tag:blogger.com,1999:blog-582368152716771238.post2610128616761290280..comments2024-03-18T07:59:05.430-05:00Comments on The Grumpy Economist: Taxes and cliffsJohn H. Cochranehttp://www.blogger.com/profile/04842601651429471525noreply@blogger.comBlogger56125tag:blogger.com,1999:blog-582368152716771238.post-88108192892366073402015-09-02T09:24:14.822-05:002015-09-02T09:24:14.822-05:00Could one not setup government benefits to taper o...Could one not setup government benefits to taper off with earned wages so that the net income of any individual is (almost) strictly increasing with increasing wages? So, e.g., rather than losing your health insurance you lose a percentage of it when you go above a certain threshold and this occurs in a number of phases. Such a model, if could be implemented effectively, would get rid off the cliffs.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-13976241888205632922013-06-07T12:36:45.870-05:002013-06-07T12:36:45.870-05:00In order to fix this problem with low-income indiv...In order to fix this problem with low-income individuals, you first have to see how the people have to live that are on the very edge of qualifying or if they are just out of reach of government assistance. <br /><br />My wife and I barely make above minimum wage, and after all we have to pay for if we do not budget correctly we barely have food to eat. Since we make above what the government deems "necessary" for government assistance, we are denied any help.<br /><br />This wouldn't be so bad if there weren't people who do not properly report their income are taking advantage of the same system denying us to get plenty of food stamps and welfare...<br /><br />Maybe taking some time to really screen and follow up on what people are reporting as income and how they're really living would help the money go to families who ARE actually in need.<br /><br />Great blog, John, I'm glad there are people like yourself out there helping people take control of their taxes and understand more about the financial world around them. Keep up the great work!Online Taxeshttp://www.onlinetaxpros.comnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-41466166245494164922012-12-12T01:05:21.800-06:002012-12-12T01:05:21.800-06:00Ed Prescott and Lee Ohanian have an Op-Ed today in...Ed Prescott and Lee Ohanian have an Op-Ed today in the WSJ in which they state that the *average* "marginal effective tax rate" in the United States is 40 percent. That is, on average, for every $1 earned, 40 cents goes to various taxes, including payroll taxes, income taxes, sales taxes, excise taxes, etc.<br /><br />It should not go unnoticed here that Prescott and Ohanian actually use the term "marginal effective tax rate" correctly---they do not confuse it with other disincentives, such as loss of federal, state or local benefits.<br /><br />http://online.wsj.com/article/SB10001424127887324469304578142790851767144.html?mod=WSJ_Opinion_carousel_1Vivian Darkbloomhttps://www.blogger.com/profile/18362419878968863283noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-29765935820058140722012-12-10T14:29:19.502-06:002012-12-10T14:29:19.502-06:00great post kyle8, thank you. the answer can't...great post kyle8, thank you. the answer can't be to find new rationalizations and ways to tax the so called rich. the answer must be to keep a lid on the growth of government. every successful civilization in the history of world committed suicide by raising taxes too high (either directly or indirectly via debasement of currency). this is the provocative thesis (my words not his) of tax historian charles adams in his amazing analysis of tax history, "Taxes: For Good and Evil." a must read.Anonymoushttps://www.blogger.com/profile/05238184001366013770noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-41197559042796433452012-12-10T14:23:21.092-06:002012-12-10T14:23:21.092-06:00anonymous you are changing cause and effect based ...anonymous you are changing cause and effect based on assertion. "they" (low income individuals) are unable to get out of violent neighborhoods in large part because of incentives to stay there thanks to modern welfare state. and why are the neighborhoods "violent"? lets take a holistic look. what about the "war on drugs" that turns poor blacks into criminals and incentivizes them to carry and use guns to enforce extra judicial "justice." Anonymoushttps://www.blogger.com/profile/05238184001366013770noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-2424065191402488512012-12-01T21:59:11.234-06:002012-12-01T21:59:11.234-06:00In the U.S. today, there is no difference between ...In the U.S. today, there is no difference between “that [which] was mine in the first place” and an entitlement.<br /><br />It may not be right, but it is nonetheless legal, practical, and ideological reality.<br /><br /><br />Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-53727314839403926862012-11-30T15:24:15.269-06:002012-11-30T15:24:15.269-06:00In a word, yes. The CBO states: "[T]he phasi...In a word, yes. The CBO states: "[T]he phasing out of that assistance adversely affects incentives to work. As a result, lawmakers face difficult choices when targeting benefits to low- and moderate-income families. One choice relates to phaseout rates—specifically, whether benefits should be phased out gradually over a broad income range or more quickly over a narrower income range. The former approach would affect more families but allow for lower marginal rates of benefit reduction."