The Other Way

As I’ve said before, I don’t think we can balance the budget without raising taxes. Of course, tax hikes have to be conditional on even larger spending cuts (a 3-1 ratio at least). And they should be real spending cuts, not phony-baloney baseline cuts or giving ourselves credit for ending the war in Afghanistan.

Given that, you might think I see Obama’s tax proposal — which mainly involves setting higher marginal rates for millionaires — as the beginning of a “Grand Bargain”. But I don’t. It’s a perfect example of how not to do tax policy. It’s built on the Warren Buffet complaint about not being taxed enough (even though Berkshire-Hathway owes hundreds of millions in back taxes). It then institutes a series of escalating marginal rates that, incidentally, will not tax Warren Buffet since his salary is actually small.

It’s crap. It’s the same mentality — we must tax X! — that gave us the abomination that is the Alternative Minimum Tax. That creature was started because of hysterical media reports about millionaires not paying any taxes because deductions wiped them out. The tax burden of the AMT is bad enough, but the deadweight loss — the time, energy and money burned to comply with it — is death.

Our hideous and destructive tax code has been built by bullshit like this. No one sat down and said, “What’s the best way to raise the money for our government while minimally impacting the economy?” Instead, it’s been built of a series of things we should subsidize (kids, home ownership, charity) and things we should punish (rich people). It’s been built on they hysteria-of-the-week. And it’s a simple fact that you will not create a good tax system this way.

Taxing Warren Buffet more is not the basis of good policy. Taxing Warren Buffet more should not be our goal (although it may be the result). Narrow aims like that are what have given us the current mess in which the IRS can’t tell you whether your tax return is right or not. Narrow aims like that distort markets and create unintended consequences. Narrow aims like that result in stories like this, where ex-pats in foreign countries are being threatened for not filing tax returns because someone got a bug up their butt about it.

There are a number of viable alternatives. Milton Friedman proposed a flat tax calibrated to provide negative tax to poor people, the negative tax replacing the welfare system. Simpson-Bowles outlined a number of proposals that the GOP is currently favoring that would eliminate most deductions in favor of a lower overall rate. The Value-Added Tax is a possibility and would be far better than the Fair Tax. One change I would like to see: eliminate the corporate tax completely but tax capital gains and stock income at normal income rates.

All of these are viable options. Any is preferable to the system we have now. And while none would stimulate the economy right away, the long term effects could be dramatic:

It will make U.S. multinationals more competitive and more likely to increase employment here in the U.S. It will shift employment away from the tax avoidance industry of lawyers and accountants to skilled workers who actually produce goods and services. It will cut down on the roughly $2 trillion U.S. multinationals have stashed overseas to avoid high U.S. taxes. It will stop rewarding U.S. multinationals for carrying debt and building financial services subsidiaries and will make them less vulnerable to financial crises. It will increase dividend payouts. It will lower the cost of capital and increase investment. These benefits only arise after firms change the way they operate, and that will take time, like many years.

On the individual side of the income tax, tax reform will reduce the excessive subsidies for housing and redress the disadvantage of renting. It will reduce health benefit subsidies which drive up health care costs. It will reduce the complexity which forces most taxpayers to use a tax preparer. With some extra effort, we could go to a return free system for most taxpayers.

Tax reform is the definition of long-term thinking. It will take years to do (Reagan had to fight for two years to get even mild reform) but will pay off over decades. If Obama were serious about both the deficit and the economy, this would have been the subject of his speech this week.

It wasn’t. Campaigning for 2012 was.

Comments are closed.

  1. Seattle Outcast

    Since they never actually cut spending, they need to do that first. After spending has been cut enough to make most progressives commit suicide, we can then seriously consider if taxes need to be raised.

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  2. AlexInCT

    I am with SO on this. We should NOT allow them to do any “revenue increases” until they first demonstrate that they are serious about rolling back the behemoth. And then, I would prefer that if we allow them to steal even more of our money, all revenue from any tax increases be tied to a law that specifically states they are restricted to paying down the debt, period. No loopholes.

    Without those two conditions being met first, letting these crooks raise taxes on anyone again is going to result in exactly the same thing it has for the last 5 decades: they are going to spend as much as 30% more than whatever extra revenue they now get, and we will just be doing this kabuki dance yet again sooner than later. The only difference then is that we will likely have a $20 trillion, or as I expect if we keep spending in Obama mode for the next decade at least $30 trillion, debt obligation instead of the $15 trillion we have now.

    No new taxes until we have significant cuts that bring government’s spending on par with what it can collect under the current tax structure (talk about an incentive to make the economy grow so they can get more income for a change). Then, when we add new taxes, make sure they only pay off debt. Anything short of that is just insanity.

