Harvard economics professor Greg Mankiw talks dollars and cents by comparing the McCain and Obama tax plans to the status quo. He presents a straightforward calculation anybody can follow. But through the magic of television and the news and despite the armies of pundits, most readers will be seeing the numbers for the first time. That’s sad.
If there were no taxes, so t1=t2=t3=t4=0, then $1 earned today would yield my kids $28. That is simply the miracle of compounding.
AdvertisementUnder the McCain plan, t1=.35, t2=.25, t3=.15, and t4=.15. In this case, a dollar earned today yields my kids $4.81. That is, even under the low-tax McCain plan, my incentive to work is cut by 83 percent compared to the situation without taxes.
Under the Obama plan, t1=.43, t2=.35, t3=.2, and t4=.45. In this case, a dollar earned today yields my kids $1.85. That is, Obama’s proposed tax hikes reduce my incentive to work by 62 percent compared to the McCain plan and by 93 percent compared to the no-tax scenario. In a sense, putting the various pieces of the tax system together, I would be facing a marginal tax rate of 93 percent.
The bottom line: If you are one of those people out there trying to induce me to do some work for you, there is a good chance I will turn you down. And the likelihood will go up after President Obama puts his tax plan in place. I expect to spend more time playing with my kids. They will be poorer when they grow up, but perhaps they will have a few more happy memories.
Now some wag will probably ask, ‘why not lower taxes even further’. The answer is that we need to collect some monies for the common good. So it all depends on what we value as a common good. If you did the calculation for someone who didn’t pay taxes but expected to receive money from the government, the higher the tax rate on those people who do earn, the better for you.
Actually, there is a “no tax” option: consumption taxes.
The beauty of a consumption tax is that it removes all incentive distortions from the production side of the equation, and moves the tax to the consumption side. You don’t get taxed when you make stuff, only when you buy it.
The best, most researched consumption tax plan out there is the FairTax (disclosure: my father is the Founder and Chairman of Americans for Fair Taxation). It’s not some hair-brained scheme; it’s a real, comprehensive alternative to the ridiculous system we have today:
http://www.fairtax.org/
If you consider Mankiw’s example, your kids would have $28, and they’d spend that and pay a 23% inclusive sales tax. This would give them $21.56 of pre-tax money to spend. Way more than the $4.81 of McCain’s plan, or the $1.85 from Obama.
The tax is also includes a “prebate” that effectively returns all of the tax on essential goods and services. Low consumers (aka the poor) pay little or no tax, while high consumers (aka rich, G5-flying, Hamptons-party-throwing, Hollywood celebs) pay a lot more tax.
Anyway, just thought I’d mention that there is another way…
L3
It is telling that in this time of conomic uncertainty, only conservative & libertarian think-tanks (and no left-leaning ones, to my knowledge) have published any studies about the effects of the 2 candidates tax plans’ effects on jobs and economic growth…
Bottom line per Heritage (http://www.heritage.org/Research/taxes/cda08-09.cfm)
* McCain’s plan incentivices twice as many new jobs as Obama’s
* McCain’s plan results in three times as much GDP growth
* McCain’s plan results in 60% higher disposable income
It Wasn’t Just a Joe-the-Plumber-Inspired Whim
[Kathryn Jean Lopez]
In a radio interview in 2001,
Barack Obama unequivocally embraced “redistribution” of wealth several times, and also laments that the Warren Court was not liberal enough.
Tell me this isn’t socialism.
Obama is the most radical nominee for president in modern history.
Enter at our own risk.
Call it Socialism, call it Communism, or call it redistribution, the bottom line is clearly that Obama’s plan will not be good for the US economy. The message that comes through repeatedly from his campaign, though, is that he knows what is “fair” and he intends to implement a policy directed toward “fairness” no matter what the impact will be on the economy. This strikes me as arrogance bordering on hubris. So I am left to ask: why do 45% of American voters support this candidate? F
Gateway Pundit has the text, re: Audio Link Above about Redistributing Wealth ( 2001 )
You can bet that Senator Government has got himself a plan to snag himself a healthy dose of that cash while it is being redistributed.
The weakness of Prof Mankiw’s argument is not in his conclusion that working will yield less of a return under Obama’s plan than under McCain’s plan. The good professor doesn’t go far enough. The step that the professor should take is to ask WHY WORK AT ALL? The more one’s needs the more one is given by the gummint. Work and you get taxes imposed on you. Don’t work and you receive benefits. Work less and let them give you more. Yes, that’s the trick.
“Drink is the curse of the working class.”
Karl Marx
“Work is the curse of the drinking class.”
Anon
Ah, what a treat! At long last I get to argue with somebody of the caliber of L3.
It is so boring to have to make do with mental midgets such as (censored), (censored) and (censored). Now a foe worthy of my steel!
Let’s see, where shall I start? The constitution has an amendment explicitly authorizing the personal income tax. So long as that amendment is in place, I want no
replacement taxes for the income tax. You will, I feel certain, wind up with both the income tax and the replacements as well.
That is my number one objection to the “fair tax”.
My second objection is that a sales tax of 30% would seem most likely to put us on the wrong side of the Laffler curve both as to governmental revenue and as to overall economic activity.
While I understand that $100 plus 30% equals $130 and that $30 is 23% of the total, claims of a 23% tax rub my fur the wrong way. This is not a reason to reject the “fair tax” proposal but it does make selling the idea a bit trickier.
I rather keep the income tax and see what I can do to get the maximum marginal rate down as close to 0% as possible.
Were I the Richard Potato (now don’t tell me you have never heard of Dick Tater), I think I would declare a 15% flat tax on the gross amount of every paycheck. 5% to go to the general fund and 10% to annuity of choice, the latter to replace the current Socialist Insecurity system.
Interest and dividends, except for those required to be free of federal taxation, would be subject to the same 15% withholding rate, the witholding to be remitted by the paying agent.
