Asymmetrical Information

"There is some level at which taxation becomes confiscation, and I'd argue that when you are working more hours for the government than you are for yourself, we have crossed that bright line."

We cross it well before we reach that point, dear. When the threat of terrible penalties is required to effect partial, grudging, deceit-riddled compliance with the tax laws, and when a web of interlocked industries with no productive end in view grows up around the practice of tax avoidance and minimization, you may be sure that we crossed it long ago.

"Pharaoh taxed the Israelites in terms of service: 'And the Egyptians made the children of Israel to serve with rigour; and they made their lives bitter with hard bondage, in mortar, and in brick, and in all manner of service in the field.'...As a reckless generalisation we can say that the productive people of the world have discovered from experience that they will always have to yield 10 percent to somebody, whether to a gangster, a feudal lord, or a department of Inland Revenue. It comes to much the same thing in any case. To escape from one tax gatherer will usually mean paying blackmail to another. Up to about 10 percent the exaction is in accordance, it would seem, with a law of nature. When it rises above that level, the time has come for the Israelites to study the atlas. There may be better places than Egypt; and in point of fact there are." -- from C. Northcote Parkinson's essay "Limits of Taxation, or Self-Defeat."

I've always thought that the argument used to defend the progressive tax system (those that have "too much" income should pay more) could be used to take all of your income, whoever you are and regardless of how much you make. It all depends on the perspective of the person who decides how much is too much.

I am an avowed fee-for-service libertarian. While I pay approximately 40% of my income in taxes (all totaled: Fed, State, Property, SS, Sales, etc.) I am also solely responsible for paying all my bills. No help comes my way, directly, from any government agency.

Which makes having to give so much to the state so stinking galling.

Dear Revenue-Generating Galt Unit: Welcome to the world of full-fledged, tax-paying victimhood. I have been handing money over to the Taxstapo in my own name for more than 30 years, and time has not dulled the resentment over dollars diverted to prop up peanut prices, gild the retirement of people better off than I, bribe the Egyptians, support a host of pet causes like the Rock and Roll Museum, subsidize the bumblings of the UN, underwrite underused mass transit, and maintain bases the military would rather close. As Mark Twain said, to imagine that you are an idiot and a member of Congress is to repeat yourself. I wish you all good fortune in your promising career of writology, but urge you as an alternative to lawlessness to support the move for a flat tax on income. When the cost of preserving the State's dead hand falls equiproportionally upon all, then the day of taxpayer revolt and federal-budget liposuction draws nearer.

I'm reading this in Australia with a certain astonishment. I spent some time in Providence RI, and often learnt what a socialist country Australia was, what with its high taxes and a government that set an upper limit to how much it would refund doctors from the public purse. Would someone like to post a link to US income tax scales? Our 48 percent marginal rate cuts in at around A$52,000 - think A$=US$ for these purposes. Some of us think the government needs to provide some tax relief . . .

Hey Jane, Melbourne is a pretty nice city and our financial journalists could use a bit of class.

If you count sales tax, and the employer's SS contribution (as you should) I think you'll find most professionals in NY pay more than 50% of their income.

Respond to incentives. Move.

Ignore the man [BW, above] Jane. Come to breath-taking Sydney instead. New South Wales was always free-trade; those Victorians were the 'protectionists' (all that rain.)

Yea, Axel! Thinking of the problem as "giving money to the government" dulls the argument. Rather, listing what the money is used for, as Axel does in part above, sharpens the argument. Realizing that you are working so that others don't have to work, or so that politicians can build monuments to their shallowness in their home states / districts / towns is infuriating.

Several years ago, a company who's name I have long since forgotten, conducted an experiment with its employees, who were complaining about "low wages". The company set up a series of tables in a long hallway leading to the parking lot on a particular payday. Each employee was paid 100% or his or her gross compensation, in cash, at the first table. At successive tables, they were required to pay, from that cash, the various taxes which were normally withheld from their paychecks. They then left the building with the remaining cash compensation. The experiment had to be terminated prematurely to avoid a "near riot" which threatened to develop as employees realized how large their gross wages actually were; and, how much was being deducted from their gross wages to satisfy the "needs and wants" of government. Merely eliminating withholding would help "the day of taxpayer revolt and federal-budget liposuction" become reality.

