Some of the Wealthy Asking to Be Taxed

[Ghent12]

Re: Some of the Wealthy Asking to Be Taxed

This is an incorrect characterization of what Buffet has actually said.

What he's said has been specifically to single out payroll taxes (i.e. FICA) and dividend tax rates.

Neither of these fall into the category of either loopholes or legitimate business capital exemptions.

Thanks for the correction. "Heard it from the grapevine" tends to result in the need for such things.

Buffet's proposals are still, however, quite irresponsible from a realistic perspective. Let him try it out on his own time and dime and see how it works out--have him create his own experimental microcosm where the people that work under him (all of them except his upper managerial talent) get pensions for no contributions whatsoever, and let him pay for it strictly from his combined income and no liquidation of any stored wealth whatsoever.

[Scot]

Re: Some of the Wealthy Asking to Be Taxed

I really doubt having higher taxes in any way disadvantages potential competitors any more than they are already disadvantaged in having far, far less money.

People become wealthy not via income, but via business creation.

Higher income taxes on income don't disadvantage potential competitors. Higher income taxes reduce the potential for competitors. Business creation is less easy when capital is siphoned away by the state.

[DSpencer]

Re: Some of the Wealthy Asking to Be Taxed

It seems like this will be a key issue for a long time. Many threads on itulip and issues in the media keep coming back to it. With that in mind I have some questions for the community:

1. Why is the Obama "plan" being referred to as the "Buffett tax"? Doesn'tBuffett want to raise the capital gains tax? Doesn't the Obama plan raise personal income taxes?
2. Ignoring the capital gains issue for a moment - for those who support raising personal income taxes on "the rich": what percent of federal income tax revenues should be paid by the top 5% of income earners? And what tax rate would accomplish this?
3. Is there some kind of objective definition of the rich paying their "fair share"? Is there even a subjective definition?
4. If all personal revenue was taxed as income and everyone paid the same rate would that be fair?
5. Can taxing the rich actually do much to solve our problems or is it symbolic?
6. If you think we should raise taxes and cut spending: what is the right ratio between a dollar of tax increases to spending cuts?

[Thailandnotes]

Re: Some of the Wealthy Asking to Be Taxed

I've started reading about NZ tax reform after hitting Sharky's blog...

Of course NZ & the US are apples and oranges, but it does provided food for thought.

"After a severe and protracted economic crisis in the late 1970s and early 1980s, New Zealand radically reformed its tax and banking systems, while also reducing regulation and protectionism, and liberalizing free trade. The results are impressive; the Heritage Foundation’s 2010 survey ranked New Zealand fourth in the world for economic freedom.The New Zealand government also had a tax surplus from 1994 to 2008.

"New Zealand does not have capital gains or inheritance taxes. Interest and dividends are taxed as regular income. For individuals, very few expenses are deductible. For example, you cannot deduct mortgage interest or capital losses. The income tax form is short in comparison to the equivalent forms in the United States; for 2010 it consists of forty one “lines.” Property taxes (called “rates”) are low, and apply only to land, not to improvements or other forms of business property. Local city councils collect and spend rates."

http://www.12knowmore.com/

[cjppjc]

Re: Some of the Wealthy Asking to Be Taxed

It seems like this will be a key issue for a long time. Many threads on itulip and issues in the media keep coming back to it. With that in mind I have some questions for the community:

1. Why is the Obama "plan" being referred to as the "Buffett tax"? Doesn'tBuffett want to raise the capital gains tax? Doesn't the Obama plan raise personal income taxes?
2. Ignoring the capital gains issue for a moment - for those who support raising personal income taxes on "the rich": what percent of federal income tax revenues should be paid by the top 5% of income earners? And what tax rate would accomplish this?
3. Is there some kind of objective definition of the rich paying their "fair share"? Is there even a subjective definition?
4. If all personal revenue was taxed as income and everyone paid the same rate would that be fair?
5. Can taxing the rich actually do much to solve our problems or is it symbolic?
6. If you think we should raise taxes and cut spending: what is the right ratio between a dollar of tax increases to spending cuts?

1. It's catchy, and backers like using his name.
4. Yes it would seems to me.

[c1ue]

Re: Some of the Wealthy Asking to Be Taxed

Buffet's proposals are still, however, quite irresponsible from a realistic perspective. Let him try it out on his own time and dime and see how it works out--have him create his own experimental microcosm where the people that work under him (all of them except his upper managerial talent) get pensions for no contributions whatsoever, and let him pay for it strictly from his combined income and no liquidation of any stored wealth whatsoever.

You're again mischaracterizing what Buffet is saying.

He isn't saying his employees should get taxed less on their FICA.

He's saying he should get taxed more on FICA and dividend income.

Thus there is no hypocrisy here - any benefits deriving from FICA are still being paid for by Buffet's employees.

