health insurance.) With the chance of any substantial deduction-financed rate lowering off the table, that's an invitation for everyone to get in touch with their lawyer and lobbyist.

To be fair, it does say
   simplicity of “postcard” tax  ling for the vast majority of Americans.
But this simplicity comes largely by exempting a swath of voters from any obligation to pay Federal taxes:
the framework simplifies the tax code and provides tax relief by roughly doubling the standard deduction to: $24,000 for married taxpayers filing jointly, and $12,000 for single filers.
The tax code itself gets no real simplification, transparency, or stability. 

Ronald Reagan himself understood that corporations pay no taxes. All taxes apparently paid by corporations come from higher prices, lower wages, or lower payments to shareholders. The right corporate tax is zero. Tax people. This document offers  
Tax relief for businesses, especially small businesses.
In sum, it pretty much abandons the idea of tax reform, designed to improve "supply side" growth, appropriate for an economy at full employment, in favor of tax cuts, at best a short-run Keynesian stimulator in appropriate for the moment; and it accepts the notion that the basic function of the tax code is to transfer money to or from various groups.

Its reception is therefore predictable. 

Binyamin Appelbaum, writing "News Analysis" in the New York Times, not the opinion pages, is titled well, "Trump Tax Plan Benefits Wealthy, Including Trump." It starts
The tax plan that the Trump administration outlined on Wednesday is a potentially huge windfall for the wealthiest Americans. It would not directly benefit the bottom third of the population. As for the middle class, the benefits appear to be modest. 
Well, sell a tax plan by its income transfer features, with Democrats who think entirely that way, and no surprise, "tax cut for the wealthy" is all you will hear.
The administration and its congressional allies are proposing to sharply reduce taxation of business income, primarily benefiting the small share of the population that owns the vast majority of corporate equity.
Even the corporate tax is evaluated not by its incentives, but by presumptions about its distributional effect. It's wrong -- only a small share of the population holds stocks directly, but every American who has a pension fund, including government employees, is invested in the market.
President Trump said on Wednesday that the cuts would increase investment and spur growth, creating broader prosperity. But experts say the upside is limited, not least because the economy is already expanding.
Well,  sell a tax reform as a "tax cut," whose economic effects come from who gets "money in their pocket" rather than by incentives, and no surprise people evaluate it as a Keynesian tax cut.

I don't dream that the Times and Democratic Party would say anything about a Republican tax plan other than "tax cut for the rich" or think of economic effects in incentive and growth terms rather than Keynesian terms. But one could at least give them an argument to disagree with!

The times Editorial revealed full-on Trump derangement conspiracy theorizing is alive and well. They are happy to speculate in print that the Treasury Secretary, the leaders of the House and Senate, and a little battallion of policy wonks are hard at work on a tax reform proposal all for the purpose of... lowering President Trump's personal taxes.

I found the WSJ editorial a more useful, and balanced summery of the small but definite promise, and the many dangers.

So yes, if this went through, it could be a good step in the right direction. It could show Congress can do something, and could pave the way for a real tax reform. Just as changing Medicare to block grants would have been a good small step in the right direction. I'm consequently not holding my breath.

But I am still (always) optimistic. If this fails, there will be no choice but to embark on a real reform.
Make no small plans for they have no power to stir the soul.  
You can always count on the Americans to do the right thing after they have tried everything else.

41 comments:

  1. Taxes are seen primarily as a way to punish the rich and redistribute to the poor. This is the majority view, even among a lot of economists sadly.

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    1. Except payroll taxes which punish the worker bees i.e. stop at 128k and generate nearly as much as income taxes.

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  2. "put more money into the pockets of everyday hardworking people."

    That's what they say but does the plan do that?

    Looks like a lot of give and take unless you get hit with the AMT, have a bunch of business income or are in the top bracket.

    For our family:

    Give: Lower rate in current 25% & 28% bracket
    Some unknown child credit tax increase
    Maybe child care deduction

    Take: Much higher taxable income
    Higher rate in current 10% bracket
    No exemptions
    No SALT write-off
    Higher Cap gains cap (maybe)

    Net $1,000 more in taxes with my current guesswork. +5%

    Not terrible but it sucks considering the massive deficits this will spawn.

