foolsguinea, you still have not answered my questions in post 34. Might want to do that before snarking on tangents.
One oversimplification of the Laffer Curve is the presumption that taxation is a dead loss- the government steals your money and you’re that much worse off for it. In reality governments use tax revenue to pay for useful things like security, schools, public infrastructure, etc. that economically are externals to the profitability of a business. Even welfare can arguably be better than having mobs of rioting poor people torch cities on a recurrent basis. One argument for universal health care is that US companies are having to compete with companies based in countries where the government picks up the health care tab. As one person put it in a 60 Minutes interview about France, the taxes there are very heavy “but we get to live in France”.
Lumpy, the idea of deadweight loss is not that taxation is taking from individuals to give to the government - if that was all that was happening then it would be called a transfer. Deadweight loss is when people don’t do something that they would have done if the tax did not exist. For example, if I am willing to pay up to $12 for a $10 T-shirt, but there’s a $5 tax on it, then I won’t buy it, even though I could have paid up to $12 and made myself, the manufacturer, and the government all better off. There are clear analogies to purchases as a whole, and to hours of labor.
That is a poor argument, because companies are simply giving part of their pay in the form of health insurance coverage. If there was a national healthcare system, then they would convert this part of pay back to dollars…but then taxes would have to be higher to pay for healthcare, leaving national competitiveness unchanged. (Indeed most jobs where you can relocate between countries are high paying, in which case the workers would be worse off because UHC advocates favor progressivity, ie socking the rich.)
If you think that UHC can make healthcare cheaper but not lose quality, then that would axiomatically improve welfare, but the proposals on the table, such as HR 3200, do not do that. (And saying “Well, France manages it” is flawed because of different populations. What matters is the relevant tradeoffs we face.)
I would argue that your position is the gross oversimplification, not the Laffer curve. And either charmingly naive or intentionally disingenious.
It assumes there was no better alternative for investment than what the government used the money on…which is laughable on its face.
For example, the Federal Dept of Education didn’t even exist until the 1970s. Since it’s inception, it has spent $100s of billions of taxpayers money. I would argue that it has accomplished nothing, and probably has made matters worse.
For arguments sake, lets say that $300 billion in constant dollars has been spent on the Dept of Education. That’s $300 billion that could have been saved and invested, and instead it was squandered. Do you know what $300 billion could do in the pockets of smart entrepreneurs, savvy business bankers, or successful venture capitalists? Create oodles of jobs, that’s what.
Your post also assumes that the tax dollars spent on public education are generating more educational ‘value’ than if they were simply returned to the citizens, who then spent their own money on educational options via their own choice or vouchers. The atrocious state of the public schools in just about any major city, where per capita student expenditures often top $15,000-$20,000 per year, should put this assumption to rest.
Finally, your welfare point takes the alarming position that taxpayers must somehow bribe their fellow citizens not to become lazy thugs, take to the streets, and threaten their life and liberty via extortion. What that says about the nature of people on welfare would play right into the hands of Pat Buchanan or any right-wing conservative. I’m going to guess that’s not what you meant. But that’s the logical conclusion from your post.
In short, your post assumes that the government creates value superior to what private investment could create, and that everyone on welfare is a latent criminal, just waiting to go on a murderous spree if not sated into a state of permanent government dependency.
If that’s the case, we should just give the government all of our money, since that would create more jobs, more wealth and a better society. The Soviet Union and Mao’s China tried that already. It didn’t work.
That doesn’t seem to contradict what Lumpy was saying.
There is a deadweight loss to taxation, but there are similar distortional effects from the underproduction of other goods which the government could provide. That’s the essential idea behind public goods and other markets with positive externalities.
It isn’t laughable when you put it in a realistic context.
You can pull a hypothetical entrepreneur out of the air to wave around, but I can then point to the recent example of people using their private funds to bid up asset bubbles to dangerously high levels. There certainly is a better use for a lot of the money that the government spends, but there’s also a better use for investment than building houses no one wants to buy. That private markets are efficient in many situations does not mean that the government isn’t sometimes a better choice.
More than that, you don’t have to believe that poor people are inherently “lazy thugs” or any such ridiculous nonsense to recognize that desperate people will act in desperate ways, and that providing some stability to the system is good for everyone. Suggesting a few relatively modest measures to ensure stability doesn’t require a Soviet state, and it’s a silly false dilemma on your part to suggest otherwise.