It is just that Buffet himself would pay more towards these benefits.

Higher income taxes on income don't disadvantage potential competitors. Higher income taxes reduce the potential for competitors. Business creation is less easy when capital is siphoned away by the state.

In a theoretical sense, this is true.

In the real world, however, businesses rarely start only with their own capital - or at least the ones which succeed don't.

Thus I'd posit availability of credit for new business is a far greater factor than income tax rates.

VC does fulfill some of this hole, but only for potentially very high profit sectors.

1. Why is the Obama "plan" being referred to as the "Buffett tax"? Doesn'tBuffett want to raise the capital gains tax? Doesn't the Obama plan raise personal income taxes?

Buffet has spoken specifically on the tax rates enjoyed by the uber wealthy, but specifically on the subjects of FICA and dividend tax rates. He's never said the income tax rate should go up for him.

As for 'Buffet tax' - this is yet another cynical exploitation of another person's reputation - along the lines of the Volcker plan.

Remember that one?

2. Ignoring the capital gains issue for a moment - for those who support raising personal income taxes on "the rich": what percent of federal income tax revenues should be paid by the top 5% of income earners? And what tax rate would accomplish this?

How about Reagan era? A mere 60%

3. Is there some kind of objective definition of the rich paying their "fair share"? Is there even a subjective definition?

Yes. When the rich feel the same pain as their lesser countrymen.

4. If all personal revenue was taxed as income and everyone paid the same rate would that be fair?

No. Because you still need some amount to eat. To live. To pay for educating your kids.

This amount is non-discretionary.

The principle behind progressive taxation is that disposable income, i.e. discretionary spending, increases disproportionately as income levels rise.

5. Can taxing the rich actually do much to solve our problems or is it symbolic?

Yes. In 2 ways:

1) There is significant revenue there. It won't make up for Afghanistan/Iraq, but then again it is still a lot of money.
2) High tax rates force speculative investment. If you're going to lose 60% or more due to taxes, you've got much less to lose than if you only have to cough up 15%, and that for very easy, safe, and passive investments.

6. If you think we should raise taxes and cut spending: what is the right ratio between a dollar of tax increases to spending cuts?

There is no such fixed ratio. Clearly when times are bad, the government can/should take up the slack to reduce the economic shock. Equally when times are good, government should be saving up for bad times.

To try and fix some absolute value number as the correct ratio is the hobgoblin of the small mind or the objective of the demogogue.

"After a severe and protracted economic crisis in the late 1970s and early 1980s, New Zealand radically reformed its tax and banking systems, while also reducing regulation and protectionism, and liberalizing free trade. The results are impressive; the Heritage Foundation’s 2010 survey ranked New Zealand fourth in the world for economic freedom.The New Zealand government also had a tax surplus from 1994 to 2008.

"New Zealand does not have capital gains or inheritance taxes. Interest and dividends are taxed as regular income. For individuals, very few expenses are deductible. For example, you cannot deduct mortgage interest or capital losses. The income tax form is short in comparison to the equivalent forms in the United States; for 2010 it consists of forty one “lines.” Property taxes (called “rates”) are low, and apply only to land, not to improvements or other forms of business property. Local city councils collect and spend rates."

The question is how much of this prosperity is organic - i.e. permanent change to New Zealand's economy - vs. hot-money inflows.

Thailand is a fine example how hot-money inflows reversing can fundamentally change the direction of economic progress.

[dcarrigg]

Re: Some of the Wealthy Asking to Be Taxed

It seems like this will be a key issue for a long time. Many threads on itulip and issues in the media keep coming back to it. With that in mind I have some questions for the community:

You ask some good questions here. We probably span the gauntlet here on solutions, but if we can be honest, it may be helpful.

1. Why is the Obama "plan" being referred to as the "Buffett tax"? Doesn'tBuffett want to raise the capital gains tax? Doesn't the Obama plan raise personal income taxes?

I believe that the above description of the Obama "plan" is correctly assessed except for the fact that he wants to limit deductions, which I believe are global (across earned income and capital gains). That being said, I don't believe that the President either intends or wants to increase these rates at all. This is the man that Goldman built. The "plan" is just a bald-faced play to the base (the plan is untrue). There is no formal legislative proposal. It is not going to happen, so it is not worth worrying about.

2. Ignoring the capital gains issue for a moment - for those who support raising personal income taxes on "the rich": what percent of federal income tax revenues should be paid by the top 5% of income earners? And what tax rate would accomplish this?

This is a good question. To give a frank answer, putting all tax rates back to Clintonian levels - phased in - over time - would generate substantial revenue across the income spectrum and probably be less harmful than the Grover Norquists of the world would have you believe. At least then (although it was also for other reasons) we had manageable deficits and growth. It's about as hard evidence of a 'good structure' that you will get in this game.

