The Only Game in Town

by Jacob Davies

(We just moved over the weekend and we're still buried in boxes, so I haven't had a chance to post here the last few days, but this is a quick* post on some issues related to taxation.)

* Quick, and therefore not short. Pithiness is hard. (Pissiness, on the other hand...)

In many discussions of the effects of increased progressive taxes it seems to be assumed that business owners or high-income salaried workers or wealthy investors face a choice between deploying their resources - work effort and funds - or not doing so, and that the change in the quantity of expected returns from resource deployment will change the amount of those resources deployed.

I see little evidence that this choice exists at all. Rather, there is only one game in town, and you can't even take your ball and go home.

For investment funds, in order to choose not to invest them at all, you would have to withdraw the money in cash and stuff it under your mattress. Short of that option, you are investing whether or not you want to - at the very least providing reserves to your bank to loan out. The only question is which investments you are making. However, taxation affects the returns from different investments of different risk levels to a proportionate degree, so the choice is not between a risky investment that might be reduced from 10% return to 8% return by taxes, or a safer one at 5%, but between putting it into a risky investment now at 8% return or a safer one reduced by taxes to 4%. The ranking of investment choices remains the same, and those who look for the highest return will still put money into risky ventures.

There is no real option to "hoard" in the world of modern banking; leaving the money in the bank just means that professionals, and not you, are the ones making the decisions about which investments will pay the highest returns, and bankers for obvious reasons make those decisions based on the real returns from the investment and not the post-income-tax returns that an investor will receive.

For individual work effort, the choice is supposedly between work and leisure. However, only in a very extreme situation does this really apply - for instance, where marginal rates are (say) 90% and the person is in a position to adjust work effort in small units in response - i.e. to stop working part-way through the year or to cut back on hours. The Beatles complained about confiscatory tax rates (per the song, rates of 95%) but they were not in a position to reduce work effort in a way that applied only to the marginal part. Short of not working at all, in which case they would have no income at all, they could not control how much money was returned in a fine-grained way. And of course, in general they would rather have 5% of a million pounds than nothing at all.

With marginal rates of, say, 50% and the type of working conditions that apply to most people, the case is far weaker. The theory runs like this: let's assume that someone is working a 60 hour week so they can bring home $300,000 a year, returns are exactly proportionate to work effort, and they have perfect flexibility about how much they work. So, they rate the value of that last hour of leisure a week that they could acquire at about $3,333 a year ($5,000 * .66 after income taxes); otherwise they would have already cut back on work effort. Now a new bracket is introduced that increases the marginal rate to 50%. The return from that marginal hour is now $2,500, and so the consequence might be that they push down working hours until the marginal value of that extra hour of leisure is equal to the $2,500 earned from it.

That's one story. Here's a second story: the worker works until they have earned (after taxes) say $200,000, and that happens to require them to work 60 hours a week. When tax rates go up, they will only earn $180,000 for 60 hours a week, and to compensate they will increase their working hours until they earn $200,000 again.

To me both stories are equally implausible. People actually work the hours they work based on social norms (the 40 hour week) and/or a rough estimate of income maximization (i.e. not a work/leisure tradeoff). High-income jobs do not resemble low-tech piecework labor; it is rare that even extending work hours beyond 40-60 hours a week can actually increase output at all. A lawyer in independent practice, for instance, working 60 hours may be able to bill more hours if he extends to working 80 hours a week, but the work quality will fall off. And if workers work for income maximization and not because of a hypothetical work/leisure tradeoff, taxes will have no effect at all on work effort - more work means more money, whatever the tax rate.

That's my take; have at it.

Comments

[y81]

It's more a question that people shift into tax-favored forms of compensation and investment return, which may not be socially optimal: company cars instead of salary, municipal bonds instead of equity investments in tech startups, etc.

[Jacob Davies]

Muni bonds and company cars are surely pretty minor in the grand scheme of things. There are only so many tax-favored avenues of renumeration that can be exploited before you end up in tax evasion territory, and I can't imagine them having a significant effect.

I generally think things are pretty straightforward. People work to make as much money as they can. People invest to make as much money as they can. They aren't making leisure/work tradeoffs. Tax rates, certainly tax rates below 50%, have nothing whatsoever to do with it. There's no other game.

[efgoldman]

Yes, Jacob, but now you're making too much sense.

I work overtime which is physically debilitating to me because I need the damned money!

If I were in the Gates/Buffett class I wouldn't work at all. But then I wouldn't need the damned money, would I?

A co-worker who makes slightly less money than I do complains about the taxes on her OT. Of course, she never married, lives with her mom in a paid-for condo, goes on expensive cruises every year, etc...

I, on the other hand, pay a mortgage, am still paying off my daughter's student loans (the ones I took - she's saddled with the horrendous grad school loans), drive two vehicles with a combined mileage north of 200k, and work Sundays in a church for the xtra money.

The GOBP is so full of snit, no wonder they have to explode and spread it everywhere.

And Arthur Laffer should have his degrees revoked.

[CharlesWT]

Employees will consciously or unconsciously adjust their work effort to match the reward they are getting for that effort. If income/payroll taxes are increased, employers may have to increase wages to get the same work effort/productivity they were getting from their employees before the tax increase.

[Tony P.]

Pithiness is hard.

"Eschew surplusage," Mark Twain advised.

Woodrow Wilson, perhaps the last American president to write his own speeches AND be considered an orator, was once asked how long he needed to prepare a speech.

"That depends," said Wilson. "If I am to speak for 10 minutes, I need a week. If for an hour, I need a day. If for two hours, I am ready now."

--TP

[Jacob Davies]

That is somewhat true at the low end, largely because so many workers are paid so badly that a basic sense of unfairness (both with regards to their employer and societally) is an impediment to an enthusiastic work effort. The more you earn, the less likely that is to have a significant effect, and by the time you hit $100k I seriously doubt that you are adjusting your work effort towards absolute levels of compensation in any way. (You may be adjusting work effort to relative income levels somewhat, if you are paid relatively more or less than your peers, but tax increases hit everyone the same way and do not affect those calculations.)

There is one case where I can see a good argument for higher progressive taxes making a difference. That's professions like law where a very expensive upfront decision has to be made based on expectations of higher lifetime (post-tax) earnings. On the other hand, we seem to already have too many lawyers (no offense, y'all) and law schools seem to have adjusted their prices to compensate; slightly diminished lifetime earnings for lawyers might overall be a good thing.

Doctors are a bigger concern, although some flattening of the income disparities between specialties might itself be a good thing, and again if medical schools have adjusted prices in part to compensate for lifetime expected earnings, they could compensate downwards again - but I acknowledge that that is likely to be a difficult and uncertain process. I think we should do a lot of things differently in turning out doctors, though, in particular finding a systemically better way of balancing expected incomes between specialties in terms of their relative demand.

The other problem with income taxes is that they somewhat unfairly penalize "new money" over "old money". In other words, people who had a chance to accumulate money under the low-tax regime have an unfair advantage over those who accumulated money under the high-tax regime. However, higher taxes also drain investment funds faster for someone to maintain a given lifestyle, and therefore have some wealth-inequality-reducing effects.

[cleek]

A lawyer in independent practice, for instance, working 60 hours may be able to bill more hours if he extends to working 80 hours a week, but the work quality will fall off.

and for salaried workers, the number of hours worked is basically irrelevant. you can't manipulate your take-home pay by working a different number of hours. you get what HR gave you at your last employee review. and you like it. dodging taxes is something you can do when you fill out your 1040, not something you can do day to day.

not a lot of John Galts making salary, i bet.

[Roger Moore]

"Eschew surplusage," Mark Twain advised.

"Omit needless words," William Strunk. I'm sure that he worked as hard polishing that sentence as anything else in Elements of Style.

Rather, there is only one game in town, and you can't even take your ball and go home.

Sure you can. Taking your ball and going home happens in the form of pulling your money out of investments and spending it on consumption, to which I say, "Bring it on!" We're suffering much more from lack of demand than lack of capital, so any law that encourages the filthy rich to spend like drunken sailors should be enacted immediately. That it would also help to reduce the long term structural deficit and income imbalance is just icing on the cake.

[UserGoogol]

To be fair to conventional economics, elasticity of the supply of labor doesn't necessarily depend on individuals making small adjustments to their labor. If a small percentage of workers are willing to make a big adjustment to their work, (early retirement, switch to an easier job, break up the Beatles, whatever) that has the same effect in aggregate as a large percentage of workers being willing to make a small adjustment to their work.

[russell]

not a lot of John Galts making salary, i bet.

Other than in their own minds, not a lot of John Galts, period.

[Nate]

John Galt wasn't even John Galt.

[Bernard Yomtov]

It's more a question that people shift into tax-favored forms of compensation and investment return, which may not be socially optimal: company cars instead of salary, municipal bonds instead of equity investments in tech startups, etc.

Rates on municipal bonds are going to adjust very quickly to changes in tax rates. Higher rates will just reduce the yield of munis relative to taxable bonds.

