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April 17, 2010

Comments

That's... actually reasonably hard to disagree with. Quibble with, sure, no problem, but given our current governmental structure, that sounds rather sound. Naturally, however, the devil would be in the details, and the details would be in the progressive portion of the code. Therein would lay the challenge in keeping the code concise...

Since the progressive section is a continuous rather than stepwise, I'm assuming that we're not talking about marginal tax rates, correct? If we are talking about the actually tax rate, this seems like a pretty decent plan. Of course, a lot of the complications in the tax code come from how to treat income from different sources. I suppose that if you are counting investment income the same way as normal income, most liberals would be quite happy about this simplification - that is, if hedge fund managers paid ~40% rather than near 15%.

One more thing - I do think that there is some utility in a marginal tax bracket system with brackets at exceptionally large incomes with very high rates. That is, if you have a $5 million tax bracket with a 90% marginal rate, you probably don't generate a ton of revenue from that bracket, but you do deincentivize taking the kinds of risks necessary to generate that sort of income (since the risk no longer is worth the potential pay off).

I don't understand how the BTR would be set. Suppose the government posts spending in FY2010 (ending Sep. 30) some time in December of 2010.

Does that determine the BTR for calendar 2011 (taxes due Apr 15, 2012)?

How are deficits or surpluses allowed for? That is, wouldn't Congress have to have the ability to spend more or less than what your plan suggests? Then how would it help? You could do something very similar with the budget already.

I suppose what you're after is a system to link taxes and spending, which sounds fine, but unless you want to demand a balanced budget on the BTR basis I don't see how it will be a lot different than what we have. I do think that some sort of automatic adjustemnt is not a bad idea, though. Let's make sure it includes wars and other supplementals.

Rates are the simplest part of a tax code, and have almost nothing to do with complexity. You can fit a multi-bracket rate schedule on a single page. The question is what the rate is going to apply to, and what deductions you are going to allow.

And this is where the ship always hits the rocks. Take away the mortgage interest deduction and you're (a) taking money from a bunch of middle/upper income people and (b) creating chaos in the real estate market. Take away the ability to save pre-tax dollars for retirement, or use pre-tax dollars for child-care and, again, you're not creating "simplicity" for anyone other than the people who have been taking advantage of these policies. And what are they getting in return for the "simplicity" of getting rid of the policy? The chance to pay more in taxes. And, of course, making child care and retirement saving more expensive couldn't possibly have any unintended side effects.

I'm not saying that the tax code should be changed. I am saying that incremental change is the only way to change it, and thus that wild fundamental changes, even if their end-states might look good on paper, are nearly always bad ideas. IOW, no one redesigning the tax code should be expected to be greeted as a liberator.

@CharleyCarp:

An alternative to incremental change is to simplify the tax code while converting existing tax breaks into direct subsidies. That would leave us with the same overall outcome- people would have the same after tax and subsidy income as before- but it would move what is effectively hidden government spending out into the open. Any program that's truly deserving should be able to survive as a line item in the budget. Anything that can't survive that way shouldn't be protected from scrutiny by hiding itself as a tax break.

Taxes are complex because of taxpayers. If taxpayers would agree to behave then we could have a nice simple tax code. Alas, they do not.

Ugh's rules for tax reform:

1. Capital gains rate = ordinary income rate.
2. No credits, period.
3. Merge the AMT into the regular Code.
4. For individuals, a deduction for yourself and dependents, only, nothing else.
5. Depreciation deductions are spread over the useful life of the asset.
6. I'm sure I'm forgetting several things.
7. Oh yeah, a 100% increase in the IRS's budget, 80% dedicated to enforcement.

CharleyCarp is right that the complexity is in defining taxable income. This is made worse by applying different rates to different types of income.

CharleyCarp: Take away the mortgage interest deduction and you're (a) taking money from a bunch of middle/upper income people and (b) creating chaos in the real estate market.

Actually in the UK they phased out their mortgage interest subsidy without substantially affecting the real estate market (that is, they continued on to have a giant property bubble just like the US).

It wasn't quite as extensive as the US deduction though. Right now may not be the time to ditch it since the housing market is so crappy (and would/will be much crappier if & when the banks stop holding onto millions of foreclosed homes as they have been). A really good time would have been when a housing bubble was forming since it would have dampened down growth and removed a useless, expensive and regressive subsidy, but I guess that would require a government that wasn't run by complete idiots.

Anyway, on the tax proposal, nice to have a serious take on it, but as CharleyCarp says it's the mess of deductions and special cases that are the problem. I would also break out the "non-core" deductions (i.e. other than for dependents) as explicit subsidies, and as we discussed the last time this came up, remove or at least substantially reduce the tax advantage of capital gains income.

However, all of that is peripheral. Rates have to rise by a substantial but affordable amount, they have to rise on just about everyone but they have to rise a lot more on the rich, not just because that's where the money is, but because income & wealth inequality at current levels substantially impedes economic growth, as is quite apparent from the last decade or two. Simply put, "let's all grow the pie!" isn't much of a rallying cry when one's own slice's absolute size is not growing and is an ever-shrinking percentage of the whole pie. So we have to soak the rich and the merely well-off by a fairly hefty chunk, there's no way around it.

We might have to have a debt crisis first though. I hope not, but the childish refusal by Republicans to even talk about taxes at the levels of G.W. Bush or Reagan is pushing us that way.

