The hypocritical cliff

[moda0306]

  Austerity in the face of recession never works.

But increasing taxes and increasing spending does?

Yes.  After Pearl Harbor we ended unemployment almost over night.

If we had sent people stimulus checks of $1,000 every 6 months until the recession ended I believe we would be sitting at 6% or less unemployment right now with healthy-ish balance sheets and business owners would be doing quite well, whether taxes were at 35% or 39% on their income.  Inflation would be manageable.

I don't have time to provide the link right now but Paul Krugman went into a pretty simple, logical analysis as to why the stimulus was not big enough.  And he did this well before it had time to prove its effects.  I don't agree with everything he says but his analysis was pretty sound, or at least not something I've seen reasonably refuted on an analytical basis.

[Pointedstick]

  Austerity in the face of recession never works.

But increasing taxes and increasing spending does?

Yes.  After Pearl Harbor we ended unemployment almost over night.

Yes, taking all the men and either drafting them into the military or putting them in internment camps would have that effect, wouldn't it?

Let's not let full employment become a nonsensical end goal. The government has many means to increase employment. What we want is prosperity, not full employment. During those fully-employed war years, we had rationing, austerity, price controls, wage controls… the very opposite of prosperity.

[Benko]

Growing the private sector and decreasing unemployment is what I meant.

Krugman?  Seriously?

[moda0306]

The government interacts with the private sector.  A massive growth of either one could likely contribute to the growth of the other, considerably, depending on conditions and what the government is doing.

Yes. Krugman.  Really.  One of the few economists who has rightly predicted the state of inflation and interest rates, as well as the inadequacy of the stimulus, since 2008.  He also was very clear that he thought there was a huge housing bubble.

Further, I am confused as to how liquidationists think that we had a huge malinvestment problem, and therefore need to clear it, thereby, by definition, shrinking the private sector activity, but then lament about how hard business owners have it and think the government spending is at the cost of the private sector, and not contributing to the growth of it. 

[moda0306]

CBO: ADDS $3.9 TRILLION MORE TO DEFICIT...

That's compared to the curren law, which is with all the cliff legislation turned on.  I don't think anyone was assuming we'd actually have MORE austerity than the cliff we were told would be such a disaster if it became permanent law.

[moda0306]

http://krugman.blogs.nytimes.com/2011/0 ... -stimulus/

Here's Krugman's article following up on the inadequacy of the stimulus.  It's not a bunch of partisan drivel, but a pretty reasoned analysis. However, I'm open to any negative critique of this position based on sound analysis, not hyperbole.

[systemskeptic]

The problem is separate taxes on capital gains, pure and simple. 

1. You have $0 in net worth and work your ass off 70 hours a week to earn $450,000 a year and you pay 35% (now 39%) in taxes.

2. You are unemployed and sit on your ass drinking cocktails at the beach with a $10M net worth collecting $400,000 in dividend checks and you only pay a 15% rate (now 20%).

Is this a proper way to design a society?

[MachineGhost]

No one pays marginal income tax rates.  The effective tax rate is around 20% average even when the top marginal rate was was 91%.  The only thing that has real economic impact is net spending increases or decreases, not reductions in projected baseline spending increases ("spending cuts") or vice versa.

Between constant tax revenues as a percentage of GDP, constant effective tax rates and spending cuts that are never real cuts, its all smoke and mirrors both sides of the aisle exploit to keep the game going.  Who's having the last laugh all the way to the bank, really?

[Storm]

The problem is separate taxes on capital gains, pure and simple. 

1. You have $0 in net worth and work your ass off 70 hours a week to earn $450,000 a year and you pay 35% (now 39%) in taxes.

2. You are unemployed and sit on your ass drinking cocktails at the beach with a $10M net worth collecting $400,000 in dividend checks and you only pay a 15% rate (now 20%).

Is this a proper way to design a society?

This is a contrived analogy designed to produce an emotional response.

1. You work, make money, and pay taxes (some of the lowest in the first world, I might add).
2. You already paid taxes on the $10M net worth when you earned it in the first place, so why should you pay taxes twice?  The inheritance tax is a good example of double taxation.

[MediumTex]

And then you have people like Warren Buffett who has never paid a dime in taxes on probably 90%+ of his wealth.

[Storm]

Good article on Business Insider about how the GOP is winning:

http://www.businessinsider.com/republic ... ing-2013-1

tl;dr - One of the main goals of the GOP platform has been to make the Bush tax cuts permanent - 99% Mission Accomplished!