The above taxes would be collected after business taxation was effected. Business taxation would be based on adjusted gross income—gross income minus refunds and minus other taxes directly levied on the business in question. This tax, along wioth those other taxes, would be paid ahead of everything else, including the payroll.
By doing things this way, we skim the cream at different points of monetary circulation.
While this does resemble hidden taxation, I deem it necessary to collect at different places in order to alleviate the pain of the ripoff.
On the other hand, it eliminates the demon of “progressive” taxation and by taking from the gross amounts, reduces if not eliminates the governments ability to play favorites and divide and conquer with the tax code.
And it will pluck the goose so as to gain the maximum amount of feathers with the minimum amount of squawking.
I now retire to my bunker and see how much shelling I get in return.
In the long run markets are rational. In the short term not so much. This election is being determined by emotion and that is good on many levels for president Elect Obama. Professor Mankiw’s arguement would elicit nothing but blank uncomprehending stares at a meeting of the Harvard English departments faculty and they will be equally confabulated when they call Joe the Plumber on a Sunday afternoon to come snake out the crapper and he tells them he doesn’t work on Sundays try calling and making an appointment on Moday.
There is something to be said for the notion that those who have profited greatly from living in a society do owe more to it, and should be taxed accordingly. And who are those people? A lot of them are government workers and people who get a substantial amount of their income from government checks or grants. I think we ought to just start taxing such folks across the board, and just keep on increasing THEIR taxes until we have a balanced budget.
The morons who keep saying that those who have benefited most from society should pay more proportionally need to put their wallets where their mouths are.
Maybe Senator Biden’s retirement package, and those of his colleagues could be trimmed and distributed to their constituents to bring more equity to that area, also.
the laffer curves suggests that if you lower taxes you increase government revenues to a point by increasing the tax base. So far every tax cut has resulted in an increase in the total revenues collected. we have not come to the point of dimishing returns for cutting taxes.
the real problem right now –to governments — is that they are taking risks. they want/need/have to get private enterprise to take the risks.
to do so the government needs to increase the compensation for risk taking by lowering the capital gains tax to as low as it will go.
the china and singapore currently have zero 0 capital gains tax. this may be the secret reason their economies flourish.
Wish this lady had been Obama’s Pastor instead of “Rev” Wright!
—
Its always good to hear a person’s ideas within context of the times. How ironic that this radio interview took place in Sept. 2001. I am finding it difficult to forget that Obama called our Constitution an “imperfect document . . . ” and stated that it shows ” Blind spot of framers,” which, Obama also said, continues today.
His continuing mindset leads me to question his potential role as U.S. President (if elected – Nov. 2008). And it lends credence to his campaign rhetoric and plans to “change” America — by starting with the U.S. Constitution, even as unthinkable as that might sound to right-thinking Americans. Beware and take care of what Obama has said throughout his state, national, and international presence. And believe him. All ongoing documentation and his actions show that he is not the man for the highest office in this nation. And that remark has nothing to do with the color of his skin, as he would have Americans and the world view depict as such.
Get informed on this side of the ballot box, because the other side of it would be too late.
Comment: Rev. L. Dowell – 21 August 2008
Joanne said…
Raila Odinga Pledges to Distribute the Country’s Wealth
Several minutes into the video at this site, this is what is said of Raila Odinga of the Socialist Orange Democratic Movement – Obama’s cousin:
“The flamboyant politican became popular with Kenya’s poor by pledging to distribute the country’s wealth more evenly.”
If that doesn’t sound like deja vu and the apple, Obama, doesn’t fall too far from the tree of his relatives, I don’t know what does.
Obama’s African Hubris
(No Quarter Blog is currently down.)
Former Clinton aides currently working for Obama were the “mutual acquaintances” who directed Dick Morris to Kenya to advise the Odinga campaign in November of 2007, shortly after Odinga visited with Obama in America. Morris was an extremely divisive factor in the Kenyan elections, as a foreigner, a white man, and the creator of an antagonistic “have vs. have nots” campaign platform for Odinga’s ODM. He also suggested the current campaign of civil disobedience to protest the election result, including a “Million Person March”, a la Louis Farrakhan and the Nation of Islam.
When things got out of hand following the election, Obama called Odinga repeatedly, but Mwai Kibaki, the leader of the Government would not return his calls as he perceives Obama to be biased toward his Luo relative Odinga in the conflict. Obama is featured prominently in ODM campaign posters, slogans, and songs in Kenya, and the plaintive phrase “A Luo will become President in America before a Luo will become President in Kenya” is often heard.
Obama funded extremist Afrocentrists who shared Rev. Wright’s anti-Americanism
Doug:
You might want to see the latest link from Drudge. Apparently, Barack Obama is downright serious about instituting a massive redistribution of wealth in America, and he is on record as saying so in 2001 on WBEZ.
Not one to point fingers but the me generation does not care about the future, only that they get their slice so they will be the “group” that will elect the “O”ne along with the brain washed “why can’t we all get along” under thirty something veggie eating college known it all that have no real concept of personal rights and private business and the government should stop all trans fat do gooders because they don’t believe you are suppose to control what you put in your mouth. Man has tilted to the downhill race for the last time, mans history is circular and we have gone from the high arch and now race at break neck speed to the low!
DOW Futures are down 300 pts. @ 3AM Central.
I think a rousing mid-day speech by McCain (broadcast by Fox News) helped the floundering DOW on Friday, although the index had been limit down in the pre-market Futures trading.
It’s going to take more than that today (Monday), I fear, to keep the DOW from triggering downward limits during market hours trading. There will need to be at least the perception that the leftist commies are on the run and the realization that the polls are heavily skewed pre-election toward Obama.
Voice Ink Meet Rev. Lainie Dowell
Years ago, I had written, also, to Rev. Jeremiah Wright and spoke out about the many problems with the Black Baptist denomination during the same period that Barack Obama is now known to have sat in his congregation (Rev. Jeremiah Wright and his father are Baptist Clerics).