My brother-in-law principles of taxation:

1) "Income" should mean the same thing whether you're talking to the tax man or to your brother-in-law. If you can impress the latter with it, it's fair game for the former.

2) The tax code ought to preserve the rank-order of incomes before and after tax. If you make more money than your brother-in-law does, pre-tax, you should take home more than he does, after tax.

I'm fairly sure that our current tax code fails to honor either principle completely.

The idea that subsidies for things like child-rearing or mortgage interest or health insurance ought to be explicit rather than administered as tax breaks is admirable in principle. In practice, doing it through the tax code may in fact be less cumbersome.

The idea that progressivity is good but only up to a point seems misguided to me. Seb seems to imply that it's okay to tax the 50,001st dollar of income less heavily than the 500,001st dollar, but if the 5,000,001st dollar or the 50,000,001st dollar were taxed more heavily than that then "the general voting populace" might "become disconnected from the fact that higher spending equals higher taxing". Since "the general voting populace" is not remotely likely to have a 500,001st dollar to be taxed, the extent of progressivity Seb is willing to countenance would seem to already do the damage Seb warns of.

--TP

Anyway, on the "too poor to pay taxes" front, I don't actually favor zero rates at the lowest-end. A rate that starts at 10-15% no matter how small the income is fine and would stop a lot of whining about lucky duckies who don't pay any tax (although they would probably continue the pretense that only the income tax counts, being lying hacks).

I prefer solving the problem of "the marginal incentive to work" through massive counter-cyclical spending on direct job creation used to maintain full employment, reduced as growth and private employment picks up, rather than by regularly shooting the employment market in the head with high unemployment periods. The stimulus wasted vast amounts of money on tax cuts that could have gone to relatively low-cost WPA-type employment programs and we wouldn't have 10% unemployment now, but I guess what worked for FDR isn't good enough anymore.

The funny thing about the mortgage interest deduction is that it's a remnant. Used to be that all interest was deductible by individual taxpayers, but then everything got carved back until the mortgage interest deduction was the (almost) only thing left.

So, not really by design, but close to an accident of history.

And I agree with CC that an outright repeal of that deduction would not be a good thing.

"Seb seems to imply that it's okay to tax the 50,001st dollar of income less heavily than the 500,001st dollar, but if the 5,000,001st dollar or the 50,000,001st dollar were taxed more heavily than that then "the general voting populace" might "become disconnected from the fact that higher spending equals higher taxing". Since "the general voting populace" is not remotely likely to have a 500,001st dollar to be taxed, the extent of progressivity Seb is willing to countenance would seem to already do the damage Seb warns of."

No that is misunderstanding the problem. There are two issues which cut in different directions. On the one hand marginal dollars are less value at the top end so taxing them at a higher rate isn't as morally problematic as taxing them at a high rate when each dollar is the difference between eating and not eating tonight. In theory I suppose you could argue that taxing the top earners at 99% on the margin would be fine from a pure 'justice' analysis (I would tend to think not, but I can understand the argument).

A separate issue is that nearly everyone is fine with free, and lots of people are happy to spend money if they don't ever have to think about paying for it themselves. Wiser decisions are made by the voting populace if they have a stake in BOTH the spending and the paying for things. If a large majority of the population can vote for spending without ever thinking for a moment about paying for part of the increase themselves, that won't lead to wise balancing about costs and benefits.

The two ideas are in tension, and have to be balanced against each other.

If a large majority of the population can vote for spending without ever thinking for a moment about paying for part of the increase themselves, that won't lead to wise balancing about costs and benefits.

Which is why "tax and spend" is better from every point of view than "borrow and spend", any anyone who claims to be both fiscally conservative and a Reagan/Bush/Cheney Republican is full of it.

Yes, that is why routine large deficit spending is a bad idea.

I am saying that incremental change is the only way to change it, and thus that wild fundamental changes, even if their end-states might look good on paper, are nearly always bad ideas. IOW, no one redesigning the tax code should be expected to be greeted as a liberator.

A Moment of Agreement between CharleyCarp and myself. The problem with CC's idea, though, is that pretty much the entire electorate has to agree with the drift that things have to take, over time, and remember that they agreed, and not change their mind, and (likely) convince their children that this is the right course. Because slow change is going to have to be so slow (IMO) that implementation will span administrations, Congresses, etc.

Getting a majority to agree and stay agreed is going to be the trick.

I hate to be a killjoy, but doesn't the very problem you are trying to address (that there are majorities in favor of both higher spending and lower taxes) mean that your proposed solution will not be enacted?

"I hate to be a killjoy, but doesn't the very problem you are trying to address (that there are majorities in favor of both higher spending and lower taxes) mean that your proposed solution will not be enacted?"

Maybe. But we can couch it as tax simplification. Which would be a huge plus in and of itself. And the higher spending lower taxes people aren't about it in a rational way (so far as I can tell). So I don't think they will necessarily be opposed to this (which doesn't directly attack the problem anyway, it rather makes the problem clearer in the long run).

lots of people are happy to spend money if they don't ever have to think about paying for it themselves.

What spending programs are people advocating that they won't also be paying for?

"What spending programs are people advocating that they won't also be paying for?" Pretty much anything that increases spending under the current "I won't raise taxes on the middle class" promise Obama made.

