My intention in this post is to illustrate the frustratingly low level of discourse in blogs these days. Over at OTB James Joyner has a post on the Obama Administration’s pursuit of fairness in the tax code in its advocacy of the “Buffett Rule”, i.e. that the very rich should pay roughly the same rate of their incomes in taxes as those in lower brackets. I made the following comment:
I guess it depends on whether you want to equalize marginal tax rates or extract the greatest amount of revenue on a continuing basis. The problem is that you can’t do both.
Any number of studies have found that the tax on capital gains that maximizes continuing revenue is actually quite low. Here’s one of the recent studies which finds that a rate below 10% actually increases revenues.
As long as capital gains are taxed at a lower rate than earned income the very rich will pay a significantly smaller proportion of their total income in taxes than those who depend primarily on earned income. One of the advantages that the very rich have is the ability to manage their incomes to minimize their tax burden. You pays your money and you takes your choice.
If you decide that greater equality is more important than revenue, you’re presented with two alternatives. Either you can trim your spending commensurate with the lower revenue or you can borrow (or just spend into existence) the difference between what tax revenues and expenditures. Those choices have consequences, too.
Reducing spending requires tough political choices and, well, spending less on stuff you probably actually want to spend on. Borrowing more (or spending into existence) runs the risk of increasing inflation or a loss of faith in the currency.
The reaction to this comment was several different varieties of out-of-hand dismissal. No attempts at refutation. Several claims of bad faith. Lots of challenges of the study cited on grounds of bias, in the absence of any substantive criticism an extremely weak response. That’s it.
Here’s a Google search of the literature on optimal capital gains tax policy. The results include studies from the Minneapolis and Cleveland Federal Reserve, the NBER, some scholarly studies, and a number of studies from think tanks advocating lower taxes or neoclassical economics. My quick check of the studies in the first three or four pages of results found no studies advocating a higher capital gains tax. I would appreciate it if somebody located a study finding that a higher capital gains tax rate would maximize revenue. I haven’t found any.
Here’s the thing: as long as you tax capital gains at a lower rate than earned income, the very rich will have lower effective tax rates than people in lower earnings brackets. That’s just mathematics. And optimal tax policy suggests that, if you’re taxing income, you should tax capital gains at a lower rate than earned income.
So you pays your money and you takes your choice. You can have fairness, defined as the “Buffett Rule”, or you can maximize revenues. You can’t do both.
I just came from OTB, saw your comments etc. I foolishly (once again; I’m weak) chastised odograph, excuse me, John Personna, about the effect of Bill Clinton’s cap gains tax rate reduction, and the notion that those of us involved in the capital markets on a day to day basis know he’s talking tripe.
To your point, you got guffaws about sources from JP and Brummajumma-hummable Joe etc. a sensible discussion about tax incidence and appropriate burden can be had. But no longer at OTB.
At the risk of sounding arrogant, James posted yesterday about “where have all the intelligent conservative commenters gone.”. The answer is, James created an environment where no rational person wants to go. Read the essays, yes. Comment? Not really. It’s become a thumbs up thumbs down parlor game, interrupted by invective.
As I’ve noted, I yield to no one on hyperbole etc, but it’s just shtick. The lefties on that site actually believe their BS and have simply banded to gather to shout down dissent. It is simply, as Jan noted, “tiresome.”.
I thought about leaving a comment there, but as is typical these days, I figured it wasn’t worth my time or the hassle. That goes for most of the internet, not just OTB.
Here’s the thing: as long as you tax capital gains at a lower rate than earned income, the very rich will have lower effective tax rates than people in lower earnings brackets. That’s just mathematics. And optimal tax policy suggests that, if you’re taxing income, you should tax capital gains at a lower rate than earned income.
On the substance…
This is correct. And a rational person would attempt to to balance and maximize as best as possible taxes while optimizing capital formation. a demagogue would go for class warfare. That’s where our President has gone. I wish I was surprised.
I’ve seen arguments that the differential should be eliminated (google Prof. Burman), which is a slightly different argument and I think is accompanied by reducing and flattening income tax rates. Part of the benefit appears to be in the form of tax simplification, which would seem to me to necessitate more than simply eliminating the differential.