[jrudkis]

Efgoldman seems like a candidate for a tax bracket effect: he has a second job at a church which he could stop doing if the effective rate of that employment puts him above whatever he thought his time was worth.

This is probably true of couples as well. So, sure, my job may be in flexible. In order to earn (theoretical) $500k per year, I either do it or I don't. If my wife's income is then taxed at the highest rate for every dollar she makes, it may not be worth it for her to be employed, and she would take care of the kids (happily, not theoretical).

I think there are options in the real world. At some point, dual income is less desirable, and our nanny loses her job.

[bobbyp]

Given stable or increasing output and a stable population, a mass shift toward greater leisure* could result in, drum roll please, full employment.

Economics is so easy.

*cf "The Right To Be Lazy" by Paul Lafargue, Marx's son-in-law.

[bobbyp]

"I either do it or I don't."

So much for smoothly differentiable curves. You have just crashed microeconomics. What do you have to say for yourself?

[jrudkis]

So much for smoothly differentiable curves. You have just crashed microeconomics. What do you have to say for yourself?

Sorry. I thought as long as I bought the required pair of daily shoes, I was doing my part to uphold the frgile system.

[Sebastian]

"To me both stories are equally implausible. People actually work the hours they work based on social norms (the 40 hour week) and/or a rough estimate of income maximization (i.e. not a work/leisure tradeoff)."

I'm not sure where you get this idea, but it doesn't really reflect the people I know. I know quite a few people who really do put in more hours because they can make more money (and they work nothing like 40 hours). Many of them are in some sort of sales/consulting job and they really can choose to work 50-70 or 80 hours based on whatever they are valuing.

And I think what you identify as the doctor problem exists in a lot of professional areas. Professionals are asked to put a huge up-front investment in time and money with the hope of a high income later. It seems very likely that a much lower income will mean that the people decide not to invest years or a decade of their life learning to do something when they aren't going to get much higher pay out of it.

[Brett Bellmore]

"Given stable or increasing output and a stable population, a mass shift toward greater leisure* could result in, drum roll please, full employment.

Economics is so easy."

So could a shift from modern agriculture to subsistence farming. There are better and worse ways of achieving 'full employment'.

[McKinneyTexas]

Jrud makes several obvious points that show the fallacy in JD's post. There are others: investors can chose capital investments over income producing investments, defer their income and pay taxes at a lower rate. People across the spectrum can lay off/forgo service providers who otherwise would be desirable because the marginal cost of earning a net dollar to pay the service provider is too high, e.g. lawn, maid, laundry, etc. These service providers would be hardest hit by middle and upper middle class economizing. This logic extends to the Keynesian model that most here hold as an article of faith: jack up taxes, make the cost of the net dollar a real imposition and people will simply adjust their lifestyles downward, consume less, etc.

Finally, professionals can work less. Businesses can lay off nonessential employees to increase after tax margins. Aspiring business owners will have to pro forma after tax income at much higher levels to get financing, which is not likely and thus new business development will be inhibited. As you know, banks are paid back with after tax dollars. Likewise, selling a business will become more difficult unless the cash flow after tax is sufficient to service the purchase debt.

[cleek]

fortunately, we already have plenty of real-life evidence as to what happens when the US has these tax rates: business as usual. no need to spin fabulous fantasies about what would happen if reality matched some economic model that only works in the head of armchair economists. we already know. and it ain't bad. in fact, it's fine.

[Jesurgislac]

McKinneyTexas: People across the spectrum can lay off/forgo service providers who otherwise would be desirable because the marginal cost of earning a net dollar to pay the service provider is too high, e.g. lawn, maid, laundry, etc.

This comment by McKinney in particular reminds me of an apocryphal line in a school essay; "In Victorian times, everybody had servants."

Looking nostalgically into the past, it's understandable that people prefer to daydream that they'd be one of the rich and privileged, not one of the servants, but in the present day to say that "across the spectrum" people hire and fire service workers to do their lawn, their laundry, or clean their house, is just indicative of how short McKinney's spectrum is, and how McKinney perceives the people outside his spectrum of attention: anonymous service workers who exist only to be hired and fired.

[Hartmut]

And in ancient Rome even very poor citizens usually had at least one slave. Caesar alone flooded the market with 1 million extra slaves (leading to a massive inflation and drop in prices). On the other hand that also led to massive unemployment of free citizens who had to rely on the grain dole (the panis in panem et circenses). But don't forget these were the high times of tax farming. Who needs an IRS, if it can be so lucratively outsourced? I wonder when there will be proposals in Congress to reintroduce that concept.

[Uncle Kvetch]

fortunately, we already have plenty of real-life evidence as to what happens when the US has these tax rates: business as usual.

Stop mucking up the works with your silly facts, cleek. Our friends on the other side of this debate have made it amply clear that this discussion can only be properly conducted on the basis of hypotheticals, anecdotes, vaguely remembered aphorisms from Econ 101, and the reading of sheep entrails by moonlight.

Besides, it's different this time.

[wj]

Rather, there is only one game in town, and you can't even take your ball and go home.

True, but the implications are not quite what you infer. There is only one game in town . . . but if it is bad enough, you can leave town. That, after all, is what our ancestors did when they came to America.

The question becomes, how bad are taxes relative to what they might be elsewhere? And what are the draw-backs of those alternative countries? Obviously taxes are not the only criteria -- otherwise everybody would have moved from California to Nevada to escape state income taxes. But with a global economy, there are lots more, and easier, options than there once were. For example, I could be sitting home at my computer working on my employer's system, whether I remained in California, or moved to Australia or South Africa -- and without even having to bother to learn a new language.

High-income jobs do not resemble low-tech piecework labor; it is rare that even extending work hours beyond 40-60 hours a week can actually increase output at all.

As someone else noted above, working more hours in a job which emphasizes mental effort rather than physical effort eventually hits a point of diminishing returns. But it is routine to find people in the high tech fields working 50-60 hours per week (or more), even though we are on salary. It clearly isn't for more money, even in the long term (there is no obvious correlation between hours worked and the size of annual raises). My take is that there is a (sub-)cultural value of "getting the job done" -- even though, by 55 hours a week or so, the quality of work, and the amount accomplished for an additional hour, has dropped substantially. But it sure isn't a decision made on economic grounds.

[Eric Martin]

True wj, but do you think there was a mass exodus from America during the 1990s when the pre-Bush tax cut rates prevailed?

If not, why would there be one now when the Bush tax cuts expire, and rates return to 1990s levels?

[hairshirthedonist]

At some point, dual income is less desirable, and our nanny loses her job.

Of course, you're wife's job is now open for someone who needs one, maybe someone who would like to hire your nanny.

This is a disconnect between microeconomics and macroeconomics, perhaps an example that is inverse to the something like the Paradox of Thrift. Instead of each individual attempting to save, with only his own immediate circumstances in mind, unintentionally reducing every other's ability to save, and thus his own, we have individuals choosing not to work, leading them to assume that many others will do the same, when, in fact, there are many waiting to fill the positions they've left open.

One of the problems we have is an increasing inequity in wealth and income. If somone making $500k decides that some marginal unit of output is not worth his while because the highest marginal income-tax rate is too high, let someone making $150k take up that work and make a bit more to spend on more essential and economically stimulative things. I'm okay with that (to the extent that it will actually happen).

[hairshirthedonist]

or your wife (stupid grammar!)

[russell]

People across the spectrum can lay off/forgo service providers who otherwise would be desirable because the marginal cost of earning a net dollar to pay the service provider is too high, e.g. lawn, maid, laundry, etc.

The points you make above are generally good, McK, but I'm not sure this particular point is all that relevant in the case we're actually talking about.

Raising the marginal rate 3 to 5 points on incomes north of $250K is not, I suspect, going to induce very high income earners to mow their own lawn, clean their own toilet, or iron their own shirts, unless they're inclined to do so anyway.

To echo Jes' comment, I'm far more worried about an economy increasingly based on providing goods and services to the very wealthy than the opposite.

If somone making $500k decides that some marginal unit of output is not worth his while because the highest marginal income-tax rate is too high, let someone making $150k take up that work and make a bit more to spend on more essential and economically stimulative things.

Right the hell on.

As an aside, the most objectionable thing I've found in all of the discussion (hree and elsewhere) about making the kinds of puny adjustments in the marginal rates that we're contemplating is how freaking indispensable high income earners think they are.

They're not. High income earners are not inherently the most valuable, the most productive, or the most necessary folks in the mix. Really, they're not.

They just happen to make a lot of money.

Good for them, but there's no need for the entire public policy of the United States of America to be oriented around preserving their privileged status.

If it's not worth it to you to make that extra million, stand down. Go fishing. Play with the grandkids. Someone else will sure as hell step up to take your place.

[Hogan]

working more hours in a job which emphasizes mental effort rather than physical effort eventually hits a point of diminishing returns.

This is also true of jobs that emphasize physical effort, as anyone who has had such a job can tell you.

[hairshirthedonist]

This is also true of jobs that emphasize physical effort, as anyone who has had such a job can tell you.

