You wouldn’t be Jim MacQuarrie would you? Jim has a Big Mac fixation, too…
See
But Buffet won’t pay income tax on much of his income, since it will fall under capital gains and other similar categories. People need to stop fixating on federal income tax and look at total tax burden. Municipal property taxes, sales taxes, etc, are all vastly less progressive than federal income tax is.
It would be interesting to see the bar analogy of the OP redone with actual values for real tax burdens of the various percentiles, and included incomes as well. Certainly it would paint a different picture. I’m much to lazy to go digging for that sort of information, though.
Yes, if McDonalds could figure out a way to do it. Rich people already do pay more for the same products than poor people, through a variety of mechanisms. I seek out generic products instead of brand-name, and compare the unit price for all of them. I clip coupons. I go to garage sales. For some items, I haggle over prices. All of these are things that are worth my time. But someone like Warren Buffett’s time is worth a lot more than mine, so it probably isn’t worthwhile for him to do those things (at least, not to the same extent), so he probably does pay more. Capitalism works on the principle of all the market can bear, and whenever some people can bear to pay more, capitalists figure out ways to charge them more.
This has been an interesting discussion to watch. Thanks.
Before I decamp for the sidelines, please allow me to observe that so far I have seen no mention in this thread of the benefit derived by mere possession of property.
It’s good to be a bar-owner, even if nearly all your customers are deadbeats.
So to pick up the conversation from yesterday, my thumbnail sketches of how government should spend money:
Markets are usually the most efficient way to allocate resources when the goal is maximum production. Markets however have systemic weaknesses. First and most significant, externalities both positive and negative distort marketplaces, but there are other types of market breakdowns as well. Second, other things being equal, in any economic transaction the party that enters negotiations with more resources has a bargaining advantage over the other party. Absent regulations to mitigate such advantages (such as labour standards) or redistribution (such as progressive taxation) this will result over time in increasing inequality in resource distribution which eventually will contribute to social unrest, increased crime, and in extreme cases outright rebellion. Third, markets have a difficult time overcoming certain sorts of collective action problems, where the problems aren’t necessarily externalities per se, but just practicality issues in collecting payment from consumers (imagine, for example, trying to privatize municipal street & sidewalk systems and charging based on use - regardless of whether it would otherwise be a good idea, the impracticability of it is overwhelming.) In general government expenditures outside of necessities like defense should be aimed at correcting these sorts of systemic market failures. However, where feasible it is a good idea to use market-like mechanisms to do so (like, for example, dealing with negative externalities by legislating the externalized costs into the price of the good in question).
I happen to think that the pattern found in modern industrialized nations is very approximately correct, though obviously there is plenty of room for specific improvements. Ignoring justice and defense expenses (since everyone agrees on spending on those), the big ticket items for the governments of all industrial nations are education, health care, and physical infrastructure.
Education: the issues here are both positive externalities and distribution. Education at all levels has positive externalities - we all benefit from the education of others in our society in ways they don’t get directly compensated for. In addition, society as a whole benefits from ensuring a certain minimum level of education available to everyone, since allowing the development of an uneducated underclass will lead to increase in levels of crime, etc. So what to do? The pattern we see almost everywhere on the planet is basic education available to everyone in a publicly funded system, plus advanced education with both direct subsidies and various means-based assistance.
This seems approximately correct to me, as it addresses both the positive externality issue and provides for a universal minimum availability. There is an argument to be made for introducing some market elements into lower levels of education. The usual idea is vouchers, but care needs to be taken. Some people cost more to educate than others (developmental disabilities, for example) and we would expect the availability of education for such people to suffer at a cost to society as a whole.
Health care: trickiest subject here. First, some things like immunization programs have such huge positive externalities that we would be fools not to just do straight public funding of them. After that it gets complicated. Globally we see a wide variety of approaches to this issue, and none are completely satisfactory. A pure market approach suffers several problems. Cost of critical medical care is sufficiently high that just paying as you go isn’t practical, so we would inevitably see some sort of insurance system arise. But once you have an insurance system, there’s a disconnect in the incentive structure since people don’t see the real costs of the care they receive. Moreover, human aversion to dying being what it is, demand for medical care is extremely inelastic. This means that prices will have to go very high before ordinary marketplace rationing-by-price will balance supply and demand. But since humans in addition to being averse to dying are empathic, as societies we are unlikely to just let people die in the streets for want of a round of penicillin, so if we’ve set the price using markets and then pick up this penicillin tab with public money it’s going to get extremely expensive.
