Scoring of "Millionaires Tax" proposal only brings in $47B over 10 years

[Independent]

Start with "ease of collection and greater compliance." Do you find it easier to figure and pay your federal and state income taxes or your state sales tax? Which do you think offers more opportunity for tax evasion? Clearly the sales tax wins hands down in terms of "ease of collection and compliance."

As a general economic principal, we should look to tax things we want less of. An income tax taxes savings, investment, and work - all things we want more of if our objective is to foster economic growth.

Taxes on investment income generally tax delayed consumption more highly than current consumption because it treats inflationary gains as income. Meanwhile sales taxes tax consumption uniformly regardless of when it occurs.

Taxes on capital gains create frictions in investment decisions where people decide not to sell assets to avoid paying a tax. Imagine an owner of a junky store retaining ownership even though he doesn't want the store any longer and the property could be put to better use by someone else. Ideally we want a tax system that doesn't bias these kinds of economic decisions.

Same too with marginal income taxes. The decision to work an extra hour shouldn't be biased by changes in effective tax rates.

Our income tax, as currently configured, contains thousands of preferences, deductions and credits that not only distort economic decisions but also require thousands of manhours and even entire industries of wasted effort to comply. Income taxes, with their mandatory filing requirements, are more susceptible to these kinds of uneconomic policies - although progressive sales tax schemes could be made equally bad.

I'll take the other side of this, recognizing that neither of us has any say in tax policy anyway (at least I don't, I guess I'm not sure about you).

According to Slemrod, no nation has maintained a general retail sales tax above 10%. Compliance gets so bad that they have to switch to VAT. Now a VAT should be somewhat simpler than an income tax, but the gap isn't so large.

I don't "want" more saving/investing. The market provides incentives to get out of bed and work, and it provides incentives to save/invest. I don't think we should assume the market rates are "wrong" and need to be "corrected" by differential tax rates.

All taxes generate frictions, the one you mention isn't particularly bad. Both low marginal rates and minimal complexities are useful in reducing frictions. Both of those argue for taxing capital income at the same rate as labor income.

A good trade-off would be to index capital gains to inflation as part of the deal match the rates on labor income.

Not sure what "changes" in effective tax rates means. Note that for working people who consume all their incomes, taxing consumption is the same as taxing income.

Agreed. We should dramatically simplify the federal tax system. Note that some of those wasted hours are currently spent trying to re-label labor income as capital income to take advantage of the lower rate. That's another good reason to make them the same. And I'll agree that a VAT tax, left in the hands of lobbyists and politicians for a century, would be likely to have a remarkable level of complexity.

 

[Midpack]

Our income tax, as currently configured, contains thousands of preferences, deductions and credits that not only distort economic decisions but also require thousands of manhours and even entire industries of wasted effort to comply.

I wish I knew how much this cost us all, presumably astronomical between the IRS (106,000 employees), private tax preparers and attorneys...

 

[samclem]

From today's WSJ ("Tax Breaks Exceed $1 Trillion: Report" [may require subscription])

In part:

A congressional report detailing the value of major tax breaks shows they amount to more than $1 trillion a year—roughly the size of the annual federal budget deficit—and benefit wide swaths of the population.
The figures could be useful to lawmakers of both parties and President Barack Obama, who are looking for ways to shrink future deficits and offset the anticipated cost of overhauling the much-criticized U.S. tax code, an effort likely to include tax-rate cuts. Both parties are looking to trim or eliminate tax breaks to achieve those goals.

We often hear about the deduction for mortgage interest as the biggest individual tax break, but that's probably because we don't even consider the untaxed compensation many workers receive (medical benefits and retirement contributions from employers).

I searched around a bit but didn't find the answer to this: Will the subsidies under the ACA for individually-purchased health insurance be classified as taxable income?

 

[Gone4Good]

I'll take the other side of this

I was using "sales tax" and VAT interchangeably, although I understand the distinction. As far as a VAT goes, one of the chief complaints about the VAT by those who generally oppose taxes is that it is too efficient at raising revenue.

I don't "want" more saving/investing. The market provides incentives to get out of bed and work, and it provides incentives to save/invest. I don't think we should assume the market rates are "wrong" and need to be "corrected" by differential tax rates.

The intention isn't to "correct" market rates, it's to remove distortions caused directly by the tax code. The best tax scheme is one that nobody ever has to factor into their decisions. Taxes on income fail that test miserably, so much so that entire classes of investment are designed specifically to avoid taxes.

How much money is invested in municipal bonds specifically to take advantage of the tax break? How much more would governments need to pay in interest if that break did not exist? How much more government spending do we have as a result? How much less investment in other thing that don't get favorable tax treatment?