Enter methamphetamines...not that there isn't still a dimishing return. It just takes a little longer to get there, but the return diminishes much faster once you've gotten there. You might get through a number of 70-hour weeks on the line at the plant or working three jobs before you have a psychotic episode.

[McKinneyTexas]

Russ, JD and Eric, are we talking about marginal rates of 39.6% or 50%? Does FICA remain as it is, capped, or is the plan: go to Clinton rates and uncap FICA? Right now, the rate proposals are a moving target. At 39.6% and FICA as it is, you get only bitching. Go to 50% or uncap FICA, and we'll see who is right about whether tax rates affect taxpayer behavior. At present, we are arguing about how many angels can dance on the head of a pin.

[Eric Martin]

McTex: I am not aware of any proposal on the table from either party to go up to 50%.

At present, the debate is whether to allow the Bush tax cuts for the highest two brackets expire, or not. If they expire, we return to Clinto era rates - 39.6%.

However, I DO support adding additional brackets above the approx $375K* highest threshold.

*JanieM knows the exact number.

[hairshirthedonist]

Go to 50% or uncap FICA, and we'll see who is right about whether tax rates affect taxpayer behavior.

I don't think anyone is arguing that tax rates don't affect taxpayer behavior. The question is the significance of the effects, so we're either all right or all wrong about there being effects.

[Tony P.]

I absolutely agree with Russell on practically everything. But just to show how fair and balanced I am, I will nitpick two words in "... the kinds of puny adjustments in the marginal rates that we're contemplating ..."

First, the tax increase scheduled for 2011 is not something we're "contemplating". The tax increase of 2011 WAS VOTED INTO LAW BY THE REPUBLICANS IN 2001. They done contemplated it, and RAMMED IT THROUGH ON RECONCILIATION.

Second, and more seriously, "puny" is probably not a word I'd use to describe a 3-5 percentage point increase in almost any economic context. The difference between stagnation and boom is 3-5% growth in GDP; the difference between a decent and a predatory mortgage interest rate is 3-5%; the difference between "normal" and "high" unemployment is 3-5 percentage points.

So I think 3-5% on the top marginal rate is not "puny" -- quite aside from the fact that it evokes such caterwauling from some people. I think it's a BFD. And that's why I think it will have big POSITIVE effects.

Am I thereby saying that the GOP was "right" to ram through the sunset provision back in 2001? No, because we all know they didn't MEAN IT.

--TP

[McKinneyTexas]

McTex: I am not aware of any proposal on the table from either party to go up to 50%.

Right, I agree, but JD's post was discussing a hypothetical 50% marginal rate. That would produce a reaction, not that there is a chance in hell of passing something like that.

[John Thullen]

At 91% high marginal tax rates from the late 1940s to the mid 1960s, only four or five percent (annually) of the angels quit dancing or were fired from dancing on the head of the pin.

But maybe that was a "lag effect" from low tax rates in the 1920s, or better, maybe the markets knew and looked ahead and discounted(they know everything, don't they?) the low marginal tax rates of 2002.

Lucy can splain anything.

[Bernard Yomtov]

I think there is no doubt that some taxpayers will change their habits as a result of a tax increase. Some will work less, others more, for the reasons argued above. (And BTW, Brett, subsistence farming is not the issue. Leisure is a good that people value.)

But is this the central issue? I don't think so. If we are worried about deficits over the long term, then it must be because we think they will hurt the economy. So taking steps to reduce it must have beneficial long-term effects overall. Otherwise, what are we worried about? And we are not going to reduce it at the current tax rates, no matter how many asterisks someone puts in the budget and no matter how many curves anyone draws on napkins.

So can we get serious?

[GoodOleBoy]

This is a disconnect between microeconomics and macroeconomics.

Here's another personal anecdote that perhaps is not such a disconnect.

I have grandchildren who live in Arizona and Utah. My principal residence is in Utah and I have a place in Arizona where I can stay when the weather is more inviting than it is at present. Two services to which I have become very accustomed in recent years, pay tv and internet service, are a problem to maintain in two locations because providers require that I maintain continuous service. Under this arrangement, the cost of service at one of the locations is always for an unused service.

I recently started using my mobile phone 'hotspot' for both of these services, at any location I happen to be, at a cost that right now is equal to one of these services at one of these locations. At the moment, and for the last two months, I use my laptop using my phone as a wireless router. My wife uses the same in another part of the house and when the grandkids were here we had 3 laptops going and it was great. We don't watch a lot of tv, but the service I get over the mobile phone meets our requirements. The tv service can be piped to my flat panel HD TV through an HDMI micro cable.

Maybe this will create some serious competitive pressures in the cable/satellite tv and internet services business. Needless to say, I'm excited not to have to deal with them at all.

[McKinneyTexas]

Russell, I missed this: is how freaking indispensable high income earners think they are.

I've heard that argument too, usually cast in terms of penalizing success, creativity, etc. That's not the argument I hear most nor is it the dominant argument against raising marginal rates on the rich. Most importantly, it isn't only the rich who opposed tax increases and the non-rich who do so aren't, by definition, insane or duped or stupid.

In progressive quarters, it is fair, just and right for the very small minority of very wealthy people to be taxed at significantly higher rates. Outside those quarters, not everyone feels that way, including many who will never come close to being even in the top one percent of earners. If only the uber wealthy opposed tax increases, they would already be fact. Opposing higher marginal rates resonates well outside the Millionaires Club because taking other peoples' money, simply because they have it, strikes many people as unfair in a number of ways. The many voting to take something away from the few; the question of whether, simply because someone makes a ton of money, someone else has a claim on it. Not everyone resents the wealthy, even LSC wealthy people.

There are good and bad arguments for raising taxes and good and bad arguments for opposing tax increases. Picking the indispensability of high earners is not really a good reflection of how the debate shapes up.

[McKinneyTexas]

And we are not going to reduce it at the current tax rates, no matter how many asterisks someone puts in the budget and no matter how many curves anyone draws on napkins.

What about the spending component?

[Eric Martin]

McTex:

See, ie, Ayn Rand and her many devotees, from Alan Greenspan to...well, "Rand" Paul.

[Eric Martin]

What about the spending component?

What spending would you cut to get there? Currently, if you block off SS and Medicare, there is only really defense. Everything else is nominal.

[hairshirthedonist]

Opposing higher marginal rates resonates well outside the Millionaires Club because taking other peoples' money, simply because they have it, strikes many people as unfair in a number of ways.

It resonates within the Millionaires Club for a different set of reasons, I guess, where taking other people's money is how you get there. (Sorry, I couldn't resist.)

[McKinneyTexas]

It resonates within the Millionaires Club for a different set of reasons, I guess, where taking other people's money is how you get there. (Sorry, I couldn't resist.)

Where's that rimshot emoticon when you need it?

[hairshirthedonist]

The many voting to take something away from the few;

This comment is more serious than my last.

I've seen this notion presented before, as though somehow there is an oppressed minority under the thumb of an oppressive majority. Without even considering the nature of the "oppression," there is an implied conflation of "the few" and "the many" with regard to tax policy and "the few" and "the many" with regard to groups based on intrinsic human characteristics.

Anyone who earns a given income can fall within the few who are subject to higher tax rates, regardless of who or what they are, if they are so lucky and/or brilliant and hardworking. They are not the same as the few in the sense of members of a given minority group who are relatively powerless and/or have no choice but to be within their minority group (e.g. blacks, gays, (ethnic) Jews, women (not a minority, but historically relatively powerless) etc.), or even those in groups that have some choice, but not much realistically, or that should be protected for the sake of human rights or democracy (e.g. members of a given religion, people with certain political affiliations, people who like to dress funny).

Tax rates apply to incomes, not specific human beings over their lives or for reasons having to do with anything other than income. If being taxed at the highest rate is such a problem, you are free not to seek out the income subject to those rates. It might be stupid not to seek that income, but it's a choice. (And the work will be there for someone else.)

You can say that this "many taking from the few" argument isn't meant to conjure the American ideals of the protection of minorities (that aren't simply statistical minorities into and out of which individuals might move easily over time), but I won't believe you.

[McKinneyTexas]

Currently, if you block off SS and Medicare, there is only really defense. Everything else is nominal.

The below comes from Wikipedia, so maybe it's legit, maybe not. I don't know.

I see 571 Billion in "other mandatory programs. I also see SS, Medicare and Medicaid growing through the roof. I also see two wars that need to be wrapped up. Defense needs to be looked after a real and valid assessment is made of what the mission is and what is needed to accomplish that mission with a reasonable margin for error.

Cap SS for a year, maybe two. Ditto medicare/medicaid. Give docs a tax credit for taking medicare/medicaid patients.

* Mandatory spending: $2.184 trillion (+15.6%)
o $695 billion (+4.9%) – Social Security
o $453 billion (+6.6%) – Medicare
o $290 billion (+12.0%) – Medicaid
o $0 billion (−100%) – Troubled Asset Relief Program (TARP)
o $0 billion (−100%) – Financial stabilization efforts
o $11 billion (+275%) – Potential disaster costs
o $571 billion (−15.2%) – Other mandatory programs
o $164 billion (+18.0%) – Interest on National Debt

US receipt and expenditure estimates for fiscal year 2010.