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  3. Corporations are owned by shareholders. As it is now, when a corporation earns a profit, the pay taxes on a portion of it, and they re-invest a portion of the remainder into the business increasing the value of the enterprise, and they distribute what is left as a dividend.

    The shareholders pay a tax on the dividend, and as the company grows, the value of their shares grows, and when they sell those shares they pay capital gains taxes. The congress regularly raises and lowers the the rule for capital gains and dividend taxation. But these are generally taxed a lower rate than ordinary income. However, this is a "double taxation" as the corporation paid taxes once pass through taxed moneys to the shareholders and the shareholders are taxed again.

    My proposal:

    Cut the corporate tax rate to 0, and remove the preferential treatment for investment income and gains.

    My hunch is that this would be close to revenue neutral. And in fact do very little to the demographics of who is carries the tax burden, but would do great things toward simplification of both the code and the byzantine accounting of personal income taxes.

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    1. The problem with this is that every man and his dog will start looking to incorporate. So some shareholders will go from double taxation to zero taxation! And the outcome certainly won't be revenue-neutral.

      An imputation system would get rid of double taxation without creating this perverse incentive. But, of course, it has its own problems, particularly in globalized capital markets.

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    2. Your proposal is already available to most businesses, that is how pass throughs are taxed.

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  4. Real tax reform would repeal the 16th amendment and implement a consumption tax. If you want redistribution, do it through the expenditure side. I don't believe we really appreciate the overall loss to society associated with the tax inefficiencies created by our current law. But you seem to have an idea that what really matters are the individual incentives that are distorted. I agree.

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  5. Douglas,

    "Cut the corporate tax rate to 0, and remove the preferential treatment for investment income and gains."

    Haven't you heard? I am not a laborer. I am president, CEO, and chairman of my corporation Frank Restly, Inc. All that lowering the corporate tax rate to zero will do is encourage individuals to incorporate themselves.

    "My hunch is that this would be close to revenue neutral."

    I sincerely doubt it.

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    1. I agree with Douglas Magowan. If you think everyone will incorporate, then his plan will work since shareholders will be taxed at the same rate as income that is earned (probably 35%) even if there is only one shareholder.

      In an employer/employee relationship, the employer withholds taxes at the appropriate rate based on IRS and state guidelines. The corporation passes through any income to their shareholders even if there is only one shareholder and the shareholder(s) should be taxed at a rate that is equivalent to someone earning the same income through hard work. The sole proprietor and small business owner will be taxed at an equivalent rate based on his/her income. So you either earn income from an employer, a corporation, or a sole proprietor/small business owner, but you should pay taxes at the same rate. No special tax rate for investment income!

      And, if corporate profits are not taxed and instead passed through to shareholders, (who would be taxed at the same rate probably 35%), then shareholders would be more engaged in the CEO’s salary and benefits as well as the salaries and benefits of all of the employees.

      Bottom-line, all income whether passive or active (through blood sweat, and tears) should be taxed at an equivalent rate. All income should be subject to FICA taxes (Social Security and Medicare ) and all income including passive income should be subject to Social Security taxes and not just the first $127, 200 of active income for 2017. (Removing the cap on income subject to Social Security taxes will not necessarily increase the monthly benefit especially if congress limits the amount of the maximum monthly benefit like they do now. Taking the cap off income subjected to Medicare taxes did not increase the monthly benefit for recipients, and removing the cap on income subjected to Social Security taxes does not need to impact the monthly benefit of Social Security recipients either. Furthermore, subjecting income from all sources including passive/investment income to Social Security and Medicare taxes would help these programs remain solvent.)

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    2. Frank Restly Inc. pays no taxes. But Frank Restly, sole proprietor and CEO must pay taxes. No tax savings by incorporating yourself.

