Tax Policy

[DougMacG]

Thomas Sowell, Hoover Institute/Stanford Prof and author of dozens of great books including "Basic Economics" wrote a column a couple of weeks ago called 'An Overdue Book' http://townhall.com/columnists/thomassowell/2012/11/28/an_overdue_book/page/full/, referring to WSJ's Stephen Moore's new book "Who's The Fairest of Them All?: The Truth about Opportunity, Taxes, and Wealth in America"  http://www.amazon.com/Whos-Fairest-Them-All-Opportunity/dp/1594036845

Sowell writes: "If everyone in America had read Stephen Moore's new book, "Who's The Fairest of Them All?", Barack Obama would have lost the election in a landslide."
...
The title "Who's The Fairest of Them All?" is an obvious response to liberals' claim that their policies are aimed at creating "fairness" by, among other things, making sure that "the rich" pay their "fair share" of taxes. If you want a brief but thorough education on that, just read chapter 4, which by itself is well worth the price of the book.

A couple of graphs on pages 104 and 108 are enough to annihilate the argument about "tax cuts for the rich." These graphs show that, under both Republican President Calvin Coolidge and Democratic President John F. Kennedy, high-income people paid more tax revenues into the federal treasury after tax rates went down than they did before.

There is nothing mysterious about this. At high tax rates, vast sums of money disappear into tax shelters at home or is shipped overseas. At lower tax rates, that money comes out of hiding and goes into the American economy, creating jobs, rising output and rising incomes. Under these conditions, higher tax revenues can be collected by the government, even though tax rates are lower. Indeed, high income people not only end up paying more taxes, but a higher share of all taxes, under these conditions.

This is not just a theory. It is what hard evidence shows happened under both Democratic and Republican administrations, from the days of Calvin Coolidge to John F. Kennedy to Ronald Reagan and George W. Bush. That hard evidence is presented in clear and unmistakable terms...
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The rich pay more when rates are lower.  What today's Dems don't like is that in times of rapid growth the rich are also making more, and growing in numbers. 

Charts from another article, link below:













chart link: http://www.manhattan-institute.org/html/ir_22.htm

[DougMacG]

translation from the original Arabic:

"In the early stages of the state, taxes are light in their incidence, but fetch in a large revenue...As time passes and kings succeed each other, they lose their tribal habits in favor of more civilized ones. Their needs and exigencies grow...owing to the luxury in which they have been brought up. Hence they impose fresh taxes on their subjects...[and] sharply raise the rate of old taxes to increase their yield...But the effects on business of this rise in taxation make themselves felt. For business men are soon discouraged by the comparison of their profits with the burden of their taxes...Consequently production falls off, and with it the yield of taxation."

Excerpt from 'Muqaddimah', by Tunisian Historian Ibn Khaldun, 1377
(Posted previously on 'Economics': http://dogbrothers.com/phpBB2)/index.php?topic=1023.msg16968#msg16968

[bigdog]

Doug, likewise I appreciate the ongoing discussion that is had on this forum. You know well that I too could paste graphs and tables and arguments. These would include many from peer reviewed economics journals that would take your posts to task. We both know, however, that no matter the evidence that I post, minds are not changed. This discussion began on the media forum with a post about how 6000 millionaires had left the UK. Despite the fact that there is zero evidence to that effect, with the front loading of revenue and the economic downturn, for example, leading to the loss of revenue, and hence NO REASON to run the story, there was a shift in the conversation to the Laffer curve. The Laffer curve has its critics, and as I posted Murray Weidenbaum himself has issues with strict adherence to that idea. That fact apparently doesn't resinate with those here. That's fine, but it leads me to wonder why not. I conclude that perhaps he is unknown on this board. And that is a concern to me.

As for the article I posted re: JFK. Perhaps it was the author's father, or given how his father was, perhaps the author himself overheard conversations that were less than public.

I do look forward to name dropping our former professors, though!!! If only I had known we were able to do that on this forum. Not quite the same thing, but I have had a former president compliment my beard.

[Crafty_Dog]

"This discussion began on the media forum with a post about how 6000 millionaires had left the UK. Despite the fact that there is zero evidence to that effect, with the front loading of revenue and the economic downturn, for example, leading to the loss of revenue, and hence NO REASON to run the story, there was a shift in the conversation to the Laffer curve."

Certainly a case can be made that it was all (really?  all?) a matter of front loading (something which the Laffer Curve also predicts), but just as surely the results of decreased revenues and economic downturn are also precisely what the Laffer Curve predicts so I confess that the notion that there was "NO REASON" to run the story eludes me; quite the contrary! -- the decreased revenues and downturn are EXACTLY why the media coverate should have been there.  Of course said coverage should also mention that some ascribe the decrease in revenues to forestalling and the (unbacked by data as far as I know) assertion that in a year or two it would all balance out.

"The Laffer curve has its critics, and as I posted Murray Weidenbaum himself has issues with strict adherence to that idea. That fact apparently doesn't resinate with those here. That's fine, but it leads me to wonder why not. I conclude that perhaps he is unknown on this board. And that is a concern to me."

The Laffer Curve says that at 0% tax rate and 100% tax rate, revenues are neutral and that at some rate, to be empirically determined, revenues are maximized.  Does anyone disagree with this?!?

AS for the appeal to authority of Murray Wedenbaum, I am not a badly educated man about political economics but I confess that his name only rings a vague bell.  By all means please refresh my memory!

As far as this goes:

"You know well that I too could paste graphs and tables and arguments. These would include many from peer reviewed economics journals that would take your posts to task. We both know, however, that no matter the evidence that I post, minds are not changed."

Well, certainly in most places minds being changed is a rarity   but I would submit that it is a simple fact that the essence of the Laffer Curve is a simple truism and that there is also plenty data such as that posted by Doug, which backs up the theory with emprirical data so in the absence of something/anything to the contrary why should minds be changed on this point?

[bigdog]

1. The article was about 6000 people leaving the UK. They didn't. Why run the story?
2. "The" Laffer curve suggests that there is one. Proponents of the idea suggest that the curve depends on the economy.
3. Weidenbaum is searchable. And important.
4. But it isn't. See 2 here and econ journals.

[Crafty_Dog]

I thought the story was about a dramatic decline in revenues (and an economic downturn), apparently in response to a tax rate increase?

The Laffer Curve is a concept and a truism.  As I stated, what the point of maximum revenues is, is an empirical matter.  No doubt it varies according the various variables.

Weidenbaum:  Since you ARE familiar with him, may I ask you be the one to give us a good URL or two?

"4 But it isn't. See 2 here and econ journals":  Not sure to what you are referring here.

[DougMacG]

I think the argument over the Laffer curve is about where we are on the curve and what the elasticity is at that point.  Hopefully no one including Reagan's first chief economic adviser believes people produce full speed as tax rates approach 100% or that taxes have no effect on production.

Take one example, the federal capital gains rate max is pretty low at 15% - for 21 more days.  If that were the only tax on capital gains (ignoring that state tax, federal corp tax, state corp tax and the inflation tax) lowering the rate might not increase revenues - from that tax.  Some Republican candidates wanted capital gains tax rates droped to zero.  That may bring in revenue from other taxes by spurring other activities like hiring and plant expansions, but 0% doesn't bring in more revenue - from that tax.  My problem isn't the 15% tax or that 20% total would be too high, but that states tax capital gains as ordinary income.  As the combined tax rate goes up, the number of people choosing to incur the tax goes down.  What the revenues will do depends on the shape of the curve and where you are on it.  Does that make sense?

An aside for a story attempting analogy:  My old boss in the export business (a less famous former Prof of mine) used to explain to our manufacturers the following regarding product price strategy.  He drew his own 'Laffer curve' and said that there is a perfect or optimum price for the product that maximizes revenues and profits and we can't know precisely what that perfect or optimum price is.  If we set the price too high, we incur (and waste) all of the same marketing and sales costs but lose sales and miss out on these revenues.  If we set the price too low, we have left money on the table, people were willing to pay more, but we bought market share and gained customers with our error.  The strategy is to set the price as close as possible to the unknown optimum price without going above it.  Same I think applies to taxation, though we have made it enormously and unnecessarily complex. We have all these costs of governing that we need to cover whether people produce or not.  Some workers with fixed pay and fixed hours have no elasticity in production - no choice to work more, less, faster or smarter in response to whatever government or their employer throws at them.  The rich most certainly do have options, as demonstrated in the UK story.  That doesn't mean we should tax the rich lower or the same as paycheck to paycheck working people, but it means we need to be more aware of the likely responses to our policies as we design them.  In general, the lower the marginal tax rate, the less incentive one has to change behavior to avoid the tax.

Dems like Obama think (or say) a 36% federal tax rate (plus 9-10% state in some cases) is no hindrance to productive activity and that bumping that up to 44.6% (+12.3 Calif) plus embedded tax, corporate taxes, etc is still no hindrance.  Simple arithmetic will calculate the increase or decrease in revenue.  They are wrong. (An admittedly close minded statement!)  Bush's 1.6 or 3.9 trillion dollar tax cuts claim is a lie or amazingly naive untruth.  Federal revenues grew by 44% in 4 years when they were fully implemented.  Who knew?  (Not the readers of the NYT front page or lead editorials. Not the viewers of CBS network news.)  It was a percentage rate cut, but not a tax cut at all.  It was a tax increase on the rich if we are measuring taxes in dollars.

The honest question or argument is how much will people in the aggregate, not one author, change their productive behavior, not whether the will make adjustments.  If people don't change behavior to different circumstances, what is the point of studying economics?

The amount of change people make seems to always surpass expectations.  That means the expectations were wrong, not the change.  The change documented in the U.K. is phenomenal, even the part that was from frontloading.

"This discussion began on the media forum with a post about how 6000 millionaires had left the UK."

You mean 10,000 'left' and 6,000 stayed.  The data tells a story that is true. 10,000 left that income bracket comparing one year to the previous.  Some of the coverage of the data had statements that were false, saying or implying people physically left the U.K.  

