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| Source: Wall Street Jouirnal |
With Monday's deadline for filing tax returns looming, let's start a national conversation: How much is the most anyone should have to pay? When do taxes indisputably start to harm the economy and produce less revenue—when government takes 50% of people's income? 60%? 70%?
I like half, but the principle matters more than the number. Once the country settles on a number, each of us gets to add up everything we pay to government at every level: federal income taxes, yes, but also payroll (Social Security, Medicare, etc.) taxes, state, city and county taxes, estate taxes, property taxes, sales taxes, payroll taxes and unemployment insurance for nannies, household workers, or other employees, excise taxes, real-estate transfer taxes, and so on and on, right down to your vehicle stickers and those annoying extra taxes on your airline tickets.
On April 15, once this total hits the alternative maximum tax, you've done your bit and federal income taxes can take no more. You compute federal income taxes as usual, but then you get to reduce the "tax due" that the total is less than the alternative maximum.
The zombies howl that the top federal tax bracket is still "only" 40%. Surely "the rich" can contribute a bit more? They forget that the economic damage of taxes comes from the total tax bite, not just the federal income tax.
Marginal taxes are a purer measure of economic damage. If you earn one more dollar, how much do you get to keep? Marginal rates are higher than average rates in a progressive system: If the government takes 100% of income above $100,000, then somebody earning $150,000 pays a 33% average tax rate but has no incentive to work at all after he reaches $100,000. Ideally, we would limit marginal rates, but this is not practical in a simple backstop like the AMaxT.
American governments also like to hide taxing and spending by passing mandates and regulations, forcing people and businesses to spend on their behalf. Ideally, we would limit this economic damage as well, but this is also not practical in an alternative maximum tax.
However, both considerations mean that the true economic damage will be higher than the AMaxT rate, so we should leave some headroom in setting that rate.
Every cent of corporate taxes comes out of some person's pocket, in higher prices, lower wages, or lower returns to investors. For example, even the tax zombies don't dream that we stick it to the big oil companies by charging gas taxes. To limit this damage, every single cent of tax that government assesses, at all levels, should be assigned to somebody and count against that person's alternative maximum tax. It is easiest to assign all corporate taxes to shareholders. When corporations send you the annual 1099 dividend form, they also report all taxes paid by your shares, which count against your AMaxT. Some taxes could similarly be assigned to workers and reported on W2 forms.
Yes, there are details to work out. People get big tax bills in some years, such as when they pay estate taxes. Incomes fluctuate. Smart tax lawyers could game the system.
This isn't hard to fix. For example, we could use an average of several years' income or, better yet, scale the AMaxT limit to consumption rather than income.
Liberals might object to a maximum tax, since it leaves out all the benefits that we get from government. In setting the maximum level of taxation, shouldn't we consider the nice roads, free schooling, police, national defense, thoughtful regulation, and other benefits and services?
This is a valid consideration if one argues about what's "fair." But I propose the AMaxT entirely to limit the economic damage of taxation, a goal you must consider even if you think it's "fair" to take every cent of a rich person's income.
To limit economic damage, benefits are irrelevant. Suppose that the government levies a 100% income tax, but it is so good at providing services that each of us gets back twice the value of what we put in. Good deal? Yes. Functioning economy? No. Each person gets services whether they do or don't pay taxes. But with a 100% income tax, nobody works, nobody pays any taxes, and nobody actually gets any services.
How many people are really being taxed at outrageous rates? I don't know. The U.S. tax system is so complex, with so many layers of taxing authority, that nobody really knows. Still, an alternative maximum tax is a win-win bet.
If there really are few people who pay an extraordinarily high percentage of their income, then liberals shouldn't object. They won't lose any revenue and will enjoy snickering "I told you so." If it turns out that there are lots of people being so taxed, then we will sharply reduce the unintended, multiplicative effect of taxation, and we will measure that fact. A canary in the coal mine is as valuable chirping as choking.
The disincentive effects of heavy taxation settle in gradually. For the first year or two, all people can do is hire smarter lawyers and work a little less hard. It takes years for businesses to retrench, close, never get started or fail to expand; for people and companies to move abroad; for students to give up investing in an expensive M.B.A., medical school or engineering degree; for people to stay put rather than follow lucrative opportunities, or to retire early. All this shows up slowly and gradually drags down an economy and its tax revenues.
