tag:blogger.com,1999:blog-582368152716771238.post7502331901029100203..comments2024-03-28T14:41:03.793-05:00Comments on The Grumpy Economist: Corporate Tax John H. Cochranehttp://www.blogger.com/profile/04842601651429471525noreply@blogger.comBlogger106125tag:blogger.com,1999:blog-582368152716771238.post-38928637664871511342018-02-16T20:56:42.135-06:002018-02-16T20:56:42.135-06:00Nice to think that Corporations mean profit-making...Nice to think that Corporations mean profit-making productive companies producing real stuff. I'm guessing, by number, there are more personal companies, shelf-companies, etc., than "real" productive companies. How to factor in that a significant number of people will keep dividend income inside their own personal company and not pay tax except for the little they withdraw to live on (and thus attracting low-end tax rates)?Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-4721678312946873762017-02-14T14:08:24.923-06:002017-02-14T14:08:24.923-06:00Why is it so difficult to realise the truth in wha...Why is it so difficult to realise the truth in what you say? Here are some of my efforts. http://niclasvirin.com/documents-eng.shtml Niclas Virinhttps://www.blogger.com/profile/07610388191451799753noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-56082874267174404412017-02-07T18:11:36.275-06:002017-02-07T18:11:36.275-06:00Nancy,
"One easy way to move towards a progr...Nancy,<br /><br />"One easy way to move towards a progressive consumption tax by the way would just be to remove all limits in IRA, 401(k), etc."<br /><br />IRA's, 401(k)'s, etc. are tax deferred - not tax free. And so the contributions are taxed when they are withdrawn.<br /><br />Also, a true consumption tax (like a national sales tax) is assessed independently of how it is financed (current income, borrowing, etc.).<br /><br />Simply eliminating the limits on IRAs, 401(k)s, etc. would allow tax free savings but would not tax consumption financed by borrowing (car loans for example).<br /><br />You can make the argument that the taxation on consumption financed by borrowing will eventually take place as the loan is paid off, but that assumes that it will be paid off and will be paid off from taxable income.FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-81085304100584499182017-02-06T07:24:20.382-06:002017-02-06T07:24:20.382-06:00So simple this is beautiful, John.
One easy way t...So simple this is beautiful, John. <br />One easy way to move towards a progressive consumption tax by the way would just be to remove all limits in IRA, 401(k), etc. I think the ideal is a uniform VAT -- with eliminating corporate, income, and estate taxes -- plus on-budget transfers for progressivitNancy Hammondhttps://www.blogger.com/profile/02254206433585567601noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-81614411093852704482017-02-02T17:27:23.801-06:002017-02-02T17:27:23.801-06:00And one other thing. Another economic theory you ...And one other thing. Another economic theory you may have heard of is the impossible trinity:<br /><br />https://en.wikipedia.org/wiki/Impossible_trinity<br /><br />"The Impossible trinity (also known as the Trilemma) is a trilemma in international economics which states that it is impossible to have all three of the following at the same time:"<br /><br />1. A fixed foreign exchange rate<br />2. Free capital movement (absence of capital controls)<br />3. An independent monetary policy<br /><br />What should be apparent, is that neither fiscal policy, equity, and productivity are not mentioned. Increased productivity should drive up the exchange rate and / or the interest rate independently of monetary policy.<br />If the sale of government equity increases productivity, then it becomes apparent that:<br /><br />1. A fixed foreign exchange rate can be maintained by the federal government selling equity<br />2. Free capital movement is preserved<br />3. Independent monetary policy is preservedFRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-7995573743231191802017-02-02T17:04:26.303-06:002017-02-02T17:04:26.303-06:00Anonymous,
Thanks for sticking with me so far. W...Anonymous,<br /><br />Thanks for sticking with me so far. With this type of equity there would be a potential rate of return (presumably set by the Treasury / Executive Branch of Government) and a realized rate of return. If I buy $1,000 of equity with a 5% potential rate of return over 5 years (non-compounded) = $1,250. But if I only have $1,100 of tax liability after 5 years my realized rate of return = ($1,100 / $1,000 - 1) / 5 = 2.0%.<br /><br />And so your statement:<br /><br />"...with annual interest payments, vs equity which may grow annually by the same percentage as the bond interest..."<br /><br />This assumes no risk premium, no central bank intervention in the government bond market, and no foreign buyers of government bonds.<br /><br />In all likelihood, government equity would offer a potential rate of return greater than what is offered on government bonds because they are riskier, the central bank would not be able to purchase them pushing returns down, and international buyers would have no use for them because international buyers don't pay U. S. taxes.