The housing bubble was directly caused by an excess of borrowed money. As all unsustainable asset bubbles are.
Those bubbles were not created by people putting their own capital at risk. They were created through leverage, by borrowing, and by offloading assets to Freddie and Fannie to ‘re-use’ their capital for more borrowing.
The fractional reserve system, the cost of borrowing for banks, and the creation of Freddie and Fannie were all created by, managed by, and regulated by, the government.
Fannie and Freddie weren’t exactly a crucial factor in the housing bubble and weren’t responsible for the meltdown of the financial system, they’re just another playa. Government did not create fractional reserve banking, bankers did. Banks have always paid a borrowing cost from their bondholders/investors and each other before the advent of central banking. F and F were indeed created by the government but aren’t relevant in this at all really. The problem we have isn’t government, it’s the absence of government. If government was doing its job everything would be chill.
If I lend money to an organization that puts that money at risk, then yes, I am putting my own capital at risk. Asking another person to gamble it for me does not change the underlying nature of the risks that were taken.
And the Fannie & Freddie complaint is just a red herring, as Dick Dastardly has already noted. F&F did not lead the revolution. They were followers, drawn into the subprime world by dwindling market share after their initial refusal. They were pressured to adapt to adverse market conditions, and in doing so, they did make the situation worse, but it was Wall Street that originally screwed up by doping up on so many poor loans and skewing the market, as even a cursory look at the timeline will show.
F&F were moving away from the market just when it was starting to get dangerous, at least until they felt they had no other choice but to take the same plunge that Wall Street was doing. This New York Times article has the same information, with a bit of spicy drama added:
Emphasis added.
Fannie had lost so much market share precisely because it was smarter than Wall Street at the beginning and knew how worthless these loans were. This commendable resolve eventually dissolved, and they joined the bandwagon, which of course contributed to our present problems. But those problems were started by market failures in the financial system, which is to say, people using their private capital poorly.
The fractional reserve system, as already pointed out, was created by banks. It was regulated by the government after the bankers fucked up and lost all their depositors’ money (which was gold deposits, back in the day). This happens to be a regular pattern: the government steps in to regulate after private markets cause extensive damage to countless people.
And the cost of borrowing is only indirectly set by the government in its control of the federal funds rate through its open market operations. Banks charge a premium on their own loans above and beyond the base rate based on the risk of the loan and other profit-related factors. The Fed isn’t directly responsible if all of Wall Street decides that the loans they’re slicing and dicing are magically low risk because, hey, home prices always go up. That was a failure of the market to correctly determine the risk of the shit loans they were giving out. And the entire reason that these institutions had such unwieldy leverage was that regulators like Alan Greenspan thought the companies could look after themselves and their shareholders’ value without governmental oversight. This belief in the efficiency of the financial markets is the same reason why he felt comfortable in keeping the federal funds rate so low.
He was wrong to do so, and his mistake demonstrated that the financial markets don’t actually function efficiently without adequate regulation.
This important lesson is further emphasized by the stark contrast between the unregulated shadow banking system, which caused our crisis, and normal depositor institutions, regulated by the FDIC, which remained relatively stable.
The problem with this thread is that there seems to be an unstated assumption that the correct policy is to maximize the amount of revenue government can extract from society.
The real question is, ‘what is the appropriate size of government?’ Only when you know that can you reasonably talk about the best way to raise revenue to pay for it. If your attitude is simply that so long as you can extract money from the economy you should do so, you’re opening the door for a very large government.
There is very strong evidence that government should be significantly smaller than it is now. If you plot economic performance against the size of government for all the OECD nations, you see a very strong correlation between larger government and reduced economic performance - even as low as government sizes of around 25% of GDP, which the majority of governments exceed today.
This relationship also holds when you study the economic growth rates of individual states - states with smaller governments as a percentage of GDP outperform the ones with larger governments. And the same relationship also holds with Canadian provinces.
So there are really two questions here. The first is how big government should be in the first place, and the second is how progressive the tax system should be to pay for that government.
As far as progressive taxes go, revenue maximization isn’t the only thing to consider. There are good reasons to believe that it’s very dangerous to have a taxation structure in which a majority of the voting population pays little to no tax. Once you get to that point, there is very little incentive for lower and middle class people to vote to restrain the size of government.