Here is Prof. Burman’s testimony to Congress:
“A lynchpin of the Tax Reform Act of 1986 and the two recent bipartisan tax reform proposals is that they cut ordinary income tax rates and tax capital gains and dividends the same as other income. This is a very controversial proposal as some view a preferential capital gains tax rate as an essential element of a pro-growth tax plan. My research suggests that this argument is wrong. Lower capital gains tax rates provide enormous opportunities for inefficient tax avoidance and are as likely to harm the economy as help it. What’s more, taxing capital gains in full allows for substantial cuts in ordinary income tax rates while maintaining progressivity.”
http://budget.senate.gov/democratic/index.cfm/files/serve?File_id=1206f206-fe66-4156-98c4-dff62a6d337a
Thank you, PD. That’s very helpful. It will take a while for me to digest it, especially since it contradicts a lot of other things that I’ve read.
Yes, that’s it exactly. What frustrates me is that the commenters quite literally had nothing. They just didn’t like the point I made so they dismissed it.
In my view the rates on earned income can be raised without reducing revenues but only if the rates are raised for the full top decile or more. Those in the top 1% of income earners are the best equipped to avoid paying additional taxes.
Pd. (and Dave)
As a veteran of the tax debate wars my reaction is that the professors words are seductive, but fail quantitatively.
So he’s going to reduce the rates on so called earned income, and increase them on so called unearned income. First, I have to point out, the term unearned is simply stupid. The income that becomes an “u earned income” generator has been taxed. Second, it’s risk capital. It does not come for free. Lessen the return, you will get less of it. I can’t imagine that is a good thing.
More importantly, this is obviously aimed at the trust fund crowd. It’s more class envy than economics or sound tax policy. As Dave points out, the ultra ultra rich will always outsmart the tax guys, and avoid the burden. I have no idea where i stand personally. Am I 1%? I don’t think so. I’ve made more than a million a year many times. I’ve made 500k many times. Am I a Kennedy? No. And my accountants are hot shot NY metro guys who deal with PE pros, sports figures, entertainers, Fortune 500 CEOs etc, and damned if they can find those magic tax dodges for me. So guys like me take the tax hit and change our behavior accordingly.
Further, and here is the real problem, to really raise meaningful income you have to go for large numbers………..into the upper middle and even the middle class. The taxes are always advertised as a hit to the very rich, but they inevitably go deep.
I’ve heard these arguments made for increasing taxes my whole adult life. It’s always going to cure the deficit. Well, look at the deficit. Increase taxes, they are going to spend it, and the consequences be damned.
Lucy and the football, anyone?
Drew:
Yes, the ultra-rich will always outsmart the tax collector. Which is why they don’t bother to get hysterical over tax increases. . . And yet, hmmm, they do actually get hysterical, don’t they? Which makes me think maybe you’re full of baloney. Because we of course know that the wealthy are wise and indeed wealthy because they are wise, so I wonder why it bothers them so much?
Either it does cost them, or they’re paying lobbyists to save them paying taxes they don’t pay. Which seems a bit crazy.
Get back to me when you have something useful to say, Michael.
yet, hmmm, they do actually get hysterical, don’t they? Which makes me think maybe you’re full of baloney. Because we of course know that the wealthy are wise and indeed wealthy because they are wise, so I wonder why it bothers them so much?
They may not like the inconvenience it causes. Just because they can outsmart the tax code doesn’t mean it doesn’t cost them in other ways. They may prefer to take their capital gains and hve some fun with them (buy a new mega-yacht, a new home in the Hamptons, an air plane, etc.) but higher capital gains tax rates make it not worth their while. No one likes being constrained.
And is it the ultra-rich that make the fuss, or is it those in the 1 million to 20 million dollar net worth range? There’s more of them, and more that are close to getting into that range, than there are the mega-rich.
Plus I’ll note that several of the mega-rich have come out in favor of such tax increases. Perhaps they are looking to decrease potential competition from upstarts. (And doesn’t Warren Buffet have a tendency to not pay all the taxes he owes? Before he lobbies for an increase he should settle up. But perhaps he’s just following the Treasury Secretary’s lead.)