Pretty much anything that increases spending under the current "I won't raise taxes on the middle class" promise Obama made.

Or the "tax cuts, tax cuts, and more tax cuts" pledges that have defined the GOP since Reagan's time. (Is it too obvious to be worth pointing out that starting a war with Iran is a spending program?)

Seb,

You may not like it, but it IS logically possible to raise taxes on the rich WITHOUT raising taxes on the "middle class". For instance, adding a new "top" tax bracket (e.g. 50%, kicking in at $5M) would raise SOME revenue over and above the revenue we collect now.

I do not understand your determined refusal to accept the proposition that the "top" tax bracket need not start at the paltry $350K income level.

The Bush tax cuts are scheduled to expire this year. That's what the Republicans who pushed them voted for. Next year, EVERYONE who makes over $350K (roughly) is scheduled to go back to paying a marginal rate of 39.6%, up from the current 35%.

Now, suppose Obama offers this alternative: let's tax the poorest of the rich at only 38.6%, but raise the marginal rate on the richer rich to 40.6%. The proposition is to make this alternative revenue-neutral for 2011 and afterwards: income between $350K and $X would get taxed 1% less; income between $X and $infinity would be taxed 1% more; X would be chosen so as to collect the same total revenue that the flat 39.6% rate would bring in.

Would you favor or oppose such an alternative?

Please note that you can answer the question entirely independently of whether you think spending is too high, or the national debt is too big, or even how you define "middle class" -- if you choose to answer it, I mean.

--TP

Sebastian: If a large majority of the population can vote for spending without ever thinking for a moment about paying for part of the increase themselves

Then shouldn't there be a clearer understanding that everyone pays tax - and that when services are cut, the poorest always pay and lose more as a result?

And shouldn't there also be a clearer understanding that most people never get the chance to vote against increased government spending - for example, for your military-industrial complex; for the vast costs of the Bush&co war in Iraq; not to mention the horrific health costs entailed by the US not having any kind of national health service or public health insurance option?

"You may not like it, but it IS logically possible to raise taxes on the rich WITHOUT raising taxes on the "middle class". For instance, adding a new "top" tax bracket (e.g. 50%, kicking in at $5M) would raise SOME revenue over and above the revenue we collect now."

Clearly it could raise SOME revenue more than we collect now. I don't think you're understanding me if you think I believe otherwise.

Point number 3 in my post is not about how much revenue can or can't be raised. It is completely Laffer Curve indifferent. It is about the wisdom of having a system where the majority of voters can vote for increased stuff without ever being personally involved in the differences in cost.

"Would you favor or oppose such an alternative?"

I wouldn't care if such a small difference would be revenue neutral. But in reality your value of X is going to be very close to $350,000 because of the population base differences. My point is that your hypothetical doesn't scale up for all percentage point differences (i.e getting me to agree to 1 percentage point doesn't mean that I will agree to all summations of 1 percentage point differences).

I don't care at 1% differences. I do start to care at on or around 20% differences. I haven't investigated enough to know exactly where I go from not caring to caring. But the rubric by which I make that choice is grounded in the idea that it isn't wise to have a large majority of the people voting to increase spending with the expectation that a large majority of the payment for the spending will fall on other people. The insight (and a rather common one at that) is that people think harder about spending their own money. They consider the tradeoffs better when their own money is involved than they do if they can get things they want wholly or almost entirely with other people's money.

Do you think that bit of folk understanding is generally incorrect?

"1. Realize that some people are just too poor to effectively pay taxes."

Agreed. Though see my fix for this, below.

"2. Admit that there is a marginal difference in dollars: it hurts the rich less to tax them somewhat more than the middle class."

Agreed. Though I'm not sure I would accept that this has any implications, for moral reasons. I figure people don't owe more than they're getting in benefits, collecting taxes in excess of this is an injustice, even if it doesn't hurt much. However,

"In order to fulfill principle 2, we have a progressive tax rate past the middle third."

Bzzzt! You're confusing "taxes" and "tax rates". (A very common mistake.) Even a flat rate ends up taxing the rich more than the poor, in exact proportion as they earn more. Heck, even a logarithmic tax, where the percentage dropped off as your income rose, would accomplish that. The only tax that wouldn't tax the rich more than the poor is a head tax, where everybody paid the same SUM, not PERCENTAGE.

The point of 'progressive' taxation is actually to maximize the problem you identified with principle 3: To push as far as possible the disconnect between taxation and benefits, so that the public will support a higher level of government spending than they would if the pain were felt by the people getting the benefits.

If you want the public to connect spending and taxes, you want to AVOID progressive taxation!

Here's my modest proposal: Calculate the head tax necessary to support the previous year's spending, and write each person a check which equaled that amount for the very poor, declining as income increased until you reached the income level at which it was figured the full head tax was affordable. Then, some decent interval later, say six months, charge them the full head tax, in a lump sum. On their birthday, perhaps, so that the revenue stream would be reasonably constant, while the pain would be felt in full by each individual taxpayer.

This way they'd have time to get used to the idea that the money was their own, and so even the poor would suffer the full pain of paying for their share of government. And be able to afford feeling it.

Now, the sum you got would be a function of the previous year's spending, and the lump sum tax you paid would be a function of this year's spending, so that if the government ran a surplus, you'd get to keep some of the money. Bingo! Immediate incentive for the voters who can't afford to pay for all of their benefits to support the government running surpluses!