To the extent taxes are considered, we really do want them to favor savings and investment over consumption. The only way to improve standards of living is through capital formation (including human capital) and the only way to form capital is through investment.

A good trade-off would be to index capital gains to inflation as part of the deal match the rates on labor income.

Indexing capital gains still ignores the inflation impact on interest and dividends. It also adds immeasurably to the complexity of figuring our tax. As much as I support indexing in theory, the thought of actually having to index the basis of every purchase I ever made, every reinvested dividend, makes me want to cry.

 

[photoguy]

G4G -- Thanks for clarifying your position. I don't necessarily agree with you but I think I understand what you are aiming toward.

Start with "ease of collection and greater compliance." Do you find it easier to figure and pay your federal and state income taxes or your state sales tax? Which do you think offers more opportunity for tax evasion? Clearly the sales tax wins hands down in terms of "ease of collection and compliance."

For people with relatively simple returns, income tax generally has very high compliance rates. It comes right off most people's paycheck (automatically collected by government) and is verified by a third party (payment processor). It's very hard evade taxes on this income.

Sales tax on the other hand has much greater collection issues. For example, how many people file use taxes on out of state purchases? In most cases there is no third party corroboration to verify collected tax and it is left to auditors to verify (however it is easy to hide sales tax skimming from auditors). If you are talking about VAT and not sales tax, I imagine that would reduce evasion but not eliminate it. But if VAT rates increased to the level of income tax there would be much greater incentive to cheat.

Our income tax, as currently configured, contains thousands of preferences, deductions and credits that not only distort economic decisions but also require thousands of manhours and even entire industries of wasted effort to comply. Income taxes, with their mandatory filing requirements, are more susceptible to these kinds of uneconomic policies - although progressive sales tax schemes could be made equally bad.

I agree with you here that the income tax system could use some simplification. However, I think if we relied on consumption taxes to collect the majority of our tax revenue, eventually there would be just as many special rules making the process very cumbersome as well (in order to make the tax progressive).

 

[Independent]

I was using "sales tax" and VAT interchangeably, although I understand the distinction. As far as a VAT goes, one of the chief complaints about the VAT by those who generally oppose taxes is that it is too efficient at raising revenue.


The intention isn't to "correct" market rates, it's to remove distortions caused directly by the tax code. The best tax scheme is one that nobody ever has to factor into their decisions. Taxes on income fail that test miserably, so much so that entire classes of investment are designed specifically to avoid taxes.

How much money is invested in municipal bonds specifically to take advantage of the tax break? How much more would governments need to pay in interest if that break did not exist? How much more government spending do we have as a result? How much less investment in other thing that don't get favorable tax treatment?

To the extent taxes are considered, we really do want them to favor savings and investment over consumption. The only way to improve standards of living is through capital formation (including human capital) and the only way to form capital is through investment.


Indexing capital gains still ignores the inflation impact on interest and dividends. It also adds immeasurably to the complexity of figuring our tax. As much as I support indexing in theory, the thought of actually having to index the basis of every purchase I ever made, every reinvested dividend, makes me want to cry.

I agree that taxes should be simple. Certainly, a simple income tax shouldn't have special rules for muni bonds. It shouldn't have special rules for capital gains, dividends, or any other kind of income, either.

I think we have some means vs. ends confusion. What I meant is that my end goal of a good economy is providing the most goods for the most people. If I had to choose one statistic, it would be after-tax income for the median worker. Many economists seem to want GDP growth. Over long periods of time those two measures seemed linked, but they seem to have diverged in the last 30.

I understand that capital formation can improve productivity and therefore help reach my goal. But, I think the elasticity of long term investments to taxes is extremely low. Because of that, and other complicating factors, middle income people lose more in taxes when they pick up the larger tax burden then they will get from any incremental productivity gain that might be attributable to lower taxes on investments.

I'm guessing that you aren't doing your cap gains with paper and pencil. You've got some computerized worksheet that keeps track of the cost basis and sorts through the complications that occur if you have multiple purchase dates. Applying an index factor to each of the purchase amounts seems pretty straightforward to me. I know I haven't studied all the complexities, maybe I'm missing something important.

 

[NW-Bound]

Ah, brokerages already started to report the basis of shares when they were sold. Indexing cap gains to inflation is no big deal. It takes but [-]microseconds[/-] nanoseconds per transaction by modern computers.

And then, when all deductions are eliminated to simplify the tax codes, the IRS can figure the taxes for all of us. No more filing. If you owe taxes by trading during the year, the IRS can subtract that right off the sale proceeds. Same with taxes on dividends and interests.

I am not kidding. Why not something so simple?

 

[Gone4Good]

G4G -- Thanks for clarifying your position.

It's not necessarily "my position." You originally asked me to explain why I thought "most economists prefer a consumption tax over an income tax." Those are the reasons why.