New proposed tax on income from interest/dividends

[eridanus]

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Originally Posted by ERD50 Here's a quick example - what happens when a big company wants to build a new plant that is going to create many jobs? Different municipalities fight over them, offering tax breaks to get those jobs. And it works. A lower cost of capital is an incentive, plain and simple.

This simply shifts the tax burden to the existing residents and existing businesses. It's questionable whether the jobs created (even with sales and property tax to the nth degree) provide enough to equal the tax incentives (aka, money taken from taxpayer). Do you think politicians do their due diligence when tossing around millions of taxpayer money? Of course not. They just want to claim that they "created jobs."

If the money is given to X, it's taken from Y.

[FUEGO]

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Originally Posted by haha The only way we are going to convert Independent is to get him a better job and more capital.

Hey, uh, I'll volunteer to be converted on those terms...

[ERD50]

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Originally Posted by haha The only way we are going to convert Independent is to get him a better job and more capital.

So true, lol! Of course I don't expect to convert him. But I do like to enter into these discussions to better understand how the people I share this planet with think about things, and maybe learn good ways to react. And to challenge my own thought process.

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Originally Posted by . . . Yrs to Go Or we could tax capital and labor the same and let the market determine the optimal mix? I thought it was a central tenant of conservative political thought that government shouldn't put its fat thumb on the scale weighing these kinds of decisions.

Well, it would drive this thread further off, but that's why I favor an NST and pre-bate in place of other taxes. That ain't perfect either, but I think it comes closer to being 'fair' than anything I've seen and I would not want exclusions for different items - that's where the govt gets its hand in and starts messin' with things.

I've got to run, but your tax example isn't apples-apples. A $3 before tax raise on $100 take home is not a 3% raise. At a 25% tax rate for each, the earner first gets $133.33 ($100 take home) and a 1.03 of $133.33 is $137.33 and after 25% tax would be $103 take home; $3 more (of course, they are all multiples).

So the worker keeps up with inflation, and the investor falls behind @ $2.25. Investments need to exceed inflation *and* taxes to provide an increase in buying power. If a worker gets a COLA, he/she is maintaining their buying power, unless the raise increases their effective tax rates. Because raises are on your gross, not some twisted math using gross and net.

-ERD50

[ERD50]

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Originally Posted by eridanus This simply shifts the tax burden to the existing residents and existing businesses. It's questionable whether the jobs created (even with sales and property tax to the nth degree) provide enough to equal the tax incentives (aka, money taken from taxpayer). Do you think politicians do their due diligence when tossing around millions of taxpayer money? Of course not. They just want to claim that they "created jobs." If the money is given to X, it's taken from Y.

Well, I really gotta run.... but that is a valid point. But my real point is not whether those incentives were justified or not, but just that they are a motivation for the company.

Let me twist it a little to balance out my earlier statements a bit - using my example of the capitalist and the ditch-diggers - we could say that the public is paying the profit that motivated the capitalist so it is really the public that made it all possible, not the capitalistic. And it's true (but only part of the truth). That is why I keep saying, why try to separate who works hard or who is lucky, etc. It is a system that works together. The capitalist could be seen as a catalyst for jobs, but it takes workers and customers too.

Actually, just to put perspective on this, I like to think about a "head tax" once in a while. After all, for the most part, our defense system protects the rich and poor houses from enemy bombs equally. And from what I've seen, the Fire Dept is just as diligent in putting out a fire on the poor side of town as they are the rich (maybe more so, the closely spaced houses can spread faster), etc. So why don't we all pay the same? Obviously, we can't (w/o a huge reduction in spending...hmmmm), but I find it interesting to think about.

-ERD50

[Texas Proud]

One of the problems with taxing capital is that capital can move easily... and also that if you tax the gains to much, people will not invest in riskier companies... so our society suffers from lack of innovation...

I remember when I was in England, we were on a tour and someone asked why there was only one chimney on a house that had more than one fireplace... it seems that the King wanted more money and wanted to take it from the 'rich'... so he (or someone under him) thought that they should have a tax on the number of fireplaces you had... which was determined by the number of chimneys.... so the designer started to have all of them meet at one place with only one chimney... so they did not have to pay more tax....

Another way around taxes is what I saw in Egypt and I heard it is the same in Mexico. Seems that 'property tax' is not collected until the structure is finished... so you see almost every structure not finished... I was surprised how many places had rebar sticking up in the air... you would think it was a requirement since it was on almost every building you saw....

