Some thoughts on Taxes

During last night’s Kudlow & Co, the conversation turned towards the subject of Taxes. I have hinted at my views over the years, but never gone into terrible detail here. Given what today is, its as good a time as any to flesh out these ideas.

1. Capital Gains Tax Cut: Markets did pretty well with a 20% Cap Gains rate during the 1990s. Rather than merely keep the rate at 15% (what the GOP wants), or raising it back 20% (what the Dems want), I propose the following: Let the rate go back to 20%, but carve out a deep discount — a 10% capital gains rate — for all alternative energy research and start ups. This should include research for nuclear power, waste storage, etc.

The priority should be to fund the small start ups that are the engines of innovation, and not just create another giveaway to oil companies (disclosure: I own COP and BP).

Incidentally, this is not primarily a "green" tax cut. As I said on K&CO. last night, energy independence is a matter of National Security. Thomas Friedman is correct: We are funding both sides of the war on terror, and we need to stop sending our money to really nasty people in bad parts of the world.

2. Alternative Minimum Tax (AMT):  Since the AMT isn’t indexed, it keeps creeping down the economic strata as inflation drives salaries higher (but not standards of living). Drop the AMT to a flat rate (20%?) for those making under $500k. This is very consistent with our views that the Middle Class squeeze is having an increasingly pernicious effect on U.S. families.

I’ve gotten tagged by the AMT in the past, and its no fun. But I was really surprised how many people I know, making what I would describe as a reasonable middle class salaries (but by no means wealthy) who are part of the AMT issue.

In 2006, ~3.4 million people got caught by the AMT. Estimates for 2007 go as high as "23 million households." This is far beyond what the original intention of the tax was . . . 

3.  US Taxes are not very high: There are two schools of
thoughts when it comes to taxes: Some believe they should be cut
regardless, while others believe tax cuts can be targeted to achieve
specific aims.

Where I fall is somewhere in between these two schools: When taxes
are terribly high, they are repressive to all economic growth, and
should be cut regardless. That was the case decades ago, but is no longer true today. (Even Larry would agree with that).

Dropping the top rates from 90%/75% to 20-40% was an enormous shift with major repercussions; Cutting the top marginal rate from 39% to 36% is merely a tax cut for cutting’s sake.

4. Pay-as-you-go works. The biggest problem in terms of budget deficits is that spending and tax cuts never seem to be paid for. As bad as the Dems were in terms of reckless spending, the past few years have seen an even more wanton approach to the ideas of fiscal conservatism, balanced budget, and small government.

Paygo is pretty simple: Tax cuts need to be paid for with spending cuts; Spending increases need to be paid for with Tax Increases. A Paygo system should keep both government spending and tax increases under control, as it forces each party to contemplate doing what they don’t want. 

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  1. V L commented on Apr 17

    1. Agree 100%
    2. Agree 100%
    3. Agree 100%
    4. Agree 100%

    I will vote for you if you run for office!

    P.S. Barry, why don’t you run for office and bring some common sense to our government before the imbeciles and special interest groups in Washington destroy this wonderful country?

  2. s0mebody commented on Apr 17

    Paygo may have worked, but I don’t think it can work going forward. If we were to revert to a paygo scheme starting tomorrow, spending would have to get slashed (and taxes increase) and then the future unfunded liabilities look ominous. Can you envision a paygo system which has the capacity to service social security through the boomer’s retirement?

    The picture I’m starting to see is monetary inflation/hyperinflation in order to service gov’t spending to the point that the system breaks. To wit, the subprime bailout talk out of congress. No solution they are throwing out is anything more than printing money out of thin air.

  3. dark1p commented on Apr 17

    you make a lot of sense. which is why none of it will happen in the forseeable future!

  4. dark1p commented on Apr 17

    you make a lot of sense. which is why none of it will happen in the forseeable future!

  5. Nova Law commented on Apr 17

    Tax rates used to be much higher, but the tax code was shot through with so many uneconomic tax dodges, that the effective amount and proportion of tax paid by upper brackets used to be much lower than today.

