August 24, 2006
From the desk of Jane Galt:You heard it here first
Greg Mankiw points to a new paper indicating that 70% of the burden of the corporate income tax falls on employees.
I made this point long ago: for all that progressives wail about making corporations pay their "fair share", you can't tax a corporation; you can only tax that corporation's employees, shareholders, or customers:
As my favorite macroeconomics professor pointed out, it is impossible to tax a corporation because the corporation is just a fictional entity designed to pass profits back to its owners. When you say you're going to "tax a corporation", the corporation doesn't go to the money farm to harvest some more cash to give to the government so we can expand job training for unwed mothers -- some real person is going to pay that tax. When you put a tax on wages, such as social security or the unemployment tax, the employer doesn't say, "oh, well, profits dropped 15% this year; better tell Merrill Lynch to issue a 'sell' rating" -- they pay their employees less, both to lower the tax burden and to recover the lost profits. They hire fewer employees, because each employee is now more expensive. This costs real people money. When you up the corporate tax, either the employees pay, because the firm can't afford as many of them; the customers pay, because the firms have to raise their prices to cover the taxes; or the shareholders pay because dividends are lower and the company is worth less. And before you liberal types start rubbing your hands in glee at the thought of those pained shareholders, keep in mind that the largest shareholders in companies are insurance companies, which invest in stocks in order to make the money they need to pay off when your house burns down; and pension funds, making the money to take picketing US Steelworkers off the streets and put them into good homes. The other big holders are mutual funds, which is what most of us have our 401(k)'s in. So when you say "I want to tax corporate profits", try silently saying to yourself "so that Mom can sell the condo in Florida and move in with me."
While undoubtedly the discovery that most of the tax burden falls on employees will be for some a strike against the tax, and for others a sign that we need some stiff laws to force those corporations to place the burden elsewhere, it seems to me that this piece of information makes the corporate income tax no less attractive than it was before--which is to say, not at all. Levying a corporate income tax is a very inefficient way to do what we want, which is to redistribute money from the company's richer owners, customers, and managers to its poorer employees.
(All right, maybe we don't all want to do this; no doubt many of my readers are even now cringing in horror at the thought. But let us posit, for the sake of discussion, that we do want to do this, because that is at heart of all the arguments I have ever heard in favour of the corporate income tax, and even assuming the ends, the means make no sense.)
Let's say that 100% of the distribution fell on shareholders and executives. Would it make sense to tax the CEO of a small tool-and-die maker (assuming such things still exist) at the same 35% as Michael Eisner? Aunt Minnie's 100 shares of AT&T at the same rate as Bill Gates' Microsoft stock? We already have a very good means for taxing income derived from being an executive, or owning stock: it's a little thing I like to call "the progressive income tax".
Now, several of my interlocutors have argued that if we don't have a corporate income tax, people will shelter income in corporations, by (for example) incorporating themselves and charging their rent to the corporation. But people already have incentives to try these sorts of stunts, because corporations, unlike people, get to charge things like rent and interest on loans against their taxes. You can incorporate right now, funnel all your income into the corporation, and have the corporation pay all your bills. Say you make $100,000 a year, and pay roughly 30% of that in tax. Furhter assume that your expenses are $80,000 a year, and you save a thrifty 20% of your income. A corporation with your income and expenses would pay taxes only on the income in excess of expenses. .35 x .2 = an effective tax rate of only 7%.
Wow! Why isn't everyone pulling this dodge? Why, because the IRS has rules against it, that's why. Anything the corporation rents or buys for you is treated as income to you, which you are taxed on. There's no reason that would change just because we eliminate the corporate income tax. Yes, there are other ways to shelter your income within a corporation, but in general, I don't know of many which would be possible without the corporate tax that aren't possible--and attractive to those in high brackets--now. Others argue that untaxed corporations somehow allow people to accrue more financial power through their ownership, which makes no sense to me; Bill Gates is powerful because he controls a lot of Microsoft stock, not because most of his earnings on that stock are tax-deferred.
Impeach the corporate income tax. Impeach it now.
Posted by Jane Galt at August 24, 2006 3:39 PM | TrackBack | Technorati inbound linksHey Jane,
You heard it here too:
http://www.knowledgeproblem.com/archives/001733.html
Lynne
Blah, blah, blah. Spare me.
"April 14, 2006— Soaring gas prices are squeezing most Americans at the pump, but at least one man isn't complaining.
Last year, Exxon made the biggest profit of any company ever, $36 billion, and its retiring chairman appears to be reaping the benefits.
Exxon is giving Lee Raymond one of the most generous retirement packages in history, nearly $400 million, including pension, stock options and other perks, such as a $1 million consulting deal, two years of home security, personal security, a car and driver, and use of a corporate jet for professional purposes."
http://abcnews.go.com/GMA/story?id=1841989
Can't tax them enough.
Jane,
You are right. One of the most complex questions in the tax economics field is who bears the burden of a tax. With business taxes, the one thing we do know is that -- except for brief periods -- the tax is not borne by the business. If it can, the business will shift the burden to its customers. If it can't, the business will try to shift the tax to its employees (by paying them less or working them longer hours for the same pay). If it can't do that, it'll try shifting the burden to other taxpayers by lobbying for special tax breaks. In the end, whatever portion of the tax that cannot be shifted is borne by the owners of the business.
Since the business is already trying to maximize the amount paid for its products and services, little of the tax is likely to be borne by customers. Getting special tax breaks is very difficult, so little of the load can be shifted to other businesses. Owners tend to have more power than employees, so in the discussion about how the tax is going to be shared between them, owners tend to come out better than employees. The irony is the oft' stated goal of business taxes is to make the tax system more fair by having rich corporations pay into the system. About the only people who benefit from this unnecessary complexity are tax professionals. (My family thanks you all very much. It's how I make my living.)
If voters understood what's going on, they'd demand a change. Of course, politicians tend to benefit from a confusing and complex tax system. If people had to pay their income tax at the end of the year, rather than have it taken out of their pay, they'd rebel. Same with the sales tax. If, instead of paying a few cents tax with every purchase, taxpayers had to pay the sales tax at the end of the year (or the end of every month), they'd revolt. By taxing corporations, the government hides the ball -- making it easier to raise government's take from the economy. Besides, it's an issue that's easy to demagogue. I predict the tax is here to stay. (Which is good, I've got 20 years to retirement.)
Blah, blah, blah. Spare me.
"...Exxon..."
Wait, let me see if I follow that: Jane's broader point of this post is, in your mind, refuted by one example of one person presently in the most senior position at one corporation, making a very large retirement package after fourty-three years' service to that company, in a market where a unique combination of high demand and social-political uncertainty has driven profits for that sector very high -- for now? And keeping in mind that chap is still subject to the normal tax levies affecting such things?
Back in your cage!
Don, if you were paying attention, the point was that even if you set high corporate income taxes, you won't stop the issue you link.
You'd have to assemble a law that said something like "you can only pay this tax by cutting C-level executive's salaries and retirement packages."
The post is about corporate tax. When you say "tax them" you mean people like that Exxon executive. What you want are progressive income taxes (for better or worse), not corporate taxes. Which, again, is the point.
David,
Re; "By taxing corporations, the government hides the ball -- making it easier to raise government's take from the economy."
Exactly. But it isn't just corporate taxes that do this. Progressive income taxes do precisely the same thing - its just a bit less obvious. The progressive income tax is really just a sophisticated method of convincing the lower middle classes to pay more in taxes. The way I see it, if the government is extracting roughly 35% of GDP in some form of tax or another, then roughly 35% of the cost of everything I buy is a hidden sales tax. This is why I don't buy in to "tax the rich" proposals in any form. I know who is really paying them.
If Congress would only craft a tax targeting excessive executive compensation... Wait! It has! The problem is Congress is subject to the law of unintended consequences. (Some would argue that Congress' main activity is to produce more examples of the application of that law.) The result of the law targeting excessive compensation has been to increase, rather than decrease, examples of excessive compensation such as the one Don mentions.
Why? Glad you asked. The law imposes a punitive tax on compensation in excess of $1 million. However, the law provides an exception for incomes that are tied to performance (and other market driven factors) -- after all, you can't punish corporations because they pay their movie stars or baseball players more than $1 million. The result of this law is that more and more of an executive's compensation is tied to formulas based on the company's share price, net sales, gross margin, or some other similar factor. In the case of Exxon, these formulas produced outsized incomes for its executives. If the law had remained the same, more of an executive's pay would be discretionary and board's would keep compensation from having such dramatically upward swings from things over which the executive had little control.
Anything the corporation rents or buys for you is treated as income to you, which you are taxed on.
Wait a second -- if I am an employee of a company and it sends me on a trip to China, the cost of the ticket is counted as income to me and I have to declare it as such to the IRS? This is news to me. Or is this true only if I am a stockholder? Or am I missing something else completely?
--the CEO of a small tool-and-die maker (assuming such things still exist)--
They do, my husband's a contract mfr, very small biz employee-wise.
Another motivation is that many people just don't like large corporations. They'd rather see a dozen small tool and die manufacturers than one large one.
Which leads to the idea of a progressive corporate tax, but as corporations are fictional individuals I'm afraid it would be too easy to split a large one into 20 small ones with no real effect.
On the other hand, this may make the people who dislike large corporations happy, who knows?
Well, if we can get all these people corporations to pay both sides of FICA - then we might actually see some change.
I'll make a deal, if you guys eliminate the cap on FICA and income derived from capital gains, along with an increase in the taxes on the incomes of the top 20% of income earners (and a sharper increase on the top 1%), I'll lobby for a repeal of the corporate tax.