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    3. Douglas,

      "Frank Restly Inc. pays no taxes. But Frank Restly, sole proprietor and CEO must pay taxes. No tax savings by incorporating yourself."

      Why would I as sole proprieter pay any significant taxes?

      I don't pay myself wages (no FICA taxes).

      I re-invest my profits back into my corporation. I get a new company vehicle every year, I maintain college enrollment taking classes every year, etc.

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    4. As a sole proprietor, you can claim 50% of self-employment tax costs as income tax deductions and income is passed through to you. If you have no wages/profit then the IRS would probably want to talk with you. How do you buy food, pay for housing, live? You list your truck which you can deduct and college classes (if they relate to your business), so your truck and classes are where your profits go? How do you live/survive?

      Any wages/profits would be subject to 15.3 FICA, since you would pay both the employee and employer portion and then you can deduct 50% of that cost. (But a deduction is not the same as a tax credit and you may lose some deductions if you are subject to the AMT.)

      I think this is getting into the weeds and away from the main discussion of tax reform.

      Bottom line, I agree with reducing corporate taxes (which I would like to go to zero), getting rid of deductions (including the charitable and mortgage deductions) and I would like the US/Congress to come as close to a flat tax as possible or Cochrane’s VAT. Finally, I do not believe that investment income should receive special treatment. Income is income regardless of the source and investors/shareholders/laborers should all pay an equivalent amount.

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    5. Anonymous,

      "As a sole proprietor, you can claim 50% of self-employment tax costs as income tax deductions and income is passed through to you."

      I would not draw any income from Frank Restly, Inc.

      "If you have no wages/profit then the IRS would probably want to talk with you."

      I would have no wages, only profits.

      "How do you buy food, pay for housing, live? You list your truck which you can deduct and college classes (if they relate to your business), so your truck and classes are where your profits go? How do you live/survive?"

      That is simple enough. Frank Restly, Inc. makes low interest (0%) perpetual loans to Frank Restly the individual.

      "Any wages/profits would be subject to 15.3 FICA..."

      I would not have any wages. Profits would be taxed at the corporate rate (0%).

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  6. John,

    "But I am still (always) optimistic. If this fails, there will be no choice but to embark on a real reform."

    Real reform would start with Congress relinquishing tax policy decisions with regard to business cycle adjustments. That would require two things:
    1. Congress would need to recognize that monetary policy can't fix every problem.
    2. Congress would need to develop a sense of humility.

    Regarding your quote:

    "You can always count on the Americans to do the right thing after they have tried everything else."

    https://quoteinvestigator.com/2012/11/11/exhaust-alternatives/

    Those words were never uttered by Winston Churchill (despite popular myth).

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  7. My own pet theory regarding taxes is that we should abandon the estate tax and the capital gains taxes for private citizens, and introduce a moderate wealth tax instead (0.5% per year or so). The problem with the capital gains tax is that it disincentivizes risky investments because it does not treat gains and losses symmetrically. A wealth tax, however, mostly punishes those capitalists that sit idly on their capital without putting it to productive use. Thus, it would be in the interest of society to abandon capital gains taxes and to tax wealth instead. Switzerland does exactly that. And as a result, the Swiss have the highest level of entrepreneurship in the world (measured in the number of newly founded firms per citizen).

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  8. "Corporations don't pay any taxes"?

    By that reasoning, neither do consumers. The taxes come out of businesses' pockets.

    And savers don't pay taxes. Taxes come out of the asset market's pockets.

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    1. Yeah that's what I always think about with that argument. You could just as easily argue that we should only tax businesses, not people -- after all, every dollar of taxes a person pays is a dollar they don't spend at a business. Therefore all personal taxes are really paid by businesses in the form of reduced demand.

      It's an equation, any change to one side changes the other too.

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  9. Why do you think we should end the estate tax? To me it seems to be a great way to reduce economic stratification in America, and economic stratification is undesirable. A system can be "fair" in that every person has the same chance to make 10% more than they have, but still imply growing stratification -- look at the example of geometric Brownian motion. It's possible to have the expected value go to infinity while a trajectory goes to zero almost surely (tech talk).

