The logic of tax cuts on the rich.

Politics & Elections
81

k9, with all due respect, I’m just not buying what you’re selling. Walking me through your opinions on why tax increases will cause the wealthy to cut personal income and expand growth is just plain contrary to mainstream economic thought, on both the left and right.

For example, economic liberals protest the conservative idea that higher taxes make people less interested in additional income, because even if someone only takes home 60 cents on the dollar, they would typically want the 60 cents rather than go without.

What you’re claiming is that the incentive is actually opposite for the super wealthy: that they are more interested in avoiding taxes than profiting. This seems to be an assertion that for 99% of taxpayers, the liberal model holds; and for 1%, the conservative model holds.

Granted I am simplifying your points, but extraordinary claims need extraordinary evidence. I think you should provided cites for your assertions that higher taxes on the wealthy results in the wealthy cutting their personal incomes and generating broader economic growth. Whether those cites are specific or general in nature, I defer to you - but I ask that they be on-topic (eg, a general cite that people sometimes act not in their own self interest doesn’t actually demonstrate what you are claiming.)

82

Hardly. I go without money I could earn. You probably do too. After the feds and locals are through with me, I only bring home ~$0.60 for my next dollar earned. Right now I choose to earn less than I could and take more time off, because the value of my marginal time exceeds my marginal income.

I live in a two-earner household. So do a lot of other folks, who factor childcare, pet care, laundry, cleaning, food prep, etc. into the cost benefit analysis of whether the lesser earner should bother working. Or how much he or she should work. And that analysis includes taxes.

83

No, I am following it pretty closely. It’s not that it’s complicated; it’s just that it doesn’t make a lot of sense.

You said -

And I asked -

Now you appear to be saying that -

OK, so you don’t think it will raise much money, but rather encourage investment.

So far, I follow you. What I don’t follow is how someone who is making $600K a year after taxes will voluntarily make $550K a year in order to avoid paying $100K in taxes. Why is that worth $50K a year to me? I have that much less after-tax income.

In 2017, the United States ranked 13th of the top 15 countries in yogurt exports. (Cite.)

Is that a sign of progressive tax policy?

Regards,
Shodan

84

Culture.

85

No… I was replying more or less to **septimus’ **comment that we tax the rich because that’s where the money is.

And what I was curious about is whether or not that’s where the money actually is, at least in taxable forms. Just because someone has a lot of wealth, that doesn’t automatically translate into a similar income.

An extreme example might be Warren Buffett, whose 88 billion dollar fortune is primarily in Berkshire Hathaway Class A stock, which doesn’t pay dividends, and nor is he selling any. His listed salary is $100,000(!). How exactly are you going to tax him for being rich if he’s just hanging onto a bunch of stock worth a lot, but not actually realizing that income?

86

Buffet’s income is over 100x his salary.

87

Of course people will not prioritize income over everything else in their life. The point I’m addressing is that changes to tax policy, unless those changes are extreme, generally don’t have major consequences in terms of people avoiding income.

So, to say another way:

  1. Joe doesn’t want to stay an hour later at work and get another $40 on his paycheck because he wants to spend time with the kids.
  2. Joe doesn’t want to stay an hour later at work and get another $38 on his paycheck because he draws a firm line that his time is worth $40, tax increase be damned.

No. 1 happens all the time. No. 2 is kind of nonexistent.

See the difference between the two scenarios?

88

Do you have any investments, or do you spend all the money that you earn? If the latter, then I can completely understand why you are not following.

If the former, then it seems that this should make sense to you that people will forgo some money now, in order to have even more money later. If they are paying a higher tax rate on extracting their money, then rather than extracting it and putting it into mutual funds or hedge funds or foreigner investments, they leave the money where it is, rather than paying a higher tax in order to move it.

When it comes to personal consumption, there is also the difference between liquidating assets or using them as collateral.

If you are worth a billion dollars, and you want to buy a 50 million dollar yacht, you can either liquidate 50 million of your assets in your company, or you can borrow that money. With a billion in worth, you are a well qualified borrower, and will pay a very low interest rate. The level of tax you pay on extracting money from investments you own has an effect on how much you borrow vs liquidate in order to make purchases like that.

Also, as far as personal consumption, if it costs more in taxes to extract money from your company, then maybe you won’t buy that $15 million painting.

If you voluntarily make 50k a year less, and 20-30 years down the line, leaving that money in the company means that you have much more money than you would have if you had taken it now.