I wanted to mention but forgot, almost not reported is the fact that the so called Buffet rule would run the government for a day or two. Since baloney seems to be the term of the day, this is a bunch of baloney. Class warfare politics with no real deficit reduction implications.
A certain commenter has been blathering recently about intransigence on the part of the GOP, yet we get nothing but grandstanding like the Buffet Rule and zero leadership from the President, not even calling his buddy Harry Reid to suggest that it might make sense to actually pass a budget for the first time in years….as required by law. Nah. Better to play politics than lead.
And is it the ultra-rich that make the fuss, or is it those in the 1 million to 20 million dollar net worth range? There’s more of them, and more that are close to getting into that range, than there are the mega-rich.
I’d say it’s really 500k to 5MM, but let’s not quibble. The point is that a Hollywood movie star who makes 10mm a film can afford to be popular, er, socially conscious, because it’s a rounding error. (BTW, ask them to abide by the liberal “they’ve got enough” rule and give up the Malibu palace and see how caring they are). But I digress.
I don’t know if the motivation is to suppress competition, but the simple fact of the matter is that to make a dent in the deficit you need large numbers….population, not dollars. The ultra rich are few. And that means t his is all just class warfare and a Trojan horse that will ultimately lead down to those making 100k for tax increases. And then it will just get spent…….
The empirical evidence is on my side.
Let’s put some numbers and percentages together.
The top 10% of income earners make about
$90,000$110,000 or more.The top 1% of income earners make about $375,000 or more.
The top .1% of income earners make about $1.75 million or more.
I think there’s actually more than one problem. To the extent that the extreme wealth of the top .1% is produced by gaming the system without building anything, creating anything, and so on, I think that’s a problem. However, I think the much greater problem is that so many in the top 90-99% earn the greater part of their incomes by being paid by the government.
More than 60 years ago Schumpeter predicted that intellectuals would bring about the death of capitalism. I don’t think this is what he meant but I think that’s what’s happening.
Update
I checked my estimate of the top decile of income earners and found my recollection was wrong. I’ve corrected it.
Let’s stipulate that Dave’s numbers are correct. (and I have no reason to think otherwise).
It illustrates my point. There are so few that to raise the kind of tax revenue numbers that could deal with the deficit you have to go very low in the income scale. At the risk of hyperbole, you could confiscate the majority of the top earners income and still only run the government for a short period of time. We have a spending problem, not a taxing problem.
If I misinterpret, I apologize in advance, but I disagree with Dave’s assertion that the very top make their money by gaming the system. I’m in the business of making people rich, every time we buy one of their businesses. And they haven’t gamed anything, they have worked and risked their bloody asses off.
As for the government and the top 10%. Intuitively I’m thinking that is more valid than anyone on the left would like to admit. But I don’t have data.
The operative phrase was “to the extent”. Perhaps I should have added a “whatever” to that. I don’t think that all of those in the top .1% of income earners make their incomes solely by gaming the system. I think that some do.
almost not reported is the fact that the so called Buffet rule would run the government for a day or two
So . . . it does raise some money.
I’ll take a day or two. One day at a time, sweet Jesus . . .
Perceived fairness is necessary, otherwise you’re selling painful cuts to the poor and no pain to the rich. That’s the path to social instability. You want to cut money for poor kids, start with hitting the rich a bit more. Otherwise the working folks start thinking the government is nothing but a tool of the rich. Which is fine . . . so long as you deprive the working folks of the vote first.
The 99% have more votes than the 1%. When the rich are harrumphing and alternately claiming they’re immune to taxes or victimized by taxes (and really: pick one, huh?) they have a tendency to forget that we are just a little more pain and one good demagogue away from getting truly confiscatory. That’s why many of the rich are in favor of higher taxes, Drew: they’re not weak-minded, they’re smarter than you.