Taxing corporations gives corporations an incentive to oppose government spending which I think is desirable. Nor do I think that the fact that corporate taxes are actually borne by others is a very convincing reason for opposing them. Why does this make corporate taxes more damaging than the alternatives?
ASG:
No, because the trip to China is not for you, it is for your company as part of your job. If on the other hand your company paid for you to take a vacation to China, the value of the trip would be subject to taxes.
You trying to put my out of a job?
The reason for business taxes is that they are indirect taxes that the politicians can raise in a stealth manor (and solicit lobbying $$ for).
I work on state corporate income taxes. My favorite is the progressives who lobby for forced combined or unitary returns. This is a means of taxation. Little do they realize that in many instances it creates tax benefits as loser subs reduce the tax burden on winning subs. Yet the lobby for it every year. I loved it in Maryland a few years ago (and probably every year after and before) when I was lobbying for another matter, I saw the league of women voters lobbying for unitary combined corporate tax reporting. Because corporate taxes affect women so differently.
Kafka-esque.
Corporations do not pay taxes as has been mentioned, I think. Nor do the tobacco companies pay any of these "so-called" fines or whatever, thus $3/pack cigarettes.
The only enity to pay a tax are those, like me, at the bottom of the pile who can not pass it off to the next guy or gal.
Any business large or small will fold if it can not make a profit. Is that not something taught in Economics 101?
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If you eliminate the corporate tax you also lose the argument about taxing income twice so the rational for a lower tax rate on dividends and/or capital gains is sharply reduced.
I'll make a deal, if you guys eliminate the cap on FICA and income derived from capital gains, along with an increase in the taxes on the incomes of the top 20% of income earners (and a sharper increase on the top 1%), I'll lobby for a repeal of the corporate tax.
Be careful what you wish for. I am sure smart progressives will never go for the deal. Making taxes visible to voters increases anti-tax sentiments. They much prefer to keep the corporate tax so they can brag to the slack-jaws who vote for them about how they are punishing the corporations even though they know darn well that the very voters they claim to “fight for” will be paying most of the tax.
If you eliminate the corporate tax you also lose the argument about taxing income twice so the rational for a lower tax rate on dividends and/or capital gains is sharply reduced.
You are making Jane’s point.
People should pay taxes directly to government not by way of corporations. That may well require an increase in taxes on dividends and capital gains as well as other taxes if spending levels are to be maintained. Progressives really don’t want this. They prefer a hidden tax that really falls on their constitutes that they can claim falls on the rich. A twofer, more tax revenue and a talking point that appeals to hate of the productive people in society.
Nor do I think that the fact that corporate taxes are actually borne by others is a very convincing reason for opposing them. Why does this make corporate taxes more damaging than the alternatives?
In a democracy voters should know how much the government in taking in taxes, who is paying it, and what the government is spending their tax money on. That is one of the main reasons that the corporate tax is damaging. Voters do not realize they are paying the tax.
In a democracy voters should know how much the government in taking in taxes, who is paying it, and what the government is spending their tax money on. That is one of the main reasons that the corporate tax is damaging. Voters do not realize they are paying the tax.
Well, yes, but you could say that about pretty much any tax. The economic incidence of pretty much every kind of tax is different from the entity that physically "pays" the tax. If you tax sales in one particular region for example, that will eat back to the value of the land and labor factors contributing to production in that region. Economic tax incidence is a difficult topic to work through, even for professional economists.
(Not to say I endorse the corporate tax. Jane's earlier post on the matter made the case pretty well.)
Justin, great point! That is if a heads I win, tails you lose deal is great.
Raising fica, capital gains, and income taxes would help dry up the well that reduction/reform of the corporate tax would create, not very sound economics. But then economics has nothing to do with it, does it, bearing in mind that the increases you favor go unspecified as to rates.
Jane's point about the fact that corporate taxes aren't that beneficial is fine, but there are two (related) flaws that I'd like to point out in her reasoning.
Both flaws deal with this political reality:
Corporate taxes = popularish
Capital gains taxes = unpopularish
Now capital gains taxes are actually very useful, because as unearned income they demotivate people from producing stuff they actually have control over (ie, gainful employment for the purpoes of income). But they're unpopular. So it's easier, if you want to tax capital gains, to impose a double tax than to tax capital gains directly. And this is the first of Jane's fallacies: she allows us to consider political realities when investigating the negatives of the corporate tax, but not the positives. If it weren't for the corporate tax, then we'd risk a political climate where our tax rate was completely regressive, with noncapital income producers (the workers) paying for the a society which mainly benefits the capital income producers (the rich). At that point, the United States would be a perfect model for Marxian criticism, which would destroy our credibility and lead to civil strife, if not economic meltdown.
The other, related error, is that while corporate taxes are in some sense inefficient, they're inefficient vis a vis a political fantasy (that the tax would be replaced by an equal-revenue producing capital gains tax) - it's not clear how much of that tax would be placed on the worker's anyway (for the same reason the corporate tax would be placed on the worker's), that Jane's 70% figure is seriously disputed, and that while its true the corporate tax is flawed and not idealistic, her implication that it's "inefficient" causes us to think that it's a money drain when there's really no evidence of such.
Now capital gains taxes are actually very useful, because as unearned income they demotivate people from producing stuff they actually have control over (ie, gainful employment for the purpoes of income).
Or stated another way: capital gain taxes discourage workers from saving and investing some of the fruits of their labor in the tools used for production. I think that is a negative, not a positive. If you do not like capitalism then I guess you think otherwise.
«it seems to me that this piece of information makes the corporate income tax no less attractive than it was before--which is to say, not at all.»
But the corporate tax has some merit to it, which is that in practice it is easy and cheap to collect and hard to evade (even if easier to avoid, see below). Sure, it is a tax meant to have indirect incidence, but there is a balance between expediency and theoretical correctness. And there is the general principle that broadening the tax base is a good deal. A bit like for property taxes.
Anyhow the major expedient reason to have a corporate tax is just to combat tax avoidance and evasion: because without one it is too easy to pay dividends or buy back shares to/from some nominee account abroad and effectively make all corporate profits tax-exempt at the personal level too, and it is very disingenuous to conveniently forget the tax avoidance and evasion angle.
Corporate taxation is sort of like like tax-at-source for capital income. Let's hear it from Gingrich on the attitudes of american businessmen:
http://classwebs.spea.indiana.edu/bakerr/v600/a_new_look_at_environmental_poli.htm
«If you have a society where almost every middle class person routinely fudges the law, that's telling us something. We have laws that matter-murder, rape, and we have laws that don't matter. Speed limits are an example. Why would you think that a regulatory, process-oriented bureaucratic model would work?
The first thing that every good American says each morning is "What's the angle?" "How can I get around it?" "What does my lawyer think?" "There must be a loophole!" Then he proceeds to work the angle, and the bureaucracy spends its time chasing that and writing new regs. to stop him.
America is the most incentive-driven society on the planet.»
There is also the idea that corporations in general do impose costs on the state as such: for they get the protection of the law, corporate welfare, etc.
It is bad enough that by various techniques USA corporations end up paying very little corporate tax anyhow as Warren Buffet has remarked, and never mind that many argue that dividend tax and capital gains tax should be abolished:
http://WWW.Forbes.com/markets/newswire/2004/03/06/rtr1289070.html
"Tax breaks for corporations -- and their investors, particularly large ones -- were a major part of the administration's 2002 and 2003 initiatives," Buffett said. "If class warfare is being waged in America, my class is clearly winning."
Buffett said corporate income taxes accounted for 7.4 percent of fiscal 2003 U.S. tax receipts. Except for 1983, that was the lowest in the last 70 years, he said.»
http://WWW.CommonDreams.org/views03/0520-09.htm
«The taxes I pay to the federal government, including the payroll tax that is paid for me by my employer, Berkshire Hathaway, are roughly the same proportion of my income -- about 30 percent -- as that paid by the receptionist in our office.»
«Now the Senate says that dividends should be tax-free to recipients. Suppose this measure goes through and the directors of Berkshire Hathaway (which does not now pay a dividend) therefore decide to pay $1 billion in dividends next year. Owning 31 percent of Berkshire, I would receive $310 million in additional income, owe not another dime in federal tax, and see my tax rate plunge to 3 percent.
And our receptionist? She'd still be paying about 30 percent, which means she would be contributing about 10 times the proportion of her income that I would to such government pursuits as fighting terrorism, waging wars and supporting the elderly.»
«Administration officials say that the $310 million suddenly added to my wallet would stimulate the economy because I would invest it and thereby create jobs. But they conveniently forget that if Berkshire kept the money, it would invest that same amount, creating jobs as well.»
«Instead, give reductions to those who both need and will spend the money gained. Enact a Social Security tax "holiday" or give a flat-sum rebate to people with low incomes. Putting $1,000 in the pockets of 310,000 families with urgent needs is going to provide far more stimulus to the economy than putting the same $310 million in my pockets.»
As to the problem of incidence/burden, the ultimate payers of corporate taxes depend on many circumstances.
That currently 70% of that falls on employees simply means that employees have poor bargaining power, and it would be very intellectually dishonest to hint that abolishing corporate tax would benefit the incomes of workers, because:
* If the bargaining power of workers is so weak that they have to accept lower wages to pay for 70% of corporate tax, then their wages will not rise if corporate tax is removed.
* Workers will have to pay for the 30% of corporate tax that they are not currently funding, via income taxes.
«capital gain taxes discourage workers from saving and investing some of the fruits of their labor in the tools used for production.»
This sounds like just a handwaving and knowingly disingenuous fantasy to me: a lot of capital gains are obtained via speculation on real estate, commodities, works of art, so no «tools used for production», and the overwhelming majority of capital gains is enjoyed by rentiers, not workers.
The American Dream is about work and innovation, earning a good living, not sitting back and enjoying a trust fund like a gentleman or a plantation owner.
