Size Of Government - What Do We Really Want?

[Purron]

I know this may be every kind of wrong, but the older I get the less I care. Perhaps I'm "losing my religion" (nothing to do with religion - just letting go). I should have been a musician instead of an accountant/regulator/banker/whatever. Music has always been the way for me. Too bad I've never had talent as a creater of music. Tried in my youth.

‪R.E.M. - Losing My Religion (Video)‬‏ - YouTube

 

[ERD50]

--- delete, sorry cross posted as I tried to edit...

So looking at my later post, maybe one could make the case that if it was known that there would be some fixed number of years at a higher tax rate, followed by years at a lower tax rate - that could spur investment. They could write off at the higher rate, reap the rewards at the lower rate. Same strategy many individuals use with a ROTH IRA.

But it falls apart with consistent high rates, no?


-ERD50

 

[ERD50]

...

i think you are missing the point that actually may make this work which is that because of the higher tax rates the business owner (instead of taking the profit and paying taxes on it) decides to reinvest some or all of the profit from his/her business back into his/her profitable business. there is a large incentive for him/her to do this reinvesting in his/her own business because s/he can in essence get the federal government to subsidize that investment by making it tax deductable. the higher tax rates would actually make more of the possible business equipment upgrades and/or expansions cost effective since the business owner wouldnt have to pay full price (due to the federal government subsidy via taxes). remember, anything the government subsidizes it gets more of, so higher tax rates should really encourge investment in small businesses.
...

Seems to me that this is a wash. OK, so he can invest (creating an expense) to offset gains and the higher taxes. Fine. But what's the point? To create gains that are taxed at that same higher rate as what was avoided?

Let's put numbers to it - Say a person has a $1M taxable gain. Let's look at it with 50% effective tax rates versus 25% effective tax rates:

@ 50% rates, the $1M is tax is $500K and Take Home is $500K
@ 25% rates, the $1M is tax is $250K and Take Home is $750K

So consider if they invest instead of take the profit, and assume they get a nice 50% return on their investment the next year (or over a number of years), so they have 1.5M taxable gain -

@ 50% rates, the $1.5M is tax is $750K and Take Home is $750K
@ 25% rates, the $1.5M is tax is $375K and Take Home is $1125K

In all cases the take home is greater at lower tax rates. And the delta due to investing is 1.5x greater ($375K vs $250K) at the lower tax rate, which would seem to motivate investment.

Did I go wrong somewhere? (Yes, it's not a wash, lower rates encourage investment.)

-ERD50

 

[jdw_fire]

I think you are missing the point that capital produces the most growth (jobs, wealth, etc) when it is put to the best use. "Best Use" may or may not be in the small business that produces it. If your tax scheme artificially reduces the efficiency of these capital flows (that is, it impedes them) by favoring one business (the business that produced it) over other businesses (that the market shows are expected to produce more grwth-per-dollar-invested), then the tax doesn't help businesses overall.
You claim to have an open mind, but you seem to be reading right past my main point. You've responded "around" my fundamental "issue" with your idea three times now without addressing it. Step back from the case of a single business which might be favored by a particular tax policy and look at the universe of all businesses. Then ask: How does it help the economy when we discourage the flow of capital to the businesses expected to produce the most growth-per-dollar-of-new-investment? Obvious answer: It does not help the economy, it hurts it.

well lets look at what is happening now. we have the lowest tax rates in decades yet very little growth is going on. it can be argued that the growth that is taking place is only a result of the massive amount of money creation being done by the fed. a relative few are growing their wealth but the vast majority of americans are getting poorer. could all this be because there isnt any real investment in business going on now, but instead the few people at the top are just lining their pockets with cash while the getting is good? at least my "tax scheme", as you put it, will get some investment in business going, albeit probably more investment in small, privately owned businesses. and BTW it wouldnt necessarily stop investment in businesses not your own. i never said that the CG tax would be changed. however if there is a goal of improving the wealth of many people rather than just a few then i think that my "tax scheme" holds merit. i see your point that overall, in an ideal world (but what is happening now isnt working ideally as i mentioned earlier), maybe more total wealth will be created if there are no capital restrictions but that wealth will be (is being) more and more concentrated in fewer and fewer hands and i dont think that is good for america. i have heard so many speeches and read so much on how the small business is sooo important to the health of the american economy. well my "tax scheme" encourges (strongly) the investment in small, privately owned businesses, while yours just makes the rich, richer. i am looking to have a very healthy america not just a few super rich americans.

