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Old 03-22-2012, 11:18 AM   #21
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so, this is the "other side of the aisle" playing the same card when someone mentions cutting a program or what not. They usually proclaim, "that is only 5% (or some small insignificant amount) of the budget" and we all keep our nose to the grindstone instead of fixing something. Quantity isn't a stand alone indicator for what is good or bad, right or wrong.
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Old 03-22-2012, 11:23 AM   #22
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so, this is the "other side of the aisle" playing the same card when someone mentions cutting a program or what not. They usually proclaim, "that is only 5% (or some small insignificant amount) of the budget" and we all keep our nose to the grindstone instead of fixing something. Quantity isn't a stand alone indicator for what is good or bad, right or wrong.
No it isn't.

What this means is that soaking the rich won't do it. Ultimately it will be the middle class that pays more to and gets less from their government.

The concept that if only we'd make those rich pay more then life would get back to normal isn't valid.
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Old 03-22-2012, 11:30 AM   #23
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... IOW, if someone is paying 18% of his income as income taxes, adopting a VAT tax with the probable reduction in income taxes would not bring in that much more money from him.... I would think that it would be the same for most millionaires....
But I don't know if that would be true or not.

In any given year, a wealthy person might sell some non-appreciated asset (and/or do some tax loss harvesting) - zero FIT taxes due, but maybe they spent $1M that year. Another year they might sell and spend $1M in assets they bought 13 months ago at a $900K cost basis - nice ~ 10% annual gain, but they will only pay LT cap gains rates on 10% of what they spent. Some fraction of 10% is going to be lower than the NST rates that have been floated around.

On average, with careful tax handling, I'm just not sure they would less with NST versus FIT.

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Old 03-22-2012, 11:43 AM   #24
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But I don't know if that would be true or not.

In any given year, a wealthy person might sell some non-appreciated asset (and/or do some tax loss harvesting) - zero FIT taxes due, but maybe they spent $1M that year. Another year they might sell and spend $1M in assets they bought 13 months ago at a $900K cost basis - nice ~ 10% annual gain, but they will only pay LT cap gains rates on 10% of what they spent. Some fraction of 10% is going to be lower than the NST rates that have been floated around.

On average, with careful tax handling, I'm just not sure they would less with NST versus FIT.

-ERD50
True, using this as an example would show less taxes... but both would not be earning a million dollars... also, how long can someone spend $1 million per year without earning something I would bet that this is an extreme example and not like the vast majority of rich folks... I also do not think we should make tax policy to try and 'get' the few who can do what your example shows...
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Old 03-22-2012, 12:02 PM   #25
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Don't assume that increasing taxes won't change people's behavior. By pushing rates higher, we are disincentivizing capital formation. I believe that's what the elasticity refers to. Higher taxes ultimately mean some degree of lower economic activity.

Also, what is left unsaid in this discussion is that with lower capital formation levels due to tax dis-incentives come lower levels of employment and lower private-sector benefit. In other words, if the government takes more the private sector gets less. And the lessor amount left over isn't only taken from the wealthy.
That's the theory, but I can't find any evidence to support it.

The best I've found is this: Amazon.com: Does Atlas Shrug? The Economic Consequences of Taxing the Rich (9780674001541): Joel B. Slemrod: Books which is a collection of research papers on different aspects of tax driven behavior.

IIRC, the answer is that people will ...
1) ... change timing. If cap gains rates are scheduled to go up on 1/1/2013, you can bet there will be more cap gains harvested in the last few months of 2012 than in the first few months of 2013.
2) ... change labels. If cap gains pay lower rates than earned income, hedge fund manager bonuses will become "capital gains". If the rate differential reverses, they will become "earned income".
3) .... not change their actual income producing behavior enough for standard economic tools to pick it up. In theory somebody is making some change somewhere, but it's not common enough to see. The support for "hardly at all" is pretty well documented for wage earners where it's easier to get data. It's more difficult to get good data on investments, but the general statement still seems true.

