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October 26, 2008

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Somebody made the snark that "socialist" is the Far Right's way of saying "nigger" in 2008.

Are Sarah Palin and Michelle Bachmann having some kind of contest for the most outrageous comment in a campaign? Lord, this can't stop soon enough.

Why should anyone pay tax when all we have to do to fund the government, with extra mney left over for the taxpayer, is drill for oil and send a few superannuated, super-corrupt representatives to extract money from a very large, very close, and allegedly affiliated government and economy? It works in Juneau, and she is the only person in the race with executive experience, so she must have all this stuff figured out ...

tomeck: the PA GOP just won the contest. See next post.

Taking money from 5% of households in order to send checks to 40 million households that don't pay income tax is akin to socialism.

cut taxes on most people
Remind me why this is unobjectionable? It's pure pandering, from the left as well as from the right.

Frank, it is progressive, no question. But (1) these people pay payroll tax, just not income tax; and (2) have you ever heard of the EITC, enthusiastically endorsed by one Milton Friedman? I think you worldview is either rather reductive and manichean, or perhaps you believe in a sliding scale as do most people but you might want to re-examine where you've got your thresholds set.

Manichean? What does that have to do with anything? So you're going to attack my worldview. I don't like the eitc and I don't care if some celebrity economist endorsed it. That is all smoke: obscurantist.

In regard to payroll taxes: First, it is not true that the 40 million lowest income tax paying households also pay payroll taxes. Some of them do. But others are unemployed, retired, living on interest and/or principal, whatever. Second, payroll taxes have traditionally been to fund specific 'insurance' type programs: unemployment insurance (fui, sui), worker retraining (futa), and a federal retirement program (fica). I'll ignore the medicare tax. What you're (and Obama) are suggesting is that the top 5% should pay for the retirement programs of those 40 million. Wow. That is a big change from the traditional bipartisan view.

Another matter of concern is that Obamas plan will bring the ratio of non-taxpayers to taxpayers very close to 50%. Once the number of non-taxpayers exceeds the number of taxpayers the country will be &%#(*).

People who do not pay income tax are not "non-taxpayers". They pay plenty of tax -- unless they are not only unemployed, but do not buy anything, own land, inherit, get cap. gains, etc., etc., etc.

Frank, I invoked manicheanism because you seemed to be claiming that Obama's plan was pure socialism when, as I was trying to imply, if this is so then we already live in a socialist country, what with the EITC being long since established. Any notion that Obama's plan as more than incrementally socialist - i.e. that it is progressive, and lacks any clear intent to achieve full socialism - would strike me as risible. RE Friedman, he is generally regarded as one of the leading advocates of an economic theory wholly hostile to socialism. You are certainly not obligated to embrace him, or any other thinker; but if you are going to define socialism arbitrarily and to reject established schools of thought then you will have to do an awful lot of work to explain to people just what your worldview is, and why they should find it convincing.

Let's talk about the effect of Obama's tax plan on jobs.

I'll give you real numbers. I am in the top 1%. I bring home about $1 million per year after tax.

Aside: "Pfft! You can afford to pay taxes! Who are you to complain?" I hear you say. Yes. I can afford to pay taxes. And I do pay them. But let's get back to the point.

What happens to that money? I consume about $150,000 (a family can only eat so much) and reinvest the rest in my business in order to grow it. As near as I can tell, Obama's tax changes will add $200,000 to my tax bill. It won't effect my consumption. It will only reduce the money I have left to reinvest. Instead of $850,000 to invest, I'll have $650,000.

When I invest in my business I generally match my new equity with an equal amount of new borrowing: $650k of equity plus $650k of borrowing equals $1.3 million of investment. I spend about 50% on materials and 50% on labor to produce my products. My employees make about $50k per year. My $650k of new equity, therefore results in 13 new jobs ($650 x 2 = $1,300 x 50% = $650 labor / $50 average wage = 13 jobs). Basically every dollar of new investment goes directly to payroll for a new employee.

If my taxes are $200k higher then I will be able to hire 4 fewer people next year. It will not change my living conditions at all.

How useful will it be to the 40 million families that Obama gives it to? Each family will get half a penny. Four families forego jobs so that 40 million families can each have half a penny.

4 jobs is insignificant you say. But so is half a penny.

How much money would a family have to receive for it to be material to their way of life? Would $500 do it? I doubt it, but let's use that figure. That is equal to 100,000 half pennies which equates to 400,000 new jobs foregone.

Now we're talking a real impact on jobs.

I would really like to know what Sarah Palin thinks is an appropriate use of the government's power to tax.

A windfall profits tax on oil companies, proceeds distributed to citizens in the form of direct payments?

Higher business taxes will also effect americas retirement savings.

Let me give you some real numbers. The long-term historical return for the stock market is about 11%. Another way of saying that is that people have historically, on average, priced listed companies at an 11% total yield.

Obama wants to raise taxes on businesses that earn more than $250,000. I have seen somewhere that he wants rates to go from 35% to 39.6% (correct me if i'm wrong). Another way of saying that is that, under Obama, money left over for shareholders will be 60.4% of every dollar rather than 65.0%. That is a 7% reduction in yield. When this law passes, the shares will suddenly be worth 7% less than before the law passed.

If you look at it another way, in the first year, every $11 of actual tax raised by the government with this change, will result in $100 of market value being lost from the share price. (Because as we saw before, earnings are historically priced at 11% by the market). It is true that the market price will only fall once as it digests the impact of this rule change BUT how inefficient it is! The government takes $100 from you're net worth now (via the stock price adjustment) and only gets $11 of useable tax now! It takes nine years before the government gets $99 of useable tax.

There are ALWAYS unintended consequences.

Go ahead and talk about manichea, schools of thought, worldview explanations and shit.

Maybe if you talk enough no one will consider the real world numbers and their impact.

Well, frank, I don't know the ownership structure of your business, but I do know that payroll expenses are generally a deduction against the earnings of that business. So if you really want to reinvest your earnings in the business, and you have as much control over operations as you suggest, it would seem to me that it would be a lot more efficient to simply hire the workers in question, deduct their payroll costs against the earnings of the business, and reduce your (or your company's) taxes into the bargain.

Dave W.

Huh?

Are you suggesting that by deducting the wages from my taxes that the new wages will not have an impact on me? Wrong. It's already figured in.

Or perhaps you're suggesting that if I leave the money in the business rather than bring it home and then reinvest it that the numbers will magically change in my favor. Wrong again. There is no magic here. I'm not trying to fool you with trick numbers. The $850k and $650k are fully taxed dollars whether they stay in the business or come home.

frank, you are successful enough to be clearing $1 million in your business and yet you do not know that profits are subject to income tax, not revenue? What is spent on payroll is not profit and so any income tax change has no impact on your payroll.

The $150,000 you are taking as profit actually puts you in the range for lowered marginal income tax rates.

Also, the 39.6% you quote is the marginal income tax rate for earnings over $250,000, not effective rate for total earnings over $250,000.

frank

I think your trolling skills would be greatly improved by sitting down for an hour or so with an even marginally competent CPA. Gross receipts are not taxed as income.

1) Frank, I will wager a year's supply of Alpo that you do not make a million dollars a year. 1a) If I'm wrong and you do, 1b1) I apologize for questioning your bona fides and 1b2) ask your forgiveness for my callow aspersions. By the way, 1c) I am a dog typing this and sending it in from the 1c1) 17th mountain of Geldemor using a 1c2) wireless router comprised 1c21)entirely of tin cans, 1c22) broken cell phones, and 1c23) chewing gum.

2) Nice smackdown Warren.

Matthew and Eric.
I am a trained accountant who used to hold a cpa license (I let it lapse years ago). The revenues of my business far exceed $1 million. I am saying the cash I have in my hand after business costs and both business and personal income tax is $1 million. Think of it as my net paycheck (although it is not a paycheck it is just profit). I take $150,000 of that money and consume it on housing, utilities, food, clothing, vacations, whatever. Then I have $850k of cash left in my hand (or $650k after Obama is done with me.) If I did nothing with the $850k/$650k but put it under my mattress I would still have a functioning business. That business would produce another $850k/$650k next year. What I am talking about is what happens when I reinvest the $850k/$650k that is extra every year to grow my business further. I am saying that I could spend it on wages for 17 new employees ($850k) or for 13 new employees ($650k after obama taxes).

Matthew: I am not taking $150,000 as profit. I am taking $1,500,000ish as profit, paying $500,000ish as taxes, and having $1,000,000 to spend on whatever I want. I currently spend $150,000 on living and reinvest $850,000 because I think it is fun to expand my business.

Matthew: I realize the 39.6 is the marginal tax rate. But if a corporation has taxable income of $10 million and the rate for income above $250,000 goes from 35% to 39.6% it is insignificant that the rate on the first $250,000 is less.

Eric: It must comfort you to assume I don't know what I'm talking about. And I find it interesting that you call me a troll. I have simply provided to real world case studies. How is that trolling?

I just want to say that the new frank isn't me. Don't call it a comeback I've been here for years.

Frank, it must have been exciting having you as a CPA if you think a marginal tax increase from 35% to 39.6% would see you paying $200k in extra taxes on $1.5 M of taxable income. You're off by about a factor of three, even assuming all your numbers are right as to the tax rate and the portion of your income that's taxable. And since you yourself presented your situation as being a small business owner who reinvests extra income in the company, paying for extra jobs and helping society, you should be aware that those extra profits rolled back into increased company payroll are deductable like the rest of the payroll - they aren't part of your company's taxable income. I mean, I'm sure you rocked as a CPA but even I as someone with neither a business nor an accounting background know that much. I strongly endorse the upthread suggestion that if you are indeed in anything like the situation you claim, you should get a professional to explain the tax laws to you until your understanding is better than it currently seems.