    As Larry correctly mentioned last night, in 1980 the top 1% of wage earners paid 19% of the total income tax take (70% top rate), while in 2004 the top 1% of wage earners paid a whopping 37% of the freight.

    http://www.taxfoundation.org/news/show/250.html

    Proposals to raise top the top rate back into the 40s or 50s would certainly lower the amount and proportion of taxes paid by the top 1%.

  6. V L commented on Apr 17

    The top 1% pays more in 2004 than they paid in 1980 because in 2004 there is much greater income discrepancy.

    For example, in 1980 CEO’s made 50-100 times more than what an average worker made; but in 2004 CEO’s make “a whopping” 400-500 times more than what an average worker makes.
    As a result, they pay more taxes in 2004 because they make more.

    If Larry and you want to fix this problem, it can be fixed (only not through lowering the taxes for the rich but through lowering their compensations).

  7. Fred commented on Apr 17

    I think a tax hike for anyone making over $1,000,000 makes sense. I would also suggest a “luxury VAT tax” on sales of “items” over $100k.

    I also agree with your AMT comments. The Death Tax should be eliminated for estates < $5 mill. Finally make the Cap gains, and other "sunset" tax cuts permanent!!

  8. Bob A commented on Apr 17

    “As Larry correctly mentioned last night, in 1980 the top 1% of wage earners paid 19% of the total income tax take (70% top rate), while in 2004 the top 1% of wage earners paid a whopping 37% of the freight.”

    Yeah and while most people pay 14.4% FICA/Medicare on every cent they make, people in the top 1% pay that 14.4% on only the first 90k. If you look at the total tax burden including sales taxes, property taxes, sin taxes, etc etc, I suspect people making 50k a year pay a larger percentage of their income in taxes than than most people making a million per year.

  9. F commented on Apr 17

    As V L says, the tax share of the top 1% increased because the income share of the top 1% increased almost exactly the same amount. Brad Delong has the graph. The top 1% made 8% of the total income in 1980, but made over 17% of the total income in 2004.

  10. donna commented on Apr 17

    AMT is the big reason I’m not working. If I work, we get hit with AMT, and end up paying even more. Much nicer to get a refund than work and lose anyway.

  11. Whammer commented on Apr 17

    I’ve been hit with AMT for at least the last 5 years. Nearly $12K in AMT this year. In CA, a lot of us get whacked with it because of relatively high state income tax and high property values driving high property tax payments.

    The AMT is creating a “humpbacked” tax system where the highest earners are paying lower marginal tax rates than the “pretty good” earners.

  12. John F. commented on Apr 17

    1. I can’t believe what I’m hearing. A capital gains tax cut for all PROFITS derived from alternative energy &c? Instead of taxing energy profits differently, why not instead tax the negative externality directly: at the wellhead, the refinery, or the pump? You’ve described a recipe for boondoggles, corrupt congressman, and big government. Are you sure this is what you want?

    2. What is your ideal tax system? Is it the current one with a tweaked AMT, and if not, please speak up since it’s your megaphone!

    3. What’s your objective function here? Ability to pay? Balance budgets? Comparison to other countries? If we can run a bigger government on lower rates because of a larger economy, will you take that deal? Since the budget is coming into balance, and since our political class doesn’t have the balls to take on the entitlement problem, are we about to see “tax hikes for tax hikes’ sake” coming out of Congress?

    4. Why, why, a thousand times why? Debt and debt service levels are unimpressive by historical standards, the bond market has been purring, and the economy continues to grow. What’s the actual problem (no homilies allowed)?

    There are a whole bunch of beliefs embedded in your post, many no doubt deeply held. Reading Friedman won’t help: the main purpose of his writing is to define conventional wisdom and sell bookloads full of it. Did ‘conventional wisdom’ make your earlier call for oxymorons?

  13. Estragon commented on Apr 17

    From an economic point of view, I think there’s a lot to be said for using a new, broad based, national VAT to get rid of a lot of complicated and counterproductive taxes (such as AMT).

    The reality though, is any fool can still cut taxes or increase spending, whether there’s a paygo impediment or not, and any fool probably will. Tough choices tend to be made only when the silent majority is fully onside, and that only tends to happen when there’s some sort of imminent crisis.