and then how bout you deal with the other problem we are currently facing and that is funding our government, these topics are interrelated. as you know our government has run up a huge debt and it continues to grow. i am sure that your answer to that is to just cut spending (as that would be the most productive way to keep capital unrestricted) but you and i both know that isnt gonna happen. this country has decided to spend money collectively on certian things and in doing such we need to pay for said things therefore taxes are required. and even with the massive debt and current deficits we, as a country, need to spend much more to repair/rebuild our country's many infrastructures. so how do we pay for that? if we dont change the tax rates, at least at the high end, we will never be able to pay for this. and then, once the super rich have finished lining their pockets what is to stop them from just leaving and watching from afar as america crumbles. given all that is on our plate i think you need to consider them all together.

one other thing to consider is that if you keep taking from the poorer people (to include what most people call the middle class) you may very well get a revolt and just what do you think that will do to your flow of capital?

anyway, back to my example, currently not much growth (economic or job) is happening by big business (and hasnt for a while) even though you have your low tax rates. so since that doesnt seem to be working how bout trying to stimulate small businesses with my "tax scheme", which did seem to work in the late 90s and earlier. i know i know, your gonna say that there isnt any evidence that the higher tax rates in the past was the cause of the growth (no evidence that it wasnt either) but at least they didnt stop the growth and frankly we need the higher taxes anyway to pay out debts.

 

[jdw_fire]

Seems to me that this is a wash. OK, so he can invest (creating an expense) to offset gains and the higher taxes. Fine. But what's the point? To create gains that are taxed at that same higher rate as what was avoided?

Let's put numbers to it - Say a person has a $1M taxable gain. Let's look at it with 50% effective tax rates versus 25% effective tax rates:

@ 50% rates, the $1M is tax is $500K and Take Home is $500K
@ 25% rates, the $1M is tax is $250K and Take Home is $750K

So consider if they invest instead of take the profit, and assume they get a nice 50% return on their investment the next year (or over a number of years), so they have 1.5M taxable gain -

@ 50% rates, the $1.5M is tax is $750K and Take Home is $750K
@ 25% rates, the $1.5M is tax is $375K and Take Home is $1125K

In all cases the take home is greater at lower tax rates. And the delta due to investing is 1.5x greater ($375K vs $250K) at the lower tax rate, which would seem to motivate investment.

Did I go wrong somewhere? (Yes, it's not a wash, lower rates encourage investment.)

-ERD50

--- delete, sorry cross posted as I tried to edit...

So looking at my later post, maybe one could make the case that if it was known that there would be some fixed number of years at a higher tax rate, followed by years at a lower tax rate - that could spur investment. They could write off at the higher rate, reap the rewards at the lower rate. Same strategy many individuals use with a ROTH IRA.

But it falls apart with consistent high rates, no?


-ERD50

absolutely not if CG are still taxed at a lower rate, and maybe not even if they arent (eg. if the business owner wants to work fewer hours per day/week/month/yr but not take a pay cut. see earlier post)

 

[samclem]

Okay, now I understand what your higher taxes are supposed to achieve. We could have gotten here a lot quicker if you'd dropped the "good for the economy" rationale a few posts back.

well lets look at what is happening now. we have the lowest tax rates in decades yet very little growth is going on.

.Millions of different variable in play, very difficult to take one and say it is causative without solid regression analysis. But to imply higher tax rates bring economic growth is truly , umm, "out of the box" as you say.

a relative few are growing their wealth but the vast majority of americans are getting poorer.
. . . however if there is a goal of improving the wealth of many people rather than just a few. . . .
. . . wealth will be (is being) more and more concentrated in fewer and fewer hands
. . . just makes the rich, richer. i am looking to have a very healthy america not just a few super rich americans.