If you subscribe to the tea party strategy of "starve the beast" you're also looking pretty good because the US is now collecting only 17% of GDP in revenue where we historically have collected 19%.

[MachineGhost]

If you subscribe to the tea party strategy of "starve the beast" you're also looking pretty good because the US is now collecting only 17% of GDP in revenue where we historically have collected 19%.

But that's only because we're in a recession or a tepid recovery.  It will even rebound to above the 19% GDP average once the economy gets going again, if ever.

The Laffer Curve has done more to damage the Republican Party than anything else.  To think that fiddling with marginal income tax rates will increase/decrease revenues ignores the evidence and confuses correlation with causation.

[Storm]

If you subscribe to the tea party strategy of "starve the beast" you're also looking pretty good because the US is now collecting only 17% of GDP in revenue where we historically have collected 19%.

But that's only because we're in a recession or a tepid recovery.  It will even rebound to above the 19% GDP average once the economy gets going again, if ever.

The Laffer Curve has done more to damage the Republican Party than anything else.  To think that fiddling with marginal income tax rates will increase/decrease revenues ignores the evidence and confuses correlation with causation.

Very good point.

The Laffer curve applies to all types of things, like hardware failure rates over time, etc:

[systemskeptic]

This is a contrived analogy designed to produce an emotional response.

1. You work, make money, and pay taxes (some of the lowest in the first world, I might add).
2. You already paid taxes on the $10M net worth when you earned it in the first place, so why should you pay taxes twice?  The inheritance tax is a good example of double taxation.

There is a grave error in your assumptions.  You are viewing the world as if people earn an income to become rich.  In reality, almost all large wealth these days is created via capital gains.

Did Warren Buffet become a billionare earning a high wage? No.  99% of his wealth is capital gains, on which taxes are never paid until you sell.  Even then he only pays 15% on it, but he has already stated he plans to donate almost all of it to charity -- aka ~50 Billion dollars that never have taxes paid.

Why should a billionaire pay 0-15% when someone in the middle class pays 40+%?  The progressive tax system is an illusion, there are only two tax brackets:  capital gains and income.  Those without capital pay far more in taxes because they are forced to pay income tax (actually perform work). 

Our current system of Capitalism is in a word, disgusting.

[Storm]

This is a contrived analogy designed to produce an emotional response.

1. You work, make money, and pay taxes (some of the lowest in the first world, I might add).
2. You already paid taxes on the $10M net worth when you earned it in the first place, so why should you pay taxes twice?  The inheritance tax is a good example of double taxation.

There is a grave error in your assumptions.  You are viewing the world as if people earn an income to become rich.  In reality, almost all large wealth these days is created via capital gains.

Did Warren Buffet become a billionare earning a high wage? No.  99% of his wealth is capital gains, on which taxes are never paid until you sell.  Even then he only pays 15% on it, but he has already stated he plans to donate almost all of it to charity -- aka ~50 Billion dollars that never have taxes paid.

Why should a billionaire pay 0-15% when someone in the middle class pays 40+%?  The progressive tax system is an illusion, there are only two tax brackets:  capital gains and income.  Those without capital pay far more in taxes because they are forced to pay income tax (actually perform work). 

Our current system of Capitalism is in a word, disgusting.

I disagree.  If capital gains taxes were charged before gains were even realized the government would soon own every dollar produced by capital flows.  You can't just double, triple, quadruple, or quintuple tax the same income over and over again and expect anyone to invest money any more.  The smart money would just flow to international equity markets that don't have such silly tax codes.

This is why the proposals to implement a Wall Street transaction fee are silly.  If we implement a tax like that, not only will it hit every individual person's retirement accounts, the smart money will simply choose to trade in London or Singapore and avoid the tax, which would be hugely detrimental to the US economy as a whole.

[systemskeptic]

No one pays marginal income tax rates.  The effective tax rate is around 20% average even when the top marginal rate was was 91%.

As MachineGhost correctly states, the upper class does not pay income tax because income is such a small portion of their wealth stream.  What's worse is most  lower/middle class looking at the progressive tax system believe that wealthy are taxed at a higher rate.  In reality they are not.  Here is a sample news title:

"In 2013, the Top 1% Will Pay Their Highest Total Tax Rate Since 1979"

Yet this is inaccurate because again, nobody actually pays the marginal rates because the 1% finance their lifestyle with capital gains/dividends not earned income as the lower class do.

So why is unearned income (of the rich) taxed at 15% and earned income (of the poor) taxed at 43%?  It should be the other way around IMHO.

[MediumTex]

I cringe when I hear people talk about the number of households that pay no tax at all, when everyone pays Social Security tax up to the wage base.