  14. Sponge Todd Square Pants commented on Apr 17

    Barry,
    promising tax cuts was W’s campaign selling point in 2000. A surplus was “anticipated” at that time. When Paul O’neill took over as Treasury Secretary, he wanted the tax cuts to be conditional on an actual surplus. W didn’t want to discuss the issue, he just wanted the cuts. O’Neill is gone now, of course.

    I find it very questionable to be funding an expensive War ,while delivering tax cuts. Money doesn’t just grow on trees they say. In reality they can just print all they want. Bankers are good for that.

  15. Mike M commented on Apr 17

    Why is the focus always on taxes and never on government spending? We debate the best way to tax when we should debate the best way to reduce government’s massive and irresponsible spending. Higher tax rates are already baked in. Get ready for them.

  16. DavidB commented on Apr 17

    I’d say leave taxes alone and cut spending. 10% right off the top. Every department could find 10% in savings without even thinking about it. Then give anyone in the government who is managing budgets 20% of any money they could save in their departments.

    The problem will be solved within a few years after a few billionaires are created in the bureaucracy

    Also, cut the pay of congress 50% if they go into deficit. They need incentive

  17. Nova Law commented on Apr 17

    BobA, the lower you go in income, the more benefits they receive – not only in direct federal spending, but also in Social Security benefits. Those in the lowest 20% of FICA payers get back almost all their paid-in Social Security taxes almost immediately, while those in the top 20% of taxpayers are almost assured of never getting back what they paid.

    Here’s an article describing how the lowest 20% of incomes get $8.21 in federal benefit spending for every dollar they spend:

    ” In 2004, the quintile of households with the lowest income received roughly $8.21 in total government spending for each dollar of taxes paid. Middle-income households got $1.30 per tax dollar, while the highest-earning took in just 41 cents.

    The ratio of taxes paid to services received is most stark at the federal level. Those in the lowest quintile received $14.76 in federal spending for every dollar they paid in federal taxes; for middle earners, it was $1.29; top earners, just 32 cents.

    In total-dollar terms, low-income families netted over $31,000 each from government taxes and spending, while high-income households lost roughly $48,000.

    This analysis shows a massive downward redistribution of over $1 trillion from the top two quintiles to the bottom three. Fully 60 percent of all Americans are net consumers of government services. That is, they receive more from government spending than they pay in taxes.”

    http://tinyurl.com/34e6e3

    The bottom line is, only the “rich” pay taxes.

  18. Larry Nusbaum commented on Apr 17

    Nova Law said: “As Larry correctly mentioned last night, in 1980 the top 1% of wage earners paid 19% of the total income tax take (70% top rate), while in 2004 the top 1% of wage earners paid a whopping 37% of the freight.”
    http://www.taxfoundation.org/news/show/250.html
    1. That’s only for Federal Income tax. And, of course, higher incomes have exploded upwards since 1980 while middle income levels have stagnated.
    2. As a percentage of income, people in the middle have been slammed with the big five in recent years: cost to purchase a home, monthly housing expense (as a % of monthly income), healthcare shared costs, gasoline, and college education.
    3. As a percentage of income, the middle class pays a lot more of their income in sales and sin taxes than do high wage earners.
    4. Most readers of this blog can certainly invest in such a way as to pay very little in income taxes should they choose to do so. (unless they bought into the idiotic rent vs. buy debate in which they own no real estate)
    5. The wealth gap continues to widen…..look for property taxes to continue to surge higher.

  19. kharris commented on Apr 17

    Have to agree, at least in principle, with John F. There is a tendency to favor tax allowances of various kinds as encouraging some activity or other. Makes us seem like nice guys. Trouble is, we encourage every activity under the sun, most particularly gaming the tax system. Every new tax allowance makes tax simplification more difficult.

    Better to do what the textbook suggests. Tax things according to their externalities. That means taxing negative externalities, subsidizing positive ones. What our host has recommended is subsidizing the lack of negative externalities.