There was an amusing article in the WSJ today about a study that found that most Americans (interestingly, without significant difference between the political parties) don’t think that tax levels above 15% are fair. “Amusing” because it turns the White House’s calculation about fairness on its ear: the reason that the status quo isn’t fair is not because the top .1% don’t pay a high enough percentage of their income taxes but because the rest of us pay too much.
Dave:
Unfortunately all those same people think it’s unfair that grandma have to pay higher doctor bills or that veterans should have reduced benefits or that we should have dirty water. They think we can balance the budget by cutting foreign aid. I hope this won’t shock you too much, but people are clueless.
No doubt about it. I’ve been noodling away for a bit. I can’t get the total for federal spending to go below 15% of income without the flywheel falling off.
However, my conclusion is that fairness means something different to Americans, generally, than it does to President Obama. Which in turn suggests that emphasizing fairness isn’t that great a strategy.
Drew, the Professor I cited is testifying in favor of the various tax reform plans out there which cut marginal rates on personal and corporate income tax, eliminate most deductions, and otherwise simplify. (Like Simpson/Bowles with a top marginal rate of possibly 23%) He is opposed to the Buffet rule, and would instead treat capital gains as ordinary income. I guess my question is whether eliminating the differential is as important as lowering the rate.
I’ve not located the Professor’s research, but he appears to believe the evidence on capital gains is “murky,” and the effect of various rates we’ve had over the years is difficult to differentiate from general economic cycles. I can see a problem with timing the effect of a rate change, and the likelihood that the market will price in a certain degree of variability of tax laws for long-term investments.
That said, he also argues that the existence of the differential between taxation of ordinary income and capital gains creates the incentive for wasteful tax shelters. That is, he is saying the rate of taxation of capital gains does not have discernible macro-economic effects, but the rate of taxation does have discernible effects on the creation of certain, specific non-productive activities. I think those ideas are in strong tension with one another.
However, my conclusion is that fairness means something different to Americans, generally, than it does to President Obama. Which in turn suggests that emphasizing fairness isn’t that great a strategy.
People haven’t started to feel the pain of cuts yet. Look at it again when they do. Obama knows what’s coming, people generally don’t. When grandma/mom/little Jimmy, whoever, turns up a loser in the budget battle, ask them again if they think millionaires should pay more. I suspect the Greeks have suddenly lost their sense of humor about wealthy tax-avoiders — and I imagine something like that will happen here if cuts get serious.
Beyond that, Drew’s not wrong that we have to hit a much bigger slice up for more money, not just the rich. When a guy making 70k a year gets a bigger bill plus fewer services, ask him then what he thinks the rich should pay. I’ll predict a one word answer: more.
It’s not rocket science to predict that almost anyone who is hit by some kind of austerity program (aka ‘cut’) will scream that someone else, preferably the nondescript ‘rich,’ should be the ones shouldering fiscal responsibility, basically taking the hit for everyone else.
It’s also called “pocket politics,” and everyone is in the game of gaming the system. But, is it really the government’s role to define ‘fairness?’ How can they do that in an ideological world? Because, in one segment of society ‘fairness’ may be defined one way, while in another the definition might be much broader…or more narrow, for that matter. That’s why an expanded government becomes a busybody, an intruder into the lives of individuals, by making presumptions and affecting lifestyle guidelines that should be left up to people themselves to determine, as well as manage. It’s like we have become this huge enabling, co-dependent government-dictated society — one who helps so much that it creates helplessness, and mass dependence on big brother government.
Like Drew mentioned earlier, it is the very cuts many self-serving people balk at that are needed. Because, the mere act of raising revenue, through increasingly higher taxes, will only create a bigger delivery system of funding, giving the government more spending power to build more social programs, which will run out of money causing the government to demand even more revenue. Does anyone see a vicious cycle here, like a dog trying to endlessly catch his tail?
In grade school my son was given the acronym STAR as something to follow. It means, “stop, think, and act right.” That is what the government needs to do: stop it’s spending, think about how to reform it’s tax code and entitlement programs, and then act right by doing something that has substance and long term healthy ramifications attached to it. The Buffet Rule is a joke. Obama’s lack of budget involvement is the epitome of incompetence. Weakening the struggling classes by hand-outs such as more food stamps, expanding free food programs in schools to include, not only breakfast, lunch, but now dinner, with no means testing involved, is creating a disabled, special needs populace, and is a crime IMO.