<br /><br />The former approach, I believe, is most in line with what you are suggesting, Anonymous. It is the approach I prefer most. I am curious as to whether Professor Cochrane and others prefer this approach -- phasing out gradually over a broad income range to allow for lower marginal rates -- or prefer the other approaches listed in the report: <br /><br />The latter approach [phasing out more quickly over a narrower income range] would increase marginal tax rates more significantly for a smaller number of families in a narrower income range. Another choice concerns the maximum amount of the assistance, which also influences marginal tax rates. Over the same income range, phasing out a larger benefit leads to a higher marginal tax rate than does phasing out a smaller benefit."<br /><br />If someone's primary concern is alleged disincentives, my guess is that his or her top priority would be smaller benefits.BNWnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-44443093459306517172012-11-30T07:26:23.367-06:002012-11-30T07:26:23.367-06:00"The only thing I would add is that if the go..."The only thing I would add is that if the government tries to eliminate "carried interest", then it will eliminate it for start-ups as well because "carried interest" is also known as "sweat equity" outside of VC and PE firms. If the government wishes to keep "sweat equity" untouched, it will have to narrowly define the firms which are not eligible for the tax treatment. I have little doubt that the government will be as bad at defining that as it is at defining "proprietary trading".<br /><br />That's a good point, Methinks (double entendre there!)<br /><br />Failing to recognize what the *real* causes of what a tax distortion is means that the solution is likely to be misdirected. This is a classic case. There is no reason at all why venture start up firms should not be able to contract at arm's length *with parties that are subject to the same tax rules*. This used to be called freedom of contract. Sure, the start-up's owners get favorable tax treatment, but that is at the expense of new investors. There is a clear voluntary trade-off here---one party gets tax benefits and the other doesn't. Unless there is improper "tax arbitrage", the Treasury doesn't stand to suffer.<br /><br />I've always thought that the real answer to "carried interest" was not to treat it as ordinary income per se, but to ensure that the trade can't be done when tax exempt partners trade part of their tax exempt benefits with taxable partners (that is exactly what happens with "carried interest"). It takes two to Tango. <br /><br />There is, I think, a ready solution to the problem: amend the code such that the trade-off within a partnership can't be used with a "tax exempt entity or person". The "earnings stripping" rules of section 163(j) contain a handy definition of "tax exempt" that would be useful for this purpose.<br /><br />Blaming tax exempts for at least half the problem doesn't get a lot of media interest, unfortunately. Nobody has the knowledge or the guts to admit that well, maybe the Princeton Endowment Fund is part of the problem.<br />Vivian Darkbloomhttps://www.blogger.com/profile/18362419878968863283noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-73562627488239766172012-11-29T01:03:29.140-06:002012-11-29T01:03:29.140-06:00"I disagree. ”Tax” is precisely the right wor..."I disagree. ”Tax” is precisely the right word for when the government takes something away from me as I earn more money."<br /><br />No, it is precisely the wrong word. When the government "taxes" in the traditional and precise sense, it takes something away from me that was mine in the first place. When the government phases out a benefit that it might otherwise provide (funded by *taxes* or by borrowing (as per Friedman, a form of *future taxation*), it is declining to spend something on me. Never was the difference between "taxing" and "spending" more cleverly disguised than combining both into a "marginal rate of tax". I see where this clever bit of obfuscation might be ideologically attractive to those who take the term "entitlement" literally, however. Vivian Darkbloomhttps://www.blogger.com/profile/18362419878968863283noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-27671598023639463232012-11-28T20:17:35.533-06:002012-11-28T20:17:35.533-06:00I disagree. ”Tax” is precisely the right word for ...I disagree. ”Tax” is precisely the right word for when the government takes something away from me as I earn more money.<br /><br />What true confusion exists (vs. ideological or partisan hackery) concerns the meaning of marginal vs. effective rates. Jeff Liebman's anecdote perfectly illustrates how this otherwise simple mathematical relationship is beyond many people.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-63573562746643669962012-11-28T14:13:17.050-06:002012-11-28T14:13:17.050-06:00My problem with the Kotlikoff - Rapson paper linke...My problem with the Kotlikoff - Rapson paper linked above (which is quite interesting, to be sure) is that it uses ESPlanner, a propriety software. Not sure how one could replicate results using the same data, if you do not have access to that simulation software.Manfred the mamoothhttps://www.blogger.com/profile/07516724901598949627noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-71175082515121775532012-11-28T11:37:37.106-06:002012-11-28T11:37:37.106-06:00Well said, Vivian.