<br /><br />Now the fun stuff. Ask any economist - was the deflation of the Great Depression caused by lack of aggregate demand or increased productivity?<br />You will get a variety of responses depending on the school of thought (Keynesian, Austrian, Monetarist, Fisherian, Friedmanite, etc.) that the economist adheres to.<br /><br />Both increased productivity and falling aggregate demand can cause prices to fall, but the fiscal / monetary response to each cause must be different, otherwise a good situation (increased productivity) can be turned bad or a bad situation made worse.<br /><br />Deflation (caused by either lack of demand or increased productivity) creates a problem for private credit because they private credit consists of nominal contracts. Meaning I may owe you 3% nominal on a loan, but because of 5% deflation, my real cost of servicing the debt is 8%.<br /><br />That is not a problem for large production companies that have wide access to the equity capital markets - instead of borrowing at an 8% real rate (3% nominal + 5% deflation) they will sell equity shares and offer other perks to make up for the low returns.<br /><br />But what about the little guy where the only options are to either run a cash business or borrow from a local bank?<br /><br />Government equity can fill a vital role here by lowering the after tax cost of private borrowing. For instance, my mom and pop business borrows $10,000 at 8% real interest (3% nominal + 5% deflation) over one year. My mom and pop business then buys $5,000 of government equity offering a 16% potential rate of return over one year and invests the other $5,000 back in it's business.<br /><br />Assuming that 16% rate of return is fully realized (remember we are talking equity returns = no guarantees), at the end of one year my mom and pop business would cash in equity worth $5,000 * 1.16 = $5,800 netting $800 of return. Notice that is exactly the same amount of real interest that my mom and pop business is paying ($10,000 loan x 8.0% Real Interest Rate) = $800.<br /><br />My mom and pop business stays in business despite 5% deflation.<br /><br />This is that zero bound you may hear bandied about. In the presence of deflation, monetary policy is pretty impotent because the real cost of debt service can rise even when the nominal cost is stable or falling. Fiscal policy can be used to either boost aggregate demand (Keynesian borrow and spend), supply destruction (see paying farmers to burn their crops - yes it did happen), or offset the real cost of debt service (actual supply side economics).<br /><br />Supply side economics gets a bad rap because even those that profess to adhere to it (Laffer for instance) don't understand it.<br /><br />Supply side economics is NOT about<br />1. Tax breaks for the rich<br />2. Flat vs. progressive taxes<br />3. Marginal tax rates<br />4. Maximizing government revenue<br /><br />Supply side economics is about using fiscal (specifically tax) policy to offset the real cost of private capital formation - that's it.FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-67394385370225304522017-02-02T10:26:13.215-06:002017-02-02T10:26:13.215-06:00That didn't work. Many a slip between keyboar...That didn't work. Many a slip between keyboard and blog.<br />I read equity meaning fairness.<br />Rather than equity meaning ownership.<br />--E5Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-83640934292322013752017-02-02T00:18:51.404-06:002017-02-02T00:18:51.404-06:00Sorry, I probably misread "Does he address eq...Sorry, I probably misread "Does he address equity at all?".<br />I read rather than .<br />I don't know if Keynes theorised about ownership equity.<br />--E5Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-5559053157373865742017-02-02T00:09:53.319-06:002017-02-02T00:09:53.319-06:00Yes Frank. Sorry about the language confusion. O...Yes Frank. Sorry about the language confusion. On the screen owned and owed are almost indistinguishable. I borrow $20 from you.... I owe $20 back to you (at least). Only when we get fancy and draw up a contract do you get to own something.<br />I have not read Keynes, only explanations thereof. My take is that he was giving a formula for eliminating boom-bust cycles. With the idea that stability is much better for everybody. The notion being that tax rates should remain unchanged while tax revenues go up and down with growth/recession but borrowing/repaying compensates and allows government spending to remain constant. Or even allows increased government spending to fill in the employment gap during recession. And, of course, reduced government spending in the better times in order to pay off the debt and to free resources (e.g. labour) for use by the, growing, private sector. This is entirely opposite to the default notion that government spending should decrease in a recession and tax rates should be reduced in a boom.<br />Keynes was at Cambridge, not far from the Engineering building, so my supposition is that ideas about controlling and regulating machinery were able to infuse into his thinking.<br />I definitely see the difference between the bond, with annual interest payments, vs equity which may grow annually by the same percentage as the bond interest but the cash benefit is obtained only when a tax assessment is paid by relinquishing that equity (instead of paying cash).<br />I very much agree about incentives being the crux of the matter.<br />I wonder if availability of the equity/tax mechanism might result in Keynes, both parts, happening simply by people's automatic behaviour?<br />--E5Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-59445882985059683512017-02-01T22:00:28.291-06:002017-02-01T22:00:28.291-06:00Anonymous,
