47% not paying federal income taxes - what should the distribution be?

Great Debates
81

I’m not proposing a major consumption tax all at once. I’m not proposing a consumption tax at all in our current economic environment.

But we can do the thought-experiment of a major increase in consumption taxes: a major consumption tax would be a big fiscal shock to the economy. In normal times, the central bank would “lower interest rates” in response to this shock. More accurately: they would make more money. If people aren’t spending, they can be given more cash to encourage spending. (I mean, it’s a helluva lot more complicated than that but that’s the basic idea.)

There would be three obvious effects. First, the big decrease in expected consumption, which would lower ROI on investment projects. Second, the easier credit which would increase ROI on investment projects. Third, lots of people in consumption industries would lose their jobs. These workers would be available to work in investment industries, which would mean a higher ROI for investment projects.

If you do things slowly, then the same sorts of things happen but they happen in smoother ways. Instead of dropping, consumption would still increase but slightly slower (compared to no consumption tax increase.) The central bank will still create more money (compared to no consumption tax increase), but will do it more subtly – instead of decreasing interest rates, they might delay the increase of rates. Instead of a whole bunch of people getting thrown out of work in consumption industries and scrambling for a new position in a new industry, some workers might see opportunities and change jobs voluntarily, or new workers might enter the labor force for investment good production. Slower works better. All of that could be explained more in tedious depth, but it’s not really central to my original purpose in the thread.

Yes. The causation was posited in the form of the economic theory I both cited and explained. It’s the simple idea that people respond to incentives. The cite I offered gets into more mathematical territory to provide the causal support, but I don’t generally believe that’s necessary for an impartial observer.

People respond to incentives. That’s the core of it.

Your position here boils down to “I don’t think people respond to incentives, or at least, not to this incentive”. To argue against this, you’ve offered a subjective evaluation of the internal motivations of hundreds of people you’ve rubbed elbows with.

I’m not a disinterested observer of this, but I can tell you that in any general argument, I’m more likely to believe the person who’s offered a long-established causal argument with a clear correlation from formally gathered samples in support of that causal argument, rather than the person who rejects the traditional causal argument based on a subjective impression that it’s wrong based on the highly biased “sample” of their idiosyncratic life experiences. I would hope most other people would judge similarly.

82

So the position of some here is that a top income tax rate of 90%+ would be catastrophic?

Do you realize this was the situation in the United States in the 1950s–and the U.S. economically dominated the world then?

83

I don’t recall any poster in this thread arguing that a 90% rate on the highest earners, the top income tax rate, would be catastrophic.

You might be misreading the discussion of a 90% rate on the lowest earners, or on everyone. That’s a different story. I hope you would agree that taxing away nine tenths of the income of the poorest people would be an especially terrible idea.

I would guess that the overwhelming majority of people in this thread are aware that marginal rates for the highest earners used to be over 90% in the United States.

Here’s JFK talking about his plan to reduce those rates: “In short, it is a paradoxical truth that tax rates are too high today and tax revenues are too low and the soundest way to raise the revenues in the long run is to cut the rates now.” (Transcript, audio) He’s making a Laffer Curve argument before it was named. What’s funny is that pretty much regardless of what the tax rate has been, federal tax receipts have remained in a fairly stable band between 15 and 20% of GDP.

Hollande in France raised the top marginal rate to 75% a couple years ago. That high rate will expire in January. There’s no will to extend it. The distortions of such a rate outweigh the meager revenue benefits. Taxes are necessary but taxes are a distortion, so it’s best to think carefully about our goals before implementing them. A 90% rate on the richest wouldn’t be catastrophic, but it wouldn’t solve anything either. It’d just be silly.

84

Even with a top marginal rate of 90%, not even the rich have nine tenths of their income taken as tax.

85

No, the alternative, the absolutely common way of having “less taxable work” is working partially or completely under the table. Getting an envelope. Working grey. Getting your salary in white and your overtime and bonus in black.

And then of course there’s the corporate ways. There are things which, if paid by the employee, are not tax deductible; if paid by the company, they are. So, have the company pay for them. Make them a benefit or, if you’re self-employed, create a company of the appropriate type so “it” can pay for them. Other things? Deductible by the employee, not by the company. Unlike the envelopes, this is legal if done right (it can still get you staked if you make the slightest mistake).

86

Fair enough. I did bring up black-market work in some of my posts, but I could’ve mentioned more of the greyish area where extra income at the edges tries to dodge the extra taxes. This is important stuff.

But keep in mind that the grey market cases you’re thinking of right now are visible, or at least talked about. They are things that are stick out clearly in the mind. The cases where somebody quietly decides against taking a second legal job, or only one person in a household decides to work, or a person stops asking for more legal hours at their job… that stuff is more invisible.

We’re going to have a hard time when we try to compare all the really obvious grey-market stuff that’s easily remembered, with all the invisible stuff that only shows up later in the aggregate statistics. It’s not a fair comparison. We’d need data to figure out relative sizes, and by the nature of these transactions, that data is hard to come by.

87

I’m one of those Basic Income Guarantee weirdos. I think everyone should pay taxes, but those below a roughly average income should pay a negative amount. :stuck_out_tongue:

88

100% of people should pay no income tax.