Good grief, my grandfather who never completed high school, but who built a successful business from the ground up (literally, I have the photographs of the building under construction) made it clear to me when I was in high school that businesses don't pay tax, they pass it on to customers. It was obvious to him, since he ran a sole proprietorship for many years. It isn't obvious to left/liberals, who rarely go into business for themselves for some reason or other...
By the way, all you rich folks should quit using those Super Sekret Methods for siphoning off all the economic growth before it gets to the middle class...or so Kevin Drum opines. To save time and keep cortisol levels low, don't read Drum's weblog, read http://cafehayek.typepad.com/hayek/2006/08/the_secret_mech.html
>if you guys eliminate the cap on FICA
That has two possible results - driving SS into problems even sooner (SS loses money on recipients pretty much in proportion to the payouts, so if uncapped contributions means uncapped payouts....) or convincing rich people to go after it (if the contributions are uncapped but the payouts are capped, what do you think that they'll do?).
> and income derived from capital gains, along with an increase in the taxes on the incomes of the top 20% of income earners (and a sharper increase on the top 1%),
I'll bite - what fraction of taxes should the top 20% of income earners pay? What fraction should the top 1% pay? For bonus points, what fraction do they pay now? After all, if you're arguing for a change, surely you know where you're starting from.
Or, is "they're rich" the "evidence" for "should pay more"?
--I'll make a deal, if you guys eliminate the cap on FICA and income derived from capital gains, --
Won't do as much as you hope it would.
Isn't Buffet's salary around $100K/yr?
Most of our capital gains go into our IRAs.
«Greg Mankiw points to a new paper indicating that 70% of the burden of the corporate income tax falls on employees.»
BTW, for those who don't click to read the original paper or who are not versed with dissembling and prevarication, the paper does not say that at all. The essence of what it says is that:
* It is possible to build a general equilibrium model under which 70% of incidence/burden falls on workers.
* To achieve this one must assume that capital is perfectly internationally mobile but labor is not internationally mobile at all.
When I read «general equilibrium» I usually perceive ''random number generator'', and it occurs to me that the mobility assumptions are somewhat unrealistic.
A lesser misrepresentation of the paper is ''even when cooking numbers and making extreme assumptions 30% of corporate taxes are still taxes on capital income''.
Andy Freeman:
>if you guys eliminate the cap on FICA
That has two possible results - driving SS into problems even sooner (SS loses money on recipients pretty much in proportion to the payouts, so if uncapped contributions means uncapped payouts....) or convincing rich people to go after it (if the contributions are uncapped but the payouts are capped, what do you think that they'll do?).
Actually raising the cap helps SS finances because the additional taxes received exceed the additional benefits paid. This is because the benefits formula is weighted towards low income workers.
As has been alluded to previously, its actually more surprising, given the political incentives involved, that corporate taxes aren't even higher than they are. People generally have no problem with taxing somebody else into the dirt. On the other hand, they hate any tax on them with a passion. But as you point out, Jane, corporations are the ultimate "somebody else". They're fictional legal designations for the interests in thousands of transactions. While it's true that any corporate tax is inevitably passed on through those transactions, it's equally true that its virtually impossible to identify the corporate tax when it's passed on through the transactions. Hence we'll be treated to Don McArthur or Justin decrying corporate greed when their taxes produce higher prices at the pump, slower wage growth, or a chintzy pension package.
Don McArthur quotes below show what is rotten with much of liberal / progressive economic thought.
1. "Blah, blah, blah. Spare me."
2. "Exxon is giving Lee Raymond one of the most generous retirement packages in history"
3. "Can't tax them enough."
What these quotes show
1. Ignore any reasoned technical or quantitative discussion
2. Point out the driver of his arguments, someone else is making more then Don thinks is right
3. Prescribe more of an economic policy that will hurt the working folks and have little impact on the wealthy.
People like Don would happily kick 10,000 working class grandmothers out of their homes if that is what it took to try and punish someone who made more money then they think they should have.
A commentor named Stevo Darkly summed it up pretty well with this comment over at Hit and Run.
"I'm afraid that concern for the welfare of The People in the abstract combined with contempt for the costs to actual, concrete individuals is the fatal disease of the Left."
This sounds like just a handwaving and knowingly disingenuous fantasy to me: a lot of capital gains are obtained via speculation on real estate, commodities, works of art, so no «tools used for production», and the overwhelming majority of capital gains is enjoyed by rentiers, not workers.
Straw man.
Justine argues in favor on the corporate income tax because it is more politically popular than capital gains taxes, the goal being to discourage income other than that deriving directly from labor. I don’t think a lot of corporate income is derived from the sources you cite so Justine clearly doesn’t like income derived from investment in the tools of production.
If you do not want people to benefiting form trading collectibles, real estate or commodities, then you should try to get laws passed to directly discouraging such activity, the corporate income tax does not further your goal.
Let's be clear about how and why a company, not being a real person, has to "pass on" its taxes to someone. To say that companies simply shift their tax burden to employees or customers seems to imply that they can simply cut employee pay or raise their prices whenever they want. A similar argument is that higher gasoline prices are caused by an attack of greed on the part of companies - as Jane has pointed out, we assume that companies are always greedy, so why didn't they raise prices earlier? Similarly, if companies can, at any time, simply pay their employees less and demand more work from them, or charge their customers more, then why not do it regardless of corporate taxes?
The net effect of a corporate tax may be that employees get less and/or customers pay more, but the cause is more complicated than CEOs seeing a tax lying in their lap and saying “who should I toss this to?” Corporate taxes aren’t hot potatoes that must be passed on to some ‘real person’ in the vicinity.
Let's think of it from a capital budgeting perspective (boring, I know, but since I've had to teach it so many times, I'd like to get some use out of it). What happens when the required returns to investment stay the same but the expected returns go down (because of the tax, in this case)? Companies should invest less, since fewer projects now have positive net present values. If companies cut back on investment by accepting fewer projects, then they need fewer employees, especially at current wages, and so demand for labor, and hence wages, go down. If they invest less in capacity, supply will be lower and thus prices are likely to go up. And of course research and development are less attractive (aggravated by the 'heads I win, tails you lose' feature of corporate taxes, where the government takes part of any gains but lets the firm keep all of the losses; this greatly reduces the attractiveness of large, risky projects, although diversification across projects and carry-backs/carry-forwards offset much of the effect for smaller projects).
Current stockholders will be hit badly by an unanticipated increase in the corporate tax rate. But going forward, they'll buy any new stocks at a price that incorporates the effects of the tax, and should still get their required return on average. Of course, that required/expected return will be a bit lower, and some capital will instead shift to other countries or to less productive assets (holding gold or real estate, or whatever). With less investment and lower returns, the economy as a whole will be smaller and people will have less incentive to save.
One could argue that tax revenues need to be raised somehow (although the amount needed is debatable), and there's no true lump-sum tax, so the distortions of this tax have to be weighed against the distortions of other taxes. But the corporate income tax is far from a free lunch and significantly reduces productive investment, which mean less research and development, less incentive to save, fewer goods and services being offered, and fewer people being employed. The comparison to a capital gains tax is a good one, since both reduce overall investment in the economy, and thus the future size of the economy. But at least the capital gains tax is more visible, and can be made 'progressive' (higher for the wealthy).
«Let's be clear about how and why a company, not being a real person, has to "pass on" its taxes to someone. To say that companies simply shift their tax burden to employees or customers seems to imply that they can simply cut employee pay or raise their prices whenever they want.»
But that is more or less what the core assumptions of the paper are: that capital is perfectly mobile and can fly without limit to countries with lower or no corporate taxes, and workers cannot escape lower salaries by going to countries with higher salaries.
The paper does not state anything about the real world, but simply about the ability to find some extreme assumptions under which the desired result is obtained.
«But the corporate income tax is far from a free lunch and significantly reduces productive investment,»
This is just crassly disingenuous handwaving, because it matters a great deal to honest people how large is the cost compared to the benefit. The use of «significantly» here is pure wishful thinking, and so is the disregard of the benefits of public investment that is done with that tax money.
And what about the very large amounts of unproductive investments companies do? In things like commodity, real estate and currency speculation, for example? Companies engage in investment not because it is productive, except in a fantasy world socialist ''paradise'', but because it is profitable for their shareholders, and damn everybody else, because we have a free capitalist economy.
«which mean less research and development, less incentive to save, fewer goods and services being offered, and fewer people being employed.»
This is just a crude restatement of the usual disingenuous propaganda of ''trickle down'' Economics, which is at best mostly a fantasy and at worst pure dishonesty (because there is quite a bit of evidence over history, and very clear in the past 10-15 years, that ''trickle down'' just does not happen).
It is also a laughably wrong argument, because it is based on the manifestly ridiculous idea that the money collected via corporate taxes on profits is simply wasted compared to it going to shareholders.
Sure a lot of tax money ends up directly or indirectly in funding the unproductive lifestyles of K-street operators, agribusiness owners, friend-of-friend pork projects, defence contractor managers, but a significant chunk of it is invested in valuable things like public infrastructure, health care, security.
All taxes by necessity reduce private investment and expenditure, by replacing some of it with public investment and expenditure, which allocation between the two is optimal for the public interest is not something that can be settled with bluster and prevarication.
Let's take a step back here for a minute. If corporate taxes are just passed on to workers and consumers, clearly corporations should pay little if any attention to differences in corporate tax rates between jurisdictions, spend very little lobbying for tax breaks, and, of course, reducing the corporate tax rate to 10% can't have had any real effect in enabling the Celtic Tiger's roar that we heard about a couple of posts down. Let's just take a step away from theory and see if we can learn anything from coprorations' actions about whether they think they can pass these costs right on to somebody else.