As of today, the top 1% of people in the U.S. pay over 40% of all taxes - the highest percentage in history. And a disturbingly large percentage of the voting population pays no tax at all. This is a dangerous combination.
Finally, looking at the effect of high marginal rates in the 20th century are not necessarily indicative of what will happen with high marginal rates today. Capital is much more fluid now, and the economy is more globalized, and therefore the rich will find it much easier to move their money to lower-tax jurisdictions. In addition, deadweight losses from business taxes are much more likely to put the taxed businesses at a competitive disadvantage in a more globalized world.
I would disagree that that is an unstated assumption in this thread.
I also wouldn’t agree that there’s “strong evidence” about the relationship between government size and economic growth, although I’m not going to summarily dismiss the idea.
Countries, and I’d guess even individual states, which can afford larger governments also tend to be the most developed, and so are already pushing at the boundary of growth. It’s possible for a developing country like China to grow 10% a year with the right institutional set-up, but the US will not manage that sort of growth again absent another technological revolution.
That’s incredibly misleading for two reasons.
First, everybody pays taxes. A goodly chunk dodges federal income tax, but they sure as hell don’t all dodge FICA, property taxes, state income taxes, sales taxes, etc. Yeah, federal income taxes are progressive, but that progressive structure is mitigated somewhat by the effect of other federal and state taxes.
And next, saying that 1% of the population is paying 40% of taxes is almost entirely meaningless without knowing what percentage of the national income those people are raking in. If these one-in-a-hundred types are paying 40% taxes, but also taking home with them 40% of everything made in the USA, then they’re paying a flat tax. Which in practical terms favors the rich, when you consider that the marginal value of an extra dollar is a lot less for Bill Gates than it is for a struggling low-income family. Because of this, there are arguments that can be made that taxation should be even more progressive than it currently is.
When I addressed this in another thread, I pointed out that the relationship even holds between equally developed countries. For example, the U.S. vs Canada, Australia vs New Zealand, various countries in Europe. It holds even when both countries have fairly large governments (i.e. countries with governments that consume 40% of GDP outperform countries where the government is 50% of GDP).
And again, the correlation exists between the U.S. states and Canadian provinces.
Government brings with it a lot of deadweight losses, which is why big governments under-perform smaller governments.
People keep bringing up FICA taxes, but since those are ostensibly supposed to be a personal retirement savings program, I don’t see that they are relevant. Property taxes largely go to paying for local services. We’re talking about federal government programs here, and the pernicious effect of a system whereby the majority of people voting for federal benefit programs do not pay federal income taxes.
You’re talking about ‘fairness’, whereas I’m talking about a problem of incentives. Totally different issues.
That sounds interesting. I’d like to look at your cite.
You’re asserting a pernicious effect, not demonstrating it. And there are excellent reasons to believe it’s a bunch of hooey.
Tax incidence is what it is. In the end, you’re trying to argue that a large segment of the population will have a substantially different attitude toward the government because the money from their monthly paycheck is disappearing from this box instead of that box. This is a risible belief, born from momentary convenience. There’s no reason at all for me, or anyone else, to believe it’s true. All you’ve got is the ostensible rationale for different lines on our payslips based on a long past political compromise that very few people remember or care about. Frankly, I doubt most people even pay attention to state versus federal, let alone FICA versus federal withholding.
I’m talking about efficiency. I’m just approaching it from a different angle.
If you need to tax, then you should minimize the cost of that tax, and given the vast disparities of income that exist between people, calculating this cost accurately would have to take into account the diminishing value of additional dollars. Is that the only concern? No, of course not. There’s deadweight loss, long-term growth, and so on and so forth. This is just one piece in the puzzle, but it is still relevant, a fundamental part of human nature, otherwise we’d all treat a 100% chance of 5 million exactly the same as a 50% chance of 10 million. We don’t do that, and there’s no need to rely on abstract notions of ‘fairness’ to recognize that the first windfall is much, much more valuable than doubling it. It’s just how people work.
Of OECD countries I think Norway has the second-highest GDP per capita after the US, and Mexico comes closest to the US in terms of taxes as a percentage of GDP. You can also look at countries like Burma or Somalia which have a really low level of taxation/GDP but who aren’t doing very well economically.