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    1. To an economist, the problem with taxes is the distortions they induce -- how much efforts to evade the tax promote the wrong economic activities. So, whether it's "fair" that some people randomly get showered with money is not relevant to that question. But, face a 70 year old with the prospect that half his or her wealth will go to the government on the margin -- or 75% if he or she leaves it to grand children -- and you have a huge incentive to round-the-world cruises (consumption, rather than leaving the money invested), and an even larger investment in tax shelters, phony charities, complex trusts, lifetime complex financial arrangements (there is a reason wealthy families are often in real estate) and other socially pointless activities.

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    2. This level of subtlety never makes it anywhere in popular discord. I've tried with liberals all the time and they simply don't accept it. They think as long as the 70 year old's rotten children don't get it, then all is well.

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    3. Moreover, I should have added: The desire to provide for one's children is one of the strongest motivations to hard work, starting businesses, and socially productive personal sacrifice there is. If all children must be equal -- equal education, equal finances, equal everything -- that sounds like an egalitarian dram. But if the parents cannot do anything to improve their children's lot, those parents don't work, save, start businesses, move to better locations, or much of anything else. The equality vs. productivity tension is nowhere stronger.

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    4. John,

      "The desire to provide for one's children is one of the strongest motivations to hard work, starting businesses, and socially productive personal sacrifice there is."

      Raising children also involves getting them to a point where they can stand on their own two feet. Attempts at improving a child's lot must be tempered with a restraint from yielding to their every whim.

      From your description above:

      "But, face a 70 year old with the prospect that half his or her wealth will go to the government on the margin -- or 75% if he or she leaves it to grand children -- and you have a huge incentive to round-the-world cruises (consumption, rather than leaving the money invested)..."

      So the problem isn't the transfer of assets from one generation to the next, the problem is the liquidation of assets by one generation OR the other? I mean after all, the children / grandchildren could liquidate their inherited assets and go on the same round the world cruises that you despise.

      If that is the problem, then the solution is simple - get rid of the inheritance tax (as you seem to favor) and instead assess a 100% tax on all investment income. That way no one (not parents or children or grandchildren) would liquidate their assets in favor of consumption.

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    5. "Raising children also involves getting them to a point where they can stand on their own two feet. Attempts at improving a child's lot must be tempered with a restraint from yielding to their every whim."

      "So the problem isn't the transfer of assets from one generation to the next, the problem is the liquidation of assets by one generation OR the other? I mean after all, the children / grandchildren could liquidate their inherited assets and go on the same round the world cruises that you despise."

      Frank,

      Your thinking is interesting but I find it to be misleading. You are assuming that the children will stay children (until when? until age 18? age 25?) and won't have their own desires to work for.

      You are also forgetting the grandparents at age 70 will not have the same amount of time left as the 30-year-old children. The latter will have 50-70 years after coming out of age to chase their desires (incentives). A 30-year-old should have the same economic incentives as a 70-year-old.

      The concept that a 30-year-old will have free money/assets from their parents/grandparents is the same as a person receiving free money/income from the state. However, a 30-year-old can become a parent and will want to provide for them (the aforementioned strong motivation) or they may decide they want to prove their independence from their wealthy grandparent by working hard (another motivation).

      The parents want (among other motivations) to work harder in order to provide full stop. If they work harder in order to respond to their children's whims, that's just like saying a citizen receives extra supportive income from the state because of their whims. Economic policy is not about dictating each parent how they behave in regards to their children (if they want to spoil them or not) but, as far as incentives are discussed, how to make people to increase the variant supply. You can't expect supply to increase if people notice they won't become better off after working more, whether it is for themselves or for whom or what they value more in their life.


      "If that is the problem, then the solution is simple - get rid of the inheritance tax (as you seem to favor) and instead assess a 100% tax on all investment income. That way no one (not parents or children or grandchildren) would liquidate their assets in favor of consumption."

      What kind of zero-sum/black-and-white/karma thinking solution is this? Increase incentive in one aspect but eliminate a different incentive? Why? So the state can get its presumed-fixed X amount of money?

