Challenge: Stabilize the Debt

[dex]

LOL I thought the same thing, but still played the game

tax cuts should create jobs (which pay taxes) and that type of pull through only had a net cost, but not a net benefit in increased tax revenues.

I think tax cuts creating jobs depends upon the starting point. If people are finding it difficult to make ends meet and the tax cuts allow for disposable income and the people spend (instead of saving); the cuts should create jobs. I don't think we are there in the USA.

I also, don't think the '86 Reagan tax cuts of the 80s created the bull market and economic prosperity. We were coming out of the down business cycle with which the cuts coincided. Some of the cuts were good, but we probably would be better off now with a lower national debt and budget deficit.

 

[jIMOh]

I think tax cuts creating jobs depends upon the starting point. If people are finding it difficult to make ends meet and the tax cuts allow for disposable income and the people spend (instead of saving); the cuts should create jobs. I don't think we are there in the USA.

I also, don't think the '86 Reagan tax cuts of the 80s created the bull market and economic prosperity. We were coming out of the down business cycle with which the cuts coincided. Some of the cuts were good, but we probably would be better off now with a lower national debt and budget deficit.

In my state (Ohio) consider the following from a "self employed" person making 500k before taxes

off the top is
35% fed tax
5.5% Ohio tax
6.2% SS tax (employee)
6.2% SS tax (employer)
1.45% medicare tax (employee)
1.45% medicare tax (employer)

The fed tax bill alone is $175,000 if I did that math right
just drop that tax to 32%.

If that person can hire a contractor for $15,000 to make him more money, then the government wins...

They can tax the 15.3% socialist taxes again AND a small amount of federal taxes, plus take one person off the unemployment payroll.

If there are 60 million people on unemployment payroll, can we drop taxes on the the 60 million richest people, in hopes they hire someone to make them more money?

I am being faced with this decision now- at one point do I hire someone to help me make more money? If I make 120k now, would I hire someone to earn me 15k more money? Maybe. 20k? almost. 30k? for sure.

If the tax I was paying at 120k was lower, the probability I would hire someone to help is higher (because I get to keep more of it and break even points are lower- so it lowers my risk).

 

[M Paquette]

I think tax cuts creating jobs depends upon the starting point. If people are finding it difficult to make ends meet and the tax cuts allow for disposable income and the people spend (instead of saving); the cuts should create jobs. I don't think we are there in the USA.

Right now the US (and much of the rest of the world) is coming off of a structural economic problem, a 'credit crunch', and a good bit of income that might normally go to discretionary spending is instead going to debt reduction, which produces less economic activity than spending.

Now, paying down debt is not a horrible thing for individuals or businesses to do. It does mean that we will see less economic activity, and less growth, for the near term than if that money were flowing into new goods and services. That means that fewer jobs are being created.

The gotcha is that in the US, an average of roughly 120,000 new would-be workers enter the workforce every month. In order to just tread water on unemployment, we would need to create 120,000 new jobs every month, which would require more economic growth than we currently have.

We won't see that sort of growth until we worked off a good bit of our structural 'hangover.'

 

[dex]

In my state (Ohio) consider the following from a "self employed" person making 500k before taxes

off the top is
35% fed tax
5.5% Ohio tax
6.2% SS tax (employee)
6.2% SS tax (employer)
1.45% medicare tax (employee)
1.45% medicare tax (employer)

The fed tax bill alone is $175,000 if I did that math right
just drop that tax to 32%.

I think the 175K is off some - the 35% is the marginal rate and the state and employer taxes are subtracted to get to the adjusted gross income subject to tax - but check me on that. It has been awhile since I read the income tax laws.

If that person can hire a contractor for $15,000 to make him more money, then the government wins...

They can tax the 15.3% socialist taxes again AND a small amount of federal taxes, plus take one person off the unemployment payroll.

If there are 60 million people on unemployment payroll, can we drop taxes on the the 60 million richest people, in hopes they hire someone to make them more money?

I am being faced with this decision now- at one point do I hire someone to help me make more money? If I make 120k now, would I hire someone to earn me 15k more money? Maybe. 20k? almost. 30k? for sure.

If the tax I was paying at 120k was lower, the probability I would hire someone to help is higher (because I get to keep more of it and break even points are lower- so it lowers my risk).

