[awm]

luke warm, on 2011-September-19, 17:49, said:

... and when he refers to buffet's secretary paying a higher rate that buffet himself, he's comparing apples to oranges... buffet's bracket is 38%, but obama is using the corporate rate and comparing it to someone's individual rate...

I wouldn't call this the corporate rate (which is 35% in any case). It's capital gains.

There are many ways to make an income. One way is to do some work, for which some person (or corporation, but I guess they are the same thing now?) pays you a salary, which is your income. Another way is to use the money you already have to buy some stuff (stocks or gold or real estate or whatever), then wait a while and sell whatever you bought for a higher price; in this case your income is the difference between the selling price and the buying price.

If Warren Buffet were paid a regular salary, he would pay tax at a 35% marginal rate (the maximum bracket under current law) since he is making billions a year. However, he (like most other super-rich folks) earns the vast majority of his income through the second method, buying stocks and selling them later, and pocketing the difference. The top capital gains rate is only 15%, much less than the 35% rate on "ordinary" income and even quite a bit less than the rate that upper-middle-class folks pay. So Warren Buffet really does pay a lower percentage of his income in taxes than his secretary.

One can argue against this by claiming that somehow capital gains "don't count" as income I suppose... but if capital gains aren't income, Warren Buffet isn't rich! Seems pretty unrealistic...

[blackshoe]

Last I heard there was also an "alternative minimum tax" with a rate of, iirc, 55%. I'm not sure to what kinds of income it applies, but I'm pretty sure it's still on the books.

[phil_20686]

The problem with raising capital gains tax is that investment costs are compound-sensitive with inflation, as capital gains eventually comes to cover the whole real cost of the item, not the inflation-adjusted gain.

Suppose I set inflation at 10% for ten years, and assume that bank interest rates are correlated with inflation, so set the bank rates at 10%. Thus if I keep money in the bank, then it will keep its value.

If I make a "stable" investment - i.e. one that grows in-line with inflation, then after ten years my investment will have a nominal value of 1.1^10 = 2.6, and would I decide to liquidate my position I would pay 1.6*0.15=0.4, or about 15% of my original investment. Thus capital gains tax acts like a wealth tax on your original investment, one that is imposed on holdings of cash and as such provides a strong disincentive for investment.

Further, most capital gains is paid by institutional investors like pension funds and banks. In practice this would harm the ability of pensions to provide returns on investment, and a high capital gains tax, coupled with high inflation, could make pension funds lose money on their investments, and so go bankrupt. All in all, raising capital gains tax seems like a very bad idea. A better idea is to reform the tax system so that individual capital gains is treated differently from corporate capital gains. In practice this may be very difficult to do, as you can normally find a smart lawyer who can structure your investments in such a way that you only pay tax on the money that you withdraw in order to spend. This is a problem that really will not go away.

Alternatively, one could inflation adjust the capital gains threshold. That would probably work better. Indeed the UK used to have higher corporate gains tax with an inflation adjusted threshold, and this worked quite well until the treasury decided it would be easier to just lower capital gains tax and get rid of the inflation adjusted assessment. When the UK changed there was much less inequality than there is now, which might favour a return to the inflation adjusted measure, even though it is more expensive to administer. OTOH, one could argue that the reason that inequality has risen is due to rapid growth which is caused by, among other things, making sure that there are the proper incentives to invest.

[PassedOut]

blackshoe, on 2011-September-20, 00:41, said:

Last I heard there was also an "alternative minimum tax" with a rate of, iirc, 55%. I'm not sure to what kinds of income it applies, but I'm pretty sure it's still on the books.

Alternative Minimum Tax

Quote

AMT Exemption Amounts for 2011

Legislated as part of the 2010 Tax Relief Act:
•$48,450 for single and head of household filers,
•$74,450 for married people filing jointly and for qualifying widows or widowers, and
•$37,225 for married people filing separately.

AMT Tax Rates

The exemption amounts mean that this amount of AMT taxable income is not subject to the AMT. Income over these amounts may be subject to AMT. Unlike the ordinary tax rates, the AMT has only two tax brackets. The AMT tax rate is assessed only on AMT income over the exemption amount. The AMT tax rates are:
•26% on the first $175,000 of AMT taxable income, and
•28% on the remainder of AMT taxable income

[awm]

phil_20686, on 2011-September-20, 05:45, said:

The problem with raising capital gains tax is that investment costs are compound-sensitive with inflation, as capital gains eventually comes to cover the whole real cost of the item, not the inflation-adjusted gain.

