I have a question about the Democrats’ latest tax proposal:
The proposal seems to reflect the middle-out (rather than top-down) approach to economic growth as articulated by Robert Reich and others.
The proposal raises taxes on top earners and corporations and transfers that money into the hands of middle-class consumers. Increased consumer spending will lead to job creation.
The difficulty is predicting how the top earners and corporations will react. It seems to me they can respond to the increased demand by: (a) creating jobs , (b) raising prices, or (c) shrinking in size due to the new tax burden.
If (b) or (c), the middle-out approach benefits no one.
Do you remember that the U.S. had a top income tax rate of 91% (top bracket $200,000) when Republican Eisenhower was President in the 1950s? During this time the United States had overwhelmingly the strongest economy in the world.
Case B:
If they raise prices, consumers will pay the higher prices or they won’t. If consumers pay higher prices, then the company makes more revenue; which is taxed and goes to benefit society. So raising prices to pay the higher tax rate defeats the purpose. If consumers won’t pay higher prices, then the company loses revenue and will have to reduce prices if they still want to sell the product. In reality, most products have too much competition from other manufacturers to vary much in price. If a company raises prices too much, consumers will buy from a competitor. So the upside goes to consumers, who don’t have to pay higher prices, and to competing companies who see a rise in sales.
Case C:
Businesses are in business to make money. Reducing revenue doesn’t make sense. According to the Free Market Theory, if a company is run so poorly that it can’t adapt, it should fail. If a company makes a product that is in demand, and it can increase production to meet higher demand, increased taxes will not be a problem. If they cannot increase production, then something is wrong. Remember that employee expenses are deductible.
Yeah, but compared to who? The United States was the strongest economy in the world only because a 91% tax rate is less destructive to your economy than four years of strategic bombardment. So unless this tax proposal is being presented as an alternative to blowing up New York City, you’re missing the point.
The Washington Post article doesn’t give too many details, but the Democrats’ proposal seems to be moving in the right general direction. Rather than pretending to help the poor and middle class with more government intervention (higher minimum wage, more lawsuits), they instead are talking about tax cuts. Helping the poor and middle class by letting them keep more of their own money. It’s amazing that no one came up with that before.
As for the fear that new taxes and fees will hurt the rich, its always a legitimate concern. France tried higher taxes on the rich, and hundreds of thousands of rich people left the country, making France’s financial situation worse. But if the tax increase on the rich isn’t too large I doubt it will cause huge problems.
Hundreds of thousands? I know Gérard Depardieu is a large man, but he’s still just one guy!
As for the OP, it’s not clear from the article that the plan raises taxes on corporations. It has certain tax incentives and disincentives, but it’s quite possible that most corporations would see no change.
The piece of this that I like is the proposed fee on stock trades. As long as the amount is small enough to avoid discouraging trading, it would be a great way to raise revenue on a market that enjoys huge tax breaks on the income tax side.
The rest of this is… well, it’s what I expect from Democrats. If it produces no results when small, clearly the solution is to make it bigger. And when it does nothing while bigger, then we have to make it enormous. Seriously guys, you play right into the “socialist hysteria” when all of your ideas are to make the government just a little bigger every time.
It’s especially ironic in an article that has three pages of liberal hand-wringing about how they need new ideas and their ideas are
“If $400 didn’t make you rich, then surely $1000 will.”
“Since the current childcare credit doesn’t help the poorest people, and it leaves everyone else paying 80% of the cost, let’s propose a new credit that will not help the poorest people at all and leave everyone else paying 80% of the cost.”
“Hey you. Yeah, you, with the payday loans and the broken down car. We think the only reason you have no IRA is that the current law provides a 50% credit on up to $2000 of retirement savings. So here’s what we’ll do: a 50% credit on up to $500. Genius!”
(And if you think I’m making up my analysis on #3, or that there’s a typo on my number, just go look up form 8880.)
Why can’t we just raise the capital gains to 35%, which would be most effective in targeting the entrenched uber-wealthy?
The rich who accumulate most of their wealth through income are more productive to society, in my opinion, than the rich who sit on their ass and play the stock market/real estate game.
This is the biggest economic fallacy currently in vogue. You’re treating the economy as if it’s a perpetual motion machine - people get more money to spend, so they spend it, which raises profit, which creates more tax revenue, which we give to the middle class, which causes them to spend even more… What could go wrong?
What could go wrong is that you don’t spend your way to prosperity. The notion that increasing spending to improve the economy, if it’s right at all, is only right under the condition where a temporary shock to the economy causes irrational savings, which causes people to spend so little that production drops so much that real productive assets like factories close, when they would otherwise be open if consumers were spending a ‘rational’ amount of money.
Somewhere along the way, some people who believe in expansive government realized that they hit upon a way to reformulate this as, “Spending increases wealth” as a general rule, and this then allows them to have their cake and eat it too - to tax the rich while claiming to actually improve economic growth.
It’s total, utter nonsense. Economic growth comes from capital investment and intellectual innovation. It doesn’t even make sense from a Keynesian perspective, because you’re not talking about borrowing and spending - you’re talking about merely shifting wealth from one area of society to another. Yes, the poor may have a greater ‘propensity to consume’ and spend more of the money on consumption goods, but the rich take that money and invest it, which increases productive capacity. The Democrat’s proposal is robbing from future production to pay for current consumption. It’s a terrible idea.