Finally... if you tax capital at a high rate... capital does not move easily... this has been proven a number of times when they reduced the capital gains rate and got more income... so if you tax capital at the same rate of labor... you again stifle growth... I have a perfect example... back in the early 80s there was a rich guy for whom I did his taxes... he had an offer to buy one of his banks... but the tax bill was (IIRC) $20 mill... he decided that he would hang on to that bank.. which made it less competative than what it would have become if he sold... something small, but multiply that by thousands and you will see how quickly the economy can grind to a halt...

[haha]

Absolutely. All you have to do to see this is to compare the USA before Reagan to the USA after the far reaching tax changes that came along during and after his adminstration.

Ha

[metabasalt]

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Originally Posted by . . . Yrs to Go The anti-tax hysteria and the "socialist" hyperbole, which is completely at odds with any objective fact, does not make putting our fiscal house in order any easier . . . and could eventually lead to disaster.

Boy you are right there! I wish I had time to pursue this. Maybe tomorrow.

[youbet]

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Originally Posted by eridanus If the money is given to X, it's taken from Y.

Nice summary of a ten page thread. Everybody wants to be X with the gov't taking from Y and giving to them......

[Gone4Good]

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Originally Posted by Texas Proud One of the problems with taxing capital is that capital can move easily... and also that if you tax the gains to much, people will not invest in riskier companies... so our society suffers from lack of innovation...

Yes, but taxes on labor reduce its supply (which is a point conservatives raise only when it suits their purpose but then convieneniently forget when talking about taxes on capital). Wage taxes also increase the cost of labor. Without question I would be willing to work for less if I could do so in a legally tax-free manner.

So the question remains, why have the government arbitrarily calibrate the tax code in a way that favors one or the other? Won't that necessarily create inefficiencies as folks twist themselves in knots trying to take advantage of the preferrencial rate? Isn't it better to use one rate for everything and let the market allocate resources on its own?

[Independent]

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Originally Posted by ERD50 So do we base policy on your experiences or mine? Heh, heh, (and again, I'm saying this in friendly way), this is why I think your line of thought on this is just silly. Now, I gave that observation as a counterpoint. I've observed both - which is why I don't want to generalize, or base policy on one or the other view.

Yep. It's impossible to come to a rational agreement on anything unless you have some reasonably common set of "facts", presumably based on similar observations. It looks like you've observed things that are far different from what I've observed.

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OK, maybe this will help. Stop thinking of *any* of it as good/bad/better/worse/harder/easier. It just *is*, and one can't exist w/o the other. Let's say it would benefit society to have a ditch dug from point A-B. Well, w/o a capitalist to buy shovels, and w/o a civil engineer and supervisor, those ditch-diggers are probably not going to be very productive. And you might not find too many volunteers to dig that ditch. But if the capitalist can provide shovels and a paycheck and profit from that ditch, the job will get done, and everyone benefits. And if there are not many ditch-diggers around, the capitalist can buy a machine and do it with just a few people. So, limit capital and you will limit jobs. Their existence depends upon it. When you say tax capital, you are really saying tax jobs and growth. Here's a quick example - what happens when a big company wants to build a new plant that is going to create many jobs? Different municipalities fight over them, offering tax breaks to get those jobs. And it works. A lower cost of capital is an incentive, plain and simple. -ERD50

This reminds me of an old Peanuts comic strip in which Snoopy is jogging and his heart and lungs are arguing about which is the "really important" contributor. Or, we could imagine a bicycle where the front and back tires are arguing about which should get the better care. The worker has very low productivity without the saver, and the saver has a zero percent return without the worker. You want to make one "more important" than the other, I don't see it.

It takes both capital and labor to have the kind of economy we want. I don't see any reason to favor one over the other in the tax code.

Note that "capital" comes in two flavors. There is the financial capital - provided by the saver who buys bonds and stocks and provides dollars. Then there is the physical capital - the actual machines or software or technical ideas that make us productive. We really want the physical capital, not the financial capital. In order to get the physical capital we need both the saver who provides the dollars, and the wage earners (engineers, programmers, scientists) who convert the dollars into usable capital. If you think the saver "deserves" a free lunch of income without taxes, then why shouldn't the engineers get wages without taxes? IMO, they are just as important.