  20. TDL commented on Apr 17

    Lawsuits are much better at dealing with externalities then are taxes (in fact this is the way externalities were dealt with up until the 1850’s;) lawsuits would allow for those directly affected to be made whole again as opposed to creating more government revenues that would allow a central, political entity to socially engineer.

    As long as governments have revenue coming in, there will always be corruption (does not matter how much or how little.)

    Cutting spending should be the more central focus at the moment. I think that 10% is too little (in every department,) and that 25% should be the starting point (at least in the negotiation process.) Also, about a third of the departments can be abolished outright.

    Lastly, there is no “fair” or optimal tax. Taxation is a destructive activity that helps to fund uneconomic projects and discourage economic activity. The first good step in undoing taxation would be simplification, however, and flat taxes would probably be the best in that regard (although the tax accounting lobby is dead set against it, wonder why?!)

    Regards,
    TDL

  21. scowman commented on Apr 17

    I think you miss the point about the AMT. But for the AMT, Bush’s tax cuts would not have been viable. The budget scoring would have been off the charts and completely unaffordable under any growth scenario.

    So the AMT is not a middle class tax trap everyone claims it to be, rather it is a tool for politicians to grant “TAX CUTS” without really giving anything away.

    Remember the rule, when talking taxes, always think like poltician!

  22. Greg0658 commented on Apr 17

    Nova – Fully 60 percent of all Americans are net consumers of government services.

    I think the upper 40% should start bearing and raising all our coutry’s future laborers and soldiers. Coming from such good stock that should be a move in the right direction too.

    Now the upper 2 quintiles would need to raise, say what, 1000 children each? Just guessing.

  23. curmudgeonly troll commented on Apr 17

    Yikers! Lawsuits are better at neutralizing externalities than taxes? Because juries are always right? Because 30% contingencies are such a small price to pay? Because they are worked out so quickly and cheaply? Because the liability is so clearly defined in the law? Holy class action, Batman!

    A good tax is one that doesn’t change behavior much and is transparent. Naturally, when you have to raise as much money as the Federal Government that’s a lot to ask.

    Personally I would go for a moderately progressive income tax with few deductions, and a sales tax, with low rates on necessities and high rates on conspicuous consumption items.

    Two particularly egregious taxes are the estate tax (at current high rates anyone with an estate worth preserving avoids the tax, hence it’s a tax on moderate estates and bad estate planning), and the corporate income tax (which is nothing but a full employment act for lawyers and accountants; taxes what you should be encouraging, ie activities that generate profits; and as everyone should know, reported profits are an illusion, cash is a fact (at least until derivatives and Enron came along))

  24. GRL commented on Apr 17

    FWIIW, here are my two cents on taxation:

    1. Get rid of the corporate income tax. The corporate income tax is really a tax on the consumers of the products of the corporation being taxed. In addition, profits and income should only be taxed once, at the individual level.

    2. Get rid of the preferential tax rates for capital gains and dividends. This should be combined with #1 to avoid double taxation of income. Income is income, from no matter what source derived. The tax system should not favor risk-taking over risk aversion, just as it should not favor one economic activity over another.

    3. Get the poor and middle class off the income tax entirely and lower marginal tax rates significantly for the suckers who are left to pick up the tab. The income tax as originally conceived was supposed to apply only to the very wealthy, and it was supposed to be such a minor imposition that most of the wealthy people forced to pay it would not bother to engage in tax avoidance schemes. We need to get back to that vision.

    4. To encourage development of alternative energy and reduce subsidies to terrorists, impose a stiff energy tax on all forms of oil-based energy. This contravenes the principle of neutrality outlined in #2 above, but would deal with the national security and global warming implications of current energy policy more effectively than a capital gains tax cut for alternative energy, since it would deal with demand.

    5. Cut federal spending significantly, and deal with the social security – medicare – medicaid entitlement crises.

    I disagree that American taxes are not too high. For any upper income earner who is not engaged in some form of tax avoidance strategy (e.g., the mortgage interest deduction, the various “tax loophole” strategies to convert ordinary income into capital gains), income taxes are absolutely punitive. Rates are way too high, especially when combined with state and local tax rates in places like California and New York, and deduction phase outs and the AMT make the problem even worse. (We won’t even get into the fact inflation makes an absolute mockery of the “income” and “gains” that are taxed.)