What to do? I end up being pretty socialist on this one, though our single-payer system in Canada is verging on being broken. We’d do well to look at some of the European models, but our current system is a political sacred cow, so it’ll be a while before we do more than make a few tweaks around the edges. The US model appears even more broken to me, and is certainly less cost-effective. Everyone receives care, and then unless they fall into one of the publicly-paid-for groups, everyone fights about who pays for what. All kinds of administration inefficiencies.
Since we’re inevitably going to provide emergency care for everyone, it seems to me that it only makes sense to guarantee universal access to preventative care as well. It probably costs less for one, and for another that’s where the greatest positive externalities are in terms of increased productivity from a healthy population. I honestly don’t know how best to structure things after that point, except to note that no system will make people happy. There will inevitably have to be some sort of rationing in the system, and people will never be happy with any rationing scheme.
Infrastructure: the biggest issue here are collective action problems, where we all benefit from various physical infrastructure but there’s no good way to charge people based on their use of it (roads). Or alternatively, you could charge based on use, but building the system privately in infeasible due to acquiring the relevant rights (sewers). Since I see no improvements in these areas where market elements have been added (like all those toll roads in Illinois), the usual system of just building them directly with public funds seems the way to go.
And how do we pay for everything? Well, if we made everyone pay the same amount we’d have nowhere near enough to fund everything it’s advantageous to do. So we’ll have to get more money from those who have more than we do from those who have less. There would be administrative efficiencies to be gained by just eliminating a bunch of taxes and making of the revenues on the remaining ones, but there are all kinds of issues that make this difficult - the jurisdiction various levels of government have to tax different types of activity, etc. The degree of progressiveness is a balance between two things - high enough rates on those with more to produce enough revenue, and low enough marginal rates at all levels to avoid inhibiting pursuit of greater wealth. And why shouldn’t the rich feel like they’re getting a raw deal paying “more than their share”? Because the balances that we’ve evolved in western industrialized democracies have resulted in the most peaceful and prosperous societies in history, and it’s the cover charge you pay to live in one.
Is there room for improvement? Of course there is. But we’ve been floating back and forth between more and less regulation, and more and less progressive tax schemes for the past century or two, and have discovered problems with moving too far in either direction. Unless someone invents an entirely new social paradigm, we’re down to tinkering with details.
I’m not sure where you were going with that last point, but I can’t resist jumping in.
It is actually terrible to be a bar owner if all of your customers are deadbeats. You will make no money. In fact, you may quickly lose all of your money if you have fixed expenses such as power, heat, property taxes, etc. and no way to recoup those expenses via revenue from customers.
It is in no business owners’ interest to charge prices, or recruit customers, who have no means to pay him/her and generate enough revenue (and profit) to earn a rate of return consistent-or-better with other available investments.
Thanks for the long and thoughtful post.
Can I pong, to your ping? I’ll do a number of posts to go bit-by-bit through your paragraphs, and then you can ping-pong back at me if you want. Sound good?
Agree with your first point.
Don’t disagree with your second point. But you seem to quickly jump to the conclusion that the transaction must be concluded between the first and second party. And the only way to make it ‘fair’ is to have a 3rd party overseeing it, imposing some sort of rule or regulation to make it ‘fairer’.
When that happens, you have immediately introduced another actor into the equation and given this 3rd party supreme and unilateral power over the transaction (should they choose to use that power). I would love it if you could throw some examples of what you are thinking about here in your next post, so I could get a better handle on what you’re thinking.
There are other ways to approach transactions such as the asymmetric one that you describe. Let’s take the classic example of buying a used car: I don’t know nearly as much about the car as the seller.
I need to factor that risk into my decision. That’s the first point I would make. I could search for substitutes: other cars, bicycles, etc. I could make other alterations to my lifestyle such as not requiring transport at all. Or I could factor the risk of failure into my purchase decision and go for it. There are lots of choices I can make either ahead of time, at the time, or even after the purchase time to accept, mitigate or remove the risk of asymmetric information.
