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

[Shodan]

Could you cite some examples of people working more hours after their taxes were raised, or less overtime when their taxes were cut?

Regards,
Shodan

[Cheesesteak]

@Shodan

Could you cite some examples of people working more hours after their taxes were raised, or less overtime when their taxes were cut?

Hellestal and WillFarnby made the claim first, I’ll wait until they cite some examples of average people quitting their jobs or reducing their hours when taxes go up.

[Damuri_Ajashi]

@Sitnam

How does this not disproportionately affect people who must buy things regularly with a greater amount of their income?

For food, housing, transportation in any given area there is a benchmark for reasonable survival. The more you make from that point the less percentage of your income you must have to spend every day for those things. Why is a Fair Tax fair?

Those who make enough to save most of their income tend to think its fair.

[Damuri_Ajashi]

@aag3981

I’m for no income tax at all. Tax consumption. Necessities like groceries and things can go untaxed. The rich consume and buy way more, most people would have control overall their income and poor would not be taxed and could receive assistance in other ways. I also have a serious issue the tax issue. Because it’s so complicated, it’s easy to hide loop holes. Taxing consumption would place the burden of keeping up with that on fewer people (businesses) and maybe under these circumstances, the borderline retard arrangement at the IRS can make some sense and maybe sorta be helpful.

Right, because there’s no way to avoid consumption taxes. Things get complicated any time there is enough money involved.

[Damuri_Ajashi]

@Hellestal

Consumption taxes don’t have to be flat. Most of them are VAT or sales taxes, but that’s not a law of nature. They can be designed differently.

It would take some administrative doing, but there is a possibility of a progressive consumption tax. The government could tax the lowest consumption levels at zero, and the highest consumption levels at rates in excess of 100%. Some economists favor this idea because consumption taxes are less distortionary and the progressive nature removes a lot of the sting at lower income levels.

I don’t believe such a tax could entirely replace an income tax, but it might make a dent and lead (over time, not immediately) to a stronger economy.
I would agree that “punishing success” is just an empty talking point. But that doesn’t mean that economics has stopped working.

People respond to incentives. Taxing income is a disincentive to the productive work that creates the income. “Everyone needs money” is not a counterargument, because these choices aren’t binary. There is a decision to make about working 35 hours and working 40 hours. There’s a decision to make about working 40 hours at this relatively easy job, or working 40 hours for more pay doing more strenuous work. The average person works less when their marginal dollar is taxed at a higher rate. That means less production in the economy.

A consumption tax would avoid that particular disincentive.
We want the flow of spending on new goods and services to be steadily increasing. We want people to spend money.

But that doesn’t mean we want them to consume. Consumption is not the entirety of the economy. There are other slices. Most important for this discussion is investment.

To simplify: Consumption is what we fritter away today. Investment is our production geared to the future. If we tax that which we fritter away in the present at a higher rate, it increases the incentive for more production geared for the future. Spending on investment works as someone else’s income just as well as spending on consumption. Consumption is the largest slice of the economy, so we wouldn’t want a massive increase in taxes with no transition time, but a slow revenue-neutral shift of some of the income tax burden into consumption taxes would be more economically efficient and would, over time, benefit the economy. All to the better if the consumption tax is implemented progressively.

Sure, a consumption tax system could work. I’m not sure its an improvement. A progressive consumption tax is probably a still more administratively manageable than our current system but the transition problems are practically insurmountable. Its not like a consumption tax doesn’t create bad incentives, I might end up buying expensive luxury items like watches and jewelry outside the US, maybe cars and computers too. Is our economy underinvested, do we have a shortage of capital investment in this country?

The FAIRTAX which is a flat consumption tax with a prebate is definitely not an improvement unless you make more than about $130,000 (there may be some people at the very low end of the income spectrum that also come out ahead). It improves little but the tax collection process (and the tax burden on high income folks) with nothing to show for it but much higher deficits and all the problems that go with a consumption tax.

[Damuri_Ajashi]

@Hellestal

I’m not sure why you have this impression. It follows directly.

1. Taxation is a disincentive to the behavior being taxed.
2. An income tax is a tax on the productive work that created the income.
3. An income tax is a disincentive to work.

That’s it. It’s a three sentence syllogism, with two premises and a conclusion. There is literally nothing more to it.
Well, this is all relative but I didn’t say “a little more”. If they’re taxed only a little more, then they’ll work only a little less.

I used 35 hours compared to 40 not because it was “little”, but because I was thinking about European/American differences and 5 is a nice round number.
Our lives are not a random sample. Our experience is not going to be reliable enough to answer a question like this. This is a similar problem from earlier in the thread of using Bill O’Reilly as a stand-in for the economic decision-making of literally millions of people. Bill’s not a random sample, either.