So the AMaxT is most important for the backstop promise it makes to young people and entrepreneurs. Yes, start a company, go to school, work hard, invest, hire people. We guarantee you that no matter what happens, no matter how loud the zombies chant, no matter what clever "revenue enhancers" they come up with, you will get to keep some reasonable fraction of what you earn. Go for it.
( One more point that got cut for length: With an alternative maximum tax, people might abandon complex tax dodges in favor of simply taking the alternative maximum.)
Updates: Several people have pointed out that this system advantages states with high income taxes. Good point. Since state and federal income taxes are both due April 15, let's amend the proposal to let you cut back proportionally on both federal and state income taxes. Oh, and credits against next year too.
A colleague writes: Perhaps you know this, (I didn't) but the corporate system you describe is close to the franking credits used in Australia, New Zealand, Malta and maybe other countries. In essence, rather than declare the dividends they receive on their income taxes, shareholders report the corporation’s before-tax earnings that supported the dividends (the grossed-up dividend) and include the taxes the corporation paid as a credit against their taxes. For your purposes, this system already assigns the corporate taxes to the shareholders. (If your tax rate is 0, you actually get a check back from the government for the amount of taxes the corporation paid on your behalf.)
On the issue, how many people are there who pay more than half. Total, on budget, federal state and local spending is about 42% of GDP. Tax expenditures bring that up to 46%. Off budget, mandates, etc. bring us easily over 50%. The average person is already paying something like his income in taxes, either now or later (when the debt comes due). Europe's numbers only look bigger because they collect it all in one place.
Allen Sanderson has a nice related Op-Ed adding up some state and local taxes in Illinois
This was a thoughtful article. If nothing else, I like the article as a conversation starter. Two preliminary observations, the first neutral and the second positive: (1) this will divert more federal dollars to states, cities, and counties. (2) Businesses will be far less worried about the employer mandate destroying their profit margin.
ReplyDeleteThinking more about my first observation, this AMaxT could have very perverse incentives. The states, cities, and counties would be motivated to usurp essential service performed by private companies--e.g., water, electricity, garbage, etc. If these are performed by the government bodies rather than private companies the taxpayer's bill will qualify as a tax credit. This harm can be seen by an example: private company A provides water to households at a cost of 10 cents per gallon, the city provides water to households at a cost of 15 cents per gallon. Ordinarily people would opt to buy water from company A; however, if the entire bill will qualify as a tax credit, people already close to (or over) the AMaxT would be well served to buy from the inefficient city over company A.
DeleteThis seems like the absolute last thing on Earth to be concerned about. Especially since many millionaires and billionaires don't pay more than 10-13 percent of their income in taxes. We're looking at you, Mitt Romney.
ReplyDeletehttp://www.taxpolicycenter.org/taxfacts/displayafact.cfm?Docid=456
Even when you combine all federal taxes the top 1 percent paid only 29 percent of their income in taxes. State taxes are not much of an issue for the wealthy since they tend to be regressive i.e. sales and property taxes. Very few states have a significant income tax and even then you can deduct those on the federal tax returns.
I am sure the readers of the WSJ will eat this up but the actual data on tax rates for high-income returns is closer to 20 percent than 50 percent.
The top 400 taxpayers in the IRS with millions of dollars in income are paying tax rates less than 15 percent.
http://www.cbpp.org/cms/?fa=view&id=3090
Welcome mr. Zombie. You totally missed the point. Federal, yes. State, local, estate, property, sales, employee, corporate taxes paid indirectly. Keep going. Greg Mankiw figured his rate at 93%, and left out sales taxes, property taxes and a bunch of others.
DeleteThe Tax Policy Center's calculations which are based on IRS data included corporate taxes. You can click the link. State and local taxes take an insignificant amount of money from the wealthy since sales and property taxes are regressive taxes and few states have very progressive income taxes.