Don't you people realize that taxes are like Stevenson's Bottle Imp? They can never be raised but only lowered. When taxation reaches zero all (former) taxpayers go to hell leaving only the faithful with good accountants that never paid any taxes in the first place.

Sigh. You are determined to discredit me aren't you as if it will invalidate the points I made. We'll call it the "Discredit Joe the Plumber debate gambit".

First, I didn't say the change in business tax rate from 35% to 39.6% will cause me to pay $200,000 more in taxes. I used that rate when discussing the effect of the tax rate change on the valuation of big, listed companies. Those companies (pge, microsoft, oracle, exxon, whatever) have taxable incomes that generally exceed $250,000 so the marginal rate is the only one that counts.

Second, my businesses are held through LLC's which are pass through entities. The personal income tax rates are the only one's that matter for me. I think you'll find that I have been VERY soft on Obama by saying that my taxes on $1,500,000 of taxable income will rise by only $200,000.

Third, you say:
//And since you yourself presented your situation as being a small business owner who reinvests extra income in the company, paying for extra jobs and helping society, you should be aware that those extra profits rolled back into increased company payroll are deductable like the rest of the payroll - they aren't part of your company's taxable income.//

You are hung up on an irrelevant point. Yes, the new payroll is deductible. Yes, I will deduct it. The only point I'm making is that i'll have less money to create the new jobs.

I compute the $200,000 using several changes.

Obama proposes: 1. top individual rate rises to 39%, 2. Capital gains rate rises from 15% to 20% or 28% and 3. (maybe the biggest) there is no cap on the income to which social security tax applies. This is a new tax of 15% on income over $100,000ish for self-employed individuals!

http://www.suntimes.com/news/politics/obama/1031268,CST-NWS-tax30.article

Frank, you're getting pathetic, so I'll stop after this, but you did indeed say in two previous comments that your taxes on $1-1.5M of income would go up by $200K - and even in this recent comment, after disavowing the $200K number, you then reinstate it, this time as a lower boundary estimate for the personal tax increase you will face. The arithmetic just does not say what you seem to think it does. Your comments about how your profits will be reduced by taxation and so you won't spend them in a way that renders them not subject to taxation in the first place don't make any sense, as you appear to concede immediately before nonetheless blithely repeating the assertion that you will have less money available to spend on creating jobs. At this point, I can only invite you again to seek professional help. Strictly in the sense of tax advice, of course.

Frank: You are determined to discredit me aren't you

But you're doing such a good job of discrediting yourself...

Hartmut: Don't you people realize that taxes are like Stevenson's Bottle Imp? They can never be raised but only lowered. When taxation reaches zero all (former) taxpayers go to hell leaving only the faithful with good accountants that never paid any taxes in the first place.

For anyone not familiar with this fine story: The Bottle Imp (PDF)

Warren

Re your 6:11 comment: Please note that I used the 39.6% rate in my 3:09 comment which was not about my personal taxes. It is what I was referring to in the second paragraph of my 5:54 comment.

On your other point: You say:
//Your comments about how your profits will be reduced by taxation// Yes. //and so you won't spend them in a way that renders them not subject to taxation in the first place// This is your error not mine. //don't make any sense// I agree what you're saying doesn't make sense // as you appear to concede immediately before nonetheless blithely repeating the assertion that you will have less money available to spend on creating jobs.//

So i'll try one more time and then quit.

During 2009: Frank's businesses which are all held in pass-through entities produce $1,500,000 of net income that is passed through to Frank's personal return via k-1 forms. (The k-1's also show that Frank was able to take $1,500,000 in cash draws from the businesses). Frank holds $1,500,000 cash in his hand but must now use some to pay taxes. Mr Obama asks Frank to pay $700,000 in tax which is $200,000 more than Frank would've paid under the tax regime in effect in 2008. Additional social security tax alone is at lease 15% x $1,300,000 = $195,000.

So Frank takes $700,000 out of his hand and sends it to Barrack. Now Frank has $800,000 in his hand. Frank takes $150,000 out of his hand and pays his living expenses for a year. Now Frank has $650,000.

2010 Starts. Franks existing businesses will continue to produce at the $1,500,000 net profit clip that they did in 2009. In addition to that, Frank takes all the money left in his hand, $650,000, and starts another project. He borrows an additional $650,000 so that $1,300,000 is available to spend on the new project. He spends $650,000 on wages for 13 new employees. He spends $650,000 on materials, office expenses, sales materials, whatever. Now he has finished products to sell. Suppose he sells the products for $2 million. What is the outcome? He will have taxable profits of $700,000 from this new venture. (sales of $2 million minus $650k labor and $650k materials, etc equals $700k). He will have cash in his hand from this new venture of $1,350,000. ($2 million sales proceeds minus $650k repayment of loan equals $1,350k).

So, Frank's total situation for 2010 is $1,500,000 taxable income from the original businesses and an additional $700,000 of taxable income from the new venture.

Frank is not unhappy.

But if I could draw you away from the details of the business which have seemed to confuse you and indicate my original point: How has society fared by Obama's increase in taxation?

Society has received 13 new jobs in 2010 instead of the 17 that I could have funded.

And as I said at 2:47
//4 jobs is insignificant you say. But so is half a penny.

How much money would a family have to receive for it to be material to their way of life? Would $500 do it? I doubt it, but let's use that figure. That is equal to 100,000 half pennies which equates to 400,000 new jobs foregone.

Now we're talking a real impact on jobs.//

Taking money from 5% of households in order to send checks to 40 million households that don't pay income tax is akin to socialism.

I can do better than 'akin'.

Stating in the constitution that all mineral rights are the common property of the people, and that all license fees derived from those resources should be returned directly to the people, either through funding government services or as a direct cash payment, *is socialism*.

That's good enough for Palin in Alaska. What's her problem with the rest of the country?

Thanks -

I compute the $200,000 using several changes.

Hey frank -

The suntimes link in your post is incomplete. If you don't mind, can you try posting it again? I'd like to follow your math.

Thanks -

russell, you are correct in that Alaska is basically a socialist society run by someonewho conducts business by the same cost raising means as the current administration.

Also, frank may be an accountant, even if lapsed, but not only is his math incorrect but he also appears not to have much grasp on economics or Obama's policies.

I am curious as to what checks Obama's going to send out and when I will get mine, though.

Way back when Bonzo was acting as President he had a Cabinet officer whose name I cannot recall but I think it was Schultz. Or Schmidt. Anyhoo this was back when the whole stupid idea that serving the rich would serve everyone was being promoted by the party of the rich. This guy, who I think was Secretary of the Treasury came out against the supply siders. He said that the Republican pary was committing a fundamental error by impoverishing the average American. He pointed out that if the ordinary American loses purchasing power then American businesses lose domestic markets. A wingnut acquaintance of mine was carrying on about how if tghe rich get a tax break they will spend their money creating jobs. Bullshit. People don't hire more people because they got a tax break. They don't expand or improve their business because they got a tax break. It works, as the Secratary said, the ohter way around. If the middle and lower classes have more discretionary money they will spend it on stuff which increases the market which gives businesses a reason to expand.

The Republican parry economic theorists have been just flat wrong about economic theory for three decades now and distorting the meaning of the word "socialism" doesn't change that reality.

.

I love when trolls created detailed ways of being wrong, instead of just barging in with random slurs and stuff. I had a good laugh so far, please continue.

frank,

A number of people have had a go at your math which does indeed seem a bit screwy on its face. You also seem to make a number of assumptions about taxable income that aren't correct such as the assumption that all net income or profit is subject to the increased rate (it isn't), that there aren't also tax incentives for job creation (there are), and that increased government revenue doesn't also create jobs (it does).

But whatever. Lets say, for the sake of argument, that you are exactly correct in your assumptions. The fundamental problem here is that your argument could be made anytime the tax rate for any group is raised above zero. Obviously no one enjoys paying taxes but the revenues are essential to a functioning society. The only real question is finding the right balance between a tax code that takes too little to fund the infrastructure that allows businesses to thrive and one that takes too much to allow businesses to thrive.

You haven't said so directly but you seem to be suggesting that the 3-4% increase on the top margin raises the burden too high to the point where it costs jobs rather than creating them. I think you're incorrect based on the recent economic history of the past 20 years. But, for the moment, my point is the type of narrow anecdotal evidence you supply will not address the question of which of us is right.

That is ultimately the problem with your argument. The "real numbers" you cite aren't "real" in any kind of macro perspective.

We can skip the accounting details and just ask Frank: if a 39.6 top rate is ruinous, especially for job creation, then presumably the Clinton years must have been full of massive unemployment. Or even: greater unemployment than the Bush years, when the top rate was lowered.

And yet, curiously, the opposite is true. That suggests to me that job creation might possibly be more complicated.

Frank, I hadn't considered the proposed end of the payroll tax ceiling. I can see how for the self-employed affluent it could in theory raise the to bracket by almost 20% in combination with the income tax change, although I don't know how these things work in terms of structuring your income to limit tax liability. Maybe you're right there - but if so, we have come full circle, as your point comes at the cost of completely destroying the stance you took in your first comment: back then, you were concerned about a modest increase in your income tax for the benefit of people who paid no income tax - and yet it would appear that the major cause of your concern is in fact a tax that this bottom 40% of earners feel very keenly indeed but that at present scarcely even touches you, as 90% of your otherwise taxable income is exempt from payroll tax.