Then the next step is whether any additional saving/investing by the rich actually benefits anybody else (especially after the tax shift). Certainly, the people doing the investing expect to reap the benefits, they aren't doing that for charity. Does the market force them to share their gains, and if so, how much? Just at a gross level, we've generally had lower cap gains rates since Reagan than before, yet the median worker's income went up noticeably before 1980 and has been pretty stagnant since. That's not proof that the benefits will always get stuck at the top, but it is proof they don't always get spread around.
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Old 03-22-2012, 12:03 PM   #26
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True, using this as an example would show less taxes... but both would not be earning a million dollars... also, how long can someone spend $1 million per year without earning something I would bet that this is an extreme example and not like the vast majority of rich folks... I also do not think we should make tax policy to try and 'get' the few who can do what your example shows...
Yes, I made those rather extreme to illustrate the point. But where I was going was, over the long run, couldn't someone keep selling assets each year that average ~ 10% gains, and only pay pay cap gains on 10% of what they spend? Balance losses against gains. 10%/year seems sustainable for quite a while, no?

I'm actually not trying to 'get' anyone - I'm trying to be fairer. Like my earlier post - someone might have a plan that would take considerable effort/risk but may payoff big for a few years, but they realize this is only good for a few years - so they live relatively modestly and amortize the big pay-off over their lifetime. Is it really 'fair' to tax them the same as someone who makes that money every year for 30 years? I do think, that on average, what a person spends is a better measure of what they should be asked to pay in taxes.

I screwed up a tax move one year and got hit with big taxes (wiping out credits deductions makes for a VERY steep curve, far steeper than what those marginal tax brackets indicate - almost a brick wall!). I wasn't any 'richer' because of this, I just ended up with a lot of realized gains in one year. But I was taxed like I made that kind of money every year, which would be nice, but it wasn't the case. My spending is much more level-loaded than that kind of income. That might be good for the Country too - a more stable source of revenue?

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Old 03-22-2012, 12:05 PM   #27
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so, this is the "other side of the aisle" playing the same card when someone mentions cutting a program or what not. They usually proclaim, "that is only 5% (or some small insignificant amount) of the budget" and we all keep our nose to the grindstone instead of fixing something. Quantity isn't a stand alone indicator for what is good or bad, right or wrong.

Without some major cuts in spending or major increases in taxes (or both), we will not be able to reduce the deficeit...

Sure, doing a little here or a little there will help, but without some big items we will still be hurting....
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Old 03-22-2012, 12:21 PM   #28
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No it isn't.

What this means is that soaking the rich won't do it. Ultimately it will be the middle class that pays more to and gets less from their government.

The concept that if only we'd make those rich pay more then life would get back to normal isn't valid.
I'm not endorsing the plan. I'm just saying it isn't fair to dismiss it solely based on "having little impact" or "not completely solving the problem."

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Without some major cuts in spending or major increases in taxes (or both), we will not be able to reduce the deficeit...

Sure, doing a little here or a little there will help, but without some big items we will still be hurting....
I agree, but a step in the right direction would be nice as well. We go around and around without ever accomplishing anything. I also look at these things as if they are not mutually exclusive. A small cut here may lead to big cut somewhere else. Or a bunch of other small cuts. Sure, we should focus most of the effort on the big hitters, but if someone brings forward an idea that is a step in the right direction, it's sole evaluation shouldn't just consist of its overall budgetary impact.
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Old 03-22-2012, 12:41 PM   #29
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Without some major cuts in spending or major increases in taxes (or both), we will not be able to reduce the deficeit...

Sure, doing a little here or a little there will help, but without some big items we will still be hurting....
Sufficient tax increases and spending cuts are already enacted to balance the budget, but it seems likely Congress will muck with them as Morgan Housel writes at
http://www.fool.com/investing/genera...is-fixed-.aspx
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Old 03-22-2012, 12:54 PM   #30
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Sufficient tax increases and spending cuts are already enacted to balance the budget, but it seems likely Congress will muck with them as Morgan Housel writes at
Congress: Do Nothing, and the Budget Is Fixed
Apparently that solves the deficit over the next ten years. Cross your fingers...