Mmmmm . . . people saying "corporations can't pass the tax on to anyone else" seem to be forgetting about the shareholders, who pay the taxes that aren't paid by workers or customers . . .
--Actually raising the cap helps SS finances because the additional taxes received exceed the additional benefits paid.--
So how much more hard-earned income do you want to grab that I won't see in my old age?
At minimum, corp taxes should be lowered. Ours are higher than France, for Pete's sake.
Estonia's got the right idea.
Levying a corporate income tax is a very inefficient way to do what we want, which is to redistribute money from the company's richer owners, customers, and managers to its poorer employees…. let us posit, for the sake of discussion, that we do want to do this, because that is at heart of all the arguments I have ever heard in favour of the corporate income tax…You’ve heard the wrong arguments. Of course, as we all know, the real reason to support the corporate income tax is that, for Heaven’s sake, the government needs revenue, and it’s not going to get all that revenue by taxing people who know that they’re being taxed. But the less cynical reason is this: the corporate income tax gives government a lever over corporations, to steer them toward socially useful activities when free market incentives fail to do so. Thus we have, at various times, things like investment tax credits, antipollution tax credits, R&D tax credits, and so on, all of which wouldn’t be possible if there were no tax against which to take the credit. Well, OK, they would be possible, but they would have to be called subsidies rather than tax credits, and they would show up on the politically incorrect side of the government’s budget ledger.
OK, that’s not a good enough reason, and I used to argue that, if (counterfactually) we could do it in a revenue-neutral way, then it would be a good idea to get rid of the corporate income tax. I’m no longer so sure, though, that the corporate income tax is all that inefficient. Nobody is ever obliged to incorporate, and the corporate income tax is what shareholders pay for the potential right to default on creditors without being personally liable. I suppose in a perfectly fair world, the tax should be used to compensate defaulted creditors. But nobody is ever obliged to lend to a corporation either. The corporate income tax is not so much a tax on profits as a tax on mode of organization. (You could organize as a partnership and make the same profits, and you would only be taxed once, instead of at both the corporate and individual levels.) Judging by how many corporations there are, it seems that the demand for the corporate mode of organization is quite inelastic, which is precisely what makes a tax efficient.
And to the extent that these taxes do come out to the pockets of shareholders they do "do what we want, which is to redistribute money from the company's richer owners, customers, and managers to its poorer employees". No?
As I point out, it doesn't just redistribute money from the corporation's richer owners, but the average joes who have their money in pension funds. If we want to take money from the corporation's richer owners, why not--this sounds crazy, I know--take the money from its richer owners?
The tax on corporate income should be abolished for the simple reason that corporations are not people, and thus do not pay taxes. Only human beings can be taxed and pay tax, regardless of how we wish to organize the revenue collecting mechanisms used by government. That the corporate income tax causes a large volume of non-productive tax avoidance, and that the presence of the tax causes overinvestment in nonprofitable business ventures should be enough reason to abandon it.
For those such as Blissex and Justin that think progressivity is not served by such abolition, then the counteroffer is that all income a person receives is treated equally for purposes of individual income taxation. In other words, no different rate for capital gains vs dividends, wages/salary, or vs inheritances.
It is very important, as a commenter wrote above, that people are aware of what they are paying. The corporate income tax shields this knowledge from the payers eyes, whether they be customers, shareholders, or employees (all of which are not mutually exclusive groups).
Sandy P
--Actually raising the cap helps SS finances because the additional taxes received exceed the additional benefits paid.--
So how much more hard-earned income do you want to grab that I won't see in my old age?
I don't want to raise the cap, I am simply pointing out that raising the cap would increase SS taxes more than SS benefits. Of course some people resent any introduction of actual facts in response to their SS rants.
Jane Galt:
As I point out, it doesn't just redistribute money from the corporation's richer owners, but the average joes who have their money in pension funds. If we want to take money from the corporation's richer owners, why not--this sounds crazy, I know--take the money from its richer owners?
I have no particular desire to increase taxes on the rich. If I did, I doubt abolishing the corporate income tax is the best way of doing so. Do you have a concrete proposal that shows otherwise?
Btw one big way of financing the current budget is deficit spending, another non-transparent means of taxation. Do you object to this as well? Who do you think pays for it in the long run?
Furthermore it is obvious that the main problems with the current budget are on the spending side rather than on the taxation side. Esoteric complaints about the corporate income tax are a bizarre distraction when the government is wasting hundreds of billions of dollars annually on a pointless war not to mention numerous lesser boondoggles.
«The corporate income tax is not so much a tax on profits as a tax on mode of organization.»
No, it is just a convenient place where to tax income in the form of profits. There are specific registeration fees for just the mode of organization.
When taxing, ease of collection matters, and thus it is better to collect tax early and where income originates.
That's why corporations also collect income tax advances on behalf of the State from employees with PAYE.
In effect corporation tax aims to be easily collected, PAYE style, minimum tax take on profits or capital gains. Otherwise profits distributed as dividends or capital gains to foreign accounts would remain untaxed, providing an even greater incentive to export capital.
Principles of taxation policy are taught in undergraduate economics government economics lectures in some countries...
No offense, but I think some of the commenters are confusing equilibrium conditions with the effects of a shifting supply/demand curve. Sure, in equilibrium, firms can't charge more for their products or pay their employees less than the market clearing price. But, the corporate tax will fall throughout the economy. The competitor who would otherwise undercut them also has a higher cost structure. Much the same effect comes into play in the labor market. Similarly, corporations clearly do seek out tax havens. But, again, this amounts to market clearing in equilibrium, not the effect of a curve shift. The individual stakeholders (Gah, I hate that term) are clearly made better off by their relocation. The corporation just serves as the mechanism to transmit those benefits.
Interestingly, when the Tax Reform Act of 1986 was passed, the corporate income tax rate was reduced from 52% to 35%. With a lag of 1-2 years, the benefits of this reduction were largely competed away as the aggregate return on equity and return on capital of the 1,000 largest companies that tend to be most sophisticated about product pricing did not change much on average over an economic cycle as compared to pre-tax reform.
Also, the 1986 act had the same top rate of 28% that applied to wages, interest, dividends and capital gains which I thought was fair and a good system. Unfortunately, once fully phased in by 1988, it only lasted two years before Congress started to meddle again and began to raise the top marginal rate on ordinary income.
I have always thought that the corporate income tax was just another cost of doing business that gets built into product prices and/or wages one way or another in order to produce a target after tax return on capital and on equity. This also implies that dividends have never been double taxed and should not get a preferential rate vs ordinary income.
For individuals, I would prefer to see an alternative maximum tax of 25% of gross income (regardless of source) with no deductions or exemptions. This would both reduce the effective marginal rate to 25% for taxpayers who opted for the alternative approach and force the Congress to explicitly quantify just what constitutes a "fair share" for high income individuals to pay in income taxes.
«Similarly, corporations clearly do seek out tax havens.»
This is what the paper mentioned by Mankiew assumes, as it assumes that capital is perfectly mobile but not labor.
«But, again, this amounts to market clearing in equilibrium, not the effect of a curve shift.»
But «market clearing in equilibrium» is merely a rather ignorant fantasy and, given the past few decades of research in political economy, price changes effect changes in the distribution of income, never mind curve shifts, and never mind the effects of raising taxes to spend them on a different mix of goods, and a different mix of investment and consumption than they would have been spent by the taxpayers.
But of course if one wants to get ''respect'' among famous Economists then deranged fantasies in the Debreu/Lucas (or just Debreu) style are indispensable.
After all the author of that paper by letting such fantasies rip wild got even mentioned by Mankiw and got the precious conclusion that «70% of the burden of the corporate income tax falls on employees» without ''but only by making sure the assumptions would be setup to deliver that result'' attached to it. Way to go!
Blissex,
You seem to have an awfully high opinion of your economic competence relative to Mankew's. Perhaps you could be so good, then, to provide us with the least bit of evidence to support your central thesis, that labor mobility approaches anything near that of capital. From where I'm sitting, its a hell of a lot easier for me to open up an account for me to participate in the London capital markets than it is for me to get a job on said markets. Of course, as you yourself point out, your argument excludes the possibility of global tax havens. Wow! I guess Bermuda, the Channel Islands, Ireland, etc. can all just shut down. Blissex just knows they're wasting their time.
Raising the SS cap only captures those middle-class suckers and doofuses who don't understand the basics or don't have guts to go to their employer and negotiate profits. And who's to say that companies won't change the way compensation is calculated to avoid the increase?
But my point still stands, raising the cap means more inflow to the Treasury. What guarantee do we have that we'll get back at least what we put in?
Who's really including SS in their retirement calculations?
«Also, the 1986 act had the same top rate of 28% that applied to wages, interest, dividends and capital gains which I thought was fair and a good system.»
Of course having the same rate for all types of income is a good idea, because in the current situation the rich and crafty can afford many ways to dress other types of income as capital gains and pay lower taxes than the gullible public is given to think.
But the clever dissembling here is stating that a top rate of income tax 28% on high incomes is fair, as introducing it for the top 20% of households would raise the total tax rate on the bottom 80% by 44%, and creating a vast redistributive swing from the feckless and lazy low income 80% to the productive and hard working top 20%.
It is simple arithmetic! Currently the average federal income tax take is 20% and the total tax take on high incomes (all income and non income taxes both federal and state) is around 30%, and it is about 30% even on low incomes, as Warren Buffet is clearly aware:
http://WWW.CommonDreams.org/views03/0520-09.htm
«The taxes I pay to the federal government, including the payroll tax that is paid for me by my employer, Berkshire Hathaway, are roughly the same proportion of my income -- about 30 percent -- as that paid by the receptionist in our office.»