The so-called forestalling of the income implies the data exaggerates the phenomenon, but it is still part of the evidence that the rich have an amazing ability to make adjustments to their income producing behavior in response to different marginal tax rates.  Timing of a taxable event is only one of the adjustments they make.  As Crafty noted, we don't know that all those elective tax events, sale of an asset would have just happened later anyway, no matter the tax rate.  It doesn't all come back because that wasn't the only thing going on.  The UK became a worse place to make a productive investment.  Regarding forestall, the velocity of these transactions, moving consumption, investment, hiring, construction and revenues forward (velocity of money) is crucial to revenues and economic well being.  High tax rates slow things down.  So do excessive regulations.  So does uncertainty.  When you slow things down, your income, tax revenues (and hiring) are all lower in any given period than they would otherwise be.  

To doctors they say do no harm.  Taxes do harm; tax something and you get less of it.  One point of tax policy is to do as little harm as possible to raise the needed revenues.  Our current strategy is the opposite.  Do maximum harm and raise no new revenues.

The forestalling phenomenon supports my argument about the financial crash of 2008.  People make investment and hiring decisions decisions today based on what they see coming tomorrow.  The economy, especially employment, peaked around the Nov 2006 to Jan 2007 timeframe when Pelosi-Reid-Obama-Hillary-Biden-Keith Ellison and company were elected and sworn in to take the majority in congress.  George Bush had two years left in office (divided government) and so did the tax rate cuts.  By the fall of 2008, triggered by failed government intervention in housing, investors could see it was time to sell and capture any remaining gains and put money on the sidelines in the face of higher tax rates, a slowing economy and rapidly increasing excesses in regulations.  The higher tax rates kept getting delayed but were always in plain view as tomorrow's tax rate on today's investment. The onslaught of new regulations with even more on the way (Obamacare!) were taxes in themselves.

Back to the U.K., one question would be - what revenue projections did their CBO (PBO?) make to foster the passing of these failed tax rate increases.  Why do these 'experts' keep getting it wrong?  How does it help in the US to keep information from the voters just because thoughtful analysis will be required to fully understand the implications.  For whatever it means, the number of returns in the top bracket dropped 60% in one year precisely at the time of a significant tax rate hike.  Revenues didn't rise less than expected year to year on the top bracket - they fell!  Can we use that strategy again, forestall income every year by raising the rates for the next year, again and again?  What could possibly go wrong with that?  See the Laffer curve for the answer.  Revenues approach zero as tax rates percentages approach 100.

Bigdog, my famous Prof name dropping from the big public university starts and ends with Heller, and it was Schlesinger who brought him up.  I like to call one Supreme Court Justice Crafty's old Prof, (yours too perhaps).  As a hockey player I'll take the assist for setting you up for the ex-President story.  If it was ex President Hayes, Garfield or Benjamin Harrison who made the beard comment I will be all the more impressed.  

"I too could paste graphs and tables and arguments. These would include many from peer reviewed economics journals that would take your posts to task. We both know, however, that no matter the evidence that I post, minds are not changed."

Of course close mindedness is a problem, but all people here still want to have a better informed minds!  Please post as time permits. I did not intend to overwhelm with so many charts telling roughly the same story.  Just take the first one for example, re-posted below.  What do you have, peer reviewed, that refutes this, that the rich pay more - in dollars or share of dollars of revenues to the Treasury, not percent of a diminished GDP - when the top marginal tax rate is lower?  Looking forward to it.

[G M]

http://www.nationalreview.com/articles/335317/embarrassing-metric-disappears-jim-pettit#

December 11, 2012 4:00 A.M.

An Embarrassing Metric Disappears
Why are government statistics on taxpayer migration being discontinued?
By Jim Pettit



As the din of America’s falling headfirst over the fiscal cliff reverberates across the nation, the Obama administration is quietly killing a key economic metric that tells how, and how many, people are voting with their feet. Since 1991 the Internal Revenue Service has been compiling statistics on filers’ addresses, which the agency’s Statistics of Income division uses to show who is moving into and out of every county and state in the nation. As you’d expect, the IRS also knows the aggregate income levels of those who move. So the movements of the most fundamental productive components of the economy — taxpayers — can be analyzed by journalists and economists, or could until now.The IRS and the U.S. Census Bureau (which provides technical support in reporting tax migration data) have not made an official announcement as to why the program is being discontinued. So we are left to speculate why such vital economic statistics suddenly got canceled.

Some would be glad if the IRS data simply went away. Blue states with high state and local tax burdens have come out looking bad in recent years. California and New York have been embarrassed publicly, as a steady exodus is underway from both.

Regarding California, the free-market Manhattan Institute for Policy Research concluded in September that “this exodus represents a huge reversal to established patterns of domestic migration, and suggests that the Golden State is no longer perceived by most Americans as the land where dreams come true.”

The think tank, which analyzed ten years of IRS data to show that California’s population is fleeing to Texas, characterizes the agency’s data as the “most useful tool” among sources identifying migration patterns. The public-policy ramifications of a declining tax base are clear, according to the Institute: Economic damage ensues when companies, fearing inevitable tax increases, get cold feet in jurisdictions with declining revenues.

Speaking of companies: The state of New York is running a high-profile ad campaign suggesting that businesses are coming back to the Empire State.  Maybe some untold numbers are, but more telling is that taxpayers are leaving.  In May, the New York Post published “Outgoing Income, Millions Flee New York’s Tax Burden,” whose lead was “New York state tops the nation in one key export — people fleeing high taxes.” The article cited the IRS tax-migration numbers, which the conservative Tax Foundation makes available in a web-based application that allows anyone to see easily how many taxpayers there are in each state.

The Post article, which found Florida to be the most popular destination for fleeing New Yorkers, spawned coverage on Fox Business News, where economist Arthur Laffer said: “You have two locations, A and B. If you raise taxes in B and you lower them in A, producers and manufacturers and people are going to move from B to A.” Media Matters, a liberal organization, responded with hostility, calling Laffer a “serial misinformer” who makes dubious claims supporting lower tax rates.

Change Maryland, an organization that has clashed with Governor Martin O’Malley, reported IRS tax-migration findings in July, determining that Maryland accounted for the largest taxpayer-migration exodus of any state in the region between 2007 and 2010, with nearly 31,000 residents having left. The report also identified Maryland’s key competitor in attracting taxpayers: Lower-taxed Virginia is now home to 11,455 former Marylanders, taking $390 million in taxable incomes during this three-year period.

After receiving widespread attention from prominent media, including National Review, the report’s findings prompted a personal, partisan political attack on Change Maryland and its founder, Larry Hogan, by the O’Malley administration.

While it remains to be seen what the official position of the IRS is, unofficially it is suggesting that the problem lies in coordinating with the Census Bureau. It is asking for comments on how people use the data and how important it is, presumably so that higher-ups at the agencies can reverse their decision if necessary.

The very idea of people voting with their feet is uncomfortable to some politicians. Fortunately, others realize the damage that a declining tax base causes and prefer transparency over attempting to delete statistics that reveal the problem.

— Jim Pettit, a communications and public-policy consultant, provides research services for various clients, including Change Maryland.

[Crafty_Dog]

Good catch of yet another Orwellian manuever GM.

==========

Barack Obama admits that he got the Bush tax cuts all wrong.

That's not how he would put it, of course—and it's plainly not what's being reported. Even so, President Obama's recent statements about the expiration of these tax cuts on Dec. 31 have put paid to the most widely accepted political slander of the past decade: that the Bush tax cuts rewarded the wealthy at the expense of the middle class.

That proposition simply cannot be reconciled with President Obama's latest position, which is that America's middle class will find itself hammered if Congress doesn't extend President Bush's middle-class tax cuts.

Here's how President Obama put it during a recent White House event with a group of middle-class Americans: Unless Congress acts, he said, "starting Jan. 1, every family in America will see their taxes automatically go up."

Related video.
Columnist Bill McGurn on the liberal fiction that Republicans gave away tax cuts for the rich at the expense of the middle class. Photo credit: Getty Images.
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He went on: "A typical middle-class family of four would see its income taxes go up by $2,200. That's $2,200 out of people's pockets. That means less money for buying groceries, less money for filling prescriptions, less money for buying diapers. It means a tougher choice between paying the rent and paying tuition. And middle-class families just can't afford that now."

To emphasize that these cuts are a big deal, he asked people to "tell members of Congress what a $2,000 tax hike would mean to you." He is now taking his message on the road, telling a group of Michigan auto workers on Monday that the end of the Bush cut would be "a hit you cannot afford to take."

In any honest universe, this would be news. President Obama says the middle class benefits mightily from the Bush tax cuts and cannot afford to see them expire. Which provokes a question: Where has our press corps been these past 10 years?

For most of that time, Democrats have been hollering that the only people to benefit from the Bush tax cuts were Bill Gates, Wall Street bankers, and the guy with the top hat and monocle who appears on our Monopoly sets. Now the same press that accepted, approved and amplified the "Bush tax cuts for the wealthy" trope leaves unchallenged a president who today tells us, oh, by the way, those Bush tax cuts are vital for America's middle class—and claims that the opposition to middle-class tax cuts proposed and put into law mainly by Republicans comes from . . . Republicans.

Perhaps the American people will accept this new Obama story line. If so, it will be because after years of assailing the GOP as the party of the plutocracy, this is the first time the American people have heard Mr. Obama or any Democrat in the party leadership concede that the Bush tax cuts benefited anyone save the über-wealthy. For the original complaint that Mr. Bush's tax cuts favored the rich over the middle class has morphed into the orthodoxy we know today: Tax cuts for the rich came at the expense of the middle class.

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President Barack Obama
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Certainly this has been Nancy Pelosi's accusation. At various times the California Democrat has spoken of "Bush tax cuts for the super-rich," of Republicans "taking food out of the mouths of children to give tax cuts to America's wealthiest," of how Republicans were using "tax dollars paid by middle-class Americans" to pay for tax breaks for "millionaires."

Sen. Harry Reid of Nevada, Ms. Pelosi's counterpart in the Senate leadership, voiced a similar complaint. Republicans, he said, "drew up their program to benefit the very, very, very few and eliminate the majority from any"—yes, any—"benefit of these tax cuts." In November 2008, he described the Bush economy as "built on a foundation for eight years that basically just value tax cuts for the very wealthiest."

Candidate Obama banged that same drum in his bid for the White House. Early in 2008, he declared that "we owe it to" the middle class "to end the Bush-McCain tax cuts for the wealthiest 2% and put a tax cut into the pockets of the families who need it." Though Mr. Obama has always said he wants to keep the Bush tax cuts for the middle class, he has always been careful not to suggest that these amounted to anything more than peanuts.

