A Weblog of Centrist Voices in American Politics
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A Weblog of Centrist Voices in American Politics | |
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April 17, 2005Not the flat tax idea againThe Economist has a nice short review article, available on-line, regarding the flat tax. I have to admit when I hear flat tax I picture billionaire Steve Forbes on the stump and think "What's in it for HIM?" On the flip side it does bother me when folks talk about how the "wealthiest 1%" received the bulk of the tax-cut benefit. No one seems to complete that statement by saying "...and they PAY the bulk of the taxes". Anyway the article discusses the success of the flat tax in several eastern European countries, first with Estonia and ultimately with Russia. Do we really want to be compared to Russia? Well no, but here's some interesting info from the article. The most remarkable turnaround in government revenues was recorded in Russia. Prior to its 2001 tax overhaul, the federal government's tax-raising powers were rapidly deserting it. Clifford Gaddy and William Gale of the Brookings Institution report that tax arrears amounted to 34% of collections in 1997. By 1998, federal revenues had fallen to just 12.4% of GDP, leaving the government unable to pay its creditors. Investigators appointed by the president revealed that Russia's biggest enterprises ignored 29% of their taxes and paid another 63% in kind, with goods and services the government might or might not want. In lieu of $80,000 in taxes, one company reportedly offered the government ten tonnes of toxic chemicals. ....How did revenues respond? A year after the reform, the personal income tax was raising almost 26% more revenue in real terms. Some of this was due to the rebound in the economy: real wages grew by 12% that year, and the take from all taxes, flat or otherwise, consequently improved. ...They [two IMF economists studying the tax effects] did discover a conspicuous increase in compliance with the tax authorities, however. In the year before the flat tax, Russians in the two higher tax brackets reported only 52% of their income to the taxman. In 2001, after falling into the new, all-encompassing 13% bracket, these same households reported 68%. The article does discuss the "fairness" issue of a flat tax as opposed to a progressive one. Fairness is the chief reason why most countries have imposed multiple rates of tax. In Canada, Australia and the European Union, for example, staple foods, but not restaurant meals, are exempted from value-added tax. This is deemed fair because the poor spend a greater share of their income on unprepared food. It can lead to nonsense, however. Jeffrey Owens and Stuart Hamilton of the OECD point out that hot roast chicken is taxed, but cold roast chicken is not. “Does anyone expect tax administrators and business owners to have thermometers on hand when they do their tax calculations?” they ask, only half in jest. George Bush has spoken of tax reform, though I don't believe he's explicitly mentioned a flat tax. Of course, he's already spent a lot of his "political capital" and so further expenditures of it will be severely taxed. So serious discussion of the flat tax will be left to another administration (or not at all). But given how complex and time consuming tax preparation has become, the interest in a simpler tax system sure rises this time of year. Posted by c3 at April 17, 2005 11:36 AMComments
And it rises rightfully so... The current tax system is one that unfairly gives tax breaks to those who don't need them, and a boon for Fortune 500 companies who can afford a tax attorney. Meanwhile, middle class families are left to fill out piles of paperwork that justifies the government taking their hard earned money. As somewhat of a supporter of a some form of the flat-tax I think it is pretty simple to say that if we adopt one we will end up like Russia. However, I do think that Forbes idea of a 15% all-around tax was also simplistic and unrealistic. The problem with any sort of tax reform is simple... There are too many interests involved. You cannot address the tax structure in this country without first addressing the power that lobbyists have over the nation's capitol. There are simply too many high dollar campaign donors in both political parties who benefit from the status quo in regards to taxes. Posted by: Mathew at April 17, 2005 01:44 PMSome of us are old enough to remember the uproar over the removal of the deduction for interest paid on consumer debt. I cannot fathom the screams over the mortgage interest deduction being removed. Posted by: EG at April 17, 2005 02:12 PM Do we really want to be compared with Russia? Russia is not exactly an economic basket case. Since instituting the flat tax, Russian economic growth rates have been much higher than almost every country in Europe. 7.3 per cent in 2003, 4.3 per cent in 2002, 5 per cent in 2001, 10 per cent in 2000 and 6.3 per cent growth in 1999. They're higher than the USA, too. Russia has a fiscal *surplus* -- the government is spending less money than it takes in. The World Bank has estimates that real disposable incomes in Russia grew by 14.5 per cent in 2003, and real wages increased by 10.4 per cent. (inflation is high, but these figures are inflation adjusted) Russia has also paid off all of their IMF debts well ahead of schedule. Posted by: Susan at April 17, 2005 02:19 PMBut by golly, we don't wanna be like Russia.... Posted by: Tully at April 17, 2005 09:48 PMI know it's heresy to brin gin facts, but the top 1% do NOT pay the bulk of the taxes. It is the group from $50,000 to $200,00 who pay the most taxes, both as a percentage and an amount. And I would go slow on comparisons to Russia: considering Russia started from almost zero, astounding growth rates are to be expected. And to credit the flat tx without any supporting evidence is, as we say in the research biz relying on anecdotal evidence. Like, "since George Bush took office, the world has become warmer." Posted by: zen_more at April 18, 2005 02:40 AMBush's tax cuts were disproportionately in favor of the wealthiest citizens. The author unfortunately confuses this - which accounts for the fact that the wealthy pay more taxes, and misunderstands/mistates the issue as the simplistic "sure, they get more back because they pay more". If someone pays 75% and gets 80% of a cut, while someone paying 5% gets 3% of the cut, that is disportionately in favor of the wealthier person - and not explained away by the fact they pay more. Whoever this 'c3' author is - sorry, I came here from a link - they should research better. Posted by: Craig at April 18, 2005 04:10 AMAccording to the Congressional Budget Office, the top 1% of income earners pay 34% of all federal income taxes, at an average rate of 27.25% of gross income before deductions and allowances. The top 5% was every form filed with AGI of $126,500 and above. This group paid over half of all income taxes. The lower 50% was every form filed with under $29,000 AGI. The Bush tax cuts actually increased the progressivity of the tax system due to the expansion of tax credits for lower-income families. Over the last decade, the percentage of total federal income taxes paid by the upper brackets has increased, and that paid by the lower 50% has decreased. A graphical representation of ALL the tax cuts and credits (including even the effects of the changes in capital gains, dividends, estate/inheritance, the child-care tax credit, the earned income tax credit, the alternative minimum tax, and payroll taxes for Social Security and Medicare) can be found here. Hmm. That doesn't seem to be the top quintile that's getting the most "disproportional benefit," does it? I know, I know. Why let the facts confuse us when there's some quality demagogin' to be done? Craig, I think Tully has pointed out that you may need to recheck your research. Regardless, even if the Bush tax cuts had disproportionately favored the wealthiest citizens I would STILL be in favor of them. That is because the wealthy already pay a DISPROPORTIONATTELY high percentage of thier income in taxes (IF they report honestly) when compared to the poor (i.e. a "progressive" tax rate). The Bush tax cuts were designed to ameliorate the burden on people paying the most severe tax burdens. Therefore it would only be FAIR for the wealthy to get the lions share of the benefit. I think you are laboring under the misaprehension that everyone shares your (apparent) desire to eat the rich. You might be surprised to find that many people (even some who aren't rich themselves) view the wealthy as fellow human beings who DESERVE to be treated fairly, even if they have assets that the rest of us are envious of. Now, to the point in hand. While I don't favor a flat tax rate, I do think the system needs to be severely streamlined ....along with closing of loopholes. There is far too much wasted on compliance when compared to the revenue taken in.... and there is far too much opportunity for some-one who can afford the expertiese to game the system. The people who the tax system really screws are the middle class (who can't afford to pay for the expertiese to game the system) and wealthy people who want to be honest (and won't game the system on principle).