      Then a person who gambles their money on riskier investments, can't take out a whatever-portion of their profits to enjoy it because they have keep investing? But that is exactly what they did in the first place!

      Decreasing tax rate in one area, only to increase it in a different area does nothing to help the problem of high marginal rates (which can hinder economic growth).

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    6. Anonymous,

      "What kind of zero-sum/black-and-white/karma thinking solution is this? Increase incentive in one aspect but eliminate a different incentive? Why? So the state can get its presumed-fixed X amount of money?"

      That is certainly one way to look at it. Another is that a 100% tax on investment income generates very little tax revenue at all (see Laffer Curve). Hence the state is never a beneficiary (in monetary terms) of a 100% tax rate. Instead the incentives of individuals are changed such that they remain invested beyond their own individual life times. Rather than paying dividends or capital gains (via stock buybacks) to individual owners, a company always reinvests it's profits into additional production / research into new products and / or improved production methods.

      The common argument is that facing a 100% tax rate on investment income, no rational person would invest. That ignores the obvious that an individual that maintains voting control in a company has a say in new opportunities that the company should pursue as well as the hiring and firing of high level employees within that company.

      "Decreasing tax rate in one area, only to increase it in a different area does nothing to help the problem of high marginal rates (which can hinder economic growth)."

      But that wasn't the problem that John described.

      "But, face a 70 year old with the prospect that half his or her wealth will go to the government on the margin -- or 75% if he or she leaves it to grand children -- and you have a huge incentive to round-the-world cruises (consumption, rather than leaving the money invested)..."

      With a 100% tax rate on investment income, the incentive for individuals to pull out of the markets and fund conspicuous consumption is significantly reduced while at the same time the amount of tax revenue that the state collects on that investment income is also reduced (far right side of Laffer Curve).

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    7. Frank,

      I am really confused. You suggested a simple solution earlier but now you are implying that the same solution isn't good enough. I was reading very carefully to find out what could have made it a good solution but I felt the only thing you were trying to say is that it doesn't actually benefit the state's presumed-fixed X amount of money.

      If your goal was to just prove that, then you have succeeded. But the rest of your answer does nothing to contribute to the other critical question "why eliminate a different incentive?"

      If we are trying to increase incentives overall, then it's weird to increase one and decrease the other.


      "But that wasn't the problem that John described."

      He didn't state that consumption is bad. He implied that investing is better and more desirable than consumption. That still doesn't make consumption bad to the point that it has to be eliminated. It is still an incentive.

      On top of that, I think you've also missed John's initial post where he says

      "Tax reform, designed to support long term growth....

      1) Lower marginal rates...."

      John's focus is to provide better incentives to increase growth. And he explains that lower marginal rates can help fueling that. So if tax X's rate is reduced to 0 and tax Y's rate is increased to 100%, how does that help lowering the marginal tax rates?

      I don't think it actually does.

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    8. Anonymous,

      "You suggested a simple solution earlier but now you are implying that the same solution isn't good enough."

      I was being sarcastic with my "simple solution". See my final comments at the end.

      "But the rest of your answer does nothing to contribute to the other critical question why eliminate a different incentive?"

      I thought I was adding an incentive - taxing investment income at 100% creates the incentive for individuals that are invested to remain fully invested with no actual tax revenue collected by the government on that income.

      "He didn't state that consumption is bad. He implied that investing is better and more desirable than consumption."

      He implied that remaining invested is more desirable than cashing out and paying for consumption out of income obtained from that investment.

      "That still doesn't make consumption bad to the point that it has to be eliminated."

      First I never stipulated that consumption is bad (that is John's argument). Second, even if consumption was bad, it would not be totally eliminated even with a 100% tax on investment income. Investment income is not the only form of income out there. Consumption can be paid for out of labor income, profits, financing, and other means.

      "On top of that, I think you've also missed John's initial post where he says...Tax reform, designed to support long term growth...."