Also, the propensity to consume of the poor does not extend to the middle class - especially as it ages. I’m in the middle class, and a lot of our income goes into retirement savings, saving for my kid’s college education, etc.
No matter how they respond, the net result is less capital to be used to create businesses, invest in upgrades, do R&D, etc. Most people talking tax policy today focus on the incentive effects and behavior of the taxed parties, but more important is the fact that the money you are taking is the money we use to create factories, do R&D, start up new companies, pay for employees until we show a profit, buy inventory, and all the rest.
In order for consumption to increase, production must increase first. You cannot consume without first producing. Moving dollars from rich people to poor or middle class people does not increase production, it inhibits capital formation, and consequently inhibits production. Inhibiting production decreases consumption and impoverishes society.
Supply is important because without it people will go without. Demand is important because it directs resources to accomplish the desired ends of consumers. Supply is the engine of the ship, while demand is the captain.
How about the person who creates a new business, employs 50 people, then sells the business to someone else? Are her capital gains also the result of useless activity?
And if a person knew that 35% of their capital gains will be taxed away, the threshold for profitability just went way up to justify building a new company. A venture capitalist who may lose everything on a new venture and have 35% of the gains taxed away if he’s right is going to require much more certainty or require much higher profit estimates before he’ll invest money in a new firm. That means that ventures that are valuable but risky, or not valuable enough to warrant investment under the new tax regime will not be created. That’s opportunity cost, and it will make the economy less dynamic as high-risk/high reward investments vanish in favor of safer ones. More investment money will flow to big corporations and into government T-bills and the like to minimize risk.
If you’d like me to do the math, I can show you how big an effect taxes on profits and capital gains have on investment in high risk ventures.
By the way, the highest risk ventures are start-up companies by people with no capital of their own, no track record and no connections. So the people most hurt by such taxes are the poor, minorities, non-ivy league graduates, etc.
If capital gains were simply taxed as income, on the same (moderately) progressive scale as all other income, then the poor assuredly could not be hurt by such taxation. Either their net income and tax rates would remain low–or they would no longer be poor.
So what benefits the economy more? 100k people who get a $1M windfall, or 100M people who get a $1k windfall? Or the government spending $100B to fix broken roads and bridges and the like? Or the government spending $100B to send some people to Mars? (Assuming that it can be done on the cheap.)
In any event, it seems to me that if you’re super rich, paying 25% taxes instead of 20% or 15% instead of 10% isn’t going to make any difference whatsoever compared to the ups and downs on the stock market, while the government could do a lot of important things with that extra 5%. (Obviously it would be different if it were 85% vs 90%.)
(I should get started with that Piketty book my father gave me for my birthday…)
You missed my point. I’m not talking about the capital gains on the poor person. I’m talking about the capital that’s available to the poor person to start a business.
Let me give you an example of how this works. Let’s say I’m an investor with capital. You’re a poor person with a great idea. You come to me to invest in your company. You want $100,000.
So I do a proper analysis of your business proposal, and I attempt to assign a risk value to it. Investors always do this, because risk is the key variable in new startup investment.
So I decide that you have a one in 5 chance of success. So 4 times out of 5 I’m going to lose all my money. That one time in 5 has to make up for that. Doing the math, you find out that the breakeven point comes if you get back $500,000 if the company is a success (i.e. if you invested in 5 identical ventures, you would expect to lose $100,000 on four of them, so the fifth one has to recoup that $400,000, plus the $100,000 you invested in that one).
But breakeven isn’t good enough. I need to show a profit, and that profit has to be greater than what I could earn putting my money in a safe investment. Let’s say I could get 5% on a T-bill, and that I’m not going to get my investment back from you for 10 years. In that case, My $100,000 is actually worth about $169,000. So I’m going to need $845,000 in return if you are successful, just to get on an even playing field with a safe investment.
Now… Let’s consider what happens when we add a 35% capital gains tax. Now, I lost $100,000 on four of my investment ventures, so I can call that a capital loss and deduct it from my gain, and I can deduct my original $100,000 investment in yours. But that leaves $345,000 in ‘capital gains’. But notice I’m not really gaining anything over just leaving my money in the bank, when you factor in the additional risk I took. But now I have to pay $172,000 of that money to the government, leaving me worse off than if I had just not invested at all. So sorry, poor person, you’re not going to find an investor.
In this way, capital gains taxes bias investment towards safer opportunities. That punishes the people who don’t have connections, who don’t have Ivy League degrees, who don’t have a track record of starting successful businesses, and who don’t have capital of their own.
Well, people with connections obviously have better opportunities under any possible construction. I don’t see that the tax rate makes additional difference.
Similarly, people with a successful track record or relevant credentials are also always better positioned.
A shift toward safer opportunities, certainly. But I don’t see that that’s a bad thing. I don’t see that government should be in the business of incentivizing speculative investment with preferential tax treatment.
I like the 0.1% financial transactions tax. Applying that tax is practically like picking money up off the sidewalk.
It applies a disincentive to people who make a lot of trades. And that’s basically a good disincentive. I’m sure Sam Stone can come up with one example where it’s a bad idea, but for the most part people who buy and sell stocks frequently are treating Wall Street like a casino, and are making money off the swings. If less of that happens on account of a 0.1% tax, well what a shame.