The sad commentary is that we have an economy where 50% of the people make less then 29K. The flat tax will push the tax burden down from the upper to the lower 50%. If you really want to boost the tax contributions from the lower 50%, figure out how make income distribution more equitable across the spectrum, not how to get blood from a stone. Tully what is the ratio of tax liability when you figure it as a % of total wealth rather then income? After all protection of property and enforcement of property rights are on of the very few consensus functions of government, so it would be logical to look at tax liability when compared to total assets rather then AGI. If you do that calculation then you find out that the tax liability of the upper 10% is a minuscule fraction compared to the typical wage earner. But don’t let facts get in the way of your ideology. You might wanna actually get some facts together and do some research to support your own claims, RickD. Might actually have to use your synapses, though. The flat tax will push the tax burden down from the upper to the lower 50%. Uh huh. Every flat tax proposal I've seen exempted the first $20K or so of household income entirely. So I'd love to see your attempts to demonstrate that statement empirically by scoring out any of the actual proposals. (I am personally NOT in favor of a flat tax as defined by any of the proposals I've seen.) Of course, the bottom 50% does look like a growth area, since they pay under 4% of the total. So, to push the "burden" down onto them we have to get them up to 50%+ of the total, which would mean boosting their taxes by 1400%+. Frankly, I don't think they have the money. Willy Sutton would give it a miss. But don’t let facts get in the way of your ideology. I never do. How 'bout you? Wanna go dig out some of those things you're asking for, or just get other people to do your homework for you? Posted by: Tully at April 18, 2005 12:41 PMRick, I think it's reasonable to consider tax liability as a percentage of AGI rather then total wealth when the tax liability you are considering is restricted to INCOME tax. However if you want to consider tax liability as percentage of total wealth by all means do...but lets not forget to factor in all those OTHER taxes... i.e. property tax, capital gains tax, gift tax, estate tax, sales tax, gasonline tax, generation skipping tax, car tax, boat tax etc.... I'd also suggest you find some way to differentiate between tax as percentage of total wealth between those who have accurately reported thier earnings/holdings (and thus have paid appropriate taxes on them) and those who have found a way to shelter them. I think you'll find that many among those who have amassed the largest fortunes have only done so by finding a way to game the system to shelter thier holdings from taxes. The wealthy (or even upper middle class) who actualy try to "play fair" quickly find that one way or another Uncle Sam finds a way to appropriate the majority of thier wealth. Posted by: cengel at April 18, 2005 01:33 PMI think you're probably right, cengel. It's a vicious circle- Uncle Sam tries to take more and more, cause they know most people will game the system to pay less. And the virtuous, and those who don't make enough to game the system, get caught in the middle. Posted by: stephanie at April 18, 2005 02:44 PMBut by golly, we don't wanna be like Russia....Sorry Tully, cold war mentality dies hard. As for the rest of the feedback. This is the sort of discussion I was hoping for. I've been a skeptic of the flat tax idea. I still am but the article is interesting especially given the results in Russia and Estonia. I'd really encourage everyone to read the article. Another interesting aspect is how these countries tie in their income tax to their VAT tax. The "fairness" issue is discussed. BUT, I'm always anxious about the fairness discussion based on my experieince mediating arguments about fairness, "In the eyes of the beholder" and all that. At its core the fairness question, I beleive, is "Is it fair that someone earns more and keeps more than someone else even though they both work hard and are nice guys" As for the upset comments about my statement "...and they PAY the bulk of the taxes".maybe I should have said they pay a disproportionate share but Tully, you summed up the tax distribution far better than I could. I'm thankful no one used that magical term "the middle class" so we didn't have to have the arguments about "who the middle class really is". It seems the middle class is more a state of mind than a statistical definition. Posted by: c3 at April 18, 2005 03:23 PM With all these reminders about how much the upper brackets contribute to the overall revenue stream I'd like to point out three things. 2)Anyone see corporate contributions in your 1040 booklet? around page 72 I think. 6 fucking percent. Anyone want to know how much corporations get in direct and indirect subsidies? Believe me you don't. You'd puke your guts out like you did in college after drinking too much. 3) Tax revenues are at their lowest compared to GNP since the 1950's while deficits are the highest ever. My kid is going to be paying for this crap.