* Discretionary spending: $1.368 trillion (+13.1%)
o $663.7 billion (+12.7%) – Department of Defense (including Overseas Contingency Operations)
o $78.7 billion (−1.7%) – Department of Health and Human Services
o $72.5 billion (+2.8%) – Department of Transportation
o $52.5 billion (+10.3%) – Department of Veterans Affairs
o $51.7 billion (+40.9%) – Department of State and Other International Programs
o $47.5 billion (+18.5%) – Department of Housing and Urban Development
o $46.7 billion (+12.8%) – Department of Education
o $42.7 billion (+1.2%) – Department of Homeland Security
o $26.3 billion (−0.4%) – Department of Energy
o $26.0 billion (+8.8%) – Department of Agriculture
o $23.9 billion (−6.3%) – Department of Justice
o $18.7 billion (+5.1%) – National Aeronautics and Space Administration
o $13.8 billion (+48.4%) – Department of Commerce
o $13.3 billion (+4.7%) – Department of Labor
o $13.3 billion (+4.7%) – Department of the Treasury
o $12.0 billion (+6.2%) – Department of the Interior
o $10.5 billion (+34.6%) – Environmental Protection Agency
o $9.7 billion (+10.2%) – Social Security Administration
o $7.0 billion (+1.4%) – National Science Foundation
o $5.1 billion (−3.8%) – Corps of Engineers
o $5.0 billion (+100%) – National Infrastructure Bank
o $1.1 billion (+22.2%) – Corporation for National and Community Service
o $0.7 billion (0.0%) – Small Business Administration
o $0.6 billion (−14.3%) – General Services Administration
o $19.8 billion (+3.7%) – Other Agencies
o $105 billion – Other

[Tony P.]

In progressive quarters, it is fair, just and right for the very small minority of very wealthy people to be taxed at significantly higher rates.

We don't tax people in this country, we tax incomes. We don't pick out a "small minority" of people and charge them higher tax rates for life.

In conservative quarters, it may be "fair, just, and right" to equate a person with his income. But do conservatives believe in income mobility, or not? If today's poor man can be tomorrow's rich man and vice versa, then taxing high incomes more heavily is business, not personal.

Of course, if you're rich and believe you always will be, then you will naturally think it's unfair to tax your income in order to pay for benefits for poorer people. You'll never be one of those, because income mobility only ever works in one direction here in America.

--TP

[russell]

Not everyone resents the wealthy, even LSC wealthy people.

I don't resent the wealthy.

I am in favor of increasing the marginal tax rates by a modest amount - the 3 to 5 percentage points proposed by Obama - because the nation needs the revenue, and income taxes is mostly how we raise revenue.

I'm in favor of focusing those increases on the wealthiest because of the Adam Smith argument -- a dollar exacted from a rich man deprives him of a luxury, a dollar from a poor man deprives him of a necessity -- and because folks in lower income brackets are relatively more likely to spend whatever they keep in their pocket, thus increasing demand.

If folks can't abide having only the top brackets raised, I'm fine with raising them more broadly, as will happen if the Bush cuts are simply rescinded. I just don't think that will be the most effective policy, for the reason given above.

The argument that raising taxes on the wealthy will "punish the most productive members of society" is an argument that I hear nearly every time this subject comes up.

Some wealthy people are very productive. Some aren't. Just like everybody else.

The reward for being wealthy is being wealthy. It should not earn you any particular special consideration in terms of public policy.

The problems we see now do not seem to be due to failures in capital formation. They appear to be due to the fact that (a) a very large speculative bubble burst, bleeding trillions of dollars out of the general store of private wealth, so (b) nobody is buying anything.

A 3 to 5 percent increase in the top marginal rates will raise a lot of revenue, while leaving spendable income in the pockets of the folks most likely to spend it.

[Bronx Bomber]

Tax Expendatures as an alternative to stimulus spending cuts or raising taxes.

[Eric Martin]

I see 571 Billion in "other mandatory programs."

Yes, but the "mandatory" part makes them difficult to do away with.

The discretionary side is where the cuttable fat is, if any.

Obviously, I'm less enthused with the SS and Medicare caps, but defense does need some reining in (Gates has been vocal about this) and the two wars need to be wound down - faster please.

[Jacob Davies]

jrudkis: At some point, dual income is less desirable, and our nanny loses her job.

Yeah. This is a real concern. I'm not sure how large of a concern, though, because it really only affects people who happen to be right at the margin. If your wife made $500k (hypothetical!) then even fairly large changes in tax rate wouldn't be enough to push you into the situation where it was cheaper to just stay home with the baby, so the question is how large that margin is.

McKT: investors can chose capital investments over income producing investments, defer their income and pay taxes at a lower rate.

I'm not totally clear on what this means. Can you say more? On the face of it it sounds like exactly the argument for taxes prompting more productive long-term investment that I've made elsewhere (hardly original to me of course).

People across the spectrum can lay off/forgo service providers who otherwise would be desirable because the marginal cost of earning a net dollar to pay the service provider is too high

I don't have a problem with service employment per se since it can often be part of a division of labor/specialization efficiency, although I have real concerns about the perverse influences on policy of high-income households that get used to cheap service labor.

Lack of post-tax income for service labor is a concern during an employment slump because you want to disrupt existing employment as little as possible. Under normal conditions it's not a work effort concern because at least in theory tax/spend policies will soak up displaced service workers elsewhere, i.e. net employment will be the same but more people will be government employees. As far as employment & output goes it looks like a wash.

professionals can work less

Sure, they can, but will they? I know you've described your own situation before and suggested that this was plausible for you, and I believe you. What I'm not so sure of is that that is a significant factor in general, and whether countervailing effects like the desire to replace lost income are necessarily smaller.

Businesses can lay off nonessential employees to increase after tax margins.

Tony P. had a good comment on this on a previous thread. If the business can increase margins by laying off employees, why wouldn't it have done so already? Small businesses especially are not in the habit of keeping employees on payroll who are nonessential. Maybe I'm not understanding the exact point here.

Aspiring business owners will have to pro forma after tax income at much higher levels to get financing, which is not likely and thus new business development will be inhibited. As you know, banks are paid back with after tax dollars. Likewise, selling a business will become more difficult unless the cash flow after tax is sufficient to service the purchase debt.

Now this is the most convincing argument and the one I was really looking for. And nope, I didn't know that banks are paid back with after-tax dollars. (It's almost like people can learn things from discussion. Weird.) That is definitely a concern, although again we'd have to understand how many individuals would fall into that category before knowing how large the effect would be. Obviously for salaried workers it's not a concern.

I'm generally talking about individual income taxes. I don't know much about corporate income taxes or their effects.

As for rates, marginal rates of nearly 50% will be in operation next year if the Bush tax cuts are not repeated and you live in a state with a significant income tax. For instance in California you'll be paying 39.6% federal and 9.3% state. For FICA, if it's uncapped and the pre-Bush tax rates return then high earners will be paying a marginal rate over 50% just to the feds. I don't have a problem with that, obviously, but talking about 50% marginal rates is not crazy.

[Nate]

"It seems very likely that a much lower income will mean that the people decide not to invest years or a decade of their life learning to do something when they aren't going to get much higher pay out of it. "

... Oh, for the love of . Slightly higher marginal tax rates on incomes that are five, six, or more times what the median American family makes are not going to mean "much lower income". Hell, even if we put a marginal tax rate of 99% on incomes over $5 million, or some other similarly astronomical number, it STILL wouldn't make the sky fall. So Richy McRichenstein the Third doesn't work 80 hours as a lawyer to rake in $8 mil versus $10 mil. BFD. That means there's more work for the guys just out of law school. Or the other law firm across the street. Or room for the group of junior partners who get together for coffee to start their own firm. Or maybe it turns out we don't actually need as many lawyers as we have.

Seriously, this whole "but then this tiny segment of indispensable wealthy John Galts won't work 80 hours a week for that extra million dollars a year" thing is so irritatingly pointless. I'm not going to cry for people who are making many multiples of the median income having to pay a little bit more in taxes on the money they make beyond 5-6 times what most of us do. Especially not when unemployment is near 10%. Especially not when we're talking about going back to tax rates that we had before the Bush Stagnation. Especially not when the country has had top marginal tax rates ranging from 0% to 90%, and the success of the economy and businesses was related to that very loosely at best, and possibly inversely.

The people who are currently wealthy and at the top of the heap aren't irreplaceable, and they're definitely not the most brave, clever, ingenious, or otherwise-virtued people in the country, as their incessant whining and doomsaying makes clear whenever anybody asks them to help pay for the society that let them become fabulously wealthy.

One of the major sources of our current economic troubles is the fact that income has been increasingly concentrated in a smaller and smaller portion of the country. The few, if you will, taking from the many. Which also distorts investment, as businesses that are profitable but not making whatever is deemed to be "enough" as an investment get systematically chopped up and sold off and destroyed to "extract value", (see: Local newspapers) and investment tends to be less about the actual benefits to society and the longer term return on investments versus the short term 8-10% interest rate. So finance became less a matter of finding good investments and more a matter of "innovating" into things that made appealing investments for the few with lots of money and nowhere to park it at the interest rates they wanted. Enter CDOs, swaps, and all that other nonsense. And the short-term return on things like R&D, or infrastructure, or plants, or educating workers, or lots of the other stuff necessary for the long-term health both of companies and the country got neglected in favor of wild speculation with short term returns.