Deletehttp://www.itep.org/pdf/whopaysreport.pdf
The top 1 percent pays a whopping 2.3 percent of their income in state and local taxes in Florida. In Mass. it's a whopping 5 percent. So not to pick on Mitt Romney, I am only using him because we have his tax data he paid about 10 percent in federal income taxes, another 5 percent in alll local taxes and probably another 9 percent indirectly in corporate taxes. I think most Americans would agree that 25 percent is too low, and not too high, for someone who makes 15-20 million a year doing nothing since most of his money is unearned income.
If your information is accurate, then Mr. Cochrane's plan would not have an adverse effect on the current taxation of the rich. This tax would be quite progressive. As the ITEP report states, poor individuals on average pay a much higher percentage of their income in state taxes than the wealthy.
Delete"Greg Mankiw figured his rate at 93%, and left out sales taxes, property taxes and a bunch of others."
DeleteSomeone has made a mistake ...
Usually the calculations that arrive at those kinds of numbers just add up percentages in a way that ignores the percentages are being applied to residual income, rather than gross income.
"Someone" is Greg. Why don't you read it first instead of saying what those calculations "usually" do. Greg doesn't make simple mistakes like that, really.
Deletehttp://www.nytimes.com/2010/10/10/business/economy/10view.html
http://gregmankiw.blogspot.com/2008/10/blog-post.html
(93% in the second one)
I did not read it because you did not give the link and I was not about to start hunting around and guess what you were referring to. I said "someone" because it was possible that Prof. Mankiw had been misinterpreted. I have now read the two items and see that you have quoted him accurately.
DeleteI see that Prof. Mankiw:
1) makes no allowance for the possibility of using an IRA or 401(k) to reduce the taxes on his investments.
2) assumes that capital gains will be realized, and hence taxed, every year (which is not how people should invest)
3) treats the estate tax as a tax on him (I would view it as a tax on his children, but I see his point).
To arrive at his 93% tax burden Mankiw assumes that 100% of the income (after taxes) would be invested and that it would be invested in a tax inefficient way.
(BTW Canada is one of the countries that gives credits for taxes paid by corporations against taxation of dividends)
Mankiw is also not taking into account the number of deductions/loopholes available to him and his corporation over the life cycle. The actual taxes paid by a typical corporations is more like 15% not 35%. Kotlikoff did computations of taxes over the lifetime. You don't get anything like 93%.
DeleteI think people also tend to over estimate the effect of marginal taxes. For decisions like going to medical school, what matters is lifetime average tax rate not the marginal rate. In that regard AMaxT would have a more significant impact on incentives
Steven Landsburg of Rochester had an article in the Wall Street Journal 12 years ago (March 5, 2001), with the title "You Too Could Face 95% Taxation".
DeleteThought you might be interested. Partial transcription:
The Wall Street Journal
REVIEW AND OUTLOOK
Monday, March 5, 2001
--------------------------
YOU TOO COULD FACE 95% TAXATION
By Steven E. Landsburg
Once upon a time, a man went to work and earned a dollar. He used the dollar to buy a share of stock. The stock paid a dividend of 10 cents a year, 10% being the going rate of return in the land.
Thanks to wise corporate management, the dividend eventually doubled to 20 cents a year, causing the stock price to double as well. The man sold his share for $2, which he put in the bank. Eventually, his children inherited the money and reinvested it in the same company. They used their 20-cent annual dividend to purchase goods and services, happily ever after.
That was a fairy tale. Here is the reality:
Once upon a time, a man went to work and earned a dollar. After paying state and federal income taxes, he was left with 50 cents. He used the 50 cents to buy half a share of stock. When the stock price doubled, he sold his half-share for a dollar, paid a 10-cent tax on the capital gain, and put the remaining 90 cents in the bank. Eventually, his children inherited the money, paid 50 cents in inheritance tax, and reinvested the remaining 40 cents in the original company.
The company continued to earn a 10% rate of return, of which half went to pay corporate income and excise taxes. The children therefore received an annual dividend of 5%, which came to two cents a year. After paying personal income tax on the dividend, they were left with a penny a year in income. They used part of that penny to purchase goods and services, and the rest to pay sales taxes.
Okay, that's a worst-case scenario.
[I cannot transcribe it all, I am over the limit of characters, but check the whole thing out.]