. . . Followed by more paragraphs on the need for more taxes on the "super rich . . .who are lining their pockets" etc.

If you want to make the case, on its own merits, for greater wealth redistribution from higher-income people to lower income people, that is fine. Or if you want to make the case that we should take money from the prosperity-producing private sector and put it into the public sector. Just make the case for these transfers honestly and don't think anyone is going to believe it is "good for the economy" without some real support.

frankly we need the higher taxes anyway to pay out debts.

"frankly," we may or may not need higher tax rates. Many believe we need a lot less spending and possibly higher tax revenues.

 

[cb7010]

It is interesting to me just looking at the pie charts above that only a fraction of our current federal government budget are on items that the founding fathers and constitutuion enumerated for the federal government to undertake. Thus, if we actually put the government back to performing only those functions, we'd have huge surplusses and have the debt paid off in a jiffy.

Doesn't mean I am not compassionate for pointing this out; but, Social Security, Medicare, and Welfare we not functions the constitution saw the federal government undertaking. And, although defense was, I am pretty sure they didn't envision the type of foreign adventurism we are engaged in now.

 

[explanade]

World was a lot different when the Constitution was written.

Founding fathers didn't see people living into their 70s or 80s or health care costs being crazy.

Conservatives have had 80 years to challenge the constitutionality of SS and 50 years to challenge the constitutionality of Medicare. They have a very conservative Supreme Court and federal judiciary now, full of "strict constructionists."

If they can abrogate these programs through the courts, now is the time to do it.

 

[ERD50]

absolutely not if CG are still taxed at a lower rate,

Can you edit my example numbers to show this? I'm not following you.

and maybe not even if they arent (eg. if the business owner wants to work fewer hours per day/week/month/yr but not take a pay cut. see earlier post)

Can you point it out? Your long paragraphs w/o capitalization make it tough to scan. Offhand though, it sounds pretty 'fabricated'.

World was a lot different when the Constitution was written.

Founding fathers didn't see people living into their 70s or 80s ...

wiki says (en.wikipedia.org/wiki/Founding_Fathers_of_the_United_States )

Death age of the Founding Fathers.

For their era, the 1787 delegates (like the 1776 signers) were average in terms of life spans.[9] Their average age at death was about 67. The first to die was Houston in 1788; the last was Madison in 1836.

Secretary Charles Thomson lived to the age of 94. Johnson died at 92. John Adams lived to the age of 90. A few—Franklin, Jefferson, Madison, Williamson, and Wythe—lived into their eighties. Either 15 or 16 (depending on Fitzsimons's exact age) died in their seventies,

-ERD50

 

[explanade]

What was the average life span back then?

And the average/median life span today?

 

[Purron]

What was the average life span back then?

Less.

And the average/median life span today?

More.

Yes, people are living longer and this accounts for a portion of increased health care costs. It doesn't explain why health care costs are so much higher here than in other countries with similiar changes in average/median life spans.

 

[ERD50]

What was the average life span back then?

And the average/median life span today?

I was just expressing a big question over what you wrote 'Founding fathers didn't see people living into their 70s or 80s ...', because it didn't make sense to me, when indeed, several of the FF lived into their 90's, and quite a few more into their 70's and 80's. They didn't see that?

I can't take the next step to drawing any conclusion from what you said, since what you said doesn't appear to make sense.

Regardless of increased life-spans, cb7010 was pointing out the FF did not provide any sort of federal policy to provide for elder care. You can re-read that post for the detail/nuance.

-ERD50

 

[explanade]

No but I brought up lifespan because someone mentioned that SS and Medicare isn't explicitly spelled out in the Constitution.

Those high health care costs, govt. is already paying out a big chunk of it. Besides Medicare, there is Medicaid and all the VA benefits.

 

[eridanus]

Doesn't mean I am not compassionate for pointing this out; but, Social Security, Medicare, and Welfare we not functions the constitution saw the federal government undertaking. And, although defense was, I am pretty sure they didn't envision the type of foreign adventurism we are engaged in now.

