.comment-link {margin-left:.6em;}
Visit Freedom's Zone Donate To Project Valour

Tuesday, May 25, 2010

Who 'd 'A Thunk?

WTI Cushing Spot below $64. Dow below 10,000. Euro below $1.23.

Reality returns. Some of this is Korea. Some is the Spanish banking mess. Some of it is due to the German talk about banning all naked shorts.
For a nation that is pretty comfortable with nude beaches, they've all of a sudden gotten very censorious about fully clothed trading.

Most of it is just a generalized reconnection with reality; ECB can only buy so many Euros and Eurobonds.

In the US, the news that personal incomes are becoming more and more dependent on government transfers is probably inducing some nausea. There are two major takeaways from the data in that article:
Private wages. A record-low 41.9% of the nation's personal income came from private wages and salaries in the first quarter, down from 44.6% when the recession began in December 2007.
An additional 9.8% of personal income was paid as wages to government employees.
This is a long-term trend because the percentage of retired people is rising as the population rapidly ages. The recession induced a sharp drop in private-sector jobs and wages, which is a mid-term effect. There is a very short-term periodic effect related to Census jobs.

The part of this that can be corrected is that private sector wages can grow if we are careful about adopting policies that allow private industry to be competitive. The part that is utterly insane is that government wages amounted to 9.8% of the total share of income. That's lethal. I was writing about this years ago, and this part of the trend is accelerating. According to BLS:
Total Employment: 140 million
Total Private Jobs:..118.53 million (84.7%)
Total Gov Jobs:.......21.47 million. (15.3%)
Ratio Private/Gov Emp: 5.5

Private Emp/Total PI:: 41.9%
Gov Emp/Total PI:..... 09.8%
Ratio Private/Gov PI:.. 4.2
To assess just how lethal this is, about 50% (51.7%) of personal income (PI) derives from employment. The rest is investment income, capital gains on sales of assets (approximately 30%) or government benefits (17.9%). Assume that the total tax burden is almost all borne by wage earners and private investment income. Government taxation related to government transfer payments is very low!

So now we have 70% of personal income that needs at least to pay for social benefits and government employment for long term stability, which in total costs 27.7% (and will continue to grow as retirement costs escalate). So that means a net tax burden of about 40-45% on personal income in total (it will rise even with an improving economy as retirements rise). Well, does anyone really think the economy can grow with 40% capital gains rates? No way.

But most wage earners in this country have very moderate incomes, and asking them to pay 50% of their wages in taxes pretty much guarantees a very poor standard of living plus that they'll not be able to save much, so they won't be generating much in the form of investment income.

And this is why you have a Tea Party. The entire edifice is unsustainable. Because the private wage earners have to pay about 70% of the government wages and benefits, plus most of the costs of social transfers. So government wages are going to decline in comparison to private wages. The question is whether we'll have to go Greek before that happens, or whether governments will adjust first.

Anyway, this is why I am predicting that net tax rates will rise on previously sheltered investment income such as No AMT bonds and IRA accounts. That is the only way to balance the books even with a much more fiscally conservative government.

As for the April trend in wages and salaries:
April 2007
HI: 14,250, Self: 5,410, Total: 19,660

April 2008
HI: 14,805, Self: 5,784, Total: 20,589

April 2009
HI: 14,440, Self: 5,814, Total: 20,254

April 2010
HI: 14,067, Self: 5,579, Total: 19,646

1 Year YoY Change:
HI: -2.6%, Self: -4%, Total: -3%

2 Year YoY:
HI: -5%, Self: -3.5%, Total: -4.5%

3 year YoY:
HI: -1.3%, Self: +3.1%, Total: -0-
Yup. And that includes Census employment. You have to go back three years to break even on total, but self-employment income has risen from three years ago. It's always the small/self business employment that leads us out. They are dragging a very heavy load this time.