For something a little more data-driven, we can look at Ed Prescott’s paper on why Americans work harder than Europeans. Again, this is average. I know plenty Europeans who work plenty hard, but personal experience does not count. An anecdote is often worse than no data at all because our minds fall too easily into the trap of extrapolating from an unrepresentative experience. We need to cast our nets wider, and to think about choices on a spectrum instead of the binary decisions of people we happen to know. This is a pdf, but I took the time to present at least one of the interesting tables.

Table 1. Output, Labor Supply, and Productivity
Relative to United States (U.S.=100)
                           Output       Hours Worked    Output per
Period    Country          per person   per person      Hour Worked
1993-96      Germany        74            75              99
             France         74            68             110
             Italy          57            64              90
             Canada         79            88              89
             United Kingdom 67            88              76
             Japan          78           104              74
             United States 100           100             100

1970-74      Germany        75           105              72
             France         77           105              74
             Italy          53            82              65
             Canada         86            94              91
             United Kingdom 68           110              62
             Japan          62           127              49
             United States 100           100             100

The US is normalized at 100, and the other countries (not just Europe) are percentages of US. This is two different periods to emphasize two different tax regimes.

We can see the US has the highest rates of output per person, per capita GDP, in both time periods. Japan and Canada made some progress in closing that gap. The European countries generally did not. Next, we can see that most of the countries listed had people working more hours than in the US in the 70s. Only the Japanese were working more in the 90s. The US was much more productive (output per hours work) than every country except Canada in the 70s. Every country except Canada made great productivity gains in those two decades. The French were actually 10% more productive, but they worked so fewer hours that their per capita GDP remained at 75% the US level. The apparent mystery here is why the formerly industrious Europeans start working less.

But it’s really not that hard.

Prescott uses a stripped-down “real business cycle” model to compare predicted and actual values of the labor supply given the different average income tax rates paid by the population. And hey, sure enough, the estimates aren’t bad. Obviously not the whole story but it doesn’t need to be. We already knew that humans respond to incentives. Taxation is a disincentive. It’s as straightforward as that.

Of course, this doesn’t say anything about ideal policy. It’s a choice their governments have made. I don’t mind people having different preferences about policy, even if I disagree. But even given different policy preferences, we have to face the same economic reality that taxation is a disincentive. Income taxes are a disincentive to work. There’s no dodging that point.

I’d like to point out, too, that I have made no arguments about magical job growth explosions, or tax revenues magically being higher when taxes are lowered, or any of that nonsense. This is a subtle process and it takes some time.

IANAE but when I look at those numbers I don’t see a more productive Europe working fewer hours, I see a less productive USA working longer hours.

File:U.S. Federal Tax Receipts as a Percentage of GDP 1945–2015.jpg

Top marginal tax rax rates were certainly higher in the 70s (70%) than the 90’s (39.6%) but the tax burden on the economy seems to be about the same.

File:U.S. Federal Tax Receipts as a Percentage of GDP 1945–2015.jpg

The individual tax as percentage of GDP seems to be about the same too:

http://www.cbpp.org/cms/index.cfm?fa=view&id=1324

Of course that doesn’t take into account what was going on in Europe. Had the tax regime in places like France Germany Italy has gotten more burdensome compared to the US over that time period?

I guess I’m not really sure what youa re trying to say.

[Damuri_Ajashi]

@Hellestal

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

IANAE but in terms I think you might understand: Perhaps the supply curve for labor isn’t as elastic as theory presents.

[Voyager]

@Damuri_Ajashi

Of course that doesn’t take into account what was going on in Europe. Had the tax regime in places like France Germany Italy has gotten more burdensome compared to the US over that time period?

I guess I’m not really sure what youa re trying to say.

I know a bit about Germany, and I wonder how much the reduction in hours worked is due to far greater vacation and holiday amounts than in the US, and far more pressure to use vacation than we have here.

[WillFarnaby]

@Fear_Itself

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.

Your values are made manifest by your actions. If you value your first hour of labor at $100, chances are you will not work, because there are likely no buyers at that level.

@Fear_Itself

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

No, as i said, the values change for each unit. Let’s assume you choose to work 40 hours. This simply means that you value your first hour of leisure more than your 41st hour of work. Guys, this is uncontroversial economics.

@1060westaddison

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.

Your example proves only that that your valuations changed. Let’s say at the shit job you worked 40 hours and 12 hours at a second job. In this instance, you valued your first hour of leisure higher that your employer was offering for your 43rd hour of labor, but your first hour of leisure was not valued higher than your 41st hour of labor.

Things changed and you value your first hour of leisure higher than your 41st hour of labor.