Obama did not speak out against the Black Liberation Theology era.
In fact, I now know that he, in fact, pushed it via (retrieved copy of paper Obama wrote during that time with his Saul Alinsky doctrine. Yet, during all that time (1980s- ), I had never heard Obama’s name mentioned among any ministers on the local or national scene or by any politicos until he appeared at the DNC in 2004, to give a speech. I wonder why he has not produced anything about his mysterious past and why he persists in labeling anyone who speaks about it as being people trying to smear him.
The links cited above include various other aspects about my experiences in fighting against the Black Liberation Theology being preached where I served as Associate Minister and advocated nationally for affirmation of Black women clergy during the 1980s, at a time when that was not a widely accepted practice in the Black Baptist churches. And, my advocacy has long extended to all Christian Clergywomen, Clergymen, and laity (male and female).
PASTOR WRIGHT’S CHURCH OF THE INSTANTLY DARKENING SKIN
Bill Ayers and Jeremiah Wright are not associates of Barack Obama. They are Barack Obama.
Obama is a frightening prospect — a deceptive charlatan — a rabid wolf in sheep’s clothing. The Mayan calendar calculated the end of the world to be Dec 21, 2012. If Obama becomes president, it might just be!
P.S. He is a Muslim (you can’t convert away from Islam) and he has strong Arab ethnicity — Kenya has a sizable population of Arabs, and Obama’s father was more Arab than African. This will explain a lot of his fringe connections…and Jesse Jackson’s comment about “Zionists losing their influence” if Obama becomes president.
outa my league:
DOW Futures are down 300 pts. @ 3AM Central.
I think a rousing mid-day speech by McCain (broadcast by Fox News) helped the floundering DOW on Friday, although the index had been limit down in the pre-market Futures trading.
I doubt it. Investors know McCain is a complete nimrod on economic matters. On top of that, the market has pretty well decided (weeks ago) that Obama is the winner.
Therefore, an economic policy speech by McCain, at this stage, is as likely to move the market one way or the other as a speech by Pastor Huckleberry, the mayor of Detroit, or the President of Guinea-Bisseau.
***********************
Charles:
the laffer curves suggests that if you lower taxes you increase government revenues to a point by increasing the tax base. So far every tax cut has resulted in an increase in the total revenues collected. we have not come to the point of dimishing returns for cutting taxes.
Unfortunately, Charles, we have had enough time to see “supply side” in action and find out that for every dollar we borrow from China to compensate for lost revenue to give a dollar to a wealthy person, we get about 28-35 cents in operating revenues. Depending on the economy, of course.
There is a reason George Bush has exceeded the debt accumulated by all past Presidents put together. That is that the Laffer Curve doesn’t work if you spend more, and only works when you grow revenue enough to pay off the China money and interest, eventually. It fails totally where gains in operating revenue are not permanent growth from investment – but only temp GNP growth from money simply spent away, and always dependent on the next IOU written to China (or Jpan, Saudi Arabia) to get the new cash infusion needed to prop up consumption and tax base.
This is like if I ran a company and decided I wanted to get a 2 million in operating revenue increase, I would take out a 10 million loan. So I could double bonuses to my richest execs and lawyers and put an extra 50 in quality and materials into a product I would sell for the same price, and from motivated wealthy people riding the worker bees hard and higher sales of the gussed-up product – I get my 2 million.
But if I don’t borrow another 10 million next year, all my gain in operating revenue goes away. So I borrow more, and are now in debt 18 million plus interest for 2 million in operating revenue. And the year after that, 29 million in debt and the 2 million in operating revenue doesn’t even cover the interest..
And so I would ride the private enterprise version of the Laffer Curve and Reagan Voodoo economics right into the La Brea Tar Pits.
Pretty much what the idiot Bush and his advisors did to us. (Except we can still borrow from the Saudis to pay off Chinese interest..and it wasn’t all bad…Dubya made a nice number of very rich people richer and happier and got a pile of donations from them.)
works if you don’t spend
Per 2164th we need a commercial with Rev. Wright, Pfleger, Ayers, Rezco all doing the “Im Barak Obama” line.
Dave,
I’m delighted to help you quench and temper your steel.
Your point about needing to repeal the 16th Amendment is a good one. As I understand it, the FairTax legislation would include such a repeal, and has a trigger so that a failure to repeal by a date certain would cause the entire tax code to revert to current system. The logic is that once people (especially people working for wages) get used to taking home their entire paycheck (plus benefits), it will be difficult for State legislatures to avoid ratifying the repeal.
Your point about the rate is also a good one. I’ve argued a similar point, although it is important to emphasize that this is primarily an issue of perception. The rate that was chosen is revenue-neutral, so that the government gets the same amount of dollars it gets now from all taxes (income, Social Security, capital gains, estate, etc.). Proponents of 23% argue that since income taxes are “inclusive” rates, the FairTax should use the same methodology. In other words, if you earn $100 and pay $23 of income tax, you’re paying $23 on $77 of net income, or 30%.
I prefer calling the rate 30%, for two reasons. First, it is the way most people are used to calculating sales taxes. Second, it highlights the extraordinary amount of money we pay to the Federal Government, and so will increase pressure to reduce the size and scope of Washington (one of my pet discussion points of late). Still, the tax is what the tax is, although I admit how it is framed is important.
The fundamental issue is whether we want to tax productive activity, and leave ourselves open to the distortions that inevitably flow from that decision, or tax consumptive activity. I tend to prefer taxing consumption, for four reasons:
1. It is easier to measure consumption than income. It’s like the difference between calculating a royalty and an equity participation. Royalties are relatively easy: you add up receipts, and apply a formula. Equity is tough, and is subject to all kinds of judgment calls about the appropriate level of expenses. This is why Hollywood agents have always pushed their clients to get “points” rather than a share of profits. The percentage is lower, but there is less gaming (i.e. distortion). It’s really an incentive issue.