So, the people arguing that a tax increase would mean less people working 80 hours or whatever to make the extra million? Good. Someone else can make it and income inequality will go down, the person not working so hard can spend some time with their family, or golfing, or watching sports, or whatever. If we take the argument that taxing extremely high incomes means there would be reduced demand for them, then well, I don't see that as an entirely bad thing.

[Jacob Davies]

McKT: Not everyone resents the wealthy

I don't resent the wealthy, I are one. Sure, top 20% wealthy, not top 1% wealthy, but top 20% wealthy in the US, even in the most expensive areas, is staggeringly wealthy by world standards, historical standards, my own family background, or any reasonable objective standard.

I think a grossly unequal society makes people absolutely miserable, including wealthy people. Yes, it's "for your own good", rather, for our own good. I don't resent the zero-sum status expenditures of the rich, I lament them; they make nobody happier, including the people spending the money.

[John Thullen]

You could divorce the high earning wife, given the awful drag she is on the standard of living, and marry the nanny and have her stay home with the kids.

Ya know, Pavlov fired his dog because of high marginal Tsarist tax rates and decided to do his own slavering.

The dog, for his part, moved to Austria, and sired the founder of the Austrian School of Drooling, which championed frothing at the mouth over taxes of any kind.

Sorry, whimsy is not taxed, and so I have a large supply of it, which may lead Sebastian to propose the new whimsy tax, considering the seriousness of the effing deficit.

On the other hand, Groucho and his brothers made one movie after another during the 1930s as FDR raised taxes and brought unemployment down from 23% or whatever.

[cleek]

For instance in California you'll be paying 39.6% federal and 9.3% state. For FICA, if it's uncapped and the pre-Bush tax rates return then high earners will be paying a marginal rate over 50% just to the feds.

aren't state taxes deductible from federal taxes ?

[John Thullen]

By the way, Jacob Davies won me over forever the other day by mentioning the Beatles in one of his posts.

I just want to say that the ridiculous marginal rates in England at the time didn't dissuade Paul McCartney from coming up with that great bass part in "Taxman". I believe it was his habit to stay up most of the night at Abbey Road while recording and lay down bass tracks for the songs.

George, the sourpuss about taxes, headed home early to avoid taxes and preserve his material world.

I went to see Paul the other night in Denver -- 68 years old and he gives you three solid hours of that great music - sequeing from a very touching, delicately sung "Yesterday" into "Helter Skelter" with the voice of a bull.

[Phil]

They are if you itemize, which people in those brackets almost certainly do. Local income taxes, too. And property taxes.

[hairshirthedonist]

And property taxes.

Amen. (I live in NJ. It's about 10% of my gross income. Somehow, I didn't move to another state or buy the smallest house I could find.)

[hairshirthedonist]

Make that 8%. 10% is mortgage interest.

[Jacob Davies]

Er, yeah, you can't quite just add them (let's pretend I remembered that), but let's say you earn $100 and it's taxed at 9.3% by the state, you pay that and deduct it for a net of $90.70 which is taxed at 39.6% by the feds for a final net of $54.78, right?

So the marginal rate for the top bracket in California next year (assuming the Bush tax cuts expire) is 45.22%. Or did I screw something up? That's not 50%, but getting there.

[Lewis Carroll]

"As you know, banks are paid back with after tax dollars."

Not if it's paying for something that is an allowable business expense. Unless it's something that you intend to capitalize as an asset, in which case you usually get to deduct the periodic depreciation.

And you know what else gets paid pre-tax? The salaries of my employees.

[Hogan]

"He's spending a year dead for tax reasons."

[Morat20]

So, the argument STILL boils down to "If we return to the Clinton-era tax levels, Galt will take his ball and go home, the American Dream will be murdered, the economy will die under the weight of collapsing businessment, and it'll be an employer's market with all the unemployed nannies looking for work."

Yeah, that's convincing.

Look, folks -- this isn't really a hypothetical situation. This is "the way stuff was 10 years ago".

I can't quite accept the doom and gloom line on that, seeing as how my memory stretches back to those long-ago days of the 90s.

[John Thullen]

Given the business cycle, which is going to give us recessions regardless of the level of tax rates (although I notice the Depressions usually begin in and then follow periods of low taxes) and the constant pounding away to lower tax rates every time there is a recession, I'd say we're three or four recessions away from zero marginal tax rates.

That should be a fun string to push on.

[Eric Martin]

I'd say we're three or four recessions away from zero marginal tax rates.

Which will translate into a million percent employment and the strongest US economy EVAH!

[McKinneyTexas]

McKT: investors can chose capital investments over income producing investments, defer their income and pay taxes at a lower rate.

I'm not totally clear on what this means. Can you say more?

As opposed to bonds, money market, dividend income, an investor can put money in growth stocks, mutual funds where it simply appreciates over time, producing little if any taxable income. When sold, the profit is taxed at capital gains rates, much less than ordinary income.

If the business can increase margins by laying off employees, why wouldn't it have done so already?

Good question. I'll try to answer by using my small operation as an example: 6 lawyers, 2 very good secretaries, a file clerk and a receptionist (plus my wife as office manager--if she got a salary, she'd be max-taxed plus FICA'd, so she just takes all of the money instead). The receptionist and the file clerk make the secretaries' jobs easier, they are a convenience to all, but not essential. I could pay two hours of overtime a week to each secretary and they could do in four hours what our file clerk does in a week. He does other stuff that is helpful and makes life easier, plus he is well liked, loyal and fairly dependable. Also, non-essential. I could save close to 100K a year all up if I cut them loose. I am not rolling in money as one might infer if there is a loose 100K lying around that I am not chasing pretty hard. The other side of a small operation is that you get close to and care a great deal about your employees. Everyone's life would be more difficult if I cut staff. I am fine with the status quo and don't need to squeeze out every single penny. Not everyone operates like this, but this is my third law firm in thirty years and the other two operated pretty much the same (I managed one of them, so that's probably not too surprising).

That is definitely a concern, although again we'd have to understand how many individuals would fall into that category before knowing how large the effect would be.

It affects anyone who wishes to buy, sell or start a business. To get a loan, you have to show that you will make X amount over your projected cost of doing business. The acquisition debt gets serviced out of X minus federal and state taxes. Only interest is deductible.

McKT: Not everyone resents the wealthy

That's me, carefully and clearly expressing myself. Better put would have been "Not everyone believes the wealthy ought to pay substantially more, percentage-wise, simply because they are wealthy."

The people who are currently wealthy and at the top of the heap aren't irreplaceable, and they're definitely not the most brave, clever, ingenious, or otherwise-virtued people in the country, as their incessant whining and doomsaying makes clear whenever anybody asks them to help pay for the society that let them become fabulously wealthy.

Well, some are and some are not. People are not fungible and many who have done well have done so out of unusual talent and a level of focus and perseverance (and risk tolerance) that many do not have.

Incessant whining? People who pay 35% of their income plus create jobs might feel that they've done enough. When they hear others talking about jacking up their taxes, they get touchy. And, on the subject incessant whining, the noise one hears about the wealthy not paying "their fair share" grates a bit too.

As for helping to pay for the society that let them become wealthy, first, they already are paying for that society and, speaking for moi, I did most of the work myself, using the same tools the rest of us got, i.e. public education, working summers, etc.

[McKinneyTexas]

Not if it's paying for something that is an allowable business expense. Unless it's something that you intend to capitalize as an asset, in which case you usually get to deduct the periodic depreciation.

And you know what else gets paid pre-tax? The salaries of my employees.

Not correct. Loan repayments are not an expense item, ever. Now, there may be offsetting expenses, e.g. you buy a tractor for 60K and depreciate it under the applicable IRS schedule. In theory, the depreciation schedule should more or less match the loan repayment schedule. But we are talking about buying a business--some assets are depreciable, but I'm pretty sure the intangibles, executory contracts, customer lists, know-how, good will, etc. are not. You buy the stock of a company and you depreciate nothing.

[hairshirthedonist]

I am fine with the status quo and don't need to squeeze out every single penny.

Maybe I'm missing something, McTex, but your response seems to be irrespective of tax rates, which was the variable in question.

[Jesurgislac]

And, on the subject incessant whining, the noise one hears about the wealthy not paying "their fair share" grates a bit too.

Aww. You know, you really ought to live in a country with laws that suppress irritating poor people from complaining about how you pay less of your income proportionally than they do. In 18th century France, for example, you could have had those annoying peasants executed for irritating you about complaining that they not only work harder than you, they pay more taxes than you do. Vive la reverse revolution!

For god's sake, McKinney, have some dignity. If you don't want to pay your share, you have to accept that the people who do, get to complain about how you don't.