-Marcus Posted by: Marcus at April 18, 2005 03:59 PMLOL, Chris. I actually don't want us to be like Russia in general. The societal psychosis of the Russians started centuries before communism, and it's a little early to tell if the release from the collectivist system has derailed that ugly streak. And they've still got more warts than a toad convention. But if an idea works, we should notice and be ready to use it for ourselves. CBO and the IRS track those income/tax distributions--it's a matter of knowing where to look. By twisting the numbers you can claim that the rich got bigger breaks, but in terms of share of tax burden, their share is going up, and that of the bottom 50% is going down. If you call the three middle quintiles the "middle class," then the middle class has done well by the Bush tax cuts, especially families with children. The top 20% of income earners pay over 80% of all federal income taxes. The next quintile pays about 16%. The middle quintile pays the rest. The tax cuts actually pushed the the next lowest quintile into negative taxation--because of the EITC expansion and the new child tax credit, they get slightly more back as a group than they pay in. And the bottom quintile hasn't actually paid more than they got back as a group since W.'s daddy sat in the Oval Office. The EITC and tax credits flow back to them as well. (Anyone who thinks we don't already have a "baby bonus" in the tax code better check again.) Income taxes are less than half of government tax revenues. Where the lower ranges get screwed is through payroll taxes, but that's another rant. Posted by: Tully at April 18, 2005 04:10 PMDon't confuse rates with collections and burdens, Marcus. Loopholes pretty well guaranteed that no one but lottery winners ever paid top rates when it was 70% (and higher). Hard to believe, but the rate cuts of the last few decades were accompanied by a heckuva lotta loophole closing. And the AMT was designed to kill off what remained--the only problem is it's not inflation-indexed. Those at the upper end can't deduct their tax bills away anymore. Corporate taxes were 11.4% of total federal tax revenues in '04. Income taxes were 49%. Payroll taxes were 35.5%. Tax revenues are at their lowest compared to GNP since the 1950's while deficits are the highest ever The first is simply not true, the second is not true in terms of %age of GDP. Tax revenues in terms of GDP are about where they were in 1958, 1964, 1975, and 1991. I'm not sure about 1958, but 1964 was the result of the Kennedy tax cuts and 1975 and 1991 were the result of recessions. Also, the WW2 and post-WW2 deficits were much larger in terms of %age of GDP. Still, it isn't very pretty. The problem is the revenue/spending spread, which is currently approaching the somewhat obscene levels of the 80's and early 90's. The GOP has not recently given anyone reason to believe they're the party of fiscal discipline. Congress has been giving drunken sailors everywhere a bad name. Posted by: Tully at April 18, 2005 04:48 PMIf you look on page 74 of your 1040 instruction booklet you'll find that corporate income taxes account for 6% of federal income, not 11.4%. My reference for the lowest revenue came from this source The wealthy have numerous tax shelters not available to moderate income types like me. Tax burdens should not be ignored. A suggestion. They are quite relevant to the discussion. Warren Buffett feels it's quite relevant as he is rather outspoken about it. "As a matter of personal conviction, and without pretending to discuss the details or formulate the system, I feel that we shall ultimately have to consider the adoption of some such scheme as that of a progressive tax on all fortunes, beyond a certain amount, either given in life or devised or bequeathed upon death to any individual – a tax so framed as to put it out of the power of the owner of one of these enormous fortunes to hand on more than a certain amount to any one individual; the tax of course, to be imposed by the national and not the state government. Such taxation should, of course, be aimed merely at the inheritance or transmission in their entirety of those fortunes swollen beyond all healthy limits." Gee, Marcus, I don't use booklets, having joined the computer age, but I see the 2004 IRS Form 1040 Instructions booklet does indeed say that in a little pie chart. And guess what? It's wrong! My info comes directly from the 2004 IRS Data Book, cross-verified with CBO reports. Collections of corporate income tax in 2004 were $230,619,359,000. Total IRS tax collections in 2004 were $2,018,502,103,000. Dividing A by B gives me 11.425% (rounded off). For 2003 (the year the tax booklet cites) total tax collections were $1,952,929,045,000 and corporate income tax collections were $194,146,298,000--which is 9.94% rounded. You may certainly visit their web site and check my figures and my math, but I'm pretty certain that I didn't transpose any digits or drop a decimal. In addition, the booklet is citing total federal revenue (which includes borrowing) instead of tax collections, which is what I referenced. This does make a difference, though not nearly enough to explain the discrepancy. The little pie chart in the booklet is simply wrong. They must have given the crayons to the intern that day. RE: "Worst since 1958"--Do you normally use third-hand bluster quotes from second-hand press releases offered by either leftist or rightist special interest org websites (that are quoting other leftist or rightist special interest org websites) for data acquisition? I've found that primary sources are much more reliable. Really. Some days even these folks are more reliable than the special interest orgs. But a dance through the this site would do more good. And I've used that Roosevelt quote myself. He used it to argue for a progressive death tax instead of an income tax, in order to curb the excesses of the robber barons and their totally untaxed and often ill-gotten fortunes. So what? At the time Roosevelt was Prez, the federal budget was funded entirely by excise taxes. We had no corporate, income or death taxes. None. Roosevelt never argued for a progressive income tax. Not once. Posted by: Tully at April 18, 2005 07:11 PMWorse since Eisenhower... From the CBO"During the post-World War II period, corporate income and excise taxes have declined in importance and payroll taxes have become more significant. Since the early 1950s, corporate income and excise taxes together have declined from nearly half of receipts to less than 15 percent. Over the same period, payroll taxes have increased from slightly more than 10 percent of revenues to more than one-third." you are somewhat correct in the figures above Corporations are not paying their fair share. Oh and if I am not mistaken TR in 1906 did mention progressive income tax which went into effect under Wilson. Posted by: Marcus at April 18, 2005 07:53 PMBTW the Bull Moose Party platform included progressive taxation. Be darned. The Progressive Party platform of 1912 included a call for progessive taxation of inheritances, Marcus. It also included a call for ratifying the Sixteenth Amendment, which would allow the government to tax income. It did not include a call for progressive taxation of incomes. Roosevelt addressed the subject of a graduated income tax as a desirable option for government in his State of the Union speech of 1907, but also declared in the same speech that it was both impractical and much less desirable than a graduated inheritance tax. Roosevelt lost. It was Taft who pushed the Sixteenth through, and Wilson who kicked Teddy's ass in 1912 and then got the 16th ratified. Teddy's support was never better than lukewarm by any standard. But hey, my bad for making an incorrect blanket statement about Roosevelt. He actually said something positive about a graduated income tax, right before he shot it down in the same speech as impractical and inferior. Your bad for misleadingly quoting Roosevelt by citing a speech on inheritance taxes when talking about income taxes. Citing the WashPost in a general and fairly irrelevant quote