SCOTUS has judicial review. SCOTUS has decided that Social Security can be a function of the US government. In fact, Article I states that Congress may pass laws for "general welfare". Likewise for Medicare and welfare.

Social Security is definitely what the Constitution supports.

 

[njonge01]

+1

Like

 

[jdw_fire]

. . . Followed by more paragraphs on the need for more taxes on the "super rich . . .who are lining their pockets" etc.

exaggeration seems to be your favorite method of disagreeing. i guess you have to revert to something when you dont have a substanative argument.

If you want to make the case, on its own merits, for greater wealth redistribution from higher-income people to lower income people, that is fine. Or if you want to make the case that we should take money from the prosperity-producing private sector and put it into the public sector. Just make the case for these transfers honestly and don't think anyone is going to believe it is "good for the economy" without some real support.

i made the case that higher tax rates would create job/economic growth in the the area of small business and when you couple that with the low growth (if there is any at all) being produced by the large corps i am thinking there is a good probability that there would be overall higher growth than we are experiencing now. your only real argument against it was a generic 1 talking about capital flows but that didnt take into consideration nor explain the poor capital flows we are experiencing now so it doesnt really apply.

 

[jdw_fire]

Can you edit my example numbers to show this? I'm not following you.

ok. remember that capital gains tax rates dont change.

Seems to me that this is a wash. OK, so he can invest (creating an expense) to offset gains and the higher taxes. Fine. But what's the point? To create gains that are taxed at that same higher rate as what was avoided?

Let's put numbers to it - Say a person has a $1M taxable gain. Let's look at it with 50% effective tax rates (case 1) versus 25% effective tax rates (case 2):

year 1:

case 1: because of the 50% tax rate the owner reinvests the $1M into his/her business.
[-]
@ 50% rates, the $1M is tax is $500K and Take Home is $500K
[/-] case 2: because of the 25% tax rate the owner takes the gain and pays the taxes @ 25% rates, the $1M is tax is $250K and Take Home is $750K

So in case 1, since s/he invested instead of took the profit, they get a nice 50% return on their investment the next year, so they have 1.5M taxable gain -

year 2:

case 1: @ 50% rates, the $1.5M is tax is $750K and Take Home is $750K
case 2: because there was no investment, the profit remains the same as the 1st year: @ 25% rates, the $1M is tax is $250K and Take Home is $750K

however since in case 1 the net profit grew, the value of the business grew. using a cap rate of 10% to estimate that value increase, the gross gain in the value of the business is $5M. if s/he decided to sell now s/he gets an additional $4.25M net after taxes from his/her investment. so what was the take home in those 2 cases assuming the business is sold?

case 1: 0 + $750k + the value of the business at year 1 + $4.25M

case 2: $750k +$750K + the value of the business at year 1


a difference (in favor of the higher tax rates) of $3.5M
-ERD50

Can you point it out? Your long paragraphs w/o capitalization make it tough to scan. Offhand though, it sounds pretty 'fabricated'.
-ERD50

well they may decide to do what i said (or just invest the amount of profit over say $250K/yr) in the short term to focus on growing the value of the business in that same short term thus attempting to converting the income from the net profit to a capital gain (provided said business does actually grow).eventually this business owner may grow his/her business large enough (hire enough employees) that s/he can cut back on his/her own work hours and actually receive a higher per hour wage for his/her business without moving his income into a higher tax bracket. a desire to reduce working hours without reducing total pay is a valid reason to grow the business while keeping the net profit about constant (say, maybe, $250k/yr).

 

[Independent]

I don't care about the size of government, so I didn't vote in the poll.

I just think the voters ought to pay enough taxes to pay for all the gov't they want.

If I saw a group of Congressional candidates who seemed likely to vote to raise taxes enough to pay for our current spending, I'd happily vote for the one in my district.

If I saw a group of Congressional candidates who seemed likely to vote to reduce spending far enough that our current taxes would cover it, I'd happily vote for the one in my district.

I don't see either. Both major parties talk about "fiscal responsibility", neither is serious about balancing the budget.