Whether Frank can/will create new jobs is certainly arguable - Wonkie makes a very nice point about secondary effects that Frank seems destined to ignore. How much money Frank has is obviously important to Frank, but maybe how much money everyone else has may be more important, even to Frank. Unless he's into Darwinian capitalism.

To me, the elephant in the room is deficits. Frank - an honest question here - how do you suggest funding the government? Who would you tax? Or, do you suggest cutting government spending, and if so, who gets cut? Or do you suggest the gov't keep borrowing money? Or printing money? Or operating a business? Other ideas?

"Way back when Bonzo was acting as President he had a Cabinet officer whose name I cannot recall but I think it was Schultz. Or Schmidt. Anyhoo this was back when the whole stupid idea that serving the rich would serve everyone was being promoted by the party of the rich. This guy, who I think was Secretary of the Treasury"

List of Secretaries of the Treasury. Under George W. Bush:

Paul Henry O'Neill, from January 20, 2001 to December 31, 2002; John William Snow Virginia, from February 3, 2003 to June 30, 2006, and Henry Merritt Paulson, Jr., since July 10, 2006
I can't figure out who you are talking about.

My best guess would be Paul O'Neill, who famously had the book written about him by Ron Suskind, and left while disagreeing with the Administration.

How that gets you to any of the rest of what you're saying, though, I'm unclear.

It might help if you checked sources before posting.

"Way back when Bonzo was acting as President he had a Cabinet officer whose name I cannot recall but I think it was Schultz. Or Schmidt. Anyhoo this was back when the whole stupid idea that serving the rich would serve everyone was being promoted by the party of the rich. This guy, who I think was Secretary of the Treasury"

List of [LINK DELETED] Secretaries of the Treasury. Under George W. Bush:

Paul Henry O'Neill, from January 20, 2001 to December 31, 2002; John William Snow Virginia, from February 3, 2003 to June 30, 2006, and Henry Merritt Paulson, Jr., since July 10, 2006
I can't figure out who you are talking about.

My best guess would be Paul O'Neill, who famously had the book written about him by Ron Suskind, and left while disagreeing with the Administration.

How that gets you to any of the rest of what you're saying, though, I'm unclear.

It might help if you checked sources before posting.

I can't figure out who you are talking about.

I assume that by "bonzo" he meant Reagan. Now, George Schultz was Secretary of State under Reagan but not of Treasury.

What happens to that money? I consume about $150,000 (a family can only eat so much) and reinvest the rest in my business in order to grow it. As near as I can tell, Obama's tax changes will add $200,000 to my tax bill. It won't effect my consumption. It will only reduce the money I have left to reinvest. Instead of $850,000 to invest, I'll have $650,000.

I understand the argument (passing on the math), but I'll direct you to income tax rates under Eisenhower and Nixon, when we managed to maintain economic growth.

You see, cutting taxes on a large swath of the population will spur additional consumption, so your customers will be buying more of your widgets (unless you are a manufacturer of luxury yachts). More widgets sold = more revenue = more to reinvest. Consider it the flip side of the Laffer Curve.

In reverse chronological order:

Scott de B/10:57a and cw/10:11a : Yes, I see that the public will have more money to spend and they'll buy more widgets. In my example, the tradeoff was 400,000 new jobs equals $500 each for 40 million households.

cw/10:11a: Deficits. Yes, that is the elephant in the room. What would I do? I would leave the tax regime as it is. I would freeze the overall growth of federal spending until revenues caught up and the deficit went away.

hilzoy/10:07a. Yes of course, the economy is complicated. I've told you the facts in my case. I will pay the tax and create fewer jobs.

brent/10:04. We're a long way from balancing taxation with infrastructure spending. We're not talking about infrastructure spending at all. We're talking about taxing 5% in order to send checks to 40 million households who pay no income tax! It is absolute vote buying.

russell/7:42a. I tried the link again and it works. Did you include the "tax30.article" on the following line?

PS. apparently no one wants to tackle the stock market valuation/inefficient use of money example I gave at 3:09a.

Look: socialism is a word that has a meaning.

'When I use a word,' Humpty Dumpty said, in a rather scornful tone, 'it means just what I choose it to mean, neither more nor less.'

'The question is,' said Alice, 'whether you can make words mean so many different things.'

'The question is,' said Humpty Dumpty, 'which is to be master - that's all.'

Gary, don't confuse Bozo* and Bonzo! ;-)

*sincere apologies to the venerable clown

frank,
I can save you about 10x what your taxes will go up- you should be using a c corp type taxation structure. Using a passthrough structure with your income and takeaway is *insane*. Given the scenario you've layed out, you'd go from 500k(!) of tax liability to only paying personal taxes on 150k (since your corp is reinvesting all its other profits).

That you haven't done this, initially claimed that you paid taxes on money that you spend on payroll, etc suggests that this just a fantasy scenario. If it isn't, then you are, by far, the most incompetent CPA to ever walk the face of the earth. You should blame no one else for how high your taxes are, you have voluntarily increased them by a factor of 10.

So- if you are telling the truth, then we shouldn't use you as a test case, since you've volunteered to radically increase your tax liability. Let's use a business run by someone who is not crazy instead.

Another way of saying that is that, under Obama, money left over for shareholders will be 60.4% of every dollar rather than 65.0%. That is a 7% reduction in yield. When this law passes, the shares will suddenly be worth 7% less than before the law passed.

Ricardan equivalence- the government's borrowing of money to fund tax cuts shouldn't expand expectations of future returns at all, as businesses should understand that they will face higher future tax liabilities.
It's funny how you seem to think that tax cuts are somehow free- that engaging in them doesn't involve either cuts in government spending or increases in federal borrowing (crowding out private equity and raising future obligations).

Sigh. You are determined to discredit me aren't you as if it will invalidate the points I made. We'll call it the "Discredit Joe the Plumber debate gambit".

Ironically, joe the Plumber's story didn't add up either. Makes 40k but about to buy a business that takes in 250-300k in profit?


Carleton Wu/12:51

Under the current tax regime it is a wash as to whether a c corp is better than a pass-thru entity for my situation. The top c corp rate is 35% and the top individual rate is 35% and fica only applies to the first $102k of self-employment income. If Obama's regime goes into effect a c corp would be better because I could cap my wages at $150k and limit my exposure to the 15% fica tax on wages in excess of $250,000.

You said of me: //you...initially claimed that you paid taxes on money that you spend on payroll//. Sigh. This was not my claim. This was someone else's confused comment that I responded to. My position has always been that I use fully taxed dollars to make a new investment the following tax year which then creates new jobs (payroll). Yes, the money I spend on the new payroll is deductible in the tax year it is incurred.

More Carleton Wu:

//I can save you about 10x what your taxes will go up- you should be using a c corp type taxation structure.//

and

// Given the scenario you've layed out, you'd go from 500k(!) of tax liability to only paying personal taxes on 150k (since your corp is reinvesting all its other profits).//

To nit pick. You've ignored the corporate tax.

Now: $1,500,000 is taxed at 0% at the business entity level because I use an llc. $1,500,000 is taxed at the personal level yielding a tax in the neighborhood of $500k.

With your plan using a C corp (under the 2008 tax regime and dividing the $1,500k into $150k salary taxable at the personal level and $1,350k taxable at the corporate level only. I'd pay not much tax on the $150k at the personal level allowing for itemized deductions and such. But on the corporate $1,350k income i'd pay (or my corp would pay as my proxy) about $500k.

The result is the same.

I would freeze the overall growth of federal spending until revenues caught up and the deficit went away.

Except that spending freezes tend to damage the economy, damage long term revenue and there really isn't much that anyone in power in either party is willing to "freeze" anyway.

By far, our largest expenditures are in defense, education and medicare. Any kind of effective freeze on any of those budgets would have predictably catastrophic results, not only on the functionality of those crucial sectors but on the massive economies they create. But other than that, great idea.

We're talking about taxing 5% in order to send checks to 40 million households who pay no income tax! It is absolute vote buying.

First, "we" are not talking about that at all because I do not agree that households that do not pay income taxes do not contribute to the tax revenue base. But again, whatever. I have no interest in going over all that again. You are focused on who gets the tax cut and I am focused on how we raise revenue. The simple question is: Would you be any more in favor of his tax proposal if he didn't include a tax cut for the middle class? Based upon your furious calculations above, I would guess not.

PS. apparently no one wants to tackle the stock market valuation/inefficient use of money example I gave at 3:09a.

It seems that you are still completely missing the point frank. This kind of narrow analysis is completely off the mark. Again, it can be applied to any context in which the effective tax rate in any particular situation is raised above zero. It, thus, asks the wrong question and predictably ends up with the wrong answer.

Put it to you this way: It would be very easy to point out a business model where growth is very much helped by government spending, even indirectly. In my own business, two of my major clients are recipients of small business association loans that are backed by public sector spending. I receive far more money from them than I pay in taxes on an annual basis. If I was inclined to think about it further, I could come up with a half a dozen other ways in which public sector spending greatly aids my own and many other private sector businesses far beyond any value they could achieve by spending those tax dollars more directly in their business. But it would also be the wrong question to ask.