If more of the working class knew how the Social Security wage base worked I think that there would be a lot more political pressure to apply the payroll tax to all earnings, not just the first $100,000 or so.

I'll bet if you added up the tax burden that all Americans face in the form of income taxes, payroll taxes, property taxes, sales taxes and other government sponsored wealth confiscation schemes, you would see a much more equitable picture across all income levels.

[systemskeptic]

I disagree.  If capital gains taxes were charged before gains were even realized the government would soon own every dollar produced by capital flows.  You can't just double, triple, quadruple, or quintuple tax the same income over and over again and expect anyone to invest money any more.  The smart money would just flow to international equity markets that don't have such silly tax codes.

If I buy $1000 of AAPL today, sell it tomorrow for $1000 cash, and use those shares to buy $1000 of VTI the day after, where is the tax on any of these "capital flows."  From what I can see the tax owed is $0 unless there is a profit (income). 

If I buy $1000 of AAPL today and sell it in 20 years for $10M, I pay a 15% tax rate.  Someone else working for 20 years to earn $10M via a salary pays 45% all along the way.  Both are an income [increase in net worth].  So how do you justify the tax difference?

It's okay if you believe that the (under capitalized) poor should pay tax but the (well capitalized) rich shouldn't, I guess, but is that really your position?

[Pointedstick]

At the federal level, discussions of who should pay what tax on which income always turn silly because the government doesn't actually need the money anyway. Taxes are just a tool to reduce inflation and create a demand for the currency. But right now, inflation is incredibly low and demand for dollars is ensured by all sorts of other things we're fond of discussing, such as a big military and having the world's reserve currency. I posit that federal taxes could drop to 0% on everyone without any real problem.

[systemskeptic]

If more of the working class knew how the Social Security wage base worked I think that there would be a lot more political pressure to apply the payroll tax to all earnings, not just the first $100,000 or so.

Exactly.  So someone making $10,000 a year pays 6.8% in payroll tax and someone making $10M pays 0.068% (aka zero) because it is capped at $100k.  The guy barely making minimum wage is paying 100x more in payroll taxes.

[MediumTex]

I disagree.  If capital gains taxes were charged before gains were even realized the government would soon own every dollar produced by capital flows.  You can't just double, triple, quadruple, or quintuple tax the same income over and over again and expect anyone to invest money any more.  The smart money would just flow to international equity markets that don't have such silly tax codes.

If I buy $1000 of AAPL today, sell it tomorrow for $1000 cash, and use those shares to buy $1000 of VTI the day after, where is the tax on any of these "capital flows."  From what I can see the tax owed is $0 unless there is a profit (income). 

If I buy $1000 of AAPL today and sell it in 20 years for $10M, I pay a 15% tax rate.  Someone else working for 20 years to earn $10M via a salary pays 45% all along the way.  Both are an income [increase in net worth].  So how do you justify the tax difference?

It's okay if you believe that the (under capitalized) poor should pay tax but the (well capitalized) rich shouldn't, I guess, but is that really your position?

For whatever reason, lots of people like the idea of taxing income derived from labor at a higher rate than income derived from allocations of capital (i.e. investments).

I don't fully comprehend the distinction myself.  It seems like income ought to be considered income, regardless of the source.

If people say that higher taxes on capital gains have a chilling effect on the allocation of capital, wouldn't it also be true that higher taxes on ordinary labor-derived income should have a chilling effect on people's willingness to learn how to provide profitable personal services?  Obviously, this doesn't appear to be the case.  I've never heard a person say they would have become a c-suite executive or skilled surgeon, except the taxes they would have to pay on their incomes would just be too high so they instead opted to become an unskilled laborer.

Why would higher taxes have a chilling effect on the allocation (and creation) of capital but not the allocation (and creation) of labor?

When you look at it a certain way, there is really no distinction between labor-derived income and investment-derived income.  They are both the result of the allocation of certain types of capital.  It seems odd to me that we don't tax these different forms of income the same way if they are all basically the result of capital allocation decisions.

[systemskeptic]

When you look at it a certain way, there is really no distinction between labor-derived income and investment-derived income.  They are both the result of the allocation of certain types of capital.  It seems odd to me that we don't tax these different forms of income the same way if they are all basically the result of capital allocation decisions.

Agreed 100%.  I think Capitalism is a great way to allocate resources, but the current tax laws have it flipped on it's head, over-taxing labor and under-taxing capital. 