@Voyager

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.

@Cheesesteak

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.

Sorry no time to respond to these questions of uncontroversial economics. Read man economy and state Fundamentals of human action

[Budget_Player_Cadet]

Wait, is the libertarian telling us to go read econ 101?

[foolsguinea]

No, the ‘Austrian’ is telling us to read Mises.

Which, firstly, means his claims of “uncontroversial economics” are doubly out the window: Obviously there’s a challenge to him in this thread, and Mises is an object of derision in economics circles.

Secondly, his claims of “uncontroversial economics” are a way of avoiding a debate where we challenge his contentions and he has to defend them.

Thirdly, what both he and Hellestal are doing in this thread is using syllogistic logic with badly framed and epistemologically uncertain premises. As Dr Krugman likes to remind us, models are approximations of reality. They can be pretty good approximations, and we can work with them, but every economist uses models, and they are of necessity abstractions.

It’s impressive how far you can travel from reality when you lock in a bunch of fuzzy “definitions” and then follow apparently ironclad logic from them.

Since Farnaby is an ‘Austrian,’ he’s probably wrong about something (sorry, but appealing to Mises is like appealing to homeopathy). I don’t know that Hellestal is quite wrong. I do think he’s missing a layer of sociological reality.

We are not really a bunch of perfectly free middle-class actors. The decision to work more isn’t entirely taken by the worker. Not that individuals aren’t responsible for their own decisions, but that the range of acceptable decisions is redefined by custom and by the dictates of those in power.

[nate]

A simple question for the consumption tax pushers… if you took the typical household with the median household annual income ($53,891), would their total tax burden go up or down with your plan? Assuming, of course, that tax revenues for the gov’t must remain roughly the same as the current system.

[Budget_Player_Cadet]

@foolsguinea

No, the ‘Austrian’ is telling us to read Mises.

Hence my derision.

[Nava]

@Hellestal

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.

You’re coming from a system where people “ask for more hours at work”. In Spain that simply doesn’t happen except for the self-employed; we’re the only ones who get paid on volume. You don’t ask for overtime, it smacks you; if you’re lucky, you will get some money for it. If not, “be glad you’ve got a job”.

Second jobs, right… if your first wouldn’t be enough to live on, you are unlikely to take it except to prove that you’re willing to work or because you’re in a grey sector (part time jobs or trades, with each invoice negotiated in black or white, and the perception then isn’t of each of them as a separate job but as a separate client).

Having one person chose not to work. Yes, there are cases. For example, when what they get from being unemployed is similar to what they would get by being employed and there is a second home which needs rebuilding… One person who would normally want to work choosing not to “because it would raise our taxes”? Choosing to do so under the table to avoid paying taxes on that income yes, but without any thought of tax brackets.

And those grey cases, in some countries are upward of 25% of the economy. The numbers get pushed up and down mostly as reactions to government action, but not necessarily to taxation levels. For example, the bright idea of making it impossible for cleaning ladies to stay self-employed (like they had been previously) and requiring their clients to become their employees has driven independent cleaning ladies to official extinction; official only, of course. This was a paperwork complication, not a raise in taxes.

[Cheesesteak]

@WillFarnaby

Your values are made manifest by your actions. If you value your first hour of labor at $100, chances are you will not work, because there are likely no buyers at that level.

Here is your problem. You are valuing work and leisure in dollars, in the mistaken assumption that the value of dollars is constant. It isn’t. Dollars themselves have utility that isn’t fixed.

When you reduce the dollar value of a work hour, you must also take account of the changing utility of dollars when valuing leisure hours.

[septimus]

Taxes, whether of income or of consumption, certainly do affect behavior, especially at the margins. No anecdotes or false analogies will change that.

I might support consumption taxes if they were “progressive” in the sense that luxuries or unhealthy items were taxed much more heavily than necessities and healthy items. I think there’d be wide support that yachts should be taxed at a much higher rate than bicycles. Taxing sugared soft drinks at a higher rate than juice might be met with outrage. And having a political legislature pass judgment on the “values” of different goods sounds, understandably, absurd.

Perhaps more important than income-vs-consumption to the design of a taxation system is whether the taxes could be collected simply and fairly, with little chance for cheating and minimal need for bureaucracy and intrusion. For that reason, I’ve always thought government should get more of its revenue from real estate taxes (impossible to evade, since land isn’t going anywhere) and perhaps at a few infrastructure bottlenecks (e.g. fuel, financial transactions). However, income and estate taxes have the benefit that they allow desirable income/wealth redistribution.

[WillFarnaby]

@foolsguinea

No, the ‘Austrian’ is telling us to read Mises.