Today we are told a different story. Today Mrs. Pelosi tells us the "clock is ticking" on the fate of the Bush tax cuts for the middle class. Today Sen. Reid tells us "it's really important that this holiday season the middle class is not going to be burdened with the thought that they may get a $2,200 a year tax increase." And today President Obama tells us that the Bush tax cuts put some serious money in the pockets of our middle class—a benefit they will lose if Congress lets the Bush tax cuts expire.

Don't expect the admission that the Bush cuts are vital to the middle class to provoke any challenges at the president's next press conference. Like the assertion that Republicans hate women, the GOP preference for tax cuts for the rich at the expense of the middle class has become accepted scientific fact. Even when President Obama himself shows just how wrong that is.

[Crafty_Dog]

Prescott and Ohanian: Taxes Are Much Higher Than You Think
The combined levies on labor income and consumer spending have seriously reduced the hours that Europeans work. The U.S. isn't too far behind..
By EDWARD C. PRESCOTT
AND LEE E OHANIAN

President Obama argues that the election gave him a mandate to raise taxes on high earners, and the White House indicates that he won't compromise on this issue as the so-called fiscal cliff approaches.

But tax rates are already high—much higher than is commonly understood—and increasing them will likely further depress the economy, especially by affecting the number of hours Americans work.

Taking into account all taxes on earnings and consumer spending—including federal, state and local income taxes, Social Security and Medicare payroll taxes, excise taxes, and state and local sales taxes—Edward Prescott has shown (especially in the Quarterly Review of the Federal Reserve Bank of Minneapolis, 2004) that the U.S. average marginal effective tax rate is around 40%. This means that if the average worker earns $100 from additional output, he will be able to consume only an additional $60.

Research by others (including Lee Ohanian, Andrea Raffo and Richard Rogerson in the Journal of Monetary Economics, 2008, and Edward Prescott in the American Economic Review, 2002) indicates that raising tax rates further will significantly reduce U.S. economic activity and by implication will increase tax revenues only a little.

High tax rates—on both labor income and consumption—reduce the incentive to work by making consumption more expensive relative to leisure, for example. The incentive to produce goods for the market is particularly depressed when tax revenue is returned to households either as government transfers or transfers-in-kind—such as public schooling, police and fire protection, food stamps, and health care—that substitute for private consumption.

In the 1950s, when European tax rates were low, many Western Europeans, including the French and the Germans, worked more hours per capita than did Americans. Over time, tax rates that affect earnings and consumption rose substantially in much of Western Europe. Over the decades, these have accounted for much of the nearly 30% decline in work hours in several European countries—to 1,000 hours per adult per year today from around 1,400 in the 1950s.

Changes in tax rates are also important in accounting for the increase in the number of hours worked in the Netherlands in the late 1980s, following the enactment of lower marginal income-tax rates.

In Japan, the tax rate on earnings and consumption is about the same as it is in the U.S., and the average Japanese worker in 2007 (the last nonrecession year) worked 1,363 hours—or about the same as the 1,336 worked by the average American.

All this has major implications for the U.S. Consider California, which just enacted higher rates of income and sales tax. The top California income-tax rate will be 13.3%, and the top sales-tax rate in some areas may rise as high as 10%. Combine these state taxes with a top combined federal rate of 44%, plus federal excise taxes, and the combined marginal tax rate for the highest California earners is likely to be around 60%—as high as in France, Germany and Italy.

Higher labor-income and consumption taxes also have consequences for entrepreneurship and risk-taking. A key factor driving U.S. economic growth has been the remarkable impact of entrepreneurs such as Bill Gates of Microsoft, MSFT +1.39%Steve Jobs of Apple, Fred Smith of FedEx FDX -0.31%and others who took substantial risk to implement new ideas, directly and indirectly creating new economic sectors and millions of new jobs.

Entrepreneurship is much lower in Europe, suggesting that high tax rates and poorly designed regulation discourage new business creation. The Economist reports that between 1976 and 2007 only one continental European startup, Norway's Renewable Energy Corporation, achieved a level of success comparable to that of Microsoft, Apple and other U.S. giants making the Financial Times Index of the world's 500 largest companies.

U.S. growth is currently weak, and overall output is 13.5% lower than what it would be had we continued on the pre-2008 trend.

The economy now faces two serious risks: the risk of higher marginal tax rates that will depress the number of hours of work, and the risk of continuing policies such as Dodd-Frank, bailouts, and subsidies to specific industries and technologies that depress productivity growth by protecting inefficient producers and restricting the flow of resources to the most productive users.

If these two risks are realized, the U.S. will face a much more serious problem than a 2013 recession. It will face a permanent and growing decline in relative living standards.

These risks loom as the level of U.S. economic activity gradually moves closer to that of the 1930s, when for a decade during the Great Depression output per working-age person declined by nearly 25% relative to trend. The last two quarters of GDP growth—1.3% and 2.7%—have been below trend, which means the U.S. economy is continuing to sink relative to its historical trend.

We have lost more than three years of growth since 2007, and our underachievement will continue unless pro-productivity policies are adopted and marginal tax rates are stabilized or lowered to prevent a decrease in work effort across the board. That means lifting crushing regulatory burdens such as those imposed by Dodd-Frank, and it means reforming immigration policies so that we can substantially increase our base of entrepreneurs by attracting the best and brightest creators from other countries.

Economic growth requires new ideas and new businesses, which in turn require a large group of talented young workers who are willing to take on the considerable risk of starting a business. This requires undoing the impediments that stand in the way of creating new economic activity—and increasing the after-tax returns to succeeding.

Mr. Prescott, co-winner of the 2004 Nobel Prize in Economics, is director of the Center for the Advanced Study in Economic Efficiency at Arizona State University. Mr. Ohanian, the associate director of the center, is a professor of economics at UCLA and a senior fellow at Stanford University's Hoover Institution.

[DougMacG]

"Prescott and Ohanian: Taxes Are Much Higher Than You Think"
Good piece Crafty!
People need to combine the taxes and tax rates (and regulations) to accurately measure the damage.
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 180 Economists oppose further tax increases:
"To best foster a strong economy, Congress should ultimately create a simpler system of taxation with a broader base and low rates on income and investment. Simultaneously, it should prioritize government programs and pursue entitlement reforms that bring the budget to sustainable balance."
http://www.ntu.org/news-and-issues/budget-spending/no-fiscal-cliff-tax-hikes-economist-letter-12-2012.html
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Sixteen Democratic senators who voted for the Affordable Care Act are asking that one of its fundraising mechanisms, a 2.3 percent tax on medical devices scheduled to take effect January 1, be delayed.  Echoing arguments made by Republicans against Obamacare, the Democratic senators say the levy will cost jobs — in a statement Monday, Sen. Al Franken called it a “job-killing tax” — and also impair American competitiveness...

http://online.wsj.com/public/resources/documents/MedDeviceLetter12102012.pdf

Raising taxes to pay for healthcare kills jobs, puts even more people in need of healthcare.  WHO KNEW??!

Delay them?  The economic concept that excessive taxation kills off private employment won't apply later?  How will they repeal THAT rule?

[DougMacG]

Helping out Bigdog and in the interest of balance and full coverage on the board, this may be the study he was looking for, purporting to show that high tax rates don't impede economic growth. 

As you might imagine, I see flaws in the study - and will follow up. 

20 page pdf, concludes no appearance of correlation between the top tax rate and the size of the economic pie.

http://graphics8.nytimes.com/news/business/0915taxesandeconomy.pdf

[bigdog]

Perhaps, Doug, and thank you for the aid.

Following up on the CRS Resport: http://krugman.blogs.nytimes.com/2012/11/03/the-ultimate-zombie-idea/

More Follow up on the CRS Report itself: http://www.politico.com/story/2012/12/dems-seize-on-re-issued-crs-tax-report-85067.html.

And, by the way, the Congressional Budget pretty much agrees: http://www.cbo.gov/sites/default/files/cbofiles/attachments/11-08-12-FiscalTightening.pdf

"Laughing at the Laffer Curve": http://economistsview.typepad.com/economistsview/2012/06/laughing-at-the-laffer-curve.html

Or: http://blog.supplysideliberal.com/post/25998407302/mark-thoma-laughing-at-the-laffer-curve

Or: http://www.nytimes.com/2010/09/17/opinion/17krugman.html

Or: http://rricketts.ba.ttu.edu/Tax%20Rates%20and%20Revenues.htm

Or: Economists Agree: Tax Cuts Cost Revenue, http://www.usnews.com/opinion/blogs/economic-intelligence/2012/06/29/economists-agree-tax-cuts-cost-revenue---

[G M]

BD,

Let's boil this down to it's essence. Do higher costs effect behavior?

[Crafty_Dog]

I am in a hotel lobby in AZ at the moment and so must apologize for not having the time at the moment for reading BD's contributions.   That said, I have been following the issue of tax rates for some thirty years now (beginning with Jude Wanniski's "The Way the World Works") and feel like I have been exposed to pretty much all the pros and cons along the way and so will endeavor a post without having read BD's posts yet (though I will read them when I get home for I do respect what he brings to our conversation)

GM's pithy question seems quite on point to me. 

Ultimately all this seems to me as simple as the first graph we learn in microeconomics class-- the one showing supply and demand.  When prices go up, so does supply.  Of course when the government captures a portion of the price, the return to the supplier is less and hence supply is lessened.  Of course the question presented, and it is one to be answered empirically, is at what rates is the effect de minimis, and at what rates are revenues maximized? 

Whether rates should be maximized is a separate question!!!

[DougMacG]

Good points already made.  Of course costs affect behavior, and when you tax something you get less of it - to varying degrees.  With half the country favoring tax increases, the burden is not on one poster to defend the merits of high taxes...

What did this study measure and how did they manage to miss basic truths - finding no link between disincentive and output??  And how is this study being mis-used by people like Paul Krugman, Chris Van Hollen and President Barack Obama to draw conclusions not studies or demonstrated?

First a reply to the Laughing at the Laffer curve series.  It is a straw argument, Laffer did not say all tax rate cuts lead to higher revenues.  They chart the opinions of 40 economists on a different question than we face today.  The question today is tax increases, not tax cuts.  But go to the source of the data and see that for 'Question A', only 8% of the same respondents disagree with the statement that tax cuts made today will grow the economy.  That is the conclusion purportedly refuted in the Hungerford / CRS study, a pretty big contradiction, assuming the opinions of these economists is of significance.

