Do We Really Want Less Work or Investment?

by Dave Schuler on December 20, 2012

Why am I continually disappointed? This time the question asked in Michael Kinsley’s op-ed was “Given that all taxes are disincentives, what kinds of taxes do we want?” I expected an answer to the question but once again my hopes were dashed. He barely scratched the surface of the question let alone answering it.

Here’s the gist of his remarks:

A good tax — one that has minimal effect on behavior — has two qualities. First, it is as low as possible. Second, it is as consistent as possible across the alternatives.

Sure, a tax of 15% — the current, scandalously low ceiling on the tax on both capital gains and interest — would be less distortive than a tax of 35%, which was the theoretical top tax rate under President Clinton.

But the real distortion comes in a tax system that might take 15% and might take 35%, depending on the situation.

[…]

It’s sometimes said that capital gains are “taxed twice.” First they tax your wage income, and then they tax the return on anything you manage to save out of it. In reality, much of the income of the very rich is not taxed on either occasion. Mitt Romney was embarrassed when the world discovered that he had paid taxes of only about 13% on his income in recent years. But that’s on realized income. What percentage of his total lifetime fortune will have been through the tax mill when he dies?

Anyway, what is so terrible about “double taxation”? There are two economic decisions going on: work versus sloth, and saving versus spending. True, you want to encourage work and saving, while discouraging sloth and spending. But just as true: You must tax something. So it makes sense, or so it seems to me, to tax all of these activities equally at the lowest responsible rate. Right now we are violating this principle in every possible way.

At the end of the op-ed he hoists the Jolly Roger:

Like tuning the piano, reforming the tax code is not something you can do just once and then forget about it. You’ve got to do it and then do it again, forever. Even if we blow it this time, we’ll probably get another chance in 2036.

I think he’s mischaracterized the requirements for a good tax code. Beyond the lowest practical rates and being “consistent as possible across the alternatives” I think a good tax code should be time-consistent as well. A good tax code wouldn’t tinker with the rates, how income is calculated, or what’s being taxed every few years. Otherwise all planning will be short term planning. Confucius said “If your plan is a one year plan, plant rice. If your plan is a ten year plan, plant trees. If your plan is a hundred year plan, teach children.” We’re planting rice to the exclusion of all else.

I would state things a bit differently. You will get less of whatever you tax than you otherwise might. The present income tax imposes a tax on income earned through work, on royalties, on rents, and on income earned through investment. The assembly line worker of his example will, in all likelihood, pay tax only on his work and that only via the payroll tax. Statistically speaking, he’ll pay no income tax at all and, consequently, his behavior will not be affected by taxes on income. Until the point at which the thirst for additional revenue reaches him, something inevitable with the spending commitments we’ve made.

In a living environment in which most people buy things imported from China and the rich buy things imported from Europe while millions of our fellow citizens are unemployed, don’t we really want to have less spending on consumer goods rather than less work (by people whose labor is actually taxed) or less investment?

Meanwhile, I’m sure the people in the government of the Chinese Republic, the Weimar government, and the Soviet government all thought they’d have plenty of time to continually tweak, experiment, and refine. The end of a government can come very quickly and it’s frequently the result of economic turmoil. I.e., tweaking, experimenting, and refining.

{ 33 comments… read them below or add one }

PD Shaw December 20, 2012 at 11:10 am

I thought Kinsley was smarter than to claim that rich people like Romney might not ever pay taxes. Romney paid taxes on his income like everybody else when he at Bain; he subsequently paid capital gains taxes on the sale of his business and returns on investments. While retired he paid an effective rate of 13% on his income because he didn’t have much income, just some speaking fees. When he dies he will have gift taxes to be paid from his estate.

The only thing that might be worth musing over with respect to people like Romney might be whether wealthy people (particularly politicians and CEOs) who decline salaries since they can live comfortably without one should still be required to pay the effective payroll tax they would have paid. While should only some people be taxed for working?

michael reynolds December 20, 2012 at 1:11 pm

PD:
We don’t know what Romney paid or didn’t pay.

Dave:
Even I (radical communist democrat liberal and hater of the rich) think we need some kind of consistency over long periods of time. At very least we should make a plan and stick with it for, let’s say, a decade before tinkering.