2. It is a broader tax base. A consumption tax is (crudely) a tax on GDP vs. a tax on income. The GDP is about $13.3T and the national income is about $11.6T. Broader bases tend to create more efficient systems.
3. Lower transaction costs. The current tax system creates about $250B annually of compliance cost. Estimates for the FairTax are about $30-50B. This extra cost is a deadweight loss on the entire economy. If you capitalize this ~$200B loss, this is about $2-4T benefit.
4. It captures the economic activity of illegal aliens. IAs don’t report income, but they do buy stuff. So they’d pay their fair share of taxes. In addition, IAs won’t get the prebate, so they will pay more than a legal worker doing the same job and having the same consumption level.
The interesting thing about Mankiw’s analysis is it highlights the distortive effects of any income-based tax. The difference between the three outcomes listed are pretty breathtaking, methinks.
Anyway, there’s a lot more benefit to a FairTax-type system than these (cross-border effects, interest rate benefits, elimination of the tax benefit of being a non-profit vs. for-profit enterprise, etc.), but that should be enough for you to carve on with your sharpened sabre.
Cheers.
L3
The L.A. Times Suppresses Obama’s Khalidi Bash Tape
– Andrew C. McCarthy
Gateway Pundit reports that the LA Times has the videotape but is suppressing it.
Back in April, the Times published a gentle story about the fete. Reporter Peter Wallsten avoided, for example, any mention of the inconvenient fact that the revelers included Ayers and Bernadine Dohrn, Ayers’s wife and fellow Weatherman terrorist. These self-professed revolutionary Leftists are friendly with both Obama and Khalidi — indeed, researcher Stanley Kurtz has noted that Ayers and Khalidi were “best friends.” (And — small world! — it turns out that the Obamas are extremely close to the Khalidis, who have reportedly babysat the Obama children.)
Nor did the Times report the party was thrown by AAAN. Wallsten does tell us that the AAAN received grants from the Leftist Woods Fund when Obama was on its board — but, besides understating the amount (it was $75,000, not $40,000), the Times mentions neither that Ayers was also on the Woods board at the time nor that AAAN is rabidly anti-Israel. (Though the organization regards Israel as illegitimate and has sought to justify Palestinian terrorism, Wallsten describes the AAAN as “a social service group.”)
Denethor or Samwise?
A challenge:
http://article.nationalreview.com/?q=YmFhYzIzMGQ1Y2FlMTA4N2M1N2VmZWUzM2Y4ZmNmYmI=
Doug (post #14) had a very interesting comment.
To paraphrase, how likely is it a Democratic congress and president may attempt to solidify their initiatives by amending or changing the constitution? We may see some conflicts with the SCOTUS and the Constitution like FDR in the ’30s.
With two thirds approval of both houses of Congress (almost certainly Democratic) we may see amendments proposed with as profound an economic impact as the the 16th (income tax).
In our system power resides with the people but many people don’t realized it is exercised through the states. Consequently, two thirds of the states can call for a constitutionl convention. In that scenario the red/blue state divide becomes even more significant.
Adding insult to injury, Mankiv took Obama’s latest revised tax proposals as his comparison, which probably won’t be the real ones proposed in the end.
Obama during the primaries proposed to raise the Capital Gains tax to 28%, not 20%, and impose the payroll tax on all income and not exempt the $97.5K to $250K bracket. It is also not clear whether the medicare tax of 2.9% is applicable in the Obama plan.
The payroll tax for the self employed is 15.3% , and the Mankiv analysis seemed to use a rounded down tax of 6%. The increase in the top rate under Obama is supposed to be Clinton’s rate of 39.6%, not 39%. So federal income taxes on the self employed in the top bracket will go from 35% presently to 54.9%, not 45% as Mankiv shows. Then in high tax states, such as California, the state tax of 11% must be added on top to get a new total top marginal income tax rate of 65.9%.
The upper 5% of earners pay by some measures, 60% of income taxes. A large percentage of those presumably are self employed. So a large percentage of those paying 60% of federal income taxes now would have their taxes at the top bracket raised 57%. That has to do wonders for the job market. NOT!
There also is in Obama’s plans are presently no mention on how to fund the 45 million uninsured with health insurance equal to those in Congress. At one time, I believe there was talk from Obama of a 7% tax on income over and above the new higher rates to pay for his health care proposal.
Mc Cain if he had only started his campaign earlier would have been talking about the earlier and much higher Obama tax increases, not Obama phony revised tack to the middle numbers.
Leo, minor point of contention: it depends on what kind of Illegal you are talking about. If they are working under a phony social security number, their FICA witholdings are going straight to Washington to help fund the boomers retirement (I suspect that is the main reason for having them here) and they won’t get any of it back.
DonB71: careful, talk like that will get you a knock on the door from the new national police force. That right there is enough for me to ink the dot for McCain next week.
American voters are suckers. For generations it really didn’t matter that much which party or which candidate dominated the political scene. Both could be expected to operate within a framework that tinkered with the system but neither was likely to break it.
Cousins Barack and Michelle are coming to family dinner with grenades in their pockets and almost nobody is suspicious or has any concern about what is going to happen.
Obama doesn’t want to tinker with the system. He wants to break it. His recently revealed quotes about wanting a SCOTUS that “goes around” the Constitution to redistribute wealth is about as plain speaking as it gets. Obama doesn’t give a hoot about the Constitution, the culture, or the value system. Obstacles to be pushed aside to make way for the New Society.
I think I have a handle on the master plan, if there is one. The nationalization of healthcare combined with the opportunites created from the financial bailout will create dozens, perhaps hundreds or thousands, of private/public hybrid corporations. The “ruling class” presently comprising mostly Democrats but with hordes of Republicans not far behind, will legislate a protected pathway from public to private sinecures.