Neither of our scenarios is the same as data. They attempt to understand a national policy by looking at the results in too narrow a context.

The right question to ask is how well economies function relative to shifts in their tax code. Again, how much is too much and how little is too little? Of course, there are a great many other factors including regulation, shifts in international economies, changes in available resources and commodities, etc.

But what we do know is that, in the past, a top marginal tax rate near what Obama is proposing has coexisted with a lot of growth in the economy. That doesn't mean that it is the cause of such growth but it does tend to contradict your opinion that the higher tax rate will necessarily lead to job loss and other harmful economic consequences overall. All of your meticulously constructed scenarios aside, the proof is in the pudding.

All I'll say on this for now is this:

frank: How much money would a family have to receive for it to be material to their way of life? Would $500 do it? I doubt it, but let's use that figure. That is equal to 100,000 half pennies which equates to 400,000 new jobs foregone.

This was the point at which I stopped listening. Mind, if you actually think that your individual data point is arbitrarily generalizable to the macroeconomic level -- let alone in a linear fashion -- then you should really stop now before you embarrass yourself further.

PS. apparently no one wants to tackle the stock market valuation/inefficient use of money example I gave at 3:09a.

Because it's innumerate. You assume:
-money collected in taxes does not facilitate economic activity (eg infrastructure, defense, administrative,etc)
-reductions in taxes dont lead to additional borrowing, crowding out private investments and increasing anticipated future taxes
-that US corporations actually pay at the listed rate; in fact, there are many opportunities for corporations to reduce their taxes, and the actual US tax rate on corporations is much lower than this

Under the current tax regime it is a wash as to whether a c corp is better than a pass-thru entity for my situation.

Only if you erroneously assume that you'll pay taxes on gross income that you reinvest in the corporation. This is not correct, and again suggests that your corporation is fictional.

You said of me: //you...initially claimed that you paid taxes on money that you spend on payroll//. Sigh. This was not my claim. This was someone else's confused comment that I responded to. My position has always been that I use fully taxed dollars to make a new investment the following tax year which then creates new jobs (payroll). Yes, the money I spend on the new payroll is deductible in the tax year it is incurred.

Now I will say of you: this is nonsensical, why are you waiting until the following year in order to make these expenditures? This is a needless process that only increases your tax liability. Emphasis: putting off expenditures until the next tax year *only* serves to increase your liability.
The person was confused because your stated plan intentionally increases your tax liability. They assumed that, like a rational person, you would not be behaving in this manner, particularly with your stated concern about overpaying taxes.
*Actual* businesspeople work with this kind of thing all of the time: using profits to upgrade infrastructure prior to year-end, for example.

With your plan using a C corp (under the 2008 tax regime and dividing the $1,500k into $150k salary taxable at the personal level and $1,350k taxable at the corporate level only. I'd pay not much tax on the $150k at the personal level allowing for itemized deductions and such. But on the corporate $1,350k income I'd pay (or my corp would pay as my proxy) about $500k.

No, because you're reinvesting this into your fictional corporation. You only pay corp taxes on profits if you follow your insane business plan of holding these monies long enough to pay tax on them and only then reinvesting them.

Again- if you spent the income that you intend to spend on payroll and infrastructure *immediately*, rather than waiting until the next tax year, you will save *hundreds of thousands of dollars*. This is not Obama's fault.

I also noticed some other weirdness in your bizness skillz:
-You appear to be taking no deductions for depreciation. Perhaps your business involves no infrastructure (eg you rent your building, etc). This is also suggested bc you don't list any investments in infra, just employees and materials.
-you said that half of your new investment goes into "materials"; this seems confused- after you hire a new employee, they will require raw materials into the indefinite future, yet you appear to be budgeting only for the first year. Alternatively, why do you need to provision an employee with a year's supply of raw materials? Surely your business sells these on a timeframe shorter than a year and can therefore pay for additional raw materials out of the gross income rather than budgeting for it far ahead of time? In what business do new employees need 50k of materials?
-if your market allows for it & you're trying to maximize profit, you should be borrowing up to the point that your business can expand, not waiting for money in the bank. This is not like infrastructure (ie doesnt require significant time to become profitable)- if additional employees pay for themselves, then profit maximization would suggest that you'd hire them regardless. Now, your fictional business may just be your hobby, but your hobbyist numbers will not apply to businesses seeking to maximize profits- they will get short-term loans up to the point that they think new employees will be profitable, and so jobs will still be created.

Perhaps if you relayed (or invented) additional details about your business, this would make sense. What do you manufacture? How many employees do you currently have?

hilzoy: I would really like to know what Sarah Palin thinks...

assumes facts not in evidence.

Yes, the money I spend on the new payroll is deductible in the tax year it is incurred.

It just occurred to me that this is another example of how your corporation fails to adhere to reality: if, in reality, you take X as profit in year 1, and X again in year 2, but invest X from year 1 during year 2, your corp taxable profit is 0. Because you've paid taxes on the X in year 1, in year 2 your balance sheet shows net X after operating costs - X 'investment' (actually, just additional payroll, so really part of operating costs) = 0 profit.
At least, that's how it'd work with a c corp; I dont know about an S corp, but my limited understanding is that the basic rules work the same except for how profits are handled. So maybe this doesn't work for s corp (ie once you've taken it as personal profit, you don't get a write-off against future profits for investment)- but that would merely demonstrate that you've chosen to vastly overpay your taxes.

And, if your business is growing so fast, it's odd that you've chosen to discuss these numbers as if they were static. If you're really investing almost 1M/year, shouldn't your profits be rising? Or is that another aspect of how your business is just a hobby- your constant expansion isn't leading to an improvement in the bottom line?

Carleton Wu

I am in real estate development. I mostly build for my own account - holding them as rentals. I occasionally sell some buildings.

When I make a new investment, it is always in the construction of a new project. Construction costs tend to be approximately 50% labor and 50% materials. It is not always true but is a good generalization.

In my field, one must accumulate capital before starting a new project. Hence, the once a year nature of my reinvestment makes sense. [Although you are determined to find a way in which I am stupid and don't know what I'm talking about - I assure you that I do know what I'm talking about.]

You seem to have an idea that money which does not leave a corporation is not subject to taxation, or that if the corporation spends it quickly it is not subject to taxation, or if it is subject to taxation but you spend it quickly then at least the new expenditure is deductible. We seem to have some sort of terminology difficulty between us.

In my view, each transaction is taxable. Some businesses have frequent transactions (grocery stores) and some have infrequent transactions (ship builders). Businesses are supposed to match the revenues from those transactions with the inventoriable costs of those transactions in order to determine a gross profit. In any given tax year, the sum of all transaction gross profits is arrived at. Then business expenses which are unrelated to specific transactions are deducted from the gross profits. These unrelated costs are sometimes called overhead or period costs. They might include rent or the receptionist's salary. This figure, which is gross profits minus period costs, is the approximate taxable income. The grocery store will have thousands of individual transactions in a year that are reflected on one tax return. It's taxable income will be relatively stable from year to year. The shipbuilder will probably complete one ship every two years. It's taxable income will yoyo (or would 'oscillate' fit your sensibilities more?) between years where it has no gross profit but some period expense which creates a net loss one year and a big gross profit and some period expense the next which will yield taxable income. But in either case, at the end of the cycle, wherever you want to draw the line, the corp has some dollars on hand which are residual profits which have been fully taxed. Do you agree?

It is those dollars I've been talking about. This is where we seem to lose each other. I say 'now I will use those dollars to create a new venture that will employ people' . Is there something wrong with that?

You say //Only if you erroneously assume that you'll pay taxes on gross income that you reinvest in the corporation. This is not correct, and again suggests that your corporation is fictional.//

You say //Now I will say of you: this is nonsensical, why are you waiting until the following year in order to make these expenditures? This is a needless process that only increases your tax liability. Emphasis: putting off expenditures until the next tax year *only* serves to increase your liability.//

All I can figure is that you are locked into a mindset of a business that is an ongoing eternal process rather than a project based business. You seem to be saying upgrade the process today and deduct it now instead of waiting and deducting it later. You are assuming that 'upgrade' must absolutely occur no matter what so deduct it sooner. But in a project business, like in construction or shipbuilding, one must always think in terms of shutting the business down after each project. There is no guarantee that there will be another ship order.

you say //No, because you're reinvesting this into your fictional corporation. You only pay corp taxes on profits if you follow your insane business plan of holding these monies long enough to pay tax on them and only then reinvesting them.//

You're just wrong. I'm at a loss to explain it any other way. It's as if you're saying that if the money keeps turning it's not taxed. You must be thinking of a business with no inventoriable costs where everything is immediately expensed. It is a tiny business indeed that is not required to inventory costs.

Regarding depreciation. Yes I take depreciation but pointing to it complicates the math and you're having a hard enough time grasping this already.

Again, one of the biggest stumbling blocks we have to communication is your certainty that I'm clueless or a shill. You're determined to show me where I'm wrong rather than trying to understand what is going on.

Carleton 5:33p

I didn't notice your 5:33p comment until after I wrote my 5:52 comment.

This is exactly the gist of our confusion. In your scenario, the X profit from year one that i invest in year 2 you are DEDUCTING AS AN EXPENSE in year 2 to achieve zero profit in year 2. In my business, as in most business of any size at all, costs must be inventoried and then matched with the revenues from the sales of products they are related to. I CANNOT DEDUCT THEM IN YEAR TWO to create a taxable income of zero. I must match them with the revenues from associated sales, which in my case, as with the shipbuilder, come a year later in year 3.