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  3. richtaylor365

    One change I would like to see: eliminate the corporate tax completely but tax capital gains and stock income at normal income rates.

    No, no no, a thousand times……..NO!!! As talked about in the other thread, do you realize how many middle class retired people count on dividends and cap gains to supplement their SS checks? Not even going in to the double taxation argument, cap gains and dividends are separate and have always been treated differently then “salaries” . Not to mention that your proposal would absolutely decimate the stock market, removing any incentives to participate, and would grind this economy to a grinding halt.

    Re: raising taxes, the “immigration” analogy works for me:

    1) It’s stupid to have any discussions about immigration reform without a secure border (It’s stupid to have any discussions about raising taxes without establishing a spending ceiling).
    2)Secure the border first, once this is done and the tide is stemmed, then we can determine what needs to be done with those already here (Once the tide of spending is stemmed and the government has proven to the folks that they are responsible stewards of our tax money, only then can we talk about increasing those taxes).

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  4. Hal_10000 *

    Rich, I see your point. However, for people on fixed incomes, their tax rates would be low to begin with. Distributions from Roths are tax-free, in fact. If you eliminate deductions, the tax rates for most people would be comparable to or lower than what the cap gains and income rates are *right now*. The only people who would be paying higher rates would be those in the top tax bracket. And even that right would be lower than what cap gains and stock income were taxed up until the Bush era, when we did not have a noticeable economic collapse.

    I also don’t see that this would destroy the stock market or anything else. You would throw billions into corporations and eliminate hundreds of billions in deadweight loss. Remove incentives? How on Earth does that happen when your cap gains rate is still lower than what it was for most of history? Frankly, I think the low rates on cap gains have created problems, encouraging speculation and stock flipping. Since we lowered the cap gains rate tax, we’ve had two huge market bubbles driven by speculation. And in both cases, the chief culprits were paying very low tax rates.

    You can read McArdle’s argument for eliminating corporate taxes. I’m not 100% on it; mainly threw it out as an idea. I might favor a flat corporate tax. But I have to see any evidence that taxes on cap gains ad stock income are a massively destructive as our corporate tax system.

    http://www.theatlantic.com/business/archive/2010/10/why-we-should-eliminate-the-corporate-income-tax/65351/

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  5. Kimpost

    Lower the corporate tax rate to 25 or 30%, eliminate as many loopholes as is politically possible, and lower the federal taxes a couple of points, especially for the lower brackets. And end it all by slapping a 20% VAT on everything. If that’s not politically possible, then start at 10% and build from there. Over time you’ll be able to raise it. It’s also a good tax for social engineering purposes. Capital gains at 15%? That’s ridiculously low, but I’d keep it at that, because of the current state of the economy. In the long run it has to go up, though (It’s 30% in Sweden).

    You basically need to lower some taxes, but add some new ones. I don’t think you can do it any other way. Your net revenue needs to go up, not down.

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  6. trade_pro

    I make money and decide to invest it in the market, let’s say 10K.
    One of you also invests 10K.
    (Will say the tax rate for both of us is 10% which is just easier)

    In 2011, I lose 6K and you win 6K. Account balance me: 4K —–you:16K

    I can write off a maximum of 3K this year and 3K next year on a carryover. I save $300
    You, on the other hand, must pay tax on the full 6K winnings. You pay $600.
    Government has $300 of cash flow.

    In 2012 I make 6K and you lose 6K. Account balance me: 10K —–you:10K
    I am taxed on 6K minus the 3k carryover. I pay $300
    You are allowed a write off of 3K this year and 3K next year. You save $300.
    Government still ahead the $300 from last year but this year a scratch.

    In 2013, we do not trade. (New tax rates deter us.) Account balance me: 10K —–you:10K
    No taxes on my account.
    You are allowed the $300 deduction.
    Government loses the $300 in your deduction.

    Nice loan given to the government for 2 years interest free on money that basically just changed hands for a year.
    It’s only $300 but that is at a 10% tax rate with 10K. What are the actual tax rates? What is the amount of money in the stock market? A hell of alot more in both cases.

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  7. Dave D

    Maybe I am too simplistic, but they JUST raised forecasted defecits from Bush’s all time (non-stimulus) high of ~425BILLION per year to bHo’s ~1.5+ TRILLION per year for the forseeable future and you don’t think there is PLENTY of room to cut spending before raising taxes? WTF? And this is BEFORE Obamacare kicks in?

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  8. richtaylor365

    Roths are a relatively new concept, great for new new investors but the ratio of Roth holders to stock holders is probably one out a hundred, maybe less. For those 10s of millions of retired boomers who worked for a fortune 500 company and still hold the company stock, the cash flow thrown off from dividends and cap gains can be the difference between a comfortable retirement and poverty. Every pension, 401K, 457B, they all own stocks.