    In addition, the tax system is far, far too complex. This is because the government insists on using the tax system to regulate economic behavior and to hand out goodies (essentially legalized bribes) to politicians’ constituents.

    You can try all you want to make the income tax “fairer” and “simpler,” but as long as the government has to take ~1/3 of GDP and insists on regulating everything, the stifling, unfair tax system will always be what it is: stifling and unfair. You cannot really reform the tax system without reducing the size and scope of government.

  25. anderl commented on Apr 17

    Sad Barry, You would have Congress go the route of legislating markets? No more free markets eh?!?! Well not as free as they used to be. I bet you’d really be tickled pink if Congress disbanded the Fed and started to determine monetary policy themselves. Then pay as you go would take on a whole new meaning. Yeah put all your faith in that group to determine the direction of the economy.

    What is really sad is that you don’t think two steps ahead on the ramifications of legislating alternative energy tax cuts. You would have every one re adjust their portfolios dumping tons of money in a bunch of low float high risk investments. Why not go ahead and give them a bigger tax break on call buying on alternative energies and another break if they use margin to do it too!!!! Yeah keep thinking with your heart and not your head. You have a good spirit and I give you credit for that but follow a thought through before putting it to print. Look at the cons of your position before making an opinion. Understand risk and probability.

    Another fat chance feel good article though. A lot of good stuff and wishful thinking but a snowball in hell of ever happening.

    ~~~

    BR: You mean they don’t already legislate markets?

  26. M.Z. Forrest commented on Apr 17

    Since we are offering tax ideas, here go.

    1) Repeal the corporate income tax. Replace it with an excise tax on revenues for corporations and LLCs. This would get companies out of the limited liability arena – Walmart – unless they actually had a need for the protection. Of course if they could be profitable with it, so be it.
    2) Tax income above $100,000 at an appropriate level. Tax income above $1M at an exhorbitant level.
    3) Until SS and healthcare are fixed, maintain the current funding structure.
    4) Tax imports at the corporate revenue excise level. If this results in double taxation, oh well.

  27. Greg Alton commented on Apr 17

    On point 1), the big question that I’d like to hear your views on: carbon tax or fossil fuel consumption tax. Providing a benefit for cap gains on alternatives will be hard to administer (gains to tax lawyers) and may not affect consumption at all (might, surprisingly, lower the price of oil/increase consumption in the long term). If you really agree with Friedman, isn’t it worth considering a fossil fuel tax?

  28. david foster commented on Apr 17

    “carve out a deep discount — a 10% capital gains rate — for all alternative energy research and start ups”…but the definition of what counts as “alternative energy” would be defined politically thru frantic lobbying activities. For example: coal miners would want coal-to-liquids technology to count: many environmentalists would be bitterly opposed.
    We might well get results as irrational as the current policy of subsidizing corn-based ethanol while discriminating against sugarcane-based ethanol (far more efficient in terms of energy balance) thru a 55-cent-per-gallon tariff.

  29. REW commented on Apr 17

    Regarding #1 (Cap gains)
    This is not a bad idea, but it is not a good one either. The best part is where Barry wants taxes to be used to spur innovation and to support start up companies. Our system is a unique form of capitalism called Entrepreneurial Capitalism, and Barry’s idea fits well within that mindset. Unfortunately there are many negatives to Barry’s idea. First, it adds complexity. Tax revenues depend on the tax rates AND the ability of the taxpayer to understand the system and comply. We already have several capital gains tax rates (5%, 15%, 25%, 28%, just on long-term gains at the Federal level, plus short-term rates and various state rates) not just the 15% rate Barry mentions. Second, having government decide what is a legitimate startup is less than efficient. Third, capital gains are not indexed for inflation. Barry mentions this in regards to the AMT, but not the capital gains tax, which hits far more tax payers. Think about what that means (4:22 comment) for all those stock gains you thought you made. Fourth, all capital gains taxes are unnecessary. Capital gains only result from the successful application of previously taxed income. The ideal capital gains tax rate is zero. If you want to raise taxes, fine, but the capital gains tax is anti-growth and it’s negative impact hits hardest on those at the bottom rungs of the socio-economic ladder.