You've made this claim before, I think in this same thread. I thought this was BS then, and I think the same now. Some reasons:

(1) If inflation were the reason for the low capital gains rate, then the rate should be inflation-dependent. In particular, inflation in the US has been quite low the past few years. This has not effected the capital gains rate.
(2) There are other ways to save your money and these also suffer from inflation. In particular, if you stash money under your bed it will devalue from inflation but you do not get a tax refund. If you put money in a bank account, it will earn interest which you must pay tax on at income-tax rates, despite the fact that inflation often implies that your bank account actually dropped in real worth. In terms of incentives, since every other way to save money also suffers from inflation the incentive to invest (in order to maximize return) will remain even if capital gains were taxed at income rates.
(3) In fact, the only way to "dodge" inflation is to spend your money right away. This is actually better for the economy than all this saving anyway, so why not encourage it?

blackshoe said:

Last I heard there was also an "alternative minimum tax" with a rate of, iirc, 55%. I'm not sure to what kinds of income it applies, but I'm pretty sure it's still on the books.

First, the AMT rate is only 25-28% as in PassedOut's post. Second, it does not apply to capital gains.

[mike777]

"One can argue against this by claiming that somehow capital gains "don't count" as income I suppose... but if capital gains aren't income, Warren Buffet isn't rich! Seems pretty unrealistic..."




As my buddies at the IRS tell me all the time the real issue is how do you define income.

Easy question to ask much more difficult to define.

A simple example is if mom and dad pay for an adults college or house or car that sounds like income to me.

If you "win" a car or house you pay taxes.


As others point out income is taxed at the corp level and then again as cap gains or div.

Then there are the huge "gift tax" loopholes which Buffet uses to the max.

I much more prefer we raise gift taxes and close loopholes than raise income rates.

[blackshoe]

It would be much simpler if we all used the old "Clinton tax form" (which I'm sure was attributed to many presidents before Bill): "How much did you make last year?" "Send it in." Of course, that might bring the revolution sooner rather than later.

[mike777]

blackshoe, on 2011-September-20, 19:34, said:

It would be much simpler if we all used the old "Clinton tax form" (which I'm sure was attributed to many presidents before Bill): "How much did you make last year?" "Send it in." Of course, that might bring the revolution sooner rather than later.

same problem how do you define income?

If you buy your 18 year old something is that income?

Or is that a special interest group that gets a tax loophole?

[PassedOut]

mike777, on 2011-September-20, 20:12, said:

If you buy your 18 year old something is that income?

Expense.

[phil_20686]

awm, on 2011-September-20, 10:29, said:

(1) If inflation were the reason for the low capital gains rate, then the rate should be inflation-dependent. In particular, inflation in the US has been quite low the past few years. This has not effected the capital gains rate.
(2) There are other ways to save your money and these also suffer from inflation. In particular, if you stash money under your bed it will devalue from inflation but you do not get a tax refund. If you put money in a bank account, it will earn interest which you must pay tax on at income-tax rates, despite the fact that inflation often implies that your bank account actually dropped in real worth. In terms of incentives, since every other way to save money also suffers from inflation the incentive to invest (in order to maximize return) will remain even if capital gains were taxed at income rates.
(3) In fact, the only way to "dodge" inflation is to spend your money right away. This is actually better for the economy than all this saving anyway, so why not encourage it?

(1) This does/did actually happen. Long term capital gains tax in the US is less than short term capital gains tax. It used to happen to a much larger degree - until 1986 one paid tax on only 50% of your capital gains, although you paid it at a higher rate than the US has now. These measures were all designed to encourage investment by allowing investors some lee-way against inflation. As trading volumes increased the cost of administering complex taxes went up. In the UK it was decided that it was better just to have a simple rule and lower the tax rate.

(2) This is true, but besides the point. Investors can find things to invest in that are inflation protected, gold, property, commodities. I think owning a business outright might also work? I don't think that there can be any capital gains tax when a company has no real valuation. At any rate, the stock markets are an important part of the capital management of our economy. Thus, you would prefer people to invest in the stock market than to own gold or property. Raising capital gains affects these decisions, especially in periods of high inflation, which is when investment is most needed.