Fannie/Freddie is the model business plan. Democrat loyalists like Raines and Gorelick tooks tens of millions out of only those two hybrids. I suspect the pathway has already provided tens of billions to staffers, lobbyists, former congress critters and their families. There will be plenty for everybody who kicks the can down the road.
If succeeding in business on your own makes you a public enemy subject to heavy taxation while at the same time playing nice within what will quickly become a massive private/public conglomerate earns you rewards, then it’s not difficult to see which way the public will be steered.
Note that O was only targeting blacks for redistribution.
First of all, how do we know for sure who “Greg Mankiw” really is?
Well, I’d go first to the Harvard University Economics Department faculty directory, where I find this:
N. Gregory Mankiw
Robert M. Beren Professor of Economics
Ph.D. MIT
Primary Fields of Interest: Macroeconomics.
Research Topics: Price adjustment, consumer behavior, financial markets, monetary and fiscal policy, economic growth.
So I guess he’s not just some adjunct professor.
I’m sending the Mankiw blog link to my Harvard son and to my other son who’s a recent college grad. Let’s see whether they learned some critical reading skills.
You don’t need to be a weatherman to know which way the wind is gonna blow in an Obama administration.
For those of you who might be under the impression that there is any more tax burden to redistribute, these are the latest figures compiled by the IRS on the breakdown of personal taxation in the US:
The top 1% paid 39% of the total
The top 5% paid 60%
The top 10% paid 70%
The top 25% paid 86%
The top 50% paid 97%, which means that…. the bottom 50% of tax payers only paid 3% of the total income tax take.
Combine that with the number of people who don’t pay taxes at all but who are eligible to vote and we have a situation where a majority of the voters have effectively a “free option” in voting, as we would say in our business.
That scares me a lot and its only going to get worse.
Obama’s tax policy and his proposed “tax cuts” are not going to make more jobs in America, instead it will make more unemployment and will cause people to lose more money, not make more money. His left wing illuminati thoughts are going to get this country into trouble and leave us there for years to come!
I sent the link to professor Mankiw’s blog post to my boss, who’s an Obama supporter. (I work in the Finance industry.)
His reaction to the post was, “that professor of yours sure makes a lot of money”.
I think he’s missed the point of the post.
Psychology time:
What is it about Sen. Obama and ‘punishment’?
Here is his comment to Joe the Plumber:
‘It’s not that I want to punish your success….’
He doesn’t want his girls to be ‘punished’ with a baby.
Is there a psychologist in the house?
Why do I sense that when Sen. Obama says he doesn’t want to punish success that he really does want to punish success?
If you did the calculation for someone who didn’t pay taxes but expected to receive money from the government, the higher the tax rate on those people who do earn, the better for you.
I look at the progressive income tax with its high marginal tax rates as a form of tax farming. Nobody does anything for their pretax income. The high rates fall on those whose bargaining position enables them to pass the cost of the taxes on to consumers. In other words, to get Greg to work you basically double his salary and pass the cost on.
Now if you establish a 50 percent marginal tax rate the government becomes equal partners with the rich. Politicians who steer additional money from your wallet into their pocket get half of it — their cut — to play with. Plus they claim credit for not taxing you. Now this is a very inefficient way to get that extra money but hey, they escape the blame.
Of course the compounding calculations in the above example works for the economy as a whole and the Social Security system in particular, since it relies on transfer payments . If the economy grows at 3 percent plus for the next 30 years and the tax base grows with it, then Social Security will be solid (with a few obvious adjustments). If the GDP grows at one percent or less — then the retirement system goes Kaput.
If congress takes away your 401K to make you buy government bonds instead of invest in the private economy (which is under study), they will spend the money as it comes in — leaving behind IOUs. When everyone wants to collect at about the same time — well, the IOUs will bounce and that system goes Kaput, too. The only question: who will they blame?
Captain Ramen,
Good catch. You’re right.
The ~14% does indeed get paid by those who work with false papers. But the cash-only day laborers pay nothing. Both would pay, and as much as 30% on goods they buy under the FairTax. And without a prebate.
L3
The average American in the broad middle income category pay an average of 6% net in federal personal income tax. I’m not making that up. They may be in the 25% bracket, but they pay 6%. The highest earners pay an average of 18%.
Now, you tack on what, 7.5% for a salaried workers share of FICA, and that comes to 13.5% Am I correct to assume that the flat and consumption taxes are intended to include the whole of an individuals FICA payment as well? I like to think so, because with the high rate numbers quoted for flat and consumption taxes, it doesn’r sound like an attractive alternative.
hdgreene,
Interesting perspective.
Of course, all taxes are paid by the consumer, even income taxes. If my taxes go up, I have to be paid more to make up for my lost pretax income. That means the company that pays me has higher expenses, and must raise prices. Higher prices mean less sales, so to compensate businesses scale back, generally laying off workers in the process.
Now, if productivity rises faster than taxes, the company may be able to absorb this cost increase and not increase prices. In that respect, tax increases that are lower than productivity growth may have little short term impact.
But over the longer term, the rises in productivity occur because of investment. If the government captures all of the economic rents from productivity growth, the incentive to invest goes down, and eventually the investment dollars dry up, and productivity stops growing. This is a really bad thing, since at the fundamental level, increases in national wealth all come from productivity increases.
The sad thing is that the working poor are disproportionately hurt by decreases in investment fueled by rising tax rates. This sounds weird, but consider the following:
A man needs a hole dug in his backyard for a pool. He hires a guy with a shovel, and pays him $10/hr. It takes that guy 100 hours to dig the ditch. The cost is $1,000.
The pool digger then decides to rent a backhoe. The rental cost is $200/day. With the backhoe, it takes him 2 days to dig the hole. He charges the homeowner $900, saving him 10%, and getting the job done in 2 days vs. 12.2 days. He then pays the backhoe owner $400, leaving him with $600 for two days work, or $37.50 per hour. The backhoe owner’s return on capital is probably 20%, so he’s doing fine. But the pool digger’s wage rate increased by 375%.