I will, however, pick one "nit" with Axel. I have no idea about Axel's income, so I have no idea at what level "gild the retirement of people better off than I" becomes an issue for him. However, as one who's retirement is being "gilded" at the present time, I would remind Axel that I was compelled to pay into the Social Security system at the maximum rate for my entire career, with the "promise" that my retirement would be "gilded" modestly. I was also forced to pay into the Medicare system for my entire career, with the "promise" of healthcare in my dotage (I'm not "doting" quite yet!). The fact that Axel's "contributions" to Social Security and ultimately Medicare will be used to pay for my "benefits" is not the result of any action, or lack thereof, on my part. Whether one believes that my "contributions" are socked away in a "trust fund" from which my "benefits" will be paid, or that these systems are "pay as you go" entities, my time to pay has passed and my time to collect has arrived. I still believe both systems are "Ponzi schemes", but I apparently got in earlier than Axel, so I'll get at least some of my payout.

Move to Florida. No state tax. No city tax. I rent an 800 sq ft apartment for $525 per month (and I live in Central Florida, one of the fastest growing areas in the nation). Everyone else from up north lives here, so it will almost be like living at home. You could even move to Miami, which is the most expensive part of Florida, yet is still cheaper than any part of the Northeast. And it's practically a borough of New York City. Also, no snow!

Then again, you'd be living in Florida, which has numerous drawbacks.

Soothe yourself with the notion you are helping the poor and underprivleged,rid yourself of the arcane and ancient Aristotelian idea that a act must be voluntary to be good. Take heart in the knowledge that although Theresa Heinz Kerry pays only 12% in income taxes proportinally you are doing more for the needy. Constantly remind yourself of an essential truth,that you are to find virtue in the federal guvmint,not within yourself. This may be questionable in your own mind but it frees you to do things previously unmentionable and unthinkable. Look what it did for the Clinton's.

I recently plunked down a down payment on a townhouse in Rahway, NJ that's a 10-minute walk to the train station. It is scary to make that kind of financial commitment, but I hope to get some shelter from inflation by buying a big hard asset. And I like the idea of having some space for my books, and a cat.

"It is at times like this that I start to believe the supply siders, even though the empirical evidence for their propositions is pretty shaky"

The empirical evidence in support of supply-side policies is *not at all* shaky.

E.g., Robert Lucas:

"The supply-side economists ... have delivered the largest genuinely free lunch I have seen in 25 years in this business, and I believe we would have a better society if we followed their advice."

And from his AEA Presidential Address:

"Taking U.S. performance over the past 50 years as a benchmark, the potential for welfare gains from better long-run, supply side policies exceeds by far the potential from further improvements in short-run demand management." [His emphasis]

http://home.uchicago.edu/~sogrodow/homepage/paddress03.pdf

This is precisely the middle class squeeze that Kerry talked about so ineffectively.

In contrast, I made a LOT of money in capital gains this year, and paid 15 percent. Does that seem right? It used to seem right to me, because we needed to "encourage investment" in order to grow the economy. But most of these gains were due to overseas investment, and did very little to promote welfare at home.

I don't really see why we should tax income from work more heavily than income from investments. It makes no sense.

One small nit: The combined employee/employer SS bite is 12.4% -- up to $87,900 of earnings. The Medicaire tax is 2.9% combined, and the sky's the limit.

If you're paying both halves, you're self-employed and ought to be able to claim some reasonable business expenses (perhaps you SHOULD speak to a tax pro).

That said, your plight is real and I explored this problem about a year ago in another thread on this blog.

The problem is that our elected representatives give much lip service to "taxing the rich" with a "progressive" scheme -- but in fact we don't tax the rich much at all; We tax the poor sons-of-a-bitch who are trying to BECOME rich. It turns out that the goals of getting rich and earning a comfortable living are mutually exclusive.

Guys like Bill Gates and Warren Buffet pay a much, much smaller fraction of their wealth than poor shnooks like you and I because our tax system is based on income and not wealth.

I ask all: what does income have to do with wealth? Why tax income at all? (Cause it's relatively easy to do and doesn't much exercise the rich who don't pay all that much in tax, relative to their wealth).

Warren Buffet draws an annual salary of $100,000. Guess how much tax he pays.