(3) Everyone spending their money when they earn it is not better for the economy. This is a bit of a myth. A high savings rate is actually good for the economy. There are two main reasons, firstly, if you save money, then that has a deflationary effect on the value of money, to the effect that everyone else is better off by the value of your labour. In effect, if you save money, then you might as well have worked for free. You are making a "gift" of your labour to the economy. Secondly, a high savings rate puts demand on a more predictable path, which tends to lessen the effects of recession. The more people have saved up, the easier it is to survive losing your job. Your argument would suggest that it is better for the economy if no-one had a pension. Of course, in the real world, there is a balance to be struck between savings and consumption. If everyone was a hermit who wanted nothing but bread and water it would be impossible for the economy to function no matter how productive we were. Of course, there is a difference between "saving" which one intends to spend at a later date, compared to the case of the very rich who are very unlikely to spend much of their money in their own lifetimes. However, in a sense, that doesn't matter too much. That is just money removed from circulation. Such an occurrence can be easily balanced by a central bank. What is damaging for an economy is if the savings rate is too low, as that makes capital expensive for businesses to compete for, which puts a limit on growth. Moreover, in such an environment productivity growth is soaked up by the owners of capital, rather than by the owners of skill, purely because the extra wealth of a productivity increase will always accumulate with who ever holds the rarest resource in the supply chain. The only developed country which is definitely over-saved is Japan, where the savings rate is notoriously high even among the poor. However, that does have its advantages as the recession has made no difference to Japan's GDP, which as of the end of 2009 was at the highest point since 94, when other major economies had experiences a sharp decline. See here. In the 2000's american saving rate was negative, it is now at 7% or there about. This is good for the economy in the long run.

In a very real sense the US economy is an a bad spot because "everyone spent their money", and that meant that when a rainy day came consumer spending took a much bigger hit that it might have done. Moreover, 6-7% is the historical average for US savings rate if you go back far enough, and it is not unlikely that the savings rate will stay there. If that is the case one can expect a 7-10% drop in consumer spending as a permanent feature, which means the US economy will take years to absorb its overcapacity.

[phil_20686]

For the record, I do think that personal investments in the stock market and the like should have their profits taxed as income, I just do not think that changing the capital gains tax is a sensible way to go about it. At least not in its current form.

[kenberg]

blackshoe, on 2011-September-20, 19:34, said:

It would be much simpler if we all used the old "Clinton tax form" (which I'm sure was attributed to many presidents before Bill): "How much did you make last year?" "Send it in." Of course, that might bring the revolution sooner rather than later.

Yes, this has been around for a while. But if we returned to the tax rates of the Clinton years and this resulted in a balanced budget with declining national debt and a growing economy, I really wouldn't mind.

The world changes, no doubt about it. But if we begin by asking how the economy looked after eight years of Clinton, and compare it with the absolute panic in the markets, the failing financial institutions, the whatever else at the close of eight years of Bush, a sensible person might be cautious about any claim that Republicans are the wise folks on economic matters.


Btw: Is there any consensus now on the wisdom of letting Lehman fail? I guess the third anniversary of the bankruptcy came about the other day. I have been traveling and not paying close attention. But I would suppose that those who criticize Obama for rescuing GM also think it was a great idea to let Lehman go down the tubes. I get the idea that not many economic experts, except maybe Michelle, agree with that.

[luke warm]

kenberg, on 2011-September-21, 07:46, said:

But if we returned to the tax rates of the Clinton years

speaking of clinton and taxes, i wonder how obama is feeling about bill's recent words on taxes and spending

[PassedOut]

Elizabeth Warren discusses class warfare:



Pro-business and pro-America and pro-the-honest-truth. I like it.

[phil_20686]

PassedOut, on 2011-September-21, 15:57, said:

Elizabeth Warren discusses class warfare:

http://www.youtube.c...h?v=htX2usfqMEs

Pro-business and pro-America and pro-the-honest-truth. I like it.

I find it all a little mad. She basically spoke in generalities. Everyone agrees that people should pay their "fair share", its just not at all clear what that means in practice. Also, there are issues of political framing involved. "tax cuts for the rich" is what you say when you want to make it seem like they pay less, tax reductions sounds much more neutral.

What is a "fair" level of inequality in a society? As a rule, societies cannot exist without inequality in income because people will not work well without some level of incentivisation. How much better paid should the top one percent of the income distribution be paid? Ten times the mean salary? Should one impose penal tax rates to lower the income gap when it exists almost purely because of successful entrepreneurs? Its true that some started off quite rich, eg Koch, but koch still took his father company from a capitalisation of about 1 bn to a company with over 100bn in sales. Should people be allowed to own a company that big? is that fundamentally unfair?