And, once again, note, I am talking about people that make much more than that. People that actually own and control vast amounts of our nation’s means of production. Incentivizing them to use that means of production to grow the economy, rather than extract the wealth from the economy and move it to China or another developing areas will provide jobs, as well as goods and services that can be afforded by the people that have jobs.

89

If he’s not realizing that income, then that means that that money is still being used as capital for the growth of the economy.

But, if you raise his taxes,then he may invest some of his earnings into a 401k or roth style investment that lowers his taxable income, bringing his marginal rate down to where he is making $40 an hour again.

Which is my point. I’m not suggesting that the wealthy skip meals in order to afford to pay their taxes. Whether they extract the money or not, they will be worth about the same amount. But, if the money is in a company that they control, then they have control over that wealth. If they want to grow their wealth, then they need to direct the companies that they control to create wealth.

If taxes are low, then if they want to grow their wealth, they can direct their companies to extract that wealth.

Extracting wealth is not sustainable. Eventually, the company no longer has the capital it needs to function, much less grow or adapt to changing markets. Creating wealth is sustainable, and leads to the creation of more wealth.

90

k9, I understand your opinion. I’m asking for cites that support it, because I don’t think economists agree with you.

91

Wealth isn’t income (though they tend to be correlated) and I’m sorry if I caused confusion by appearing not to know that. Anyway, much wealth accumulation is initially taxed via corporate income taxes.

And, although now it mostly just affects billionaires, and multi-millionaires with bad tax accountants, there is the estate tax. I guess that tax will mostly be waived for Mr. Buffett’s estate, which mostly goes to charity. (With the foxes now ruling the hen-house I wonder what new “charities” have been devised. The status of the Donald J. Trump Foundation is under review due to “the persistently illegal conduct” of Trump and his three oldest children.)

Taxation is a complex maze. Even if we could somehow re-design from scratch there may be no simple “optimal” way to tax. All we should hope to do is to gently nudge the existing tax system into better directions.

Perhaps in some countries, raising taxes on the coddled working man to ease the burden on billionaires would be good public policy. But I’d want to see cites before I’d put the U.S.A. into that category.

92

I’ll play around and see if I can find specific cites. This is not something that I came across as a specific formula, but something that has come from years of reading opinion pieces by economists, including contemporaries like Krugman, Shiller, and Summers, as well as old schoolers like Smith, Keynes, even a little Marx, as well as my personal experiences with growing a business, and how taxes modify my decisions, along with discussions I have had with other business owners (nearly all very conservative) in my area, combined with the experiences I have had working for many, many different companies that were in different stages of growth or wealth extraction.

So, sure, we can agree to disagree that taxes have an effect on how wealthy people invest their money. Even if I had a direct quote from Krugman saying, “Increasing taxes on the wealthy stimulates the economy.” that would still be challenged, as he has not always been right.

But, this whole thing has been one of several points that I made earlier, that have not been addressed, and I am curious as to whether you object to them as well.

Debt does have an effect on the economy, in that higher debt means higher interest rates, which means more saving and less borrowing, which means less spending, which means a slower economy. Reducing revenue increases debt, increasing revenue can decrease debt, which means lower interest rates, less saving and more borrowing, which means a stronger economy. Do you disagree with that reasoning for taxes on the wealthy being responsible for stimulating the economy?

I also pointed out the indirect effects of having room to cut taxes when stimuli effects are desired. This is indirect, and is less about stimulating the economy right now as it is trying to have tools to keep the economy healthy in the future. Do you disagree with this as well?

You also agreed that cutting taxes on the lower economic classes and increasing spending stimulate the economy. If you want to do that without increasing debt, you have to increase taxes on someone. So, it is an indirect effect, but raising taxes on the wealthy allows you to lower taxes on consumers, and/or spend more money in the public sphere, both things that stimulate the economy.

We’ve gone back and forth on the first point, which I personally think is pretty straightforward cuase and effect, but that is the only one that you have challenged. Do these other effects of changing the tax rate on the wealthy seem to make logical sense that they would improve the economy to you?

93

What I’m saying is that I don’t even think Krugman supports your contention, whether or not he is right.

I disagree because the crowding out effect I think is mostly a theoretical boogeyman in the US economy. Whereas the impacts of tax increases on consumption are real, to be sure.

I think cutting taxes during an economic expansion is positively insane, especially considering the cronyism underlying the recent tax cuts. I also don’t think that cutting taxes during a recession does very much, because additional spending is typically much more effective.

I’m not buying the premise of the question. There’s nothing wrong with a country accumulating some debt during downturns if there’s otherwise a reasonable fiscal policy in place. In good times, I also see nothing wrong with tax reform, not as an issue of stimulating the economy, but as a matter of economic fairness and maintaining a progressive tax system.