Now, nothing like I propose, OR you propose, is going to happen, for two reasons:

1. We're already way above the level of government spending the public would tolerate if they weren't kept from noticing just how freaking expensive our government really is.

2. Politicians operate on the exact opposite of principle 3, they want the disconnect between taxes and spending to be as big as possible, not as small as possible, so as to be able to buy votes. (Vote buying with spending is ineffective when the voters notice you're buying their vote with their own money.)

But it does make interesting speculation this time of year.

Sebastian: it isn't wise to have a large majority of the people voting to increase spending with the expectation that a large majority of the payment for the spending will fall on other people.

Do you have any evidence that the people for whom proportionally *more* of their income goes in taxes (and who feel what they pay *more* as a loss in income) really feel the way you claim they do?

It's just occurred to me. You keep repeating this, and I'm presuming you're basing it on something other than conservative doctrine about how people with less money than you think - but given how generally ignorant you've been about the lives and experience of people who get by on low-income jobs (remember those endless rice-cooker debates?) I do wonder now if you've got any reason to believe this beyond political doctrine? Anecdata, even?

Pretty much anything that increases spending under the current "I won't raise taxes on the middle class" promise Obama made.

OK I see what you're saying.

IMO Obama's "no new taxes on the middle class" is as much political theater as anything else. And it remains to be seen if it actually plays out that way. But I can see how you could view it as disassociating new spending programs from their costs in the minds of average tax payers.

To be honest, if your goal is to make the costs of government spending more concrete to people, the thing to do is get rid of the withholding regime. Just have everyone pay their full federal tax bill directly once per quarter, like self-employed people do.

I think to most folks their income taxes are an abstraction. They never see the money, so it never really registers with them as being *their* money. They just do their financial algebra based on their take-home pay.

As far as progressivity, I'd say it might make as much sense to eliminate exemptions as it would to raise top marginal rates. My wife and my household income this year put us in the 28% bracket, but our effective federal tax rate after all was said and done (as calculated by our tax preparer) was about 11%. That means we're paying at the same effective rate as someone making much less money, but who doesn't have the advantage of a mortgage deduction, the self-employment write-offs my wife can take advantage of, or the various investment-related tax manipulations that are available to us.

That doesn't seem right, to me.

But all of that said, I'd add that raising the top marginal rate for very high earners is not a bad idea. We need the money.

"But all of that said, I'd add that raising the top marginal rate for very high earners is not a bad idea. We need the money."

But we only need it because 'we' are spending it, and the spending is politically feasible only because most people don't have to pay for it. The equilibrium level of spending in a society where most voters were paying for the spending would be quite a bit lower, which is exactly why it's been arranged that most people aren't paying for the spending.

Incidentally, another proposal that's been suggested, much more radical than mine, is that the "no taxation without representation" principle be inverted: No representation without taxation. That would quite neatly prevent buying votes with other people's taxes: The people who weren't paying taxes wouldn't have votes to buy.

I replied to this a moment ago, but it seems to have gone missing... my apologies if it shows up later and this becomes redundant.

No representation without taxation. That would quite neatly prevent buying votes with other people's taxes: The people who weren't paying taxes wouldn't have votes to buy.

What taxes? Any taxes?

And what if you pay taxes but receive other benefits and so your federal dollars paid equals or is less than federal dollars received?

And in the latter case, how broadly do we construe "benefits"? Are tax exemptions included? Services received from the federal government, in any form?

And why is it just "you get a vote or you don't"? Why don't you get more votes the more dollars you pay in?

And, all of my questions here are, frankly, not asked seriously, because IMO the question is absurd.

Over the entire history of the United States, how many voters do you think have never paid any federal tax? How many do you think have never paid any federal income tax? Note that the last is a trick question, because for about half the history of the nation there was no income tax.

What is the freaking point of the United States of America? Opinions vary, of course. Here is mine.

The United States was created to establish a nation in which the people were sovereign, and in which government operated only at the consent of the people.

If you're a person and you're subject to the government, you get a say. You get a vote. That's the point of the United States existing, at all.

And yes, in the early days of the nation, the franchise was significantly more limited than it is now. Among other reasons, that's because what the law recognized as a legal, responsible person was different then than it is now.

Want to go back? I don't.

If you'd like to confine the definition of "person" for purposes of law to be only those whose federal income tax liability is, net/net, greater than zero, that's an interesting point of view, but I doubt you'll get very far with it.

And the reason you won't get very far with it is not because all of the freeloaders will twist their Congressperson's arm to make sure it doesn't pass.

You won't get very far with it because it reduces membership in the polity -- citizenship -- to something you acquire through the payment of something like dues.

Income tax payment is one of about ten thousand ways in which people who live here fulfill their responsibilities as citizens. Political community is about more things than money.

"Yes, that is why routine large deficit spending is a bad idea"

Not necessarily.
Define "large".
The US government has run deficits (way)more often than not throughout its history. Discuss.

All else being equal, the change in the government's net fiscal position at any given time is exogenously determined. Discuss.

The reader is urged to go to the following sources for more information: New Deal v2.0 and Billy Blog

Summary:

Conservative makes yet another disingenuous argument to shift the tax burden down the income ladder.

Somehow I am not surprised.