Your example above seems to quickly jump to the conclusion that there is no other option available to the 2nd party and therefore they need the support of a (very powerful) 3rd party to interject in what would otherwise be a voluntary transaction.
Your next sentence blows me away. I’m not even sure how to respond to it. Social unrest? Outright rebellion? Good heavens. Are you implying that the richest industrialized countries with the freest markets (U.S., U.K., Hong Kong, Singapore, some European countries) are careening towards the cliff of civil rebellion?
The countries where there is actual unrest and rebellion afoot (Colombia, Zimbabwe, western parts of China, other Sub-Saharan African countries) are invariably those where there is an extremely strong socialist/nationalist/dictatorship bent and extremely heavy control over the economy. Just in recent history there have been outright toppling of governments (the former Soviet Union and satellite states, Nepal) and I don’t recall any of those being rich, industrialized countries with reasonably free markets. Just the opposite.
I don’t even want to go into this subject here and now. But I have to admit I find your statement incredible.
But you do say a number of important things later in your post that I absolutely, 100% agree with. So let me pause here and ask a question.
What is the objective function here? What is it we are trying to acheive with our public policies? You don’t come out and say it explicitly in your post, but if I pick up bits and pieces here and there it seems to be ‘avoiding inequality’ and ‘social unrest’. You should correct me if I’m wrong.
In other words, the policies you would choose should have an objective function of (1) tightening up the distribution of wealth and (2) ensuring a minimum standard of living for all citizens to avoid social unrest. Or maybe you’re saying the minimum standard is irrelevant; it’s the distribution that matters. I couldn’t quite tell. It would actually be helpful if you could clarify this point, because I think it might matter later on.
I would offer another perspective. The objective function should be improved living standards for all Americans, via high-value-added and rapid job growth in a competitive, diversified economy, along with a basic safety net in place to ensure that a rare, unforeseen or catastrophic event doesn’t wipe somebody out or leave them destitute.
Support for education, health care and infrastructure are critical elements. They provide the opportunity to take whatever you have as an American citizen, combined with whatever efforts you are willing to put forth, and give you the best chance of success compared with anyplace else on Earth. But education, health care and infrastructure are means to an end. Not the end in themselves.
That’s a slightly different angle than saying the federal government needs to try to solve social problems. I think it’s a subtle but important distinction to highlight at the beginning, because we may come back to it a number of times later on. We probably shouldn’t stop and debate this right now, because it’s possible we’ll end up in the same place.
I agree with the last half of your paragraph. The way I would phrase it is that there are transaction costs associated with large projects that create inertia that is just too damn big for any reasonably-sized private entity to overcome.
Sure, a private company could try and raise $100 billion to construct a new highway from point A to B, but what are the odds that would ever really happen? Between the fund-raising, the eminent domain issues, the legal challenges, etc.
I think there are sensible investments in infrastructure that can provide a healthy, positive return to American citizens that would never happen if left to the private sector because the transaction costs are just too high. I have a least one idea about how to go about implementing those.
That’s enough for now. Look forward to your responses.
Re: civil unrest
You’re looking at far too restricted a historical scope. The most unregulated market economies were pre-labour-movement UK and US. There was significant social unrest, rioting, general strikes, etc. This unrest was the origin of Marxist thought. We haven’t been anywhere near this precipice for ages, I realize, but that doesn’t mean it isn’t still there. If all labour regulations were rescinded, no workplace safety standards were enforced, etc., then the first time we ran into a high unemployment cycle you’d see some employers taking advantage of that and we’d be right back to the early days of the labour movement.
I certainly didn’t mean to imply that there needs to be government oversight of every market transaction. Even just a moderately progressive taxation system along with anti-trust rules will prevent untoward concentrations of wealth.
Re: purpose of govt action
Well, maintaining public order, and providing an environment which will lead to maximization of living standards. Hence, you have both wealth redistribution & public education to avoid an underclass which will tend towards criminality and unrest, and general subsidization of education at all levels to encourage a more productive work force, stimulate pure scientific research with no immediate financial return, etc. And so on in other areas. Where you have central goods the market will underproduce, or will produce with undesirable distributions, the government has a role in modifying the equation in whichever way is most practical.
My apologies for any confusion. I was trying to stick with the OP’s pub metaphor, but it didn’t come off well.
