The hypocritical cliff

[doodle]

I think an intresting question as well is what primary purpose does taxation serve when the government doing the taxing is taking back the very money that only it has the ability to create?

Taxation gets turned from a practical issue into one that possesses moral overtones that sully the discussion. I think we should start with the basic question of why does taxation exist by government in the first place efore we get into taxation models. What is taxations real effect and purpose within the economy?

[Storm]

MachineGhost, 

You said "So you are investing with a lesser amount of capital than if you had no income taxes to pay; and your subsequent return is also lower before you owe the second layer of capital gains taxes."

If this statement was true, than even if you only had a single tax (capital gains) that is a double/triple/infinite tax because

"So you are investing with a lesser amount of capital than if you had no capital gains taxes to pay; and your subsequent return is also lower before you owe the second layer of capital gains taxes."

It should be clear why that statement is not a proof of double taxation but merely a product of new income being taxed... In the first case it is two types of sources (income and capital gains) in the second it is the same type of source but different instances (capital gains and capital gains).  Is that a double tax? No that is just a tax on new income...

Systemskeptic, if it is not a double tax, then why can't I take any income I make, direct it towards equity investing pre-tax and then pay full income tax on the capital gains?

What MG said is true - if I earn $100,000 and pay a 25% tax rate, then invest the remaining $75,000 I only have 75% of my labor capital working for me in the investment market.  If that capital returns 10%, or $7,500, then I have to pay 15% capital gains tax, or $1,125, then I have only made $81,375 total.  The government earned $26,125 of tax revenue from me.

In the other way, if I was able to put the full $100,000 of my labor capital towards equity investments, make 10% return, and pay 25% tax on $110,000, I've made $82,500 total.  Also, the government actually came out ahead because they got $27,500 tax revenue.

So, this double and triple taxation actually harms the free market because the market is more efficient at allocating capital than the government is.  In the second example, both individual and collective earned more money.  Also, the economy was benefited more because the full 100% of my labor capital was allowed to flow into investments, creating more opportunities for others to earn labor capital (aka jobs).

If you fail to understand this you probably fail to understand basic economics.  I hate to say it, but the emotional response "tax the rich because they can afford it" really has negative effects on everyone.  We should be striving to reduce limitations on capital flows.

In fact, everyone should have the option to direct 1-100% of their labor capital towards any other investment - equity investment, bonds, savings, etc, without paying a tax, and should only be taxed when they realize the gains and cash out their investment.  I would completely get behind a flat consumption tax because it would allow this.

[moda0306]

Storm,

That all assumes there is absolutely no basis for income taxation.  If I have to pay some money into federal tax, it's because they provide services to me that warrant the tax. Or at least that's the general assumption (if we disagree on that, then we should be focused on the legitimacy about tax #1, not worrying about double taxation).  So if the guy only has 75 cents on the dollar to deal with, it's because that's all he SHOULD have since he has to pay the Feds for all their services.

Once he has that capital, he's getting what he should get (after another set of tax) because be paid what he should have paid at both decision points.

I'd ask again, other than passive investments, when is this ever so clean as physical capital vs human capital.  If I ran a business and bought a computer as a tool, I'm going to try to claim as much of the income as a "return on capital" and as little as possible as salary.

As an accountant, trust me, the distinction would make things incredibly complex (or manipulated).

[doodle]

Moda,

This issue of taxation though should be somehow indexed to inflation and demand within the economy, no? Why should we be taxing anyone at all (other than for redistributive purposes) when private sector aggregate demand is too low to result in full employment? The economy is perfectly capable of handling the sevices provided by the feds and private demand when there is 10 percent unemployment. There is no need to tax in this scenario to pull inflationary pressures out of economy. What purpose does the tool of taxation serve in the economy? Until that is agreed upon, how can we decide how the tool should be utilized?

[doodle]

Take the estate tax for example. We are talking around the issue here when we discuss whether it is double taxation or not. The federal government doesnt implement this estate tax because it needs the revenue. The estate tax exists because there is a fundamental question of whether a human should be able to obtain wealth by the mere luck of being born into the right family. This touches on issues of the foundation of what constitutes a meritocracy. Taxes in my mind exist for two reasons...