Paul Krugman (former Economist?) writes a column called Conscious of a [Lying] Liberal where he gloats about the Hungerford revelation.  When I read liberals, I look for two things, a lie or deception in the first statement and then a logic string where they build further on the foundation that was false in the first place.  Krugman, referring to CRS, begins: "a report showing no connection between tax cuts for the rich and economic growth...".  I read the entire study.  It did not study tax cuts.  It studied output as it correlates to the top, published marginal tax rate over very different times.  When you study the most significant tax rate cuts, you get a very different conclusion.

Politico writes:  "At the crux of the debate is the question of whether to increase tax rates for the wealthiest 2 percent of Americans."  Really the question is whether you can raise taxes on only the wealthiest without hitting the rest of the people and without tanking the economy.  Democrats in speeches claim with confidence that you can.  Rep. Chris Van Hollen says the CRS report “put a stake in the heart of the Republican argument that small increases in the marginal tax rate for wealthy individuals somehow hurt economic growth.  No it didn't say that at all.   Another quote: "...a tax ONLY on the wealthiest among us.  Folks like me", says Barack Obama who privately employs only his mother in law, implying it won't hurt anyone but the rich who can afford it.  Democrats in peer reviewed work argue quite differently, see Romer and Romer (Christina Romer was chief economic adviser to Pres. Obama until this was published): http://elsa.berkeley.edu/~dromer/papers/RomerandRomerAERJune210.pdf  "Our results indicate that tax changes have very large effects on output.  Our baseline specification implies that an exogenous tax increase of one percent of GDP lowers real GDP by almost three percent."

So what are the flaws in Obama campaign donor, Thomas L. Hungerford's report, released right before the election?  Asked more precisely, what exactly did it study?  Did it study or demonstrate that if we raise the top tax rate today to 1950s levels, we will experience the growth rates of the 1950s, as inferred by former Enron adviser Paul Krugman?  No.

From the report:  "Data is analyzed to illustrate the association between the
tax rates of the highest income taxpayers and measures of economic growth. ...
Throughout the late-1940s and 1950s, the top marginal tax rate was typically above 90%; today it is 35%. Additionally, the top capital gains tax rate was 25% in the 1950s and 1960s, 35% in the 1970s; today it is 15%. The real GDP growth rate averaged 4.2% and real per capita GDP increased annually by 2.4% in the 1950s. In the 2000s, the average real GDP growth rate was 1.7% and real per capita GDP increased annually by less than 1%. There is not conclusive evidence, however, to substantiate a clear relationship between the 65-year steady reduction in the top tax rates and economic growth. ... The evidence does not suggest necessarily a relationship between tax policy with regard to the top tax rates and the size of the economic pie, but there may be a relationship to how the economic pie is sliced."

The report does not look at causation whatsoever, the "65-year steady reduction" in tax rates is a falsehood, they did not study tax cuts and they made no study of tax rate increases, the question we face today.  Instead they run a series of regression analyses looking for and not finding correlation between top published tax rate at different times and other measures like output.

Another way to do that would to study years that start with 195x and to compare with years that start with 197x.  What would be wrong with that comparison?  The obvious answer is that the top tax was lower but MANY other things changed.  The data would show a better economy in the 1950s (with a higher top tax rate).  It would not demonstrate, as Hungerford does not and cannot demonstrate, that output in the 1970s would be the same if top rates were 90% (1950s levels) instead of 70%, or if they were 35% (mid 2000s levels) instead of 70%.  Why not?  Different times and MANY different factors.

Bigdog acknowledged what Hungerford does not about different times, the 1950s for example: "Of course I can think of differences."   But what was different economically about the 1950s that is not true today.  My thoughts off the cuff: 1) The top tax rate then applied to almost no one so it is not a good measure of the burden of government.  The top rate today hits the owners of the businesses that employ more than 50% of the people who work for small businesses, the sector that in good times creates most new job growth. 2) The overall burden of taxation was a LOT smaller then.   3) Businesses did not face anywhere near the same regulatory burden as today.  4) U.S. manufacturers faced very little foreign competition.  5) There was much less mobility of capital.  Your choice was how to invest in America, not where to invest.  Today investment is global.  6) Investors did not face the same uncertainty of tax rates, not shown in the numbers.  The 1950s were relatively stable times.  7) State tax rates were lower, the combined burden of all taxation was much lower. And 8 ) Workers did not have the same options not to work in the 1950s as they had after the war on poverty began and expanded.  If you built a business, workers would come.  Today you face the competition of workers not taking work for pretty good pay and workers leaving the workforce in record numbers.  Again not shown or measured in the study.

Is the top tax rate today the same as it was in 2003-2004?  The Hungerford data says yes, but it's not true.  For the rich it is the future tax rate that applies to business and investment decisions.  Early in the full implementation of the Bush tax cuts, tax rates would stay at that level for as far as the eye could see and investors could rely on that.  With the changeover of congress, then a new President committed to repeal coming, then the expiration date impending every two years for four years, investors and business owners have faced higher future rates for investments not shown in current rate data.  For 2003 Hungerford takes the output out of recession in higher tax years, with no context or weight to the fact that investments being made at that time in response to the policy change would lead to revenues growing 44% in 4 years.  Instead 2003 was just another dismal year to average out the peak years that followed.  

A more useful study would be to isolate similar policy changes the best you can and study their effects.  

[bigdog]

As a reminder, this discussion has morphed dramatically. I began this discussion in the Media Issues thread, when a post was made about why the US media wasn't covering this story: "The British press is abuzz with the notion that 10,000 millionaires left the country in the interim, and no doubt some did make for their chalets in Gstaad." As I noted, the probable reason why the story didn't receive consideration from the US media, except the Breitbarts, was because there was no story there. The claim that millionaires relocated to avoid taxes was false. The discuss was then morphed by someone (Doug, I think) then changing the story from the notion that these wealthy individuals had moved (literally) to saying that OF COURSE they had moved... from that millionaire tax bracket. That is NOT the same thing as was originally posited in the article mentioned in the post I originally responded to.

What I have done is to post position papers, blog posts and articles by profession economists calling your positions into question, because there is not a general consensus among professional economists that the positions that many of you support is correct. You can call those positions and studies into question all that you want (and Doug, I appreciate the time that you put into your very thoughtful, thorough posts... and the discussions elsewhere), but the fact remains that the effectiveness of the positions you extol is not as cut and dry as you believe.

[G M]

BD,

When we tax tobacco and Alcohol, we do so knowing taxes discourage that activity. So, when we tax economic success, we are doing what?

[G M]

http://hotair.com/archives/2012/12/17/depardieu-goes-galt/

Depardieu goes Galt?

posted at 8:51 am on December 17, 2012 by Ed Morrissey

Not exactly, although I love Instapundit’s headline.  Going Galt means removing your talents from the world altogether until the world comes to its senses.  The French film icon has instead decided to continue providing the world his talents, but for the future having a Belgian address from which to provide them:

Gérard Depardieu has said he is handing back his French passport and social security card, lambasting the French government for punishing “success, creation, talent” in his homeland.

A popular and colourful figure in France, the 63-year-old actor is the latest wealthy Frenchman to seek shelter outside his native country by buying a house just over the border in Belgium in response to tax increases by the Socialist president, François Hollande.

The prime minister, Jean-Marc Ayrault, described Depardieu’s behaviour as pathetic and unpatriotic at a time when the French are being asked to pay higher taxes to reduce a bloated national debt.

“Pathetic, you said pathetic? How pathetic is that?” Depardieu said in a letter to the weekly newspaper le Journal du Dimanche.

“I am leaving because you believe that success, creation, talent, anything different must be sanctioned,” he said.
The arguments in this dispute are very revealing.  Depardieu’s critics in France are heaving volcanoes of emotion, tossing out accusations of unpatriotism and “pathetic” selfishness.  Depardieu, on the other hand, offers the rational argument that (a) he has the resources to choose his tax regime, (b) he has no particular reason to fund Hollande’s socialist tax policies, so (c) he’s moving to Belgium.

To paraphrase from a movie in which Depardieu did not appear — it’s not personal, mon cher.  It’s business.  Except, of course, the French government wants to make it personal.  They want to appeal to patriotism, as if anyone ever pledges allegiance to a tax code, precisely because they can’t win the argument on either rationality or business.  Hiking taxes in France will do exactly what it will do in the US — force the wealthy who are already providing the lion’s share of income-tax revenue to decide whether to stay put, push capital into markets where it’s welcomed rather than punished, and drive revenues down instead of up when the economy declines as a result of both.

So no, Depardieu isn’t going Galt.  He’s simply choosing a better market for his capital.

And one last question, prompted by the commenters in our Headline thread: What government in history has ever “asked” its citizens to pay taxes?

[G M]

http://taxprof.typepad.com/taxprof_blog/2012/12/the-states.html

States That Spend Less, Tax Less—and Grow More
Wall Street Journal op-ed:  States that Spend Less, Tax Less—and Grow More, by Dave Trabert & Todd Davidson (both of the Kansas Policy Institute):

States with an income tax spent 42% more per resident in 2011 than the nine states without an income tax. States in the bottom 40 of the Tax Foundation's Business Tax Climate Index (which assesses business, personal, property and other taxes) spent 40% more per resident. In the American Legislative Exchange Council's Rich States, Poor States Economic Outlook (based on 15 policy variables), the bottom 40 spent 35% more than the top 10 states. ... [T]he states with no income tax, plus those included in the Tax Foundation and Rich States, Poor States rankings (18 in all) are quite diverse: large, small, coastal, inland, bordering Canada and Mexico, densely and sparsely populated. ...

States that allow taxpayers and employers to keep more of their earnings are reaping the benefits. States without an income tax have significantly better growth in private sector GDP (59% versus 42%) over the last 10 years. They increased the number of jobs by 4.9% while jobs in the rest of the states declined by 2.6%. States without an income tax gained population (+5.5%) from domestic migration (U.S. residents moving in and out of states) while all other states as a whole lost 1.3% of population between 2000 and 2009. ... The path to superior economic growth and job creation is clear.

[Crafty_Dog]

Warren Buffett Knows That Tax Rates Matter
The bond market shows that people focus on after-tax cash flows when making investments..

