Camp tax reform plan points to a more retirement unfriendly tax system

[samclem]

While most of us (including me) reflexively examine any tax reform by seeing what it would do to our own tax calculations, it's worth at least considering the bigger picture. Those with retirement portfolios holding stocks and bonds will benefit if businesses prosper. Some tax schemes make the economy more efficient and get out of the way so that capital can flow to where it produces the highest return. Other tax schemes distort the capital markets and reduce growth.

I'd rather pay a 10% tax on growth of 5% per year than get all kinds of special deductions and carveouts that result in a 5% tax rate on growth of 2% per year.

[mpeirce]

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Originally Posted by samclem I'd rather pay a 10% tax on growth of 5% per year than get all kinds of special deductions and carveouts that result in a 5% tax rate on growth of 2% per year.

+1

This is crystal clear when one holds large indexes like the S&P 500 or total market.

You really are hoping the entire US economy does well.

[kmt1972]

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Originally Posted by samclem While most of us (including me) reflexively examine any tax reform by seeing what it would do to our own tax calculations, it's worth at least considering the bigger picture. Those with retirement portfolios holding stocks and bonds will benefit if businesses prosper. Some tax schemes make the economy more efficient and get out of the way so that capital can flow to where it produces the highest return. Other tax schemes distort the capital markets and reduce growth. I'd rather pay a 10% tax on growth of 5% per year than get all kinds of special deductions and carveouts that result in a 5% tax rate on growth of 2% per year.

At a certain level, it is hard to argue with this. Of course one should seek to optimize after tax income and for sure having the lowest effective tax rate is not the only way to do it. I am not sure for me the way to achieve this is for greater economic growth. Greater economic growth might mean higher inflation which erodes my retirement assets relative to retirement costs.

I would rather have 2% after inflation rate of return with 0% inflation than 4% after inflation rate of return with 10% inflation.

[samclem]

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Originally Posted by kmt1972 Greater economic growth might mean higher inflation which erodes my retirement assets relative to retirement costs.

True, but the right kind of economic growth won't cause inflation. If economic growth is the result of increased productivity (maybe resulting from tax policies that encourage capital to be put to the use that produces the highest absolute return, rather than the one favored by tax policy writers), then it will not produce inflation. Growth resulting from excessive growth in aggregate demand (e.g. maybe due to a tax policy that makes cheap money available for buying homes or paying tuition) without accompanying growth in productivity will result in inflation. More here.
On a yet bigger picture level: Economic growth is the only way to a brighter future for our kids, and the only hope we have of servicing our national debt. So, beyond the needs or retirees, we need growth.

[audreyh1]

AMT would totally screw the new plan unless they restructure it as well. Somehow they've never been willing to let go of the AMT.

[kmt1972]

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Originally Posted by audreyh1 AMT would totally screw the new plan unless they restructure it as well. Somehow they've never been willing to let go of the AMT.

The plan calls for the elimination of AMT. It also will use Chain-CPI instead of CPI to adjust tax brackets. So that is a hidden tax increase over time.

[mpeirce]

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Originally Posted by kmt1972 The plan calls for the elimination of AMT. It also will use Chain-CPI instead of CPI to adjust tax brackets. So that is a hidden tax increase over time.

It may well produce a slower increase, but chained CPI more accurately tracks the cost of living.

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Definition of 'Chain-Weighted CPI' An alternative measurement for the Consumer Price Index (CPI) that considers product substitutions made by consumers and other changes in their spending habits. The chain-weighted CPI is therefore considered to be a more accurate inflation gauge than the traditional fixed-weighted CPI, because rather than merely measuring periodic changes in the price of a fixed basket of goods, it accounts for the fact that consumers’ purchasing decisions change along with changes in prices. Because the fixed-weighted CPI may consistently overstate inflation by ignoring the disinflationary effect of quality improvements and new technology, in addition to the substitution effect, the U.S. Bureau of Labor Statistics maintains that the chain-weighted CPI is a closer approximation to a cost-of-living index than other CPI measures. Chain Weighted CPI Definition | Investopedia

[growing_older]

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the U.S. Bureau of Labor Statistics maintains that the chain-weighted CPI is a closer approximation to a cost-of-living index than other CPI measures.