If you want to make an argument about encouraging production/economic activity you should remove all taxes from income (increasing the world's capital) and instead levy a tax on excessive wealth (hoarding the world's capital). 

One thing pure libertarian/capitalists get wrong is that they forget the earth is a shared resource.

[Storm]

I disagree.  If capital gains taxes were charged before gains were even realized the government would soon own every dollar produced by capital flows.  You can't just double, triple, quadruple, or quintuple tax the same income over and over again and expect anyone to invest money any more.  The smart money would just flow to international equity markets that don't have such silly tax codes.

If I buy $1000 of AAPL today, sell it tomorrow for $1000 cash, and use those shares to buy $1000 of VTI the day after, where is the tax on any of these "capital flows."  From what I can see the tax owed is $0 unless there is a profit (income). 

If I buy $1000 of AAPL today and sell it in 20 years for $10M, I pay a 15% tax rate.  Someone else working for 20 years to earn $10M via a salary pays 45% all along the way.  Both are an income [increase in net worth].  So how do you justify the tax difference?

It's okay if you believe that the (under capitalized) poor should pay tax but the (well capitalized) rich shouldn't, I guess, but is that really your position?

For whatever reason, lots of people like the idea of taxing income derived from labor at a higher rate than income derived from allocations of capital (i.e. investments).

I don't fully comprehend the distinction myself.  It seems like income ought to be considered income, regardless of the source.

If people say that higher taxes on capital gains have a chilling effect on the allocation of capital, wouldn't it also be true that higher taxes on ordinary labor-derived income should have a chilling effect on people's willingness to learn how to provide profitable personal services?  Obviously, this doesn't appear to be the case.  I've never heard a person say they would have become a c-suite executive or skilled surgeon, except the taxes they would have to pay on their incomes would just be too high so they instead opted to become an unskilled laborer.

Why would higher taxes have a chilling effect on the allocation (and creation) of capital but not the allocation (and creation) of labor?

When you look at it a certain way, there is really no distinction between labor-derived income and investment-derived income.  They are both the result of the allocation of certain types of capital.  It seems odd to me that we don't tax these different forms of income the same way if they are all basically the result of capital allocation decisions.

I agree with you, but earlier systemskeptic was talking about how it was not fair that Warren Buffet doesn't pay taxes even though his stock increases in value every year (until he sells it).  There seems to be a huge difference between saying "capital gains should be taxed at the same rate as regular income" and "capital gains should be taxed before the gain is realized."

Also, to some extent, having capital gains taxed at a lower rate makes sense, because the original principal investment was always earned in some way or another, so the principal has already been taxed once.

What does seem a little bit strange to me is that capital gains on housing is not taxed.  You can make $250,000 profit flipping a home and not pay 1 cent of tax.  This is a straight up bribe to the housing lobby if I've ever seen one.

[systemskeptic]

I agree with you, but earlier systemskeptic was talking about how it was not fair that Warren Buffet doesn't pay taxes even though his stock increases in value every year (until he sells it).  There seems to be a huge difference between saying "capital gains should be taxed at the same rate as regular income" and "capital gains should be taxed before the gain is realized."

Also, to some extent, having capital gains taxed at a lower rate makes sense, because the original principal investment was always earned in some way or another, so the principal has already been taxed once.

What does seem a little bit strange to me is that capital gains on housing is not taxed.  You can make $250,000 profit flipping a home and not pay 1 cent of tax.  This is a straight up bribe to the housing lobby if I've ever seen one.

Storm,

If you re-read my comment about Buffet I think you find that I was not suggesting to tax unrealized gains as income, that is clearly ridiculous.  Rather that someone like Buffet can amass a great fortune and in his own words "pay less tax than his secretary." 

With regards to your statement "having capital gains taxed at a lower rate makes sense, because the original principal investment was always earned in some way or another, so the principal has already been taxed once"

I think you will also find this a poor argument upon further reflection.  All incomes have a source, it does not matter whether it is the previous source or future source...only whether they are taxed at different rates.  Maybe think on it some more...

As far as the tax exceptions on housing, you are exactly right.  If you apply the same reasoning to the capital gains / earned income argument I think you will find they are identical in concept.  The point is that all income [increase in net worth] should be taxed the same way, IMHO.

[moda0306]

Storm,

Just because the principal has been taxed doesn't mean income derived from the borrowing of that principal to others should not be taxed.  I've wrestled with this one, but let's pretend it's not money for a second.

Let's say you purchase land.  You can't depreciate land, so you've used after-tax money.  If you borrow that land to some guy to put a trailer park on and he pays you rent, should that rent not be taxable income?