Currently the average total tax take is 30%, of which 20% from federal and 10% from state taxes; note that even Reagan could not get that total average take much under 30% even by running a big deficit, never mind the current ''big government for big business'' administration.
The top quintile of shouseholds have around 54% of total income pay about 25% of their income in federal taxes and 5% in state taxes, and the bottom 80% have about 46% of total income and pay about 14% of their income in federal taxes and 16% in state taxes.
Side note: Isn't it absolutely amazing that very few tax reform advocates mention cutting sales and other state taxes, which hit the poorest 80% much harder than the richest 20%? Aren't those taxes too?
With a top income tax rate for the top quintile of 28%, probably the average total tax take on them would fall to no more than 25%; of which 5% constant in state taxes, and federal taxes down 20% from 25% to 20% total rate. Also that 20% would need to be roughly constant across the whole top quintile, if the rate of federal income tax on the top 1% is to be capped at 28%.
The top quintile get about 54% of all income, so an average total tax rate of 25% on that would raise about 13.5% of total income, out of the 30% that is needed.
This means that the remaining 80% would have to pay about 16.5% of total income in taxes. But the bottom 80% get only 46% of all income, so their average total tax rate would have to go up from 30% to 36% (36% of 46% => 16.5%); of which 16% constant in state taxes, and federal taxes up 43% from 14% to 20% with a much higher top rate of federal income tax than 28% (assuming that the bottom quintile as now should not really pay any federal income tax).
So the average household in the top quintile would have a total tax take of 25% on average incomes of $184,500, compared to 36% (44% higher rate) for the bottom 80% of households with an average income of around $44,500.
Well, it seems like that discouraging poverty by making it an unaffordable luxury for the feckless and lazy 80% of households would be a wonderful objective.
To maintain the current situation of a mostly flat rate across incomes, the average total tax rate on the bottom 80% would need to fall from 30% to 25% too, which would require cutting the total federal tax rate on the bottom 80% of household with 46% of income from 14% to 9%, greatly improving the regressivity of taxation on the bottom 80%.
Fine, but reducing tax revenue by 17% (from 30% to 25% of total income) would greatly increase an already large deficit. Is this the purpose?
«the least bit of evidence to support your central thesis, that labor mobility approaches anything near that of capital.»
Well, this is a just a malicious misrepresentation, because I have never stated or implied, except in your deranged imagination, that «labor mobility approaches anything near that of capital», never mind that this is my «central thesis» as you state with shameful deception.
My point has been and remains that Randolph's (not Mankiw's) 70% fantasy depends critically on the assumptions that all capital is perfectly mobile and all labor is not at all mobile, and that a multicountry general equilibrium analysis has any relationship to the reality-based economy in dynamic world.
As to the mobility of capital or labor, only an inveterate buffoon could ignore that an an awful lot of capital is rather imperfectly mobile, and that for example mansions or shops or factories cannot be frictionlessly moved to London or the Bermuda, or that about a million people a year immigrate into the USA to work there.
We don't live in Randoph's Soviet ''paradise'' where around every country there is a Berlin wall with KGB guards to prevent people living or entering, and where towns or factory complexes can be relocated by thousands of miles with the stroke of a pen.
It would be interesting (but difficult) to find some sensible metric to compare the relative mobilities of labor and capital; but it is pretty obvious that the mobility of capital is not 100% or close and that of labor is not 0% or close.
«as you yourself point out, your argument excludes the possibility of global tax havens»
Another malicious misprepresentation, because I have stated precisely the opposite, that Randolph's model critically relies on perfect mobility of capital for its 70% result precisely because there are countries with lower or no corporate taxes. Tax havens do exist, but their existence would be irrelevant in his model unless all capital could be moved frictionlessly, so Randolph assumed out of nothing than all capital is indeed frictionlessly mobile. This is all over again the ''silly putty'' :-) theory of capital, which has been ridiculed for decades.
«The corporate income tax is not so much a tax on profits as a tax on mode of organization.»No, it is just a convenient place where to tax income in the form of profits. There are specific registeration fees for just the mode of organization.
How can it be a tax on income when there is a perfectly legal way to earn the same income without paying the tax? The registration fees are trivial by comparison. The big disadvantage of incorporation is that it subjects you to the corporate income tax.
I always wondered what Buffet's receptionist got paid.
I thought w/the child credit, EITC, 401K contribution, etc., the bottom doesn't even pay fed taxes or it's minimal?
Blissex,
I think you're mixing apples and oranges. My suggestion of an alternative maximum tax rate of 25% on gross income with no exemptions or deductions applies to the federal income tax liability only. Those of us who earn income from wages would still pay FICA tax (with the Medicare portion applying to all wages, salaries and bonuses, not just the first $94,000) as well as state and local taxes.
In my own case, since I live in a high tax state (NJ) and work in a higher tax state (NY), my total tax burden (federal, state and local) has averaged approximately 38% of gross over the last 35 years and has been as high as 41% while never lower than 33%. This does not even include the employer's share of FICA taxes which most economists agree are actually born by the employee in the form of lower wages, nor does it include corporate income taxes which are largely built into the price of the goods and services I buy.
The bottom 50% of income earners pay only about 4% of the federal income tax. For lower income people, FICA taxes are the big hit at the federal level. At the state level, sales and property taxes hit lower income people harder as a percentage of income, but most states also have a progressive income tax.
The total tax burden, as a result of the mix of both regressive and progressive taxes, is surprisingly flat across the income spectrum. However, offering an alternative maximum tax of 25% for the purpose of calculating one's federal income tax liability is unlikely to change the distribution of the tax burden. To be absolutely sure, we could add back capital gains and dividend income to the base for calculating the Alternative Minimum Tax.
Finally, it is only a good idea to tax all income at the same rate if the rate is manageably low. I think taxing capital gains at much above 30% at most, as we did in the inflation driven 1970's, would adversely impact investment and risk taking.
The greater the economic power, the greater the ability to pass on costs (including the cost of taxes). Thus those with the least economic power eventually end up paying most of the taxes. Think standard of living - not dollars. The powerful turn in the checks with all the numbers on them, but it is the powerless who actually pay. Not just corporate taxes, but all taxes, are ultimately regressive. The rich don't pay taxes - they collect them.
As for the poster above who asks (quite reasonably) why the powerful complain about their "burden" if this is true - its because they don't get it either. The myth of progressive taxation is so engrained that not even those who benefit the most from it (the powerful) are aware that it is a myth.
"I have always thought that the corporate income tax was just another cost of doing business that gets built into product prices and/or wages one way or another in order to produce a target after tax return on capital and on equity."
The way that the company makes sure that future projects produce that target after-tax return on capital is by rejecting any projects that don't meet the hurdle. Hence less investment, because otherwise good projects get turned down because of the tax.
Ann:
The way that the company makes sure that future projects produce that target after-tax return on capital is by rejecting any projects that don't meet the hurdle. Hence less investment, because otherwise good projects get turned down because of the tax.
That’s a partial equilibrium argument. The conclusion might turn out to be right in general equilibrium, but it’s easy to counter the argument as it stands. If firms undertake fewer projects, they will hire fewer workers. This will cause unemployment, which the Fed will attempt to alleviate by cutting interest rates. Lower interest rates reduce the target return on capital, so more projects become profitable again. In fact, since labor supply is quite inelastic, firms will end up employing just about as many people as they did to begin with, so they’ll end up undertaking about the same number of projects.
You might argue that the lower interest rates will cause people to shift from saving to consumption, so there will be fewer assets available for investment. However, by most accounts saving is quite inelastic, too.
A more promising argument, perhaps, is that lower interest rates will draw resources away from the production of productive investment goods by (1) making housing construction more attractive and (2) weakening the currency and thus making exports more attractive.
> Actually raising the cap helps SS finances because the additional taxes received exceed the additional benefits paid.
In other words, we're already hosing the people who are around the SS max, so more of the same will have no effect.
Raising the cap will increase the number of hosed people (otherwise, what's the point) and hose people who are politically powerful. Are those things likely to increase or reduce the amount of political support for SS?
When you put a tax on wages, such as social security or the unemployment tax, the employer doesn't say, "oh, well, profits dropped 15% this year; better tell Merrill Lynch to issue a 'sell' rating" -- they pay their employees less, both to lower the tax burden and to recover the lost profits.
But is the reverse true? When profits go up 20% does Walmart say "oh, better increase the pay of that guy at the register by 20%? Do they increase training or benefits? I'm not being rhetorical here. Could anyone shoot this notion down or back it up?
Walmart will not increase wages or benefits as long as they are able to attract enough employees with the skills they need without doing so. They may also not be able to easily reduce wages and benefits enough to meet a new payroll tax if they cannot attract enough employees at the lower rate, instead they may have to spread the cost at least temporarily over other aspects of the business such as higher prices, lower capital investment, lower profit margins.
I think any business that is subject to the discipline of the marketplace and not encumbered by uncompetitive union contracts and/or expensive legacy costs for retiree healthcare will pay employees a salary and benefit package sufficient to attract and hold people who can perform their jobs in a competent and efficient manner. If payroll or other taxes change over time, it will adjust as best it can by changing prices or service levels or adjust other costs or try to become more efficient. If all competitors in an industry are faced with the same issue, it is probable that the most significant adjustment will be on the price side.
«I think you're mixing apples and oranges. My suggestion of an alternative maximum tax rate of 25% on gross income with no exemptions or deductions applies to the federal income tax liability only.»
But I have not addressed this aspect of your comments at all. Why are you mentioning it? Just to try to confuse things? I have only commented on the top 28% rate of income tax for high income earners as this clearly shows:
«With a top income tax rate for the top quintile of 28%, probably the average total tax take on them would fall to no more than 25%; of which 5% constant in state taxes, and federal taxes down 20% from 25% to 20% total rate.»