Another crucial point which Greg Mankiw missed. How can you assume that the before tax rate of return on a corporate investment will stay the same in a world where there are no taxes? How can returns stay the same in the absence of roads, defence, law and order etc. which taxes pay for? Assuming that these would be provided by the free market in the absence of taxes, won't those expenditures diminish returns in a similar way that taxes do?
DeleteThanks for highlighting the principle that no one, including the rich should be taxed above a certain percentage of earnings. However, a maximum tax rate that includes state and local as well as federal taxes punishes states and towns with low tax rates, which I doubt is Professor Campbell's intent. If California has a top income tax rate of 13% and New Hampshire no income tax rate, the federal income taxes of CA residents should not be capped at a lower level.
ReplyDeleteAn alternative maximum tax operating only at the federal level is a good idea.
In a previous message I referred to "Professor Campbell" rather than "Cochrane". Please correct the earlier message if possible.
ReplyDeleteDon't worry, that's a compliment!
DeleteI agree with the idea from an economics standpoint, but with limited political capital I think the simplification message is more important. This would add more pages to the code and increase opportunities for politicians to screw it up and accountants to take advantage.
ReplyDeleteIf tax incidence cannot be seen, what is the mechanism for which it can be distorting and affect behavior? Let 100% of a corporate tax be passed through to wages and agents are oblivious (strong assumption). If done so equally on all levels, it's a form of lump sum taxation in which people work just as hard, right? I'm missing something. I wonder if the going assumption is that while people cannot tell where and how they're taxed, they can properly value the value of their final consumption and know, I made X on paper, I spent .4X on things I want, so I must have been taxed at 60%. That I buy, but it's harder for me to argue, in a world where no one has any idea on incidence that they know IF they had worked X+1, they would have spent .4x+.4 (or what we really believe to be the case, + .03). I guess we could assume in the time series every person has enough income heterogeneity to be able to discern their marginal rate ... though in a permanent income world where people have credit cards and home loans and consumption and income are delinked ... I'm just utterly confused.
- Finance PhD student who needs to take more econ ...
A comment received by email: Total taxes paid is really what one should look at indeed. Note President Sarkozy introduced a maximum tax in France (the “bouclier fiscal”, or tax shield). Of course, that did not survive.
ReplyDeleteWhat would be worth investigating a bit is also how the US treats foreign income. In most countries, foreign income that is pursuant to a double taxation treaty taxed elsewhere, is not subject to tax in the country of residency. US federal tax subjects all worldwide income to tax, and only gives a partial credit for foreign taxes paid. But the most primitive of all are state tax systems that do not give any credit at all (and blatantly ignore double taxation treaties). As a result, US residents of “blue” states with foreign income are easily subject to overall income tax rates (federal, state and foreign tax) of well over 50 or 55%, just as a result of double taxation of income that was already taxed abroad.
The other tax topic that I’d really hope academia would look into (and quantify) is the well-hidden confidential scam by which state taxes in half of the states exempt public sector pensions (including 250k+ pensions of “administrators” and 50 year old retired police chiefs of peaceful hamlets in upstate New York or rural California) from state income tax. But that’s another topic.
To ask how much tax someone should pay is silly for the premise of the question is false---that the position of all taxpayers is the same. What should be the tax rate of a supplier to the US Gov't who takes no risk, for he works on cost plus contracts? Should he be able to earn an income higher than Congress or the President?
ReplyDeleteThe better question is can we manage an income tax, especially given the millions of opportunities for fraud and evasion (example, pumping up cost of goods sold by false invoicing from Hong Kong shields hundreds of billions of income from taxes each year). Mankiw pays 93% because he cannot lie about his income. His taxes would be a lot lower but for all who lie about their income and avoid taxes.
I am a liberal democrat who favors progressive taxation but I long ago abandoned the idea of doing such with an income tax because it is impossible to administer such fairly (and the compliance cost to honest business is off the charts).
In addition, it is sheer madness to tax creation of jobs with FICA taxes. A FICA tax is about a 20% wealth tax on a venture capital fund, for example, as most funding goes into salaries. My liberal friends wholly fail to understand this.