When working I would have been all in favor of a flat tax or national sales tax in place of the current income tax. Now that I'm ER, I think the current income tax works in my favor.

 

[clifp]

In my state (Ohio) consider the following from a "self employed" person making 500k before taxes

off the top is
35% fed tax
5.5% Ohio tax
6.2% SS tax (employee)
6.2% SS tax (employer)
1.45% medicare tax (employee)
1.45% medicare tax (employer)

.

Well to start off SS tax only applies to the first 106K so once you get over the figure the marginal tax rate drops to just over 40% since the Ohio tax is deductible. It is also a very rare self employed person who doesn't take advantage of company cars, cell phones, computers, as well entertainment. I suspect most have capital gains and depreciation expenses also.

I think there are definitely times and tax rates where cutting the top marginal tax rates will create more jobs and increase economic activity that will result in higher revenue for the government and more prosperity for all.

However, I don't believe that at the current tax rates and the current situation that cutting taxes will do much other than increase the deficit.


As for the simulator, I thought it was ok. I reached the end having only cut 1/2 of what was need and didn't feel like going back and re-doing.

 

[samclem]

In 2007, the federal budget (incl SS expenditures) was $2.8 trillion. The CBO estimated that Iraq and Afghanistan war-related expenses added another $115B, so we've got a total of approx $3 trillion in spending for 2007. (Source--Wikipedia)

As far as I recall, the government seemed to be accomplishing its required functions in 2007. Adjusted for inflation, the 2007 federal budget would have been approx 3.1 trillion today

Now, here it is 2010 and the federal budget is $3.5 trillion. We're wringing our hands about the terrible choices we must face if we are to get the expenditures down. Hmmm.

I know chopping out $400B to get to the 2007 federal spending level won't get us a balanced budget, but it's a move in the right direction. Yes, we've added some folks to the Social Security and Medicare rosters since then, but I know that the administration has found some heretofore unknown/unexploited efficiencies to be had in Medicare that can go toward meeting that tab.

 

[dex]

I but I know that the administration has found some heretofore unknown/unexploited efficiencies to be had in Medicare that can go toward meeting that tab.

soylent green?

 

[samclem]

soylent green?

It's a natural fit. We know the administration has proposed funding for "green jobs" and "green energy", this could be the big secret.

 

[dex]

It's a natural fit. We know the administration has proposed funding for "green jobs" and "green energy", this could be the big secret.

I liked that movie. I think it didn't do well because it was lumped in with all the other disaster movies made in the '70s
Considering that movie was made in '73 (based upon a book written in the early '60s) it was pretty good. It hits upon many of the issues we have today.

There was talk about a re-make but I don't know what the hook would be today.

That poster looks as if it is from Mad Magazine - another favorite of mine.

The movie is set in 2022 - 12 years to go.

 

[Emeritus]

Thanks, that's an interesting study and the authors are very clear that their work has limited application, that more work is needed, and that previously published work (Ireland, 1994) reached different conclusions (esp about the impact on govt revenues in the US from a decrease in taxes). Modesty is becoming in an academic, we should see more of it.

I am curious as to why you bring up business tax rates in particular. Surely you're not claiming that US corporate tax rates are low by OECD standards.

Nominal Business tax rates have little or nothing to do with the actual taxes businesses pay
http://www.oecd.org/dataoecd/30/16/41069272.pdf

"Federal plus state corporate income tax revenues in 2004 totaled $225.8 billion, or 2.1 percent of GDP. Corporate income taxes are also a
major source of revenues in other countries. For members
of the Organization for Economic Cooperation and Development
(OECD), corporate income tax revenues in 2002—the most recent year for which data are available— averaged 3.4 percent of GDP"

http://www.cbo.gov/ftpdocs/69xx/doc6902/11-28-CorporateTax.pdf
so

So if we increased corporate taxes by 50% we would be at the OECD average.

Yeh--I'll call that low

 

[samclem]

Nominal Business tax rates have little or nothing to do with the actual taxes businesses pay
http://www.oecd.org/dataoecd/30/16/41069272.pdf

"Federal plus state corporate income tax revenues in 2004 totaled $225.8 billion, or 2.1 percent of GDP. Corporate income taxes are also a
major source of revenues in other countries. For members
of the Organization for Economic Cooperation and Development
(OECD), corporate income tax revenues in 2002—the most recent year for which data are available— averaged 3.4 percent of GDP"

http://www.cbo.gov/ftpdocs/69xx/doc6902/11-28-CorporateTax.pdf
so

So if we increased corporate taxes by 50% we would be at the OECD average.

