Size Of Government - What Do We Really Want?

[M Paquette]

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

Well, folks did tend to die younger. Records for the US are a bit spotty. While life expectancy at birth was 38 in England from 1750-99, what this really reflected was high child mortality. Infant mortality was 17% and only 69% of newborns made it to 15. But those that did make it to 15 could expect to live another 37 years. If you made it through childhood you would likely make it into your 50s, and many lived much longer as 15% of the English men making wills in the 17th century died at age 70 or above.

Data compiled in 1790 by a prominent physician, Dr. Benjamin Rush, indicates that of 100 people born in the city of Philadelphia, more than one-third died before the age of six and only one quarter of the population survived beyond 26. Life expectancy in 1790 for the US population was 34.5 years for males and 36.5 years for females. Dr. Rush was the surgeon for the Pennsylvania Navy, and Surgeon General of Military Hospitals for the Middle Departments during the Revolutionary War. He provided the only surviving records of the Philadelphia yellow fever epidemic of 1773. (More patients died when treated by bloodletting and mercury than when left alone. )

 

[ERD50]

RE- my original example, and jdw_fire's claim that higher tax rates can motivate re-investment:

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.

(to jdw_fire): Can you edit my example numbers to show this (that higher tax rates can motivate re-investment)? I'm not following you.

ok. remember that capital gains tax rates dont change. ... (ERD50-skipping to summary) ...
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 (50% tax rates): 0 + $750k + the value of the business at year 1 + $4.25M

case 2 (24% tax rates): $750k +$750K + the value of the business at year 1

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

So I got some time to look at the example you provided, and I guess the answer is "No, higher tax rates cannot be shown to motivate investment w/o resorting to circular logic"?

You used a technique I seem to be seeing more and more of, include the premise in the example to 'prove' the point. In your example, the only reason the owner taxed at a 50% re-invested in the business and not the owner taxed at 25% is because you decided to set it up that way. Let's try an actual comparison, rather than a pre-determined outcome:

For your scenario, you assumed the businesss was sold in year 2. And the value of the business was increased based on the added profit from the re-investment. You used a 10% capital ROI rate, and taxed that added cap gain profit at a fixed 15%. OK. But you never showed what happened if done at the 25% tax rate.

So take the 50% tax rate case - the added $500K profit from investment is only 'worth' $250K after taxes. So if sold, add the increased value of the business ($2.5M, $2.125M after 15% CG tax) to the second year take home ($750K) = $2.875M).

Compare the same actions at 25% tax rates - the added $500K profit from investment is now 'worth' $375K after taxes. So if sold, add the increased value of the business ($3.75M, $3.1875M after 15% CG tax) to the second year take home ($1125K) = $4.3125M).

So $4.3125M with 25% rates, versus $2.875 with 50% tax rates. Some motivation for higher tax rates, hmmmm? Even if you value the business on pre-tax profit (doesn't seem reasonable), the after-tax cap gains are then the same, and the lower tax rate provides more income $ in the pocket of the owner.

Care to try again?

-ERD50

 

[jdw_fire]

RE- my original example, and jdw_fire's claim that higher tax rates can motivate re-investment:



So I got some time to look at the example you provided, and I guess the answer is "No, higher tax rates cannot be shown to motivate investment w/o resorting to circular logic"?

You used a technique I seem to be seeing more and more of, include the premise in the example to 'prove' the point. In your example, the only reason the owner taxed at a 50% re-invested in the business and not the owner taxed at 25% is because you decided to set it up that way. Let's try an actual comparison, rather than a pre-determined outcome:

For your scenario, you assumed the businesss was sold in year 2. And the value of the business was increased based on the added profit from the re-investment. You used a 10% capital ROI rate, and taxed that added cap gain profit at a fixed 15%. OK. But you never showed what happened if done at the 25% tax rate.

So take the 50% tax rate case - the added $500K profit from investment is only 'worth' $250K after taxes. So if sold, add the increased value of the business ($2.5M, $2.125M after 15% CG tax) to the second year take home ($750K) = $2.875M).

Compare the same actions at 25% tax rates - the added $500K profit from investment is now 'worth' $375K after taxes. So if sold, add the increased value of the business ($3.75M, $3.1875M after 15% CG tax) to the second year take home ($1125K) = $4.3125M).

So $4.3125M with 25% rates, versus $2.875 with 50% tax rates. Some motivation for higher tax rates, hmmmm? Even if you value the business on pre-tax profit (doesn't seem reasonable), the after-tax cap gains are then the same, and the lower tax rate provides more income $ in the pocket of the owner.

Care to try again?

-ERD50

maybe we arent understanding each other.

if you are asking me why a person would be more likely to reinvest profits in his/her business if there are higher tax rates it is because any given reinvestment s/he makes in his/her own business will cost him/her fewer after tax dollars when the tax rates are higher. as an example, consider a $1M investment in this person's business. at a tax rate of 25% that investment costs the owner $750K in after tax profits (IOW, the owner has to give up $3 in after tax profit for the investment to only get the government to put $1 into the investment), however, at a tax rate of 50% the investment costs the owner only $500K in after tax profits (IOW the owner only has to give up $1 in after tax profit for the investment to get the government to put $1 into the investment). the business owner gets far more reinvestment bang for his/her after tax buck when there are higher tax rates and i am suggesting that there are some (i am not saying all) business owners who will be motivated to make the reinvestment if tax rates are 50% who wouldnt make the reinvestment if the tax rates are only 25%. (i can remember times in the 1980s and even in the 1990s when investments were made because the tax advantages made them profitable whereas if the tax rates were lower, or someone was in a lower tax bracket, the same investment wasnt profitable. i personally bought real estate that wouldnt have made financial sense for me personally to buy if i hadnt gotten the tax deductions or my personal tax rate had been lower, so dont tell me what i just suggested wouldnt happen.)

now i thought, in the post where you asked me to adjust your numbers, you were making some point that if that owner did make the reinvestment because of the higher tax brackets, in the long run it would turn out badly for him/her and i attempted to show that wouldnt be the case. however since in this line of reasoning the business owner is making the reinvestment because of the higher tax brackets it was appropriate to not have the business owner make the reinvestment in the case where the tax brackets werent higher.

 

[Texas Proud]

maybe we arent understanding each other.

if you are asking me why a person would be more likely to reinvest profits in his/her business if there are higher tax rates it is because any given reinvestment s/he makes in his/her own business will cost him/her fewer after tax dollars when the tax rates are higher. as an example, consider a $1M investment in this person's business. at a tax rate of 25% that investment costs the owner $750K in after tax profits (IOW, the owner has to give up $3 in after tax profit for the investment to only get the government to put $1 into the investment), however, at a tax rate of 50% the investment costs the owner only $500K in after tax profits (IOW the owner only has to give up $1 in after tax profit for the investment to get the government to put $1 into the investment). the business owner gets far more reinvestment bang for his/her after tax buck when there are higher tax rates and i am suggesting that there are some (i am not saying all) business owners who will be motivated to make the reinvestment if tax rates are 50% who wouldnt make the reinvestment if the tax rates are only 25%. (i can remember times in the 1980s and even in the 1990s when investments were made because the tax advantages made them profitable whereas if the tax rates were lower, or someone was in a lower tax bracket, the same investment wasnt profitable. i personally bought real estate that wouldnt have made financial sense for me personally to buy if i hadnt gotten the tax deductions or my personal tax rate had been lower, so dont tell me what i just suggested wouldnt happen.)

now i thought, in the post where you asked me to adjust your numbers, you were making some point that if that owner did make the reinvestment because of the higher tax brackets, in the long run it would turn out badly for him/her and i attempted to show that wouldnt be the case. however since in this line of reasoning the business owner is making the reinvestment because of the higher tax brackets it was appropriate to not have the business owner make the reinvestment in the case where the tax brackets werent higher.

Seems this flawed logic is being debated at other places...

Online Debate: Higher corporate tax rates encourage business investment. | Debate.org


I think that I will go with one of my professors advice when I asked about the gold standard.... he asked me if my friend really believed that it mattered and I said 'yes'.... he said 'there is nothing you can say to change his mind'....

So, there is nothing I can do to change your mind that your logic is flawed... there is a lot of evidence to show WHY it is flawed out there.... I don't wish to waste my time looking for it.....


Your real estate example is not valid... you were getting deductions from the gvmt that made it more profitable to invest which caused capital to be invested in a place that was not the best investement without that tax incentive.... IOW, if the only reason you invested was for tax reason it is a bad use of capital....

 

[ERD50]

maybe we arent understanding each other.

Well, I re-read your earlier posts, and this post, and I do believe I'm understanding you perfectly. You support higher tax rates, period.

The relavent question is not "Can I present a scenario where someone re-invests with 50% tax rates?", the relavent question is "Do 50% tax rates provide more/less incentive to re-invest than 25% tax rates?".

I don't have time now to provide examples point by point, but I notice you provide 'explanations' of how a business owner might behave - but you totally ignored my numbers that show re-investing with 25% tax rates puts more in the pocket of the owner, and the ratio of money in pocket w/wo re-investment is the same. It is not greater with higher tax rates. Seems to me the bottom line is the motivator for a business.

the business owner gets far more reinvestment bang for his/her after tax buck when there are higher tax rates

Show me this mathematically, without resorting to the subjective owner perception of the value of his after-tax $. That is subjective - is re-investing $750K a 'bigger' sacrifice @ 25% rate, or is $500K a 'bigger' sacrifice @ 50% rate? In either case, they give up 100% of their income to re-investment. If we look at it just a little differently, clearly it would be less of a 'sacrifice' for the $750K take home person to re-invest $500K than the $500K take home person. With $750K income, he (or she/it - I'm not going to type it each time) would still have $250K take home to enjoy. So who is more likely to re-invest $500K?

i personally bought real estate that wouldnt have made financial sense for me personally to buy if i hadnt gotten the tax deductions or my personal tax rate had been lower, so dont tell me what i just suggested wouldnt happen.

I won't suggest that it couldn't happen, I'm saying that as far as general trends, it doesn't make economic sense that higher tax rates motivate re-investment and it won't happen generally. CFOs will make the same calculations that I did.

...however since in this line of reasoning the business owner is making the reinvestment because of the higher tax brackets it was appropriate to not have the business owner make the reinvestment in the case where the tax brackets werent higher.

And that is circular logic. IOW, to 'prove' that red cars are faster than blue cars, I painted this very fast car red, and a very slow car blue. And so it goes. All you 'proved' is that re-investing in a very profitably business will increase the value of the business and increase future profits. You did not demonstrate that higher tax rates motivate this more than lower tax rates.

Of course, we can investigate behavioral changes till the cows come home. If higher tax rates mean an owner isn't going to get as much absolute $ reward for his investment, then he will likely look for alternatives. Don't re-invest at all, re-invest somewhere with a lower tax rate (that option is available to some businesses), etc.


BTW, what is with your aversion to capitalizing the first word of a sentence? Clearly, both of your shift keys are not broken, as uppercase characters appear in your posts. It really does make reading your posts more difficult, and to be honest, they are hard for me to follow to begin with. There is a reason for the convention.

-ERD50

 

[jdw_fire]

Seems this flawed logic is being debated at other places...

Online Debate: Higher corporate tax rates encourage business investment. | Debate.org

just because you think it is flawed dosnt make it flawed. it is interesting that the pro side (higher tax rates encourge reinvestment) of the debate you linked actually won that debate, thanks for posting it.

I think that I will go with one of my professors advice when I asked about the gold standard.... he asked me if my friend really believed that it mattered and I said 'yes'.... he said 'there is nothing you can say to change his mind'....

So, there is nothing I can do to change your mind that your logic is flawed... there is a lot of evidence to show WHY it is flawed out there.... I don't wish to waste my time looking for it.....

the same can be said about you, as nothing can be done to change your mind. since you dont provide evidence that my logic is flawed i see no reason to believe you. i could just as easily say your logic is flawed.

Your real estate example is not valid... you were getting deductions from the gvmt that made it more profitable to invest which caused capital to be invested in a place that was not the best investement without that tax incentive.... IOW, if the only reason you invested was for tax reason it is a bad use of capital....

just because you say my example isnt valid doesnt invalidate it. dont we, as citizens of this country, want more investment in this country, even if it isnt "the best investement without ... tax incentive"? i dont know about you but i do want more investment and job growth here, in the USA, and i am in favor of using the tax code to accomplish it. just because the best investment, from a world view, would be to move jobs out of this country doesnt mean that is what i want to take place. i was looking for a way to encourge job/economic growth in the USA and i still dont think that the generic platitudes about capital flow and best investment have refuted my suggestion. i agree with the pro side of your linked debate on the point that lower tax rates incentivize the taking of company profits (thus paying low taxes on those profits). i will repeat here that the low tax rates that we are currently experiencing is not encouraging company reinvestment or job growth, yet back when tax rates were higher (in the late 1990s) we had both economic and job growth. low tax rates in this country over the last decade have incentivized CEOs to make fast profits (taking them and paying the tax) at the expense of workers and reinvestment. maybe the low tax rates even encourged the financial problems we had in the late 2000s because so much of the illicit profits could be kept by the people making and selling all those synthetic financial products.