      I saw that as well. The question is with regard to punitive taxation (sin taxes), do taxes that are designed to collect no revenue but to instead alter behavior fall within the lower marginal tax rate = higher growth argument?

      I mean suppose of sending murderers to jail, we instead started taxing them at 1000% of their income. Would reducing that 1000% tax rate to 950% improve real growth?

      If you accept that consumption paid for out of investment income is bad (seemingly John's argument), if you accept that sin / punitive taxes do not fall under the "lower marginal tax rate = higher growth" argument, then how is a 100% tax on investment income not the right rate?

      Final thoughts - (Serious) I don't agree that consumption (even that paid for out of investment income) is bad (that was John's argument). I don't agree that tax policy should be used in a punitive / punish the wicked fashion (John surprisingly supports the idea of sin taxes - see previous posts). I was simply bringing ideas that John supports to their logical conclusion.

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    9. Professor Cochrane,

      Some of these arguments seem more philosophical than scientific. The fact that an effect can be imagined (economic distortions caused by taxes) doesn't mean they actually happen to important degrees or that the benefits of a policy aren't more than the costs. For example, I've heard economists saying that at present we're saving too much and consuming too little, especially the rich. That's why, for example, the Bush stimulus mailed small checks to everyone rather than doing a top rate cut.

      As a non-economist who talks to them sometimes, it seems to me that for all his faults, Marx had a point that extreme economic stratification leads to a loss of freedom. Reducing stratification through the estate tax may be worth some distortions, even if they are large enough to be measured.

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    10. Frank,

      Fair enough, you were sarcastic. I couldn't see how but if you say you were, then I'll accept it. Am I corrent to assume that you are also being sarcastic when you equate murderers with free citizens or when you suggest an enormous tax increase of 1000% and then ask if there will be real growth if it drops to 950%? Because If I couldn't identify your sarcasm earlier, I am confident that I have hopefully suceeded this time.

      I also feel that you aren't actually serious when you say this or that is John's argument. There is a big difference between blocking the option to buy goods or services from asset liquidation and adjusting taxation so that investment is relatively more desirable than consumption. On John's example the grandfather's initial intention would have been to give the inheritance (which is an investment) to his heirs. But high taxation forces him to consider round-the-world cruises instead.


      "I thought I was adding an incentive - taxing investment income at 100% creates the incentive for individuals that are invested to remain fully invested with no actual tax revenue collected by the government on that income."

      I am sorry but no. It does not create an incentive to remain fully invested. It creates coercion and it goes against the value of Liberty the USA and that statue in New York are trying to stand for. Even if other areas of this nation are freedom-sketchy, it is still morally wrong.

      It doesn't even matter if there are additional sources of income. It is like saying "hey, there are 10 different transport vehicles you can take but if you want this specific vehicle you can only enter and never exit it". What happens if all the other vehicles are unavailable due to unforeseen circumstances? Big problem then. And in terms of investment, it is just like you said earlier. No person would invest.

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    11. Anonymous,

      "There is a big difference between blocking the option to buy goods or services from asset liquidation and adjusting taxation so that investment is relatively more desirable than consumption."

      Even taxation of 100% on investment income does not block liquidation. The owner of the asset can still sell the asset and recover his / her initial investment. The only thing being taxed at 100% is income obtained from that investment (interest / dividend payments, capital gains, etc.).

      "I am sorry but no. It does not create an incentive to remain fully invested. It creates coercion..."

      https://www.merriam-webster.com/dictionary/coerce

      "To restrain or dominate by force."

      I never said that armed federal agents should starting pointing guns at heads and make individuals hold onto their assets (actual coercion).

      "What happens if all the other vehicles are unavailable due to unforeseen circumstances? Big problem then."

      The other form of income (that I didn't list) is the monetary value of the initial investment in the asset. That form of income is still available (and untaxed) even when returns on investment are taxed at 100%.

      "And in terms of investment, it is just like you said earlier. No person would invest."

      I said that is a common argument. And I also said this:

      "That ignores the obvious that an individual that maintains voting control in a company has a say in new opportunities that the company should pursue as well as the hiring and firing of high level employees within that company."