Yes, with an annual new investment of $850,000 my business grows as do my profits.

I tried the link again and it works. Did you include the "tax30.article" on the following line?

There is no following line.

I was able to find the article based on your comment. It wasn't all that informative.

I did find this, which seems relatively accurate and complete. I don't know if the "Tax Policy Center" are a bunch of commies or not, but the analysis seems basically coherent to me.

Here's how I make out the numbers for Obama's plan wrt your situation. I'm assuming the scenario is $1.5M of income. Not capital gains, not dividends, just income from your business.

The top rate on income above $250K goes from 35% to 39%. That's an increase of 4 points on $1.25M, or $50,000.00.

The FICA cap will be removed for income above $250K, so you'll probably get hit for another 2 points on $1.25M. That's $25,000.00.

So, you're going to be on the hook for $75K.

It's unclear how you get from there to $200K. If you'd like to explain it for me, that would be great.

$75K is a lot of money, even if you make $1.5M. You'll be taking a five percent hit.

What does the nation get for that?

From the analysis I cite, Obama's plan raises revenue by $600B, while McCain's loses $600B, over the next decade. So, the nation gets about $1.2 trillion bucks over the next ten years.

Part of the cost may be that you, personally, will create about 1 and half fewer jobs. As others have pointed out, the overall economic benefits associated with Obama's plan may well offset that.

Plus, Obama's plan gives you, as an employer, some relief in other areas.

It seems to me that it may suck a bit for you, personally, but it is, net/net, good for the nation.

You've had a pretty good ride for the last eight years. Time to take one for the team.

If I'm misreading the analysis somewhere, let me know.

Thanks -

Carleton Wu - just fyi - it ends up working the same for either type of corp. For an S, there is no corporate tax on the profits. The profit is apportioned to the owners (via a K-1) and they pay the tax at whatever their rate is. You'd think it a nice gesture for the corp to distribute enough money so the owners wouldn't have to pay the tax out of their own pockets, but that usually depends on the investment opportunities and cash flows of the owners vs. the corp. As retained earnings are spent in the following year(s), they cut the profits of the corp in that year, just like the c.

I know nothing about Frank's business and can add nothing to that discussion.

The larger issue is the underlying assumption that he makes the best use of his money - "best" in this case being defined on a society-wide basis. Obviously I've never met Frank and he could well be an exception. But I've met any number of others who regard the money they make as absolutely THEIR money. They conveniently forget all the governmental and societal forces that enable them to even get started, and they certainly don't want to pay THEIR money to support those forces. Most of what you hear from these folks is the bs about reinvestment and trickle-down. As others have said, we're now 3 decades into the experiment and it there's no indications that it's working.

cw

Fica is 15.3% not 2%. It accounts for more than the entire difference between my $200k number and your $75k number.

As for your further analysis: I shrug. Maybe it will turn out as you say and maybe not. I do not dispute you. I just know that in my specific case, the money that is taken from me is a 100% dollar for dollar decrease in jobs and payroll for society. I do not know how it could be used more efficiently than that.

You say it is my time to take one for the team. And in your comments to Carleton you suggest that people like me just don't want to pay taxes at all. Yeah, ha ha. As if paying $500,000 per year in income taxes (not to mention wages, property taxes, sales taxes, etc) hasn't been taking one for the team. As if the fact that the top small percentage of people pay the majority of ALL taxes isn't taking one for the team. I've never once argued on this blog that I should pay taxes or that my taxes should be reduced. I've only argued that raising them in order to write checks to 40 million households who don't pay taxes is counterproductive.

To Mr. Wu you said //As others have said, we're now 3 decades into the experiment and it there's no indications that it's working.// This statement is utter bullshit. The standard of living in the united states is miles above what it was 30 years ago. Not only that, but the engine of the US economy linked with free trade has raised the standard of living by a huge degree in the entire world. If that is not proof of success - then how is it a proof of the failure of trickle down. I'll wager you'll point to something like rising income disparity or decreased social mobility - but both ignore the real and tangible increase in overall standard of living. Some like to point at the fact that the poverty rate is the same as it was 30 years ago - but they fail to mention that the standard of poverty has risen over the last 30 years. Utter, utter, bullshit that anyone but an ideologue can see right through.

important correction of my 7:16pm comment

I've never once argued on this blog that I should [NOT] pay taxes or that my taxes should be reduced. I've only argued that raising them in order to write checks to 40 million households who don't pay taxes is counterproductive.

Fica is 15.3% not 2%. It accounts for more than the entire difference between my $200k number and your $75k number.

OK, that explains it. Thanks for the reply.

I think if you look into it you'll find that, under Obama's plan, FICA tax levied for income over $250K is not at the same rate as that levied up to the current maximum.

I'm not sure if Obama has committed in writing to a specific number (which does, in fact, set off my radar) but "about 2%" is generally the number he uses when discussing it.

As a final note, "households that don't pay taxes" are vanishingly rare. Households that don't pay income tax excluding FICA, less so.

Thanks -

As for your further analysis: I shrug. Maybe it will turn out as you say and maybe not. I do not dispute you. I just know that in my specific case, the money that is taken from me is a 100% dollar for dollar decrease in jobs and payroll for society. I do not know how it could be used more efficiently than that.

If we believed you. But even then, your business-as-hobby mentality is not likely to be practiced by most. Most businesses maximize their profits, and hire as many employees as are necessary to do so. Ergo, Obama's plan won't be the drag on business growth that you anticipate.

As a PS, it was me (russell) who used the "take one for the team" language, not cw.

My point there was a reply to your question about "what the nation would get" in return for raising your taxes. The answer, briefly, is revenue, which we in fact need because we are insanely in the hole.

So, yes, you would take about a 5% hit. And yes, that might, in your particular case, translate directly into about one and half fewer jobs created by you, personally.

Hard to say if the overall economic benefit of that increased revenue would, or would not, result in at least one and half jobs being created through other means.

But here is the deal from *my* point of view. And for the record, "my point of view" is that of someone not quite at your level, but still well into upper middle class territory. Not a commie.

My point of view is that the tax changes proposed by Obama are at most modest. They will return us to a tax schedule similar to that of the 90's, when the economy was, in fact, quite robust. They will, more or less, reverse the tax breaks given to the very wealthiest among us over the last eight years, and balance those give-backs with modest tax relief for lower and middle class folks.

In short, they don't freak me out. They seem fair, modest, and sane.

As a wealthy person, who has enjoyed eight years of remarkably favorable treatment under the tax code, you'll be asked to kick in another 5% of your income above a quarter of a million dollars. That will, over the course of ten years, put $1.2 trillion bucks into the public coffer.

So, yeah, take one for the team. That's not meant to be flip, or smart-ass, or derogatory.

It's intended to mean exactly what it says.

Thanks -

You seem to have an idea that money which does not leave a corporation is not subject to taxation, or that if the corporation spends it quickly it is not subject to taxation, or if it is subject to taxation but you spend it quickly then at least the new expenditure is deductible. We seem to have some sort of terminology difficulty between us.

I've explained it pretty clearly; at this point explaining again isn't likely to help. If you're getting taxed on money that you're putting into payroll, then you're doing it wrong.

Of course, if the LLC forces you to declare money that you planned to reinvest as profit because you don't or can't immediately invest it, then you are using the wrong corporate structure. Because you take very little out of the corp year to year, the double-taxation issue shouldn't hurt you very badly. cw suggests that this isn't the case, but I have no idea about s corps.

btw, my father owned a construction business, and I've both worked with him and discussed his finances countless times (he had a c corp). My hands-on experience is with tech companies- not in an accounting role, but in start-ups where many of us became aware of the financials and how our processes were impacted by them. While we're sharing and all.

So I've seen accounting for construction projects (in my case, building on contract, not on spec). I've not done it, of course, but Im familiar with the basics. Im not familiar with how this works with LLCs, but Ive seen the construction business work in a c corp & if you are telling the truth about your financial situation then you are voluntarily shoveling money into the furnace. Either that, or my dad was a felon.

But in a project business, like in construction or shipbuilding, one must always think in terms of shutting the business down after each project. There is no guarantee that there will be another ship order.

Then your earlier description is completely inaccurate. You described how you would sink the lion's share of each year's profits back into the business, hiring additional workers in the process. Now, you're describing a process where you let temporary workers go and rehire to spec when you start another project.
Don't blame me if you're having trouble keeping your story straight.

also: I mostly build for my own account - holding them as rentals.

How does that fit in with someone who is "waiting for another ship order"? Unless you live in Tokyo and need to wait for them to fill more of the bay, it sounds like you can just continually buy land & build on it, yes? I don't see why you'd be "shutting the business down" if you're building to rent. You might slow down when the real estate market slows, but cyclical slowdowns are not what we're talking about here. Since you're putting up 50%, it sounds like you can start a project whenever you feel like it, no bank in a normal business environment is going to turn you down.

In my field, one must accumulate capital before starting a new project.

Talk to other builders; many of them use significant loans. You don't need too much capital if you've got a proven track record as a responsible builder. Again, here I speak from experience- banks do not require 50% buy-in from a builder.

Regarding depreciation. Yes I take depreciation but pointing to it complicates the math and you're having a hard enough time grasping this already.