By CLIFFORD S. ASNESS
There are important questions we need to answer about taxes. How progressive or regressive? How should rates vary on different forms of income? How much of fixing our fiscal problems should come from raising revenue versus cutting spending? I have my opinions and you are entitled to yours. But some basic truths, old fashioned as it may sound, really aren't subject to opinion.

Nevertheless, in an effort to support raising taxes, particularly capital-gains taxes, and to head off the argument that such hikes would be a drag on the economy, billionaire investor Warren Buffett argued in a New York Times op-ed last month that tax rates don't matter to investment decisions. He wrote that if someone comes to you with a good investment idea, no one says, "If the taxes are too high, I would rather leave the money in my savings account, earning a quarter of 1 percent."

In the field of economics and finance you would be hard-pressed to find something more patently wrong.

Consider how every business-school student, investment banker and investment analyst on Earth has been taught to choose whether to invest in a specific project or company. You make a spreadsheet (a napkin will do sometimes). You put in your best guess of the future cash flows, and you discount those cash flows back to the present at some required rate of return you believe reflects the risk entailed. Of course, opinions about the future cash flows and the proper discount rate can vary widely, but the essential methodology is ubiquitous.

Now here's the kicker: Nobody who pays taxes and has ever done this exercise has failed (while sober) to use after-tax cash flows in this calculation. Somewhere in the spreadsheet there is a number, say 20%, or 28%, or a Gallic 75%, representing the taxes you'll pay on the assumed cash flow—and you only count the amount you'll get after paying this tax. If you turn the tax rate up high enough, projects or companies that looked like good investments become much less attractive and vice versa.

Mr. Buffett is undoubtedly right that rich people will continue to invest some amount in something regardless of the tax rate (except for a 100% rate!). He's also undoubtedly right that an investment that easily clears all hurdles will likely still be attractive after a small tax increase. But life, and the investment decision, occurs at the margin. Fewer and smaller investments will be made if the after-tax prospects are worse. It's just math and logic, unassailable and commonly accepted regardless of one's political persuasion.

Some recent commentators have actually tried to prove the illogic that Mr. Buffett merely asserts. They argue that if an investment was profitable at a 15% tax rate, it will still be profitable at, say, a 35% tax rate—just less so. Therefore investors will still go ahead with it. But here, as in so many things, the government doesn't play fair. It taxes gains, but losses are deductible only under certain conditions and circumstances. In finance-speak, the government grants itself a call option on your profits. This fact alone will make investments that were profitable at one tax rate decidedly not so at a higher one.

The bond market offers particularly compelling evidence that people focus on after-tax cash flows when making investments and that they will, contrary to Mr. Buffett's assertion, alter their investment behavior based on tax rates. The yield on tax-free municipal bonds is almost always considerably lower than the before-tax yield on taxable corporate bonds of similar risk. Despite his claim that taxes don't matter, we can be sure that Mr. Buffett would not hold corporate bonds in his taxable portfolio if, before taxes, they yielded only the rate on otherwise similar tax-free munis.

This sort of investment decision is just one example of how taxes affect our actions. Consider that George Lucas sold Lucasfilm Ltd., including the Star Wars franchise, to Disney DIS +0.79%this year at least partially to avoid a likely coming hike in the capital-gains tax. While Mr. Buffett is telling us taxes don't matter, here's proof that taxes are stronger than The Force.

Also consider the choice of where to retire. Opinions vary widely on how much state tax rates, high or low, affect this decision, but does anyone claim there is no effect? One simple visit to Florida dispels this misconception. When retirees choose Florida over California, it's not the heat—it's the progressivity.

I have great admiration for Warren Buffett as an investor. He has also been smart about minimizing his tax bill. From making sure his profit is in the form of long-term capital gains and not, for instance, dividends, to how he structures his bequests and charitable contributions, Mr. Buffett is perhaps our premiere national example that tax rates and tax structure affect people's investment decisions in a very real way.

Taxes matter. They matter to business and life decisions alike. They matter to the rich and to the poor. They are, or at least they should be, incorporated into nearly every financial decision made. Discussing tax policy without acknowledging this fundamental reality is bizarre. Actually asserting the opposite is willful ignorance.

Mr. Asness is the managing and founding principal of AQR Capital Management .
=================
Of Liberals and Loopholes
The current tax code favors high-tax states. .
  
One post-election budget surprise has been President Obama's resistance to John Boehner's proposal to get $800 billion in new revenue by closing tax loopholes. Here's one likely reason: the high tax rates of his blue-state Democratic brethren.

One of Mr. Boehner's ideas, taking a cue from Mitt Romney, would impose a limit on annual deductions. During the campaign Mr. Romney suggested a range for a deduction cap, anywhere from $17,000 to $50,000 a year, and many liberal pundits praised the idea on equity grounds.

Since the affluent tend to itemize their deductions more than do average taxpayers, and since the affluent pay higher marginal tax rates, they tend to benefit more from deductions. Ergo, limit deductions and you raise the effective tax rate (not the marginal rate) of the affluent. (The effective tax rate is the share of total income paid in taxes, while the marginal rate is the tax on the next dollar earned.) Such a reform would help tax efficiency and equity, and the economy would benefit from fewer investment distortions.

But suddenly liberals are having second thoughts, and our guess is that this is because residents of high-tax Democratic-run states are about twice as likely to take advantage of tax loopholes as taxpayers in low-tax states. For example, 44% of Connecticut filers itemize their deductions, but only some 21% of North and South Dakota residents do.

One tax writeoff in particular illustrates the point: the deduction for state and local income taxes. This allows a high-income tax filer who pays, say, $20,000 in state and local income taxes to deduct those payments from his federal taxable income.

Because the highest federal tax rate is 35%, the value of the state and local deduction is enormous for high-tax states. If President Obama succeeds in raising the federal tax rate to 39.6%, the value of those deductions rises to nearly 40 cents on the dollar. This deduction certainly eases the pain of New Jersey's 8.97% top tax rate, or Hawaii's 11%.

One pernicious effect, however, is to favor high-tax states at the expense of the nine states with no income tax and those with low rates. That's clear from looking at the IRS tax return data for the 50 states and the District of Columbia. In 2010, the deduction for state and local income taxes for all states amounted to $249.7 billion.

But here's the blue-state kicker: $51 billion of those writeoffs were claimed by residents of one state, California. And five liberal states—California, New York, New Jersey, Maryland and Massachusetts—accounted for about $121.8 billion. A mere five states accounted for nearly half the federal revenue lost from this tax deduction.

The inequity is especially stark if we compare this to states without an income tax. The average state and local income-tax deduction claimed per tax return in 2010 was $4,109 in New York and $3,819 in Connecticut. But the average Texan claimed only about $100, and the average Florida deduction was a mere $219. No wonder New York Senator Chuck Schumer opposes tax reform.

Residents of states without an income tax can also deduct some of their sales tax payments. But in 2010 those deductions only reduced taxable income for individuals in all states by $17.9 billion, and in Texas by $4.3 billion and Tennessee a mere $1.2 billion. State and local property taxes are also deductible from federal income tax, and those also tend to be higher in high-tax states. The nearby table illustrates how much more residents of high-tax states benefit overall from the state and local tax loophole.

We believe in federalism, and if affluent liberals want to pay 13.3% of their income to live in San Francisco, that's their foolish privilege. But it becomes everyone's problem if some of that tax burden is effectively borne by residents of Knoxville, Lubbock and Orlando because of the federal tax deduction.

To put it another way, when Californians voted to raise their top rate to 13.3% last month, they were voting to reduce revenue for the federal Treasury and thus increase the political pressure to raise tax rates on all Americans. The state and local tax loophole helps disperse and disguise the real cost of big government. As Mr. Obama likes to say, this is reverse Robin Hood.

All of which helps to explain what appears to be the ebbing liberal support for a tax reform that reduces rates in return for fewer deductions. Democrats in Congress once supported that kind of reform. But these days they tend to represent states with ever-higher tax rates that prop up state and local governments dominated by public unions that demand ever-higher pay and benefits. The resulting state tax burden would be intolerable if much of it weren't passed off on Uncle Sam.

Mr. Obama wants to raise tax rates, rather than eliminate deductions, so his fellow Democrats can keep raising state and local taxes without bearing the full economic and political cost. Tax equity and economic growth are the big losers.

[DougMacG]

Note: This is aimed at the partisans in the White House, not in response to reasonable posts made here.

The tax cuts in debate now are the law of the land because of a bill that President Obama signed in compromise with a Democrat majority House and a Democrat majority Senate in December 2010.

The Bush tax cuts are way past their expiration date now.  

These so-called tax cuts for the rich and for everyone else who pays taxes were passed by a Democrat majority House, a Democrat majority Senate and signed into law by Democrat President Barack Obama.  They were nervous about putting the fragile economy back into recession and did not have the Democratic votes, even among the people who passed healthcare, to make this any worse.  The growth rate then was slightly better than the growth rate now.

This was nearly 2 years after George Bush left Washington and a month before Republicans assumed majorities in congress.

The President announced his reasons for signing the tax cut bill:  "My number one priority is to do what's right for the American people, for jobs, and for economic growth."  President Obama said [these tax cuts] "will make a real difference in the pace of job creation and economic growth. In other words, it's a good deal for the American people."
http://tpmlivewire.talkingpointsmemo.com/2010/12/transcript-of-obamas-remarks-on-tax-cut-deal.php


That was true then.  But not true now?

[bigdog]

BD,

When we tax tobacco and Alcohol, we do so knowing taxes discourage that activity. So, when we tax economic success, we are doing what?

Are you equating addictive drugs to economic success? That's pretty liberal.

What is the elasticity of economic success? Is it more or less than that of tobacco and alchohol?

[Crafty_Dog]

I'm not GM but until he steps in I'd like to take a swing at that one.

The point is that the point of taxing alchohol and tobacco is to discourage their use.  The question presented is then why the same people do not realize that taxing work, profit, and success has the same effect?

[bigdog]

I'm not GM but until he steps in I'd like to take a swing at that one.

The point is that the point of taxing alchohol and tobacco is to discourage their use.  The question presented is then why the same people do not realize that taxing work, profit, and success has the same effect?

Does it? And if so, why? Most people can do without a post work drink. If one is driven by an "economic success" goal, then even would they stop trying? Or, are they not as goal driven as I am being led to believe?