 

[jdw_fire]

Well, I re-read your earlier posts, and this post, and I do believe I'm understanding you perfectly. You support higher tax rates, period.

this is proof that you dont understand me "perfectly" and makes me wonder if continuing this dialog has any point. you attribute things to me that i didnt say and you seem dead set against the possibility that higher taxes could be beneficial to this country. your mind is made up and it seems there is nothing that can be said that will change that. however, that belief of yours doesnt make you correct.

The relavent question is not "Can I present a scenario where someone re-invests with 50% tax rates?", the relavent question is "Do 50% tax rates provide more/less incentive to re-invest than 25% tax rates?".

and i think i did address that question exactly.

I don't have time now to provide examples point by point, but I notice you provide 'explanations' of how a business owner might behave - but you totally ignored my numbers that show re-investing with 25% tax rates puts more in the pocket of the owner, and the ratio of money in pocket w/wo re-investment is the same. It is not greater with higher tax rates. Seems to me the bottom line is the motivator for a business.

i did address your numbers but since you dont think i did let me give you another example, 1 from the residential real estate business. i dont know if you are aware but when upgrading a house, the owner rarely gets his money back for the cost of a given upgrade (unless said upgrade is required to make the property liveable). for example, when adding a bedroom to a house the owner can expect the value of the house to go up by about 80% of the cost of the remodel. so with no tax advantage, i.e. a regular home owner who cant deduct the expense, this remodel doesnt really make sense immediately prior to sale. for the real estate business person who plans to flip this house, is in the 25% tax bracket and can deduct the cost of the remodel, since s/he will really only be paying 75% of the cost of the remodel s/he may consider it but because of the variability in the real estate business, it may very well not make sense to do the remodel. however, for that same real estate business person who still plans on flipping this house but now s/he is in the 50% tax bracket, it makes sense to invest in this remodel because the owner only has to pay 50% of the cost of the remodel (the government pays the rest in refunded tax money) and s/he is likely to do the remodel provided the business is sufficiently capitolized. so if there is already net profit in the company this remodel is very likely to take place. hence, economic/job growth as a direct result of higher tax rates.

... If we look at it just a little differently, clearly it would be less of a 'sacrifice' for the $750K take home person to re-invest $500K than the $500K take home person. With $750K income, he (or she/it - I'm not going to type it each time) would still have $250K take home to enjoy. So who is more likely to re-invest $500K?

please recognize that the person reinvesting only 2/3s of his after tax profit ($500k at the tax rate of 25%) back into his business isnt getting as large an investment in his business (only $666.67k worth of equipment/employees) as the person who invested all of his after tax profit ($500k at the tax rate of 50%) which would result in $1M worth of equipment/employees. so given your example, at the higher tax rates more investment gets done and hence more economic/job growth would take place. even if this person in the 25% tax rate invested the remaining $250k after tax profit in something other than his business the total investment would still be less ($250k + $666.67k < $1M). however what i am also suggesting is that since taking the money out of the business is so cheap when the tax rate is 25%, that is what is likely to be done, atleast it is more likely to be done at the 25% tax rate than when the tax rate is 50%.

I won't suggest that it couldn't happen, I'm saying that as far as general trends, it doesn't make economic sense that higher tax rates motivate re-investment and it won't happen generally. CFOs will make the same calculations that I did.

maybe, maybe not. i think they are more likely to think about this the way i have suggested and when the tax rates are low they will pull as much money as they can out of the business because it is cheap to do so.

...however since in this line of reasoning the business owner is making the reinvestment because of the higher tax brackets it was appropriate to not have the business owner make the reinvestment in the case where the tax brackets werent higher.

And that is circular logic. IOW, to 'prove' that red cars are faster than blue cars, I painted this very fast car red, and a very slow car blue. And so it goes. All you 'proved' is that re-investing in a very profitably business will increase the value of the business and increase future profits. You did not demonstrate that higher tax rates motivate this more than lower tax rates.

no it isnt circular. what you quoted here wasnt my attempt to prove that higher taxes would motivate more reinvestment in business. i talked to that topic earlier in that post. and i already explained what you quoted and here you AGAIN attribute something to me that i didnt say.

 

[nun]

I'm amazed this thread has lasted so long. Military should shrink, military benefits should shrink as they are ridiculously rich, SS and Medicare ages should be increased, more progressive tax so that the richest pay more, reduce tax rates on the middle class but increase revenue by eliminating tax deductions like mortgage interest, massive infrastructure investment to employ people and get the US in a position to remain competitive with The rest of the world.

[moderator edit]

 

[Alan]

Thanks folks, time to move on.

‪Porky Pig Cartoon Ending "That's All Folks!"‬‏ - YouTube