I don't see how one can even begin to talk about a sensible tax policy until some of the above questions have really been addressed, and I just don't see that happening. In the UK we have a similar situation with the political issue of the NHS funding. One can always attack the conservative party for "underfunding"* the NHS to score political points, but at some point we as a country need to ask what % of our GDP we are prepared to spend on healthcare, otherwise the budget will always increase, as there is always a poor deserving grandmother of fourteen who could get a few more years with her grand kids if only there was more money.

* The NHS budget has never been cut in nominal terms, and only once cut in real terms since 1979. nevertheless the labour party likes to call it "underfunding" by the conservatives because its a vote winner.

[blackshoe]

Interesting questions. Take these two: "Should people be allowed to own a company that big? is that fundamentally unfair?" First, I don't think it's fundamentally unfair. Second, what's the alternative? Spend a lifetime building up an Apple or a Microsoft, only to have some State bureaucrat come along and say "sorry, you're not allowed to own something this big, we're taking it over"?

As to what word conservatives (or liberals for that matter) use to describe the funding of whatever project they're talking about, well, if a politician opens his mouth, he's lying. Check the facts for yourself.

[PassedOut]

phil_20686, on 2011-September-21, 17:28, said:

Everyone agrees that people should pay their "fair share", its just not at all clear what that means in practice.

Maybe true in the UK but, alas, not in the US. Here we have a powerful group of free lunchers dedicated to receiving benefits -- from the government and from their more responsible neighbors -- without raising the taxes or paying the insurance premiums necessary to pay for those benefits.

Some history: In 1995, the 400 US taxpayers who earned the most money paid an average of 30% of their income in taxes. The unemployment rate was 5.6%. Now the top 400 earners average less than 17% in taxes and unemployment is 9.2%. And today in Germany, where taxes are much higher than in the US and where the social safety net is much stronger, unemployment is just 6.1%.

The 47% in the US today whose taxes consist only of social security, medicare, and sales taxes lack the income to pay anything more. You can't get blood from a turnip. The government could confiscate their total incomes along with everything that those folks own and still not fix the US debt problem. It's just math.

A good part of the reason for that is that the successful war against the middle class has reduced the tax base while it pushed folks down the ladder. People like the Koch brothers seek that outcome. People like Warren Buffett seek the restoration of a strong middle class.

I agree with Warren Buffett on that. Others agree with the Koch brothers. People who think that things are better now than under Clinton want the Bush tax cuts continued. Those who prefer the Clinton years disagree. I guess it just depends upon your world view.

[phil_20686]

PassedOut, on 2011-September-21, 19:18, said:

Maybe true in the UK but, alas, not in the US. Here we have a powerful group of free lunchers dedicated to receiving benefits -- from the government and from their more responsible neighbors -- without raising the taxes or paying the insurance premiums necessary to pay for those benefits.

Some history: In 1995, the 400 US taxpayers who earned the most money paid an average of 30% of their income in taxes. The unemployment rate was 5.6%. Now the top 400 earners average less than 17% in taxes and unemployment is 9.2%. And today in Germany, where taxes are much higher than in the US and where the social safety net is much stronger, unemployment is 6.1%.

In the UK the concept of social satey nets are well established - you are not necessarily expected to contribute the full cost of the medical and social benefits you receive, as they are funded disproportionately by the wealthy, and in practice this is true even in the US.

I'm pretty sure that the numbers in your post refer to how much federal income tax was paid on their income, one could easily argue that the incidence of corporation tax falls (at least partly) on shareholders, and should be included in their total tax burden. looking only at income tax is definitely a wrong way of looking at tax incidence. All corporation taxes are paid either by the consumer through higher prices, or by the shareholders through reduced profits, and working it out can be difficult. Attempts to do so can be found at institutes like the Tax Policy Centre, which suggest that the very wealthy still pay about 30% of their income in taxes. Just not in the same taxes as they did before. Obviously such things are fraught with difficulty.

[luke warm]

PassedOut, on 2011-September-21, 19:18, said:

I agree with Warren Buffett on that.

do you personally feel that you pay too little in taxes?

[helene_t]

phil_20686, on 2011-September-21, 17:28, said:

I find it all a little mad. [....]
What is a "fair" level of inequality in a society?

Of course she didn't provide an argument for a particular level of progressiveness/regressiveness of the tax system. Heck, I suppose it is possible to agree with her and still think that the current tax system is not too regressive.

She just said that rich people should pay "a chunk" of their wealth back in return for the fact that the government facilitated their wealth accumulation by providing infrastructure etc. Shouldn't be too controversial in itself. Of course it is controversial what exactly a "chunk" is.