1. To pull inflationary pressures out of economy

2. To shape the economy and society to function in a more just manner

Double, triple, taxation isnt adressing the heart of the issue IMHO

[Pointedstick]

Don't forget #3: to create a demand for the currency. I would argue that #3 isn't especially relevant in the USA due to our having the world's reserve currency and an agressive foreign policy backed by a gigantic military, and #1 isn't relevant right now, which basically leaves your #2.

[Pointedstick]

Although in all fairness, I think moda's right that there's another reason too, a #4 perhaps: giving people who don't understand MR (i.e. nearly everybody) a sense of having some "skin in the game" when it comes to government spending.

[doodle]

So adressing number 2, then Americans should ask if the gross inequality in income distribution in our country and the corrpution it is having on our democratic process is beneficial to our society's health? Should top CEOs be making 200 to 300 times what an average worker makes when only 40 years ago they ran companies making just 20 to 30 times? Is a concentration of wealth among a small elite corrosive to our society and its values? If yes, then taxation or market reform must be implemented unless we want to keep pushing things until we have a social breakdown and revolution like what happens throughout much of south and central America on a regular basis.

[Storm]

Storm,

That all assumes there is absolutely no basis for income taxation.  If I have to pay some money into federal tax, it's because they provide services to me that warrant the tax. Or at least that's the general assumption (if we disagree on that, then we should be focused on the legitimacy about tax #1, not worrying about double taxation).  So if the guy only has 75 cents on the dollar to deal with, it's because that's all he SHOULD have since he has to pay the Feds for all their services.

Once he has that capital, he's getting what he should get (after another set of tax) because be paid what he should have paid at both decision points.

I'd ask again, other than passive investments, when is this ever so clean as physical capital vs human capital.  If I ran a business and bought a computer as a tool, I'm going to try to claim as much of the income as a "return on capital" and as little as possible as salary.

As an accountant, trust me, the distinction would make things incredibly complex (or manipulated).

There really is not much basis for tax, other than it legitimizes the government's claim on the property we all live on.  You think you pay tax money for services, but the reality is that the government produced the money in the first place and you're just giving it back to them.  I keep going back to the british colony model.  You move in, establish a hut tax of 10 pounds sterling per year, then conscript a military and pay them 5 pounds sterling a month salary.  Their shiny british silver money is only worth something because the villagers need to barter it to pay their hut tax.  If they don't pay the hut tax, they get evicted by the same military you hired.

Now, let's say your colony gets really well established and you don't need as much military because there aren't many external threats.  So, the amount of money you're paying out isn't enough for all of the villagers to get enough to pay their hut taxes.  Deflation sucks, so you decide to create additional services: fire, police, teachers, schools, etc, and their salary all comes from the government as pounds sterling.  Now there are more shiny coins that the villagers can barter goods and services for to pay their hut tax.

Population growth is large, so you need to get even more money into the system - there are just too many huts now!  Public works projects, and roads get built and these projects are paid for in pounds sterling.

The model works, and it describes MMT/MMR.  I know you get this, so I'm probably preaching to the choir.

Really, what I'm getting at is that the reason we pay tax in the first place is to legitimize the government.  The services they provide are necessary to provide a vehicle for getting the money into circulation in the first place, so it can be paid back to them in the form of taxes.  I only look at taxes as a means of taking excess money supply out of the system so that it doesn't create excessive inflation.

In this case, the tax rate could be 0% if there is no inflation, but if no money was coming out of the system, we might need some levers to pull to deflate the economy.  The tax rate could be cranked up as needed to effectively regulate inflation.

What I'm proposing is that we end the distinction between different types of gains, but allow gains to accumulate untaxed until they are consumed in some way.  Perhaps what you're saying is that people will just consume things and everything will be a "business expense."  That's a legitimate concern, but it already happens anyway.  The IRS considers a business that doesn't make money for several years a hobby.  How would this be any different?

[Storm]

Take the estate tax for example. We are talking around the issue here when we discuss whether it is double taxation or not. The federal government doesnt implement this estate tax because it needs the revenue. The estate tax exists because there is a fundamental question of whether a human should be able to obtain wealth by the mere luck of being born into the right family. This touches on issues of the foundation of what constitutes a meritocracy. Taxes in my mind exist for two reasons...