Right; you're getting stuff wrong, and this is for our benefit somehow. And you somehow knew before presenting your argument that it would be too complex for us simple folk. You're waiting for the next order, but you're building for yourself. Whatever. I notice that your simplifcations are those which exaggerate your hypothetical tax bill... if you've got millions in rental property, you are getting *serious* depreciation breaks. Possibly larger than the tax hike you're whining about.

btw, if you're mostly building to rent, how exactly is it that you're extracting the capital from these rentals in order to put up half on new projects as you said you were doing? It seems to me that your business model would very quickly end up with all of its capital sunk into rentals & none for new work. Another simplification?

Mr Wu

//Most businesses maximize their profits, and hire as many employees as are necessary to do so. Ergo, Obama's plan won't be the drag on business growth that you anticipate.//

But that is exactly what I do. I consume a relatively small and stable proportion and invest all the rest. I invest to maximize profits. And I hire as many employees as are necessary to do that. It's just that with Obama's plan I will have less to invest.

I don't know where you get this business-as-hobby idea. It's true that I don't ever need to work again and that I choose to because it is fun. I guess you think that makes my work a hobby. But it doesn't reduce the intensity with which I pursue it. Most would even argue that a man who pursues something he loves does it with more intensity. One could also argue (and I believe it's true) that someone like me who is not driven by need can also approach the proposition in a more humane way then the 'true businessman' that you seem to idealize in your last comment.

Mr. Wu 8:08p
I give up. You win. I'm stupid and have nothing constructive to add to this blog. Good for you. Go ahead and continue to believe as you like. Enjoy your life in tech-land.

Finally. It looks like Frankenstein is going away. Now we can cling to our initial biases in peace!

And thanks Carleton for playing dumb for long enough to wear him out.

I hate it when someone turns the light on when I'm trying to sleep.

As for your further analysis: I shrug. Maybe it will turn out as you say and maybe not. I do not dispute you. I just know that in my specific case, the money that is taken from me is a 100% dollar for dollar decrease in jobs and payroll for society. I do not know how it could be used more efficiently than that.

First, you seem to be mixing up cw with russell. Second, what I and many others have been trying to tell you at length is that this entire approach - talking about your "specific case" - doesn't make any sense when trying to understand a tax policy that is applied to the macroeconomy. I am not sure what your resistance is to understanding that because you have yet to raise a reasonable response to it.

Perhaps the result in your specific case will be exactly as you say. Just the details you have provided suggest that the situation might be more complicated than you seem to think but even if we take you at your word, it tells us almost exactly nothing at all about the wisdom or the effectiveness of Obama's economic policy. So yes, you shrug. That's precisely the point.

If that is not proof of success - then how is it a proof of the failure of trickle down. I'll wager you'll point to something like rising income disparity or decreased social mobility - but both ignore the real and tangible increase in overall standard of living.

This seems like an odd statement to me. If the question is "does trickle down economics work?" it seems to me that one does not look for proof that it hasn't failed but proof of its success.

Moreover, you seem to be putting a lot of weight for increased standard of living globally on the "success" of trickle down economics but, as much as that seems unwarranted, I am happy to concede the point for the sake of argument.

Is that the only goal of of a trickle down economy as you see it? To increase the standard of living? Do stagnant wages and income disparity not factor in at all? If so, then what can one say? I guess congratulations are in order. We have arrived at our goal. But in any case, it doesn't strike me that citing these problems is a point to be blithely dismissed. (You put it somewhat more colorfully and I don't have any problems with cursing but its against the posting rules on this blog.)

Trickle-down works? To show that, you'd have to compare a period when t-d wasn't in vogue - let's say 1955-1980, and compare it to when it was in vogue, say 1980-2005. So, Frank, your position is that our financial welfare increased more from 1980 to 2005 than it did from 1955 to 1980?

It's late and I'm off to other things.

But that is exactly what I do. I consume a relatively small and stable proportion and invest all the rest. I invest to maximize profits. And I hire as many employees as are necessary to do that. It's just that with Obama's plan I will have less to invest.

If you were maximizing profits, you would take out short-term loans to cover employee costs if those costs were balanced by greater profits. You eschew that approach, which is fine- but most businesses will not handle things in this manner. If they can make money building a building, they'll do it, whether the profits are taxed at X% or X+3%. They won't forgoe the opportunity because they don't have the cash in hand to finance it.
(Now, whether the capital will be available to fund them at X+3% is another question, but capital isn't a problem for you apparently).

I don't know where you get this business-as-hobby idea...

I dunno, maybe it's because you said I currently spend $150,000 on living and reinvest $850,000 because I think it is fun to expand my business.

See, that's not the motive for most businesses. They exist to make money, and don't have the luxury of foregoing profits. They aren't being grown for fun. Now, the owners may enjoy what they do, but that's not the basic motive.

I give up. You win.

Yeah, I was kind of expecting that after the rent/capital conundrum. Hard to explain how you're putting up 50% of all new construction costs when most of your capital stays in rental buildings... one simplication too many, I guess.

Gnurlman- got, like, a point? Semblance of a point? Shred of a dying light of a point? Perhaps you also are making 40k but considering (ie fantasizing about) buying a business that makes 250k- but why should you do it, when you'll be taxed several hundred dollars more on that 250k? The horror!

frank,
You've been polite, and Id like to offer a suggestion- when arguing about politics, economics, etc on the internets, Ive found that it's just about pointless to bring in personal expertise or experience.
Best case, you'll just end up arguing about that experience rather than policy. Since nothing can be verified, no one who disagrees with you is likely to accept your assertions as facts. If you'd been around here for a while and become known for a thing, that'd be different... example, Slarti is known for knowing about defence systems and defence contracting.
It's like entering a discussion of health care reform by citing your sister-in-law's botched surgery in Toronto- could be true, could well not be, doesn't really matter to the fundamental argument in any case. No one will be convinced who was not already convinced.

So, in the future, if you've got a case for a public policy, make that case. If you go personal, it will never have the result that you want it to have. That's my experience, anyway.

I scanned a number of the other posts on this blog and the comments. Now I realize you guys aren't into looking for truth. You've made up your minds. You're focused on power; getting it and using it.

No wonder the markets are crashing. The smart money is getting out of town before it is too late.

Singapore is nice. Perhaps i'll go there and cash my rent checks.

You guys will deserve the world you create.

I scanned a number of the other posts on this blog and the comments. Now I realize you guys aren't into looking for truth. You've made up your minds. You're focused on power; getting it and using it.

LOL. Well I guess when the awesome persuasive power of personal anecdotes and ill considered hypothetical scenarios fails, casting generalized non-specific aspersions around is the way to go. Actually attempting to make a economic policy argument on the merits is apparently out of the question. Good job, frank! Good job, man! You sure told us! Have fun in Singapore.

I know most of you have heard it before, but I've gotta quote my favorite capsule definition of Singapore:

Disneyland with the death penalty.

"...I've gotta quote my favorite capsule definition of Singapore...."

Which is from my old friend, Bill Gibson: "There is no slack in Singapore. Imagine an Asian version of Zurich operating as an offshore capsule at the foot of Malaysia; an affluent microcosm whose citizens inhabit something that feels like, well, Disneyland. Disneyland with the death penalty."

Is it too late to submit an entry?

You're focused on power; getting it and using it.

Yes, clearly left-leaning Americans in general, and posters here on Obsidian Wings, are focussed with a laser-like intensity on the acquisition of POWER!

Equally clearly, it is the power-lust of the left, and especially of the posting community here at ObWi, that has led to the crashing of the global financial markets.

RESPECT OUR AUTHORITY! OR WE WILL CRUSH YOU AND YOUR PUNY CAPITAL MARKETS, TOO!

I understand that you've found the conversation on this thread frustrating, but don't you think this is, perhaps, just a little over the top?

Thanks -

comrades,

now that our desire for power has been discovered, we're going to have to accelerate the implementation of our Four-Year Plans. i shall being laying the foundations for Re-education Camps 23 through 29 immediately.

viva la revolucion!

I scanned a number of the other posts on this blog and the comments. Now I realize you guys aren't into looking for truth. You've made up your minds. You're focused on power; getting it and using it.

Bwa-ha-ha-ha! The power, it flows through our veins like crisco! But yummier!

Really, that's only slightly less funny than how you've been building rentals for years but don't have any rental income or depreciation. Or how you're a cpa yet unable to find a single deduction for a multimillion dollar business.

But I suspect we'll see you again; the lure of ObWi is strong. Perhaps "johnny" the retired Army Captain will weigh in on Iraq, or "mike" the doctor-cum-lawyer will lecture us about Roe. We won't know it's you, yet we will still feel you with us somehow, and throw up a little bit.

My employees make about $50k per year. My $650k of new equity, therefore results in 13 new jobs ($650 x 2 = $1,300 x 50% = $650 labor / $50 average wage = 13 jobs). Basically every dollar of new investment goes directly to payroll for a new employee.

If my taxes are $200k higher then I will be able to hire 4 fewer people next year. It will not change my living conditions at all.

This is nonsense, Frank. As others have pointed out, your payroll expenses are tax-deductible.Paying an extra $200K in taxes on your profits should not affect your hiring decision. Let's work through it.

You face a decision as to whether or not to hire a new employee (or four, I'm simplifying), at a cost of $50,000/yr. How do you decide? Well, if the new employee is going to generate revenue in excess of $50K/yr you'll do it, and if not you won't. Why does the tax rate on that excess matter?