Because it would make too much sense, we should have only three taxes (and no employer provided health insurance): (1) a land tax, on land only; (2) a gross receipts/VAT on world wide sales; and (3) a wealth tax, world wide, on every American citizen or owner of an asset with a connection to the USA. The last tax should be collected by bounty hunters and secret rewards, letting America trial lawyers do the court work on a contingent fee basis. For example, we could pay secret rewards to Swiss Bankers who tip off an American depositing lots of undeclared money. We just have to be willing to fight fire with fire. The wealth tax would hit certain targets as well, such as property and casualty insurance premiums. Thus, you can have an Old Master in the living room, but you are going to pay a lot of taxes to insure such. And, if someone takes the painting to Monaco, well an employee will seek a photo on a cell phone, stop at the US Counsel, and retire when our CIA operatives enter the villa and liberate and forfeit the undeclared painting.
"Wealth tax" sounds as if it would be hard to administer, possession does not prove "ownership." See, e.g., trustees and messengers.
Deletean off shore wealth tax is very easy to administer. you just seize assets and let people sue to get it back. this is where a reward system would really work. leave home for the night and your housekeeper photos your household effects and emails them to the US embassy The next day the navy seizes your yacht or house in Palm Springs. You come running in saying, I reported correctly, making a false statement under oath. The agent then pulls out those photos with the painting of an Old Master in your living room that isn't reported. On go the cuffs and off you go to the caboose.
DeleteIt is those arrests at 6:00 a.m. in the morning, followed by a perp walk, that get attention. It can be done. We have plenty of manpower. They are just focused on the wrong tasks.
Get rid of the income tax and it will be a very different game.
" you just seize assets and let people sue to get it back"
DeleteWhat a wonderful system that would make. Perhaps we should implement it in private transactions. where is your house again? :)
As a supplement on wealth taxes. Marginal Revolution has not realized that it is coming.
Deletehttp://marginalrevolution.com/marginalrevolution/2013/04/the-idea-of-wealth-taxes-is-only-getting-started.html
Alexander Hamilton,
DeleteWhy does a government tax to begin with? Forget all of the arguments you have heard about progressive versus regressive, wealth redistribution, or fair versus unfair.
1. Does a government tax to regulate the supply of money? (See Abba Lerner's functional finance)
2. Does a government tax to regulate the value of money? (See Article I of the Constitution)
3. Does a government tax and spend to regulate the velocity of money? (Liquidity preference of 0 for federal government)
4. Does a government tax to regulate the time cost of money?
Frank,
Deletethe government taxes to provide public goods. "Public goods" in economics are those defined as "non-rivalrous in consumption". [This definition is in every Public Finance textbook.] And *because* there is non-rivalry in consumption, the finance of such goods has a big moral hazard component. If Peter can consume the same amount than Paul of public good X, then Peter will free ride on Paul to finance the provision of X. And so will Paul. And thus, public good X is not supplied optimally. And this is where taxation comes in. The government compels you to finance public good X, to avoid moral hazard or free ridership on your part.
Of course, it gets very complicated very quickly. Because in the real world, it becomes very fuzzy what a "public good" really is. It is not clear that all of the goods financed in the 3.9 Trillion Dollar Federal Budget are really "public goods".
Manfred,
DeleteBut can a government provide public goods with placing a drain on the availability of private goods? During World War II the government provided a public good (defense of country) while at the same time demanding private goods (labor, material, etc.) be directed towards that public good.
Why are public goods defined as non-rivalrous in consumption only? What happens when a public good is rivalrous in production?
Frank,
DeleteTo answer your first question: of course. Producing any good takes resources, and resources are finite. Thus, if the government produces "defense", it takes resources (manpower, land, other natural resources, money, etc) away from the production of other goods and services society may want. There is one thing though: *because of the non-rivalry aspect*, "public" goods are externalities - positive externalities. And therefore, the production of these "public" goods should aid (to a certain extent) the production of private goods. For example, if the government decides to finance a vaccination campaign, this is considered a "public" good, because healthy people produce positive externalities. It is much better to run a society with healthy people, than with sick people (PLEASE, I do not want to get mired in a discussion of whether the whole health care sector should be run by the gov, or Obamacare, or whatever - I am just making a small point of positive externalities). Same thing with Interstate Highways.