Let me try to attack the "kicking...Anonymous,<br /><br />Let me try to attack the "kicking the can down the road" problem a different way. A government can conceivably sell as much debt as they want with the following conditions:<br /><br />1. They must be able to extend the maturity of that debt out to an infinite time horizon. 100 year bonds, 1000 year bonds, 10,000 year bonds, you name it.<br /><br />2. The bonds they sell must be of the accrual (not coupon) type. Meaning the bondholder receives his / her interest and principle back when the bond reaches maturity.<br /><br />If these two conditions are not met, then there can come a point where the interest due will exceed the available tax revenue. The federal government can suffer a cash flow crisis (expenditures exceed income) but never a solvency crisis (liabilities exceed assets). The federal government's assets consist of all the tax revenue it is ever going to collect out to an infinite time horizon. If the U. S. federal government is dismantled because of foreign invader, armageddon, or political upheaval, then paying back debt is the least of our problems.<br /><br />That being said, there is are perfectly good reasons for a government to not sell bonds - they want people to produce and sell goods instead of collecting interest payments. It's all about incentives.FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-88690310216579746082017-02-01T21:40:02.494-06:002017-02-01T21:40:02.494-06:00Anonymous (E3),
"No, Frank, I did mean owed ...Anonymous (E3),<br /><br />"No, Frank, I did mean owed to".<br /><br />I have never heard that turn of phrase. Bonds can be owned by (held by) someone. <br /><br />"At least some of the government debt must be owed to (i.e. bonds held by) the 1%, surely?"<br /><br />Yes. And so which would you rather do for the 1% - sell them bonds that offer a riskless rate of return so that they can live high on the hog without lifting a finger or sell them equity so that they must take risk (i.e. do something productive) to reap the rewards?<br /><br />"If anybody is to buy equity from the government it has to be somebody with spare money."<br /><br />But that doesn't necessarily mean they are wealthy. The propensity to consume though weighted toward the lower side of the income scale is not absolute. There are plenty of poor penny pinchers - my grandmother was one of them. It used to be (my grandparent's generation) that people saw savings as a virtue instead of a vice.<br /><br />"Mind you, if that equity is essentially prepaid taxes, and taxation is not balanced to spending, then it is still just kicking the can down the road. Unless I'm missing something. The equity gets relinquished in lieu of paying tax, right?"<br /><br />Yes the equity gets relinquished in lieu of paying tax. But you are missing several things.<br /><br />1. The road is really, really, really long. If we take away armageddon, foreign invaders, and political upheaval, how long will the U. S. government be able to collect taxes? All securities (bonds and equities) are claims against future income (in this case future taxation) and so what is the value of that future taxation?<br /><br />Or more specifically, what is the non-discounted present value of all the taxes the federal government is going to collect? Most economists use a discounting factor equal to the interest rate that the government pays on it's debt when calculating the present value of taxes. But suppose the government sells equity instead of debt - what discount factor should be used (if any)?<br /><br />2. The bumps in the road that create problems for debt issuance are recessions. Payments on debt are not indexed for the current economic situation. Equity (in the form of prepaid taxes) is indexed for the current economic situation. As economic growth slows / contracts, so do incomes and tax liability. Meaning that during a recession, some people (both rich and poor) will not be able to cash in some or all their government equity (they won't have enough tax liability) - that is why equity is considered a risk asset.<br /><br />Finally, I have never sat down and read Keynes. Does he address equity at all?FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-76593917711411726262017-02-01T21:23:29.410-06:002017-02-01T21:23:29.410-06:00This comment has been removed by the author.FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-63921999936694181912017-02-01T18:05:54.817-06:002017-02-01T18:05:54.817-06:00No, Frank, I did mean "owed to".