You are arguing that you sit down at the end of the year and look at your after-tax profits. Then, if you want to hire someone ypou have to write a check for $50K right then, so you can only hire if you have the money left over. But that's completely false, and since you're a CPA you know it.

You don't base hiring decisions on your after-tax profits last year. You base them on whether you expect to make more profit by hiring than by not. And the tax rate on your profits doesn't matter much, because it doesn't affect whether the new employee will actually be profitable.

And you don't pay thenew employee out of last year's profit. You payout of additional current revenue, which should exceed the cost of the employee. Yes, it may take a while for the new hire to really start producing revenue, but that's what loans are for.

Now, it's not really as simple as that, I understand. But it's a lot closer to a sensible decision process than your description.

Let's talk about the effect of Obama's tax plan on jobs.

I'll give you real numbers. I am in the top 0.000000001%. I bring home about $10 billion per year after tax.

Personally, I don't consume much. I live in a yurt and spend $1.39 a day on rice and beans. The rest of that $10 billion I invest in my business. My business gives ponies to little girls with cancer. How's that profitable? I have a lapsed CPA license, so just trust me.

Anyway, I figure if the top marginal rate goes from 36% to 39.6%, that'll cost me an extra $7 billion a year. That's money that I can't spend on ponies. That's the real cost of Obama's socialism: sad little dying girls with no ponies.

Bernard Yomtov

You said //You are arguing that you sit down at the end of the year and look at your after-tax profits. Then, if you want to hire someone ypou have to write a check for $50K right then, so you can only hire if you have the money left over. But that's completely false, and since you're a CPA you know it.//

I am not in a pay as you go business like a candy store where you get revenues enough every day to pay your employees. In that type of business, it's true that one would hire immediately if there was an expectation that incremental revenues would exceed the added payroll. I am in real estate development. I must contribute actual capital out of my pocket to build something and I must pay wages for many months before I get any revenues. When one year long project is finished and sold or rented and financed (and the profit is taxed) I count my pennies to see if I can afford to build a big project next or a small project.

Surprisingly enough, I actually know what I'm talking about.

TSW
What in your opinion is a fair, socially just, basis to distribute the cost of government services among the population?

For simplicity's sake, let's assume that all current government programs are provided by one entity. In other words defense, education, social security, infrastructure, every type of government expenditure for every level of government: city, county, state, federal are all in one basket. And let's say that there is only one tax that finances all of it. There are not separate payroll, income, sales and property taxes. There is just one tax.

How would you allocate that tax among the different income strata of society? Everything is open: maybe you would divide it by age or hair color or education status. I'm being silly now.

If you could start with a clean sheet of paper, what you you do? How do you define fair?

An observation: it seems that a great proportion of Frank's tax increase is the added FICA on personal income over $250K. It would seem that changing this to corporate income would avoid that, and would be in his best interests, no?

One thing about the two or three day exchange of views I've been having on this thread is ironic. Tag teams of people have been coming at me to show how I can't possibly be operating a business properly, or don't know anything about taxes, or my motives for operating a business don't square with what true motives should be. They allege that I am fake because my descriptions don't line up exactly with their notions of what reality should look like.

This is supposed to be a site where people exchange views on social policy. Fine.

I have an idea that social policy should commune with and be responsive to reality. But no one in several days has been able to come to grips with a business model that is VERY common but which is slightly outside the box that they are familiar with. One, Carleton Wu, in a kind moment, went so far as to confide that it is wiser not to bring true life situations to bear on the discussion because they just confuse things.

Perhaps the website name should be changed to "Flying Blind" instead of Obsidian Wings. It evokes the same blackness and flying notions of the original title. What's more, one senses the same inevitability of crashing with both. It would be equally difficult to sustain flight with wings made of stone as with no sight. And that is what your after right: a website where public policy is set with no reference to reality?

243
Yes. And that is what i'll have to do if Obama pushes these changes through congress. Up until now, the pass-through entity model has been best. But who knows really. The devil is in the details. There seems to be so much rage against business that maybe they'll decide grab it in a c corp too.

I have no idea whether Frank is truthful or competent -- but he's been a lot more polite than some of the regulars have been to him. You could have made all the same points without calling his business model "pathetic" or "crazy." Why not assume good will and ask questions about the parts that seem to you to make no sense based on the information you have so far? Frank has replied courteously to most of these attacks as if they had been sincere questions. It didn't help. I don't blame him for being disappointed in the conversation.

But Frank, not everyone was rude, and nobody understood what you were getting at, so you may not have been as clear as you thought. You referred to a "tag-team" attack, but obviously people chipping in on a comment threat aren't working together. remark sounds like people were working together. You might get better results by ignoring the rude ones.

I am NOT a CPA -- but I don't quite see why you're taking out the money as profits instead of reinvesting it during the tax year. I think I understand your point (paraphrasing) that you can't just turn it right around because you can't well predict how much you'll be able to invest, but all businesses have that problem to some extent. It sounds as though you have made a policy decision to limit the risks you might incur if you borrowed and invested based on your anticipated income stream. That's probably wise -- especially in your line of business this year! -- but it is a little unusual for a growing business. AFAICT, most businesses are not project-based and do not play it that cautiously. So I don't think your experience is very generalizable.

One more thing. I think you may have reversed cause and effect here: No wonder the markets are crashing. The smart money is getting out of town before it is too late.

No wonder the markets are crashing. The smart money is getting out of town before it is too late. Singapore is nice. Perhaps i'll go there and cash my rent checks.

One of the reasons we want to keep a bit more business profit as taxes and invest it in infrastructure is that it turns out a lot of the extra money for the rich is invested out of the country, so it doesn't have the domestic multiplier effect it would in your business. Not that I have anything against Bangalore, but if push comes to shove I'd rather pour the money into Cleveland.

How do you define fair?

Assuming your single bucket / single tax model, I'd look for a moderately progressive tax scheme based on total individual wealth.

An observation: it seems that a great proportion of Frank's tax increase is the added FICA on personal income over $250K.

Yes, and it also seems that the size of the increase is due to frank's assumption that FICA taxes for income above $250K will be levied as the same rate as those for income up to the current cutoff.

I believe that assumption is false, and by quite a large margin.

For the record, frank, I have no bone to pick with your real-world examples. I'm just trying to figure out where your math is coming from.

Thanks -

What in your opinion is a fair, socially just, basis to distribute the cost of government services among the population?

Well given your opinion that we are all power mad and unpersuadeable ideologues who are apparently also causing the market crash, I am surprised that you would want to continue the conversation.

Nonetheless, this is not a bad question. If I can take the liberty of addressing it myself what I would say is that the issue of fairness is related to what we want to achieve and then determining the most equitable way to get there. In other words, the first question is not: What's fair? The first question is: how much, in terms of revenue, do we need to maintain the well being of our society as well as supporting growth and economic opportunity?

Once we determine that then I think the only reasonable answer is a progressive tax code. Perhaps there are ways to do that do not involve income tax but the bottom line is that the basic math makes it clear that, unless we are going to all agree on ways to drastically reduce costs (making extremely unpopular and massive cuts in our military, education or medicare budgets, would be the only real ways to do this) then we have to collect more from the people who make more than from the people who make less.

Now, if someone wants to make the argument that the overall economy would be better off if all top earners were charged 36% or 33% or even less as opposed to 39% then I am all ears. Run the math and do the hard work of calculating what the real results of such a change would be. Better yet, examine how well the economy has worked during times when the tax rate for top earners was at a similar level and explain why those examples are dispositive. Your examples fail because they are either anecdotal, which is pointless, or they elide far too many of the relevant economic factors as in your stock valuation.

There are a lot of factors involved and this is, obviously, what economists do for a living. If one can make a case or even point to a convincing case that has already been made proving either that the lower tax rate will work better for the country's economic well being or that the higher tax rate will be harmful, then speaking for myself, I would be happy to examine it. But pointing to your own circumstance which seems, to say the least, unrepresentative, does nothing to help any of us examine this issue in its real context. That point has been made pretty repeatedly in this thread.

One, Carleton Wu, in a kind moment, went so far as to confide that it is wiser not to bring true life situations to bear on the discussion because they just confuse things.

That's not quite what I said- your personal details are irrelevant to tax policy. If your personal situation were typical, then you wouldn't need to reference your personal situation. Yours does appear to be remarkable in that 1)you can't reinvest without paying income taxes and 2)you don't care to borrow even when you can make more money, you will only do work with cash-in-hand of at least 50%. So if we all believed every word, it still doesn't really bear on tax policy. Certainly, you're mistaken to extrapolate the impact of your case on all new taxes.
Raising your personal case only makes another possible point of contention, and it's one that we cannot really resolve. Me, I still think that there's a huge problem with your description of mostly building to hold and rent, but not mentioning rental income. Or depreciation, which should be gigantic if this is actually what you're doing...
Which is exactly my point- no one really cares about your business, really, other than curiousity. But when you raise your business as the example- yeah, it's going to get critiqued. Anyone can say anything on the internet. The alternative is believing TSW, and being forced to argue based on that example. Better to avoid personal, unverifiable stories.

You're best off arguing from factual information that others can verify; it's not just a convenience.

Frank,

You obviously know how you run your own business. But might I suggest that there are some other things to think about.

You write,

I am in real estate development. I must contribute actual capital out of my pocket to build something and I must pay wages for many months before I get any revenues. When one year long project is finished and sold or rented and financed (and the profit is taxed) I count my pennies to see if I can afford to build a big project next or a small project.