Yeh--I'll call that low

It's questionable whether it is appropriate to compare the taxation burden experienced by businesses in different countries by using "corporate taxes as a % of GDP."

An appropriate metric is the "effective corporate tax rate", and it's not an easy statistic to find (obviously, it will be subject to some degree of subjectivity, especially concerning what constitutes "income"). Here's one private study by the American Institute of CPAs with data from 2007. The information came from the actual review of the records of thousands of companies, and the ETR includes taxes paid to sub-national entities and even to foreign countries (when applicable). Due to the various ways the tax codes exclude income, etc, there's a big difference between the statutory highest marginal rate (the US clearly has among the highest statutory marginal rates, at 35%) and the effective taxation rate. But, hey, hey, the US still come out near the top with an effective rate of 29%. From the study:

Also consistent with expectations, U.S.-based companies pay an effective rate of approximately 29 percent, three percentage points above the worldwide average of approximately 26 percent. However, a few countries pay even higher effective rates: Argentina, Japan, Italy and Russia.

Here's a direct link to the table of statutory and effective corporate tax rates in the study: link

 

[FinanceDude]

Nominal Business tax rates have little or nothing to do with the actual taxes businesses pay
http://www.oecd.org/dataoecd/30/16/41069272.pdf

"Federal plus state corporate income tax revenues in 2004 totaled $225.8 billion, or 2.1 percent of GDP. Corporate income taxes are also a
major source of revenues in other countries. For members
of the Organization for Economic Cooperation and Development
(OECD), corporate income tax revenues in 2002—the most recent year for which data are available— averaged 3.4 percent of GDP"

http://www.cbo.gov/ftpdocs/69xx/doc6902/11-28-CorporateTax.pdf
so

So if we increased corporate taxes by 50% we would be at the OECD average.

Yeh--I'll call that low

So, if we increase corporate taxes 50% we'll lower unemployment and fix the economy? Uh, not really...........

 

[Emeritus]

It's questionable whether it is appropriate to compare the taxation burden experienced by businesses in different countries by using "corporate taxes as a % of GDP."
Here's a direct link to the table of statutory and effective corporate tax rates in the study: link

Its a totally correct measure if you are trying to figure out how much of the social burden is borne by corporations, which is the underlying policy question.

Tax revenues are directly related to GDP. any laffer style claim has to show an increase in GDP

 

[Emeritus]

So, if we increase corporate taxes 50% we'll lower unemployment and fix the economy? Uh, not really...........

Not the question. The short term USA economy is clearly suffering from a lack of consumer demand due to high unemployment and poor job protection. The long term economy is much more complicated.

Corporate taxes are an excise tax on the benefits of the corporate form of governance. Those benefits are provided by government and are substantial. They are also always a matter of choice. No one needs to pay corporate taxes. Organize your business as a sole proprietor or a partnership and you pay no corporate taxes. If you want the benefits, pay the fee.

 

[Texas Proud]

We have gotten onto taxes more than what I think the OP wanted... but I will throw in an issue that seems to be left out...

My boss is one who makes over the $250K... and guess what... he says all the time he gets screwed... he had people do research for the research credit... but did not get to use them because after a SMALL amount of credit he hit the AMT tax... IIRC, he has over $60K of credits that he can not use...

So, any tax break they come up with, he will not do anything because HE will not get the benefit of it... you will need to change the AMT before someone like him will do anything...

 

[jIMOh]

We have gotten onto taxes more than what I think the OP wanted... but I will throw in an issue that seems to be left out...

My boss is one who makes over the $250K... and guess what... he says all the time he gets screwed... he had people do research for the research credit... but did not get to use them because after a SMALL amount of credit he hit the AMT tax... IIRC, he has over $60K of credits that he can not use...

So, any tax break they come up with, he will not do anything because HE will not get the benefit of it... you will need to change the AMT before someone like him will do anything...

I agree if you work for a mega corp making 250k or even 400k that most tax credits will NOT apply to you.

I do not think the tax credits should apply- your boss has the security of megacorp and makes a great income.