    How on Earth does that happen when your cap gains rate is still lower than what it was for most of history?

    Because corporations use that money to expand their business, money that they would otherwise have to borrow. It’s all risk/reward, if the reward (in the form of capital appreciation and income from cap gains) is not sufficient to justify the risk, then folks will go elsewhere, like bonds.

    And regarding flipping, how is that even an issue when the short term cap gain rate is the ordinary income rate?

    Corporate taxes need to be lowered, if for no other reason then to be competitive with the rest of the world. The 20 to 25% range makes the most sense to me.

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  9. Hal_10000 *

    There is plenty of room to cut spending. Spending is near 25% of GDP, an unsustainable level. However, tax revenue is currently at 15% and would maybe go up to 18 if the economy were good. That also is unsustainable.

    5% GDP spending cut, 2% increase in revenues and you’re balanced. Call it 3-1 spending to tax hikes. I’d prefer an even higher ratio since spending tends to always come in above projection.

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  10. AlexInCT

    Lower the corporate tax rate to 25 or 30%, eliminate as many loopholes as is politically possible, and lower the federal taxes a couple of points, especially for the lower brackets.

    I think you are right about the corporate taxes needing lowering and the loopholes needing closing. Especially the sweetheart deals big corps like GE that are in bed with government get. However I would like to understand what you mean by lowering the tax bracket for the lower brackets. The lowest bracket already is getting a massive wealth transfer as they often end up with subsidies ranging from $2-$4K when they file their income tax returns and the IRS sends them back their money plus that extra cash. This makes it so something like 47% of people not only pay no taxes, but benefit big time from those that do pay taxes as long as they can work just long enough to pretend to be employed. The lowest bracket after those that pay nothing and get money back is then 10% if I recall correctly. Lowering the taxes on them will just serve as an incentive for them to also think others should be paying more taxes.

    And end it all by slapping a 20% VAT on everything. If that’s not politically possible, then start at 10% and build from there. Over time you’ll be able to raise it.

    I dislike the VAT intensely because contrary to the belief that it is based on how much you spend, it still impacts the poor disproportionately. When all I have to spend is to meet my basic living requirements, losing 20% on that hurts ass. And I do not have the choice not to eat or pay for heat/gas. The guy that has cash to spare and wants to spend it on what we would consider luxury items has the choice. A flat tax would be far fairer.

    It’s also a good tax for social engineering purposes.

    As I already pointed out that’s not true, and “social engineering” anything, but especially taxes, is a non starter. If anything most of our problems today are tied directly to the social engineers and their schemes.

    Capital gains at 15%? That’s ridiculously low, but I’d keep it at that, because of the current state of the economy.

    The democrats are obsessed with changing that upwards precisely because the people impacted the hardest will not be the rich, but all the people like me that have been saving on my own because I expect Social Security to be broke or worthless by the time I can collect. And when they wipe us out the believe that we will have no choice but to beg them for help. Presto, they get to run our lives anyway.

    In the long run it has to go up, though (It’s 30% in Sweden).

    And how many people short of the ultra rich invest?

    You basically need to lower some taxes, but add some new ones. I don’t think you can do it any other way. Your net revenue needs to go up, not down.

    It would be a lot more effective if they focused on cutting spending first though so they are not as hungry to plunder the people.

    Societies abandoned the concept of plundering their neighbors in raids and wars to gain wealth, and our governments basically substituted plundering the productive as a means to jack up their income.

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  11. Hal_10000 *

    Also, my main point is that if you want to get the economy going long term, tax and spend stimulus ain’t the way. (Funny how libs say we can’t cut spending in a recession but we can raise taxes). Tax reform is an economic stimulus that costs nothing. You could even end up with more revenue on the outside but a healthier economy overall, as happened in ’86.

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  12. AlexInCT

    How does this formula do anything to the debt? And how quick will it be before they tell us they need more money anyway? Here in Ct our governor told everyone we had to “share” the sacrifice and jacked taxes to the tune of a billion extra dollars a year with the promise of cutting that much out fo the budget. So we are now paying more taxes and have gotten practically nothing from the pubic sector but token things to make it look like the governor is playing hardball. Come next year they are going to raise taxes yet again, and the same idiots that howl the loudest will vote again for demcorats.

    We are doomed.

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  13. Section8

    If Obama were serious about both the deficit and the economy, this would have been the subject of his speech this week.

    So do you still believe the Republicans threw away a 4 to 1 offer from Obama as you were stating back when you thought the Tea Party was wrong for making a stand, or are you starting to believe now, as I and some others here did back then, that he was full of shit and wasn’t about to truly commit to anything of the sort that involved any serious cuts or entitlement revisions?

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