Micheal
They aren’t smarter, they are publicity hounds. I’ve posted before I have direct experience with Mr Buffet totally at odds with his public persona. And I’d note Mr gates also found a way to avoid the tax man. You would be well advised to forget them as examples.
In any event, the real question here is what fraction of the nations resources should go to assist those who need help, and what fraction of the nations resources should be taxed to do that. The lefts answer is always more. It’s almost impossible to pin them down.
But I’ve played the cocktail circuit game of asking how much is “fair” for years. Invariably the answer comes in under current rates. So this shows you at least got one thing right, people are clueless. The latest fascinating poll is the one where lottery winners taxes should be capped at 10%.
More practically, the very fact that the ultra rich resort to clever evasion, and the well off stop working at some point (you think I’m wrong? Ask a union worker what they need in overtime pay) tells you people have an inherent tolerance for taxation vs leisure or avoidance.
Flip it around from sources to uses. This usual grandma will have to eat dog food crap gets so boring. 25% of the nations output is now being spent just by the Feds, and we can’t help grandma? Balls. The money is going to all sorts of waste because it’s just OPM. It’s candy everywhere in return for votes. But the notion that it’s really going for the poor and elderly or that we already do not have the resources for the poor and elderly is just for the mush minded.
You are constantly going on about nihilism and caring and other blather. The fact of the matter is that government has, at all levels, so much money they could take care of all the usual needs like defense and roads and such, and still care for the disabled, poor elderly etc in spades if government wasn’t so busy building empires and waste and statues to politicians etc.
While you invoke rioting in the streets in Europe and say we need more, more, more, I look and say, “there it is, government has bankrupted those who follow the big government model, it’s ridiculous to continue down the path, and we had better turn course before its too late.”
Br’er Buffet says, “Throw dem rich folks in the tax patch. That’ll get ’em. Rich folks don’ like no tax patch.”
Br’er Obama knew he could catch those rascally rich folks in the tax patch. Br’er Buffet was a rich folk, and Br’er Obama knew it takes a rich folk to catch a rich folk.
Br’er Obama threw all the rich folks into the tax patch. Br’er Buffet got thrown in as well, but he quickly came out without a scratch. Br’er Buffet starts gnashing his teeth and pulling out his hair. Br’er Buffet runs to Br’er Obama wailing, “more taxes, more taxes. Dem taxes ain’t hardly scratching rich folks.”
Br’er Obama worked and worked to get the tax patch filled, and once he got it filled, he could hear the screams from the tax patch. Then Br’er Obama saw Br’er Buffet strolling along, smiling, and looking smug. “My tax people was born and bred in the tax patch,” he said. “Born and bred in the tax patch.”
Br’er Obama shrugged and thought, “Somebody’s screaming and that’s good enuff.” Then, Br’er Obama thanked Br’er Buffet for his generous campaign donation and patted himself on the back. Doing good is hard work, and Br’er Obama rested on the golf course.
“For the Snark was a Boojum, you see.”
I know this is only somewhat tangentially related to the earlier discussion about capital gains taxes and fairness etc. but we could seriously mitigate all our debt and unemployment problems if we could deal with the trade deficit.
I’m not saying we have to go crazy with tariffs or anything especially considering as members of the WTO we gave up that bit of sovereignty years ago, but why cant we just copy some of the more devious things that the Chinese or Singaporians do like giving land in exchange for factories or offering to pay their utility bills for X amount of years. My logic being that if people have jobs they can pay for all these things and taxes can stay the same or be lower, whatever people like.
The general shape of the argument against trade subsidies or tariffs is that it actually reduces economic activity below what it otherwise might be and it harms the country with the higher trade barriers more.
For quite a while here I’ve been arguing for a strict principle of reciprocity: whatever barriers or subsidies our trading partners impose or grant we should do pretty much the same thing. Yes, it would reduce the total amount of economic activity but I think we could survive that in a way that we won’t survive the loss of, say, low skill jobs.