My basic point is that, in any discussion of the fairness of tax burdens, to focus excessively on income is a mistake. Hypothetically, even if Richard Branson had to pay 99% of his income in any year in taxes, he would still be an immensely wealthy man by virtue of the assets which he already owns.
That said, I am opposed in principle to property taxes, although I do favor progressive income taxation.
So, prior to the last election this chain-e-mail made the rounds. And prior to this election, a guest with no other posts to his name posts it again, hit-and-run-style.
Ladies and gentlemen Dopers, we have been spammed by a Republican propaganda-bot.
Fair enough. Thanks for the response.
I don’t want to belabor this point. But I have a feeling we’ve spotted our first gap in perspectives, here. I’m not sure it will really matter in the long run.
Let me get to the rest of your post in a little while.
Are you arguing that we should all pay the same amount? That Buffett if Buffett pays 8 million so should his secretary? Because his point is why should someone with less disposable income pay a higher percent of their income in taxes? As others have pointed out, he is talking about total tax load, not just federal income taxes. Here is a thought experiment: Two people one makes 50k and one make 5 million. Suppose the 50k person pays 10% federal taxes an the 5 million pays 20% (just to simplify, I am not going to talk about deductions, shelters, capitol gains vs regular income, and other things that change rates). Seems the 50K guy gets the better deal. Except we need to look look at other taxes as well:
[ol]
[li]Sales tax: 50k probably spends a third of his income on taxable good(50k*.9/3=15k) while 5 million spends less than 10% (5 million*.8*.1=400000). At a reasonable 5% sales tax that comes to 1.5% for 50k and .8% for million.[/li][li]Property tax: 50k lives in a 200k house and 5 million lives in a 10 million dollar mansion. At a 3% property tax rate that comes to 12% and 6%.[/li][li]Payroll taxes: You pay 8% up to 108K, so 8% and .01%[/li][/ol]
So we have the 50K guy paying 31.5% and the 5 million guy paying 26.8. This is why we don’t have a flat tax. Not really to make it truly progress, but to make it less regressive.
Actually the worker probably benefits more from his education. But Gates benefits from his education AND all of his employees’ educations. Even if he only gets a tenth as much benefit per employee, he still gets more total value than any one employee.
This isn’t really about class envy. Fairness should come into it, but really it is about practicality. I do not advocate a return to 90% income taxes, but I think the capitol gain tax is too low. I make a decent living and can afford to pay more than some, but I don’t see why more of every dollar I make should go to the government than someone who makes a whole lot more than me. A flat tax rate would only make sense if it applied to all income and it was the only tax you paid, otherwise it will shift more of the tax burden from the highest earners to the middle earners.
Jonathan
Just want to throw in a cite (PDF warning) here. See graph on page 3. WA is an extreme example, but it shows how sales/property taxes disproportionately affect the lower income groups. There’s no income tax here at all.
The people who pay the capital gains tax have more to risk. First of all, the money has to be invested for a year (thanks to Bush), meaning that the invested money has to work for a year before the investor can lessen his tax consequences. Prior to Bush’s tax cuts, I believe the LTCG was 2 years (going by memory), which was fine for me, because imo, we should try to limit gambling in the investment field to try and minimize the swings in the economy. So, if Buffet was playing the day trading game, he is subject to a 35% tax. After 2010, it appears that the holding period is going to be 5 years (way too long, imo).
In that time frame, whether it be 1 year or 5, the investor has much more risk than the non-investor. Buffet thinks that we should all be holding stock forever. That’s his preferred time frame which he jokes about all the time, but he’s always in the long position. The max loss in one year for a write-off is what, $3000? That’s awful. The way the market had been selling off the last 8 days, Buffet, Gates, Jobs, anyone with their wealth substantially tied to existing stock could lose billions. Warren’s secretary still has a job.
In the meantime, while the investor is waiting out the investment (i.e., waiting to no longer pay STCG), the money is working, which especially needed in times likes these.
The may have more absolute money at risk (say 50 million in investments vs 50k a year salary), but it is very rare that someone making that much money is going to lose so much they risk homelessness or being unable to afford medical care. Many people in the US who feel they are financial stable are a layoff and cancer diagnosis away from being broke.