demonstrates that you can read, and little else. Actually digging out the CBO paper is much better, but if you'd dug deeper you might have noted the adjustments for projected effects of pre-paid taxes due to accelerated depreciation, and collections of pre-payments for future taxes and captures of previous year's taxes. The IRS did actually collect $230,619,359,000 in corporate income taxes in 2004. The figure of 6% remains utterly incorrect (and the IRS' bad for giving crayons to interns). Now, fisking and whining and niggling aside, your point, I gather, is that you think corporations pay too little. Bearing in mind that corporate taxes ultimately come from the customers, and are therefore really indirect consumption taxes, what would you like them to pay? And how? Also bear in mind that in a multi-national business environment, any corp that thinks we tax too much can pick up and leave. And some have. I also gather you think the rich should pay more. Same questions, except that the rich are less likely to pick up and leave. Be aware that I think that the payroll taxes (SS & Medicaid/Medicare) which figure so prominently in the WashPost quote are indeed a nasty trick on the working person. Posted by: Tully at April 18, 2005 11:24 PMThe upper tax rate has plummetted from approximately 70% during the Reagan era to what, about 33% now? That's a 50% reduction. Add to that the massive reductions in estate taxes and more importantly, dividend taxes.Marcus; Again I would say read the Economist article (maybe you have). Its point is that, at least in the cases cited, creating a flat and possibly lower rate actually increased tax revenue to the state. Now, some reactionaries might say that's bad because the state doesn't deserve more money. Some other folks might say I just want to "punish" those who make more by having a high marginal rate. I hope you're not saying that. Again I think the crux of your argument is "fair share". I can't fight the "fairness" argument. Its like defining pornography. Know it when you see it, Chris? ;-) Fair is in the eye of the beholder. Posted by: Tully at April 19, 2005 12:15 AMFlat tax: It'll never happen because too many accountants would be put out of work. Tax loopholes: Every time the IRS closes one loophole, they open 10 more. Those of us fortunate enough to be able to hire good accountants know this. What % does tax code benefit: Who writes the tax code? Here's something to think about. A GIT is designed, in part, to control upward economic mobility and control inflation. Who does that benefit? Posted by: anonymous at April 19, 2005 02:20 AMPhilosophically, I have a severe problem with corporations who pay little or no taxes. So imagine the cost of said service if done by a private company. Pretty substantial wouldn't you say? Chevron AND its customers are fortunate to have such a service provided by all of us. So would it not behoove Chevron and its customers to make a substantial payment to cover said costs? Taxes are necessary for a democracy to survive. It stands to reason that greater wealth is often the greater beneficiary of numerous government programs. Look at ADM, Cargill and other agribusinesses. Not only do they get a buttload of money in subsidies, millions of taxpayer dollars go into research in agriculture, biology, computer, genetic microbiology, mathmatical modelling, geology, physical climatology, hydrology, nutrition etc. etc. etc. to provide the science and the products that benefit these companies and their customers, as well as the educational infrastructure, governmental structures and regulations, water projects, roads necessary for efficient distribution of supplies and products. Contrast this to the government services needs of a small plumbing company, maybe 15-20 employees depending on the season, with 10 vans, some office and inventory personnel. There work depends on repair and retrofit in existing structures, installation of new pipes and sewage lines, new hookups etc. They don't need a 30 million dollar coast guard cutter to bail them out. If anything they'll probably be working on one on a govt contract. So for c3, yes it is about a certain level of fairness. As I show above, wealthier concerns are greater recipients of government provided goods and services. They ought to pay more rather than less or nothing at all. I note that like pornography you can actually come up with some pretty good definitions of fairness, at least for economic/governmental and business purposes. For instance, inre porn, pay per view hotel video companies often have different types of adult programming, catering to the porno laws of various jurisdictions, i.e., Cincinatti vs San Francisco or Las Vegas. differences exist but not gross differences. Coming up with a standard of tax fairness is not really that hard either. An audit of goods and services provided by the government is doable and from that one should be able to extract a ballpark figure of costs. Anyway, you have better luck defining pornography is than defining what a Republican or Democrat is these days. and I'll repeat, the deficit spending of the past 4 years has been unconscionable. The tax cuts, for the most part useless in terms of overall employment and wages. Poorly directed and overly generous they contribute greatly to the debt mess that will be left to our kids.
"When our tax laws are revised the question of an income tax and an inheritance tax should receive the careful attention of our legislators. In my judgment both of these taxes should be part of our system of Federal taxation. I speak diffidently about the income tax because one scheme for an income tax was declared unconstitutional by the Supreme Court; while in addition it is a difficult tax to administer in its practical working, and great care would have to be exercised to see that it was not evaded by the very men whom it was most desirable to have taxed, for if so evaded it would, of course, be worse than no tax at all; as the least desirable of all taxes is the tax which bears heavily upon the honest as compared with the dishonest man. Nevertheless, a graduated income tax of the proper type would be a desirable feature of Federal taxation, and it is to be hoped that one may be devised which the Supreme Court will declare constitutional." So you see, for a time at least, TR was quite an advocate of progressive taxation. As for the Washington Post, it's a pretty reliable newspaper and their fact checking is pretty darn good, much better than Bill (Soldier of Fortune) O'Reilly's or Sean Hannity's or Ann Coulter's dire lack of the same. sorry this is so long but I have jury duty Tuesday. This forum is less juvenile than most although Tully should really refrain from ad hominem crap. Posted by: Marcus at April 19, 2005 03:56 AMMarcus, you need to give it a rest. You came here spouting and Tully showed pretty clearly, point by point, the multiple instances where you simply didn't know what you were tallking about. The regular visitors here know that Tully invariably knows his stuff, and goes to the most reliable sources. If you pick a battle with him,.and he's well-informed and you are not, then he's entitled to get a little testy. You could at least acknowledge the instances where you were wrong and Tully straightened you out. You are WAY off if you think Tully or our other regular posters are O'Reilly, Coulter, or Hannity buffs. Posted by: bk at April 19, 2005 08:36 AMAfter having selectively and misleadingly used a quote that didn't apply, Marcus, you finally dig out the one that does. After I painted a big sign with red X's on it for you--that was TR's 1907 SotU speech that I mentioned above in my mea culpa while wilfully copping to my inaccurate statement. Yep, TR was so much the advocate for progressive income taxation that he went so far as to acknowledge his diffidence. Please note in your gloat that I openly acknowledged my factual error immediately and went on to supply the very reference to refute myself that you subsequently used. "Externalities" is the economic term for those unpaid side costs you were taught about in econ (a class I used to teach) and