[ziggy29]

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Originally Posted by Independent If you think the saver "deserves" a free lunch of income without taxes, then why shouldn't the engineers get wages without taxes? IMO, they are just as important.

It's a side issue, but I'd simply point out that taxes on savings are often on "phantom gains" that don't even keep up with inflation.

If you gain 2% on savings in a year where inflation was 3%, you have lost real purchasing power -- and get taxed on the 2% anyway. Insult to injury?

I believe at least part of the reasoning for special treatment of long-term capital gains is a recognition that a significant portion of a "long term gain" is illusory because inflation has taken a pretty large chunk of it in many cases.

[ERD50]

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Originally Posted by Independent It looks like you've observed things that are far different from what I've observed.

Or perhaps we have observed the same thing, but interpreted it differently?

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This reminds me of an old Peanuts comic strip in which Snoopy is jogging and his heart and lungs are arguing about which is the "really important" contributor.

Agreed, I meant to add that to my ditch-dig example to you, but I did add it later in my response to eridanus: "That is why I keep saying, why try to separate who works hard or who is lucky, etc. It is a system that works together. The capitalist could be seen as a catalyst for jobs, but it takes workers and customers too."

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It takes both capital and labor to have the kind of economy we want. I don't see any reason to favor one over the other in the tax code.

Ahhhh - I think this is where the communication is slipping between us. I *don't* want to 'favor' one or the other. That is why I keep warming up to the idea of an NST - makes no difference how you earned it, get taxed on your propensity to spend. That's not fair either, but I think it's better than anything else I've seen.

I see ziggy covered my response for me, as I pointed out to YTG, one can actually lose buying power on an investment, and still pay taxes on something the govt is going to define as a 'gain'. Accounting for inflation in a CG calculation would go a long way towards removing the bias against CG taxes, so that earned income would not be 'favored' in comparison. But that is just another complication in an already overly-complicated tax code. But that is what happens when you have code (tax code or software code or architectural plans for a building) that was not designed to with a consistent approach, but just cobbled together bits and pieces of this and that. The reduction in LTCG rates in some cases is a very odd/indirect way to deal with the problem. It doesn't differentiate between a CG held for 61 months or 61 years.

-ERD50

[Independent]

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Originally Posted by ERD50 Ahhhh - I think this is where the communication is slipping between us. I *don't* want to 'favor' one or the other. That is why I keep warming up to the idea of an NST - makes no difference how you earned it, get taxed on your propensity to spend. That's not fair either, but I think it's better than anything else I've seen. I see ziggy covered my response for me, as I pointed out to YTG, one can actually lose buying power on an investment, and still pay taxes on something the govt is going to define as a 'gain'. Accounting for inflation in a CG calculation would go a long way towards removing the bias against CG taxes, so that earned income would not be 'favored' in comparison. But that is just another complication in an already overly-complicated tax code. But that is what happens when you have code (tax code or software code or architectural plans for a building) that was not designed to with a consistent approach, but just cobbled together bits and pieces of this and that. The reduction in LTCG rates in some cases is a very odd/indirect way to deal with the problem. It doesn't differentiate between a CG held for 61 months or 61 years. -ERD50

Like you, I don't "favor" taxing anyone, it's just an unfortunate necessity. I'd be okay with a head tax if I believed that everyone gets about the same economic return per unit of effort. Because I believe there is a dramatic difference, I don't think a head tax is practical or "fair".

I'm okay with the theoretical idea of adjusting all capital income for inflation (interest has an inflation component, too). But then again, I'm okay with the theoretical idea of a pure wealth tax at the very top. The two might well cancel out for me.

For ordinary workers, I think we already have a consumption tax. Most people can use IRAs or 401ks to pay taxes only on the money they spend. There's no particular reason why most people should pay taxes on nonqualified capital gains and dividends in our current system.

I don't think a NST is quite as clean as you do. I see political arguments about taxing health care, government services, charitable spending, or tuition. I'm afraid we'd eventually end up with the same swiss cheese we have with the FIT. We'd still have the complexity of deciding what we don't tax because it's a businesss expense. I think wealthy people would find ways to avoid it (buy and register the yacht in the Bahamas, have the family company buy the private jet) similar to the current system. Then we have the huge transition expenses. And we have the notion that the "right" measure of any citizen's obligations to gov't is solely his consumer spending in the US.

I'll agree that the NST is inherently simpler than an income tax, but it also has an inherently smaller tax base. I don't see a big enough gain to offset the transition costs. If I had the political capital to do something, I'd spend it on simplifying the FIT.