Also, the wisdom of 'locking in' fiscal policy in the manner advocated will create, assuming we still have a business cycle, pro-cyclical government fiscal policy.

Yes, those poor who pay no federal income taxes are seen every day (at freeway on ramps, for example) bullying the federal government into giving rich people's money away.

This view of politics stands reality on its head, and waves off the pernicious impact of money and its power on our government.

In that spirit, I propose that anybody with a net financial worth more than 20 times that of the median household net financial worth not be allowed to vote. Furthermore, none of them, or their agents, would be allowed to communicate in any way with federal employees, including Congresscritters. This would include email, faxes, political donations, lobbying, etc. To seal the deal, these high net worth folks would not be allowed within 100 feet of a Congressman without doing jail time. Since corporations are 'persons' this would also apply to those entities.

The consequences of this policy are largely positive. The rich would have an incentive to become poorer and actually engage in political discourse (and possibly even start working for a living), rather than simply purchasing it. And by encouraging a more equitable society, a greater number of people would 'have skin in the game'.

Now one might ask why, given that folks like Brett B and Seb seem to think that all those freeloaders out there actually, with their vast numbers, determine government policy---that we do not have such a system in place right now.

To ask the question is to answer it.

"Conservative makes yet another disingenuous argument to shift the tax burden down the income ladder."

Actually that isn't true. My proposal wouldn't shift downward at all, in fact it would almost certainly shift it somewhat up bracket from where we are now.

Actually that isn't true.

Actually, it is. When you cap the 'BTR' rates at your guesstimated 18-20%, you are shifting the burden off those now paying the top marginal rate.

Your scheme also does not address Social Security payments, tarifs and/or export subsidies (yes, small potatoes), or the low rates on capital gains. Assuming we eliminate these considerations and simply call income, er income and eliminate all tax breaks, your proposal looks suspiciously like something Malcolm Forbes came up with, which was nakedly regressive.

One of the factors which eventually led to the French Revolution was that the nobility paid no taxes.

Instead, the king appointed tax farmers, who were instructed to get as much money as the king required out of the Third Estate - the mass of the people.

Tax farming was a lucrative appointment: there is a scene in The Vicomte de Bragelonne where d'Artagnan, horrified that the mob apparently intends to burn two particularly avaricious tax farmers alive, calls up the musketeers and humanely has them hanged according to their sentence.

It's one of the scary things about the far right of American conservativism is that they don't merely want to roll the US back to the days before the New Deal: they want to roll the US back to be like France before the Revolution, and have the nobility run the country and be free of taxation.

Of course, they doubtless believe they would be among the nobility... but then historical fantasists always, always do.

Maybe we could find a compromise between Brett's model and the one the US enjoys today: http://en.wikipedia.org/wiki/Dreiklassenwahlrecht>The three class franchise. The principles of electors is already established for presidential elections anyway, so there'd be nothing fundamentally new there.
With full corporate personhood also established this would also provide a real incentive for corporations to pay taxes in the US instead of tax havens abroad.

"When you cap the 'BTR' rates at your guesstimated 18-20%, you are shifting the burden off those now paying the top marginal rate."

Again, no. I'm afraid you're still misreading it. The BTR is the basic tax rate *for the middle*. And in fact it neatly tracks approximately what the middle pays now.

I then wrote: "In order to fulfill principle 3, this rate will cap out at some point--I propose 15-20 percentage points above the BTR. This will tax the rich at a higher rate..."

That would make the top marginal rate around 40% (depending on what the BTR actually ended up being in any given year). Since the top marginal rate now is less than that, I don't see how you could think I was shifting the burden off those now paying the top marginal rate.

I foresee a really, really massive lobbying effort to defeat this suggestion (should it every actually get suggested by someone in the legislature). The tax preparation industry would be utterly frantic to avoid having it happen. I mean, if taxes were that simple, just anybody could do their own taxes and save all those fees.

"The US government has run deficits (way)more often than not throughout its history. Discuss."

Ok, at present the national debt is over 87% of the GDP. The only time it's been higher was during WWII.

The last time we ran a REAL surplus, (Not a 'surplus' as a result of accounting gimicks.) was 1969. Given the average age of Americans, this was before most American citizens were born.

The cost of servicing the debt is at present over 10% of the budget, and is this low only because interest rates are way below historical averages. Were interest rates to go back to historical averages, the cost of servicing the debt could easily exceed half the budget.

In former times most of the national debt was held by Americans, and it could be argued we "owed it to ourselves". At present, over 50% of the national debt is held by foreigners, and rising. We do NOT owe it to ourselves anymore.

Capital gains rate = ordinary income rate.

I would prefer that the income tax be converted to a progressive pseudo-consumption tax: capital gains and interest that are entirely reinvested are tax free, those not reinvested are assumed to be for consumption, and taxed the same as any other money used for consumption. Make it work that way for the big guy's portfolio and the little guy's savings account. Essentially all the information needed to make this change is already reported to the IRS.

Russell: To be honest, if your goal is to make the costs of government spending more concrete to people, the thing to do is get rid of the withholding regime. Just have everyone pay their full federal tax bill directly once per quarter, like self-employed people do.

I wonder how many people know the story behind income tax withholding. As David Brinkley told it in Washington Goes To War, it was invented by a man named Beardsley Ruml, who was the Tim Geithner of his day, being chairman of the New York Fed as well as treasurer of Macy's.