it's a very reasonable and valid point of debate. Corporations by nature limit risks in order to maximize profits. An equivalent phrase for "limiting risks" is "evading responsibilities." It's one of the less attractive features of corporatism. The larger the corporation, the better they tend to be at evading responsibility. WaPo's quote was irrelevant not because of the factual claims therein but because it didn't bear directly on the factual basis of your own claims re: the economy, Marcus. If you get picked for a jury you may get some long lectures on rules of evidence, and the differences between direct evidence and indirect inflammatory hyperbole and circumstantial evidence and hearsay. The WaPo quote was of the second sort. I reviewed my postings and found no ad hominem directed at you, just some mild sarcasm. I guess you mean that I insisted on better claims sourcing from you, and called you on bad factual citations from biased secondary and tertiary sources and a misleading TR quotation. Yep, that I did. But that's not ad hominem. Anyway, have fun and good luck with the jury duty if possible. Usually it's just a grind, but it can be interesting. Posted by: Tully at April 19, 2005 10:21 AMThe brief discussion of taxation as a % of wealth intrigued me. I Googled to this website because I couldn't find the information at U.S. treasury or the IRS website. It probably could be considered left-leaning ideologically but I share it because of it's content: http://www.osjspm.org/101_taxes.htm#8 It states "the lowest 3 quintiles own approx. 5% of the national wealth and pay 14% of federal taxes." It goes on to state "the weathiest 5% have 59% of the wealth and pay 38.4% of federal taxes; the wealthiest 1% have over 38% of the wealth and pay 24.8% of federal taxes. These households have an average wealth of $10.2 million and pay only 3.5% of their wealth in taxes. By way of comparison the bottom 40% of taxpayers have an average wealth of $1,100 and pay 163% of their net wealth in taxes." It looks like the author may have changed the definition of taxes in the middle of the paragraph, since the last two sentences refer to "taxes" and not "federal taxes". It cites as sources, the Congressional Budget office and United for a Fair Economy. It concludes "If all taxpayers paid the same 10.5% of their wealth in taxes as median income families pay, the taxes of the lowest 40% would be cut by 94% while the taxes of the wealthiest would triple." I'm not advocating for this particular point of view, because if they are including all taxes, then use taxes like those on gasoline, general purchases, property etc. shouldn't go down just because someone is poor. However, I think the report should give one pause before taking the position that the rich and upper middle classes pay almost all the taxes. They also have almost all the assets. Perhaps not an unbiased report, but it's still food for thought. Posted by: tim at April 19, 2005 11:49 AMTully, My issue with your comments is the idea that the top X people pay X% amount of all income taxes. I see this line used often and frankly I don’t think that is really all that relevant since it is a bit self referential. For me the only relevant issue is what level of tax is being paid compared to ones total assets. And why do I feel this way? Well Adam Smith said it best. “The expense of government to the individuals of a great nation is like the expense of management to the joint tenants of a great estate, who are all obliged to contribute in proportion to their respective interests in the estate. In the observation or neglect of this maxim consists what is called the equality or inequality of taxation.” The total tax each year paid by a guy like Bill Gates is a small infinitesimal fraction of his net worth. The farther down the economic scale you go the larger that % becomes. There are people who have little or nothing in the way of assets who pay close to 100% of their net worth. Now tell me why is it fair that a man who earns 35K and has two kids, rents and has little or nothing in the way of assets should pay what might add up to 50% of his net worth in taxes. (sure he pays no income tax, but he does pay payroll, excises, and corporate tax (since corporations simply pass along their tax liability, he also pays a part of those liabilities which are baked into the goods and services he consumes). You want to define "fair" as a function of AGI (while giving "unearned" income special status and ignoring sheltered income altogether). The only way that is fair it to pretend that wages (which is what the income tax primarily hits as most other forms of income are given special treatment) are the primary metric of determining tax equity. I am suggesting that what Smith was talking about is essentially correct. The tax liability of the upper 10% of asset holders is an absurdly low % of their net worth when compared to those who primarily earn wages and have a modest net worth. It's not really that I dispute your numbers, I reject you analysis of what they mean and I would suggest that the % of income tax paid by those making more then X% of AGI is meaningless when discussing the issue of the fairness of tax liability. Yeah, the problem with looking for data on such things as "weath" is that it's not just one thing but a universe of factors, and it's harder to define and amalgamate the data to get a single (and reliable) comparison gauge. Same with "taxes" as a generic instead of a specific such as "federal income taxes." No, it's not an unbaised report, though it makes some very good points and is worth a read for that alone. Their data are out of date and they're getting their "wealth" stats filtered through a partisan leftie org (FAIR). Their tax and income stats are pretty good, but because they're out of date they don't yet reflect the realities of the first Bush admin and post-9/11 America. By the time we get really good reliable data for 2001-2005 we'll be watching the 2008 White House race. There are NO reliable stats on asset distribution ("wealth") in America, and you can find nebulous claims that run all over the map. The data used by FAIR comes from the triennial 2001 Federal Reserve Study of Consumer Finances, but the 2004 report results won't be released until next year, so we're already out of date. The FR/SCF survey itself has some serious limitations even before it's selectively cited. It uses too small a dataset and relies on honest survey responses, among other things. And that's the good data! There is also an ongoing (decades-long) debate about whether assets or income are better measures in gauging quality-of-life. (The argument being that non-cash assets don't mean much until turned into spendable income--you can't eat your stock certificates.) In short, it's a very murky area even without the partisan and ideological arguments, issues, and aspects. I would argue for a broad income definition as a QOL measure on purely pragmatic grounds--that it's much easier to accurately measure using available data, making the resulting datasets less amenable to distortion and variance. On that basis the current figures indicate that in the last few years the lower quintile has held steady, the middle quintiles are gaining slightly, and the upper quintile has gained slightly better than the middle quintiles. The dot.com bubble burst slammed down the top quintile--the "rich" took a BIG income/asset hit. Still, since then the rich appear to be getting a bit richer, the poor don't seem to be getting poorer, the rest of us are muddling along. Posted by: Tully at April 19, 2005 12:54 PMTim, It sounds like that site is playing games with statistics in order to make thier arguements. We have no idea if they are even comparing the same statistics or mixing apples and oranges..... and they don't provide us with any source data to try to deduce whether that is the case. Furthermore, we don't even know what they consider "wealth". Nor does it say much about whether "wealth" is actualy a relevant factor to consider. Playing devils advocate for a moment, lets examine a hypothetical scenerio. I earned 