      People do invest for reasons other than monetary returns.

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    12. "https://www.merriam-webster.com/dictionary/coerce

      "To restrain or dominate by force."

      I never said that armed federal agents should starting pointing guns at heads and make individuals hold onto their assets (actual coercion)."


      Thank you for giving me the definition's source. You did not say anything about guns and armed agents but number 2 is pretty clear.

      https://www.merriam-webster.com/dictionary/coerce
      1 :to restrain or dominate by force
      2 :to compel to an act or choice
      3 :to achieve by force or threat

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    13. Anonymous,

      As long as you are okay with the Merriam-Webster definition of coerce, you might also want to look up the definition of compel:

      https://www.merriam-webster.com/dictionary/compel

      1. to drive or urge forcefully or irresistibly
      2. to cause to do or occur by overwhelming pressure

      It is a stretch to say that a 100% tax on investment income will force, compel, or cause overwhelming pressure on investors to hold onto assets.

      Consider that while holders of assets pay taxes on gains (capital gains, dividends, interest payments, etc.) they also get to deduct losses from taxable income. That would not change under a 100% tax on investment income. And so investors would still be able to sell off losing assets and reap the tax benefits against other forms of income (wages, profits, etc.).

      That alone should give you pause:
      A 100% tax on investment income (positive gains) AND a 100% tax rebate on investment losses (negative gains) creates a really perverse incentive for investors to find the companies that are totally mis-managed.

      The reason we don't have a 100% tax on investment income is not because it is coercive (it is not).

      It is because that tax would generate little tax revenue as a "sin tax" (which John is seemingly okay with) AND because it would create an incentive to invest in poorly run companies.

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  10. The windmill at which we tilt will only collapse of its own weight. This Gordian knot is so embedded in our culture, that even repealing the 16th Amendment would not fix this. Congress would still capriciously tax we the people. Apologies for the mixed metaphors!

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  11. Unlike Reagan's comprehensive tax reform, which ran to about 350 pages, this several page 'outline' doesn't really provide much detail.

    Once again, the GOP prattle on about the ultra-high corporate tax rate..A myth they like to use to 'fix' the system.

    The 39% tax rate the GOP bandy about is the highest federal bracket of 35% with the addition of the average state tax of 4%. And yes, that is high, but not the highest worldwide. But that doesn't tell the whole story, because our corporations do apply tax credits, losses from prior years, and deductions which brings our real average Corporate Federal Tax Rate to 18.6% (17% in some studies).

    Oddly, that amount is on average lower than the 20% the GOP want......until you sit back and ask...If they are once again removing tax deductions for personal filers, are they doing the same for corporate filers? Do corporations keep those deductions, credits, loss carryovers, all of which are designed to encourage businesses to invest and hire BTW, or do they give them up as well? Who knows. it doesn't seem to address the subject. When the GOP 'accidentally forget to include something', you can bet corporations keep them.. In that case, on average, corporations will have that 20% cap, and an average 60% deduction...and they'll be paying about 8%..Is that right? ..Not to mention killing the AMT and allows repatriation of overseas profits? Sweet! Just call me John B Egan Inc!

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  12. Why does it matter how tax reform is "sold"? If an imaginary Congress (the only kind that could pass meaningful legislation) could get real reform pass by selling tax cuts or redistribution, who cares what the Hoi Polloi think?

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  13. Egads, a 75,000-page federal income tax code? And people think it is gamed and rigged?

    And every year, we hear the need to "reform" income taxes, but somehow payroll taxes are never in the discussion?

    Other topics not on the table:

    1. A national sales tax
    2. A national property tax
    3. A national gasoline tax
    4. Higher tariffs

    That said, the GOP missed an opportunity to cement themselves in as the majority party for a generation. Imagine if---just for one year---the GOP said, "We promised tax cuts for the middle class, and here they are: We are cutting marginal tax rates from the bottom, but leaving in place the top two tax rates. This will increase incentives to work."