Jane,

That rate sounds pretty high. Is it because you are self-employed?

I second the above commenter. Are you getting hit with the AMT? Why do your deductions disappear? And why is it stupid to buy a house when rates are at their lowest? (Or are you saying mortgage rates can only go down?)

Jane,

And remember we aren't even paying enough in taxes to cover spending, which is why we borrow so much. Your effective rate should be even higher if we had saner people in government.

Are you in favor of the elimination of the estate tax? if so, are you willing to see your taxes go higher to pay for that?

Or do you think that we can cut spending enough to not have to raise taxes? What would you cut? Military spending?

I'm not self-employed in the sense that I have a day job, but of course freelance work pays you as a contractor, so of course I'm liable for social security taxes as well as the ordinary income taxes.

My deductions disappeared because I crested the income caps on things like my student loan deduction, thanks to that selfsame freelance work. (This may have made my effective tax rate closer to 60 percent, since I probably would have gotten money back.)

It's stupid to buy a house because prices, which vary inversely with interest rates, have undoubtedly peaked; the top of the market is already getting soft, and I expect the rest of the market to follow. Plus the rent to mortgage payment ratio is currently very attractive in the Greater New York area, another indicator of a housing bubble. The number of ARMs, interest-only mortgages and so forth pouring into the market leads me to believe that it's not long before everything goes to hell, though of course it's never safe to bet on when a bubble will burst.

Amen on the pain of free-lancing as a business proposition. My eyes nearly bugged out first time I got hit with the paperwork on that, let alone the taxes.

Jay's point, though, isn't piffle. Consider the tax burden imposed on the small proprieter of any business with the far, far, far lighter burden imposed on the rentier/investor class's dividends and capital gains, and explain to me again how cutting taxes on investments is supposed to help the economy grow. Isn't small business the engine of economic growth?

Jane, one question: how the hell did you pay only $50,000 for business school?

That apartment sounds like something from the ass end of Craigslist. We should work on that.

More significantly, trotsky, is that our entire tax system creates a massive transfer of wealth from the young to the middle-aged and the old. The payroll taxes, mortgage interest deductions, and all those kiddie deductions are the obvious examples.

You whiners need some perspective. You act as if paying tax is just throwing money down a hole. Your tax money buys things. Beneficial things. I could start a list of these things but it would just go on and on. Are you too stupid to see this?

Wealthy people benefit more from what this tax money buys so we ask them to pay more. Wealthy people are in a position to tilt the system in their favor so we ask them to pay a larger percentage. Sensible people accept this.

Arguing about how and where our tax money is spent is commendable. Equating taxation with theft is childish, and considering how many influential people spout this philosophy, ultimately seditious. This will destroy our society. The "terrorists' have nothing on the anti-tax libertarions.

I didn't -- I spent a great deal of time paying off large chunks of my debt.

The apartment's actually rather charming, for where it is and what I pay. But of course, the original point was that I don't pay much, because my income isn't that high.

I could see an accountant (a kind reader has sent one that specialises in freelancers) and may, but my work has pretty low expenses; it's basically just my brain. Not a lot of deductions there, although perhaps I should file a depreciation report ;-).

Three hills, there's a difference between being an anti-tax libertarian, and not wanting the government to take half my incremental income. As for what the money's spent on, a large chunk of my tax money is spent on things like the 1-in-3 New York residents who are on Medicaid, which is not beneficial to me, except in some extremely abstract sense, and the out-of-control giveaways to the city unions, most of whose workers make more than I do, with lavish benefits to boot.

Oh I very much agree, three hills. The things government does that benefit society as a whole shouldn't require tax rates of more than 10% federal and 5% state.

Jane, what about a roommate? Two people paying what you pay could get a 2BR above the water table.

That's what the electoral process is for. Campaign and vote for someone who spend your tax money more wisely.

Plus this "extremely abstact sense" may be very important and not so abstract in years to come. Have faith in your society. Be generous.

Where did I decry the democratic process? I'm not heading into the hills with a gun and a truckful of canned goods, nor am I going to stop paying my taxes or start bumping off old people in my neighbourhood. I'm complaining, which is the foundation of all democratic activity.