    Regarding #2 (AMT)
    Imagine that, government actions had unintended negative consequences! The problems with the AMT were also mentioned above: lack of an index to inflation and adding complexity to the system. Barry’s suggestion is a good one, but from a pro-growth perspective, fixing the capital gains tax is much more important. AMT is a media darling because it threatens to impact not just the evil rich but the average Joe sixpack. I don’t get too worked up over the AMT. It is essentially a flat tax system with rates of 26% or 28%. If nothing is done to the AMT, millions of tax payers will find themselves in essentially a flat tax system. Clearly the current AMT rates are too high; but my fear, based on history, is that any attempt by Congress to fix the AMT will make the Code more complex and onerous.

    Regarding #3 (US tax rates)
    True, taxes in the U.S are way below where they were 25 years ago, but that is not the right comparison. Where are they in comparison to competing markets? The U.S. has enjoyed the benefits of being a low-tax haven for a while, but that is changing. As the Flat Tax revolution spreads, the U.S. may find itself well out of touch with the rest of the world. Barry’s key implication, where Kudlow would disagree, is that all tax cuts “pay for themselves” with higher revenues. No true supply-sider says such nonsense. If you look at the Laffer curve, it clearly depends on where you start as to whether revenues will increase or decrease after the cut. Some taxes should be eliminated (capital gains and estate taxes, most international tarrifs), some reduced (possibly the top marginal rate), and some raised (certain consumption taxes like on gasoline). All of them should be simplified. The key is to adjust rates in the most pro-growth manner.

    Regarding #4 (Pay-go)
    I am cautiously optimistic that pay-go rules will have a positive effect, but the skeptic in me thinks this is purely a political ploy. I would be much more optimistic if pay-go included some form of dynamic analysis. The default assumption that all tax cuts lower revenues is just as wrong as the Kudlowdite claim that all tax cuts raise revenues.

  30. jkw commented on Apr 17

    The increase in income disparity is the natural result of late-stage capitalism. As productivity goes up, consumption has to increase at an equal rate for the economy to be stable. If consumption fails to keep up, then there is excess production capacity. If the slack is not absorbed through some kind of inefficiency (typically either government or wealthy people), then labor market prices will be bid down until nobody can afford to buy anything.

    This is why the difference between the upper and lower class peaks right before depressions. The lower class bids down labor prices as fewer and fewer of them are needed to produce everything that is consumed. The excess profits are kept by the wealthy. Eventually, labor prices fall so far that the middle class can’t afford to buy what they are making and you get a deflationary depression. As productivity continues to rise while consumption falls, the system is pushed further from equilibrium.

    The only way to prevent this is to provide support for the lower/middle classes. Welfare takes money from people who aren’t spending it and gives it to people that will spend it, thereby increasing the consumption level (also known as GDP). The great depression ended when the government finally hired a huge number of people to do nothing productive (blow things up in Europe) and paid them well. That created stable growth for a while, as infrastructure improvements and lifestyle changes allowed consumption to keep up with productivity. People expected future income, so they became less scared of spending money (during depressions, people save everything they can because they might need it later, which makes the problem worse).

    The increasing income disparity shows that we are once again falling behind on consumption. The American consumer has shown a willingness to spend any money that is thrown at them. As long as the wealthy are willing to do this, the economy will continue to grow. If the wealthy ever decide that they aren’t willing to lend or give more money to people who have none, then the economy will collapse.

    Capitalism is fundamentally an unstable economic system. Limited socialism (high taxes with strong unemployment insurance) is far more stable. As long as the government doesn’t control what people do with the money, socialism provides much more stable growth than capitalism.

    Growth does not come from investments. It comes from spending. To the degree that taxes take money from people who aren’t spending it and give it to people who will spend it, they increase economic efficiency.