And there is a big difference between what is being compared here. I've heard many more people say they want to be "rich" when they grow up than a 2 pack a day smoker.

Again, what is the elasticity of a "good" versus a goal?

[Crafty_Dog]

I get the point about elasticity BD-- in a sense it is what the Laffer Curve says i.e. that there is a rate which maximizes revenues.

As best as I can tell though, and I say this without condescension, what you are not getting is that ultimately your argument denies the basics of supply and demand.  other things being equal, the greater the price the greater the supply and the less the demand. 

If the price I get for Job Y is $X and the government takes 25% I get $.75X.  If the government increases that to , , , lets choose a random number here, say 39%, then I get $61X for the same work.  O the whole it seems to me an obvious truism that less people will be willing to do Job Y for $.61X than will be willing to it at $75X.  The principle is the same when the cost of something (e.g. alcohol and tobacco) goes up.  People will buy less of it at the higher price.

[DougMacG]

Good arguments all of you.  I can't resist adding: my answer is yes and yes.

To the comparison of cigarettes and economic success, yes - the tax on success is being sold as a sin tax, and yes we are seeing less of it.  If you reject the idea that being driven to succeed is comparable to smoking two packs a day then welcome to our side!  Tax it and you will get less of it.

I keep posting (unrefuted) that startups are happening now at a record low rate in history.  

I also see regulations as a bigger tax than taxes and corporate taxes in America as highest in the world.  So take regulatory burdens, federal individual taxes, state individual taxes, federal corporate taxes, state corporate taxes, the uncertainty of it and all the other taxes like commercial property taxes and add them all together when you make the calculation of why people aren't starting up new startups and why they aren't expanding the businesses they already have.  When you combine these, Crafty's number of 61% is more like having 30% to keep or re-invest.  And a 70% reason to not reinvest.  Add in the elements of risk, that most of these ventures fail, and you get one mathematical conclusion: don't do it.

The best economic indicator I ever read I can't find right now, goes something like this.  We need to start in this country every year at least 130 companies that will someday grow to become billion dollar companies employing at least a thousand people.  One man companies like myself are great but they sadly never amount to much and don't turn around national economies.  We aren't starting real companies right now which means we are looking at a generation of economic disappointment ahead.

In a good economic climate, success of a startup is a leap of faith, the deck is stacked against you with a myriad of risks that can go wrong.  In this climate it goes from improbable to you've got to be kidding.  Odds of failure are near 100%.  If you succeed you will be demagogued and your winnings will be confiscated.  Explain that to the wife or husband, why you are going to work 16 hour days 7 days a week in the early years to get it all going and walk away with nothing more than what a good civil servant makes.

I posted a while back that one of my buddies did that, started a company from scratch in 2002, built it up, it took 6 years to show any profit.  That's a lot of perseverance - believing that it's worth it.  They took the company public, made it the best in the world in their product segment, and sold it for a billion dollars in 2011. http://en.wikipedia.org/wiki/Dell_Compellent  Try doing that now.  What is he doing now?  Not another startup!  His politics may be JK Rowling but his action is - I'm not going through that again.

Instead of demagoguing and punishing success, the best thing we could do for our economy is treat the successful with some semblance of equal protection under the law and hope they keep doing what they do for as long as they can!  

How many people like that are there in the country?  Bill Gates, Steve Jobs, etc. I know one guy with that capability and most people know no one who can do that.  Pres. Obama calls them the wealthiest among us and say get them stopped.  We need enough great entrepreneurs to step forward every year and dedicate themselves to innovation on a new idea and are committed to building it up to make one more American success story.  It takes thousands trying to get a hundred to succeed.  But why should they?

If your whole focus in life is the public sector, public spending and giving to those in need, we still need a vibrant private sector to fund that.

The problem isn't just in America.  In Japan they had Canon and Honda and Toyota and a few others that became phenomenal companies.  What would their economy be without them and where are the new Hondas and Toyotas building new empires in new industries?  Few and far between.  I'm sorry but an economy that cannot replicate success is a failure.

High marginal tax rates don't kill off wealth already accumulated, they kill off the spirit of building new wealth.  The evidence is all around us.  Why are we so willing to shoot down entrepreneurs before they get started?  I will never understand.

[Crafty_Dog]

A small story of importance to me because it is mine.

I had an opportunity to become THE representative of a gun accessories company in a NATO nation owned by a friend who is completely friendly to the US.  Unfortunately the minimum annual tax (and this would come on top of the minimum CA corporate tax of $900) was $3000.  Even though I would only be selling domestically (so as to avoid the super strict export regime) I had to pay the export tax!!!   In other words, throw in some transaction costs and before I would make a penny I would be out $4,000!  Every year!  Add in VERY large taxes/fees/licenses per transaction and the fact that I had no idea how much business the company would do, and I simply saw no way I could take the risk of going into what would have and should have been a nice little sideline business that I could have grown over time.  No way I could commit to $4K a year when the business might not have made even that, not to mention the value of my time.

Martial arts is a very, very tough way to earn a living and at the age of sixty developing a sideline business surely would have made sense, but thanks to high tax rates it would have be foolish of me to try.   

[bigdog]

Thank you for sharing your story.

[DougMacG]

Interesting to note that Democrats opposed cutting the rates that will now be re-imposed if there is no deal - and they will blame Republicans for the increase.

[Crafty_Dog]

The Reps are so incompetent.  Boener needs to be replaced, perhaps by Paul Ryan.

[Crafty_Dog]

RAHN: Obama’s hidden-tax heist

Fed policy erodes productivity gains
By Richard Rahn
The Washington Times
Monday, December 24, 2012

 
How is it possible that the government can spend almost twice as much as it takes in without having high inflation? The fact is that over a long period of time, it can’t. In the short run, which can be a few years, the government can paper over its fiscal irresponsibility by expropriating most of the productivity gains in the private sector through regulatory and central bank actions. This is precisely what has been happening in the United States.
 
The reason real, after-tax, per capita incomes have been able to increase year by year for most Americans for the past two centuries is that productivity has been growing — that is, the amount of goods each worker produces per hour has risen steadily. The reason productivity rises is that workers tend to be better trained, the amount of productive capital per worker rises, and there is a steady flow of innovation, which reduces costs and improves goods and services.
 
To understand productivity growth, look at the advances of farm and construction machinery — which enable one worker to do more, better and with greater safety. Wal-Mart, Amazon and FedEx have made amazing developments in reducing distribution costs by instituting better equipment and systems. Magnify these individual company and industry gains throughout the economy, and the result is a steady national gain in worker productivity.
 
Over the past few decades, worker productivity growth has averaged more than 2 percent. Most of this gain eventually ends up in worker paychecks, with some being siphoned off to support people who are not working and pay for various government schemes. Even so, for the quarter-century preceding 2007, after-tax, real (inflation-adjusted) per capita, disposable income grew at about 2 percent per year.
 
Since 2007, worker productivity growth has slowed, in part because of the lack of new investment. The big change has been that real, per capita, disposable income has slowed sharply since the end of the recession, being less than 1 percent per year, which has yet to make up for the 3.64 percent loss in 2009. By contrast, in the three years after the end of the Reagan recession in 1982, real, per capita, disposable income grew by almost 4 percent per year.
 
The recent gains in productivity growth have been taxed away by government. The increases in taxes are all non-legislated taxes, largely invisible to most people. First, there is the inflation tax imposed by the Federal Reserve, which currently taxes away about 2 percent of the purchasing power of the individual’s money each year. There is nothing new in this tax; the Fed has been in the business of creating inflation since it was formed in 1914.
 
What is new is the big tax on savings, again imposed by the Fed. By artificially holding down interest rates to lower-than-expected real market rates, the Fed is, in effect, expropriating interest income (an implicit tax) that savers normally would be expected to enjoy. This interest manipulation enables the government to fund its debt at less than what would be real market rates at the expense of savers, making the deficit appear much smaller than it really is.
 
There also has been huge growth in the unseen “regulatory tax” over the past four years. A regulatory tax is the cost of regulation imposed on the productive sectors of the economy when the costs of the regulation exceed the benefits. The Obama administration continues to ignore legislative mandates, both on comment periods and cost-benefit analysis, for the tidal wave of new regulation that is hitting businesses — and individuals.
 
The Fed also imposed the hidden tax of capital allocation as a result of its artificial low-interest-rate policies. Simply put, large institutions with strong balance sheets or companies that have been designated “too big to fail” (a few major financial institutions) can obtain all the loans they want at virtually zero interest. Smaller companies, particularly new ventures, are being restricted in their ability to get funds because of all the new regulations supposedly designed to reduce risk. Those regulations have the same effect as imposing a high tax on smaller firms and startups — which also happen to be the big job creators and innovators. In effect, we have created a system in which small, innovative firms are being “taxed” to subsidize large or government-favored enterprises.
 
Despite the fact that the government (including the Fed) has managed to heist almost all of the private sector’s productivity gains through hidden taxation, the amount of continued deficit spending is too great to avoid a future great inflation. The Obama administration has made it clear that it is not serious about reining in spending. Its tax-increase proposals would not fund the government for more than a few days at most and would do real damage to the economy. The Republicans, rather than being unified and insisting on ending this scam, which they could do by refusing to vote for all of the spending, seem to be content to slightly slow the rate of the nation’s fall.
 
The bleak outlook is that most Americans can expect a continued decline in their real, after-tax incomes. History shows that at some time, the monetary bubble will burst. The longer the Fed continues to mask what it is really doing, the bigger the bust will be — only the exact day of reckoning is uncertain.
 
Richard W. Rahn is a senior fellow at the Cato Institute and chairman of the Institute for Global Economic Growth.


Read more: http://www.washingtontimes.com/news/2012/dec/24/obamas-hidden-tax-heist/#ixzz2GAbt4JJh
 Follow us: @washtimes on Twitter

[DougMacG]

http://www.washingtonpost.com/business/fiscal-cliff/democrats-now-pushing-for-tax-cuts-they-once-opposed/2012/12/25/bc318a84-4df4-11e2-950a-7863a013264b_story.html

a remarkable turnaround for Democrats, who had staunchly opposed the tax breaks when they were written into law about a decade ago.  - WashPost 12/25/12


Where have we seen that before?
http://dogbrothers.com/phpBB2/index.php?topic=1791.msg68596#msg68596
"Interesting to note that Democrats opposed cutting the rates that will now be re-imposed..."  - 12/21/12

[Crafty_Dog]

Obama's Tax Bill Comes Due .
Article Comments (60) more in Opinion | Find New $LINKTEXTFIND$ ».
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smaller Larger 
The headlines say the Senate has passed a bill to avoid the tax cliff, hallelujah. This is the way to look at it if you have a pre-Copernican view of politics where Washington is the center of the economic universe. The better way to see it is that the tax bill on the private, productive part of the economy is now coming due for President Obama's first-term spending and re-election.