But - to run a vaccination campaign, or build Interstate Highways, you need resources, and thus, it is not free.
To evaluate whether such production of "public" goods is beneficial to society, economists have developed "social cost-benefit analyses". Arnold Harberger comes to mind. If my memory does not fail me, he has papers on social project evaluation. The World Bank also has techniques to evaluate the social benefit of "public" goods projects.
As to your second question: production in some sense is always rivalrous, because resources are finite.
You ask "why are public goods defined as non-rivalrous in consumption only", because that is the definition. It basically started with Paul Samuelson's paper (ca 1954, in the Review of Econ and Statistics), he developed the first formal model of pure public goods, which are non-rivalrous in consumption (but rivalrous in production in the sense that they do need resources to be produced).
People took his model and finessed it - nowadays it gets more complicated with "club goods", "excludable goods", etc etc. But, the basic definition still stands.
Manfred,
DeleteBack to the original question - why does a government tax.
Your answer:
"Frank, the government taxes to provide public goods."
That is not entirely true. The government can obtain payment to fund public goods by simply selling those goods. The Federal Communication Commission already does this with bandwidth auctions. Similarly, the Treasury Department does this with bond auctions (if you count bonds as a public good). Because money is fungible, the sale of one good can fund the production of another good (See Social Security Trust fund - bonds are sold to Social Security to pay for other government expenditures).
Frank,
DeleteI am not quibbling with you.
You are correct that in some instance the government does sell assets. Two comments however. One, I am not sure how bandwith works, but my guess is that if some bandwith is sold to Firm A, then Firm B cannot use it. Thus, bandwith would not be a public good, it is a private good (it is rivalrous in consumption). Same thing with bonds - if I buy a certain T-bond, then you cannot buy that particular T-bond; it seems to me that there is rivalry in consumption as well.
Comment #2 is that there are other goods that the gov has NOT sold, like national defense. Yes, it does buy equipment from private suppliers, but the Armed Forces still are in the gov hands.
Now, there are people who have argued throughout economic history that there are NO public goods (again, in the sense of being non-rivalrous in consumption). That ALL goods are private, and thus, they should be provided by the market. Well, ok, it's a point of view. It is not clear that such a view is the majority view among economists.
One more thing: not all public goods are provided by the government. The typical example mentioned in Pub Finance class in network TV. When CBS sends out its signal, and if I watch CBS, I do not diminish the quantity available to you to watch CBS as well. Network signal is a public good, but it is privately provided. How? Via advertisements. In some sense, the ads you see on TV are the "tax" that you pay to watch the CBS signal.
Pick up a Public Finance textbook, and read the "provision of public goods" chapters. For example, Harvey Rosen's textbook is one of the best textbooks out there.
Given that actual government revenues (local,state, federal) have remained at the same level as a % of GDPs since the 60's when we had marginal tax rates as high as ~90% and as low as ~30%, perhaps we do have an implicit AMaxT provided through loopholes.
ReplyDeleteWhere exactly do you get this disinformation?
Deletehttp://research.stlouisfed.org/fred2/graph/fredgraph.pdf?&chart_type=line&graph_id=&category_id=&recession_bars=On&width=630&height=378&bgcolor=%23b3cde7&graph_bgcolor=%23ffffff&txtcolor=%23000000&ts=8&preserve_ratio=true&fo=ve&id=W077RC1A027NBEA_AFRECPT_GDP&transformation=lin_lin_lin&scale=Left&range=Custom&cosd=1960-01-01&coed=2012-10-01&line_color=%230000ff&link_values=&mark_type=NONE&mw=4&line_style=Solid&lw=1&vintage_date=2013-04-16_2013-04-16_2013-04-16&revision_date=2013-04-16_2013-04-16_2013-04-16&mma=0&nd=__&ost=&oet=&fml=%28a%2Bb%29%2Fc&fq=Annual&fam=avg&fgst=lin
1960: Government receipts as percentage of GDP = 27%
1970: Government receipts as percentage of GDP = 30.9%
1980: Government receipts as percentage of GDP = 32%
1990: Government receipts as percentage of GDP = 31%
2000: Government receipts as percentage of GDP = 34.5%
2010: Government receipts as percentage of GDP = 30.5%
I am not making a straight supply side argument, but I have noticed that when the total take from government(at all levels) exceeds 30% economies begin to slow. And that is big because many of our problems are insurmountable if we have slow or negative growth.