When did I mention or address the consequences of your alternative maximum tax?
«In my own case, since I live in a high tax state (NJ) and work in a higher tax state (NY), my total tax burden (federal, state and local) has averaged approximately 38% of gross over the last 35 years and has been as high as 41% while never lower than 33%.»
You just need a better tax consultant :-).
«The bottom 50% of income earners pay only about 4% of the federal income tax.»
For the less alert reader, note the sudden and astute switch from tax rates as a percentage of the income of the taxpayer affected to a percentage of the income of all taxpayers (because that 4% is 4% of all income taxes paid by all tax payers), and from total tax paid to just income tax. Also note the astute use of pay only as if it was natural that the bottom 50% of taxpayers should pay taxes on the income of all taxpayers, not just their own.
Well, this sounds like pure handwaving to me, especially in light of the numbers I have provided, which would apply with little modification to the case of a 25% max tax take as to a maximum 28% top income tax rate on the wealthy, as the two might be roughly equivalent.
If running the state takes at least 30% of national income, then capping the total tax take on the rich at 25% has much the same effect as capping the maximum income tax rate on the rich at 28%: that the less rich have to pay a much higher total rate, because the less rich earn a smaller proportion of national income than the rich.
«Finally, it is only a good idea to tax all income at the same rate if the rate is manageably low.»
Why is «tax all income at the same rate» a good idea? This is pure handwaving. For one thing it is a bad idea in practice to tax lower incomes at all, if only because the cost is largely not worth it (especially at a low tax rate). Getting 30% of the income of a top-20% earner with an average income of $187,500 yields $56,500 and getting 30% from a bottom-20% with average wage of $14,800 yields $4,440, and the cost is not proportionally lower. And never mind that leaving a $187,500 household with $131,250 does not seem quite a ferocious as leaving a $14,800 household with $10,260; unless one agrees that the $187,500 deserve morally to pay a lower tax rate as they have worked hard at high productivity, and a feckless and lazy household who can't be bothered to earn more than $14,800
should be punished with a higher tax rate. Tax poverty into history! :-)
Otherwise in practice taxing the lower 40% (and arguably the lower 60%) of incomes at all is probably a waste of time. The main reason why it is done is a matter of principle, just to give every citizen, and not just the rich, a stake into a well functioning tax system and budgeting. To remind even the poor that someone has to pay for the all the money Congress gives to big businesses, agribusinesses, the military-industrial complex, the constituents of committee chairmen, K-street, and all the other campaign donors. In other words a symbolic but important function.
Aside: for the same reason (and many others) means tested welfare is a bad idea, and thus Buffett gets social security, even if he says he should not:
http://transcripts.CNN.com/TRANSCRIPTS/0505/04/ldt.01.html
«BUFFETT: I think -- I personally would increase the taxable base above the present 90,000. I pay very little in the way of Social Security taxes because I make a lot more than 90,000. And the people in my office pay the full tax. I would -- we're already edging up the retirement age a bit. And I would means test -- I get a check for $1700 or $1900 or something every month. I'm 74. And I cash it. But I'll eat without it.
DOBBS: You will eat without it. So will literally more than a million other Americans, as well. Means testing, the idea of raising taxes, the payroll tax. In 1983, Alan Greenspan, the fed chairman, he had a very simple idea. Raise taxes, that's what you're saying here.
BUFFETT: Sure. But I wouldn't raise the 12 point and a fraction, I would raise the base. From above $90,000.
DOBBS: That's a progressive idea. In other words, the rich people would pay more?
BUFFETT: Yeah. The rich people are doing so well in this country. I mean, we never had it so good.
DOBBS: What a radical idea.
BUFFETT: It's class warfare, my class is winning, but they shouldn't be.»
Again, that I disagree with Buffett's means testing notion here. Yes, it is ridiculous to pay a $22,000/y pension to people who earn a lot more than that, but the cost is not that large (after all there aren't many of them) and there is an important principle at stake.
Going back to the tax-rates-on-what discussion, a «low tax rate» is just not possible unless one is happy, like this administration is, to create a very large amount of federal debt and stimulate inflation, in the interests of big business, but probably not those of capitalism, freedom, and democracy.
«That’s a partial equilibrium argument. The conclusion might turn out to be right in general equilibrium, but it’s easy to counter the argument as it stands. If firms undertake fewer projects, they will hire fewer workers. This will cause unemployment, which the Fed will attempt to alleviate by cutting interest rates. Lower interest rates reduce the target return on capital, so more projects become profitable again.»
As usual, mentioning «equilibrium» outside the context of ''we gotta publish equilibrium papers to get tenure'' fantasyland is ridiculous.
And more than ridiculous in the particular case above, because the discussion is about the effects of taxation without the effects of spending the tax money thus raised.
Taxes don't necessarily destroy money or profitability; they mostly shift some private demand (e.g. for holidays) into public demand (e.g. for road maintenance), which may well increase the overall before-tax profit rate, and the effect on after-tax profit rates thus is undetermined (they may go down, but they may go up). Interest rates or not.
Discussing tax rates as if taxation were not the other side of the coin from public spending is at best foolish and more probably disingenuous.
Blissex,
Two points and one question.
1. My comment about taxing all income at the same rate relates to taxing income from different sources like wages, interest, dividends, and capital gains at the same rate, not taxing the total incomes of different individuals who earn drastically different total incomes at the same rate. I support progressive income taxes; I would just like to see them capped at some reasonable percentage of total income. The definition of reasonable is subject to debate.
2. The cost of collecting income and FICA taxes from wage earners whether their salary is high or low is quite small given the withholding mechanism and modern technology.
3. Question: What percentage of income do you think high income people (say, $200,000 and above) should pay in combined federal, state and local taxes -- 35, 40, 50 percent? If they are really wealthy, do you think government (combined federal, state and local) should be their senior partner and try to take 60 or 70% of gross income? Just trying to clarify what you think is reasonable. For the record, I think 35% would be about right and certainly not more than 40%. I don't think government should be anyone's senior partner, no matter how wealthy. I'm sure many others probably have a different view.
Andy Freeman:
> Actually raising the cap helps SS finances because the additional taxes received exceed the additional benefits paid.
In other words, we're already hosing the people who are around the SS max, so more of the same will have no effect.
Raising the cap will increase the number of hosed people (otherwise, what's the point) and hose people who are politically powerful. Are those things likely to increase or reduce the amount of political support for SS?
Raising the cap won't increase the number of "hosed" people since it would only affect those currently above the cap. It would "hose" these people a bit more. The cap goes up every year anyway, adding another .5% to the annual increase would be hardly noticed by most of those affected.
I am not advocating this as it would not address the main problem with SS. SS is currently collecting more than it pays out but the government is not saving the surplus but instead blowing it on stupid wars and other boondoggles. Raising current SS taxes would just aggravate this problem.
I'm not interested in what Buffet says, I am interested in what he does.
Does he cash his checks?
Does he return them to the treasury? Does he donate them? Does he take the deduction?
We know he avoided billions in death taxes that he advocates for everyone else.
Warren could have handed his money over to treasury any time he wanted, but he chose not to.
He's spent millions in tax avoidance.
> Raising the cap won't increase the number of "hosed" people since it would only affect those currently above the cap.
Actually, it will.
[For the purposes of this discussion, "near" and "at" the cap is folks who are currently paying far more than they'll ever get, you know, the folks who have to be coerced because SS is not an investment, but "the right" to pay welfare for old people.)
It's already the case that folks near/above the cap get returns that none of them would voluntarily choose.
So, in one sense they're all already hosed. However, folks at 3x the cap are being hosed only 1/3 of their uncapped contribution. It's not as big an issue to them, relatively, as it is to someone at the cap.
However, if we raise the cap with the intention of improving SS's finances, those 3x folks are suddenly going to be pissing away 3x as much money, exactly the same proportion as the folks at the cap.
In other words, increasing the cap will increase the number of effectively hosed people. That's the point, at least if your goal is to help SS's finances.
knzn: "Lower interest rates reduce the target return on capital, so more projects become profitable again."
I've done financial analysis of projects at three very large corporations. All three of them established long term hurdle/discount rates for projects. Short term changes in interest rates have no effect on the analysis of corporate investment. Only when interest rates are lowered for long periods of time will corporations adjust investment discount rates. Federal Reserve adjustments and changes in unemployment will not normally affect the viability of projects.
Corporate tax rate changes, though, immediately change the profitability of all proposals.
BC: "I have always thought that the corporate income tax was just another cost of doing business that gets built into product prices and/or wages one way or another in order to produce a target after tax return on capital and on equity."
Well, that sounds simple. But the corporate income tax is not the same in every nation, is it?
"In fact, since labor supply is quite inelastic, firms will end up employing just about as many people as they did to begin with, so they’ll end up undertaking about the same number of projects."
Why would labor supply be inelastic? For one thing, the minimum wage prevents people from being employed at too low a wage, so less demand will lead to unemployment rather than to people working below the minimum. Plus people have alternatives to a very low wage - welfare, unemployment pay, etc.
And to say that, if firms employ as many people, they'll take on as many projects, is another huge leap. You're right that it's all complicated and that there are possible offsetting factors, and Blissex is right that there will hopefully be some benefits to the use that the government makes of the funds (although that's not guaranteed).
But it's unreasonable to simply assume that everything is inelastic and thus that a major cost increase has no effect in the end. Higher costs make marginal projects unattractive.
> In fact, since labor supply is quite inelastic
Huh?
Household servants/assistants used to be far more common that they are now. I'm pretty sure tht that's because they're relatively more expensive than they used to be. If so, that's a pretty dramatic example of a wage shift destroying a class of work.