  31. Greg0658 commented on Apr 17

    Researched US population & birth rates

    Population 301,634,450
    Births 14.14 per 1000 = 4,222,882 per year

    Population of 20 to 65 year olds = 165,956,888
    Upper 2 quintiles of 20-65yo = 66,382,755

    Turns out the upper 2 quintiles would need to produce 15.72 new children per year for 45 years

    I was off, 707 children per upper wage earner to keep pace with the US birth rate, if the lower 3 quintiles gave up on child raising

    Thats 1414 for the wife and you. Hell of a mansion … or a farm.

  32. Zephyr commented on Apr 17

    Greg, your math is wrong and much too complicated. If the upper 2/5 were to equal the child output of the other 3/5 they would only need to outproduce them by 50% per capita. You say they must each produce 1414 per year. This would only be true if the members of the other 3/5 were currently producing 943 children each.

  33. Zephyr commented on Apr 17

    On taxes:

    I think inflation “gains” should not be taxed. If an investment has gone up in price by more than inflation then the tax should apply to the amount in excess of the inflation amount. Inflation is not profit – it should not be taxed.

    The rich do pay almost all of the tax, and net of the benefits recieved everyone else is a net recipient of the wealth transfers. But we must tax the rich because that is where the money is.

    I don’t mind being taxed, I just wish it could be less complicated. It is a terrible waste of resources to have multitudes of people analyzing and processing the complex tax system. So much effort that could be more productively employed.

  34. TKL commented on Apr 18

    Barry says: “Dropping the top rates from 90%/75% to 20-40% was an enormous shift with major repercussions”. I’ve heard this before, usually from people who give the reduced rates credit for economic growth. But the rate reductions began with JFK, and ever since we have had the same old long-term GDP growth, with up cycles and down cycles. Indeed, high-income taxpayers don’t spend the tax savings; they invest it — largely in boring assets like common stocks, muni bonds and an extra house or three. Give a bunch of money to someone who doesn’t need it, and they’ll sock it away. Same goes for the pot of extra money from the widened income gap; nobody at the top rungs needed the money, so they probably just invested it in the usual boring assets. The result of lower rates and widened income inequality might therefore be inflated asset prices, not higher GDP. Financial assets all around are driven to a high-price, low-return state, while the huddled masses spend more than they earn. Something may be trickling down on people, but it’s not money. I suspect that we could raise rates a helluva lot without long-term effect on GDP growth.

  35. Greg0658 commented on Apr 18

    your right Zephyr – flipped around division

    .0636 kids X 66,382,755 (4th5th pop 20-65yo) = 4,222,882 births

    Thats only 2.86 kids over 45 years or 5.72 for the wife and you. Very achievable.

    I know the dollar / population inflection points of the upper 2 quintiles don’t align in statistic data – but the $ break point from the 3rd to the 4th is $65,832.

    I checked this thought twice – but was wrong – I should stick to art and ductwork

  36. Don Quijote commented on Apr 18

    Simple tax solution,

    Get rid of all Corporate taxes, get rid of all inheritance taxes, get rid of income taxes, get rid of the whole income tax code.

    Replace it with a wealth tax:

    assets on December 31 – liabilities on December 31 * flat rate = taxes due on April 15.

    Simple and Stupid, everybody pays their share according to their ability to pay.

  37. Eric commented on Apr 18

    The whole question of how large a share of the tax burden is carried by whom is totally uninteresting, because your pre-existing ideas about what is “fair” or “unfair” pretty much determine how you decide to measure the tax burden. In other words, anyone handing out measures of the tax burden is really just giving their opinion about whether they pay the right amount of taxes (usually they think it’s too much), and they’re doing it in a manner which pretends to be fact but is really just a disguised opinion.

    In each of Barry’s four suggestions, he states pretty clearly what the intended goal would be. This makes him out to be a pretty straightforward, cards-on-the-table sort of guy.

    Many if not most of the above commenters have done the same. To those that didn’t, I would like to emphasize that it is much more interesting to hear people’s answers to the following questions:
    1) What do you think is (or would be) the effect of tax policy XYZ?
    2) Why do you think the effect of XYZ is bad (or good)?
    3) If you think the effect is “bad”, what “good” effect would you prefer?
    4) What policy would you propose to achieve your preferred effect, and how do you think it would work?