The Senate-White House compromise is a Beltway classic: The biggest tax increase in 20 years in return for spending increases, and all spun for political purposes as a "tax cut for the middle class." But taxes on the middle class were only going up on January 1 because the politicians had set it up that way, manufacturing a fake crisis. The politicians now portray themselves as scrambling heroically to save the day by sparing the middle class while raising taxes on small business, investors and the affluent.

***
The nearby table shows the taxes that are going up this year. The best that can be said is that Senate Republicans managed to moderate the increase in the death tax from what it would have been, and to spare some upper middle-class families from even higher taxes by raising the income threshold for the new 39.6% top rate. But even those families will still see their taxes raised because couples making more than $300,000 will begin to have their deductions and exemptions phased out as their income rises.

 .
The bill also makes most of the tax provisions (including a fix to the Alternative Minimum Tax) permanent, which removes some uncertainty from business and investment decisions. So much for the good, or shall we say the less bad, news.

On the other hand, the tax rate on capital gains will rise to 23.8% (including the 3.8% ObamaCare surtax), the highest rate since 1996, and at a time when business investment is mediocre. This contrasts with countries like Singapore and the Netherlands that compete with the U.S. for capital and have a capital-gains tax rate of zero.

The estate tax deal is a reprieve only compared to the 45% that Mr. Obama wanted and the 55% that would have hit without a deal. Republicans still had to agree to a rate increase to 40% from 35%, and the $5 million exemption is a pittance for 50 years of work and thrift.

After paying a lifetime of taxes on wages and salaries, business and farm profits and capital gains, Americans who save their money rather than spend it get the reward of giving 40% to Uncle Sam. As a political matter, the GOP also gave a big break to Democratic Senators running in 2014 who would have had to defend the 55% rate.

As for small business, the overall tax increase this year is substantial. The new listed top rate of 39.6% doesn't include the phaseout of deductions that will take the actual rate to 41% or so for many taxpayers. Add the ObamaCare surtaxes on investment income (3.8%) and Medicare (0.9%), as well as the current Medicare tax of 1.45% (employee share), and the real top marginal tax rate on a dollar of investment income from a bank savings or money-market account will be about 46%. Throw in state taxes, and the marginal rates in many places will be in the mid-50%-or-higher-range.

Meanwhile, even as Democrats claim these tax rates won't matter to investment, Senators stuffed their bill full of tax subsidies for special business interests. The wind tax credit survived (cost: $12.1 billion), and so did the tax breaks for cellulosic ethanol ($59 million) and the impoverished producers of Hollywood ($248 million).

Mr. Obama said on New Year's Eve that he wants to pursue "tax reform" this year, but the Senate-White House bill is a walking repudiation of the concept. It's especially embarrassing that Republicans went along with this, given their 2012 campaign support for fewer loopholes in exchange for lower rates. We trust the CEOs who pushed for these special-interest provisions realize they can kiss goodbye their hopes of reducing the 35% corporate tax rate any time soon.

Keep in mind that this entire exercise was also supposed to promote "deficit reduction." But the bill's special-interest favors give away much of the alleged new tax revenue of $600 billion over 10 years, which is surely an overstatement as the rich change their behavior to avoid the higher rates.

In any event, this bill increases spending by at least $30 billion by extending extra jobless benefits for another year. It also postpones for two months the automatic spending cuts that were set to begin this week, so in February we can all witness the delights of another phony showdown that will result in more phony deficit reduction. Maybe they can combine those with a phony debt-limit fight too.

The private economy is growing, so perhaps it can absorb these tax shocks and keep moving. The tailwinds from the housing recovery and oil and gas revolution are helping, and the stock market is rising on a tide of easy money. But the higher rates will make the U.S. less competitive and keep growth slower than it might have been. As we learned in the 1980s and 1990s, faster growth than the anemic Obama recovery is the only real way to reduce deficits.

***
If there is a silver lining to this fiasco, it is that this may be the high-water mark of Mr. Obama's redistributionist tax agenda. The President has had unusual leverage over Republicans because he just won re-election and because taxes were going to go up even if they did nothing. The GOP wanted to avoid the blame for not sparing the middle class from the higher rates.

But we hope the GOP has learned, after two failed attempts, that Mr. Obama is not someone with whom it can do a "grand bargain." Even as the Senate deal was taking shape, Mr. Obama gave a speech literally taunting Republicans for agreeing to raise tax rates. He also made clear that the price of any future spending cuts or entitlement reform will be another tax increase. He doesn't want to reform government. He wants to expand it and destroy GOP opposition to his agenda in the bargain.

Whether or not the House today passes this Senate special-interest heap, Speaker John Boehner should from now on cease all backdoor negotiations and pursue regular legislative order. House Republicans should pursue their own agenda and let Mr. Obama and Senate Democrats pursue theirs. Mr. Obama has his tax triumph. Let it be his last.

[bigdog]

http://thehill.com/homenews/senate/275101-senate-fiscal-cliff-deal-in-trouble-in-house

http://www.tnr.com/blog/plank/111527/is-fiscal-cliff-deal-good-biden-mcconnell-obama-boehner-bush-tax-cut-debt-ceiling#

http://reason.com/archives/2013/01/01/to-revive-the-economy-cut-federal-spendi

[Crafty_Dog]

"To take from one, because it is thought his own industry and that of his fathers has acquired too much, in order to spare to others, who, or whose fathers, have not exercised equal industry and skill, is to violate arbitrarily the first principle of association, the guarantee to everyone the free exercise of his industry and the fruits acquired by it." --Thomas Jefferson

[DougMacG]

"To take from one, because it is thought his own industry and that of his fathers has acquired too much, in order to spare to others, who, or whose fathers, have not exercised equal industry and skill, is to violate arbitrarily the first principle of association, the guarantee to everyone the free exercise of his industry and the fruits acquired by it." --Thomas Jefferson

Can you imagine a leader today with a thought that deep?  Now we have the Choom gang setting the course.

[DougMacG]

[Overtaxing the rich] "hurts aspiring Americans more than it hurts those who have already made it."

This is a very important point that I wish had been made persuasively by Romney, House Republicans, and those who will follow.


This deal is almost all about taxes.  The Republicans will have another chance to cut spending, if they even want to, at the edge of the debt ceiling.  Malpass is right, after we don't cut spending or reform entitlements, it is just more debt and more taxes forever.

One important piece of the deal that may never have been otherwise corrected is the estate tax.  When we surrender all we ever earned and saved, even at death, we have lost.

The highest federal tax rate including surcharges is now 44-46%.  In a high tax state that means approaching 60%.  Combine the cost of regulations and you might as well round it to 100.
------------------
David Malpass: Nothing Is Certain Except More Debt and Taxes
The Senate fiscal-cliff bill still means higher taxes on every working American. So much for just going after 'the rich.'

By DAVID MALPASS  WSJ excerpt

Whatever ultimately emerges from the fiscal-cliff negotiations over the past 48 hours, the country will survive. But the damage can't be undone. Taxes are going up for all working Americans. And so is the size of government.

Businesses have been waiting to see whether a second Obama administration will encourage the economy. During the fiscal-cliff negotiations, however, the president made clear that his goal isn't to get business going again but instead to expand government and redistribute income. He offered no real spending cuts and instead used the year-end deadline to divide America into classes—to the point of campaigning on New Year's Eve against higher earners. Though the president talks about fairness, his policies penalize profit and investment. This hurts aspiring Americans more than it hurts those who have already made it.

The deal that emerged from the Senate early Tuesday morning is being sold as a tax cut for the middle class, but the expiration of the two-percentage-point payroll tax holiday means that working Americans' take-home pay will drop. The bill reduces the value of tax deductions for upper incomes and, with the new open-ended 3.8% Medicare tax that was enacted under ObamaCare, income-tax rates on families and small business owners earning over $450,000 have been pushed above 44%.

The Senate bill makes the tax code more complex, provides for no spending cuts and creates four deadlines—for the debt-limit increase within weeks, the March 1 automatic spending cuts known as the sequester, a second sequester on March 27 (to make up for overspending since the first sequester) and the March 30 expiration of government spending authority. These deadlines will keep Washington negotiations on the front page for months but with little likelihood that government will cut programs, sell assets or downsize the 1,300 federal agencies and commissions.

No wonder many House Republicans balked at what was presented. The New Year's Day legislation is breathtaking in its largess. The Senate bill extends 52 tax credits, mostly for one year, ensuring huge annual lobbying fees and political contributions. Section 206 provides a juicy capital-gains tax exemption for contributions of property for conservation, meaning wealthy environmentalists with extra acreage will be able to take a tax deduction for the appreciated property and have the environmental organization preserve it, adding to the value of the primary property. Section 312 provides faster tax deductions for "motorsports entertainment complexes." Section 317 allows expensing of film and television productions, meaning lower taxes for Hollywood.

The bill devotes much space to tax credits for government-approved energy schemes, providing taxpayer subsidies for energy-efficient new homes, existing homes, appliances, cellulosic biofuel and "Indian coal facilities." Underscoring the complexity of the tax code, the bill takes seven pages to index the alternative minimum tax for inflation because it takes side trips to curry favor with the owners of plug-in electric vehicles and with first-time home-buyers in the District of Columbia.

The pattern across the developed world is for politicians to negotiate with each other and, after much drama, make the brave decision to downsize jobs through taxes and mandates rather than downsizing government. This country is no different: Whatever tax and spending decisions Washington makes over the next few months, the likelihood is that government will be bigger in 2013 and the fiscal problems even more urgent.

There has emerged from the budget negotiations no process to cut government programs, limit the debt or reform the tax code. Many tax rates have now gone up and almost no spending restraint has been implemented, hurting 2013 investment and hiring. Even if the spending sequester is allowed to proceed on March 1 or substitutes are found, the cuts will be a small fraction of the spending binge in recent years that left a string of $1 trillion deficits.