The only thing I would add is...Well said, Vivian. <br /><br />The only thing I would add is that if the government tries to eliminate "carried interest", then it will eliminate it for start-ups as well because "carried interest" is also known as "sweat equity" outside of VC and PE firms. If the government wishes to keep "sweat equity" untouched, it will have to narrowly define the firms which are not eligible for the tax treatment. I have little doubt that the government will be as bad at defining that as it is at defining "proprietary trading".Methinkshttps://www.blogger.com/profile/17278490832490933652noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-80548650462051750652012-11-28T10:19:53.373-06:002012-11-28T10:19:53.373-06:00This is a great article. Articles like this tend t...This is a great article. Articles like this tend to focus on the impact of effectively high marginal income tax rates on low-income people. But Republicans and Democrats have agreed in the past (and continue to do so) to stealthily increase marginal taxes on higher-income households, which they do by phasing out deductions. Examples include ROTH IRA contribution limits or means testing Medicare Part B and Part D(currently), so-called "Cadillac" health plans (forthcoming), and limiting the mortgage-interest deduction (under discussion).<br /><br />I suspect that the analysis of the effects of these polices are more complicated than the ones for lower-income households. I would very much appreciate Prof. Cochrane pointing us in the right direction on this matter.John R. Grahamhttps://www.blogger.com/profile/09420909459359064358noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-41106957397104910802012-11-28T09:03:18.809-06:002012-11-28T09:03:18.809-06:00"As an investment professional, the carried i..."As an investment professional, the carried interest rule is a joke. The assets that the manger has in the fund can be taxed as a capital gain, but the 2/20 fee is clearly income. Mangement fees are fees. Fee income is earned income."<br /><br />As an investment professional, this should be food for thought:<br /><br />If a private equity partnership invests $100 in a company and that company increases in value to $200, there is a capital gain of $100 (taxed as long-term capital gain if held for more than one year. The partnership agreement determines how that capital gain will be allocated to partners. In your example, that would mean $80 allocated to the LP's and $20 to the GP. The LP then pays, out of his share, $2 to the GP as a "management fee". The $2 is deductible against LP's ordinary income, if any (within or without the LP).<br /><br />The mainstream media coverage on this issue normally suggests that "carried interest" involves "creating capital gain income from thin air" or "converting ordinary income into capital gain income", as an alchemist might be able to do. In fact, the amount of capital gain to be divvied up is fixed and "carried interest" is a voluntary contractual arrangement whereby LP's agree to cede part of their favorably taxed capital gain to the manager in return for a lower management fee (and such ordinary management fee would be a deductible expense to the LP). There is a clear matching principle involved here.<br /><br />Given the above, it should come as no surprise that the majority of the equity supplied in private equity carried interest deals comes from tax exempt entities, such as university endowment funds and other "not for profit" entities that reside in ivory towers immune from public scorn. They don't care about this exchange, because they don't pay tax anyway, and have no use for deductions. Therefore, the normal "matching" does not work as it should. Doing away with the tax exempt status for these investors would be as much a solution to this arbitrage as would taxing "carried interest" at ordinary income tax rates.<br /><br /><br /><br />Vivian Darkbloomhttps://www.blogger.com/profile/18362419878968863283noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-45970687127102405732012-11-27T13:59:11.621-06:002012-11-27T13:59:11.621-06:00what if they try fail and then revert? will that c...what if they try fail and then revert? will that convince you?LALhttps://www.blogger.com/profile/08196675112184615614noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-13234234854671588452012-11-27T13:51:06.955-06:002012-11-27T13:51:06.955-06:00also from the study:
"Students who attended ...also from the study:<br /><br />"Students who attended charter high schools were more likely to graduate and go on to college."<br /><br />and:<br /><br />"They also suggest a need to look beyond test scores to fully assess charter schools' performance."<br /><br /><br />I think the last point is very important and is not so satisfactorilly explained by demographics alone<br /><br />thanks for the link!LALhttps://www.blogger.com/profile/08196675112184615614noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-90197315195760481322012-11-27T13:29:14.296-06:002012-11-27T13:29:14.296-06:00The number is 1 - Change in Disposible Income/ cha...The number is 1 - Change in Disposible Income/ change in earned income.<br /><br />marginal income suck?<br /><br /><br />Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-13560426824609112442012-11-27T13:22:05.514-06:002012-11-27T13:22:05.514-06:00As an investment professional, the carried interes...As an investment professional, the carried interest rule is a joke. The assets that the manger has in the fund can be taxed as a capital gain, but the 2/20 fee is clearly income. Mangement fees are fees. Fee income is earned income.<br />Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-14272695390385935872012-11-27T13:16:44.016-06:002012-11-27T13:16:44.016-06:00Kyle8,
"Does that mean that if a nation taxe...Kyle8,<br /><br />"Does that mean that if a nation taxed 90% of all income, and borrowed a corresponding amount, then it's economy would be fine because, after all, it is in equilibrium?"<br /><br />From the Keynesian point of view, it would be very difficult for the economy to grow. The Keynsian multiplier = 1/(1-c+t). As taxes get large the multiplier shrinks. <br /><br />Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-13419083748213695652012-11-27T10:26:18.583-06:002012-11-27T10:26:18.583-06:00$10,000 is $10,000; if you would be $10,000 poorer...$10,000 is $10,000; if you would be $10,000 poorer accepting more work, that is a huge disincentive: the kind that makes you unable to provide food for your elderly parent or young child. <br /><br />On top of that there are a lot more poor people in places where I think you've forgotten to look because it is so easy to do so.LALhttps://www.blogger.com/profile/08196675112184615614noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-82322217464561051752012-11-27T10:16:31.819-06:002012-11-27T10:16:31.819-06:00http://www.rand.org/pubs/research_briefs/RB9433/in...http://www.rand.org/pubs/research_briefs/RB9433/index1.html<br /><br />From the study:<br /><br />On average, across varying communities and policy environments, charter middle and high schools produce achievement gains that are about the same as those in traditional public schoolsAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-30077709577160840072012-11-27T09:42:29.203-06:002012-11-27T09:42:29.203-06:00Do you have any links to any literature that I cou...Do you have any links to any literature that I could look at which controls for the student quality in order to judge the school quality?Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-83760175301179584912012-11-27T09:18:51.019-06:002012-11-27T09:18:51.019-06:00Some Chicago public schools are good. I graduated ...Some Chicago public schools are good. I graduated from one. Most are awful, and consign their charges to a lifetime of poverty. Charter schools and catholic schools do much better with the same students. The statistics and academic literature are just overwhelming. If CPS were so great, it would not need to worry about competition from charters and vouchers. John H. Cochranehttps://www.blogger.com/profile/04842601651429471525noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-67515714859816938852012-11-27T08:07:16.517-06:002012-11-27T08:07:16.517-06:00John: for the record, Chicago public schools are ...John: for the record, Chicago public schools are pretty good. I have plenty of friends who send their kids to Chicago public schools. The problem with Chicago public schools is lots of kids who come from bad environments. But if your kids are in "gifted" programs or on accelerated track, the quality of education is excellent. Northside Prep? Walter Payton? those are some of the best schools in the nation, if not in the world and they are public.<br /><br />So it's unfair and biased to bash Chicago public schools.<br /><br />Don't confuse causality here. Do you expect teachers to perform heroics on kids who come from broken homes and broken neighborhoods? Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-24737885644525745922012-11-26T22:57:28.116-06:002012-11-26T22:57:28.116-06:00I think you left out the most interesting part of ...I think you left out the most interesting part of the quote in the extended anecdote. I'll reproduce from the original: <br /><br />"She tried taking an additional weekend job, but the combination of losing 30 percent in increased rent and paying for someone to take care of her child meant it didn’t help much either."<br /><br />This is not a story of substitution effects--it's the income effect. This unfortunate woman faced a marginal tax rate greater than 100%--she could increase her hours worked and see her take-home pay fall, and her ability to secure goods and services decline. If it's all about substitution, she should go back into more "leisure". But it has little to do with substitution: her initial response to the fall in income was to work even more! She only tried to "work less" when she failed to earn more by getting a second job. <br /><br />If a marginal tax rate >100% doesn't stop a person from trying to work more, then marginal tax rates can probably be said to be irrelevant.Devinnoreply@blogger.com