Everyone hates to pay taxes. But hating taxes is not a valid reason to embrace a system that doesn't work. I thought the supply sider stuff was over once people realized Reaganomics were actually voodoo economics that are very bad economics in the long run. Its kinda like making the minimum monthly payment on credit card debt, only worse. We are far less taxed then any other western democracy. We are the only western democracy without universal health care, our schools are losing ground, and if Seniors are removed our standard of living is near the bottom of WD's. I think that people paying at the higher income tax rates refuse to recognize that the enviroment America has provided has been very good to them, and instead credit only themselves for the relatively high degree of success they have had. The reality is it's a nature vs nurture type of balancing act, with nature being ability and nurture being taxes essential to the enviroment thats contributed to their success.

Generosity, Three Hills, is voluntary. This wallet hoovering under threat of severe punishment is not. Therefore, it is not generosity.

In his landmark book Our Enemy, The State, Albery Jay Nock demonstrated the clear connection between the expansion of the State's exactions and the decline of private, voluntary generosity. Inasmuch as State welfare and such have been proved to be actively deleterious to their supposed beneficiaries, while private charitable efforts are genuinely helpful and constructive, I'd say that puts the lie to the "generosity through taxation" canard. Unless, of course, your true aim is to destroy both prosperity and the concept of property rights, which is what I've suspected about the defenders of massive taxation for a long, long time.

Wealthy people are in a position to tilt the system in their favor...

Evidently not:

so we ask them to pay a larger percentage.

Why not move to New Jersey, where I can get rid of my city tax, lower my state tax, and pay less sales tax to boot?

Yes, why don't you? Yet, somehow even with the evil high taxes in NYC, high rents, high cost of living, etc. you choose to stay. And even if you left, your landlord probably wouldn't have much trouble re-renting your place. Why? Because, inspite of every reason libertarian-types throw out for why places like NYC, SF, etc. are undesirable, people want to live there and are willing to pay for the privilege, both in housing costs and taxes. People love their big-government transit system, and the big-government land-use and building codes that give you walkable cities and things like central park.

I will say one thing about federal and state tax burdens..they ought to be adjusted for where you live. I make around the median for San Francisco (which is where I live), but that amount makes me a high income earner in the eyes of the federal government, even though my cost of living is higher than much of the country.

I wish those that say they want lower taxes would tell us who will pay the difference or what spending they think will be cut.

Anyone?

I _think_ I remember reading that this is what

drove Ingmar Bergman out of Sweden: One year

his income tax was greater than his income ;)

GT: kill farm subsidies; end the war on drugs and stop paying to enforce it. Ideally, also cut welfare, medicare, and SS significantly. Probably a whole bunch of other things you could cut, too; but the farm subsidies and the war on drugs are the most obvious.

GT, why do you ask such questions?

Human resources superfunction
Health 258 G$
Medicare 295 G$
Income security 351 G$
Social Security 520 G$

Total: 1,424 G$.

Any other questions?

If we could find a way to shut down the off-shore tax havens that corporate America and our congressmen ( YES! EVEN THEM !) use to keep most of their money, then maybe the BILLIONS of dollars that would be taxed would help lower ALL our rates.

GT: What I'd cut FIRST:

1) End all federal welfare programs. Their main effect seems to have been creating more poor people.

2) Dissolve the DEA and related agencies. Prohibition doesn't work - and they've demonstrated that over and over again.

3) Social Security and Medicare are tough ones - they've always been more like welfare than paid-pension plans, but too many people are counting on them. Young people think they're getting screwed because they've got to pay in but they don't expect to ever get their share. It's a problem with a Ponzi scheme, eventually the latest arrivals will get screwed. So I'd go for a plan to gradually eliminate SS and spread the screwing over two generations. To start with, no more increases in benefits, and set the age for benefits to start at 75.

4)End all federal education programs. Over 40-some years, American public education has declined in effectiveness as federal involvement has increased.