  38. jkw commented on Apr 18

    TKL,

    The problem with having marginal tax rates in the 70-90% range is that it provides a huge incentive for people to hide their income. If the tax rate is 90% and you can avoid paying taxes on it at a cost of 75%, you still come out ahead. Cutting the tax rates from 90% to 50% won’t drop tax revenues significantly because you cut down on tax avoidance schemes. Changing tax rates by 3-5% will not change tax avoidance levels, because there will be very few schemes where that small of a change will matter.

    Cutting taxes will not generally increase how much someone is willing to work. Most people being paid over $100,000 a year aren’t paid based on how much they work anyway. Most of them are paid based on how much money they control. So cutting tax rates on high incomes only helps if it will reduce tax avoidance.

    Cutting taxes on savings never helps. If somone has a lot of money, they are going to save and invest it somehow. Increasing the tax rates won’t make them suddenly decide that they would rather stuff it in their mattress than pay taxes on the gains. If it makes people spend money instead of saving it, then the policy will encourage growth. There is no good fiscal policy argument (other than tax avoidance) for cutting rates on savings (there are good arguments based on freedom and similar ideas). Unearned income should never be taxed at a rate below earned income.

  39. NotAPro commented on Apr 18

    Which would you rather be: middle class or poor getting all these so-called government goodies and benefits and paying no income tax, or rich and get nothing from the government and paying big taxes?

    I know my choice.

  40. philip commented on Apr 18

    What the hell, you guys? I see so many “tax the million a year crowd until the cry” posts. Why, exactly, do you feel that success in providing people what they want is such a bad thing? You get money from other people for providing something they want. So if you are really good at it you should be forced to pay for the clowns you went to high school with? The ones who will sign on to any old loan without reading the papers? The ones who skipped class to have sex in their cars and have babies they couldn’t afford? You sound like a bunch of Europeans. People so scared of risk and responsibility they are willing to give up their rights and even more willing to give up other people’s rights to make sure they are covered no matter what. Political cowardice. Lifestyle cowardice. Lack of personal accountability.

    And Larry Nussbaum, calling people who talk about the very real “rent vs. buy” problem “idiotic” is not accurate or useful and seems to deny that many who chose to buy despite the numbers are in it deep.

  41. TKL commented on Apr 18

    JKW,

    Not sure our tax and legal systems couldn’t be structured to prevent and punish avoidance schemes. We require withholding, 1099 reporting, et cetera. We closed loopholes in the 1980s, in a trade-off for one of the rounds of rate reduction. Nothing requires us to restore the loopholes if we raise rates.

    But assuming you’re right, it follows that the optimal tax rate is the one at which revenue is maximized — i.e., the rate at which we collect the most without reaching the point of diminishing returns as a result of avoidance schemes. Kind of like the Laffer curve, which actually counsels raising rates if that would increase revenue (a point that hacks like Laffer never mention).

    Philip, it’s not cowardice. It’s class warfare. The wealthy have been waging that war forever. (Remember slavery? You can read about it in the Bible.) And they have been winning the war in this country for at least a quarter-century. Be happy. You’ve got what you want. But don’t be surprised or critical when the opposition pushes back. It’s a jungle out there.

  42. Michael Storm commented on Apr 19

    BR –

    Awesome! So important to have you helping out pols out with a few sensible ideas.

    Howabout —

    1. Pushing back the Social Sec and Medicare retirement age by 1-month each year forward.

    This make more sense than some “we wont touch your benefits if your 55”.

    C’mon… if you are planning to retire in 3 years, you put in an extra 3 months. If you are planning to retire in 36 years you put in an extra 36 months. Easy, fun, shared sacrifice.

    2. Corporate tax rates — at 35% federal they are just way too high. This just powers so many lease-games and off-shore tax shelters. Drop the corporate rate to around 20% and watch the boom.

    Final comments — Your AMT point is right on. The problem with the AMT is that the % was defined in the 70s when marginal rates were so much higher. The concept is fine, just LOWER the AMT rate to 20%!

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