ReplyDeleteKyleN,
Deletehttp://research.stlouisfed.org/fred2/graph/fredgraph.pdf?&chart_type=line&graph_id=&category_id=&recession_bars=On&width=630&height=378&bgcolor=%23b3cde7&graph_bgcolor=%23ffffff&txtcolor=%23000000&ts=8&preserve_ratio=true&fo=ve&id=W077RC1A027NBEA_AFRECPT_GDP&transformation=lin_lin_lin&scale=Left&range=Custom&cosd=1960-01-01&coed=2012-10-01&line_color=%230000ff&link_values=&mark_type=NONE&mw=4&line_style=Solid&lw=1&vintage_date=2013-04-16_2013-04-16_2013-04-16&revision_date=2013-04-16_2013-04-16_2013-04-16&mma=0&nd=__&ost=&oet=&fml=%28a%2Bb%29%2Fc&fq=Annual&fam=avg&fgst=lin
Here is a graph of federal, state, and local tax revenue as a percentage of GDP. Do you see any correlation between recessions and government revenue because I sure don't.
REALLY! Because I sure as hell do. I see a rather obvious connection, a recession seems to occur just after each high peak of taxation.
DeleteEach successive peak was higher than the last up until the year 2000.
DeleteLet me try to rephrase the question - do you see a level of taxation as a percentage of GDP that has always pushed the country into recession?
I have always wondered this. Can you tell me what is the definition of a “tax”? Suppose I move into a community where the rent includes maintenance charges for common spaces (like the gym, pools, pas etc.). Is that a tax? Or would you call that a fee for a service provided? How is this in any way different from what a state charges its citizens for the services it provides? Do you assume that only governments can collect tax? I just fail to see the economic distinction between taxes and other transactions. If your objection is to income taxes, would you be satisfied if all taxes became consumption taxes? How are consumption taxes levied by the state economically different from any other transaction?
ReplyDeleteSrikrishna,
Deletelet me attempt a response. But space is limited, so the reply may be incomplete.
Your community example: in some sense, I would say yes, it is a tax - with one big difference. Suppose your hypothetical is a gated community - this gated community charges you these "community fees" (for grass cutting, pool maintenance, etc). The difference with a "normal" tax is that, the gated community can EXCLUDE you from living there, if you do not pay the tax/fee. The services the gated community provide (grass cutting) are what is called in the literature an "excludable public good" - all benefit in the same amount from the grass cutting, but the gated community can keep people out from such benefit.
Another typical example of an "excludabe public good" is cable TV. Everybody who subscribes to cable TV consumes the same amount of cable TV, my consumption does not reduce your consumption. But, the cable company CAN exclude me and you, IF we do not pay the fee.
With taxation as you understand it, it gets trickier. Normally, the government cannot exclude you so easily from living in a town. Of course, it can impound your assets, threaten you with foreclosure, threaten with "the full force of the law", but it cannot simply expel you from a town, if you do not pay your taxes.
In general, the fine difference between a tax and a "fee" is that taxes go to finance "non-excludable" public goods, and "fees" go to finance "excludable" ones.
Then you branch out to WHAT FORM taxation should take - income taxation, consumption taxation, etc. That is a whole other story, which entails incentives, deadweight losses, opportunity costs of taxation, etc, for which there is no space here.
I think you have confused the meaning of public goods and "Excludable". Cable TV is a club good - non rivalrous and excludable. However, within the confines of gated community, the services are rivalrous and non-excludable (meaning I cannot exclude certain residents of the community from using "specific services" as long as they are within the community). A gated community is very similar to a state. If I don't pay taxes in a state, I can get arrested so there certainly are sufficient penalties to ensure that people pay taxes.If you feel state taxes are too high, you are free to move to another state similar to how you can move to a different community.
DeleteWhile I like what the professor proposes in theory, I have trouble with the practice.