I would posit two more questions though:

2a. How many tax brackets should there be? Is it fair to lump those making $200,000/year in with those making $200,000,000 per year when those making $200,000 per year are taxed so differently than those making $20,000 per year? Could tax brackets be more equivalent over orders of magnitude?

2b. If one believes the (also untrue) line that lowering taxes on the income earned by the top bracket will create jobs, then what is the optimal top marginal tax rate? Does it follow that we would have full employment if the top marginal rate were lowered to 0%? Is there not a point where one has 'enough' employees regardless of income tax rates? If we lower taxes on the Waltons will they hire two greeters at each Wal*Mart instead of one?

3. Is there some kind of objective definition of the rich paying their "fair share"? Is there even a subjective definition?

By definition this is an essentially contested concept and therefore there can be no objectivity. Subjectively, one can look at two things, namely:
-The GINI Index &
-Public Perception

The GINI index puts the U.S. just slightly less equal than Iran or Uganda or China. This is okay when an economy is expanding because one can fill the air with platitudes like "a rising tide lifts all ships" and "we can either grow the pie or carve up a smaller pie more equally." But when the pie is very obviously shrinking, it's hard to convince people that wealth inequality is good. There may even be civil unrest if it goes far enough - and studies appear to show a correlation with civil unrest with GINI coefficients around a 0.55 coeficient {U.S. is at 0.45 or so - NY is at 0.5}. At any rate, keeping that coefficient below 0.55 would probably be wise for social cohesion - and tangentially for economics as nobody vacations to a city rife with unrest.

Americans are very bad at perceiving how unequal wealth distribution is in their country. Polls of an 'ideal' or 'actual' wealth distribution are way off the mark:

4. If all personal revenue was taxed as income and everyone paid the same rate would that be fair?

Across the 1st world the answer has been a resounding 'no.' The first world contains neither an instance of an outwardly regressive income tax structure nor a flat income tax structure. They are invariably progressive. History has already decided this for us, but I am certain that public opinion would oblige and agree as well.

Should capital gains be taxed as income? Reagan thought so. It seems to make some sense to me too, for by definition it discourages labor as much as it encourages investment.

5. Can taxing the rich actually do much to solve our problems or is it symbolic?

Well, it depends on how much the tax is. It will not solve all of Uncle Sam's budget problems. Plans currently "proposed" will probably solve 8% of the budget problems. That's realistic. The symbolism is the key here though. It is why it is "proposed" (but not really) by the administration in the first place. If civil unrest does happen (and Rosanne Barr's out hanging out with the Occupy Wall Street folks right now lest we forget *easteregg*), congress may regret wanting to milk that 8% out of Social Security or some other place.

6. If you think we should raise taxes and cut spending: what is the right ratio between a dollar of tax increases to spending cuts?

I would say right now: $0:$0 - Once shadow inventory is somewhat worked through etc. etc. - $1:$1

It really does depend on where the tax increases are and where the spending cuts are. Spending cuts are a particularly bad idea right now - I'm not a fan of pushing austerity onto waning demand, especially while the borrowing's on the cheap (treasuries don't pay out much right now). It is a problem that will have to be dealt with.

And let's be frank: If congress enacts $10 in cuts to $1 in revenue, what do you think will happen to state and local taxes? They will obviously go up when the federal funds that feed 40-60% of their budgets are slashed. So congress would really be trading national income taxes for local property and sales taxes in most cases. Total taxes will probably remain at that 18% of GDP level just as they always have since WWII after we get a short bump (like in the '90s) to make up for the shortfall:



But it is worth examining components of those taxes. Payroll taxes make up an increasing share and corporate taxes and tariffs etc. are decreasing:






This means that the real devil is in Medicare and Medicaid. The U.S. might actually be a lot more structurally sound than a lot of us think if we could just figure out this devil of a healthcare problem.



To wit:

[mesyn191]

Re: Some of the Wealthy Asking to Be Taxed

I have nothing to add except to say c1ue and dc's posts are both excellent.

[lektrode]

Re: Some of the Wealthy Asking to Be Taxed

I have nothing to add except to say c1ue and dc's posts are both excellent.

+1
and i'm glad dc is retired(?)
o/w he wouldnt have the time to share/educate us on this stuff
and am still wondren how mr c1ue does it... ;)

[Thailandnotes]

Re: Some of the Wealthy Asking to Be Taxed

The question is how much of this prosperity is organic - i.e. permanent change to New Zealand's economy - vs. hot-money inflows.

Agreed. New Zealand's currency is extremely vulnerable. In discussions of carry trades it is often compared to Hungary and Iceland (ouch). Japanese purchases of NZ bonds turned negative last quarter, not a good sign.

