Rich Party/Poor Party

Great Debates
21

puddleglum: * He [the hypothetical Rutherford Gotbucks] inherits 200 mil and pays 100 mil in taxes. Instead of putting the money into the stock market or real estate he puts it into the bank and lives off of it the rest of his life. *

Oh, do rich people stop investing their money when top tax rates hit 50%? Fascinating. I wonder why we didn’t see that happening when top tax rates were as high as 70% prior to the Reagan cuts.

Because he did not put it into the markets companies can not use it to grow and people can not live in the real estate. Gore can proclaim, because of my plan there are fewer homes for people to live in and fewer jobs for people to work at

Even if this implausible scenario were true, we’d still have the hundred million Mr. Gotbucks paid in taxes. We could help a lot of small businesses and homebuyers with that.

I swear, this gets amusing sometimes. puddleglum, do you really believe that economic prosperity is fueled primarily by this country’s billionaires and half- or quarter-billionaires, and that if their taxes were higher, they would just stop participating in economic activity? If so, why?

22

Even if your premise is true that putting money in the stock market has the same effect as putting it in the bank there is 100 mil less money to be invested.
The higher the tax rate on succesful investing the less investing happens.
Example you have a chance to invest in a company that has a 3 to 1 chance of failing. However if they succeed you will receive 5 times your original investment.
Would you invest in such a company?
How about if the company succeeded and you got your money you then had to give half to the government but if you lost your money you lost all of it. Would that factor in your decision? It should.
Is it coincidence that ever since Reagan lowered the tax rates we have had unprecedented prosperity?

23

puddleglum: Is it coincidence that ever since Reagan lowered the tax rates we have had unprecedented prosperity?

!!! Is it selective memory that you omit the painful recession of the early 90’s?

24

No, but I also remember the tax increase of 1990.

25

puddleglum do you really believe it’s appropriate for my not-so-hypothetical Mr. Gotbucks to avoid taxation entirely in the scenario I have described above?

Do you think it would be fair to have a system where those who earn their income by working for it have to pay taxes, but those whose income derives from inheritance and investment would pay no taxes at all?

That is precisely the system that Bush and his fellow Republicans are proposing.

See, this is why it drives me mad when Greens say that there is no difference between Democrats and Republicans. Here is a very clear and palpable difference that no one seems to be talking about.

26

puddleglum: *The higher the tax rate on succesful investing the less investing happens. *

Why? As far as I can tell, almost all people like to make more money, and they like to invest money where they get the highest rate of return. When stocks pay off better than bonds they buy stocks; when stocks fall, they buy bonds. When they can’t get a 20% return on investment, they settle for 15%, though they’ll always be on the lookout for a chance to get 20% again. I’ve never seen people stop trying to make money just because they get taxed on what they make. What’s your evidence for thinking that they do?

Example you have a chance to invest in a company that has a 3 to 1 chance of failing.
However if they succeed you will receive 5 times your original investment. Would you invest in such a company?
How about if the company succeeded and you got your money you then had to give half to the government but if you lost your money you lost all of it.

Now let me get this straight. In your scenario, I have a chance to invest in a company that has a 3 to 1 chance of failing but will pay off 5 to 1 on my investment if it succeeds. (Presumably, if it fails, I lose all my investment no matter what the top tax rate is.)

You are asking me whether the investment would be more attractive if the profits were taxed at 50% than if they were taxed at 0%. Well, duh! Are you seriously suggesting we should have a zero-percent top tax rate?

And I think your selection of the numbers here is based on statistical ideas that don’t really apply. You seem to be suggesting that because the investment is risky, the rate of return (5 to 1 with zero tax, 2.5 to 1 with 50% tax) needs to be higher than the chance of failure (3 to 1) in order to motivate investors to participate.

Now I appeal to the economists here. Is this a valid criterion to judge the likelihood of attracting investors? I can certainly see the statistical argument in favor of it on a very large scale: that is, if I were making a thousand such investments, I would want their average rate of return to exceed their average probability of failure, so that I would have a better-than-evens chance of making a profit overall. But I don’t see how that reasoning applies to deciding whether to invest in any one venture, because statistical arguments don’t apply to a sample size of 1: if it fails I lose everything, if it succeeds I get either a 500% profit or a 250% profit, and that’s that. Is there any mathematically defensible reason why I should be comparing the rate of return to the chance of failure in this single case?