In fact I’d dearly love there to be no tinkering, no deductions. I’d love to take this away from the accountants once and for all. Pay X on the first portion of income, Y on the next and Z on the top bit. Three, maybe four rates, progressive but not confiscatory. I understand why that’s hard politically, but is there some economic reason why we can’t just reduce it to something simple and comprehensible?

Dave Schuler December 20, 2012 at 1:30 pm

I understand why that’s hard politically, but is there some economic reason why we can’t just reduce it to something simple and comprehensible?

Not only is there no economic reason against a simple and comprehensible tax system, from an economic standpoint such a system would be better. It’s power and politics. Taking away their ability to subsidize people or behaviors they like and penalize people or behaviors they don’t like via the tax code would take away much of Congress’s power.

PD Shaw December 20, 2012 at 1:30 pm

And we don’t know whether Obama paid taxes in the years he didn’t disclose. If one is going to argue that “much of the income of the very rich is not taxed,” then one is obligated to present evidence of how that is so, and not just rely on the ignorance, gullibility and partisanship of your audience.

jan December 20, 2012 at 3:28 pm

Uber liberals like Michael are always so concerned about certain people’s taxes — people like Romney — who opted out of Bain to invest himself in public service,, and was later criticized by some because, had he stayed in, he would have had a self-worth in the ‘B” category — billions — like Warren Buffet.

Now, Warren, a businessman idol of the left, loves to talk the talk about taxing supposedly under-taxed millionaires like Romney more, while, in reality, the IRS and Warren have been battling over something like a billion dollars in back taxes, since 2002, owed to the government. Doesn’t this sound a bit odd for man who is begging to be taxed more?

Steve Verdon December 20, 2012 at 3:40 pm

“Given that all taxes are disincentives, what kinds of taxes do we want?”

Poll taxes of course. Very little disincentive there!

Sure, a tax of 15% — the current, scandalously low ceiling on the tax on both capital gains and interest — would be less distortive than a tax of 35%, which was the theoretical top tax rate under President Clinton.

But the real distortion comes in a tax system that might take 15% and might take 35%, depending on the situation.

Actually the level of distortion a tax imposes is related to the (price) elasticities.

Mitt Romney was embarrassed when the world discovered that he had paid taxes of only about 13% on his income in recent years. But that’s on realized income. What percentage of his total lifetime fortune will have been through the tax mill when he dies?

So are we talking income taxes or wealth taxes?

Anyway, what is so terrible about “double taxation”? There are two economic decisions going on: work versus sloth, and saving versus spending. True, you want to encourage work and saving, while discouraging sloth and spending. But just as true: You must tax something. So it makes sense, or so it seems to me, to tax all of these activities equally at the lowest responsible rate. Right now we are violating this principle in every possible way.

That’s right! Double down on those inefficiencies!

I think he’s mischaracterized the requirements for a good tax code.

Really? Ya think?

Beyond the lowest practical rates and being “consistent as possible across the alternatives” I think a good tax code should be time-consistent as well.

Ahhh, well no you have a very tough nut to crack. Time consistent policies are not easy to implement.

A good tax code wouldn’t tinker with the rates, how income is calculated, or what’s being taxed every few years. Otherwise all planning will be short term planning. Confucius said “If your plan is a one year plan, plant rice. If your plan is a ten year plan, plant trees. If your plan is a hundred year plan, teach children.” We’re planting rice to the exclusion of all else.

Hello Milton Friedman. His solution for monetary policy was monetary rules. You could do the same thing with taxes, but again, they are hard to implement.

In a living environment in which most people buy things imported from China and the rich buy things imported from Europe while millions of our fellow citizens are unemployed, don’t we really want to have less spending on consumer goods rather than less work (by people whose labor is actually taxed) or less investment?

We want more of both income and investment, and conversely less consumer spending. That looks impossible to achieve, but there is a way out…investment. More investment spending means you’d have more firms spending money on things like plant, factory and equipment. You’d also have people making said plant, factory and equipment. Basically you reduce your consumption today, increase your levels of capital, and so long as labor stays the same or increases you’ll have even more in the future…of both consumption and capital.
Michael,

In fact I’d dearly love there to be no tinkering, no deductions. I’d love to take this away from the accountants once and for all. Pay X on the first portion of income, Y on the next and Z on the top bit. Three, maybe four rates, progressive but not confiscatory. I understand why that’s hard politically, but is there some economic reason why we can’t just reduce it to something simple and comprehensible?