89

This is indeed rational, basic economics. If your marginal rate of pay is $20 an hour and you value leisure at $16 an hour, a tax rate that lowers your marginal rate of pay to $15 will cause you to quit your job. Of course you would have to order these values, for they would decrease at different rates. Let me simplify it. For example if you value your first 12 hours of leisure in a day at $16, but ensuing hours of leisure at $12, you may still opt to work 12 hours a day, because the value of your new marginal rate ($15) of pay is higher than the value of the 13-24th hours of leisure. In this case you would not quit, but lower your hours.

90

Putting an arbitrary value on leisure time is rubbish. I value my working time at $100 an hour; no one is willing to pay me that, but since I value it as such, should that be point from which to debate? Likewise, my personal valuation of leisure is equally flawed.

91

As WillFarnaby posted, this is basic economics. The valuation is not something you pick. It’s the value at which behavior changes.
You could, right now, get a second job. Why don’t you?

92

The U.S. income tax system is set up to close the loopholes on the second. Pretty much any economic benefit is taxable - so giving someone access to a company car creates a tax liability for the employee. There are some loopholes (and a few big enough for you to drive your 40 foot yacht through - and some quite specifically written to benefit certain individuals) but honestly, not many.

93

Because behavior* doesn’t* change that way? The fact that I could get a second job and don’t, because I don’t want to increase my working hours; certainly doesn’t mean that I would decrease my hours when making less pay. Maybe there’s a number of hours I find it desirable to work, not more nor less. You have utterly failed to prove your claim.

Ruken, what you say here implies that you have no understanding of the lives of the working poor. They seek hours of work in order to make money, and certainly in my part of the country they are not generally able to find demand for their labor at will. They are grateful to get “hours” meaning hours of paid labor.

Not to mention that there is not infinite demand for my labor, nor do I have infinite capacity to work.

Further, some people indeed do work two or even three jobs. Not because they don’t value their leisure time, but because it takes that much to cover expenses. Cutting pay on the working class, or raising taxes on them, makes it harder for them to save money, harder to spend money on goods they desire (or require), and so forth. It’s bad for GDP.

94

Hellestal, you’re a smart guy, and I understand that you’re trying to follow the econometrics, but I think you’re indulging a fallacious interpretation here:

I think the existence of social insurance is probably a more likely swing factor. Don’t fall into post hoc ergo propter hoc for an illogical claim.

Absent social insurance, it certainly is possible for low-paid individuals to work absurdly long hours. Look at the USA before 1932. So, yeah, high taxes can lead to lower work output when those taxes are supporting more of a safety net, not in general. As far as the worker is concerned, if taxes make one’s compensation for working lower without also offering some economic support outside one’s work, one is incentivized to work longer, just as much as if one were underpaid by one’s employer to begin with.

More importantly, labor rates are almost certainly driven by demand for labor as much as the desire of the workers to work. If some labor can be offshored and the country still live comfortably, there may not be that much hiring. And that’s driven not by employees (which most workers in the West are) but employers.

Treating job rates purely as a function of the desires of the employed is just bad economics, and leads to victim-blaming in depressions.

95

This presumes there is a number at which I would be willing to work 80 hours per week for.

96

Board eated my longish response and I have no more time for the next couple weeks.

Suffice it is to say that I strongly disagree and I will explain why after my duties are over. No point in writing in a terse response that’s guaranteed to be misunderstood.

97

If one is a truly a low-tax, small government guy (not saying that one should be or that I am, though I might be), the fewer people paying taxes (and the fewer taxes) the better. If 1% of the population paid a single tax, that would be preferable to the idea that everyone needs to pay something to have skin in the game.

98

I’m not sure that’s how people actually make decisions. Speaking from personal experience, the only time when I worked substantially more than 40 hours/week was when I was working a badly-paid job with a nonprofit organization, and needed to take a 2nd job to pay the bills. Now that I get paid a more typical amount, I have no desire whatsoever to work more than 40 hours.

I do agree that the higher the tax rate, the more incentive people have to cheat on their taxes.

99

It is not quite that simple. The value of the extra dollar of pay diminishes at higher levels of pay. Working two jobs to feed ones family - as the working poor do - is a lot different from working two jobs to out more money in your investment account.

For many families the marriage penalty is a bigger factor than incremental tax rates for one worker. Get rid of that if you really want to help. (But notice higher income couples, who get hit harder by it, get married more often than lower income couples which shows there are other factors. The data I’ve seen is for better educated couples, but I think there is a correlation.)
Also, for many jobs the incremental value of an employee hour goes down a lot after 50. Would you want someone to do safety critical work in his 60th hour of work? Me neither.

100

This is nonsense.

Let’s say you need $500/wk take home dollars to pay your bills and enjoy the lifestyle to which you have become accustomed. The $25/wk from 475-500 give you significantly more utility than the $25/wk from 500-525. The $25/wk from 450-475 give you more utility than either of the other two, because of how much more important stuff you have to give up to make ends meet at $450/wk.

So, if you were to lower the tax rate such that my income goes from $500/wk to $525, you’re giving me low utility dollars, and I’m more likely to reduce my hours and replace those earnings with leisure time. I don’t need that money as much as I need the other money.

Raise my tax rate such that my income goes from $500/wk to $475, and you’re taking away higher utility dollars, I’m more likely to scramble for extra hours to make up the shortfall, trading leisure time for earning time.

Raise my tax rate, and I’m highly unlikely to cut my hours and reduce my income more from $475-$450/wk because I’m now giving up even higher utility dollars in exchange for marginally more leisure time.