1. To pull inflationary pressures out of economy

2. To shape the economy and society to function in a more just manner

Double, triple, taxation isnt adressing the heart of the issue IMHO

Really good points, doodle.  I think the average american thinks "taxes pay for government services," when the reality is that #1 is the real reason.  #2 is also great as we really can shape society through tax credits.  If you don't doubt this, look at the stranglehold that real estate and housing has on the overall economy, and ask yourself if the mortgage interest deduction and the capital gains exemption have anything to do with it (they very much do).

We would also be very wise as a society to reflect upon whether our policies in #2 above are having the desired effect.  Is it desirable to live in a world where housing costs as much as it does in some areas of the country?  Are those housing prices the result of natural market forces, or distortions due to behavior caused by manipulation of the market through tax codes?

[systemskeptic]

Systemskeptic, if it is not a double tax, then why can't I take any income I make, direct it towards equity investing pre-tax and then pay full income tax on the capital gains?

What MG said is true - if I earn $100,000 and pay a 25% tax rate, then invest the remaining $75,000 I only have 75% of my labor capital working for me in the investment market.  If that capital returns 10%, or $7,500, then I have to pay 15% capital gains tax, or $1,125, then I have only made $81,375 total.  The government earned $26,125 of tax revenue from me.

In the other way, if I was able to put the full $100,000 of my labor capital towards equity investments, make 10% return, and pay 25% tax on $110,000, I've made $82,500 total.  Also, the government actually came out ahead because they got $27,500 tax revenue.

So, this double and triple taxation actually harms the free market because the market is more efficient at allocating capital than the government is.  In the second example, both individual and collective earned more money.  Also, the economy was benefited more because the full 100% of my labor capital was allowed to flow into investments, creating more opportunities for others to earn labor capital (aka jobs).

If you fail to understand this you probably fail to understand basic economics.  I hate to say it, but the emotional response "tax the rich because they can afford it" really has negative effects on everyone.  We should be striving to reduce limitations on capital flows.

There is no argument to be made about someone's personal philosophy because that is an opinion, but regardless of what you believe it should be logically congruent.  I still do not think this view is logical for the reasons mentioned, but let's assume it is and evaluate how it fits with the philosophical priorities you listed in your post:

1. "the market is more efficient at allocating capital than the government is"

2. "the economy was benefited more because [more] of my labor capital was allowed to flow into investments, creating more opportunities for others to earn labor capital"

If your argument for a lower capital gains rate is that it is a double taxation, and the economy is harmed by high rates, lets flip your example around.  If we flip the rates for income and capital gains (which attenuates wealth inequality as opposed to amplifying it):

"If I earn $100,000 and pay a 10% tax rate, then invest the remaining $90,000 I only have 90% of my labor capital working for me in the investment market.  If that capital returns 10%, or $9,000, then I have to pay 25% capital gains tax, or $2,225, then I have only made $9295.  The government earned $12225 of tax revenue from me."

OK.  So with the rates flipped, more money is invested in the economy.  If your goals are the two above, why are you focusing on a lower capital gains rate with respect to the income tax rate, instead of the other way around? 

[systemskeptic]

Keep in mind there are political and practical constraints to offering different tax rates on different sources.  Today, capital gains rates are much lower so what does Warren Buffet do?  He does not receive a salary or payout dividends on Berkshire.  If you could somehow muster the political/social/cultural force to reduce income taxes to 0% (good luck) then what do you think Warren Buffet would do? 

Probably pay himself a massive salary and let Berkshire shares stagnate.

Moda already mentioned how people classify things to evade taxes, this is always true when you have different rates -- that is called arbitrage.  The only solution is to have equal rates.  Ironically, the most practical solutions are often the most logically congruent and philosophically desirable.

[Storm]

OK.  So with the rates flipped, more money is invested in the economy.  If your goals are the two above, why are you focusing on a lower capital gains rate with respect to the income tax rate, instead of the other way around?

While I do believe capital gains should be taxed less than income, I'm also saying that if we were to stop the ways in which capital gains are double taxed, this wouldn't be necessary (we could charge the same rate for all income, just only tax when the income is realized rather than before it is reinvested).

Effectively this would be like an IRA plan that anyone could use except you had no annual contribution limits, contributions are never taxed, and you can withdraw at any time and pay (a full income, not reduced capital gains) tax at time of withdrawal.