Comparing ststes or provinces within a country is disingenuous, it’s the kind of thing the Heritage Foundation or Cato do to claim lower taxes create jobs. You’re obviously going to get some states that attract new jobs by offering less costs to businesses for locating there and you can easily write something that passes for an academic study claiming that low taxes/less government create economic growth, but it’s just companies shopping for the best deal within a certain country, they’re still locating in that country.
Business wants to locate in wealthy high-infrastructure countries with big markets for their goods and lots of people who can afford them making America the number one destination of companies who are expanding from their own country for the first time, closely followed by the EU. The costs of doing business are not generally a factor in this as they’re immeaurably outweighed by the potential profits of locating in a relatively high-tax environment like America rather than a low-tax environment like Pakistan. In low-infrastructure countries trying to become big global players like India, the lack of national infrastructure that you find in low-tax revenue nations is actually seen as a problem, and they’re all busily growing their tax base to provide more national infrastructure.
And in general even the lowest quintil pay about 20% of their earnings in taxes. People in the highest quintile pay a little more, while the top 1% take home well over a third of national earnings and havr doubled their share of national income since Reagan. It’s a certainty that these people have to start paying more taxes at some point in the future, there’s just no other option.
EDIT: spelling, had a couple of drinkies 
First off, to not acknowledge that Norway is an extreme case that rightfully ought to be left off of any comparison is just plain wrong. Norway has a huge amount of oil and gas wealth per capita, and is also socking away a lot of money for the day when their oil will run out, and it is running out. The notion that this huge amount of per capita GDP is somehow due to the high tax model is absurd. Same goes for their surpluses, plus the ability to sustainably fund lots of social programs.
Secondly, it makes no sense to compare countries at different levels of economic development, when what we’re looking at is the growth effect of economic policy. So instead of your bizarre pairings, I nominate Sweden, Denmark, and Finland vs Ireland, Hong Kong, and Singapore. For a comparison among large-population countries, I nominate the US, UK, and Australia vs France, Germany and Italy.
It is true; the Laffer Curve is a phenomenological explanation of what happens. It readil explains the huge growth of the “underground” economy-where wages are paid, and work performed, all without taxation. Why is there so much cash in circulation? It is because tradesmen will readily give you a huge discount, if you pay in cash. As taxes rise, the government wil try to circumvent the underground economy-they will probably try to eliminate the $100 bills-but the UE will continue to grow. I just got an estimate on a tiling job-the guy would take 50% less for cash-retty good verification of the truth of the Laffer Curve.
So take Denmark instead of Morway then. Same high taxes, same cradle-to-grave welfare system, same economic growth.
http://ic.pressflex.com/249.pressflex.net/images//924.photo.jpg
And just because a country has lots of oil doesn’t mean anything. Arab countries have most of the world’s oil and almost no taxes but their combined GDP is less than Spain’s.
Ireland has the same taxation level as the UK. Using Hong Kong and Singapore, two tiny states but huge commercial and banking hubs as examples is much less fair than using Norway as an example. The bottom line is that there’s no correlation between taxes and economic growth.
Both Norway and Denmark (which has its own considerably natural resources) have extremely high social cohesion, and unified and highly educated populace, and relatively few international obligations. In short, as nations, they are successful on a small scale. Quantity is a Quality all its own.
And if Europa Universalis teaches us anythihng, it’s a whole 'nother ball of wax to match that as a large, diverse, economically complex country.
Grey money is one of the problems (or is that a feature, not a bug?) of the Spanish economy. Many people get part of their income in taxable “white,” part in “black,” either from a different or a single source. I’m talking about people at all levels of the economy, from bricklayers to heads of corporations or politicians.
From an employee’s point of view, advantages of maximizing black:
- less taxes,
- easier to suckle on the government’s teat, from government-sponsored housing to college fellowships
Disadvantages:
- some government benefits (for example unemployment) are calculated based on white,
- if your employer cuts off black, your choices are “suck and grunt” or the classified ads
For an employer, advantages:
- employers who pay black are also charging black; also some taxes (the employer’s part of Social Security) are based on white pay. So, less taxes
- it’s a blackmail tool
Disadvantages for the employer:
- double accounting is a female dog, it really complicates things
- and it’s illegal. Just. A bit. Illegal. One of the fastest ways to make anybody angry is to touch his income, the government doesn’t like it when you do it to them, either.
Note that something like a student who gets pocket money from tutoring isn’t considered “black,” unless the student also has a second job which would make that pocket money taxable.