So what's the Social Security Trend?
Social Security Disbursements:
April: 66,775 +11.6%
FYTD: 437,658 +7.7%

April: 59,854 +9.3%
FYTD: 406,364 +7.8%

April: 54,759 +12.1%
FYTD: 376,893 +6.4%

April: 48,849
YTD: 354,329
So the April total of wages, salaries and self-employment income is flat from three years ago, but Social Security outlays rose 36%! Does anyone else think this is why the Social Security and Medicare Trustees reports have been delayed by this administration? Yes, Social Security is running a big deficit, and it will for several years even with healthy growth. Then the real ugly hits in 2015-2016, at which we would have to start cutting benefits.

From Social Security Trustees report (2009) page link:
Contributions plus tax on benefits: = 689 billion
Total Outlays: = 625.1 billion

Contributions were 672.1 in 2008. Wages have fallen but the cap has
risen, so make that - 3.5%; approximately 649 billion in 2010.

The two year rise in benefits by April is 22%, by fiscal year to date
is 16%. Call it 18%, or 2010 outlays of about 737 billion. Taxes on
on Social Security will also have risen; we'll call them 22 billion.

This gives us a 2010 estimate of income/outlays:
Contributions plus tax on benefits: 671 billion
Total Outlays---------------------: 737 billion


We are so in the red. We need to raise wages to compensate. To generate wages we need jobs. Raising taxes on corporations will cut jobs. Ergo, we need to cut welfare for the non-poor AND raise personal taxes PLUS cut government wages and benefits.

I'd bite the bullet and cut corporate taxes 5% this year and 5% next year and then leave them there for 10 years, while raising the Medicare tax 1%. I wouldn't fool with the Social Security tax, but I would make Social Security benefits taxable (for purpose of income tax) the same as wages, phasing that in over three years.

I'd freeze federal government salaries for three years, and freeze the government share of benefits for three years, which would inflict a hefty pay cut on federal government salaries. Then I'd pass a statute capping the increase on government compensation packages to the previous year's GDP gain, with a drawback for negative GDP years. So if total GDP grew three percent in one year, but shrank 1.5% the prior year, the most government workers could get would be the two year increase in GDP, or about 1.5%.

I'd phase out all government student loan programs over 5 years. This would inflict a fearful shock on universities, but they need one. By the magical workings of the market, tuitions would fall sharply.

I'd place an upper limit on net annual tax-sheltered incomes of 10K per person, 20K per couple. That would apply to all investment income, including interest, dividends, capital gains, and revenues from currently tax-free bonds.

In short, I would beat everyone up in the attempt to prevent ourselves from going Greek.

I'd freeze federal government salaries for three years, and freeze the government share of benefits for three years, which would inflict a hefty pay cut on federal government salaries.

Not me. Stopping growth isn't enough, you need to cut cut cut at the government level to see any noticeable difference.

I'd start chopping FTE's at the government level, forcing these people to get employment in the private sector where they actually, you know, PAY INTO Social Security. At the very least I'd freeze all government pensions immediately forever and put all future government employees into Social Security. Ultimately it won't solve the financial problems of the SSA, but it will end the two-class system (Cadillac for government employees and Yugo for everyone else).

At least that what I'd do if I were dictator for a day.
The tax situation cannot be solved through adjusting
income tax brackets and capital gains. We need tariffs.
An income tax taxes one's productivity. This is becoming harder and harder to do with American labor
competing with third world labor. We are subsidizing
consumption at the expense of employment.
Charles - don't federal employees pay into Social Security now? I am pretty sure this was changed along with the massive adjustment in 1983. I think all federal employees hired after 1983 do pay in.
Sporkfed - an income tax most definitely taxes productivity, but all taxes are a tax on productivity.

Obviously there are upper limits to taxation in an absolute sense (after which net revenue drops when taxes are raised).

But the other factor is that taxation slows growth, which impedes job creation.

It's wildly obvious that we must cut our spending considerably in order to retain growth potential.
M_O_M, I'd like to clarify something.

I'd place an upper limit on net annual tax-sheltered incomes...including interest, dividends, capital gains, and revenues from currently tax-free bonds.