So you rely on internal financing. But lots of developers don't. They are happy to borrow when prospects look good. OTOH, when prospects look bad, they tend to cut back, as you probably do also, regardless of cash on hand.

Your point is you face a mismatch of the timing of expenses vs. cash flows. Of course, part of the reason financial markets - like banks - exist is to solve this problem, so that profitable projects can be undertaken without relying strictly on the company's internal resources.

That gets us back to the notion that hiring decisions are based on the revenue produced by the potential new employees - their productivity, in other words - even if that revenue is not immediate. I

As with my previous comment, I'm simplifing considerably -financial markets are far from a perfect solution here - and not trying to state universal rules. But while this may obscure things somewhat in any individual case it has the advantage of giving a more macro view of the effects.

After all, that most popular of Internet courses, Econ 101, says that the level of hiring by the firm depends on the marginal revenue of the next worker. It leaves out a lot, but that is the framework.

Frank,

I agree with what Brent said as an answer to your question. I wasn't attacking you personally; I was just trying to illustrate the absurdity of basing tax policy on unverifiable, atypical anecdotes.

Bernard you said //So you rely on internal financing. But lots of developers don't. They are happy to borrow when prospects look good. OTOH, when prospects look bad, they tend to cut back, as you probably do also, regardless of cash on hand.// And Carleton points at the same thing, saying it is atypical to finance growth from capital rather than borrowing.

But it is just not true. Banks do not loan 100% of the cost of the new venture or cost of growing the old venture. The standard in real estate development for most of my career has been that a bank will lend 50% of the cost of buying land and 75% of the cost of the total project (land plus construction costs). In addition, if you build multiple units in one loan, the bank claims a disproportionate share of the proceeds of the first units sold so that their loan is fully paid off first before the developer gets any profit. In effect, the developers profits are tied up in the last few houses which he essentially owns free and clear. So, for any real estate development project to occur EVER the entrepreneur must pull enough money out of his own pocket to pay for half the land or 25% of the total construction costs (whichever is higher) PLUS have enough personal reserve to cover his own living expenses until the last few units are sold. Depending on the size of the project it could be a year or two years.

You guys insist I am atypical. I am only atypical in that I have not gone bankrupt in the latest downturn.

Angry aside: F&%$#ing progressive types are happy for me to take such risks with my own money but they don't want me to harvest the reward for taking such risks. They even demand now that I sell 20% of my output at losses as 'affordable' units ("and please would you reserve them for teachers and policemen who are our powerful unionized constituents"). They in effect skim 20% of profits off the top this way AND THEN tax the net at the progressive rates we're talking about.

Other businesses are the same. Banks do not loan 100%.

I suspect you guys live in a world of book learning rather than of experience.

russell. In regard to a fair tax scheme you said //I'd look for a moderately progressive tax scheme based on total individual wealth.//

Do you mean income or wealth?

To my mind the term income means annual increase. (Actually, increases which haven't been transacted are not income. For example, the value of your stock rises and it is not taxable income until you sell it and realize the gain)

To my mind the term wealth refers to the net worth of an individual. It is the retained earnings at any moment in time
whereas income is the positive net change in retained earnings during a period of time.

'Modestly progressive' is pretty nonspecific. But it is more specific than Brent's answer which was a treatise on the process to use to come to an answer rather than an actual answer.

Aside: Brent's answer is one a consultant would give. Someone who is not willing to commit. Someone who has great learning but is not a risk taker. There is a reason risk takers deserve their reward. They are willing to step in and commit to something with their time and money - money they have accumulated by foregoing expenses that the consultant probably hasn't. Risk takers are about the answer not the process.

Frank,

I will take a risk and give you a non-consultant-type answer to your "what's fair?" question:

A small annual Pre-mortem Estate Tax.

Another name for your "pre-mortem estate" is your "net worth", but I prefer the acronym PET. Not as catchy as "death tax", but serviceable.

My argument is this: what you can "afford" is more a function of your wealth than of your income. We are used to taxing income, but as you rightly point out, your income is just a positive increment to your wealth. (There are other positive increments, and many negative ones too, of course.) So my PET scheme would, indirectly, tax income.

Now, my PET formula would not be a simple percentage of your net worth. Your age would be one of the variables in the equation, something like it is in the IRA minimum withdrawal formula, except over the whole age spectrum.

I know one ojection right off the bat: suppose your net worth goes up in a given year due only to appreciation in some stock you own -- an unrealized capital gain. You have no actual cash to pay the tax with. To this objection I reply that you postulated a single level of taxation. In particular, we are replacing, among other things, local real-estate taxes. Now, when my house "appreciates", it does not throw off cash to me any more than your stock does for you -- but my tax bill goes up. Under my PET plan, we would both be in the same boat. Fair?

Note that your call for clean-sheet-of-paper proposals is basically an invitation to thought experiments. I like thought experiments. They help us identify the essential conditions of the problem. An essential condition of my PET scheme is complete information on everybody's net worth in more-or-less real time. As a formerly obsessive user of Quicken, I don't consider that condition too surreal.

Now, I have a question for you:
The old Steve Forbes "flat tax" formula was
tax = 17% of (income - $30K)
or something like that. Would the formula
tax = 57% of (income - $130K)
be any less "flat", given that the qualitative form of the equation is exactly the same?

--TP

Tony
Interesting.
I've always been in favor of some type of death tax. I think it levels the playing field from generation to generation.

I will join your thought experiment.

1. Some people will have negative net worths due to misfortune or bad decisions. Will the tax system seek to raise enough revenues in order to bring the wealth of those persons up to at least zero? Which would open a whole can of worms because there would then be an incentive for banks to lend to people who tend toward insolvency with the knowledge that the State would restore the deficit. In the same way, deficit spending by individuals would result in no harm to them as the State would restore any deficit.

2. There will be valuation problems. Is that farmland worth $100 per acre or $1,000 per acre? All valuations involve assumptions about the amount and timing of future cashflows and a discount rate.

Please restate the question at the end of your comment. I didn't follow it. I think you're asking whether 57% of income over $130k is the same as 17% of income over $30k. The answer, of course, depends on the amount of total income.

Do you mean income or wealth?

I'm happy to go with whichever you prefer. We currently use a mix of the two (income tax vs, for example, property tax) and fund different things with the different taxes.

If we had to pick just one, my personal inclination would be to go with wealth, because overall I think total wealth is a better measure of what resources folks have available to pay taxes from. But if you prefer income, I'm good with that.

Sorry I can't be more specific than "moderately" progressive. It would really depend on what kind of revenue we actually needed to raise, what the actual spread was in the quantity being taxed, and perhaps on a variety of other factors.

As far as a justification for a progressive tax:

In Book V of "The Wealth Of Nations", Adam Smith develops the following simple argument in favor of progressive taxation.

When poor people pay taxes, it's more likely to take money away from necessities and essentials -- food, shelter, clothing.

When rich people pay taxes, it's more likely to take money away from non-essentials.

It's basically a moral argument, but not one that is impractical, or one that requires some kind of saintly nature to grasp or understand.

Tax poor people, and they eat less. Tax rich people, and they buy one less car.

A rich guy buying that extra car stimulates the economy, but so does the poor guy buying potatoes and hamburger.

Fairness has a lot of dimensions. It's not just a matter of everybody putting the same number of pennies in the pot.

My guess is that you get that.

Thanks -

'Modestly progressive' is pretty nonspecific. But it is more specific than Brent's answer which was a treatise on the process to use to come to an answer rather than an actual answer.

My answer was, I thought, a polite way of communicating that it was in fact your question that lacked specificity. Apparently I was too subtle.

You asked what one would do if they had a blank sheet of paper and had to create a tax policy. If one is not an imbecile, then the first question they ask before they write down anything is: what does this tax policy need to fund? How much revenue does it need to generate and from what potential tax base? Attempting to answer that question without considering those factors is not the bold act of a "risk taker." Its the act of a stupid person exposing a shallowness of thought that isn't going to be particularly helpful with regard to a discussion about either actual existing tax policy or fantasy tax policies that one writes down on a blank piece of paper.

Saying, for instance, that a flat tax or a universal sales tax is what one considers fair is fine as long as one has no interest in understanding or discussing the economic consequences of such a policy. There are imaginable circumstances where very little is paid in taxes by anyone at any time. But those imaginary societies do not have 500 billion dollars in defense spending to cover every year.

So perhaps you live in a world where only those wimpy consultants are concerned with understanding a problem before they attempt to solve it. Good luck in that world. In my world, the most successful people are the ones who actually think about the consequences of their actions and weigh the risks before they act.

But hey, if you think you have a more specific answer to your question, lay it on me. Lets hear the bold risk taker's answer to how to invent a tax policy out of thin air without any discussion of the relevant competing factors.

Tony P
On rereading your question, it dawned on me what you're asking.

Neither is truly flat because they both exempt some portion of income. With that in mind, the second is less flat because it exempts a larger proportion of the population.

Brent

So, it is not helpful for me to offer a real world example as I have done. And it is not helpful for me to eschew real world examples and offer a clean sheet of paper. Do I understand you correctly?

We must carefully carefully sift through every permutation before we even offer a morsel of answer.

Whoosh....was that opportunity passing us by?

Now the conditions have changed. We must start over sifting through the permutations.

Whoosh.

But at least we're not imbeciles.

Brent.

Here's my bold answer: don't change a thing. Stop fiddling with the tax regime. Focus on the expenditure side of things.

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Whatnot


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