100,000 last year and paid 10,000 of it in taxes (making up figures out of thin air) and you earned 20,000 and paid 1,000 in taxes. I take my 100,000 - spend 10,000 on living expenses and put 90,000 in the bank. You take your 20,000 - spend 10,000 on living expenses and then spend 9,500 gambling in Vegas, saving 500 to put in the bank. According to thier model, I have paid only 11% of my "wealth" in taxes compared to you who has paid 200% of yours! This despite the fact that, aside from your Vegas trip, we both had the exact same standard of living (spending 10,000 each on living expenses) during the year. They seem to suggest that the tax system is unfair because I have not been punished for being prudent (i.e. not spending my wealth) and you have not been compensated for squandering yours (gambling in Vegas). I'm not saying that a person can't make an arguement that the poor have too much burden and the wealthy too little (although I wouldn't) but I'd be leery of any site that want's to play the sort of games this site does in order to support thier arguement. Rick, I haven't tried to define "fair" at all. You're making assumptions. I am using the best data available, and rejecting/debunking unsupported claims that rely on either questionable data or no data at all. I don't have an ideology to pursue other than getting an accurate view of the actual situation in order to have a proper basis for pragmatic decision-making. The one thing I'm really opposed to is partisan doom-saying and demagoguery. From either side. As I point out above, figuring out what wealth is, who's got what, and what's "fair" is quite a chore, and if you manage the first and the second you then get into the ideological/moral arguments of the third, and the practical effects of resultant public policies on capital formation and national economic health. But making claims about what's going on without empirical evidence is blue-sky partisan propagandist politics, not realistic analysis. Eating the rich can give you a long-term fiscal tummyache. Starving the poor is simply unacceptable. In between there's a whole lotta ground for reasonable political choices. Those are my parameters. Posted by: Tully at April 19, 2005 01:11 PMTully, I am no more for "eating the rich" then Adam Smith was. I also do not advocate basing taxation on assets for exactly the issues you cover in your comments. That does not mean that an analysis of tax liability should not include the analysis I have suggested. You do seem to think (and please correct me if I am wrong) that the top 50% of income earners paying X % of the income tax is unfair, I’m suggesting that if you look at the data in another way you get a completely different picture. I am also challenging the idea that looking at the income tax in a vacuum is not all that relevant. I am suggesting that your data points are way too narrow to be useful. Sure collecting data on net worth is hard but I’m not interested in what is easy because that may lead us to draw incorrect or incomplete conclusions. But first we have to settle the question of whether or not Adam Smith is correct, regardless of whether or not formulating a tax policy based on his notion of wealth would be easy or not. The question stands, would it be unfair to use net worth as a metric to gage tax liability. I’m not asking if it is easy, or even practical, I’m just asking if it could be done, would it not produce a more equitable distribution of tax liability. My position is that it would for precisely the reason Smith states, that since the protection of property and property rights are one of the bedrock functions of government, it follows that tax liability should have some relationship to the amount of prosperity one owns. That is not “Soaking the Rich” any more then asking someone to pay more money for heating a 60k sq foot home then heating a 1k sq foot home would be. Rick D, The real problem with the philosophy of basing taxation on net worth is that it is blind to how that net worth was aquired. I get the concept that you want to scale tax based upon the consumption of public resources (paid for by taxes) that corresponds to the individuals interest .... however, basing tax burden on net worth in many ways achieves the exact opposite of what you are advocating. Consider this Hypothetical: Person A earns 1 million dollars a year and spends 1 million dollars a year (wine, woman and song, etc). Person B earns 100K a year and spends 50K a year. Now answer these questions: 1) After 10 years which person will have the higher net worth? 2) Which person has likely consumed more public resources in those 10 years? 3) Which person according to the "net worth" metric will be paying a larger tax burden? 4) Which person truely could have afforded to pay a greater proportion of the tax burden? All the philosophy of basing tax burden on net worth does is discourage fisical responsibility (such as saving for retirement, offspring, or disabled dependants) and encourage rabid consumption and physical irresponsibilty. I don't care whether you are qouting Adam Smith or Adam Sandler.... the theory is arse backwards! Posted by: cengel at April 19, 2005 05:06 PMI do not accuse you of an "eat the rich" argument, Rick, I was noting my pragmatic parameters. I can work happily between the extremes if the reasons for the structure are justifiable and the results beneficial. I don't know why you think I believe the tax structure is unfair simply because I offered the data, which is "narrow" because it addressed a specific claim. I do know you can't shove the "burden" down the ladder much, simply because the money isn't there. The top 50% will always pay the bulk of taxes, for the same reason that Willy Sutton robbed banks. That's where the money is. ...would it be unfair to use net worth as a metric to gage tax liability... First define that wonderfully vague and usually self-centric term, "fair." I certainly don't think it's an invalid approach, but every path has consequences. The two purposes of taxation are revenue-raising and socio-economic engineering. The basic concept of progressive taxation is that the more you have (or the more you make) the higher the rate you should pay. But to use your heating analogy, should someone with that 60K sq ft home pay more per unit of energy used for their heating? They're already using more energy, and and are charged more for energy accordingly. But should they pay at a higher rate? Is that "fair?" Why, or why not? By itself the purpose of progressive taxation (as versus flat taxation) is explicitly socio-economic engineering. I'm not against progressive taxation or socio-economic engineering. What I'm against is using false, irrational, and/or emotional class-warfare arguments to justify socio-economic engineering. Posted by: Tully at April 19, 2005 05:20 PMRick; You do seem to think (and please correct me if I am wrong) that the top 50% of income earners paying X % of the income tax is unfair, I’m suggesting that if you look at the data in another way you get a completely different picture. I am also challenging the idea that looking at the income tax in a vacuum is not all that relevant. I know Tully is more than capable of defending himself but I would suggest that when you deal with differential tax rates for higher income based solely on "they have a lot already" or "they don't need that much" etc. the "fairness" argument becomes problematic. From those perspectives a 90% tax rate for millionaires is as fair as at 38% tax rate. Conversely any reducation in taxes to the wealthy is "unfair". That's why the fairness argument is so difficult. Posted by: c3 at April 19, 2005 08:15 PM Rather than a flat tax, any thoughts about replacing income tax with consumption tax? Would this promote personal saving? "purpose of progressive taxation (as versus flat taxation) is explicitly socio-economic engineering." Tully, That said, the goals of progressive taxation - leveling the playing field and the like, may be offensive to someone's sensibilities but it does not necesssarily make it wrong for the country. We're seeing right now the effects of