By this statement, did you mean interest, dividends, and cap gains currently sheltered in 401(k) and similar accounts? If so, I agree, if you meant to put all investment income in the "earned" income category, I heartily disagree.
No, no, no, Neil. I meant eliminate the tax shelter for investment income above that annual line (adjusted for inflation). After that, the income gets taxed as if it weren't tax-sheltered, but of course on the same basis as non-sheltered income. So if it's capital gains, the regular capital gains treatment, etc.

I would far rather do that than increase top marginal rates.
That's what I figured. I saw it the wrong way when I first read it, though, so thought I'd ask.

I'd say it's vitally important to decrease taxes on dividends, in particular. Theoretically, they shouldn't be double-taxed at all, but I'll settle for lowering the rates on both dividend income and corporate income.

That would go a long way toward reducing mal-investment shenanigans and stock jobbing aimed at retaining earnings within a corporation or paying out investors through share price manipulation.

You may be correct. Most of the government employees I know are local not federal. The one Fed I know I haven't talked to in a couple years.

The last local I talked to is thinking about getting a loan for a fourth (!) house. When I asked about wage and pension cuts (furlough days, layoffs, paying in to the pension plan instead of not paying a dime) she said "The union won't let that happen and they can't touch our pensions. I'm in a better position than you, you should come work for the city." She then proceeded to bitch about property and sales taxes going up. All of her personal savings and investments are in real estate, she has no clue about capital gains because she's never sold anything yet. Nobody in their late 40's should be that naiive.
If you get rid of or limit the tax exemption from currently-tax-free munis, then the interest rates needed to fund state & municipal debt will increase...a lot.
Tariffs enable us to tax foreign productivity while
encouraging domestic substitution for those goods.
Does anyone really think foreign corporations will
leave the US consumer market ? This approach also allows for a strong dollar to keep oil lower. I cannot
understand why people want to weaken the dollar to
compete. That approach lowers the standard of living.
David - yes, it will, but consider that there is strong exemption. This would probably change the muni market more (to diffuse ownership).

As it is now, there really is a problem with very wealthy people paying very little tax.

I realize that this would be painful, but at least it spreads the pain around pretty generously, and provides incentives to most people to consider the overall picture more.

There is another reality, and that is that local spending is out of joint and has to be curbed somewhat. So interest rates are going higher regardless because of the risk component, and local bond raising will be somewhat constrained in the future.
Charles - when a person believes themselves secured from the common fate, all but the very best of them become extremely callous to the common fate.

Yes, that is naive, but I don't find it surprising.

Excellent list. I'd consider eliminating the Soc. Sec. cap on income + consider an additional Soc. Sec. + Medicare surcharge on interest, etc over a threshold (maybe over 50K in those per year). If you look at income tax receipts, the big dollars are in the top 10% to 1%; the uber-rich who fall into the top 0.01% don't pay (as a %) any more than someone at the 10% -- but the spread in income is like $100k for the top 10% but greater than $10mm for the top 0.01%. The uber-rich simply have to pay more; in a state like CA 2 elementary school teachers (married) are probably paying 40% in Fed + State + Soc Sec & Medicare. Not much more to get out of them.

Also reinstituting the 1 per lifetime cap gain exemption on home sale would help as well (always, of course, allowing the rollover to a new home).

Maybe also some small amount of interest / dividends being tax free per year (first $500-$1000) (this is more policy related -- encourage savings).

Charles K. -- Fed employees pay Soc. Sec taxes just like everyone else -- they have for 25+ years. The retirement benefits are comparable to a generous private company -- 401k + small def. bene. pension + social security. Not "gold plated"; the great deal is if you are under CSRS (the old system), you paid in at a rate comparable to Soc. Sec. but got a much better benefit -- and if you retired and got another job, you could later qualify for Soc. Sec. At least that's the way it was when I worked for the feds (12+ years ago).

Ed S.
Ed, the problem with smacking down the "uber-rich" is that most of the people in that top .01% don't make that every year. Most of that action is one-time cap gains events, like the founder that gets cashed out of a startup. That's why they're not paying taxes on it at the same rate as the top 10%. If you're going after that money, you're just eating our seed corn.