[wj]

but do you think there was a mass exodus from America during the 1990s when the pre-Bush tax cut rates prevailed?

If not, why would there be one now when the Bush tax cuts expire, and rates return to 1990s levels?

Actually, Eric, I was trying (obviously very unsuccessfully) to make a different point. One about hours worked vs. marginal compensation.

Because I not only think that there was not a mass exodus before the Bush tax cuts, I note that there was not a mass exodus, but was a massive economic expansion, during the 1950s -- when marginal tax rates, at the top levels, were far above their current level.

[Jacob Davies]

McKT: As opposed to bonds, money market, dividend income, an investor can put money in growth stocks, mutual funds where it simply appreciates over time, producing little if any taxable income. When sold, the profit is taxed at capital gains rates, much less than ordinary income.

Well, that's the purpose of the lower capital gains tax, to encourage exactly that kind of investment, right? I don't personally think it's necessary because the "internal compounding" effect of reinvestment already provides a tax advantage over bonds etc, but in any case it's not escaping the game, it's just moving investment from point A to point B, and point B may even be economically advantageous.

On the nonessential staff, point taken to some degree. Anything that produces a belt-tightening response has that potential and I can accept that personal income taxes on the owner might be one of those. Now as with personal service staff, the net employment effect may not be overall negative in a tax/spend scenario; some percentage of businesses lay off employees in response to a hike, but far from all of them, and the increased tax revenues are used for government hiring. (I'm not going to get into, here, private vs. public employment preferences, I certainly don't reflexively favor public employment.)

On the fairness of progressive taxation, the US tax code is only very mildly progressive when you take payroll taxes into account and even less so with the employer side included. Now, if we are willing to never talk about Social Security ever again - which I'd be happy with - then certainly income taxes are fairly progressive, though not nearly as much as they have been historically.

But in that case the federal budget has been far, far deeper in the red than we generally admit, and the revenue problems of the government are much larger than generally admitted. I actually think that is the best picture to use - repaying Social Security for all the money borrowed by the general fund is going to cost a lot - but it doesn't make for a good argument against raising income taxes. And raising low-end income taxes significantly has much worse welfare effects than raising high-end income taxes and has less potential to raise revenue. If I was king I'd shift the entire curve up but it would be a very small shift at the left side and a great big jump at the far right side, with several new brackets above $1m. I would make a good case that the real welfare effects of even a 10-20% change in tax rates on people making over $1m are nil. Not "small", but nil. At that point, income is just so many markers in a relative-status game, and an across-the-board proportionate reduction in the number of markers would have no effect on the recipients.

But really what this is about is that the money system is a social fiction, and at a certain level of inequality the fiction breaks down. When people's lives are being blighted by unemployment and insecurity, someone else's possession of certain numbers in a computer system no longer seems like a compelling reason for them to command the labor of thousands of others and exercise disproportionate political power. Luckily, and I mean this, we have the ballot box to substitute for guillotines here, but I don't think your argument against progressive taxation on fairness grounds is going to make a lot of headway if things keep on the way they've been going.

[Nate]

"As for helping to pay for the society that let them become wealthy, first, they already are paying for that society and, speaking for moi, I did most of the work myself, using the same tools the rest of us got, i.e. public education, working summers, etc."

As I'm pretty sure was mentioned before in another thread, the world you grew up in, with the tools you took advantage of (e.g. cheap, government subsidized public colleges) isn't around any more. Myself, I have multiple tens of thousands of dollars in student debt. Which I don't regret, and I'm making a lot more than before I went back to school, but that load of debt massively distorts the options that are available to me. Am I, or other people who've graduated with $25K+ in student debt going to go out and risk starting a business? Almost certainly not.

You grew up in a time when the government was a) taxing the very tippy top brackets MUCH higher, and b) using that money to invest in the physical and educational infrastructure we've been coasting on.

Meanwhile, the very top of the income distribution has been concentrating wealth in their own hands, and using the power they have through wealth and political connections to keep doing so. Which has been massively distorting the economy, and keeping regular people's wages stagnant. Putting tax rates at $250K back to what they were during the 90s isn't such a shock. Adding tax brackets above that, that kick in on incomes over say, $1 million, then $5 million, then $25 million, or something along those lines, at increasingly higher MARGINAL rates is one way to rectify things.

The other is like the endgame of a game of Monopoly, when one person's got all the colored slips of paper, and nobody else can do anything, and the game ends.

[CharlesWT]

"On the fairness of progressive taxation, the US tax code is only very mildly progressive when you take payroll taxes into account and even less so with the employer side included."

You might as well include the employer side since regardless of who pays the payroll taxes; all by the employee, all by the employer or split between them; the net effect is going to be about the same.

[Lewis Carroll]

"Loan repayments are not an expense item, ever."

The interest portion is. The remainder is treated as addition to your cost basis in the business, which you recover when you sell it. Or, as you take capital distributions rather than salary, effectively making part of your compensation *tax free* (or a return of principal if you prefer) while you receive it.

"You buy the stock of a company and you depreciate nothing."

And you pay nothing in taxes on its appreciation, assuming you can add to its value while you own it. And then you pay 15% tax on the gain when you sell it. Assuming again, that you add to its value so you can sell for more than you paid.

I don't see what's so oppressive.

[jrudkis]

As I'm pretty sure was mentioned before in another thread, the world you grew up in, with the tools you took advantage of (e.g. cheap, government subsidized public colleges) isn't around any more. Myself, I have multiple tens of thousands of dollars in student debt. Which I don't regret, and I'm making a lot more than before I went back to school, but that load of debt massively distorts the options that are available to me. Am I, or other people who've graduated with $25K+ in student debt going to go out and risk starting a business? Almost certainly not.

You grew up in a time when the government was a) taxing the very tippy top brackets MUCH higher, and b) using that money to invest in the physical and educational infrastructure we've been coasting on.

I think this is a good argument. Maybe someone here can expand it into a post. I think the argument can be made that the distortion of the boomers helped create the inequalities, but it would be interesting to see if the data matches the assertion.

[Sebastian]

"We don't tax people in this country, we tax incomes. We don't pick out a "small minority" of people and charge them higher tax rates for life."

This isn't much of a response to the problem. The problem is that people don't tend to make good cost/benefit analysis when they think they make someone else pay for what they want. It doesn't promote good government when people think they can vote for more benefits and never expect to have to pay more for them. See for example, California....

[JanieM]

The problem is that people don't tend to make good cost/benefit analysis when they think they make someone else pay for what they want.

Oh, you mean like this, where miners die so that top management can have higher salaries and shareholders can have higher profits?

Or where ordinary people struggle to get by on two jobs, because cost/benefit decisions get made in such a way that the cost is on the backs of low-wage people, and the benefit is to the $2 million-a-monthers?

[Jacob Davies]

I don't think you can take California as particularly relevant to how the federal government deals with taxation and spending. The cause of the problems here is the proposition system, which allows the citizenry to anonymously vote to raise spending and fail to vote to raise taxes with absolutely no personal consequences. It's everybody's fault and therefore nobody's fault; it's like being governed by 20 million spoiled children.

That is compounded by various propositions that mandate spending, make it virtually impossible to raise taxes, and impose term limits that mean that California lawmakers do not care in the slightest about long-term responsibility or re-electability.

The federal government is in a totally different situation. In a representative system with no term limits, lawmakers are much more concerned with electability and long-term consequences, and unlike California's electorate, they have to sign their name to each vote that they make.

California is screwed up, but not really a case of tax-and-spend gone wild.

Sure is pretty here, though.

[CharlesWT]

A lot of Californians and others continue to come to Texas. You can bet very few of them are coming here for the scenery, the climate or the culture.

[russell]

On the fairness of progressive taxation, the US tax code is only very mildly progressive when you take payroll taxes into account and even less so with the employer side included.

And even less so when you consider the difference in the tax rate on earned vs. unearned income.

The problem is that people don't tend to make good cost/benefit analysis when they think they make someone else pay for what they want.

And god almighty, does that ever cut two ways.

See also: private profit, public risk, in all of its many forms.

Seriously, people should consider this:

Meanwhile, the very top of the income distribution has been concentrating wealth in their own hands, and using the power they have through wealth and political connections to keep doing so.

and this:

But really what this is about is that the money system is a social fiction, and at a certain level of inequality the fiction breaks down. When people's lives are being blighted by unemployment and insecurity, someone else's possession of certain numbers in a computer system no longer seems like a compelling reason for them to command the labor of thousands of others and exercise disproportionate political power.

If wealthy people want to be part of the community known as the United States of America, they can share the hard times as well as the good times along with the rest of us.

If they don't want to step up to that, they can pound sand as far as I'm concerned.

They're being asked to pay 3 to 5 percent more on the dollars they make above a quarter of a million dollars a year. That is twenty thousand dollars, plus, a month.

A month.

And that's the very entry level that we're talking about. It goes up, and up, and up, from there.

Millions of people have lost their jobs, their homes, their life savings, their health insurance. They're f**ked.

You tell me who has a reason to cry.

Like everybody else in the world, some wealthy people are exceptionally productive. Lots of others are not.