having too much money influence Washington. Too many no bid contracts or handouts to those who can influence the politicos. You can't deny that the additional costs are detrimental to the individual taxpayer and the economy. (Remember the Bush 400 billion, er 700 billion drug plan?) In terms of your comment on energy usage, as to why one who uses more energy should pay more, (geez, who even wants to clean a 60K sq ft home) here's the problem one runs into regarding pricing. Larger consumers of energy hasten the day when system capacity needs to be increased, such as adding a new power plant and or natural gas line. These are very expensive undertakings. It may also mean an additional transformer or power line for the neighborhood that wouldn't have been necessary with a much smaller home. One of the reasons that PG&E in California spent so much money on energy conservation in the 80's was that it was cheaper than building another power plant. So larger individual consumers can be a distinct liability to the utility and their other, more frugal customers. So see the pattern? Bigger uses not only more but more in proportion. Not always of course but a case can be made that the effect is very significant. So to me, progressive taxation or pricing actually makes a certain amount of financial sense. (There is of course the obvious discontiuity when you get to the lowest levels and those levels get direct assistance or subsidies.)
Inre to externalities - I do know the term quite well having taken 3 or 4 econ courses years ago. It's just that only ex-college students who actually took econ know it so I left the term out of the discussion. Jury duty was waiting for the entire morning to find out they didn't need me. For work lost it was a very expensive morning. Sorry to hear your jury call was a waste. It's annoying to take the time/money hit just to be sent home. The least they could do would be to give you a spectator seat to something interesting. There are very solid governmental benefits for higher income earners that the lower income brackets rarely collect. Name 'em. Explain how they are related to (and justified by) higher income. Explain what benefits a married couple with $60K AGI gets that justify their paying taxes at a rate 80% higher than a a married couple with $55K AGI. Explain what benefits a single/divorced mother of two with $40K AGI gets that justifies her paying taxes at a rate 80% higher than a single/divorced mother of two with $38K AGI. Be specific. Once again, you offer a sweeping general justification without specific examples. The tax tables are real, and specific. The taxes paid are real, and specific. If you wish to claim that those being charged at a higher rate are being so charged because they receive disproportionally larger benefits, you should be specific about what those benefits are. Larger consumers of energy hasten the day when system capacity needs to be increased, such as adding a new power plant and or natural gas line. These are very expensive undertakings...larger individual consumers can be a distinct liability to the utility and their other, more frugal customers... Bull. Actually they cost less to service on a per-energy-unit basis than a bunch of small customers using the same overall amount of energy. It's both cheaper and easier to deliver ten units to one palce than one unit to ten places. If both the small customer and the large customer are paying the same rate-per-unit, the small customer is being susbidized by the large customer, not the other way around. To state the obvious, it's also not the customer's fault, big or little, if the utility can't get its act together. See "Blaming the Victim." As I said above, I'm not against progressive taxation or socio-economic engineering (or progressive taxation for socio-economic engineering). What I'm against is using false, irrational, and/or emotional class-warfare arguments to justify socio-economic engineering. We should know why we are doing what we are doing, what goal it is meant to achieve, and what tools are best suited for the job. Otherwise we're going to be pounding those nails with pliers when we really need hammers. Coming up with a bigger pair of pliers isn't a good solution to that problem. On the side issue of the WaPo quote: Corporate taxes have held at a fairly steady single tax rate for decades, while individual income taxes have fluctuated and have never been a flat rate in that period, but several rates. Corporate rates were (roughly) 50% until the 1980's, and have been around 35% since. During the same time frame, the top individual tax rates have gone from 91% to 40%--a much larger movement. The big killer has been the constant increase in payroll tax rates over that period--a tax of which businesses pay roughly half, although the collections are attributed to the individuals' accounts. So follow along here to get the real figures on individual-paid taxes versus business-paid taxes for the span 1960 to 2004. The ratio of individual-paid taxes to business-paid taxes in 1960 was 1.88. The same ratio in 2004 was 2.16. That's a shift in the "comparitive equality" of individual/business taxation of 14.9% in favor of business--a far cry from the massive (nearly 1000%!) shift the WaPo story implies through misleading presentation. Real, but not massive at all. And it still requires more examination of corporate income vs. individual income to actually compare the two--if baseline individual income grew 30% higher than comparable baseline corporate income during the period, then businesses would actually be getting hit proportionally harder than individuals. If it goes the other way, vice versa. But we still need those other figures to draw a meaningful conclusion. Until we have that, it's hot air. But at least it's accurate hot air. Along with the misuse of the payroll tax figure, WaPo also includes excise taxes as "business" taxes. That's as cheap a trick as counting payroll taxes as only being paid by individuals, just on the other side of the sheet. Excise taxes are always ultimately paid by the consumer. Always. And excise taxes have gone up much less quickly than other taxes, for a great number of reasons (including free trade agreements). But including them as "business" taxes is a naked and dishonest attempt to stack the deck taller. The term you were looking for in changes in marginal pricing is "elasticity," and is a function of supply and demand for individual products. Not applicable here in any general sense. Posted by: Tully at April 20, 2005 01:03 PMI'm pretty new here (came here by way of greengrl.org, a friend of mine's blog)...but I want to interject a question into your very engaging debate (great time waster of a thread, man!): For all the talk about who pays what portion of their incomes and what the burden is and who deserves that burden and blah blah blah... What about the fact that, in the "Bush Tax Cuts" (probably a misnomer, but one used ruthlessly by the Dems), the capital gains tax was eliminated for individuals? The problem I have with this is that the people with investment income are now paying ZERO taxes on that investment income. Now, I'm not saying we should tax the absolute crap out of that (there are probably at least a few retirees who were GREATLY relieved by those cuts) but what I AM saying is that it shifted the burden of taxes more fully down the scale to the lower end. Ultimately, it wasn't shifted at all...Congress just decided to print money and say "The Hell With It!" What would you guys say to that? How big was that chunk of the government's income? Is there some bigger issue that I'm not seeing that makes capital gains taxes such a terrible thing? (I noticed that they still allow people to deduct capital gains losses!) Thanks! Posted by: Floundericious at April 20, 2005 03:08 PMLOL I meant to say "losses under capital gains" pretty contradictory the way I had it! Posted by: Floundericious at April 20, 2005 03:11 PM"What about the fact that, in the "Bush Tax Cuts" , the capital gains tax was eliminated for individuals?" - It has? You might want to try telling that to the IRS.