If you limit it to earned income, then you're not actually talking about enough money to change anything, and you'd create some massive economic distortions trying to tax it anyway. Somebody making $10M a year can hire a LOT of attorneys to hide it from you.
Mom & Charles,

Charles - when a person believes themselves secured from the common fate, all but the very best of them become extremely callous to the common fate.

I tend to believe that the common fate eventually tends to catch up with those who feel secured from the common fate.

Separate Places: Crime and Security in Gated Communities (1998, pdf)

Two of the more thorough and wide-ranging studies were conducted by police in Fort
Lauderdale. The first found no significant change in rates for violent or property crime in a
dosed-street neighborhood. Auto theft, burglary, and some other crimes dropped consider
ably immediately after closure, but none were sustained for more than a short time. A second
study compared the change in crime rates in several closed-street neighborhoods with
that of the city as a whole and concluded that the gates and barricades had no significant
effect. That study also included a survey of patrol officers and found that the majority disliked
the street closures. Most thought that they do not reduce crime, but do slow response
time and inhibit police patrols.

I think it was GYSC who recently posted the following quote on my blog.

Fixed fortifications are monuments to man's stupidity. - Patton

My dad was a bank manager in a small farming community. In theory, the bank's vault was the most secure place in the entire town. In practice, thieves burned a hole right through the door one night and cleaned it out. To the best of my knowledge, nobody was ever caught.

Thanks for the reply -- and I didn't mean to imply a "smackdown" on the uber-rich. But when Warren Buffett's effective tax rate is lower than his receptionist's, well, something isn't right.

It's not just stagnant incomes that are killing the middle and upper middle classes -- taxes are a huge part of it as well.

I realize it's more than a bit like tilting at windmills to suggest that those who have benefitted tremendously working in the US pay (in % terms) somewhat more than the guy who makes 1/100 of what they make, but it's in EVERYONE'S best interest to not let things get too out of balance.

Ed S.
Ed, that's the thing, I disagree with your premise, and I think that's the type of thinking that is killing us. You say:

when Warren Buffett's effective tax rate is lower than his receptionist's, well, something isn't right.

Buffett's infamous personal example happens because his income is almost entirely return on investment. Increasing the taxes on that will simply destroy the economy for once and all. In our efforts to "get the rich", we've skated dangerously close once again to destroying the entrepreneurial economy. We have to stop doing this to ourselves.

What Buffett would rather you didn't notice is the real problem we should focus on--collusion between the government and the ultra-wealthy for the purpose of rent-seeking. Buffett's entire business model is to use the float from his insurance companies to purchase small- and medium-sized companies with good cash flow on the private market, for a fraction of their worth. And why can he get these deals?

Why, because the government demands half the value of the business in cash at the death of the founder! Not to mention making it extremely onerous (and dangerous to the founder's personal freedom) to go public. Naturally, Buffett supports those restrictions, by bankrolling the politicians most likely to keep them in place. Now that's what I have a problem with.
Buffett's entire business model is to use the float from his insurance companies to purchase small- and medium-sized companies with good cash flow on the private market, for a fraction of their worth. And why can he get these deals?

Why, because the government demands half the value of the business in cash at the death of the founder!

Exactly!!! It drives me nuts how few people appreciate this or bring it up when discussing Buffet's investment results. From what I've seen every part of Buffet's investment strategy is built on gaming the tax code.

If he is so in favor of higher marginal tax rates why hasn't he given any of his vast wealth to the US Treasury? Why has he instead chosen to shelter it by giving many billions to the Gates Foundation?
Excellent post and great comments.

Sadly, spreading the pain around proportionately seems well nigh impossible presently. Entrenched interests with better grip on government will ensure that the bulk of the pain is passed on to the least influential. The amount of rent-seekers, and rent-seeking, out there is too much to yield to any sane deconstruction I fear.

That said, the first thing that needs to be done is to move towards a simple, straight-forward, tax code, with virtually no exemptions etc., that extracts an easy rate of taxation and is biased toward growth.