ReplyDeleteRight now you do a lot of work to find out what your income is. Then you calculate your tax due under the standard forula. Then you cacluate it using the AMT formula. Then you do it all again for the state. Now you want me to calculate my all my taxes paid, and I will pay the greater of the standard or the AMT but less than the AMaxT...
Simplify!
What we really need is to stop jiggering with the code. Set it and forget it. If we ever get to comprehensive tax refrom, included in the package would be the requirement for a supermajority to ever change tax policy again.
IMF telling the UK to slow down on the spending cut...
ReplyDeletehttp://www.telegraph.co.uk/finance/economics/10007727/IMF-steps-up-call-for-Osborne-to-slow-down-austerity-plans-as-row-escalates.html
Is it possible to show them to slow down on the tax hike instead and *not* on spending cuts??
Prof. Cochrane,
ReplyDeleteThe AMax Tax will be definitely beneficial to those young people like us, in a sense that it will encourage higher education. I hope it could be implemented one day, though I understand it could be a long time waiting.
How many people are really being taxed at outrageous rates? I don't know. The U.S. tax system is so complex, with so many layers of taxing authority, that nobody really knows.
ReplyDeleteThis assertion is (probably) not true...
its perfectly easy to figure out IF you have the right information, and electronic card companies know this when a person uses their cards for all their purchases for a record.
while not a huge sector of the population, i see people who use their cards as bookkeeping vehicles (and i am sure that is a selling point). this is more often done with professionals who must go over their expenses to see what is for which company, themselves, etc...
but from a set of those records, you can see what a few years expenses are in detail. you can work from that to companies, and so on...
it would be quite an endeavor though
heck, tracking the real tax cost in whole computational chains from just one supermarket grocery cart would be a challenge...
i think the issue now or rather the best analogy i can make
is a bunch of drunk maple syrup sellers who owe for debts and wish to try to tap the maple trees to pay for it without their having to change their ways
worse... a huge proportion of their most proficient and best educated trees are about to die off, and policy and planning have once again zigged when they should zag in trying to match people to a future vision (rather than just educate them very well and let them self organize and be adaptable if things change).
I always thought the reasons given for civilizations rising and falling were over complicated, and avoided putting the blame on who was to blame at the end.
[there is a variant for each type of state this is the democratic republic version]
i see it as:
smart people show up, and self organize to some form of success
they then grow, have wealth, and need governance of some sort
they are involved they pick ok people and things work for a while
eventually the socially skilled but cargo cultish people with less scruples and other technique, maneuver around merit to the prize of governance
then they just waste tons of money and human effort on things counter productive to living and survival and this keeps going till thats that.
[the variation for states like rome would be]
smart people show up, and self organize to some form of success
they then grow, have wealth, and need governance of some sort
so they become governance and have self interest in things doing well
then put the same end process of faces with no minds that make up rules for people to live by and who tap the till, and so on...
Well, if it were up to me, we would scrap the tax code, cut federal outlays to 11 percent of GDP, and go with a 6 percent national sales tax and and print new money eqault o five percent of GDP and pay for the federal government hat way.
ReplyDeleteThat said, the top federal income tax rate in the 1960s was 92 percent, and the economy boomed. Real per capita income soared by more than 30 percent in the 1960s, so the top federal tax rate obviously is unimportant in terms of real GDP growth.
I think what needs limiting is the take of GDP by the federal government. As I said, I would cut to 11 percent, and finance through the printing of money and a 6 percent national salads tax.
But I like salads!!!
DeleteNobody actually paid that 92% rate. The tax code was chock full of various deductions to get around it. The result was people making investment decisions based upon the tax and not based upon the actual value of the investments.
DeleteRelated to the state tax issue:
ReplyDeleteSuppose we have a carbon tax or congestion tax to force drivers to internalize externalities. Presumably, this leads to more efficient outcomes and is a good way for the government to collect revenues. But, once I hit my maximum tax burden for the year, these taxes will not matter to me. Either I destroy the environment and pay carbon taxes or I bike to work and pay income taxes. Pigovian taxes lose their effectiveness on individuals who have hit the alternative maximum level.
I was thinking the exact same think Josh :)
ReplyDeleteThe anonymity of the internet has vanished.
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