    They would become known as the party that delivered tax cuts to the middle class.

    But even for one year, the GOP can not think that way.

    The Dems are worse.

    Interesting question: Which are worse? Taxes on income and working or taxes on imports?

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    1. Ben,

      "That said, the GOP missed an opportunity to cement themselves in as the majority party for a generation. Imagine if---just for one year---the GOP said, "We promised tax cuts for the middle class, and here they are: We are cutting marginal tax rates from the bottom, but leaving in place the top two tax rates. This will increase incentives to work."

      If they wanted to become the majority party for a generation, they wouldn't make appeals to "class warfare" monikers. Also, changes in tax brackets are just as important as the applicable tax rates for those brackets. If Congress set the income level for the lowest tax bracket at $1 million, and raised the bottom tax rate to 18%, that would represent a significant broadening of the tax base. Combine that with eliminating a lot of deductions (state / local taxes, health insurance, charitable contributions, etc.), and that starts to look like an improvement over what we have now in terms of simplicity.

      Throw in an body independent of Congress that can make wholesale changes in tax policy with regard to the business cycle, and watch the lobbyist groups disappear from K Street in Washington.

      "Interesting question: Which are worse? Taxes on income and working or taxes on imports?"

      Prior to the adoption of the 16th amendment (1913), the U. S. federal government obtained it's revenue from tariffs on imports and excise (sales) taxes. America's involvement in World War I created the necessity for an income tax recognizing that as War approached, global trade contracted (and the associated tariffs with it).

      Finally, under the Constitution, excise (sales) taxes assessed by the U. S. Federal government must be uniform and so that likely precludes any attempt to make them progressive.

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    2. Frank, I think you're misreading that clause of the Constitution. It says that excise taxes must be "uniform throughout the United States", meaning that the federal taxes must apply to every state the same way.

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    3. Yep,

      I wrote this before I read Knowlton v. Moore in depth.

      https://supreme.justia.com/cases/federal/us/178/41/case.html

      The majority opinion written by Justice White stipulates that progressive taxation is not a violation of the uniformity requirement and that uniformity is limited to geographical concerns only.

      However, Justice White also admits that the term "progressive" is not defined in the Constitution and includes this statement:

      "The review which we have made exhibits the fact that taxes imposed with reference to the ability of the person upon whom the burden is placed to bear the same have been levied from the foundation of the government. So also, some authoritative thinkers, and a number of economic writers, contend that a progressive tax is more just and equal than a proportional one. In the absence of constitutional limitation, the question whether it is or is not is legislative, and not judicial. The grave consequences which it is asserted must arise in the future if the right to levy a progressive tax be recognized involves in its ultimate aspect the mere assertion that free and representative government is a failure, and that the grossest abuses of power are foreshadowed unless the courts usurp a purely legislative function."

      "If a case should ever arise where an arbitrary and confiscatory exaction is imposed bearing the guise of a progressive or any other form of tax, it will be time enough to consider."

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  14. Will you respond to Brad DeLong?
    http://www.bradford-delong.com/2017/10/highlighted-for-september-18-2017-the-elementary-arithmetic-of-a-value-added-tax-vat.html

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    1. No. The response is obvious and elementary. It's easy to calculate the VAT rate under various assumptions. Brad's insults, slanders, ad hominem attacks, and outright lies do not merit responses.

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    2. Brad's attack was also really weird. My point was, we argue too much about tax rates. If spending is 20% of GDP, the VAT rate will be, eventually, whatever it takes to raise 20% of GDP. Yes, I had 5 words to make that point in WSJ, so I kept it really simple. But you're smart enough to figure that out if you want a more complex calculation. But what does Brad object to in that point? Is that his best shot against a VAT? Is Brad in favor of the massively complex, cronyist tax code with its huge swath of deductions for favored businesses? In an economics discussion about VAT vs income tax, Brad's best shot is he wants a more complex calculation of the VAT rate -- in the 5 words I have at WSJ? Other than a chance to make a twerpy personal attack, I just don't get it.

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