Wealth per is its own reward, and doesn't merit any special consideration at a public policy level.

The nation needs the revenue, we raise revenue by and large through income taxes, and if we're going to increase tax rates net/net the overall least disruptive place to do so is by rolling back the top marginal rates to what they were in the 90's.

It's not going to send anybody to the poor house. By and large, it will be noise.

Just f**king get on with it. We need the money, and not solely, or even primarily, because stupid liberals are addicted to taxing and spending.

Two wars, insanely inflated and unaccoutable intelligence and defense budgets (and industries), a popped speculative bubble, insane risk taking in the financial sector, and a sizeable tax cut in the middle of it all.

That's why we need the money.

Want to reform all of that? Fine, I'm right there with you.

In the meantime, the bill for services already rendered so far is due.

Pony up.

[LongHairedWeirdo]

There are times when marginal tax rates have an effect on income, though. These are tricky, and they are a mixed bag of things.

Let's pretend we have a marginal tax rate of 90%. You're a small business owner. You could pay yourself an extra million dollars a year - but you'd only get to take home $100k. Would you do that? Or would you find some way to make your life better by spending that million?

Maybe you'd spread the extra mill among your workers. It's only ten cents on the dollar to you, but it's big bucks to them.

Maybe rather than offshoring your manufacturing to China, you'd keep it onshore. Sure, you could take home an extra hundred grand but, god... keeping the jobs here in the US doesn't cost you all that much.

And what if there's a worthy charity you could donate to? A million bucks might get you all kinds of nice accolades and considerations, but it's only ten cents on the dollar to you.

Okay, but, on the other hand - what if you had a chance to increase your business and build that extra million? *THIS* is where supply-siders says the big issue of lower taxes comes in. Would you knock yourself out trying to expand your factory to bring you in an extra million a year, when you'll only get to take home a hundred grand?

And, you'll probably "waste" the money on tax deductible expenses, rather than take it home and let it be taxed - lowering the rate might mean more income for the feds.

The trouble with the supply-siders is that they want you to think that people will create new, honest-to-goodness wealth, in great big piles, and benefit everyone along the way. This is like the delusion of communism, where everyone will work hard to give everyone a fair shake... it doesn't work in reality.

With low marginal tax rates, people want to keep that money, and not spend it on stupid business expenses like high employee salaries and expensive benefit plans. And with everyone trying to keep all the money they can (and thus, not pay stupid business expenses like high employee salaries...) it's always easier to get rich on cheap, breakable crap than on high quality merchandise.

Anyway: tax policy *matters* but low marginal rates aren't an unmixed blessing. There are other sides to the story.

In the main, you're right. The claim that the tiny increases in the upper rates that we're facing will kill productivity is laughable.

"I won't take home that extra million! I'll only get $610,000, not $650,000!" isn't a rational choice.

[Sebastian]

JanieM, I'm pretty sure that you didn't respond to me at all except to take a riff off of the word 'benefit'.

Jacob, I don't see how your comment contradicts what I said. California is exactly a case of people voting benefit increases without worrying about how they are getting paid.

And this I don't agree with at all "The federal government is in a totally different situation. In a representative system with no term limits, lawmakers are much more concerned with electability and long-term consequences, and unlike California's electorate, they have to sign their name to each vote that they make."

Are you thinking of a bunch of particular legislators? Because I don't think so. If so, wouldn't Democrats have done something about the filibuster already? And for that matter, isn't the Republican use of the filibuster a way to avoid signing their name to each vote? It seems to me that neither side is particularly in line with your statement.

[JanieM]

JanieM, I'm pretty sure that you didn't respond to me at all except to take a riff off of the word 'benefit'.

And I'm pretty sure I did, and I very much doubt you are really too dim to see how.

I was echoing hairshirt's earlier point: It resonates within the Millionaires Club for a different set of reasons, I guess, where taking other people's money is how you get there. (Sorry, I couldn't resist.)

The big "game" called the economic system is rigged in favor of the already wealthy and powerful. And it has been getting obscenely more so in the US these last few decades.

You, in turn, are in effect rigging the debate by isolating the discussion to the direct costs and benefits of taxes only. I am saying that the more valid debate would take into account the costs and benefits in the larger economic system, of which taxes are only one part.

But I am not going to debate you beyond this one clarifying/elaborating response; I have seen too many times how that goes. I just wanted to get the point out there because I am so desperately tired of this eternal sh*t about changes in tax brackets. Among other things, like the sui generis wonderfulness and deservingness of small business owners.

[russell]

Let's pretend we have a marginal tax rate of 90%.

No, let's not.

There is no proposal, from any quarter, for anything like this.

When there is, we can discuss it.

Other than that, it's academic wanking.

No offense intended toward or, hopefully, taken by long haired weirdo.

It's an interesting hypothetical, but it has no relationship to the actual reality we're talking about.

We're talking about rolling back a 5 percent or less tax cut on the highest two tax brackets, which will restore the tax regime to what it was ten years ago.

Nothing more and nothing less.

[Uncle Kvetch]

A lot of Californians and others continue to come to Texas. You can bet very few of them are coming here for the scenery, the climate or the culture.

As long as we're dwelling in the fact-free zone:

My partner's three sisters and their families all moved from Southern California to the San Antonio area over the course of about 10 years. They all moved for the same reason: cheaper real estate, allowing them to have bigger houses on more land. I've never heard any of them mention taxes as a factor in their decision.

[Uncle Kvetch]

Oh, and nice try, russell, but I think it's pretty clear that the reality is much too boring and mundane for any of our conservative friends to have actual opinions about.

[Eric Martin]

UK is right. Everyone I know that moved to Texas from California either did so because they had to for work-related purposes, or for cheaper land.

QED.

[Sebastian]

"You, in turn, are in effect rigging the debate by isolating the discussion to the direct costs and benefits of taxes only. I am saying that the more valid debate would take into account the costs and benefits in the larger economic system, of which taxes are only one part."

Well that isn't surprising, as Jacob Davies raised the topic of taxation. It also isn't surprising as the US government has a lot of abilities to coerce behavior that no corporation has available. It also isn't surprising as the methods by which you want to correct the injustices involves the rather strong iron hand of the government and the inaccessible-to-anyone-else threat of criminal action.

My critique isn't limited to taxation, though it does show up in very strong form there. People make better decisions--by which I don't mean any particular political valence--when they have to weigh the costs and the benefits.

A huge proportion of the really horrific decisions are made by people who weigh the benefits and don't feel they have to pay the costs. See for example war in Iraq--speculative benefits, costs to be paid by Iraqis, taxes to be lowered in the middle of it so the war doesn't appear to cost Americans anything while it happens. Or see utopian fantasies--costs heavily discounted because the end result is sooooooooo darn good. See also pollution, where the benefit of doing whatever you're doing to pollute is focused on because everyone else pays the cost of pollution.

I'm pretty sure you recognize the decision making problem in all those cases.

When large portions of your decision making process focuses on the 'benefit' you think you can force to occur, without attention to the costs because you can foist it on to someone else. This almost always allows the decision maker to engage in chasing all sorts of speculative benefits because they don't feel they need to bear the costs. If Bush had said "We need to go to war against Iraq to try to bring democracy to the Middle East and we will need to raise your taxes 10% to do it" the discussion would have been rather different.

But instead he hid the costs in deficit spending (foisting the costs on the future), unrealistically played up the benefits (screwed up the cost-benefit analysis because he hid the costs) and discounted the costs by fear-mongering (causing people to discount the costs they could see by playing up the possibility of nuclear war).

This was all very effective, because human beings don't look as closely when they don't think they have to pay the cost. I'll even sadly admit that I was taken in by parts of it.

Now in theory it is possible, that you personally, JanieM are never taken in by that kind of thinking. I doubt it. But it is theoretically possible. But most human beings are really bad at cost-benefit analysis in general, and much much worse when they think they push off the costs to other people.

So when talking about driving the power of the US government, which BTW is much more powerful than any corporation I'm aware of, it is appropriate to talk about the steps we take to minimize poor cost-benefit analysis.

And leading people to believe, that all or most of the benefits they want can be gained at no cost to themselves by raising taxes on the rich, isn't a good start. (Not only because it is factually incorrect, but also because it makes people ignore the costs and thus make worse decisions about what the benefits are worth.)

[Nate]

I'm always baffled by the claims that the government is stronger than corporations. In theory, perhaps, but in practice, the corporations, as concentrations of money and power (often interchangeable), are much better at getting what they want from the government than the rest of us.

Also, some of us think the "costs" of higher marginal taxation of extreme wealth would actually be beneficial, in discouraging aristocracy, encouraging investment in companies and society rather than "value extraction", reversing long-term distortions of our economy, and yes, increasing government revenue to pay off some of our massively misspent debt and invest in our country and our future.

Or higher taxes on the rich could be the bigger threat than corporate governance and influence in government that allows the corporations and wealthy to get what the benefits they want, and spread the costs to everybody else. But I don't find that at all convincing.