I am completely unconvinced of this and even the example given in the link provided Chain Weighted CPI Definition | Investopedia is a blatant example of why. If prices rise, but consumers substitute inferior goods to keep their expenses down, that doesn't mean inflation is zero, it means that they have been priced out of the market.

Steak costs $2 and hamburger costs $1. I prefer steak and spend $2. But after prices double I can no longer afford steak, so I buy only hamburger, which now costs the same $2 I used to spend on steak after the price doubled. CPI is 100%, prices have doubled. CPI-chain is ZERO, since I have substituted a cheaper good. In these examples CPI-chained does NOT seem to be an accurate measure of inflation.

Also, there is an interpretation element here as someone has to decide who would substitute how much of what goods for what other goods as prices rise. It seems more vulnerable to manipulation than the fixed "basket of goods" method, which is already pretty subjective.

[kmt1972]

I actually agree that chained CPI is a more accurate way of measuring cost inflation. My main point is that relative to current law, the proposal to use chained CPI should be seen as a tax increase as chained CPI tend to be lower than CPI by around 0.2%-0.3% all things equal any given year.

[Theduckguru]

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Originally Posted by scrabbler1 Because someone who lives in New York City who earns $80k is not really earning "more" than someone earning $75k who lives in Mississippi, for example, because of the presence of higher state and local taxes. The income levels in lower-tax states tend to be lower so they are already paying less in federal income taxes. The current tax code already allows a little bit for high-tax areas the way it handles deductible sales taxes in lieu of income taxes. It is not enough overall but it is helpful. Removing that would only exacerbate the inequities.

If my retirement income was $80k, I would live in New York City.

[eridanus]

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Originally Posted by samclem I can't see a reason that a person's obligation to support federal spending should be reduced just because they live in a state that taxes them more.

New York takes more local and state taxes for their services. Mississippi takes fewer local and state taxes and relies more on federal spending for their services. Since New York is a federal tax giver and Mississippi is a federal tax taker, New York is bearing the burden for Mississippi's (lack of) spending.*

In effect, New York (and Jersey) are already paying more than their fair share of the federal government's spending. Why should Mississippi get a free pass because they won't raise their local and state taxes?

*Mississippi takes more per capita in federal welfare than New York. Who pays for that if it's not Mississippi residents?

[pb4uski]

Good thing there is not a statute of limitations on responses to posts.

[samclem]

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Originally Posted by eridanus New York takes more local and state taxes for their services. Mississippi takes fewer local and state taxes and relies more on federal spending for their services. Since New York is a federal tax giver and Mississippi is a federal tax taker, New York is bearing the burden for Mississippi's (lack of) spending.* In effect, New York (and Jersey) are already paying more than their fair share of the federal government's spending. Why should Mississippi get a free pass because they won't raise their local and state taxes? *Mississippi takes more per capita in federal welfare than New York. Who pays for that if it's not Mississippi residents?

The premise is faulty. What the federal government sends to the state or individuals in Mississippi has nothing to do with the proper federal tax obligation of the US residents who happen to live in Mississippi. These are totally separate issues. The responsibility to pay federal taxes is an individual one, not one that results from being a resident of a particular state.
Due to write-offs for state and local taxes, a person earning $1 million per year in Mississippi pays more federal tax (and thereby does more to support federal spending of all kinds) than a resident of NY earning the same amount. How can that be justified? They both derive the same benefits from federal spending of all kinds, and have the same obligation to support that spending.
If NY wants to tax its citizens to pay for a new road, monument to a legislator, or an increased dole for its citizens, it's hard to see why this should decrease the responsibility of NY citizens to support federal spending of all kinds (defense, social welfare, courts, research, etc, etc).

[Walt34]

Thank you all for an interesting discussion.

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