No, Rothbard, much clearer:

All action is an attempt to exchange a less satisfactory state of
affairs for a more satisfactory one. The actor finds himself (or expects
to find himself) in a nonperfect state, and, by attempting
to attain his most urgently desired ends, expects to be in a better
state. He cannot measure the gain in satisfaction, but he
does know which of his wants are more urgent than others, andhe does know when his condition has improved. Therefore, all
action involves exchange—an exchange of one state of affairs, X,
for Y, which the actor anticipates will be a more satisfactory one
(and therefore higher on his value scale). If his expectation turns
out to be correct, the value of Y on his preference scale will be
higher than the value of X, and he has made a net gain in his
state of satisfaction or utility. If he has been in error, and the
value of the state that he has given up—X—is higher than the
value of Y, he has suffered a net loss. This psychic gain (or profit)
and loss cannot be measured in terms of units, but the actor
always knows whether he has experienced psychic profit or psychic
loss as a result of an action-exchange.1

Which, firstly, means his claims of “uncontroversial economics” are doubly out the window: Obviously there’s a challenge to him in this thread, and Mises is an object of derision in economics circles.

While there are parts of “Austrian” economics that are controversial to be sure. This ain’t one of them.

Secondly, his claims of “uncontroversial economics” are a way of avoiding a debate where we challenge his contentions and he has to defend them.

Thirdly, what both he and Hellestal are doing in this thread is using syllogistic logic with badly framed and epistemologically uncertain premises. As Dr Krugman likes to remind us, models are approximations of reality. They can be pretty good approximations, and we can work with them, but every economist uses models, and they are of necessity abstractions.

I’m not using a model. I am making statements of economic reality about a hypothetical situation. There is a difference.

It’s impressive how far you can travel from reality when you lock in a bunch of fuzzy “definitions” and then follow apparently ironclad logic from them.

If someone chooses A over B, that person values A over B. There is no more definitions or logic needed here. Pretty straightforward, actually.

Since Farnaby is an ‘Austrian,’ he’s probably wrong about something (sorry, but appealing to Mises is like appealing to homeopathy). I don’t know that Hellestal is quite wrong. I do think he’s missing a layer of sociological reality.

I wasn’t appealing to anyone, but I was providing further reading for anyone who is interested.

We are not really a bunch of perfectly free middle-class actors. The decision to work more isn’t entirely taken by the worker. Not that individuals aren’t responsible for their own decisions, but that the range of acceptable decisions is redefined by custom and by the dictates of those in power.

Their range of acceptable decisions is limited, yes. In a world of scarce means, there will always be limitations on decisions. If you are railing against scarcity, I suggest hubris.

I was simply talking about one person and how, everything else being equal, his or her values are evident in the decisions he or she makes. I’m not reinventing the wheel here. I nowhere said people should work more, yadda yadda, yadda.

[WillFarnaby]

@Cheesesteak

Here is your problem. You are valuing work and leisure in dollars, in the mistaken assumption that the value of dollars is constant. It isn’t. Dollars themselves have utility that isn’t fixed.

When you reduce the dollar value of a work hour, you must also take account of the changing utility of dollars when valuing leisure hours.

Not necessarily, at least for this demonstration. The utility of dollars corresponds with the subjective value attributed to them by their holder. A person could value their first dollar virtually the same as their 800th dollar, or much less.

You have hit on a mistake I made, though. There is no need to attach dollar values to the valuations of labor hours and leisure dollars. I should simply state that the 41st labor hour was valued higher than the 128th leisure hour, and so forth. Attaching dollars to the values makes the demonstration more realistic for some people.

[Voyager]

@WillFarnaby

Not necessarily, at least for this demonstration. The utility of dollars corresponds with the subjective value attributed to them by their holder. A person could value their first dollar virtually the same as their 800th dollar, or much less.

You have hit on a mistake I made, though. There is no need to attach dollar values to the valuations of labor hours and leisure dollars. I should simply state that the 41st labor hour was valued higher than the 128th leisure hour, and so forth. Attaching dollars to the values makes the demonstration more realistic for some people.

Behavioral economists have ways of mapping things like leisure time into dollars.
Expected utility is hardly controversial - von Neumann and Morgenstern quantified it, but it was understood long before that.
So I’m not sure what you are getting at. It may be true that people having more money per hour will work fewer hours, all things being equal - but is that a negative? It would be if we had a labor shortage, but wage growth shows that we do not. I think it is pretty clear that we are better off if we have 3n people working 40 hours a week as opposed to 2n working 60 hours a week. The losers will be companies paying more benefits, but everyone else wins, as government expenditures go down. And companies may win also from greater demand and more leisure time for people to buy and use their products.

[Ruken]

Wait what? “Everybody wins” if people choose to work less?