----------- This change applies to capital assets that are held more than one year and sold or exchanged at a gain (including any installment payments received) on or after May 6, 2003 and before January 1, 2009. The lower rates apply to both regular tax and the Alternative Minimum Tax. Just the facts: 1) The tax change applies to capital gains on assets held at least one year. Nothing changes on assets held for less then 1 year. 2) The top capital gains tax was reduced from 20% to 15% until 2009 3) In the lower 2 brackets (10% and 15%) the capital gains tax is reduced to 5% until 2008. 4) In 2008 no capital gains is incurred by the bottom bracket. The top bracket still pays 15% 5) In 2009 the top bracket reverts from 15% to 20%. The bottom bracket reverts from 5% to 10%. Disclaimer: I am NOT an accountant. Please contact your own CPA if you have questions about the tax changes.
What cengel said. Notice that whereas the capital gain tax for those in upper brackets was previously twice the rate as for lower brackets, it is now triple that for lower brackets. A few points to add on capital gains taxes. Capital gains on investments held under a year are treated as ordinary income, taxed at your regular rate. If you're in the 33% bracket, you pay 33%. If you're in the 10% bracket, you pay 10%. To get the "cheap rate" you have to hold at least a year and a day. And net capital losses are only deductible to the tune of $3,000 a year. You can carry forward the excess losses, but still only use them up at $3,000/yr. Obviously this affects the rich more than the poor! So short-term capital gains are no different than ordinary income, and are taxed at the same progressive rates as any other ordianry income. And long-term capital gains are also taxed progressively, based on your income, just not at the same rates as ordinary income. You get a discount for being a longer-term investor--and yes, that is specifically designed to encourage the socio-economic engineering goal of encouraging national savings via long-term investment, and to discourage the economic fluctuations of market "churning." And it actually is true that reductions in capital gains taxes typically result in no immediate loss of tax revenue and sometimes even substantial immediate gains, as it encourages extra trading of pent-up assets, which means a higher base to tax. (The effect is NOT permanent.) Ultimately, it wasn't shifted at all...Congress just decided to print money and say "The Hell With It!" What would you guys say to that? How big was that chunk of the government's income? Pretty near zero, because that isn't what they did. What you describe is classic currency inflation, which didn't occur. Instead, Congress borrowed. A lot. That borrowed amount is called "the deficit." The per-capita money spent by the feds in 2004 came out to right around $7500 per person. Add up the total income and payroll and self-employment taxes reported as alrady paid on your 1040, adjust for your payment/refund, divide that by the number of people on your exemption list, and you'll have a fair idea of where you are on the "wealth transfer" scale. Posted by: Tully at April 20, 2005 05:22 PMYou all can transfer as much wealth to me as you want. I notice the CG rate is lower than the income tax rate. Any "social engineering" there? Posted by: tim at April 21, 2005 04:32 PMTully, that's the short answer. - btw did you know that managers of hedge funds need not pay taxes?
render done, back to work...have a good weekend Posted by: Marcus at April 22, 2005 03:08 AMThey get a lot more benefit out of SEC, FAA/TSA, airport budgets(bonds, infrastructure etc.) than I or your 38K/yr single mom will. They also pay a much larger amount of the "user fees" associated with those services, as well as the local and federal taxes for airport infrastructure. The question isn't should they pay more--they do, simply because they pay more taxes and pay the bulk of those user fees. The question is why they should pay at a higher base rate. Re: energy--once again, so what? By your own analysis, the newer hosues favored by the wealthier citizens are more energy efficent. And it's not their fault if the utilities don't keep up. The major bottleneck in gridwork and supply isn't the energy itself, it's the people stopping the untilities from adding capacity on a cost-effective basis. Look to the left there. Posted by: Tully at April 23, 2005 10:57 AMI notice the CG rate is lower than the income tax rate. Any "social engineering" there? Yep. Note that this only applies to long-term CG. Short-term CG is taxed at regular income rates. Long-term is taxed at lower rates to encourage long-term savings and investment, as I stated. If "the rich" (loose term for the better-off) simply spent all their money, the national savings rate would decline rapidly, and with it capital formation and economic growth. LT-CG rates lower than income tax rates are meant to stimulate economic growth. And it works. There's another side to it, though. CG rates that are too high "lock up" investments. No one wants to cash in and get whacked too hard with the tax stick. Money already in the market tends to get bogged into large established companies, leaving small growth companies starving for capital. And most of our economic growth comes from small business. So the rates have to be high enough to raise revenue, and low enough to encourage compliance and some turnover to keep fresh investment in the economy going. Balancing act. Side note: If the estate tax and various other federal death taxes are repealed, you can expect a move to apply the CG tax to original cost basis on inherited investment assets, instead of fixing the cost basis at time-of-death. This alone would likely replace most of the lost estate tax revenue--and keep legions of accountants and estate planners employed, while producing less economic distortion than the estate tax. It also wouldn't surprise me to see inherited tax-free retirement accounts like Roth IRA's revert to "plain savings" designations on inheritance, with profits and ernings taxable. Not a problem with regular IRA's, those funds are already taxed on withdrawal. Posted by: Tully at April 24, 2005 11:56 AM |
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