At leas...No, Frank, I did mean "owed to".<br />At least some of the government debt must be owed to (i.e. bonds held by) the 1%, surely?<br />If anybody is to buy equity from the government it has to be somebody with spare money. I was just pointing out, as a pragmatic observation, that if the most pampered 1% chose to do it, over a period of 10 years, they would feel only slightly less pampered.<br />Mind you, if that equity is essentially prepaid taxes, and taxation is not balanced to spending, then it is still just kicking the can down the road. Unless I'm missing something. The equity gets relinquished in lieu of paying tax, right?<br />I am not convinced that any of these dichotomies (liberal/conservative, democrat/republican etc.) really exist. It's just people. With attitudes.<br /><br />--E5Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-31994772986131992962017-02-01T16:54:03.036-06:002017-02-01T16:54:03.036-06:00Anonymous,
"Perhaps a rather large portion o...Anonymous,<br /><br />"Perhaps a rather large portion of the debt is owed BY them anyway ..... i.e. accumulated inadequate taxation..."<br /><br />And any conservative would counter that a rather large portion of the debt is owed BY the recipients of government expenditures (military personnel, social security / medicare recipients, etc.). These are the kinds of arguments that grind policy making to a halt.<br /><br />"I recall calculating that the 1% of the population with the most income could pay it off in 10 years while still being exceedingly comfy."<br /><br />If government sells me equity and then uses the proceeds to pay down debt, does it really matter whether I am in the top 1% or the bottom 10% of the income ladder? This is the craziness of liberal / conservative arguments.<br /><br />If you want to reduce the debt, then sell equity. This is not a liberal OR conservative position. It has nothing to do with rich or poor, progressive or regressive, or anything to do with social / economic status.FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-41923250910550582932017-02-01T13:37:29.349-06:002017-02-01T13:37:29.349-06:00I have one thought, if the rates get too high it w...I have one thought, if the rates get too high it would encourage a black market for goods (i.e. Moonshine, Cigarettes, etc.). There is a nice feature to this is it would basically create a hard limit on the ability to collect taxes. I wonder what the maximum rate would be before it would encourage a black market? Enforcement would have to be curtailed to limit the use of force officers can use. Sorry to drag the conversation to the more mundane. <br /><br />Great post overall. Anonymoushttps://www.blogger.com/profile/13049614430024122178noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-78725407717079255732017-01-31T23:58:10.200-06:002017-01-31T23:58:10.200-06:00Frank,
Thank you for the affirmation of my compreh...Frank,<br />Thank you for the affirmation of my comprehension of Keynes.<br />Regarding the debt (rather large per person) .... I recall calculating that the 1% of the population with the most income could pay it off in 10 years while still being exceedingly comfy. Perhaps a rather large portion of the debt is owed to them anyway ..... i.e. accumulated inadequate taxation... i.e. just that cumulative lack of Keynes part 2.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-1606940489237426082017-01-31T19:17:24.050-06:002017-01-31T19:17:24.050-06:00One other notion to keep in mind:
There is nothin...One other notion to keep in mind:<br /><br />There is nothing in the U. S. Constitution that precludes Congress from setting tax rates at a level insufficient to cover expenditures and then refusing to borrow to make up the difference. The Constitution gives the Congress the authority to borrow - it does not force or direct them to borrow. In addition, there is no requirement in the Constitution for members of Congress to have any mathematical ability:<br /><br />Question from Reporter: Congressman Joe Smith, you just passed a tax and spending bill that increases the deficit but then voted against a debt ceiling increase to pay for it. Do you have any comments?<br /><br />Congressman Joe Smith: The U. S. Constitution permits me and by colleagues to tax (or not tax), spend (or not spend), and borrow (or not borrow). We chose to tax, spend and not borrow.<br /><br />Reporter: Follow up. You do realize that the math doesn't work. You will not have all of the money available that you wish to spend?<br /><br />Congressman Joe Smith: Under the U. S. Constitution, my requirements for serving do not include being good at math. And really, it is a problem for the Executive Branch of Government now. FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-53427744796426318782017-01-31T18:20:15.070-06:002017-01-31T18:20:15.070-06:00This comment has been removed by the author.FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-22127951452975886792017-01-31T17:24:20.980-06:002017-01-31T17:24:20.980-06:00Anonymous,
Keynes repeated cycles of borrow (sell...Anonymous,<br /><br />Keynes repeated cycles of borrow (sell bonds) in the bad times and payback the debt in the good times only works (as you say) as long as Keynes Part 1 is followed by Keynes Part 2. That has never happened - instead the U. S. federal debt has grown to almost $20 trillion dollars (About $62,000 for every person in the U. S.).<br /><br />Perhaps a different approach is needed?FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-76170318768140076442017-01-31T16:18:20.897-06:002017-01-31T16:18:20.897-06:00Anonymous,