[DSpencer]

Re: Some of the Wealthy Asking to Be Taxed

C1ue,

Re:
2. Isn't it already about 58%?
4. What if their was an exemption/deduction for everyone on the first 30k of income?
6. I meant at the current time. As in if you were writing a bill that would pass tomorrow.

[DSpencer]

Re: Some of the Wealthy Asking to Be Taxed

Dcarrigg,

Very good points about opinions spanning the gauntlet and that some questions are essentially contested concepts. If that concept was recognized more often when discussing subjective questions on this forum it would probably be much more pleasant here. It's possible to disagree without claiming that someone is wrong in some objective sense.

Re: the GINI index
Is it fair to say that you believe a proper function of government and specifically taxation is to redistribute wealth? It seems that using wealth distribution to determine the fairness of taxes implies that.

[dcarrigg]

Re: Some of the Wealthy Asking to Be Taxed

Re: the GINI index
Is it fair to say that you believe a proper function of government and specifically taxation is to redistribute wealth? It seems that using wealth distribution to determine the fairness of taxes implies that.

This depends on the form of government. If we are talking about multi-party constitutional republics, particularly with direct representation, I would say yes. For autocratic regimes it is not necessarily so important or proper.

I think it's fair to say that every true constitutional republic in the modern age has used taxation to "redistribute wealth" with no exceptions (at least I know of none). From the enlightenment to the modern era this has been so. Progressive taxation (taxing at higher percentages further up the income scale) was originally supported by the likes of Adam Smith, Karl Marx, and the Marquis de Lafayette. An overwhelming majority of modern American economists support it as well.

Adam Smith and the classical liberals were particularly concerned with wealth accumulating over generations and recreating the European class/caste nobility system. This was the impudence behind land and inheritance taxation.

At the very least re-distributive taxes were supposed to be the bulwark of "equal opportunity" (not equality of results). They are still probably the best bet.

There are Austrian School economists that would argue with this, of course. I do think that there is room along the scale of progressive taxation to have a more or less progressive system depending upon the time and place.

I think that concepts of flat taxes and regressive taxes with popular support in a constitutional republic are generally little more than idealistic fantasies that never occur in practice.

You need a one-party state like Singapore or Pinochet's Chile to pull off a system where taxes do not redistribute wealth, otherwise you're out on your butt come election day.

[Ghent12]

Re: Some of the Wealthy Asking to Be Taxed

You're again mischaracterizing what Buffet is saying.

He isn't saying his employees should get taxed less on their FICA.

He's saying he should get taxed more on FICA and dividend income.

Thus there is no hypocrisy here - any benefits deriving from FICA are still being paid for by Buffet's employees.

It is just that Buffet himself would pay more towards these benefits.

Actually, my characterization seems to be quite succinct and correct. Buffett calls for simultaneous increases in FICA taxes for the "super-rich" while extending payroll tax holidays for everyone else.

Buffett may be a genius when it comes to making himself rich, but he's a run-of-the-mill demagogue in politics.

Example:

While the poor and middle class fight for us in Afghanistan, and while most Americans struggle to make ends meet, we mega-rich continue to get our extraordinary tax breaks.

He's just a mindless parrot when it comes to class warfare, which is ironic given his brilliance in other regards.

[c1ue]

Re: Some of the Wealthy Asking to Be Taxed

Isn't it already about 58%?

Top marginal income tax rate today is 35%. In 1981, the top marginal income tax rate was 69.125%

http://ntu.org/tax-basics/history-of...ividual-1.html

What if their was an exemption/deduction for everyone on the first 30k of income?

This might sell well with the bottom income quintile voters, but ultimately it still represents a massive subsidy to the upper quintile(s), or a massive burden to the middle quintile, depending on the actual rate.

There's a reason why Steve Forbes loves the flat tax.

I meant at the current time. As in if you were writing a bill that would pass tomorrow.

As I don't have the specific plan for how the deficit spending would occur, I can hardly have a ratio for what the deficit spending should be.

EJ has proposed in the past a debt writedown of $1 trillion on negative equity mortgages.

Similarly TECI I believe is in the $1 trillion range.

Contrast this with the $1.2 trillion to $1.5 trillion deficits for each of the past 3 years.

My own leanings are more towards fixing other specific structural issues in the US: health care via $200 billion towards expanding the VA system to provide a public health provider option combined with some form of debt (and housing asset value) writedown.

However these are all spending issue - the income issues are also in need of specifics.

Reversing the Bush tax cuts would mean roughly $200 billion additional revenue per year, for example.

Similarly passing a law restricting the transfer pricing games many corporations play would also affect revenue.

The one area I do agree on: the tax code is much too complex. While I do not think going to a flat tax helps - I do think that removing 90% or more of all the ridiculous exemptions and loopholes would benefit most everyone. One simple way might be a straightforward applicability test: if a proposed exemption cannot be added unless it covers some reasonable percentage of the population - say 1%.