27

Uh, no. There is $100 million less to be invested by Mr. Gotbucks; there is still $200 million to be invested, half by Mr. Gotbucks and half by the government, which, I imagine, is substantially more likely to invest it in education, housing, shoring up Social Security, defense spending, etc. than Mr. Gotbucks.

Well, not necessarily. No one is talking about raising the capital gains rate, which is now 20% for most investment assets. And even Gore is not talking about raising the marginal estate tax rate, which is 55%. And I don’t see the Purdue family, the Walton family (Wal-Mart), the Gateses or any other extraordinarily wealthy people saying, “You know what? Tax rates are too high. I’m putting my money under my mattress.” Any examples of people who have done this would be welcome.

It depends. Let’s say I invest $20,000. There are 4 chances. In 3 of them, I end up with $0. In one, I end up with $100,000. IIRC, that’s a weighted average result of $25,000 ($100,000 / 4, or a weighted return of 25%), although I’m happy to be corrected if I’m wrong on the math. If this happens tomorrow, I’ll be happy. If it will happen within 5 years, I’ve gotten less than a 5% return - big deal. With capital gains tax figured in (this has nothing to do, BTW, with estate tax), I’m only netting $84,000 ($16,000 tax paid on $80,000 of gain, more tax paid if I hold the asset for less than 18 months).

Yeah, but I have no idea what the hell you’re talking about. If it’s an investment and I survive to reap the 1 in 4 shot benefit, I’ll only pay 20% of my gain in tax. If I die, the asset is includible in my estate, but there’s no certainty that half, or any, of it will go to the government - I’d have to be worth more than $675,000 in the first place, not leave it to my spouse, and not have planned in advance to try to reduce the tax bill.

And frankly, if there was a 1 in 4 chance of success but that success would multiply my money 15-fold, then I don’t think giving the government half of my gain would prevent me from investing (as long as I had the same risk tolerance). Think about it - the only scenario affected is the gain scenario. If you lose your capital, there is no tax effect.

Frankly, puddleglum, your responses do not seem well supported.

And kiffa, [looks down, shuffles feet] thanks. :slight_smile:

28

Oh yeah, thanks kiffa! Gawrsh!

29

I am impressed by all of your mathematical arguements but they all support my premise, namely that tax laws affect the way money is invested. The do this by lowering the reward for succesful investing. This is why countries all over the world are lowering capital gains taxes.
If tax laws get passed that create prosperity for the whole country I could care less how much some rich guy is paying.
Getting back to the OP, when there is prosperity the poor are helped more than the rich in terms of how they actually live their lives. The kind of lifestlye change for 100,000 to 120 is small but to go from 20,000 a year to 30 is a huge difference.
Tax money is not invested by the government it is spent, they call it investing to hide what they are doing but it is spent.

30

A basic principle of economic behaviour is that if you tax something you’ll get less of it, and if you subsidize something you’ll get more of it.

So yes, increasing a tax on investment by 1% will reduce the amount of money being invested by some amount. What that amount is is open to dispute, but it will happen.

There are always people on the margins. There are people who have the option to buy something they want or invest the money, and they are right on the margin of decision making. Any additional tax on that investment will push them over the edge in the other direction.

Not only that, but once you have these taxes, you generally wind up with tons of loopholes. For example, exemptions for primary residences, which tends to divert money away from productive investments and into bigger homes.

31

puddleglum wrote:

Do you think that money spent by the government just vanishes (poof!) into the mist?

Let’s say the government spends $100 million on a mass transit system. The money goes to pay engineering and design firms, and building contractors. These firms then pay their employees, from engineers to mechanics, to the men laying the rail. Those employees, with money in their pockets, go out and buy new stereos, or cars, or take a flight up to visit Grandma in Detroit, and the economy is further stimulated.