The more complex the code gets, the more we see regulators repeatedly digging a hole only for an army of private sector accountants and lawyers to fill the thing, finding loopholes, right back up.
Pushing that army back out into the world to put their skill at the service of those who make stuff, helping them better run their businesses would be damned good for growth.
Thanks for your list and ideas, MOM!
Glad to see someone putting out specific ideas, rare these days..

Some issues.. the Greek situation is based on them not in control of their currency if they were then nobody would have loan them money with the low interest rate and loan volume they were able to secure under the Euro. The United States controls its currency.
Corporate tax cuts don't make sense in an environment were corporations are seeking productivity (machine/energy) over labor and have for years and that trend should continue. Tax cuts would go to larger salaries for the CEO/top management.
Small business meaning larger units 250 to 500 employee's focused on U.S. markets offer some hope but they like their larger international counterparts seek greater volume and reduced overhead via productivity meaning increased machine time over labor.
We also have something called excess capacity when it comes to housing,auto,military, construction and other post world war 2 industries. While our mature industries get very excited about emerging markets since building shopping centers,roads, chemical plants etc are in short supply in many areas of the world but here we are built out and in many area's overbuilt.
Vocker says it all when he says we need less consumption/credit and more production/savings which imply's slower growth built around actual needs vs inflated lifestyle.
Allan - the one thing I will not do is blame a person or a company for playing well in a game whose rules they do not set.

I think the evil is the tax CODE. That is one reason top marginal rates should be controlled to a reasonable level. We have created a situation in which large organizations that can set off these factors have a huge competitive advantage. This has to hurt productivity and innovation.
Sonoma - but automation is the key to our resurgence!

Believe me, even if you set up automated factories there are still ancillary jobs created.

And the key to a better living standard is very simple - we have to produce more of what we use to correct our negative balance of trade.

We have capital - that's how we got all these candle and quilt shops that are now vacant. We need a use for it. That capital can go into automated factories - which create engineering, tech, transport jobs etc - which produce things like cars that we actually need and buy.

This is precisely why China is in such a bind; countries that compete on labor costs are not going to have that much of an advantage in the new era of production.

However the key to restarting manufacturing is cheap energy, and that is why energy is the crux of the whole thing. Our ridiculous energy policy is going to prevent the natural rebound.
Automated factories require volume production, 24/7, which requires demand, that we do not have in real time unless that demand is created with cheap available credit to push demand forward.

I agree that corporate business will continue to embrace automation at all levels but will it create greater employment I have my doubts based on what is occurring in the auto industry and the exporting of our high tech chip manufacturing to Asia.
Sonoma; you are thinking about what automation used to mean. Now automation means flexibility.

Yes, you have to run the milling center (or CNC plasma cutter, or sintered composite mold-making machine) 24/7 to get best use out of it, but every run can be a different part. Those parts are assembled into products in flexible kanban-cell assembly centers. You can tailor many products to long-tail markets.

High-quality niche products really have a better demand curve than mass-marketed cheaply made crap. They tend to have more value add. They also tend to be fairly labor-intensive, just in a different way. Marketing them is more a matter of finding the people who will really get some use out of the product than about "creating" demand.

Designing those products, keeping the CNC running, assemblers, production logistics, online marketers, are all good jobs.
Sonoma - I want to second Neil. I noticed that Toyota is investing in "flex" factories for its later round, and the Germans have a few car plants like that as well.

But we do have the demand - we just import the goods.

Another factor that might (over years) help us is that the Chinese production runs are pretty awful. Every time I speak to an engineer involved in this type of thing, they have horror stories to tell. In the end, this can be very costly.

Ethics are an issue here. Eventually the Chinese will learn, but right now trying to get what you contracted for from them can be an exercise in costly frustration.
The issue is not FLEX automation but whether manufacturing automation can be the basis as MOM put it" "key to our resurgence! " and further"the key to restarting manufacturing is cheap energy," both these ideas are rear view mirror concepts continuing to put air in the same old tire and getting another mile down the road.
Demand requires the ability to pay without the current government support for auto and housing credit markets both sectors would be dead!
blame a person or a company for playing well in a game whose rules they do not set

I don't blame him for having a strategy that plays against the tax code. I blame him for being less than honest in how he presents his strategy (and himself). I also blame all the cult-of-personality/financial journalist types that uncritically propagate his half truth.