Take a small business owner which has about 250k or 400k of profit (income) each year. If that small business owner wants to make more money, they need to either
a) do more work themselves
b) have more passive income
c) hire someone to do some work (whether full time, part time, consulting or similar)

What gets the economy going is c), meaning that if that small business owner had $80k tax on that 250k profit, (33% tax), if that tax is reduced 15k or so, to where the business owner could choose to "expand" business by hiring another person for that 15k for some part time work, that does wonders to get economy going.

If that business owner just banked the 15k, then probably not, but most business owners will do little things to expand business if their "risk" is low.

Risk meaning if $1000 of profit is made, will owner keep $500 of that or less than that? Based on Fed tax+State tax+ insurance fees+medicare tax and similar will most of profit come back to business owner, or will various entities taking their cut make the investment in HIRING help not worth the risk.

My wife consults for small businesses and her fiscal year starts Oct 1. The upcoming fiscal year is probably going to be worst on record for her (even worse than 2008). Many small businesses which kept cash on hand to sustain business thru a down turn have now run out of cash.

 

[Milton]

My boss is one who makes over the $250K... and guess what... he says all the time he gets screwed...

I wonder if he would prefer to live in a 'gated community', clutching a pistol and afraid to go out at night. As Oliver Wendell Holmes Jr. put it, “I like to pay taxes. With them I buy civilization."

 

[ERD50]

I wonder if he would prefer to live in a 'gated community', clutching a pistol and afraid to go out at night. As Oliver Wendell Holmes Jr. put it, “I like to pay taxes. With them I buy civilization."

It's all a matter of degrees. But I don't think that ...

In 2001 ... the highest quintile, which in total earned 52.4% of all income and paid 82.5% of federal income taxes. The fourth quintile earned 20.7% and paid 14.3%. The third quintile earned 14.2% and paid 5.2%. The second quintile earned 9.2% and paid 0.3%. The lowest quintile earned 4.2% and received a net 2.3% from the federal government in income "credits".

Try that condensed:

[SIZE="1"]Top Quint - 52.4% of all income;  paid 82.5% of FIT.
4th Quint - 20.7% and paid 14.3%. 
3rd Quint - 14.2% and paid 5.2%.
2nd Quint -  9.2% and paid 0.3%.
Low Quint -  4.2% and received a net 2.3%[/SIZE]

exactly paints a picture of a condition of feudal Lords and peasants with pitchforks.

-ERD50

 

[Independent]

In my state (Ohio) consider the following from a "self employed" person making 500k before taxes

off the top is
35% fed tax
5.5% Ohio tax
6.2% SS tax (employee)
6.2% SS tax (employer)
1.45% medicare tax (employee)
1.45% medicare tax (employer)

The fed tax bill alone is $175,000 if I did that math right
just drop that tax to 32%.

If that person can hire a contractor for $15,000 to make him more money, then the government wins...

They can tax the 15.3% socialist taxes again AND a small amount of federal taxes, plus take one person off the unemployment payroll.

If there are 60 million people on unemployment payroll, can we drop taxes on the the 60 million richest people, in hopes they hire someone to make them more money?

I am being faced with this decision now- at one point do I hire someone to help me make more money? If I make 120k now, would I hire someone to earn me 15k more money? Maybe. 20k? almost. 30k? for sure.

If the tax I was paying at 120k was lower, the probability I would hire someone to help is higher (because I get to keep more of it and break even points are lower- so it lowers my risk).

We must think differently. If I understand the situation correctly, I'm a business owner who is netting $500k before tax, with a marginal tax rate of 44%. I can hire someone who'll add (making numbers up) $60k of revenue and $45k of (all in) expenses, so I net $15k. Would I hire that person knowing that $6,600 of my $15,000 will go to the gov't? Of course, why not? My after tax $8,400 > 0, it's extra money.

I don't see why your "breakeven point" moves because of the tax. If marginal revenue > marginal cost, I make an after tax profit regardless of the tax rate (unless taxes > 100%).

I don't see why higher taxes increase my risk. If I guessed wrong and this employee only generates $30k of marginal revenue, I lose $15k before tax. But, that reduces my taxable income by $15k, so the gov't picks up $6,600 of my loss. Higher taxes buffer my gains/losses on both the up and down side, I don't call that "higher risk".