4) Considering that many private schools give a better education on a lower per-pupil budget than the public schools, I might want to eliminate state and local public spending on schools, but neither school systems nor parents could take the shock of doing it all at once. Instead, introduce competition into schools by transferring all the present state and local school funds into vouchers. Instead of having property value increases, etc., turn into an automatic annual increase in tax revenue and school budgets as at present, build in a few percent annual decrease in the voucher value (for now). School administrators that can find ways to get by on less will survive, as will those that can persuade parents that they offer extra value worth tuition payments on top of the vouchers. The others go out of business, as they should have long ago. Within ten years, we'll know how much money a school really needs to provide a basic education, and can put it to the voters whether to continue subsidizing parents with that amount, or to continue shrinking the vouchers until all schools are fully funded by tuition and private charity.

And I could go on like this for several more days. Farm subsidies - pure pork. All sorts of programs that there's probably only one Congressman boasting about - and he isn't telling his constituents how much of their money he gave to other pork programs in trade for their favorite pork.

Sorry AT and others, I wrote too fast.

What I meant to ask was not what you would cut rather what you think can be cut, politically.

Hi Jane,

Why not create an S-corp? That will allow you to deduct a percentage of rent, your cell phone, cab fares, internet connection, this website, etc.

Rob

One trouble with democracy is that when the Peepul find that they can vote themselves goodies out of the public treasury, they do. Getting rid of anything like this makes destroying Jason or Freddy Kruger look simple---the people benefiting from any pork program *coughSocialSecuritycough* will fight like maniacs to preserve it, while the majority who're getting reamed aren't getting individually reamed enough to make it seem worthwhile...particularly since the other side is perfectly willing to cast any opposition as being rooted in "cold-hearted Scrooge-like greed." As a longtime "student of Objectivism," my response to those accusations is: "You say that like it's a bad thing." But most people are intimidated---nobody wants to be Scrooge, or the Grinch that Stole Christmas.
As for solutions, I'd love to find a way to abolish withholding, particularly on the Feral income tax. That was instituted as a "win-the-war" temporary measure during WWII, and, although I _may_ be wrong, I am under the impression that the Big One ended some little while ago. Unfortunately, the IRS is willing to make nasty examples of anybody who stands up to it...they've tried to ruin even Congressmen and Senators with audits.

"I will say one thing about federal and state tax burdens..they ought to be adjusted for where you live."

Why should I be forced to subsidize others who choose to live extravagantly?

I choose to live in a hell hole (actually my wife does, I just follow), but the benefit of that is that I can own a house and car while having an extremely small income. Should I have to pay more in taxes just because the things I trade for my small income are not very desirable to most other Americans?

Mannish wrote:

"..., somehow even with the evil high taxes in NYC, high rents, high cost of living, etc. you choose to stay. And even if you left, your landlord probably wouldn't have much trouble re-renting your place. Why? Because, inspite of every reason libertarian-types throw out for why places like NYC, SF, etc. are undesirable, people want to live there and are willing to pay for the privilege, both in housing costs and taxes. People love their big-government transit system, and the big-government land-use and building codes that give you walkable cities and things like central park.

I will say one thing about federal and state tax burdens..they ought to be adjusted for where you live. I make around the median for San Francisco (which is where I live), but that amount makes me a high income earner in the eyes of the federal government, even though my cost of living is higher than much of the country."

Let's see if I got this right: You choose to live in SF and "are willing to pay for the privilege" to get all the big-government goodies, but turn right around and want a special cut in your state and federal taxes so you can better afford to live where you get all the big-government goodies. Is that right?

Sure, pal. Why not? After all, there's nothing so important to the rest of us as you getting all the land-use and building codes that your heart desires. We'll gladly shoulder more of the burden of financing the federal government so you can more easily snuggle in the warm embrace of the Bay Area bureacracy.

Mycin

Ammonium and Mycin -

People living in NY and SF are not 'living extravagantly' and want a special cut in their taxes. A NY-er making 100k a year can live about as well as a South Dakotan making 60k per year (estimate, not a hard number). Yet the marginal income tax thresholds are the exact same for each. Shouldn't the thresholds be adjusted for the cost of living in each location?

But wallster, what the "no adjustment" people are arguing is that it's illogical to argue that "inspite of every reason libertarian-types throw out for why places like NYC, SF, etc. are undesirable, people want to live there and are willing to pay for the privilege, both in housing costs and taxes " and then turn around and argue for a subsidy on the basis that your taxes are too high! Well obviously you aren't willing to pay for the urban paradise.