The largest single tariff that China imposes is its lack of a civil infrastructure robust enough to enforce international standards (which China has agreed to) for intellectual property. Estimates for how much that costs American businesses range from the tens to hundreds of billions of dollars annually.
I completely agree with the idea of strict reciprocity, I think I first saw a fully fleashed out argument for it from Clyde Prestowitz (whose blog at Foreign Policy is excellent). Also, we need to somehow mitigate the effects of countries that use a “dirty float” against the dollar as it harms our exports and artificially induces us to import.
“25% of the nations output is now being spent just by the Feds, and we can’t help grandma? Balls. The money is going to all sorts of waste because it’s just OPM.”
Isn’t it true that most of that 25% *is* helping Grandma? If I recall correctly, most of the federal budget is Social Security, Medicare/Medicaid, and defense spending. The stuff you’re more likely complaining about as “waste” doesn’t even scratch the surface.
In 2010 the breakdown was something like this:
Total Medicare spending: $453 billion
Total Social Security spending: $695 billion
Total federal Medicaid spending: $290 billion
Total interest on the debt: $164 billion
Total defense spending: $664 billion
Total budget: $3.55 trillion
Or, in other words, Social Security was about 20% of the budget and Medicare was about 15% of the budget. Gross national income was $14.6 trillion. In 2010 the federal budget was about 24% of income. I think that income is a better measure for this purpose than product. You can’t spend product.
I think the trade imbalance induced by, for example, China’s pegging the yuan to the dollar is less pernicious than some of the other effects. Over time U. S. business start to invest more in things that don’t suffer from overseas competition as much, e.g. healthcare, housing, finance. That distorts the economy in ways that are hard to wring out even after the peg is abandoned.
“The reaction to this comment was several different varieties of out-of-hand dismissal. No attempts at refutation.”
First, there were two people who responded to you. I don’t know about others, but I don’t define “several” as “two.” That’s a couple to me.
Second, given all the other studies about bias in studies, which are themselves possibly biased, and how this bias affects their research’s integrity, I find it difficult to believe someone of your learning would dismiss such dismissals outright like this. You even say yourself:
“Here’s a Google search of the literature on optimal capital gains tax policy. The results include studies from the Minneapolis and Cleveland Federal Reserve, the NBER, some scholarly studies, and a number of studies from think tanks advocating lower taxes or neoclassical economics. My quick check of the studies in the first three or four pages of results found no studies advocating a higher capital gains tax.”
And you don’t think questioning or dismissal of studies published by organizations advocating for the position those studies arrive at is a legitimate method of debate? The IRET, who funded Dr. Evans’s study, is not unpartisan in its intellectual loyalties.
My final question: why post your linked Google search here instead of at the people who questioned the one study you linked to the first time?
No, I don’t. In the absence of refutation of the actual material at hand it’s called “the ad hominem fallacy”. There’s more than one kind of ad hominem argument. Most people think of the abusive ad hominem. The dismissals were an example of the circumstantial ad hominem. It isn’t enough to say that advocates are advocates. You’ve got to submit evidence that they’re wrong as well. Bias alone does not prove falsehood. The responses were intellectually lazy.
I like to learn. I’m not unpersuadable but I am difficult to push around. I can’t learn anything from out-of-hand dismissals based solely on the source and preconceived biases.
If you can’t vent on your own blog where can you vent? I’ve been in lengthy discussions with several of those who commented in that thread before and, shall we say, have found the experience unsatisfying. Additionally, I have found the blog comment thread format poorly suited to debate.
Also, in the absence of countervailing evidence, one study is enough.
Tasty Bits,
Br’er Buffet and Br’er Obama was hilarious! Oh, and BTW it had a lot of truth to it as well.
@Dave Schuler
Speaking of other effects of currency manipulation there’s a really interesting video from Khan Academy about how the Chinese central bank buying debt effects all the interest rates in the US and its effects on business, which you alluded to somewhat. I think this is the link if you’re interested.
http://www.khanacademy.org/finance-economics/currency/v/american-chinese-debt-loop