There is no reason. Of course, I think taxing income vs. say consumption spending is less desirable, but we there are plenty of fairly simple tax schemes out there. The idea of doing your taxes on something the size of a post card is quite possible…from and economic perspective. From a political perspective it will never ever happen even if we could run several billion year experiments. You’d have more luck with the monkey’s and getting a Shakespearean play.

Steve Verdon December 20, 2012 at 3:41 pm

There I go again messing up the html code….sigh

Hope I got that last one right. :p

jan December 20, 2012 at 3:58 pm

People always have such good ideas for the ‘other’ guy.

But, just like various entitlements or social programs, it’s all about someone else’s wealth, income, lifestyle, government gift bags, and never anything that touches their own life.

Somehow the fact that we are all in this together — rich, poor, man, woman, child, multiple colors — doesn’t seem to hit the chords of humanity in people. Instead, they divide themselves into warring groups, taking themselves out of the solution equation, and then endlessly chastise our country, the capitalistic system, and/or simply the people who live in the Nob Hill area of town.

michael reynolds December 20, 2012 at 3:58 pm

So we’re agreed: it makes perfect sense and will never happen. My accountant is relieved.

Steve Verdon December 20, 2012 at 4:09 pm

Now, Warren, a businessman idol of the left, loves to talk the talk about taxing supposedly under-taxed millionaires like Romney more, while, in reality, the IRS and Warren have been battling over something like a billion dollars in back taxes, since 2002, owed to the government. Doesn’t this sound a bit odd for man who is begging to be taxed more?

Buffet is a liar and a knave.

Link

Finally, the board capitulated. But with victory finally at hand, Buffett nearly scuttled the deal because of … taxes. As Schroeder recounts, quoting Buffett, one director proposed that the company just cleanly break the company, despite the tax consequences—”let’s just swallow the tax,” he suggested.

To which Buffett replied (as he recounted to Schroeder):

And I said, ‘Wait a minute. Let’s — “Let’s” is a contraction. It means “let us.” But who is this us? If everyone around the table wants to do it per capita, that’s fine, but if you want to do it in a ratio of shares owned, and you get ten shares’ worth of tax and I get twenty-four thousand shares’ worth, forget it.’

Buffett was willing to walk away from a deal because the taxes would have taken too much of a bite out of it. Fortunately for him, the board gave in and allowed him to structure the deal that he liked, saving him from his own Norquistian response.

Link

Berkshire Hathaway has purchased 9,200 of its Class A shares at $131,000 per share from the estate of a long-time shareholder. The Board of Directors authorized this purchase coincident with raising the price limit for repurchases to 120% of book value. Berkshire may purchase additional shares in the market or through direct offerings at no more than 120% of book value.

link

In February, I wrote in CNN Opinion about how “the man who has become the left’s favorite billionaire in the service of bashing plutocrats could be…the single most successful crony capitalist in the country.”

Buffet is a piece of shit, when it comes to tax policy, anyone who listens to him is an idiot.

jan December 20, 2012 at 4:17 pm

Buffet is a piece of shit, when it comes to tax policy, anyone who listens to him is an idiot.

You’re right. But, you won’t hear any such talk from the left, as Buffet is a close pal to Obama, and thus a billionaire business man who gets no heat from the left. Instead, they take their wrath out on people like Romney, worth only a fraction of what this man is worth, and having no IRS problems — only the stupid Harry Reid insinuations to muck up his character.

BTW, since Obama has both ears open to Buffet, does that qualify him as an “idiot?”

Drew December 20, 2012 at 4:29 pm

Dave beat me to making the essential point concerning our Rube Goldberg tax system in his 1:30. of course, i was under the knife at the time.

a couple other points. 1

1. one of the reasons that i get annoyed about assertions about fiscal conservatives “not caring” is that the poor really aren’t the recipients of amounht of funds often believed. natural political tendencies rusult in expanding to the middle class…. for votes. powerful constituencies like health care, unions, finance etc get exemptions and bailouts. i heard this morning that the taxpayers will take a $20B hit just so the UAW could get a sweetheart deal. I dont know anyone who denies we should have a safety net, but its far more than that.

2. Mitt Romney no doubt paid the prevailing OI rates on management fees received, and cap gains on capital appreciation, then and now. Thats how PE comp works.