Beyond that with all the Boomers entilements going into effect as they incresingly retire, sigificantly more cuts and more taxes will be needed. The really big deficits are more than 10 years out
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Old 03-22-2012, 02:12 PM   #31
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I agree, but a step in the right direction would be nice as well. We go around and around without ever accomplishing anything. I also look at these things as if they are not mutually exclusive. A small cut here may lead to big cut somewhere else. Or a bunch of other small cuts. Sure, we should focus most of the effort on the big hitters, but if someone brings forward an idea that is a step in the right direction, it's sole evaluation shouldn't just consist of its overall budgetary impact.

But if you can not even look at the big items, the small ones get fought over... and nothing gets done...

I think that what some were saying, and I agree with, is that all the hype on a few of the 'lets tax the rich' items seem to play to a certain group but in the end does little to fix the much bigger problem.. it makes it look like you are doing something when in reality you are not...

Heck, from what I read, we are paying almost $2 billion a year on cell phones for poor people... let's cut that and get real savings of $20 bill over 10 years (or more since the program is growing at a good clip)...

But someone would not want to make this 'small' cut for various reasons and say the rich do not pay their fair share...

BTW, I am not one who would be hit with this tax.... ever... I do not care one way or the other... I just know it is a wedge issue that is trotted out just like all the other talking points on both sides...
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Old 03-22-2012, 02:18 PM   #32
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Sufficient tax increases and spending cuts are already enacted to balance the budget, but it seems likely Congress will muck with them as Morgan Housel writes at
Congress: Do Nothing, and the Budget Is Fixed
I read the article... and would like to see more on this....

I would also like to get some of what I heard clairified.... I have heard that even under current law the debt will go up $9 trillion dollars over the next 10 years... if this is still true, then we need to do something right away, not wait 10 years and hope...


Edit... found this in the CBO

http://www.cbo.gov/publication/43083

It shows that the deficit never goes away... and increases from the 9th to the 10th year...

That under current law we would add $2.9 trillion, but with the proposed budget it would be over $6 trillion... still spending over 22% of GDP...
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Old 03-22-2012, 03:18 PM   #33
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A sales tax is not "hitting them as hard" only if we remain in the mindset that we ought to be taking a certain percent of their income. We should re-examine that. Step back and instead accept the sales tax for what it is--taxing consumption.
I think this falls under the category of "be careful what you wish for."

While I think most economists agree that a consumption tax is preferable to an income tax for a variety of reasons, it is also one of the worst possible taxes for the Early Retiree (generally low income folks who already paid high taxes on the earnings they used to build sizeable savings. With a VAT, those savings get heavily taxed again as they're spent).

If the income tax were replaced with a VAT, economists would cheer but many Early Retirees would probably need to head back to work.
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Old 03-22-2012, 03:30 PM   #34
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I am putting large amounts into Roths. It is partially a hedge to whatever tax rate changes may be dreamed up, but mostly to leave a generational legacy.

VAT is the risk I assume by choosing taxes up front, rather than conventional wisdom of deferring as long as possible.

I'm not above taking my gold colored ball to another playground if taxes become too onerous. Therein is the rub that I see for any tax, the amounts hoped for will evaporate as the muppets hide their stores from the dreaded tax collector.
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Old 03-22-2012, 04:15 PM   #35
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I am putting large amounts into Roths. It is partially a hedge to whatever tax rate changes may be dreamed up, but mostly to leave a generational legacy.