Buffet likes to be thought of as a good stock picker, in fact his stock picks have been mediocre for going on two decades now. His outsized returns have been from the mid-sized cash cows he buys on the cheap from their founders. That isn't a strategy anyone in the general public can replicate.
Sonoma - forget housing. I cannot see how a population with our demographics can be generating much demand.

We will either produce more of what we consume or we will keep consuming less. At some point the curve will cross; we will be too poor to import the stuff, and it will get cheaper to make it here - IF we have the energy to do it.
Neil (and AllenF):

Thank you both for your thoughtful replies and for the education on the Buffett / Berkshire Hathaway business model.

However, my point still stands(and it's not "soak the rich" or "get the rich"): is it appropriate that the uber-wealthy pay a lower marginal tax rate than an electrician or accountant?

Your answer,fundamentally, is Yes; individuals with incomes earned from investments and capital gains should pay a lower marginal tax rate than the income earned from labor.

I think that that inequality leads us down a very dangerous path as a society. We'll just have to agree to disagree.

Ed S.
Ed, thanks for your thoughtful reply. I have a question for you,though, something that genuinely puzzles me.

Why is the percentage of income paid as tax such a high priority?

If Warren Buffett (to continue the example) paid 36% of his income as taxes, he would still be ultra-wealthy. He'd hardly notice the change.

The electrician and accountant, on the other hand, will have their net worth cut in half by the increased taxes on cap gains and dividends, when they want to sell their respective practices that they built up over their life. What's more, it would become extremely difficult for anyone to become wealthy, so Mr. Buffett would have less competition and be even more secure in his power and wealth. None of that is fair or equal.

Why is all that less important than the percentage paid at tax time?
Ed - my answer is not that "individuals with incomes earned from capital gains" should pay less than an electrician, but that capital gains should not be taxed like wages. If the electrician has capital gains he gets the same benefit. If he saves and invests, most electricians will end up with capital gains.

And that is most certainly fair and just. Capital gains have two components. One is just inflation - a large part of capital gains paid is pure inflation, so long-term holdings are essentially confiscated by the state - there is no profit at all in them.

The second is investment return, which creates jobs. However there are also those investment losses, and while one is allowed to offset investment losses against capital gains in the same year (or in some cases, a range of years with a carryback), the losses still exist.

You know damned well that no one would buy a house if 20-30 years later they had to be taxed on their "capital gain", which would mostly be inflation. Why do you think it is any different for an investor?

A society that wants to confiscate returns on capital is a society that wants to be poor. Do YOU want us to be poor?
And Ed - it's not at all inequality. The fact that we allow the one-time shelter from capital gains for the principal residence is proof of that. In effect, we acknowledge as a society that capital gains taxation is financially lethal.

PS: The worst part about both capital gains and capital losses is that taxing capital gains really hits hardest on the small investors who are just trying to build up a retirement fund. Because they cannot spread and shuffle, they pay much more on capital gains than the really wealthy, who will mostly be able to offset those gains.

If you wanted to make life fairer, you'd cut the tax on capital gains.
Thanks for your reply and apologies in advance for the length of this reply. I appreciate that capital gains are part a return on invested capital and part simply inflation. And I understand and agree with your point on taxing inflation gains masquerading as capital gains (and I think that our tax code recognizes this– specifically with respect to retirement thru 401(k), IRA’s etc, and the exemption on primary residence sale which I mentioned in my original post).

What started all of this was my statement that “the uber-rich simply have to pay more” (in taxes). Neil and I went back and forth and you ended with your discussion of capital gains taxes and the role that investment plays in job creation – which I understand.

On the other hand, your original post said, “But most wage earners in this country have very moderate incomes, and asking them to pay 50% of their wages in taxes pretty much guarantees a very poor standard of living plus that they'll not be able to save much, so they won't be generating much in the form of investment income.” I agreed and agree – which led to my original point that the wealthiest simply have to pay more in taxes (along with everyone else).

But I (sincerely) feel like I’m in a logical loop reading the post and the comments – everyone needs to pay more, except for (paraphrasing) capital gains which should be cut, because a society that wants to confiscate returns on capital is a society that wants to be poor. Income from labor should be taxed more, but capital gains should be taxed lightly (or tax-free)? Economically this may result in higher growth, but is it politically feasible over time? Will the electorate tolerate taxation that can be spun as, “Only the little people pay taxes”?

Put another way (and Neil,to answer your question, this is why I think percentage paid is such a priority):
The lower marginal tax rate paid by the ultra-wealthy is like a negative noblesse oblige – rather than privilege (in this case, immense wealth) balanced by duty towards those who lack such privilege, privilege is perverted into taking advantage of those who lack such privilege – in this case by utilizing the tax code in such a way that they are able to proportionally contribute less to maintain the society that is the foundation of their immense wealth than those who are the majority of that society.

My bigger concern that there is less and less that ties us together as a cohesive nation – taxes are one of the last common obligations of citizenship. When the leaders of our society (and let’s not kid ourselves, the wealthy are perceived as the leaders), revel in how little they pay, it undermines society as a whole. Oliver Wendell Holmes said, “Taxes are what we pay for civilized society” and I think that a failure by our leaders to pay what may be perceived as a “fair share” (comparable marginal taxes in percent terms) can have dangerous outcomes. Having the guy who details the Ferrari pay more (in percentage terms) than the guy who owns the Ferrari doesn’t engender long term stability, let alone greatness in a country, although it may be economically optimal.

Ed S.
Ed, thanks again for answering my question.

All I can say in response is that we, as a society, decide what is a fair share. The upper 5% of income-earners already pay the majority of taxes in the U.S. If we decide that taxation of return on investment is a critical part of being an American, then we become a nation that eats a little more of its seed corn every year.

Alternately, we can decide that wealth, reinvested and managed wisely, is a good and proper part of being a productive member of society. We can focus on what one does with one's wealth as an indicator of fitness for leadership, rather than simply the fact that one has wealth.
Your solution seems to be to take away from middle class individuals who still have something to be taken away and feed it into private corporations. As you may know, corporations are pretty good at avoiding taxes under the present tax code (http://www.reuters.com/article/idUSN1249465620080812). I don’t see how giving them back something that they already mostly don’t pay would help them or us. Why don’t you talk about increasing taxes on overpaid CEOs/lawyers/bankers/politicians? Some of these money could have gone toward company development and innovation, hence job and wage growth.
Second, jobs and good-paying jobs is not the same. Third, Social Security had been running surpluses for decades, that is, more money was collected in payroll taxes than paid out in benefits. The left-over cash was put into the rest of the government and a note was placed in the SS fund that the rest of the government owes it. Perhaps, the rest of the government could try and cough up some of that cash back.
Finally, what is your problem with student loans? These are –loans-, the government would make interest profit on these under the new law. Under the old law, private corporations were collecting interest profits, while the government covered up defaults. Shutting down loan programs would screw over kids from middle class families going to state schools and relatively benefit those from wealthy families who go to independent schools with large endowments.

I readily concede that I don't know what a "fair share" is. And I've looked at the IRS reports showing who pays what in income taxes -- it's the upper 20% of the AGI distribution and really skewed to the top 5% or so. I don't think that there's a whole lot more to get out of them. And frankly, I was surprised how little the bottom 50% pays in Income Taxes.

Your point on eating our seed corn is well taken and that's not what I want (or recommend). Maybe cap gains should be zero. But from a political perspective, can we, as a society, survive with a hedge fund or PE manager earning $500mm and paying a 15% rate (current cap gains on assets held longer than 1 year) while his gardener pays 33% in Fed + Soc. Sec.?

That's my ultimate concern -- are rates are economically optimal but politically suicidal? Are the ultrawealthy smart enough to (at least appear to) share the pain? Or do we continue to "do G-d's work" per Lloyd Blankfein and end up with really confiscatory tax rates?