3. Buffet is a great investor, but also an attention seeking hypocrite, constant seeker of monopoly power and miser to chaaritable causes in Omaha.

4. Steve Verdon hit the nail on the head wrt tax elasticities. OI rates on your paycheck is one thing. But the wealthy tend towards capital preservation mode. Despite the notion of “unearned income” on investments, its risk capital, and takes a lot of effort especially if you are not a passive investor.

jan December 20, 2012 at 4:31 pm

How are you feeling, Drew?

Drew December 20, 2012 at 4:44 pm

hi jan

surgery went fine, and mr vico and mr din are doing thier job. i expect tomorrow will be a rather unpleasant day.

thanks for asking

jan December 20, 2012 at 4:50 pm

All the best, Drew.

Yeah, the day after is usually kind of rough, dealing with the aftermath of the anesthetic and the fresh surgery. But, at least it’s behind you, rather than the other way around. Anticipation for such events causes equal trauma to the mind, sometimes!

Janis Gore December 20, 2012 at 6:29 pm

Drew , Sugar, what are you listening to?

Janis Gore December 20, 2012 at 6:33 pm

I recommend La Bottine Souriante’s “Rock and Reel.”

michael reynolds December 20, 2012 at 8:53 pm

What was the surgery? Something elective, hopefully.

My closest brush with surgery was a vasectomy. I popped a valium and with the approval of my (thankfully) Irish surgeon, drak a pint of whiskey.

I do not like needles.

Janis Gore December 20, 2012 at 11:52 pm

Where did you go, Michael? My husband just had a glass of wine.

Janis Gore December 21, 2012 at 12:11 am

Yippee-ki-yi-ay.

Drew December 21, 2012 at 7:43 am

Here you go, Michael. My hand began to waste so it had to be done. Ultra painful last night and today even with Vicodin as the surgical nerve block wore off. I’m not sure even your finest Scotch would help right now!

http://orthoinfo.aaos.org/topic.cfm?topic=a00069

And if you are not squeamish:

http://www.youtube.com/watch?v=P9NuzRZDKwM

Janis Gore December 21, 2012 at 8:57 am

Will you have a lengthy rehab, Drew?

Drew December 21, 2012 at 9:13 am

There is a long back story that I wont bore you with. The standard doctor answer is “depends” and 6 weeks to 9 months depending on the definition of rehab……..and it will not fully recover.

However, a very, very good sign is that less than 24 hours after the procedure the very act of decompressing the nerve has resulted in tangible motor function improvement. (I couldnt even button my pants before) This indicates primary insult to the sensory carrying sheath of the nerve, and lesser to the inner portion (motor controlling function). The fourth and fifth finger are still numb, so I expect a good 6 months. (They say nerves repair at a centimeter a week or some such)

I just need to be able to hold a golf club reasonably well by April.

michael reynolds December 21, 2012 at 9:50 am

Drew:

Ouch.

I’m sure you know this, but just in case — Vicodin contains acetaminophen (Tylenol) which can be extremely dangerous when combined with alcohol. So, careful there, you don’t want to lose a liver to save a hand.

Janis Gore December 21, 2012 at 9:58 am

Good luck, Drew. I’m sorry it’s so painful.

Drew December 21, 2012 at 12:16 pm

Michael

Thanks, but I’m on a losing weight kick. No locohol since early October. Empty calories.

Thanks, Janis

Janis Gore December 21, 2012 at 2:55 pm

For your entertainment, dear:

http://www.youtube.com/watch?v=weGQjhR1Es8

Janis Gore December 21, 2012 at 3:31 pm

Or have fun looking at this site:

http://fab.com/ushops/4/

Janis Gore December 21, 2012 at 3:36 pm

If you email me your address, I’ll send you one of these for the new year:

http://fab.com/sale/14647/product/293504/?usid=4

Janis Gore December 21, 2012 at 3:45 pm

I’m getting two for my stepsons.

(Not really. I won’t spend another cent on either of them.)

Janis Gore December 21, 2012 at 7:38 pm

I had a couple of drinks with Lana and husband Tom tonight. As we were packing up a round gent with a white beard and suspenders came in.

Lana said, “You look like Santa Claus.”

He said, “Ho, ho, ho.”

She said, “You’re calling me names now?”

Janis Gore December 22, 2012 at 1:33 am
Janis Gore December 22, 2012 at 4:40 am

Leave a Comment

Previous post:

Next post: