Economics @ ITT

Inequality: The Elephant in the Room

Posted in economics, Policy Issues, progressive taxation, Taxation by ittecon on April 30, 2013

Robert Reich discusses the elephant in the room and advocates Keynesian economics over supply-side austerity.

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Raising Taxes On The Rich?

Posted in economics, employment, microeconomics, Policy Issues, progressive taxation, Taxation by ittecon on November 30, 2012

Economics is not some monolithic discipline, and it is consitently misrepresented by those with Corporatist and otherwise Elitist agendas. Take the following statement:

Economic theory says that when the government takes a bigger bite of your income as you move up the ladder into higher tax rates, you are less likely to work more, invest and build businesses. So economic growth and job creation suffer.

Some theories—and admitedly the mainstream theory—do make this claim, but it falls apart quickly when we understand that persons at those wage levels are not hourly workers; they are salaried. Likely, you will work just as hard, and your gross wages will remain somewhat the same; your net income—what you can’t shelter to avoid or evade taxes—will undoubtedly fall somewhat at the affected margin. Lots of smoke; no fire.

Reference: Raising Taxes On The Rich: Canny Or Counterproductive? : Its All Politics : NPR.

Response to Sustainable Taxation

This post is a response to Alex Zorach’s original post on sustainable taxation. He gives additional perspective on other pages of his site.  In his post, he takes the position that sustainability should be a key component in a well-considered tax policy. Follow the links above to read his position, and then read this response. My response is written to Alex, so where I use the pronoun you, I am referring to him.

It is generally accepted that a tax system needs to possess the following attributes, which in summary are equitability, adequacy, simplicity, exportability, and neutrality.

A tax system needs to be equitable, by which we mean fair. Fair is a loaded term, and subject to personal bias based on one’s particular worldview. That said, there are two ways to look at equity: vertically and horizontally. By vertical equity, I mean from top to bottom—up and down the income and wealth scales, from rich to poor. By horizontal equity, I mean to ask, do taxpayers in a given strata under similar conditions have a similar burden.

Vertical equity is addressed by how progressive or regressive the employed tax system is. The system may be progressive, regressive, or proportional. These terms are in common use, so I won’t define them here.

Horizontal equity is assessed, say, by looking at two neighbours in the same demographic group, earning similar income, with similar wealth accumulation and measuring their respective tax burdens. One would expect them to be comparable. I might also compare across some other class such as wage-earners versus investors or natural persons versus corporations to ensure there is no built-in systematic bias toward one group

A tax system needs to be adequate to meet the needs it was designed for. If I need to fully fund a new infrastructure project that costs $100,000,000, then the tax base needs to support this amount. Since federal taxers need to support on-going programmes that might ebb and flow with business cycles, a good system needs to adjust accordingly.

Simplicity speaks for itself. A simple taxation scheme should have the added benefit of being comparatively cheaper to administer and likely easier to asses compliance.

Exportability is the concept that some persons outside of a jurisdiction benefit by services provided in a jurisdiction. Foreign firms and tourists benefit by utilising local services, and so should contribute to the local economy.

Neutrality or efficiency says that taxes should minimise economic impact, so that microeconomic decisions are made not made on the basis of tax policy. Unfortunately, this may be at odds with macroeconomic goals. Taxes do create incentives and disincentives, but as with anything economic, we need to look at the value proposition.

To these, you add sustainability. To some extent, I feel this is a subset of adequacy.

In your position paper, you state that you have “have heard the argument from some conservatives and libertarians that it is not good, proper, or ideal to think about incentives when designing a tax system.” Clearly, these people are not economists because fundamental to a good taxation scheme is to evaluate incentives.  You also mention fairness, which, as I mention as well, is a subjective concept. One perspective of fairness is the Western productivity standard that says “to each according to what he or she produces” versus that Marxian view that says that says “to each the same.”

Regarding simplicity, we are in agreement, and moneyed interests vis-à-vis corporate lobbyists effectively write tax policy, and there are to varying degrees trade-offs between simplicity and fairness.

Now I comment directly on your ideal tax system as I summarise in turn.  First, you support the elimination of individual and corporate taxes, and then you offer alternatives:

Carbon (Fossil Fuel) Tax: I presume you are taxing this on the basis of sustainability, and it is a negative externality. I don’t feel that it would be simple to monitor or measure this at the extraction level. You cite disincentivising buring natural gas off. Who is measuring this burn off in order to assess a tax?

Disposal of Resources: Clearly, evasion would be the incentive created here. If I can dispose of the items illegally or export them to another jurisdiction, I can evade the tax. Moreover, one person’s trash is another’s treasure vis-à-vis recycling. The United States already exports trash to other countries such as China. These countries reconstitute the materials into products they that export back to the US.

Political Contributions: This fails to meet the adequacy standard. Besides as the Citizens United case recently tells us is that an entity can simply advertise in proxy for the politician on the basis of free speech. In kind and indirect contributions of this nature would not be covered.