This would encourage saving and investing, as well as avoiding double taxation of income.  Go ahead and tax the lifetime savings vehicle at the same rate as labor capital.  It would also avoid the criticism that we have right now about the wealthy paying a lower income tax.  They would pay a very high tax but it would be linked more to consumption rather than penalizing people that merely want to sell one equity and buy another.

[RuralEngineer]

I thought this was interesting.  I'm not sure how any liberal manages to keep a straight face when talking about how the U.S. doesn't tax enough.  There are only three countries that outrank us when taking corporate and capital gains into account.  Two of those are France and Italy, surely shining examples of sound economics.  I profess a complete lack of knowledge regarding Denmark. 

We're way above average for integrated capital gains (50.8% vs 41.7%).  Even when disregarding capital gains, we're still above average (19.1% vs 17.4%).

http://www.washingtonpost.com/blogs/won ... wo-charts/

[Gumby]

I'm not sure how any liberal manages to keep a straight face when talking about how the U.S. doesn't tax enough.

It's easy to keep a straight face because the chart (and the study it came from) is misleading.

The chart assumes that U.S. corporate income is taxed at the full 35% statutory tax rate. But, the effective tax rate on corporate income is always lower because of cross-border tax planning, deductions and credits, etc.

[doodle]

I thought this was interesting.  I'm not sure how any liberal manages to keep a straight face when talking about how the U.S. doesn't tax enough.  There are only three countries that outrank us when taking corporate and capital gains into account.  Two of those are France and Italy, surely shining examples of sound economics.  I profess a complete lack of knowledge regarding Denmark. 

We're way above average for integrated capital gains (50.8% vs 41.7%).  Even when disregarding capital gains, we're still above average (19.1% vs 17.4%).

http://www.washingtonpost.com/blogs/won ... wo-charts/

I dont think of myself as a liberal per se, but it is hard to talk about what is "enough" taxation until  we are clear on why we are taxing to begin with. Are there inflationary pressures? No, okay...one less reason to tax. Are there certain social or economic issues that we want to shape? If yes, then how should tax be implemented to best facilitate that particular end? If the government is trying to encourage investment, then I dont see how it makes much sense to tax capital gains on investment. I would argue that taxation should serve to maintain a certain amount of equality within our country as this is healthy for a democratic society. When inequality of wealth grows too great i think that societies begin to splinter which overall leads to lowered living standards for everyone. We need to get past the idea of taxation as moral or immoral and start asking ourselves how we can use this tool to foster economic and social strength. Extreme concentration of wealth in a small group (even though legitimately obtained) invites potential problems for society at large IMHO.

[Pointedstick]

I'm not sure how any liberal manages to keep a straight face when talking about how the U.S. doesn't tax enough.

It's easy to keep a straight face because the chart (and the study it came from) is misleading.

The chart assumes that U.S. corporate income is taxed at the full 35% statutory tax rate. But, the effective tax rate on corporate income is always lower because of cross-border tax planning, deductions and credits, etc.

Couldn't that be said of any country, though? I don't think that only applies to the USA. It's just like our income taxes; nobody really pays the marginal income tax rates, but that doesn't mean they shouldn't be lowered for the sake of fairness to the people who can't quality for all the credits, exemptions, and deductions. Being a debt-free childless single renter exposes you to a LOT more taxes than a married couple with a child, a mortgaged home, and student loan payments, for example.

[Xan]

It is truly painful to watch both sides argue about what combination of spending and tax moves should be made to tackle "our huge national debt problem."

We need a trillion dollar coin, now.  I can't stand to listen to it any more. The political theater alone would be well worth the move.  Could you imagine what the deficit scolds would say?

Maybe it'll happen!
http://abcnews.go.com/blogs/politics/20 ... nd-around/

http://www.aei-ideas.org/2012/12/how-co ... seriously/

[MachineGhost]

System's making good points...

Maybe English isn't his first language, but he seems to have completely different referrants for semantics than common, everyday usage.

What if you have an owner of a factory?  He works 60 hours per week and makes millions every year?  How do you separate his human capital from his investment capital?  Why should one be taxable and the other not?

If the owner doesn't draw a wage salary, then he is taking a greater risk than normal because he is acting as an "double entrepreneur" and commingling his labor with capital.