VAT is the risk I assume by choosing taxes up front, rather than conventional wisdom of deferring as long as possible.
You are also assuming/hoping that congress doesn't add additional taxes on your "excess" Roth account withdrawals. There is historical precident for large IRAs being taxed additionally for large withdrawals.
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Old 03-22-2012, 04:41 PM   #36
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If the income tax were replaced with a VAT, economists would cheer but many Early Retirees would probably need to head back to work.
No doubt. OTOH, if those economists are right about the boost this would give US companies, at least some of the taxes would be offset by improved return on equity investments.
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Old 03-22-2012, 04:59 PM   #37
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I think this falls under the category of "be careful what you wish for."

While I think most economists agree that a consumption tax is preferable to an income tax for a variety of reasons, it is also one of the worst possible taxes for the Early Retiree (generally low income folks who already paid high taxes on the earnings they used to build sizeable savings. With a VAT, those savings get heavily taxed again as they're spent).

If the income tax were replaced with a VAT, economists would cheer but many Early Retirees would probably need to head back to work.
While it gets away from simplicity - I imagine some sort of allowance could be made for money in taxable accounts. In effect, you'd need to somehow register how much you have. Some portion of that would be considered 'spent' each year, and adjusted for through the 'pre-bate' system to offset (maybe only partially) your cach register tax payments. Maybe similar to the minimum withdrawals on IRAs today.

Of course none of this will happen. But if it were, even with adjustments, I think it would need to be phased in over maybe 10 years, where the taxes from FIT reduce each year, and the taxes from NST increase each year.

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Old 03-22-2012, 05:14 PM   #38
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While I think most economists agree that a consumption tax is preferable to an income tax for a variety of reasons, it is also one of the worst possible taxes for the Early Retiree (generally low income folks who already paid high taxes on the earnings they used to build sizeable savings. With a VAT, those savings get heavily taxed again as they're spent).

If the income tax were replaced with a VAT, economists would cheer but many Early Retirees would probably need to head back to work.
Many proposals I've heard for a VAT or "national sales tax" usually include a "prebate" of the the assumed tax for the first $X of income.

For example, if a household with a $40K annual income was assumed to spend $10K of their income on taxable items and the VAT rate was 15%, you could "prebate" $1,500 a year to them to make up for the expected amount of tax they would be paying. If you provided this for (say) the first $50,000 of annual income, it would have little negative net effect on the poor and middle class, as they would be receiving compensation for the tax they are paying.

(It's not like this is new ground. The option to deduct an assumed -- or actual, if greater -- sales tax instead of state and local income tax has been on the books for a few years now.)

I don't think that would slam retirees on low to moderate incomes IF it were done the right way.
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Old 03-22-2012, 05:23 PM   #39
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Many proposals I've heard for a VAT or "national sales tax" usually include a "prebate" of the the assumed tax for the first $X of income.
I understand the reason for this provision in the proposals ("fairness", progressivity, and political necessity in garnering support for the proposal), and I even agree with the goal. But the practical impact will be 100% of American households receiving a government check every month. Seems like a way to increase (real or perceived) dependency on "the government." And since the size of the check is subjective (based on the bureaucratically-defined poverty level) it would become the ultimate political object. So, that's another problem.
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Old 03-22-2012, 06:21 PM   #40
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I understand the reason for this provision in the proposals ("fairness", progressivity, and political necessity in garnering support for the proposal), and I even agree with the goal. But the practical impact will be 100% of American households receiving a government check every month. Seems like a way to increase (real or perceived) dependency on "the government."
Not necessarily. If this is combined with a corresponding income tax increase *above* these thresholds which cancel out the benefit of the "prebate" up to a certain level of income, the net effect doesn't have to be that Warren Buffett's purchases need to be effectively tax-exempt.

For example, you can set a "prebate" up to an assumed $50K of income with income tax changes that start phasing out at, say $100-200K. It would be similar to a flat income tax that exempts the first $X in income, except based on the expenditure side instead of the income side.

With respect to your comments on almost everyone receiving a government check every month -- sure. Buffett can collect Social Security. There is precedent.

As to the rest of your remarks which I didn't quote? Sure, there will be a game of political football to position to garner votes. Unfortunately, nearly everything they do is pretty much predicated on garnering votes.
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