Investment always helps the poor more on a relative basis. And taxes that discourage investment hurt them disproportionately.
But don’t worry: the pool digger won’t pay any taxes on his $10/hour.
Sheesh.
L3
Great Pic to Send Around, w/article below
Someone gave me a link yesterday that discussed how Democratic Congress members were considering seizing 401(k)s and putting them in a government account that would yield…….are you ready? Three percent. Forever.
I was horrified. Here we are in a shakey stock market and our dumb shit congress is actually considering seizing what’s left of your money so that you can never recover in the long term, much less ever get those nifty dividends some companies pay quarterly.
Some folks use those dividends as part of their budgets. But of course, our fattened Congress doesn’t think about that. They are all doing just fine. And here, these nutball Socialists are thinking of yanking 401(k)s that have lost money and making it so you not only can never recover, but also making it so you can never earn more than 3%. Forever. That is, if they don’t spend it all like they did with the Social Security money we have all contributed. Read the rest ->
Mark (the other one) re: Obama’s “punishment” issue. As a licensed mental health professional, I’d say Obama believes you earn the big bucks by misbehaving; therefore you’ve got to be punished by having your goodies taken away and shared with the other children.
O’Reilly Factor Reports on the Obama-Khalidi Tape (Video)
Gateway Pundit has the whole story with links.
Roderick Reilly,
Your 6% number sounds about right, depending upon what you define as the broad middle. For people between the 50th and 25th percentile of income, it’s about 7%, and for people below the median it’s about 3%. Obviously, a lot depends on whether it is an individual or couple, and family size, and a host of other factors. But let’s use your number of 6%.
A person earning the median income ($32,000) pays about $1,920 in income tax. This is our median dude. He also pays 15.3% in Social Security and payroll taxes – half is withheld from their paycheck, the other half paid by the employer on their behalf. Crucially, the employee bears both parts of this tax; the fact that only half is deducted from the paycheck does not change the fact that all of it is compensation expense to the employer, and would be paid to the employee if it were not for the tax. (If you’re skeptical about this, we can discuss this further, but from the employer’s standpoint it is clearly a cost of employment based upon the market for labor.) This 15.3% is about $4,900, so the total payroll taxes paid by median dude is $6,820.
There are other pieces to consider – embedded taxes like the corporate income, the capital gains tax, the gift tax, and the estate tax – but let’s ignore these for now. We’ll include them in a second when consider price changes under the FairTax.
So the next question is: how much would our median dude pay under the FairTax?
Well, it starts with determining consumption. If we use 2001 Current Population Survey data, someone with mean income of about $35,000 has about $28,000 in consumption expenditures. If we assume prices don’t change, and assume our median dude purchases all “new” goods (the FairTax does not tax sale of used goods), the FairTax paid by this person will be $8,400.
But then there’s the prebate. This is a check the government sends to every taxpayer to offset the FairTax on essential goods and services. The prebate is about $2,900. It varies a little by household size, since a taxpayer with dependents has to spend more on essential goods and services. But it doesn’t vary much, so it’s fair to use the average.
This means that the net FairTax paid by median dude is $5,500, or $1,320 less than the current tax system.
But the reality is that the FairTax paid will be less than this. The reason is that for a given basket of goods, prices will fall because the taxes currently paid by the producer – especially corporate and capital gains – will be eliminated. The simplest way to think about this is that taxes are a cost of production; they lower the returns to equity (or, if you prefer, they raise the required returns). If tax rates are lowered, prices will fall, just as if the cost of a barrel of oil falls, gas prices will fall as well.
How much prices will fall is a subject of much debate. But a mid-point estimate is about 10%. So, the same basket of goods bought by our median dude above will fall by $2,800, to about $25,200, and the total FairTax paid will fall by about $840 (10% of $8,400) to a total of $4,660. This is about $2,160 (about 32%) less than the current tax paid by our median dude.
Anyway, this is a pretty simple analysis. If you’d like to see a more systematic methodology, I’d recommend this paper:
http://www.fairtax.org/site/DocServer/A_Distributional_Analysis_of_Adopting_the_FairTax.pdf?docID=781
The money quote is this:
Hope this helps. Cheers.
L3
CORRECTION:
Former editor-in-chief of “Ms.” magazine reports on her first-hand exposure to Sarah Palin
Okay, L3 I am back. Annoying having to leave an AM discusiion for something as plebian as work, but fortunately there is the PM in which to respond.
Now to wave my new Excalibur around my head:
I am certainly with you on taxing consumption rather than production. But the next great hurdle is that of Socialist Insecurity.
I hereby confess to favoring mandatory savings for ones old age. Reason is called self-defense. Without mandates, there will always be a certain number of improvident people who will not take care of themselves. They will form a lobby to obtain transfer payments to themselves. And they will get away with it. Reason is that to start with, those who pay will be charged pennies while those who receive will gain thousands of dollars. Later on, paying for it all will get a lot more onerous. so I consider it right and proper to put up a firewall against that future conflagration.
I figure that anybody who stays reasonably well employed during his or her adult life and who puts 10% of every paycheck into an annuity will have an adequate or more-than-adequate pension. Therefore, withold the 10% from each paycheck.
Inititally, this will have the same dollars and cents impact as income tax witholding.
However, since the money will be saved for a number of years instead of being immediately spent, those negative effects will vanish in due course.
My theory was that since 10% witholding had to be in place, increasing it by 50% to 15% of gross would be survivable at least even though the government would spend that additional amount right away. (Remember that the total amount is the same as FICA is right now, so the “income tax” witholding is effectively eliminated.)