Unfortunately, what we'll probably get is a VAT in addition to our current ridiculously complex income tax.

[Gone4Good]

In an older post I outlined one legitimate proposal to balance the budget without raising taxes . . . Paul Ryan's Roadmap. The CBO scored the spending side but was asked not to score his tax proposals (many of which would find wide support here, judging from the conversation). His tax proposal includes:

1) A two-rate tax structure of 10% (up to $100K) and 25% above $100K.
2) Eliminate all current deductions and credits
3) No tax on interest, dividens and capital gains
4) No estate tax
5) No AMT tax

The Brookings Institute has analyszed the tax side of the "Roadmap for America's Future" and it becomes super clear why he didn't want the CBO to do it. Here's what they find . . .

1) "revenue would average 16.1 percent of GDP between fiscal years 2011 and 2015, rising to 16.6 percent by 2020, compared with 20.2 percent under CBO’s January 2010 baseline" So no balanced budget

2) "The Roadmap’s tax provisions would be highly regressive compared with the current tax system . . . While average rates would change little among the bottom 80 percent, they would fall dramatically at the top. For example, the average effective tax rate for the top 0.1 percent would plummet from 30 percent under current law to just 11 percent under the Roadmap."

So the Roadmap for America's Future is to privatize Social Security, privatize Medicare, cut taxes by more than half for the nation's wealthiest and still run large deficits.

Weeeeeeeeeeeeeeeeeeeeeeee!

[MasterBlaster]

That tax proposal makes a lot of sense if you want to induce growth.

However it doesn't have a chance in h3ll of passing. It's just people talking.

[Gone4Good]

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Originally Posted by MasterBlaster That tax proposal makes a lot of sense if you want to induce growth.

Or if you want to create a plutocracy.

Here's what the effective tax rate looks like at each income level.

[ERD50]

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Originally Posted by . . . Yrs to Go ... his tax proposals (many of which would find wide support here, judging from the conversation). His tax proposal includes: Weeeeeeeeeeeeeeeeeeeeeeee!

I'm not sure what your point is, but it appears to be a 'rigged' argument to me.

So there are some things many of us would like (simplification), but it supposedly doesn't bring in the same revenue. That doesn't make simplification bad, it just means that this particular plan doesn't appear to meet all the criteria.

-ERD50

[MasterBlaster]

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Originally Posted by . . . Yrs to Go Or if you want to create a plutocracy. Here's what the effective tax rate looks like at each income level.

I suspect that much of the higher income groups taxes are on capital appreciation.

Are you proposing to match capital gains rates to income tax rates ? Boy that's a recipe for national poverty.

Just what is your point in the graph ?

[Gone4Good]

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Originally Posted by ERD50 I'm not sure what your point is, but it appears to be a 'rigged' argument to me.

I don't understand how anything is rigged. It's his plan. To great fan fare he had CBO score the spending side to show how he could balance the budget without raising taxes. He included a comprehensive tax proposal and asked the CBO NOT to score that. It turns out, his tax proposal reduces tax revenue by about 18% and shifts the tax burden toward the middle class in so doing. But the net effect of his spending and tax plans does not balance the budget, even after freezing discretionary spending for 10 years, privatizing social security for everyone under 55 and privatizing medicare for everyone under 55.

But my real objective in posting the Brookings analysis is to show how a tax scheme like this really works. This kind of plan (no taxes on capital and flatish taxes on income) is very popular among a certain group. So its worthwhile to look at what that would mean in practice.

BTW - I'm a big fan of simplification.

[Gone4Good]

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Originally Posted by MasterBlaster Are you proposing to match capital gains rates to income tax rates ? Boy that's a recipe for national poverty.?

Yes, I've specifically recommended multiple times in this thread that income and gains rates should be equalized.

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Originally Posted by MasterBlaster Boy that's a recipe for national poverty.?

Didn't seem to be when Reagan did it in 1986

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Originally Posted by MasterBlaster Just what is your point in the graph ?

The point of the chart is pretty obvious. The tax scheme is extremely regressive with those making more than $1MM paying a lower effective tax rate than those making $40K. While you may think that encourages growth, I suspect many middle income folks would simply conclude the deck was stacked against them. People don't play games they think are unfair. So rather than provide an incentive, this tax structure could just discourage workers and result in the exact opposite incentive structure than the one you assume.