Also, part of the reason the salaries are higher in the big cities is that the cost of living is higher. You can see how a circular argument might develop here: Cities cost more, so the marginal tax rates are lowered, so people have more money, bidding up the cost of housing, thus increasing the cost of living, thus leading to--lower taxes.

Wallster: Do the South Dakotans have all the same museums, public transit, and so on that those living in NY and SF get?

Wallster, it's more like $45k in South Dakota. My girlfriend looked at the exchange rate between Santa Clara County and Cedar Rapids, the expensive part of Iowa (her home state), and found that $52k in CR would buy her the same living that $100k would in San Jose.

Manish lives in San Francisco, and credits zoning and planning for creating "walkable" cities. He really, really should know better. Only some of San Francisco is really walkable - the parts built before zoning became sacrosanct. Zoning in general has created car-dependent cities, because of pressure from NIMBYs and BANANAs.

On a 14-mile stretch of land, about two miles across, live a million or so people. Every week, for 4 or 5 days a week, about two million people hike in from all directions to go to work, and hike back out again when they're done.

It's a topsy-turvy kaleidoscope of people layered upon people, which happens to absorb, in the surrounding 25-mile radius, a couple of million immigrants each decade from all over the world.

The only barrier to entry for citizenship in this strange place is a willingness to be tough enough to compete and to survive and frequently to do quite well.

The tax burden is harsh, and often life is harsh too, but there are many compensations, even for the poor and overwhelmed, and the young and overworked.

I sympathize with Ms. Galt's taxing predicament, partly because I share in it. But mostly because there are gross bureaucratic efficiencies in the public sector, and sorely misguided government programs that more or less burn money for no higher social purpose that I or Ms. Galt would sign onto.

But we should strive to remember that New York is a glorious experiment that we are privileged to witness and participate in, and a perfect tax code and government has never been found. There will probably always be a profound divergence between life as it is and life as we should like it to be.

Or as Donald Rumsfeld said to me the other day, "You go to work with the city you've got, not the city you want!"

It's not always easy to leave, but we managed after the kids finished college. We're upstate now, a blessed relief after 10 very long years on Long Island, and everything is cheaper and fresher, and the neighbors are friendlier, too. But moving when we did was possible only through carrying two mortages for a year before the house on LI was sold at a loss. But the double mortage was manageable AND we paid off the temporary short term loan (for the down payment) in 18 months. And within about four years after that, we paid our credit card debt down to zero.

To anyone who hasn't lived in a high cost area, you just wouldn't believe how the higher costs are reflected in every aspect of your life. I fully sympathize with those who feel that they should get some sort of extra deduction for having to live in a high cost area, and I believe that most people who live there do so because that is where the jobs are, not because they love city life so much. I find it significant that both our kids left the Island after college and that our friends who are reaching retirement age are also leaving the Island as soon as they can. Okay, so I can't get a pizza at 2:00 AM, but I don't mind that a bit.

Steven, surely you're being disingenuous when you talk about people willing to pay more in taxes to live in desirable cities. I am willing to pay Massachusetts' higher state and local taxes in place of New Hampshire's lower taxes in order to get what I consider the benefits of living in Massachusetts over the benefits of living in New Hampshire. Similarly, Manish is willing to pay California's high income taxes and whatever taxes San Francisco squeezes out of its residents for the joy of living in a city with good public services.

That's what people mean by our willingness to pay higher taxes. We're talking about a specific trade-off that happens at a state and local level. (And in Massachusetts, it's quite a good one; I'd be paying the same tax rates if I lived in Georgia or North Carolina, and I can't say I'd be thrilled with the sterling public services they provide to their city dwellers.)

You introduced the idea of people talking about paying higher FEDERAL taxes for the privilege of living in places like Boston and San Francisco. I don't see how that follows from what Manish said. There's no quid pro quo in that exchange; it's purely a result of uniform progressive tax brackets imposed on an economically diverse country. By the same token, people pay high taxes for the privilege of living in The Woodlands, TX or Sanibel Island, FL, but no one would argue that federal tax rates set by high incomes in those cities are a reflection of generous public services or an endorsement of Democratic politics!

Now, you can well harp on people for supporting the progressive income tax and for supporting welfare programs that direct income to poor people and then being shocked that high-incomes states like New Jersey, New York, and Massachusetts find their tax dollars flowing to poor states like New Mexico and South Dakota. But that's not what Manish is talking about.