Also, this idea that consumption should be a taxable event instead of income seems a bit arbitrary.  Capital, labor and Income is simply the other side of consumption.  No matter the basis of taxation, we're still faced with the dilemma of what counts as taxable income or what counts as a taxable sale. This isn't as easy as some would assume. For instance, when a rich dad pays his trust fund baby for not snorting coke, somehow that's not taxable income to the kid.  However, if that same kid works a 9-5 job that is taxable income.

I think there are two issues here: pro-growth and pro-fairness.  Pro-growth is accomplished by taxing consumption and not capital.  Pro-fairness is accomplished by not taxing "earned" income up to an amount where a conspicious consumption lifestyle starts.  If the focus is on consumption, then it will not matter to worry about what the arbitrary derived sources of income are.  So if a rich dad exploits the carried interest loophole to "earn" $50 million without paying "earned" income taxes, he will not escape.  Also, the rich dad can only give his druggie son $11K a year tax free, otherwise gift taxes are due by the rich dad.  So its not like its a conspicious consumption giveaway.

Almost all taxes have their origins in "sticking it to the rich" in some way or another.  The problem is the cure so far has been worse than than disease, but it's all about envy and fairness NOT consequences.  Without appeasing their sense of fairness, citizens will revolt.  They don't care if they are accurate or not; it is an emotional consideration.  Read the POW economics paper.

[MachineGhost]

I thought this was interesting.  I'm not sure how any liberal manages to keep a straight face when talking about how the U.S. doesn't tax enough.  There are only three countries that outrank us when taking corporate and capital gains into account.  Two of those are France and Italy, surely shining examples of sound economics.  I profess a complete lack of knowledge regarding Denmark. 

We're way above average for integrated capital gains (50.8% vs 41.7%).  Even when disregarding capital gains, we're still above average (19.1% vs 17.4%).

But remember, it is not what the rates are, it is what the goverment actually collects and that stays fixed within a narrow average of GDP.  If the Laffer Curve was real, then lowering tax rates would dramatically increase revenue.  But why in the heck would anyone want revenue to increase to a terrible misallocator of capital?

[Pointedstick]

Almost all taxes have their origins in "sticking it to the rich" in some way or another.  The problem is the cure so far has been worse than than disease, but it's all about envy and fairness NOT consequences.  Without appeasing their sense of fairness, citizens will revolt.  They don't care if they are accurate or not; it is an emotional consideration.  Read the POW economics paper.

This gets to what Doodle has been saying about appeasing the masses to avoid revolution, and I think there's something to it. Ideally, you'd want your "masses-appeasing" policies to actually do some good, or at least not destroy too much. But I think it's broadly correct that most people, especially "most people," when treated as a group, have an innate desire for the appearance of fairness that usually overrides their desire for effectiveness. Us Libertarians like to deny it, or judge people harshly for it, but I think we have to acknowledge that it exists.

[RuralEngineer]

PS,

While I agree that the tendency towards envy and the desire for socially sanctioned theft is a strong (and growing stronger) aspect of our society, I don't think throwing in the towel and letting the darker aspects of human character to reign is the answer.

[Benko]

PS,

While I agree that the tendency towards envy and the desire for socially sanctioned theft is a strong (and growing stronger) aspect of our society,

Perhaps it would not grow so much if it were not fed by constant advertising/campaigning/demagoging (sp?).

[moda0306]

Socially sanctioned theft?

I'd much rather be a wealthy business owner in 2013 than a slave or soldier forced into servitude pre-1971.

I don't things are nearly as scary as you make them sound.  In fact, in some ways, as individuals, we've never had it better. In a world where you could have been drafted or enslaved, today's is pretty damn free.

[RuralEngineer]

I'm not sure how any liberal manages to keep a straight face when talking about how the U.S. doesn't tax enough.

It's easy to keep a straight face because the chart (and the study it came from) is misleading.

The chart assumes that U.S. corporate income is taxed at the full 35% statutory tax rate. But, the effective tax rate on corporate income is always lower because of cross-border tax planning, deductions and credits, etc.

Ok, here's the U.S. relative to other OECD nations by effective average corporate tax rate.  Still above average by a considerable margin.

http://www.aei.org/article/economics/fi ... tax-rates/