Losing 40 million dollars is huge deal, but someone with 10 million dollars left is better off than someone who loses the 50k salary.
Jonathan
Isn’t this after all then just class envy? They can survive a huge loss after all, right? Losing $1M to a person previously making $50k (which is not poor btw) is going to hurt much more than a guy who already owns $100M. That’s fairness? :dubious:
Rich people are going to pay more in absolute terms, and even after factoring other taxes, the benefit they receive is far less to them, because they simply don’t need it – regardless of what overall percentage it is to them. Besides, some of these arguments just are not practical, if you still want to argue that route. How do you assess the tax benefit per person on for clean air? Should it cost the rich more because a healthy populace is one that creates more customers to buy their products?
My point was not about fairness but about risk. Your argument was that investors are “risking more” they should pay less in taxes. My response is that while they are risking a bigger number in dollars, they are not exposing themselves to the same kind of existential risks that lower income people do. I am not condemning or praising either party. I also agree that 50k a year is not poor. Depending on where you live, it can be quite comfortable. However, if your rent is $1000, you lose your job and you have a medical emergency, you are going to be in big financial trouble.
I have to disagree that the benefit is far less for wealthy people. In most places the better off the neighborhood, the better the schools, roads, and police response.
Understand, I am not trying to say we should take away all wealth above a certain level. The government needs a certain amount of money to run every year (what that level should be is another debate). Why should those earning money from investments pay a smaller percent of their income into the pot than people getting paid a salary? That goes for me with five figure portfolio and Bill Gates with his ten figure one.
Jonathan
PS: I agree that long term CP should be less than short term to encourage actually investing in a company instead of simply gambling on stock prices, but to me that is beside the point in this discussion.
I’m not so sure it is besides the point. I almost thought it was, in my responses to Grosnak’s posts a ways back. But maybe it is the point.
What is the objective function here? What is it we are trying to maximize? I posited above it should be robust job growth and rising living standards (and wealth) for all Americans. With a basic safety net in place to guard against catastrophe.
I would posit it is not the federal government’s job to solve social problems.
I would posit that if you allow for the creation of a robust economy, with lots of opportunities and employment choices for all citizens, the rest of that stuff will take care of itself in good time. Debates about biodiversity and global warming and stem-cell research are luxuries a rich society can afford. I don’t see even modestly successful economies (e.g. South Korea, Estonia, Chile) spending a lot of time wringing their hands over those things. But Americans can. Because we can afford to.
There is an interesting article today in the WSJ about Europe and global warming that touches on this point. Some European countries seem to be losing their enthusiasm for the whole global warming thing, now that it might mean real stress imposed upon their economies.
High capital gains taxes and high corporate taxes are certified job-killers. They only contribute about 20% to the overall tax revenue pie. And that 20% number is a recent one, with a couple of blowout years on the capital-gains side that will probably disappear for awhile.
I would argue that those tax rates should be much, much less (MeasureForMeasure and I have had good debates about whether they could even go to zero) if we are truly serious about creating jobs. And if you look backwards just 5 or 10 years, and assume the federal government could have just held spending to [CPI + Population growth], they could have gone to zero and we still could have broken even on the revenue side.
One problem that crops up with lowering those taxes, however, is what is happening on this board. Right now. Some people are going to get very rich, and pay very little in taxes. These will be people who forgo traditional wage income from a job in the classic sense, and instead put their own capital (and other’s capital) at risk to form enterprises and create jobs. Some folks might take issue with that and insist they pay more in taxes.
So I ask again. What is the objective function here? What are we trying to accomplish with our tax policy?
The first thing I think we can all agree on is to fund the government. In my opinion there are two primary issues and one related, but probably separate issue that should be debated:
[ol]
[li]Should taxes be used to change behavior?[/li][li]Which behavior type are fair game for tax modification[/li][li]Is our current corporate structure (independently and in conjunction with taxes) rewarding the correct behavior?[/li][/ol]
One and two are clearly relevant, but not central, to this discussion. Three is starting to starting to get far afield, but I will say this: There are two types of income you derive from investments: Dividends (shared profits from the company) and capital gain. Dividends are taxed as simple income, while capitol gains are taxed differently. Which should be higher? It seems like many corporations put too much emphasis on stock price rather than long term stability.
Jonathan