I don't personally have a stake in the matter; living in a high cost-of-living area, I sympathize with Manish's argument, but I wouldn't want to see multiple sets of income tax brackets determined by the cost-of-living in 50 states or 300 metro areas. However, it's clear that your response, far from skewering Manish, misses the point.

Brittain-

Suppose you start out with identical employees in identical cities with identical taxes. Then city A decides to raise its local taxes. Therefore, the employee in the City A will have to compensate employees more, or he will go where the pay is greater. Therefore the federal tax liability rises. Why should he be entitled to subsidization by the rest of the country?

I know the feeling... I just turned down some technical editing work, in large part because of the marginal tax rate. I've got a floor on how little I can afford to take home for my time and still have it be worthwhile, and after figuring in the 43% marginal tax rate, the highest rate the publisher could afford to pay me just didn't make it.

I'll be curious to see who the publisher get's to do the tech editing... there aren't many people with the expertise, and almost all of them are in the same position I am tax and value of their time wise...

I'm no fan of the IRS, but what about looking to collect all those evaded taxes?

Here I refer to the contractors who earn $150,000 and report $75,000; to the people who hire housekeepers, gardeners, and nannies and leave their retirements and health needs to be funded by other peoples' taxes; to the professional golf instructors, estheticians and bar mitzvah preparers who want to be paid in cash; and so on and so on.

I pay all the taxes I owe, even the ones I don't like. But I feel like a sucker.

I am convinced this is an expensive problem that is only going to get worse.

But Steven, I don't think anyone believes that 100%, or even a majority, of the higher cost of living in places like Boston or San Francisco is due to higher taxes. The cost of buying a house in either town has doubled since 1998, for example, and that has dragged salaries up as companies need to spend more to get people to move here.

In fact, I doubt taxes are even a dominant percentage of the difference in costs. Or else we wouldn't have so many high-tax, low-cost-of-living states (Maine, Utah, Ohio), and certainly it's not cheap to live in low-tax areas like southern New Hampshire, northern Virginia, and the Florida Keys.

Perhaps someone's got data that is better than my anecdotal reasoning.

Brittain--Oh I certainly agree that taxes aren't likely a large part of the difference in the cost of living. You say "The cost of buying a house in either town has doubled since 1998, for example, and that has dragged salaries up as companies need to spend more to get people to move here." I fully agree, but aren't companies also going to compensate people for the increased marginal taxes they incur for living in large cities? Why would they have to pay a premium for higher housing costs but not for higher (federal) taxes? I mean, I don't think there's some huge exodus out of Manhattan.

but aren't companies also going to compensate people for the increased marginal taxes they incur for living in large cities?

You're the first person I've seen to argue that this happens. It takes the wind out of the sails of the argument that progressive taxes discourage people from excelling in their careers, if we're to assume that companies simply take more cash out of the vault to assuage their workers as they reach higher tax brackets.

Why would they have to pay a premium for higher housing costs but not for higher (federal) taxes?

The former is a result of supply and demand. The latter is a result of a well-intentioned federal program that is misfiring in spite of its goals. You seem to be arguing, "people put up with it, so what's the problem?" Manish put forth a rationale for why it is a problem, and it is clear to me that this outcome is contrary to the spirit and intent of the law, and has implications never intended by the authors. People put up with all sorts of things, but that doesn't make them rational or just.

Brittain33 - "but aren't companies also going to compensate people for the increased marginal taxes they incur for living in large cities?

You're the first person I've seen to argue that this happens. It takes the wind out of the sails of the argument that progressive taxes discourage people from excelling in their careers, if we're to assume that companies simply take more cash out of the vault to assuage their workers as they reach higher tax brackets."

As usual, my insight (if any) into this question is based on practical experience more than theoretical speculation. Do companies take into account higher taxes (as well as other costs) in setting salaries? Of course they do. That does not mean they simply crank up the cost of labor without making other adjustments in their budgets.