Arguably this just caused a shift of work, but is it really unreasonable to think that increasing the cost of doing certain jobs would affect whether or not they get done?
How is it that some folks believe that the tax code affects corporate behavior yet believe that changing their labor costs doesn't?
«I support progressive income taxes; I would just like to see them capped at some reasonable percentage of total income. The definition of reasonable is subject to debate.»
This is a very reasonable idea indeed. The problem is in the details and how flat the curve is... My suspicion here is that your arguments do not take into account just how unequal the distribution on income is. If most of the income goes to a small rich minority, the only way to limit the tax rate on that small minority is to have higher tax rates on the much larger and poorer majority.
«The cost of collecting income and FICA taxes from wage earners whether their salary is high or low is quite small given the withholding mechanism and modern technology.»
This merely makes the principle that everybody should pay some taxes less inefficient. The cost is driven by the sheer number of tax returns which yield little tax. Again, this is because of the very unequal distribution of incomes. Also, there are costs not just in collecting, but also in auditing, and costs on the taxpayers too in keeping track of their income and preparing returns.
Here the EITC has particularly important and inefficient role, because its main effect is to compensate the regressive role of the state sales taxes, whose main purpose is to counteract the progressivity of the federal income tax. If one could abolish sales taxes and the EITC and income taxation on at least the bottom 40% of incomes government bureaucracy could be shrunk a lot.
«Question: What percentage of income do you think high income people (say, $200,000 and above) should pay in combined federal, state and local taxes -- 35, 40, 50 percent?»
Well, it is really not for me to say, but for the USA voters to decide how much of their income they want to spend on public vs. private goods.
Note that government in the USA for the past two centuries has not been George III sending the redcoats to collect his dues, but USA citizens deciding how much they want to spend on public goods and how much they want to spend on private goods. In a democracy government in effect is a group purchase scheme, and USA citizens decide fairly freely how much they want to spend through that group purchase scheme, and thus how much they got to pay for those group purchases.
In some countries voters have decided to spend the majority of their income, like 60%, through their national group purchase schemes, because they find them good value, presumably; in the USA they have decided to spend roughly 30-35%.
In either case the top total rate on top incomes cannot really be lower than the average percentage of public spending, unless one wants to tax bottom incomes at a higher rate than top incomes.
It is just arithmetic: there is dispersion, and to achieve an average of X the higher end of the dispersion need to be significantly higher than X, unless the dispersion is small because the lower end also is near X.
«If they are really wealthy, do you think government (combined federal, state and local) should be their senior partner [ ... ]»
But the government is not their «senior partner», it is themselves and their neighbors (a few thousand miles of neighbourhood in the case of the USA :->). The government is not someone else, it is in effect us.
Now all group purchase schemes have their discontents (just go to a condo meeting! :->), and those who think they pay too much and get too little. But then while there is majority rule, this is tempered by nomination and lobbying by the wealthier minority, so the end result is not necessarily unbalanced in one way only.
BTW, literally taken the idea of maximum total tax take per individual or household is quite mad for another reason: that it would involve the federal government taxing residents of states at different rates, and would give each state an incentive to raise its own taxes until the federal take is zero.
Taken literally, a max of say 35% could be an inducement to a state to enact a 40% tax on its top-20% households to force the federal level to pay 5% back to those to bring the total down to 35% :-).
Part of the reason why you pay above average taxes for your income class is that you have chosen high-budget states, and part is that probably most of your income is earned instead of capital gains. As to the first aspect, well, that is what state rights are all about: offering people different tradeoffs. As to the second, thank those much richer than you that get most of their income via capital gains and have lobbied to raise more money on earned income and less on capital gains.
«I think 35% would be about right and certainly not more than 40%.»
Well, this to me means that you think that the group purchase schemes in the USA either should be regressive overall or that they should not spend more than 20-25% of national income, while the current total spend is around 30-35%, and cutting total spending by almost 30% looks like improbable.
The reason is that all averages have some deviation, and if the upper limit of the deviation for some group like the top 20% or 5% or 1% has to be like 35% the average got to be quite a bit lower, like 26%, and then given that we are talking about capping the total group purchase spend of the top earners, the bottom ones have to be disproportionately hit, because they got disproportionally lower incomes.
BTW it is not clear to me whether your «$200,000 and above» is individual or household income, so I shall take some interpretive liberty; also easily available statistics for households are averages, and thresholds are easily available for individuals instead, so I shall mix up things a bit, hoping to be illustrative. I shall also recycle some data from a similar discussion.
So the incomes below are ''adjusted'' individual incomes, not household incomes, and that they are the entry level of their band, not the average. In the previous examples I have made I have used average household incomes per band, not entry individual ones.
They are split in 80%, 15% and 5% to make clear how the unequal distribution of income affects things even within the top 20%. The split is chosen so that the top 20% have a bit more than half of the total income and the top 5% have a bit more than half of the income of the top 20%. The average total tax rate for that year is about 28%.
We have three disjoint bands:
* bottom 80%, individual income under $60,800, get 48% of total income, total federal tax rate of 12%; average household income of $44,525.
* middle class 15%, income between $60,800 and $108,700, get 25% of total income, total federal tax rate of 21%; average household income of $120,200.
* rich 5%, individual income over $108,700, get 27% of total income, total federal rate of 28.4%; average household income of $377,400 mostly because of the top 1%.
and to give an idea of the dispersion of incomes in the top 5%;
* top 1%, individual income of at least $237,500, get 14.3% of total income, total federal rate of 31.4%; average household income of $1,022,400 (these numbers are included in the 5% above).
Lets' look at different ways of rearranging the average total rate for the 80%, 15% and 5% groups, which involves some guesstimating; I shall assume erroneously but probably not too erroneously (handwaving alert) that capping total tax rate at X involves an average of 0.70X. There is also the problem of the different profiles of state and federal tax, and each band distribution is probably Zipf (power law) like, ...
So let's assume that we cap the total tax take from the top 5% at 35%, which means probably an average total take of roughly 25%.., or at 40% which probably implies an average of 28%, and at 50% which probably implies an average of around 35%.
First assuming the middle 15% continue to pay the usual total rate of 30%:
1) 80%: 33% | 15%: 30% | 5%: 25% (35% cap) 2) 80%: 31% | 15%: 30% | 5%: 28% (40% cap) 3) 80%: 28% | 15%: 30% | 5%: 35% (50% cap)
Then assuming that it is the bottom 80% that continue to pay 30%:
4) 80%: 30% | 15%: 35% | 5%: 25% (35% cap) 5) 80%: 30% | 15%: 32% | 5%: 28% (40% cap) 6) 80%: 30% | 15%: 25% | 5%: 35% (50% cap)
And then that the bottom 80% and 15% pay the same rate:
7) 80%: 32% | 15%: 32% | 5%: 25% (35% cap) 8) 80%: 31% | 15%: 31% | 5%: 28% (40% cap) 9) 80%: 28% | 15%: 28% | 5%: 35% (50% cap)
Blissex: "Isn't it absolutely amazing that very few tax reform advocates mention cutting sales and other state taxes, which hit the poorest 80% much harder than the richest 20%?"
How can you use the adjective "poorest" to describe 80% of the population? Very few households in the U.S. are poor. Those below the "official" poverty line generally receive transfers that bring them out of the ranks of the poor.
Where is the justice in any "soak the rich" policies? Those folks who work the hardest and take the most risks continue to be penalized.
How can this be morally right or legally right?
Other than his obvious support of the corporate income tax, Blissex makes some good points about total spending and income tax rates. The maximum federal rate will have to be higher by some amount above the total percentage of government spending of national income in order to preserve/develop true progressivity.
For true tax reform, if I had to design it, this is the outline:
(1) Abolish all corporate income taxes-they alway flow back to actual people and are clearly distortive in their effects.
(2) Abolish all sales taxes. They are regressive.
(3) Abolish all FICA taxes. They are regressive.
(4) Adjust income tax rates to collect the revenue now collected. We can debate the details, but a rough outline would have brackets like, for example, 2%, 5%, 10%, 15%, 25%, 40%, 50%.
(5) No deductions but a standard deduction based on number in the household.
(6) All income, regardless of source, is treated equally for purposes of taxation.
(7) All state/local tax revenue systems mirror the federal one.
As a principle, I think it important that everyone pay something.
Blissex,
Just a couple of side notes.
I noticed that you thought it important that taxpayers be aware of the money spent for corporate welfare, defense, but did not include the biggest spending categories. Why?
Also, I agree with Buffett. All of the present entitlements should be means tested.
"oh, well, profits dropped 15% this year; better tell Merrill Lynch to issue a 'sell' rating" -- they pay their employees less, both to lower the tax burden and to recover the lost profits. «But is the reverse true? When profits go up 20% does Walmart say "oh, better increase the pay of that guy at the register by 20%?»
To put the answer by someone else in clearer terms, that depends entirely on the relative pricing powers of Wal*Mart (and within Wal*Mart, the relative power of mangement and shareholders), their customers, their ''associates'', their suppliers. These pricing powers within significant ranges are not related to economic factors...
If Wal*Mart have the pricing power to make associates bear the cost of a drop in profit, maybe they have the pricing power to not give anything back if there is a rise in profits.
But note that changes in profits do affect the pricing power of Wal*mart. Lower profits usually mean that Wal*mart's power wrt associated becomes higher, and higher profits usually mean the opposite.
What matters however is how much :-).
Yancey Ward: "We can debate the details, but a rough outline would have brackets like, for example, 2%, 5%, 10%, 15%, 25%, 40%, 50%."
Yeah, we can debate the details. How do you justify taxing some folks at 5% and others at 50%?