Furthermore, the government contractors and their employees are all paying taxes as well, so some of the money gets returned to government coffers where it can be recirculated in other ways. And the guys who sold the stereos and the cars and the flights to visit Grandma have to pay taxes as well.

Government spending is not the black hole you imagine it to be. It stimulates the economy in the same way that private spending does.

32

Spending, public or private does not stimulate the economy like investing does. Example: if I have a 100 dollars and go by lemonade with it, I end up with 100 dollars worth of lemonade. If I buy lemons and sugar with it I can make a sell 150 dollars worth of lemonade, I have just created 50 dollars worth of value.
This is a very crude example but still illustrative.

33

Spider Woman, with all due respect to you and your Dad, the problem is not with a given Political party (both major parties are filled with empty promises), but with people who believe the Government will decide if they get rich or stay poor. Nonsence. The goverment should have a role in keeping the piece, and providing a safe place for us to live and work. The rest is up to each person.

I understand all to well that some have it easier than others, and that even after a lifetime of struggling some are left with little. But it is not the Government who will change that for most, only their own abilities. (Again, the Government can and should try to give us the ‘level palying field’).

Did the people receiving welfare suddenly become rich when the Democracts were in power? Did anyone other than Big Money people make big money from Government contracts?

Anyway, I’m sorry to rant in GD, but to answer the OP I wanted to give you some background first - If George Bush is elected things will not be much different than if Al Gore were elected. (Although I’m hoping W is elected and does introduce some of the changes he is promising).

34

I printed out the thread thus far and will take it to my dad to read. This is what he hoped to accomplish, to get people talking about this. Thanks again.

[See ya at the limerick thread, trade!]

35

Ah, the ol’ “Trickle down” economics. That if you increase the wealth of the rich, it will trickle down to the poor.
Horseshit.

Call me a total, die-hard, bleeding-heart liberal. I don’t care. I’m too influenced by my father, my mom (who hated Reagan), and my academic advisor, plus by working at KrapMart for a living.

I was reading an article today in New Republic, about how Bush’s tax cuts will affect the poor worse, because the cut is on estate taxes and income tax. Many of the poor don’t make enough to pay income tax, so the cut doesn’t affect them. HOwever, they will still be paying the payroll tax.
Nice, eh?
I think that the best way to stimulate an economy is to have a nice, healthy middleclass group. A consumer group. Not a bunch of rich thugs, and some little peons.

And don’t even get me started on the happy horseshit from National Review.

I am SO my father’s daughter. AAAAAAHHHHHHHHH!!!

36

You think a mass transit system isn’t “value added?”

37

No, goddam it, you couldn’t care less. If you could care less, then you really do care.

[/rant]

So - do you think that the government “purchasing” a mass transit system doesn’t add value? Do you think that the government “purchasing” defense systems doesn’t add value? Whose money keeps much of the defense industry alive?

Of course, we could have no taxes at all. We could also have no government. This does not seem to me to be a valuable contribution to the discussion. Of course taxes affect behavior. The goal of most people debating this (including W, to give him his due) is to strike a balance between the marginal tax rate paid and its effect. That is, you try to make the tax sufficiently high to generate revenue while minimizing tax-driven behavior. It seems to me that a 20% capital gains rate is not so high that it would negatively affect behavior. It also seems to me that a 55% marginal estate tax rate on the dollars over $3 million is not such a disincentive - historically, it’s on the low side, having been as high as 70% earlier in the century.

38

Great minds and all that…

39

A mass transit system can be value added but not to the same degree as private investment. If it were private companies would build it.
Trickle down economics is a perjorative description of a policy that has worked every where it has been tried.
The best way to build a middle class is good paying jobs provided by a prosperous economy not transfers of wealth from the productive to the unproductive.

40

puddleglum: The best way to build a middle class is good paying jobs provided by a prosperous economy not transfers of wealth from the productive to the unproductive.

That sounds to me as though we should avoid letting productive people who’ve made oodles of money transfer their wealth to their unproductive coddled offspring: in other words, we should tax their estates. But you are probably equating “productive” with “well-off financially” and “unproductive” with “not rich enough to invest”, which is a common, though erroneous, way of characterizing class differences.