Before the war, people paid their income taxes in quarterly installments -- not on the current year's projected income, but on the income they had actually reported the previous year. This led to difficulties Ruml had already observed: Macy's employees, in their first year of retirement, owed income taxes on their last year of salary but suddenly had only a pension to pay them with. Looking ahead, Ruml could foresee real trouble: Army privates earning $50 a month in 1942 who had tax bills based on their (then munificent) $7500 incomes in 1941.

So Ruml came up with "pay as you go" -- the slogan as well as the principle. Henceforth, people would pay this year's tax out of this year's income, through withholding. The Ruml Plan was wildly popular, but it had a formidable opponent: Franklin Delano Roosevelt.

FDR's objection was this: to start "pay as you go" there had to be a year of tax "forgiveness", and FDR saw that as a giveaway to the rich.

A compromise was eventually reached: graduated forgiveness -- a full year's forgiveness for lower-income people and only partial forgiveness for the wealthy. FDR signed the bill and "take-home pay" entered the American lexicon.

--TP

Brett: In former times most of the national debt was held by Americans, and it could be argued we "owed it to ourselves". At present, over 50% of the national debt is held by foreigners, and rising. We do NOT owe it to ourselves anymore.

"We" owe the national debt, but "we" have a hard time agreeing what to do about it collectivelly.

So let's deal with it individually. Let's privatize the national debt. Split the check. Assign each American his fair share of the debt to service or pay down as he sees fit.

This modest proposal ought to appeal to libertarians, who prefer individual autonomy to collective decision-making on pure principle. It ought to appeal to conservatives, who are forever telling us (as Seb said upthread) that people make better decisions about their own money. But it doesn't.

Maybe it's simply because a commie pinko librul like me is making the suggestion. Or maybe it's because the word "fair" scares them off.

For if we ever tried to seriously discuss, even in principle, what each American's "fair" share of the national debt is, "the general voting populace" might start asking itself why they should take on debt in order to cut taxes for the rich. Oh sure, "the general voting populace" might ALSO ask why it should take on debt in order to spend money on itself. But I could live with that, being a (d)emocrat.

--TP

At present, over 50% of the national debt is held by foreigners, and rising. We do NOT owe it to ourselves anymore.

Actually, given that ~ 45% of the total public debt is held by government agencies and Federal Reserve banks, this figure is incorrect. Over 50% of the debt that isn't intragovernmental / Fed (or about 28% of the total) is held by foreigners. This is a definite increase from the 23% figure of FY 1997 and 1998, from which it briefly fell back below 20% 2000-2002. It's funny, though, how there's so much overlap between those who shriek from the rooftops about foreigners owning most of our debt, and those who completely reject the existence of its single largest holder, the US government and its "worthless IOUs." Why not just presume that foreigners are being played for suckers, the way FICA taxpayers are? Because otherwise, all else being equal, we do still owe most of it to ourselves.

Ok, at present the national debt is over 87% of the GDP. The only time it's been higher was during WWII.

And we're in the worst recession since the one that preceded WWII. Admittedly, less of that debt was composed of limited-efficacy tax cuts required to get "fiscal conservatives" on board with even weak Keynesianism. Meanwhile, that higher previous debt was successfully paid down, even with a net expansion of the size of government, by a mysterious method known as "flogessive naxation" that somehow didn't destroy economic growth.

...what mds said above. Look, folks, the treasuries owned by the PBofC are essentially a sterile asset. To suddenly "sell" them would not, necessarily, do them any good, nor us any harm. The Federal Reserve (US central bank)controls interest rates, not the 'bond markets'. The fed could simply buy them, much as they (THE FED) have 'purchased' junk from the major banks (to the tune of hundreds of billions) by crediting bank reserves.

The "harm" here would be the result ONLY of a US domestic political decision, not one dictated by economics.

Again: Please go to Billy Blog and get an education about modern monetary theory (MMT). Thank you very much.

Ok, at present the national debt is over 87% of the GDP. The only time it's been higher was during WWII.

Like, so what? What's your point?

.'interest rates are way below historical averages."

Compared to 1982, yes. Compared to the period 1800-1960, actually no.

"At present, over 50% of the national debt is held by foreigners."

This is simply not true. The fed and the US government (you know, those "worthless IOU's" held by the Social Security Trust Fund) owns over 40% of outstanding US treasuries. China holds slightly less than $1trillion in US treasuries.

Actually, if you look into it, the fact that those filthy foreigners hold our treasuries has not been a historical concern, even though those scoundrels have commonly held anywhere from 25-30% of the outstanding treasury debt throughout our history (look it up). But, if you are a Larouchie, the evil machinations of the British treasury, fronting as we all know for the beyond all conceivable evil British crown, knows no earthly bounds.

So in conclusion, we can only presume that those like Brett Bellmore share many of the paranoid fantasies put out by Lyndon Larouche, a nut case who actually claims to be a "New Deal Democrat".

Strange bedfellows, indeed.

For those of you shitting your drawers about the terrible possibility of the Chinese dumping their US t-bills, please go here.....

http://mpettis.com/2010/02/what-the-pboc-cannot-do-with-its-reserves/

Thank you.