 

[haha]

I was just expressing a big question over what you wrote 'Founding fathers didn't see people living into their 70s or 80s ...', because it didn't make sense to me, when indeed, several of the FF lived into their 90's, and quite a few more into their 70's and 80's. They didn't see that?

This misunderstanding about lifepsnas gets debated every few months, but few seem to understand so I guess it is hopeless.

The huge jump in life span is due to better perinatal mortality and to a lesser extent better obstetrics. And higher standards of sanitation.

The post middle age improvement has been small, but of course welcome.

Ha

 

[GregLee]

This misunderstanding about lifepsnas gets debated every few months, but few seem to understand so I guess it is hopeless.

What misunderstanding, on the part of whom?

 

[MasterBlaster]

What misunderstanding, on the part of whom?

If I may,

Ha pointed out that the increased average lifespan today is mostly a function of decreased child mortality. So to a very large degree, people who survive childhood aren't living longer lives.

The argument therefore isn't so true, that people are living longer based on an average age of death. It does not follow from lifespan data that SS must be insolvent because of extended peoples lives in more recent times.

There are other reasons why SS will become insolvent.

 

[samclem]

If I may,

Ha pointed out that the increased average lifespan today is mostly a function of decreased child mortality. So to a very large degree, people who survive childhood aren't living longer lives.

The argument therefore isn't so true, that people are living longer based on an average age of death. It does not follow from lifespan data that SS must be insolvent because of extended peoples lives in more recent times.

There are other reasons why SS will become insolvent.

From a previous post by a well-respected and modest participant here:

According to the neat WolframAlpha knowledge engine Martha recently steered us to:
-- In 1935, the average person reaching 65 in the US could expect to live to be 77.76 years old, thus drawing on SS for 12.76 years.
-- In 2005. the average person reaching 65 in the US could expect to live to be 83.82 years old, thus drawing on SS for 18.82 years.

So, the average senior is drawing checks for about 1/3 longer now than when the program started. Add in all the other benefits that SS didn't have in the beginning (for kids, disability, etc) plus the demographic changes, and it's easy to see why the Ponzi scheme (beloved as it is) is in trouble.

And, the above comparison understates the case, since in 1935 more people worked a number of years and never even reached 65, so they contributed to SS and never saw a penny of it.

 

[MasterBlaster]

That last linked information is in disagreement with other sources:

As I understand it, we are living 2-3 years longer now. That's all. The oft-quoted increased lifespans are almost entirely due to decreased infant mortality and are mis-quoted.

here's one for example:

Howard S. Friedman, Ph.D.: We're Not Really Living Much Longer

The reality is that the average 1946-born baby boomer retiring this year can expect to live about 18 years. Compare that to his or her grandparents who retired at age 65 in the 1960's and could expect to live 15 years, and you see the proper comparison. The correct evaluation involves life expectancy at age 65, not at birth! The truth, surprising to many, is that the average increase in life expectancy for a 65-year-old is only about three or so years. The increase is even smaller for retirements at ages beyond 65. And the social security retirement age is already being raised by two years (to 67).

 

[samclem]

That last linked information is in disagreement with other sources:

As I understand it, we are living 2-3 years longer now. That's all.

here's one for example:

Howard S. Friedman, Ph.D.: We're Not Really Living Much Longer

My data is not in conflict at all with what you posted. Your source is comparing individuals who turned 65 in "the mid-60's" with those turning 65 in 2011. My computation was for those turning 65 in 1935 vs 2005. I think the 1935 comparison is more appropriate, since that's the data those who designed SS were using. There were many advances in medicine and public health which affected young and old alike between 1935 and 1965: Antibiotics, etc. These welcome advances produced more oldsters, which hurt SS's funding model. Of course, the demographic effects were likely more important, but to say retirees aren't living much longer than when SS was designed isn't right. 30+% more years is a lot.

 

[explanade]

What was the life expectancy in the 18th century when the Founding Fathers didn't see a need to enumerate SS?

SS wouldn't be in trouble if funds weren't diverted to finance tax cuts and wars. And it can be easily fixed as it was in the '80s. Lift the cap and the "problem" goes away.