Maybe most important in terms of public policy: If there are really customers out there willing to spend $60k on my products, and I decide not to hire the employee, they'll just go to one of my competitors. In that case the employee is hired by someone else and the economy gets the job anyway.

 

[Emeritus]

It's all a matter of degrees. But I don't think that ...


Try that condensed:

[SIZE=1]Top Quint - 52.4% of all income;  paid 82.5% of FIT.
4th Quint - 20.7% and paid 14.3%. 
3rd Quint - 14.2% and paid 5.2%.
2nd Quint -  9.2% and paid 0.3%.
Low Quint -  4.2% and received a net 2.3%[/SIZE]

exactly paints a picture of a condition of feudal Lords and peasants with pitchforks.

-ERD50

1) income taxes are only part of the tax equation.
.

I
"It is true that the U.S. tax and benefit system is does far less than other OECD welfare states to change the Gini coefficient after taxes-and-transfers. Before taxes-and-transfers, as Tom Schaller usefully explains, the U.S. Gini coefficient is 0.46, just above the OECD average of 0.45. Italy, Germany, and France are more unequal than the U.S. before taxes and transfers.
But after taxes-and-transfers, the U.S. is tied for most unequal with Portugal at 0.38"

From that well known commie rag the national review

Does Paul Krugman Understand Net Tax Rates? - The Agenda - National Review Online

Now when the lords merciful of the national review look at the poor here is what they claim

"If you receive more in benefits than you pay in taxes, I’d say you’re getting a pretty good deal. If you’re paying more in taxes than you’re receiving in benefits, well, that’s less true."

So if you are starving and have nothing and you get a dollar and pay no taxes you have a "pretty good deal"

What lord could have said it better?

 

[HFWR]

We [-]rob banks[/-] tax "the rich" because that's where the money is...

The topic is "stabilize the debt", which, in my view, will require everyone to hold their noses, and accept less goverment/more taxes. There is no other feasible way to get the deficit/debt under control.

It's too big...

 

[dex]

The topic is "stabilize the debt", which, in my view, will require everyone to hold their noses, and accept less goverment/more taxes. There is no other feasible way to get the deficit/debt under control.

Correct - there is no magic.

 

[M Paquette]

Correct - there is no magic.

Yaaay!

 

[jIMOh]

We must think differently. If I understand the situation correctly, I'm a business owner who is netting $500k before tax, with a marginal tax rate of 44%. I can hire someone who'll add (making numbers up) $60k of revenue and $45k of (all in) expenses, so I net $15k. Would I hire that person knowing that $6,600 of my $15,000 will go to the gov't? Of course, why not? My after tax $8,400 > 0, it's extra money.

I don't see why your "breakeven point" moves because of the tax. If marginal revenue > marginal cost, I make an after tax profit regardless of the tax rate (unless taxes > 100%).

I don't see why higher taxes increase my risk. If I guessed wrong and this employee only generates $30k of marginal revenue, I lose $15k before tax. But, that reduces my taxable income by $15k, so the gov't picks up $6,600 of my loss. Higher taxes buffer my gains/losses on both the up and down side, I don't call that "higher risk".

Maybe most important in terms of public policy: If there are really customers out there willing to spend $60k on my products, and I decide not to hire the employee, they'll just go to one of my competitors. In that case the employee is hired by someone else and the economy gets the job anyway.

The break even point is about risk and reward. If the cost of hiring help is 15k (my example) or 45k (your example) there is risk.

Risk that the person takes business away
risk that person might have to collect unemployment if things go bad
risk that person might go on disability and require certain benefits to be paid

In return for taking on those risks, I expect a return. Taxes influence the ROI. Is it worth those risks to add $8400 (your example) to the 500k I already earned?

 

[Emeritus]

The break even point is about risk and reward. If the cost of hiring help is 15k (my example) or 45k (your example) there is risk.

Risk that the person takes business away
risk that person might have to collect unemployment if things go bad
risk that person might go on disability and require certain benefits to be paid

In return for taking on those risks, I expect a return. Taxes influence the ROI. Is it worth those risks to add $8400 (your example) to the 500k I already earned?

the hypothetical said "expenses are all in" which elimiantes the 2nd 2

What is
"Risk that the person takes business away"?
not objecting, simply not understanding