In the early '90s I was offered a transfer to L.A. to keep me with the firm I was with (I had accepted an offer in Texas with another firm). The L.A. offer was adjusted to reflect the difference in cost of living between Dallas the L.A. area -- it explicitly took into account taxes. It was also made clear that I'd be expected to work more hours than I would be expected to work in Dallas -- about 5 hours more per week. ("You'll want to stay at the office later to avoid traffic.") I would also need to make do with less secretarial support. ("We believe it's important for clients to hear you answer the phone.") In short, because prospective employees consider taxes in making decisions, so too must employers. But cash compensation is NOT the only adjustment that is made.

What is with the error message, "Your comment could not be submitted due to questionable content: Goog1e"? Does it think that's a bad word? Is it a virus from MSN Search?

Some of Jane's complaints about her marginal tax rate seem like they would apply more to her total tax rate, like "By what moral right does the government tell anyone, from Warren Buffet on down, that it has a right to more than half their life?" If the government took half your income when you were trying to earn enough for food and shelter, that would be slavery, since you'd have to work no matter what the tax rate. If it only takes 50% once you get enough income to start saving and considering a bigger apartment, it sucks that it's preventing you from doing those things, but you can at least choose not to put in the extra effort and not pay the tax.

Bruce Williams: Would someone like to post a link to US income tax scales?

Here. Although Effective Federal Tax Rates from the CBO is a much more complete picture.

Our 48 percent marginal rate cuts in at around A$52,000 - think A$=US$ for these purposes.

Why equate them, when the true figure reinforces your argument? The Universal Currency Converter says A$52,000 is only US$ 40,000. Our marginal rate at that income level is only half of what you're paying.

too many steves: I've always thought that the argument used to defend the progressive tax system (those that have "too much" income should pay more)

That is a crappy argument. I'm more aligned with those who have "plenty" of income should pay more.

I am an avowed fee-for-service libertarian. While I pay approximately 40% of my income in taxes (all totaled: Fed, State, Property, SS, Sales, etc.) I am also solely responsible for paying all my bills. No help comes my way, directly, from any government agency.

If you're saying that you avoid pulling at the government teat, I support you. If you're saying that the government doesn't do anything for you or shouldn't do anything you wouldn't pay for yourself, I think national defense makes a good counterexample for both of those.

AT:More significantly, trotsky, is that our entire tax system creates a massive transfer of wealth from the young to the middle-aged and the old. The payroll taxes, mortgage interest deductions, and all those kiddie deductions are the obvious examples.

Not to mention "I won't cut benefits for anyone over 55" or taxing savings less and income more.

Jane: As for what the money's spent on, a large chunk of my tax money is spent on things like the 1-in-3 New York residents who are on Medicaid,

I only have the quickest of goog1e numbers, but it looks like there are 3 million Medicaid recipients in New York State, whose population is 19 million. New York City's population is 8 million, so unless 85% of the state's Medicaid recipients can afford to live in New York, that seems fishy.

Ah, but New York City contains a little under half the population of New York state, and, unsurprisingly, a disproportionate share of its Medicaid recipients. So the number actually sounds about right.

That makes New York suddenly seem like one of those Brazilian cities with millions of poor people hanging about. I guess a lot of cities are like that, huh? LA is. It shouldn't have seemed so fishy to me.

At 35, I galted. That is, I sold my business, said goodbye to 8 employees, and went on tax strike. I started and run an economic consulting firm in CA when Clinton raised taxes. This prompted me to calculate my marginal tax rate, which I was astounded to discover (not having paid attention prior) to be 66.7% including all state, federal and local taxes. And yes, this netted the deduction of some taxes against others, and included professional tax advice. As Sub-S corp owner, I could also take income as wages or profits to minimize taxes.

Since then, a number of my peers have now galted. Most were entreprenuers under 40. We now read philosophy, surf, and explore various hobbies. One took a passion for gardening to become a gentleman farmer (you should see the tax breaks he gets!).

My domestic partner, a physician, has just given notice of his impending galt. He's 43.

The tax code has sent us an unmistakable message: You will be punished for succeeding. Like good citizens, we obeyed. We stopped working. How does this benefit anyone?

>I start to believe the supply siders, even though >the empirical evidence for their propositions is >pretty shaky.

No emprical evidence is needed for the idea of freedom.
No empirical evidence would convice me of goodness of being a slave.

It does not matter how much "good" is paid for with my money. It is bad because it is not given freely.

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