Holding Cash: This is all well and good, but one only needs to store cash offshore, which many already do. All this will do is tax the people without the wherewithal to export their wealth.

Fines and Penalties: Again, we fine and penalise all sorts of activities, but it is hardly adequate to support a four trillion dollar national budget.

Even if we were to assess all of these, I do not see how this would even close to support any significant needs.

As for the less radical proposal, I think it is important to earmark Social Security and Medicare, though in principle, they could be rolled into income tax and treated differently on the collection side, but a rose by any other name… I adamantly agree on removing any caps on income. Social Security reform is a political red herring and not key to any serious economic discussion. Medicare is a different story.

It is as important to tax interest, dividends, and capital gains at the same rate as earned income. Much tax revenue is avoided by this legerdemain. This meets the simplicity and equity requirements.

Regarding simplicity, deductions need to be severely curtailed—starting with home mortgages. Deductions are a surreptitious means to subsidise behaviour. A more open and honest way is through direct subsidies.

I don’t understand how taxing income shifts “the burden away from wage earners,” as this would be the crux of those affected. I don’t believe that saying that payroll taxes are “a major barrier to employment” makes it so.  I have been involved in hiring decisions in small and medium sized businesses, and I have never heard a discussion that went something like, “Gee, I’d love to hire that person, if only it weren’t for that dreaded payroll tax and FICA/HI.” This is ideological subterfuge and is not a true economic consideration. When a business is considering the cost of a human resource, the question is how much gross salary (including payroll taxes) and benefits do I have to pay to get another worker. If the marginal cost of hiring that is less than the marginal contribution, the hire is made.

Buffett and Gates on Why the Wealthy Need to Pay More Taxes

Posted in economics, Income Redistribution, macroeconomics, progressive taxation by ittecon on May 16, 2011

Warren Buffet and Bill Gates discuss why a flat tax would be a mistake, how taxes on the wealthiest Americans are too low, and how the tax system has been tipped totally in favor of the wealthy. From a 2005 program on Nebraska public television.

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Big Mike Breaks Down the Budget Debate

Big Mike explains the recent budget deficit debate in common language.

Tax the Rich?

Posted in economics, Policy Issues, progressive taxation by ittecon on April 20, 2011

This article suggests a replacement to our current already (somewhat) progressive  federal income tax system. Hint: It’s not a flat tax or a sales tax. What do you think?

Higher Taxes on Top 1% Equals Higher Productivity

Posted in economics, macroeconomics, Policy Issues, progressive taxation by ittecon on January 3, 2011

Michael Hudson is President of The Institute for the Study of Long-Term Economic Trends (ISLET), a Wall Street Financial Analyst, Distinguished Research Professor of Economics at the University of Missouri, Kansas City and author of Super-Imperialism: The Economic Strategy of American Empire (1968 & 2003), Trade, Development and Foreign Debt (1992 & 2009) and of The Myth of Aid (1971).

via Higher Taxes on Top 1% Equals Higher Productivity.

How Do You Feel About A Flat Tax?

Posted in economics, Policy Issues, progressive taxation by ittecon on December 27, 2010

This blog post asks the age-old question, How do you feel about a flat tax? Nevermind, that the author doesn’t prefer this solution or that the Time magazine cover is from January 1996, the question remains valid.

Let’s Not Make a Deal – Paul Krugman

Back in 2001, former President George W. Bush pulled a fast one. He wanted to enact an irresponsible tax cut, largely for the benefit of the wealthiest Americans. But there were Senate rules in place designed to prevent that kind of irresponsibility. So Mr. Bush evaded the rules by making the tax cut temporary, with the whole thing scheduled to expire on the last day of 2010.

via Let’s Not Make a Deal – NYTimes.com.

Why We’re Falling Into a Double-Dip Recession

Posted in economics, employment, macroeconomics, Policy Issues, progressive taxation by ittecon on June 4, 2010

Robert Reich (Why We’re Falling Into a Double-Dip Recession) provides a cogent analysis of the current employment situation. He is not calling a Double Dip recession quite yet, but I will be very surprised if we don’t experience one in the United States—and for all of the reasons he states. Moreover, according to This Time It’s Different (PDF), a typical recession results in an unemployment rate 7-ish points above per-recession averages. That should mean a rate of over 12 percent for a duration of 3 years. Of course, the trigger to this recession suggests that this is bigger than an average recession, so I’d expect the it to last longer (or double-dip) and the unemployment rate to increase.

As Reich points out, the primary reason it isn’t as bad as it could be is due to good old-fashion fiscal policy. He does a good job of pointing out the distinction between a Keynesian variety short-term stimulus from the long-term debt accrued by the supply-siders of the past 30-odd years. If we don’t get a handle on this, we may end up experiencing a lost decade much like Japan in the 1990s.