Sadly, I think we'll see.

Ed S.
Excellent debate.
I have little to add except to confess to an utopian dream that refuses to go away:

Will we ever live in a world where investment and work aren't taxed with all taxes levied only on consumption.

ie. No corporate taxes, no capital gains taxes, no taxes on dividends, no personal income taxes.

A straight, easy-rate, tax on all forms of consumption, be it goods or services.

A man can dream eh?
What we ought to do is index capital gains for inflation. Then long-term holdings wouldn't get huge tax bites just from inflation, and one could set the tax on the real gain close to (perhaps even equal to) the rate on ordinary income.

Reform double taxation of dividends by letting businesses deduct dividend payments from income. That way, the profits only get taxed once.

Then you can strip off the tax-free status of AMT-exempt investments, and watch the capital flow toward investments that actually make money, as opposed to ones that game the current capital gains laws.
Government retirement:

MoM's right the Feds went on social security during Reagan's term. So all Federal employees now receive SS+small defined annuity+401K.

CSRS (Civil Service Retirement System) employees receive an annuity that is comparable to most large company benefits of the era. I worked for the government, my brother worked for one of the Florida Bells; he received about 6% more than I did for comparable service length and contribution. That contribution was NOT comparable to social security by the way. I paid in 7% of my salary until, again, the Reagan years (I think) and then it was raised to 9%. This, again, is comparable to company benefits of the era. After the retirement system changed, those of us that were on CSRS were allowed to contribute to a "Thrift Savings Plan" but received no matching money from the government.
I'm so glad you're back posting - I hope you know that your adoring public really does worry about you when you are quiet for so long.

You said something that I think is the fundamental difference between an economy that will grow or one that will die: "The one thing I will not do is blame a person or a company for playing well in a game whose rules they do not set."

A thought I've had ever since the Goldman demonization of a couple of weeks ago is that banks cannot be blamed for any of the mess that we are in because they don't make policy. All banks do is serve as a clearinghouse for efficient employment of resources. The fact that they made so many bad loans and that they spend so much on lobbying is only evidence that the rules have been set so that lobbying and bad loans will have the greatest return. The rules are set, and the banks give the economy a tool to put them into action. The fix to the "banking problem" is to take contol out of Washington (so that lobbying doesn't pay as well) and allow the market to determine how credit is distributed (through bankruptcy of failed companies and ending social, political credit distribution via Fannie/Freddie/FHA/CRA).

The banks are only a mirror that shows us our priorities and the rules we have set for the game. Getting angry at them and the evil "Wall Street" is just a substitute for not dealing with our own mixed up priorities.
But from a political perspective, can we, as a society, survive with a hedge fund or PE manager earning $500mm and paying a 15% rate (current cap gains on assets held longer than 1 year) while his gardener pays 33% in Fed + Soc. Sec.?

I say: absolutely. Personally, I'd prefer a flat tax with few deductions, but a complicated tax code provides power.

Our problem as a society isn't paying too little in taxes, it's spending far too much on unproductive aspects of government. Your desire to tax rich people, especially cap gains, in borne of envy not problem-solving.
Whoops. I had not read the last few comments when I wrote the next post, and I believe the next post supports Charle's and Last Anon's comments.

In fact, I wish I had written a lot of the last two comments.

I do think that banks can be blamed for playing the game badly, but if the game is FUBAR at the highest levels, then the laws of economics tell us that individual and company-level responsibility will return increasingly less and less.

And basically, that is our problem. We keep doubling down in a poker game in which the house deck is marked. And we just do not learn from our losses.

Yes, the burdens on individual taxpayers are very high, but they are also high on most higher income taxpayers - as Ed himself justly notes.

I am not dismissing concerns about basic fairness, but an imploding system will end up being most unfair to those who need it the most. Therefore, the first questions to ask should be about possibility and feasibility. Ending up with anything that most people would consider even remotely fair will require a system that works over the long run.
Post a Comment

Links to this post:

Create a Link

<< Home

This page is powered by Blogger. Isn't yours?