[hairshirthedonist]

Sebastian,

You are right that people tend to be freeer with other people's money to the extent that they can, but I'm not sure how to apply that to our federal tax code. What does it mean in terms of what our marginal rates should be and at what incomes they should kick in? Are you arguing against progressive taxation in general, or what?

How do you think increasing the highest marginal rates will manifest itself with regard to voter behavior in a way that will affect policy (in a bad way), realistically and specifically?

[hairshirthedonist]

or freer

[Sebastian]

"You are right that people tend to be freer with other people's money to the extent that they can, but I'm not sure how to apply that to our federal tax code."

I would propose something like this.

[Tony P.]

Seb,

Everybody tries to gain benefits for himself and shift the costs to other people. The rich are just better at it.

Getting yourself a big tax cut is a clear benefit to you. Getting yourself a big tax cut by charging it to the national debt imposes costs on everybody else. You get away with it because those costs are not immediately visible to those who bear them.

When Bush rammed his 2001 tax cut through on reconciliation (including the 2011 sunset provision which his former acolytes are now calling "the biggest tax increase in history") his rationale was that Clinton's surplus proved the government didn't need "your money". It's not like the national debt was already zero at the time, though. So the tax cut was very literally charged to the national debt.

I will resist repeating my modest proposal to privatize the national debt, even though it would address at least one piece of your concern about people voting to spend other people's money.

I will merely point out that, in an alternate reality, Bush could have pushed spending cuts commensurate with his tax cuts. I say "pushed", not "rammed through", because we both know he could not have pulled it off. But "pushed" is what he would have done had he been as principled as you are. What he was pushing for instead (and somewhat secretly at that point) was invasion of Iraq.

Anyway, Dubya did not push for spending cuts. You might instinctively believe that any spending cuts he could possibly propose would mostly hit the not-rich, e.g. Medicare beneficiaries or LIHEAP recipients or family farmers. But it's doctors, hospitals, and pharmaceutical companies who actually get the Medicare money; it's oil and gas companies that get the LIHEAP money; and last I checked a goodly portion of farm subsidies go to agribusinesses. And of course, military contractors get ALL their money from "government spending". So it's not blatantly obvious that ONLY the not-rich would have opposed big spending cuts.

Government spending puts money into big pockets as well as small ones. Tax cuts do, too, depending how they're designed. Each is, by the simplest arithmetic, an increase in the national debt. But nobody is willing to have an honest argument over who should owe how much of the national debt.

--TP

[russell]

And leading people to believe, that all or most of the benefits they want can be gained at no cost to themselves by raising taxes on the rich, isn't a good start.

Unless you want to go with Brett's fee for service model of governance, nearly everything that government does for any person is going to be paid, to a greater or lesser degree, by somebody other than the person being served.

That's just the way it works.

And there are damned few free riders. Anyone who works and earns anything resembling a living wage pays taxes, and pays enough taxes that they notice it.

The US government is pretty far in debt. We can raise more revenue, or cut services, or continue as we are.

We will likely do some combination of all three.

If we're considering raising revenue, the reasonable question is how do so in the least disruptive way.

There is a very strong argument to be made, and in fact I am making it, that that least disruptive way is to roll back the Bush tax cuts on the upper tax brackets.

I'm not arguing for that because I want to stick it to the rich. I'm arguing for that because, net/net, it is likely to be the least harmful regime.

I'm not really going to get much out of it. I have a job, I'm not gonna retire for at least another 10 or 12 years, I don't use Medicaid, I'm not in the military nor do I work for a military contractor, etc. etc. etc.

So, I'm not looking for a handout off of the back of Uncle Moneybags.

We need the money. The decisions that would have prevented us from needing the money are all in the past. They're done, and we can't go back in time and change them.

Worried about the federal debt? Raise revenue. And do so in a way that won't kill whatever feeble recovery we're seeing so far in it's tracks.

[Sebastian]

"There is a very strong argument to be made, and in fact I am making it, that that least disruptive way is to roll back the Bush tax cuts on the upper tax brackets."

That is fine. I have no argument with that. So there we are. But you want new programs? The argument isn't nearly as good.

[Nate]

Okay, seriously, Sebastian, you're saying that the argument for taxing the rich to pay for investments in the country, such as infrastructure or education, isn't very strong? (Which, as noted many many times, isn't the case here, but)

In light of a) the tremendous upward transfers of wealth over the past many years, b) the greater benefits that accrue to the investor class from things like transportation and educational infrastructure (How much does Wal-Mart make because of the national highway infrastructure? How did Bill Gates make because he could hire other smart people who had had access to good colleges?) c) the many years the middle and lower classes have subsidized tax cuts for the few, on the backs of the many, thanks to the Social Security IOUs and Reagan/Greenspan/Bush tax cuts?

Because I think the case there for extra, higher tax brackets on those with very high incomes (say, I dunno, $5 mil, or $2.5 mil, y'know, 50-100 times what the median American makes) even leaving aside the other arguments I've presented about the distorting affect of high inequality on our economy, the prevention of an aristocracy (which ties in even more with estate taxes, but), plus the general marginal value of a dollar, or a thousand, or a million, at certain levels.

[russell]

The argument isn't nearly as good.

I basically agree that the psychological phenomenon you're talking about is real, but I think we just have to live with it.

People who don't have kids pay property taxes that pay for schools.

People who aren't 65 years old pay taxes that fund Medicare.

People who never go to a national park and aren't particularly interested in them, pay for them.

People who live in the suburbs to some degree pay for mass transit, and people who live in the cities and don't even own cars pay for highways.

The list goes on, and on, and on, and on, and on.

There's no practical way to fund public programs, of any kind, that doesn't involve pretty much everyone paying for stuff they aren't interested in and may never use.

If we need to do something and there's a good argument for putting it in the public sphere, then we put it in the public sphere.

If we need revenue, you find the best way to raise revenue, where "best" may have little to do with apportioning a tax liability to each person that more-or-less corresponds to what they get out of the public sector.

That's just the way it works.

[hairshirthedonist]

Seb, I remember that post of yours from April. I don't really have a problem with it, but it's a fundamental change to the structure of the tax code. That doesn't seem to be on the table right now. The current discussion is about the continuation or expiration of the Bush tax cuts. (Though I did ask you a fairly general question, which you did answer, to be fair.)

But you want new programs? The argument isn't nearly as good.

Doesn't that depend on the new program? You would support a new program that you believed would provide both economic and general welfare benefits, wouldn't you?

That's part of the problem with applying your general principle about people wanting to spend other people's money. It leaves out that spending proposals are subject to scrutiny. I could propose a new hairshirthedonist subsidy, but even I wouldn't be in favor of it from a good-governance standpoint, even if I were in favor of it for personal financial reasons.

Proposals have merit or they don't, and that's what we need to try to assess. I'm not suggesting that human failings aren't going to sometimes get in the way, but I don't think the Bush cuts expiring, or even something somewhat more progressive, would exacerbate that problem significantly.

As far as your proposal goes, I'd probably implement something based on the same general concept, but work the math a bit differently. I'd suggest, as you do, that all rates go up or all rates go down during any given adjustment to meet revenue needs, so that everyone who pays taxes sees the effects of spending. I'd probably also make the progressivity greater during times of greater need for revenue. Instead of a BRT, perhaps I'd come up with a factor that determined both the slope and scale of the tax curve. But I'm just going to stop right here because I could go on describing (and probably tweaking along the way) the mathematics forever if I don't.

[Sebastian]

I'm saying that making political decisions based on foisting costs off onto other people is the way to make bad decisions.

Read my proposal. It isn't that the rich won't pay more, it is that you don't make lots of proposals just foisting off the cost on the rich. If you want new stuff, their taxes go up AND yours go up.

And that is fair. Voting to get more stuff for you and have other people pay for it all the time isn't fair and more importantly, won't lead to good cost benefit analysis about where government money ought to be spent.

You act as if it is obvious which 'infrastructure' should be funded. But of course it isn't obvious. And the money isn't unlimited. So you have to make choices. Those choices should be based on what benefits most compared to the cost incurred.

That kind of choice is best made when the people involved will be impacted by the costs NOT just the benefits.

You have no trouble recognizing the problem with say, pollution. If you let companies only reap the benefits of industrial activity, and never pay the costs, they won't make good choices because they get benefits without worrying about the costs.

It is exactly the same with government. If people can vote increased benefits while foisting the costs off on other people, they won't be as careful about choosing wisely, because being wise doesn't impact them very much while getting stuff for free does.

Do you not believe in the pollution case?

Do you not believe that it is applicable for some reason?

Are you willing to affirmatively commit to the notion that people make better choices when they don't have to pay for it?

Really?

[Jesurgislac]

Sebastian: Are you willing to affirmatively commit to the notion that people make better choices when they don't have to pay for it?

Repeatedly claiming that some people don't pay taxes, won't make it any truer.

You really need a better argument to justify your belief that poor people can't make good decisions.

(The "all they need is a rice cooker" claim wasn't a good argument either.)

I recognize that the chief justification for being a conservative is the belief that rich people are smarter and better and more responsible. But there's no evidence for this. It's just a right wing trope.