Also, the current and emerging crop of FICA-dependent seniors will have to be supported while the younger generations provide for their own future. I say go ahead and pay this freight from the general fund, instead of a rather mythical Social Security Trust.
The additional amount of witholding would be but one of many sources of revenue for that general fund.
But maybe that one particular source of revenue is not needed or maybe its collection will do more damage than I think.
In which case, proceed with the Fair Tax, etc.
But can you plug the Social Security considerations into your calculations and see what you come up with?
And what amount my idea of a 15% rate on adjusted gross as a subsitute for the current corporate profit tax?
Last but not least, I estimate that a revenue tariff (but not a protective one!) might well be in order.
BTW: My theory is that H. Sapiens cannot command progressive taxation. That all efforts to politically arrange it are doomed to regressive failure to one degree or the other. However, when one tries simply to collect adequate sums of money in the least intrusive manner possible, all practical progression will attend, will-nilly.
Wow! I’ve rambled enough. Your thoughts sir?
Dave,
I hear you on the work thing. I mean, it’s fine for those other people, but, well, it’s just so, um, laborious. Sigh.
Anyway, back to the issue at hand. The Lady of the Lake, her arm clad in the purest shimmering samite…
/obscure references
The issue of Social Security is an interesting one, and I’m intrigued by some of your ideas. A few thoughts:
1. Re: FICA Benefits. The fundamental problem with Social Security is that people think it is a defined-benefits pension plan. It is not; it is an inter-generational transfer payment system. It collects tax revenues from the relatively young and transfers them to the chronologically-challenged. Pension plans place funds in trust for future recipients; they may be over- or under-funded by some amount, but plan sponsors have to keep the trust reasonably balanced, unless they’re an auto manufacturer.
Social Security revenues, however, are transferred to a trust, but that trust then transfers the funds, via IOUs, to the Treasury, where the funds are used to pay for current government expenditures. So what you describe – paying the money to the Treasury rather than the trust – is already what effectively happens. To treat this like a pension fund is farcical. It would be akin to me taking a loan from my company’s defined-benefit pension plan to buy a yacht, with a promise to pay it back some time in the future. Sounds great to me; to the employees, not so great.
Most of the problems with Social Security stem from this misunderstanding. If we were just looking to take care of the elderly poor – that is, if we means-tested Social Security benefits – the size of the FICA burden would shrink dramatically. We’d still take care of the issue you raise (those who need a handout to live, and so will organize to get one), while not burdening workers so much. I mean, it’s crazy to have a system where some poor working stiff making $10/hr and trying to support a family has to pay 15.3% of his earnings into a system that makes payments to my dad, who doesn’t need the money.
But, my dad’s generation was told this was the deal, so we probably should honor that deal, although it would be great to give people an incentive to opt out of the system. Many might, if, say, we offered a one-time payment of 25% of the actuarial present value of their benefits in exchange for an agreement to reduce benefits by half. People like my dad would take that offer, since he’s not really worried about becoming destitute, and we’d shrink the size of the FICA burden by 25%. And we’d also still keep a very minimal payout for those people who choose the one-time payment, but don’t have a nest egg to fall back on if they blow their payout in Vegas.. They just have to live on half of what they were planning. Just an idea.
Anyway, for future generations, we should make it clear that we are going to means-test FICA benefits, and over time will reduce the tax rate as the system comes back into balance. This would still provide the safety net, but make it clear what it really is: a welfare program for the elderly poor. IMHO, there’s nothing wrong with supporting this group, as long as the benefits are very modest. If the payout is too high, you have a moral hazard problem in that people lose their incentive to save for their retirement.
The right way to think about Social Security is that it is an insurance policy to protect against poverty in old age, which is a very beneficial thing to do for a variety of reasons. But the payments are really premiums, and you should only collect if you are poor. This would reduce the actuarial burden on the system, lower the tax rate, and be more in line with the original conception of a social safety net. After all, you only need a safety net if you fall.
2. Re: FICA collections. First of all, the FairTax collects enough revenue to fund the trust at the same level it is funded today. That is why the FICA payroll tax (both parts) can be eliminated. So, regardless what happens to benefits, the FairTax is no better or worse than the current system. So, I’d say it’s already plugged into the system, unless I misunderstand your question.
The current FICA payroll tax system is the most regressive tax in the world. Rich people actually pay a smaller percentage of their income into FICA than the working poor. This is nuts for a transfer payment system, although it makes sense if it’s a pension plan (another reason the concept behind the system is important).
3. Re: your 15% solution. I’m not sure, at this rate, you raise enough revenues to be revenue-neutral (although this might be a feature, not a bug). The current FICA tax is 15.3% by itself, so 10% for FICA would be a big reduction in revenue. Plus, I didn’t quite follow the “minus refunds” part of the business AGI.
The idea of a flat tax is pretty attractive from a simplicity and economic efficiency standpoint. But I’m not sure that “hiding” the tax is a good idea, awareness of the tax provides a natural check on the growth of government. It is interesting to note that the biggest explosion in Federal revenues started when withholding was implemented, because people soon lost the sting of paying the taxman directly. Rates were then able to be ratcheted up, and over time became oppressive.
My other concern is that mildly progressive taxation is actually more effective at raising revenues. Next slide please…
4. Re: progressive taxation. The economic argument for progressive taxation is the living has a fixed cost component. There are certain necessary activities that must be undertaken for someone to simply survive, and if we tax those activities we get less of them. So taxing survival is not a good idea.
This argues for a certain level of income (and presumably consumption) that is not subject to tax. If rates are then gently raised as income rises, the incentive effects are small and the overall revenues will rise. It is important that the progressivity is not too great or too abrupt, however, or marginal rates get really high and people have an incentive to game the system.
Put another way, taking a marginal $1 of tax revenue from a rich guy is a lot less painful or distorting than taking $1 from a poor guy. This argues that, from a pure convenience and compliance standpoint, total rates should be progressive, but not too progressive.