"I believe the first half of Keyn...Anonymous,<br /><br />"I believe the first half of Keynes has been tried repeatedly but no politician had the intestinal fortitude to follow through with the second half. Lily livered conservatives always demand to give taxes back to the wealthy."<br /><br />The same can be said of "lily livered" liberals that don't cut spending according to the second half of Keynes.<br /><br />When liberals and conservatives can get beyond name calling, they might actually get something worthwhile done.<br /><br />"In this equity case people would be lending money to the government when they don't want to spend it (like first half of Keynes)."<br /><br />I hesitate to call it lending, though in a general sense it is. The reason I say that is that Congress maintains a debt ceiling and so the first question becomes - would equity sold by the federal government (U. S. Treasury) be treated as part of the debt limit set by Congress?<br /><br />My gut reaction is no, it should not be treated as such. The reason is that equity (in this form) sold by the Treasury would be securities that pay returns that are contingent on the level of economic activity (as tax liability falls in a recession, so do the returns on equity). In addition, those returns on equity are not cash expenditures that must be authorized by Congress - there would not be cash redemption.<br /><br />For instance, if you have $10,000 of government equity but only $2,000 of tax liability, you would only be able to redeem the $2,000 worth of liability.<br /><br />What this really means is that there is no true upper limit to the amount of equity that a government could sell - the amount of outstanding equity would be driven by demand only. Contrast that with government debt where the U. S. could conceivably run into the situation where interest payments on the debt could exceed available tax revenue. Those payments are not indexed in any way to the overall level of economic activity.<br /><br />The second question is, would the central bank be permitted to buy equity sold by the U. S. Treasury. Again, my gut reaction is no. Per the Banking Act of 1933 (this created the FOMC), the central bank is only permitted to buy securities where the principle and interest are guaranteed. That would not be the case for these securities.<br />FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-82909467136744888202017-01-31T00:57:20.864-06:002017-01-31T00:57:20.864-06:00I don't know what "taxing rates of return...I don't know what "taxing rates of return" means.<br />Can you explain it or point to where it was said?<br />--E5Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-57918990999812776762017-01-31T00:37:31.507-06:002017-01-31T00:37:31.507-06:00Discount on prepaid taxes sounds a lot like volunt...Discount on prepaid taxes sounds a lot like voluntary Keynes. At least the Keynes that was explained to me. Where in a recession the government borrows, and spends, money from people who have it but aren't spending it. Then pays back those borrowings out of tax revenues that come in when the economy gets busy again.<br />I believe the first half of Keynes has been tried repeatedly but no politician had the intestinal fortitude to follow through with the second half. Lily livered "conservatives" always demand to give taxes "back" to the wealthy. When they should be simply paying back the money that was borrowed.<br />In this "equity" case people would be lending money to the government when they don't want to spend it (like first half of Keynes). And withdrawing the equity, in lieu of paying tax with cash (like second half of Keynes). If enough people would be willing to do it then Keynes might finally get a full cycle of implementation.<br />--E5Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-13750013986646617322017-01-31T00:14:47.284-06:002017-01-31T00:14:47.284-06:00Speaking for me, not the professor....
Interesting...Speaking for me, not the professor....<br />Interesting article about BTT here.....<br /><br />I seriously doubt that 0.1% is valid (the article mentions 2%).<br />It involves virtual elimination of cash (i.e. coins and notes) transactions by removing anything bigger than about 50 cents from circulation.<br />I suppose it would, in effect, be a sales tax. The assumption is that every transaction is reflective of a sale of goods or services.<br />The comment is that it (virtual elimination of cash) would be disastrous for India's rural economy. Perhaps BTT would have validity in urban areas where it might be possible to make virtually all transactions electronic. But the latter would equally facilitate a VAT.<br />It seems that BTT has no connection to "Robin Hood Tax" i.e. the suggestion for a tiny % tax on all trades of stocks and such.<br />--E5Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-37830972712704095342017-01-30T22:28:32.190-06:002017-01-30T22:28:32.190-06:00Staking a zombie through the heart was Peter Robis...Staking a zombie through the heart was Peter Robison's suggestion in Uncommon knowledge interview (at 15:30 here https://www.youtube.com/watch?v=spe619WX-Q4).Ninahttps://www.blogger.com/profile/14185021888855340322noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-59501850853054075482017-01-30T17:59:39.162-06:002017-01-30T17:59:39.162-06:00Whoops! Mixed metaphor for sure. Thanks. Whoops! Mixed metaphor for sure. Thanks. John H. Cochranehttps://www.blogger.com/profile/04842601651429471525noreply@blogger.com