I challenged one aspect of the OP because he’s so clearly wrong. I see nothing wrong with raising taxes on the wealthy as a general matter, in furtherance of several other worthy policy goals (fairness, good fiscal policy, etc). But I don’t believe that increasing growth is a reasonable outcome of increasing taxes on the wealthy, no more than raising taxes on them would increase world peace, eliminate racism, make kids eat more vegetables, or many other salutary policy goals that are in fact unrelated to the matter at hand.

94

I was mostly just curious; I hear a lot of “Tax the rich- those plutocratic bastards!” without much regard to whether or not there’s much actual income there to tax, or often, much of an understanding of how wealth vs. income actually works.

In the case of Warren Buffett, his actual reported income was 11.6 million. Which is a lot, but also a lot less than you’d think for someone worth something like 82 billion dollars.

95

Who said anything about “extreme” or “major consequences”? You wrote: “economic liberals protest the conservative idea that higher taxes make people less interested in additional income”. If it happens in the extreme, wherever that is, then we’ll just see less of it with smaller changes.

We can play the same game with prices. I may not notice a nickel difference on a tub of ice cream, but I doubt anyone is going to come here and try to tell us that supply and demand stops working once we get away from “extreme changes”.

Rational behavior toward compensation changes isn’t exactly exotic economics. Here’s CBO on it: How Taxes and Transfers Affect the Work Incentives of People With Low and Moderate Income | Congressional Budget Office

I pulled* a few other studies. We’re not talking about huge elasticities here, but if you think they’re zero and actually have evidence for it, hie thee to your favorite peer-reviewed economics journal! Because this one is a sure-shot.

The thread is about rich people but it’s poorer folks where we can see the most extreme marginal rates after transfer programs like SNAP are taken into account. Marginal rates can approach 70%. Never mind poorly designed programs with benefits cliffs where the effective rate exceeds 100%.

Now as to whatever k9bfriender has to say about shifts to investment or whatever, I can’t help either of you.

  • DOI:
    10.1257/jel.49.4.961
    10.1257/jel.50.1.3
96

:confused: Neither Class A nor Class B shares of Berkshire-Hathaway pay dividends. To an innocent bystander the difference between Buffet’s wealth on New Year’s Day 2018 and his wealth the year before might give an indication of how well he did in 2017 but of course it has nothing to do with what’s entered on Line 37 of Form 1040.

Some on the right wing seem sad that the top 1% of American households earn only 22% of the country’s personal taxable income. I hope that focusing on the huge amount of unrealized capital gains NOT reported on Lines 37 will help assuage that grief.

97

First, I didn’t say the effects are zero, nor do I agree that a 1% tax increase provides 1/100th of the economic effects of a 100% tax increase (as you imply in the last sentence of the first paragraph).

Second, forget this quibbling, and let’s talk about the main point: do you think tax increases on the wealthy creates economic growth? If not, then you and I are in agreement.

98

These are your words, not mine:

That is incorrect, as I have explained, and as mainstream economists have measured and modeled. Increasing the marginal tax rate decreases the value of marginal labor, which is competing with any number of other uses of marginal time. What’s interesting and IMO worthy of continued study is what exactly those elasticities are and how they vary for different economic groups.

That doesn’t mean k9 is right. He probably isn’t, but his arguments aren’t coherent enough for me to bother addressing.

If someone comes here insisting that all supply curves or demand curves are linear, let me know so I can come poke fun at them.

99

I think you and I are actually on the same page. When you quote me using a dozen words to describe a complex phenomenon, of course my statement can be refined, further explained, and caveats added.

More precisely, the first quote you used about “more money is always more money” isn’t meant as a total rejection of tax impacts on work. Please refer to the context of the argument k9 and I were having, in which he was arguing that the rich will cut their personal income drastically because of a relatively modest increase in their taxes. I was saying that the rich won’t do that, because more money is always more money, and people would be crazy to reduce gross personal incomes by $100k or more in response to a $50k increase in taxes.

100

Some do, some do not. Leaving money sitting in a bank does not earn them much money.

Some do, some do not; the successful ones do. Actually, I think that’s not a good question: I think you should be asking if investment in companies goes up and I don’t have an answer for that. According to the OECD Business investment as a share of GDP is 13.3% in the US and 9.4% in the UK.

What do you mean by higher value activities?

The owners, of course.

You might find this article of interest. It’s Canada-oriented, but references America a lot.