For that matter, how can anyone justify even a flat tax? With a pure flat tax, a household with $100,000 income will pay five times as much as one with $20,000 income. Why should the former pay five times as much for national defense as the latter? Why should they pay five times as much for maintaining the national parks? Why should they pay five times as much for the protection provided by the Homeland Security and the FBI?
Yancey Ward: "I agree with Buffett. All of the present entitlements should be means tested."
Why? Because one of the wealthiest men in the world says so?
Consider the normal household that prudently saves for retirement over 35 years, building up a $1 million nest egg? That $1 million will provide a mere $50,000 income in retirement. That household was counting on the $28,000 social security income promised him in return for foregoing 13% of his wages every year.
Would you now shaft those prudent ants because they did the right thing and saved? In order to fully fund the grasshoppers who splurged all their lives?
What is the moral justification for means testing? Simply that there are more grasshoppers than ants, so the majority rules?
How about this: there are more whites than blacks in the U.S. Would it be OK if the white voters decided we should skin color test all entitlements?
John Dewey,
In re entitlements:
The justice of means testing is this: you receive your benefits from workers, not the people for whom you paid the tax in your working life. Just because you got hosed is not justification to hose someone else. This pyramid scheme needs to end; means testing benefits is the most logical process by which to do so. Sorry.
In re income tax rates: I picked those brackets based on present government consumption. If you don't like them there are two options. Act politically to change the rate structure and/or to reduce the actual spending. Doing the first will flatten the rate structure, doing the second will decrease the rates at each level, and doing both will accomplish both. As I wrote- the details are open to debate.
«I noticed that you thought it important that taxpayers be aware of the money spent for corporate welfare, defense, but did not include the biggest spending categories. Why?»
Well, because the big things are already closely watched, as those spending programs deliver their benefits to a lot of people, being essentially group insurance and investment programs, so they are many-to-many. Also, they are mandatory and they run on automatic on long term trajectories that are pretty hard to change.
Civilian or defense corporate welfare are instead largely discretionary (down to the famous if small earmarks), and it is many-to-few. Bears watching rather more closely.
Corporate welfare is already watched closely by business interests. If tax were paid only by businesses or business owners or managers, benefiting mostly only corporate interests, fights over spending would be just infights at the Chamber of Commerce or the Business Roundtable. But the outcomes really affect everybody.
As to the broader picture Yankee capitalism is highly participatory. Too bad that much of the USA seem to be preferring dixie plantationism...
«Also, I agree with Buffett. All of the present entitlements should be means tested.»
Well, this is a bit of an unsupported statement...
Conversely part of the rationale of things like Social Security and Medic{are,aid} is precisely that they are many-to-many programs. Their funding may be regressive, and their disbursements progressive, but their sheer size and many-to-many nature means that they should involve everyody on both the funding side and and the benefit side.
Suppose that taxes/contributions were paid solely by the richest 20%, which was the case in the past by the way, and personal welfare benefits went only to the poorest 40% and corporate welfare benefited only the top 1%.
This would create a lot of bad incentives, as well as possibly reducing the risk pools. Even worse, in the USA given the very large disparities in incomes across states such a skewed distribution would be in effect geographical, by state. Bad news for the Union.
Anyhow means testing is a very bad idea in general mostly because of ridiculous boundary effects at the means tested threshold(s), and the high administrative overheads for the testing, and the incentives to cheating, and so on.
Means testing anyhow matters only to those that have a fetish about the absolute size of government spending, instead of its overall efficacity.
Consider Social Security again: it is in effect two different programmes, an insurance one, and a an investment one, which overlap.
The insurance bit is against catastrophic income loss in old age or disability. Like all insurance schemes, most of the people paying the premium don't get their money back, and should be very happy about that.
The investment bit is in effect a very low cost, low risk highly efficient payroll-index fund.
Now, means testing would in effect be stripping away the investment scheme, and leaving only the insurance scheme, while this administration's reforms would be the opposite, stripping away the insurance scheme and turning the investement scheme into a high cost, high risk stock-index fund.
But, as a matter of choice by leaders and voters, the USA now have both together. There is a rationale for that: to give everybody a small degree of compulsory saving, and to make the insurance scheme and the investment scheme benefit from each other's size and supervision.
Sure, compulsory investment is a bit illiberal, but we are talking about a democratic majority choice, and it is small anyhow, and even better overall it works pretty well on both the insurance and investment side.
Look again at Warren Buffett: sure, paying him the $22000/y now is merely symbolic. But symbols do matter, and for almost all pensioners Social Security is actually a fairly significant chunk of their old age income.
So one would have to set the mean-test threshold pretty high (handwaving: like $60,000 total income), also to minimize boundary effects. And then the percentage of people means tested away would be so small (like 15%) that it is hardly worth bothering.
Other countries like the UK have done it the way Buffett would like, and the result is a heavily criticized mess. Lucky the USA that don't have committees of overly clever Oxbridge mandarins designing state pension systems :-).
For some of the details of the horror, have a look at this leftie article and a liberal one:
http://WWW.LTUReview.com/user/story.php?id=62
http://WWW.Economist.com/world/britain/displaystory.cfm?story_id=6975864
«support of the corporate income tax»
I am not defending it as such, but merely as an expedient way to collect tax that otherwise would be too easy to evade. "Jane Galt" correctly says that:
«you can't tax a corporation; you can only tax that corporation's employees, shareholders, or customers:»
but you can surely use it as a witholding on tax due by «employees, shareholders, or customers».
Otherwise customs, excise and sales taxes would not make sense either: because you cannot tax imports, manufactures or goods, only importers, manufacturers or shops, or their customers.
But sales, excise and import taxes exist because it is expedient to tax goods imported, manufactured or sold, even for sure those goods don't end up paying any tax themselves :-).
I can't understand the big issue about corporate taxes, which are now pretty insignificant (due to massive avoidance and evasion by corporations], as report in these very amusing historical series from the CBO, Table 4, "Revenues by Major Source, 1962 to 2005 (Percentage of gross domestic product)":
http://WWW.CBO.gov/budget/historical.pdf
Corporate taxes are now around 2% of GDP, and they were around 4% during the 1960s, and USA businesses were doing pretty awesomely then too.
I would rather, as already mentioned, try to reduce sales taxes, which are much higher, and have rather greater downsides. But fat chance of states doing that.
Blissex,
If the actual rate of corporate income tax is falling due to "massive avoidance", then does this not contradict your argument that the tax is an expedient way to collect the taxes due?
One of Jane's points is that getting rid of loopholes is essentially impossible in the case of businesses since one cannot simply tax the revenue without having to account for profitability. The loopholes drive a lot of unproductive activity (the massive avoidance you wrote of). This is a deadweight loss to the economic well-being of all of us. It should be ended for this reason, if for no other.
For that matter, how can anyone justify even a flat tax? With a pure flat tax, a household with $100,000 income will pay five times as much as one with $20,000 income. Why should the former pay five times as much for national defense as the latter?
Umm, because they have 5 times as much stuff to protect?
«With a pure flat tax, a household with $100,000 income will pay five times as much as one with $20,000 income. Why should the former pay five times»
The practical answer is that somehow 30% of national income must be raised, and the practical solution is to charge a percentage of each person's income accordingly.
And let's have a look at the alternative... The average pretax income by household in 2003 was $71,900/y and 30% of that is $21,570/y. Charge that to every household?
What about the 30-40% of households or individuals who earn less than $21,570/y and can't afford to pay? Sell them into slavery? That will teach them to be lazy parasites! :-)
Or perhaps because the 100,000th dollar of income is not always as indispensable as the 10,000th? Because living on $70,000 out of $100,000 is not quite as desperate as living on $7,000 out of $10,000? Because the second SUV is not as necessary as buying shoes?
Because even in countries like Sweden the economy does well and the rich lead excellent lives and know which side their bread if buttered on?
Because a vast majority of Usians including millionaries and billionaries have voted for these tax schedules because they know the above arguments instinctively?
«as much for national defense as the latter? Why should they pay five times as much for maintaining the national parks? Why should they pay five times as much for the protection provided by the Homeland Security and the FBI?»
Because they have much more than five times as much to lose?
Because they can afford to go to those national parks instead of working 60 hour weeks at $5/h and holidays is taking half a shift off every now and then to sleep a bit more?
Yancey Ward: "The justice of means testing is this: you receive your benefits from workers, not the people for whom you paid the tax in your working life."
I understand Social Security is a transfer from current workers to former workers. But I don't understand your sentence. It seems to be missing a preposition or something.
As best as I can interpret it, your statement does not justify ending entitlements for some and not for others - which is what means testing is all about.
Yancey Ward: "This pyramid scheme needs to end; means testing benefits is the most logical process by which to do so."
How is that logical? How is it any more logical than privatization of Social Security? or than a gradual reduction in Social Security benefits for all recipients? How is it logical or just to deprive a benefit from those who were simply prudent and who worked harder?
Those who made the wrong career choices in life, and those spent everything they earned instead of saving, are now willing to screw those who did - and they're doing so in order to save their own full entitlement. How is that just?
Blissex: "The practical answer is that somehow 30% of national income must be raised"
Why? If every household had to come up with $21,000 annually to support government, the size of government would shrink immediately. We have huge federal and state governments only because the slackers represent enough votes that they can steal from the industrious.
Blissex: "Because they can afford to go to those national parks instead of working 60 hour weeks at $5/h"
Who works those hours at that rate in the U.S.? Only a tiny fraction of workers earn under $6.00 an hour, and few of them are primary breadwinners in their households.
John Dewey,
How is it just that someone with a non-Social Security income of $50,000/year takes another $28,000/year from people who are working, many of which don't even make $28,000/year?
Past injustice cannot be used to justify present and future injustice.