This is one of the nice features of the FairTax. The prebate builds in progressivity (high consumers pay a higher percentage of their consumption in taxes than low consumers), but the marginal rate is constant: 30%. This rate sounds high (and it is, thanks to the size of the Federal Gummint), but so long as it is applied to almost all transactions, there is no way to game it. And the transparency of the rate provides a clear price signal to citizens of what their government costs them. This, IMHO, is a good thing, kind of an economic check and balance at the micro level.
Anyway, hope this this is interesting/helpful. Enjoy the dialogue. Cheers.
(PS – sorry for any typos – I’m just banging this out on the fly.)
L3
Dave,
One more thing:
It is critical to distinguish between progressive taxation that is economically efficient (i.e. mildly progressive) vs. progressive taxation that is redistributive. The first is a good capitalist notion; the latter, a bad socialist one.
The goal should be to grow the pie, and provide sufficient revenues for the government to operate at an appropriate level. Steeply progressive, redistributive tax systems do neither.
L3
Pension plans place funds in trust for future recipients; they may be over- or under-funded by some amount, but plan sponsors have to keep the trust reasonably balanced, unless they’re an auto manufacturer. – L3
…unless they’re in steel, airlines, or the multiple utility companies that went through the Wall Street sausage maker producing nothing but trnasaction profits and retirement mansions by the lake. The defined pension plans all insured by PBGC – another GSE not yet to hit the fan but it’s making noises – lost %50B in stock market this year. Wait until they formally get in line for a bailout. Where will public sentiment be then? Who is really being bailed out – the industry that never funded them or the labor that stupidly believed in the contract?
Of course that’s after the state and local pension funds recover.
The short point is that defined pension plans were just part of the scam. Never expected to produce. Underfunded? By some amount? They were never anything but a cover story – a wink and a nod.
Well, Slade that is why I propose a mandatory 10% witholding to be put in annuity of choice. Everybody buys their own pension, bar none.
Then if an employer can be persuaded to add to it or provide another account, fine.
But the thought that employers would, or could, provide adequate retirement for anybody but senior management was and remains wishful thinking.
Ditto for medical coverage. Probably a few other things as well. I am not a hairshirt, sackcloth and ashes kind of guy, but there are too damned many people who believe that somebody else can take care of their needs for them. ‘Taint so.
Stay tuned fellers. I will try to do some elaboration this PM Meantime, another work day.
Re wishful thinking – Dave
I think this a bit of revisionist history. Back in the day – ’60′s through ’80′s (before NAFTA and globalization sucked out the industrial manufacturing base in this country – and along with it, their pension plans) that was the way things were done. Believe it or not, it was also called “responsible.” Sign a contract. Go to Work. Be responsible. Retire. It was actually considered the “conservative” option over the riskiness of markets which were openly regarded as gambling “back then”. Quelle Horreur! Easy now to look back into history and sneer at the stupidity of Labor especially now that the unions have been corrupted from their original objectives of acting as counterweight to managerial power – labor and safety laws. Too Easy.
But I rant. 20-20 hindsight does not negate the Ways Things Were.
Any more than 20-20 hindsight will in any way diminish my personal stupidity for not seeing Sept/Oct 2008 coming. I should have known better. But I was busy working.
And Dave, don’t bother going after me on the pensions vis a vis stupid Labor – been there done that about three years ago with another oh so au-courant blogger.
Better to just wait for the next GSE wave to crash.
…but there are too damned many people who believe that… – Dave
Not the issue. The issue was *contract*.
I was just speaking with one of the old-timers in question who was confused – about everything – and started to reminisce about the old days – that would be the ’30′s and 40′s – call it pre-WWII – when deals were made on a handshake.
The issue is personal integrity – the kind that translates into business management and government.
It’s one thing to assume that you are too hip/cool to fall for that line. It is quite another to look back 30 years in time when you were but a tree in the forest.
“Let’s hope we’re all wealthy and retired before this house of cards falters (dude)**.” – S&P official (2006)
**omitted from official TV transcript.
That’s the problem. No matter what ingenuous system you and Leo come up with.
No matter how hip/cool the labor force is.
This is really coming down to an election pitting the tax-eaters against the tax-payers. If the former win, they will kill the goose.
One point of leakage in moving from income tax to consumption tax would be the illegal aliens who send money back to their home countries. They would escape US income and SS taxes but consume the bulk of the money back in their low tax villages. In fact, this would create incentives to work in countries wil consumptive taxes but live (or invest) in income taxes. Probably a small point overall.
I would also point out that the “Nuclear Waste Trust Fund” works like the Social Security analog. We’re collecting excess cash for the Treasury now but when construction starts, the current taxpayers will need to pony up some cash.
The loss of the industrial base from the dual assault presented by (1) globalization and (2) increased competition among deregulated industry sectors arrived with the usual suite of unintended consequences – the massive default of pension plans onto PBGC receivership being just one.
Not many people cared at the time – maybe not even now – because the “messy” jobs were going to be replaced by so-called high tech jobs where wages were replaced by stock options and the argument was to expense or not to expense – the marginal value of that next million. Movin’ On Up, we were, to the Big Time.
Look how well that turned out.
Folks are starting to talk again about the business value of actually producing a product.
slade,
You’re right about defined benefit plans. They are, in a very real way, a small window into what it will be like if we don’t do something about SocSec. The managers and unions that perverted DBPs are no different than the politicians and interest groups who have perverted SocSec.
Wailing and gnashing of teeth await if we don’t address the problem. And if the government goes bankrupt, who will bail it out?
L3
The frustration and anger levels are high, Leo. Millions of retired people got hit twice – devalued pensions first, followed by cashing out their equities after 35% loss to save what was left.
This country is not in a good place. Pessimism is warranted on that basis alone, but I think this phenomenon of “Obama as the answer” explains the centrist-right-leaning people on this blog who are looking into the abyss.