Seb: "I then wrote: 'In order to fulfill principle 3, this rate will cap out at some point--I propose 15-20 percentage points above the BTR. This will tax the rich at a higher rate...'

Oops, I did boo-boo there. However, using the low end of your BTR and the low end of your "tax the rich", your percentages are no higher than they are at present. You appear to simply be squeezing additional tax burden into the middle third. You have also failed to address items such as capital gains, social security taxes (paid by the poor and part of the consolidated budget last time I looked), etc. So your scheme remains rather fuzzy.

Given the unspoken assumption of balanced budgets, you have essentially capped tax rates for the rich with no corresponding cap on "spending".

But it is your assumptions that skew the conversation: #1 is false. The poor currently pay burdensome taxes; #2 is misleading. Above some level, it "consficatory" rates do not hurt the rich one iota; Number 4 is specious in aggregate and totally ignores special interest legislation that is typically driven by those who "have"; and I would agree that #4 has merit when applied to the benefits the rich receive from out government, but go to extreme lengths to deny.

bobbyp, I think you miss the point of the crucial word "effectively" in Sebastian's point 1: "Realize that some people are just too poor to effectively pay taxes."

Some people are too poor to effectively pay taxes. Of course they still have to pay them, and as you note, the poor find their taxes much more burdensome: and equally, Sebastian is uninterested in lifting that crushing burden.

He just wants the principle accepted that the taxes these people pay, while crushing to them, aren't an effective part of the money needed to run the country.

...which is doubtless true. Much more effective, which is what Sebastian is arguing for, to increase taxation heavily on the middle percentiles, while allowing the nobility to get away with even more freeloading than they do right now.

It's a conservative argument: of course it's about benefiting the rich at the expense of the less of well-off. That's what being right-wing is all about.

(Incidentally, if you want to know what Sebastian thinks of the very poor, googling the archives on rice-cooker would give you an idea...)

"So let's deal with it individually. Let's privatize the national debt. Split the check. Assign each American his fair share of the debt to service or pay down as he sees fit."

Will not work. There is manifestly no point in paying off your share of a debt somebody else can run back up. Only a sucker would do that.

".'interest rates are way below historical averages."

Compared to 1982, yes. Compared to the period 1800-1960, actually no.

Yes, the gold standard, which was in effect fro most of that period, was, admittedly, pretty good at keeping interest rates down. You favor restoring it?

You favor restoring it?

No.

Will not work. There is manifestly no point in paying off your share of a debt somebody else can run back up. Only a sucker would do that.

Nonsense.

First, you are currently paying interest on debt that "somebody else" has ALREADY run up. If you had the option (which you do not have now) to service your own share of that debt individually, then you could make your own individual decision to keep paying the interest only (which is your only "choice" now) or kicking in a bit extra to pay down your own individual balance. You owe a piece of the debt either way. I'm proposing that you should have a small additional measure of individual liberty. Are you a libertarian, or not?

Second, it's not "somebody else" who runs up debt -- it's Congress and the President. They are elected by the same nation that owes whatever debt Congress and the President run up. You want the people who make up the nation to vote for Congressmen and Presidents that won't run up debt? Make those people very, very aware of their individual share of that debt by splitting the check. Are you interested in actually giving people an incentive to vote for smaller deficits, or do you just enjoy complaining about the national debt?

You have to make up your mind, Brett. Is it We The People who owe the national debt? Or is it some alien entity called The Government? If you think the latter, why is The Government's debt any skin off YOUR nose?

--TP

The theory here is that unless progressive taxation stops at some point, people will be "disconnected" from the burden of funding the system.

But is there really so much of that "disconnection" going on? Yes, a middle-class person may contribute little in absolute terms to the next grandiose space venture he votes for, but not relative to his income. The payment in dollars will be smaller than the rich person's, the payment in pain will probably be higher. As long as that is true, I say rich people have little to complain about.

The other objection I have is that this is not really anything conceptually new; it's just crude fiddling with the brackets. Progressive tax systems based on a finite number of brackets do already cap out at some point, at least in terms of percentage on the marginal dollar. In terms of percentage of total income, it approaches the rate in the top bracket as income goes towards infinity.

Sebastian, this would have been a novel idea if we did taxation like in ancient Athens. ("There is the question of funding for the chorus of the upcoming theatre festival. It's been a long time since the Alcmaeonid family did it. I vote for them. Anyone with me?").

Jes, "Of course they still have to pay them, and as you note, the poor find their taxes much more burdensome: and equally, Sebastian is uninterested in lifting that crushing burden."

The very first part of my proposal is: "To do that, exempt some percentage of the income earners from taxation entirely. I propose 10-20%."

So, exempting them from taxes does little to relieve the burden of paying taxes? That is confusing.

Harald, "Yes, a middle-class person may contribute little in absolute terms to the next grandiose space venture he votes for, but not relative to his income."

No, we can see it in the current tax debates including Obama's promise not to raise taxes on the middle class at all: the attempt to increase programs and put the cost entirely or almost entirely on 'the rich'. It isn't just a theoretical problem, it is already in the discourse. Weighing costs only in the abstract and concrete benefits doesn't lead to good political analysis. (And by that I don't mean "political analysis I agree with", I mean "political analysis which wisely and accurately weighs the costs and benefits".)

The very first part of my proposal is: "To do that, exempt some percentage of the income earners from taxation entirely. I propose 10-20%."

So you propose to exempt these very low earners from payroll tax? How do you plan to ensure they are not penalized after retirement because there were years they were not allowed to contribute to Social Security?

And how, exactly, do you propose to exempt them from paying sales tax? Are they to carry a card which they must present to the vendor? What kind of bureaucracy will this require?

Or were you just thinking about exempting them from federal income tax - the least burdensome of the taxes that people on a low income have to pay?

These things are always open to interpretation, but I think Obama's promise is couched more in terms of rebalancing the distribution of the tax burden back to something more like what it has historically been, and less in terms of "you can have all this cool stuff for free".

The argument in favor of keeping high marginal rates low is that it will encourage growth and result in an overall increase in prosperity. Whatever you think of that claim in principle, it's a hard case to make from the facts on the ground at this point.

We either need to spend a hell of a lot less, or we need to increase revenue. As you note, nobody is putting their hand up to have their personal favorite spending program cut. The money has to come from somewhere, and virtually all of the growth in wealth for the last 30 or 35 years has gone to the top 20% of earners.

The argument for raising taxes on very high earners isn't necessarily based on "give me stuff for free".

The argument in favor of keeping high marginal rates low

Sorry, a clearer statement of this would be "The argument in favor of holding marginal rates on high earners low".

The argument in favor of keeping high marginal rates low is that it will encourage growth and result in an overall increase in prosperity

Like those vexed 1950s, which right-wingers love to hark back to for everything EXCEPT that high marginal rate which so evidently discouraged growth and obviously resulted in an overall decrease of prosperity: the US was clearly sinking into the depths of poverty and depression from WWII onwards until Reagan saved the US economy in 1986. And since then it's been growth and prosperity all the way for everyone!

Yeah right.

We either need to spend a hell of a lot less, or we need to increase revenue. As you note, nobody is putting their hand up to have their personal favorite spending program cut.

Nope. They're all putting their hand up to suggest who else's favorite spending program should be cut, thus ensuring a balanced budget, responsible (and/or drowned) government, and ponies as far as the eye can see. Far more sensible than this fanciful talk of "increased revenue" and whatnot.

and ponies as far as the eye can see.

Cut the ponies!

Hmmm, Jesurgislac seems to be suggesting maintaining American economic dominance by bombing Europe and Japan, and having Japan bomb China. Unless she forgot about WWII.

It is so crazy, it just might work...

No doubt that one of the results of WWII was that the US had an advantage in manufacturing, but that advantage was not offset by marginal rates in the neighborhood of 90%. Somehow there was still enough economic incentive for people not to go Galt. And there's a lot of daylight between the rates we have now and the rates we had then.

Sebastian, you have to admit: staying out of WWII until the Japanese actually attacked, profiteering from the Allies, and stealing British technology for US development (and then Nazi scientists for MORE US development) was the smartest economic move the US government ever made. And they did it all with sky-high tax rates, too!

Hairshirtthedontist, that was offset by how little counted as income which is going to get coverage in a later post.

Sorry, hairshirthedonist, but you're missing the point. Yes, all OECD members experienced a "golden age" of broadly-shared GDP growth from the 50s to the early 70s. And much of this was driven by the US. But then the crushing weight of a 77% top marginal tax rate finally grew to be too much of a drag on the US economy. Whereupon monetarism became ascendant, top marginal tax rates were reduced by more than half ... and GDP growth continued forward at a lower level than the previous decades. However, at least an ever-larger share of a more slowly growing pie was being captured by the top echelons. Thus is trickle-down economics retroactively vindicated by the firebombing of Dresden. Or something.

I care less about simplicity (though that is nice) than clarity. Some people's taxes will probably always be "complex" because their incomes/wealth is complex. Other people file EZ forms that a Chimp could fill out.

My plan to stave off fiscal doom:

Cuts to Medicare, SS (raising the retirement age, for instance) and National Security (including, hopefully, avoiding avoidable wars for a decade or two) coupled with tax increases, largely on rich & upper middle class.

Of course, one has to be more specific than that if one wants to be taken seriously, but I have neither the time nor inclination to generate a serious proposal. At least not now. Maybe when I'm on leave this summer and I'm tired of trading baby talk with my daughter...

As for the fairness of progressive taxation... you know, rich (or just well-off) Americans do awfully well. I know this, being rather well-off myself. This society ROCKS for me. I have a lot to lose if it runs off the rails. I'd rather pay now than hoard my wealth and watch it all burn down (admittedly, an extreme outcome). But I want the rest of my income/wealth group to pay along with me - and that's the rub. Many don't want to pay, for various reasons. And that, friends, is why we get to vote...

Question:

Do we all agree that the sooner we address the nation's long-term financial issues the better? Or the less worse? This seems prettys straight-forward to me.

Oh, and I'm all for PAYGO, even if it's pretty weak sauce. It's better than no sauce.

I think the tax rates of the 1990s are more instructive than the 1950s. It's pretty clear that a few marginal percentage points here or there don't turn a boom into a bust, nor a bust into a boom.

Hmm... I haven't posted here in a long time. I would have hoped Jesurgislac could have learned a few things during the hiatus, but such is not to be.

"US not having any kind of national health service or public health insurance option?

S-CHIP, Medicare, Medicaid.

Jes, feel free to come to the US and walk into any emergency room in the country to get free service...

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