The Congressional Budget Office scores the Senate bill as adding $4 trillion to the national debt by 2022. That assumes the sequester or equivalent spending cuts are fully implemented in March, which seems unlikely. Some are hoping that during the coming confrontation over the debt-limit increase fiscal conservatives will be able to recover lost ground on spending. That won't work, because the debt limit doesn't provide much leverage.

The debt-limit statute was written specifically to make it easier to increase the debt, not as a way to limit the debt. It should be repealed and replaced with a law that cuts spending when there is too much debt. While Republicans rightly want to stop the unending growth in debt, the current debt-limit statute gives most of the power to the president, allowing him to shut down parts of the government and blame holdouts until he gets enough votes for more debt.

Rather than rejecting an increase in the debt limit, fiscal conservatives should offer a lasting remedy. This would be a debt-to-GDP limit that, when exceeded, would give the president the power to underspend congressional appropriations and to propose fast-track reductions in entitlements—but would also require him to make monthly reports to the public on excess spending and prohibit raises for government employees making over $100,000.

Fighting under the current rules isn't working and leaves government inexorably bigger. The country can't afford this approach. Demographics are making it harder each year to restrain spending or win elections on the platform of limited government. The rules pit fiscal conservatives against themselves, leading to bigger government.

Regardless of how the current crisis is ultimately resolved, there is sure to be another. Republicans and fiscally conservative Democrats should use every opportunity to strengthen the framework for limited government, in order to restrain federal spending and allow the private economy to grow.

Mr. Malpass, a deputy assistant Treasury secretary and legislative manager for the 1986 Tax Reform Act in the Reagan administration, is president of Encima Global LLC.

[bigdog]

http://www.aljazeera.com/news/europe/2013/01/20131314570244930.html

[G M]

http://hotair.com/greenroom/archives/2013/01/03/surprise-obamacare-wary-employers-not-hiring-cutting-hours/

Surprise: Obamacare-wary employers not hiring, cutting hours
posted at 1:16 pm on January 3, 2013 by Guy Benson

The real knife twist in this USA Today piece is the money quote from Mark Zandi, The One’s go-to “independent” economist:

Many businesses plan to bring on more part-time workers next year, trim the hours of full-time employees or curtail hiring because of the new health care law, human resource firms say. Their actions could further dampen job growth, which already is threatened by possible federal budget cutbacks resulting from the tax increases and spending cuts known as the fiscal cliff. ”It will have a negative impact on job creation” in 2013, says Mark Zandi, chief economist of Moody’s Analytics…The so-called employer mandate to offer health coverage doesn’t take effect until Jan. 1, 2014. But to determine whether employees work enough hours on average to receive benefits, employers must track their schedules for three to 12 months prior to 2014 — meaning many are restructuring payrolls now or will do so early next year.
How widespread will the fallout be?  Very:

About a quarter of businesses surveyed by consulting firm Mercer don’t offer health coverage to employees who work at least 30 hours a week. Half of them plan to make changes so fewer employees work that many hours. The health care law will particularly affect companies with 40 to 45 workers that plan to expand and hire. Many are holding off so they don’t cross the 50-employee threshold, says Christine Ippolito, principal at Compass Workforce Solutions, a human resource consulting firm in Melville, N.Y. Ernie Canadeo, president of EGC Group, a Melville-based advertising and marketing agency with 45 employees, planned to add 10 next year but now says he may add fewer so he’s not subject to the mandate…Others already over the 50-employee threshold plan to add more part-time workers or cut the hours of full-timers, says Rob Wilson, head of Employco, a human resource outsourcing firm. Many, he says, will hire more temporary workers, whom they won’t have to cover.

Nearly half of retailers, restaurants and hotels will be affected by the law, according to Mercer. They employ large numbers of part-time and seasonal employees, including many who work about 30 hours a week. Since such low-wage workers are widely available, it often hasn’t been cost-effective or necessary for employers to offer them coverage. Providing them benefits could be costly because employees must pay no more than 9.5% of their wages in insurance premiums, forcing employers to contribute significantly more than they do for higher-wage workers. ”I think you may see employees with fewer hours as a consequence,” says Neil Trautwein, vice president of the National Retail Federation.
So the law sets an arbitrary cap on the percentage of wages workers are permitted to contribute to their health benefits — the initial intent of which, presumably, was to compel employers to shell out to help cover more employees.  But instead of complying with the mandate and spending money they either (a) don’t have or (b) need for other purposes, cash-strapped small business owners are planning to shave hours and provide less work for their employees.  That’s not greed; it’s business reality in a stagnant economy.  The clumsy and meddlesome heavy hand of Big Government strikes again, hurting many of very the people it set out to “help.”  None of this should surprise anyone, of course.  Obamacare opponents have long argued that this project would spike spending and debt, deprive Americans of liberty, and destroy jobs.  These predictions are being vindicated with each passing day, hence the law’s enduring unpopularity.  And as the article notes, many of the most onerous mandates don’t cycle in until 2014, so the pain is just beginning.  For what it’s worth, the CBO has estimated that the president’s signature legislative accomplishment will kill 800,000 jobs.

[Crafty_Dog]

GM:  Would you please post this on the Politics of Health Care thread?  TIA.

[DougMacG]

Surprise: Obamacare-wary employers not hiring, cutting hours
 ...”It will have a negative impact on job creation”   ...The health care law will particularly affect companies with 40 to 45 workers that plan to expand and hire. Many are holding off so they don’t cross the 50-employee threshold...

Whether it is taxes or regulations or the piling on of both, we follow the path of France: (posted previously) "Why France Has So Many 49-Employee Companies
http://www.businessweek.com/articles/2012-05-03/why-france-has-so-many-49-employee-companies

Maybe the oaths of office for President, Congress or IRS agent should include swearing to "do no harm".
http://classics.mit.edu/Hippocrates/epidemics.1.i.html

[Crafty_Dog]

We have discussed this point previously.  Here is a piece from today's Pravda on the Hudson.  There is both logic and great danger here methinks , , ,
===========================

By ROBERT H. FRANK
Published: January 5, 2013

NO one enjoys paying taxes — and no politician relishes raising them. Yet some taxes actually make us better off, even apart from the revenue they provide for public services.

Taxes on activities with harmful side effects are a case in point. Strongly favored even by many conservative Republican economists, these levies are known as Pigovian taxes, after the British economist Arthur C. Pigou, who advocated them in his 1920 book, “The Economics of Welfare.” In today’s deeply polarized political climate, they offer one of the few realistic hopes for progress.

To see how Pigovian taxes work, consider a driver checking out the offerings at his local auto dealership. He is trying to decide between two vehicles, one weighing 6,000 pounds and the other, 4,000 pounds. After comparing sticker prices, mileage estimates and other features, he views the choice as roughly a tossup. But because he has a slight preference for the larger vehicle, he buys it. His decision, however, could be viewed as a bad choice for society as a whole, because of the side effects. The laws of physics tell us that heavier vehicles tend to cause more damage in crashes. They also spew more emissions into the air and cause more wear and tear on roads.

By providing an incentive to take those external costs into account, taxing vehicles by weight would make the total economic pie larger. Those who don’t really need heavier vehicles could buy lighter ones and pay less tax. Others could pay the extra tax as fair compensation for their heavier vehicles’ negative side effects.

But the mere fact that Pigovian taxes produce greater benefits than costs doesn’t make them an easy sell politically. Like other changes in public policy, a Pigovian tax produces winners and losers. And it’s an iron law of politics that prospective losers lobby harder to block change than prospective winners do for its adoption. That asymmetry creates a powerful status-quo bias that makes even broadly beneficial policy changes hard to achieve.

Yet, in principle, any change that makes the economic pie larger makes it possible for everyone to enjoy a bigger slice than before. The practical challenge is to slice the larger pie so that everyone comes out ahead. A first step toward a vehicle-weight tax would be to make it revenue-neutral — for example, by returning its revenue in the form of lump-sum rebates to each buyer. That would soften the blow, while preserving the incentive to buy lighter vehicles.

For example, if the tax were 20 cents a pound, a 6,000-pound vehicle would be taxed at $1,200, as opposed to $800 for a 4,000-pound one. If an equal number of vehicles of each weight were sold, all buyers would get a $1,000 rebate when the total tax income was redistributed. The buyer in our example would thus be making a net payment of $200 because of the tax, but his total outlay would have been $400 lower if he’d bought the smaller vehicle instead.

Although revenue neutrality would help, buyers who really need large vehicles might feel aggrieved. Paradoxically, the key to mollifying them is to propose Pigovian taxes not just on vehicle weight but also on a swath of other activities that cause undue harm to others. We could drivers tax contributing to traffic congestion, for example, on the grounds that entering a crowded roadway causes delays to others. We could tax noise, carbon emissions and other specific forms of air and water pollution. Although some people would end up as losers under any single one of these measures, virtually everyone would come out ahead under a broad suite of Pigovian taxes.

That’s because adopting a large number of them is like repeated flips of a coin whose odds are stacked heavily in your favor. If someone offered a chance to flip a coin that paid $10 for heads and lost $1 for tails, would you take it? It’s an attractive gamble, obviously, but if there is only a single flip, there’s a 50 percent chance that you’ll be a loser. After many flips, however, you’d almost certainly be a net winner.

Likewise, any single Pigovian tax is an attractive gamble for the average taxpayer, who would get a rebate equal to the amount she’d paid in tax and would benefit from the resulting reduction in harm. Under a collection of such taxes, the odds of being a net winner go up sharply. Only the minuscule minority who cause much more than average amounts of harm in almost every category might end up paying more total tax than before. And even those few would still be net winners, because of the corresponding reductions in harm.

A BROAD slate of Pigovian taxes would thus meet the challenge of how to divide the larger pie so everyone comes out ahead. And because the prospect of a continued divided government makes short-run legislative progress unlikely on other fronts, why not pick this low-hanging fruit right now?

The case for Pigovian taxes isn’t easily reduced to bumper-sticker slogans. Still, the basic ideas are not complicated, and President Obama has the biggest megaphone on the planet. It should be easy for him to persuade rational voters to embrace policies that would make virtually everyone better off.

But he must also persuade House Republicans. Getting their votes will be the real test of his celebrated rhetorical skills.


Robert H. Frank is an economics professor at the Johnson Graduate School of Management at Cornell University.
 

[Crafty_Dog]

The Stealth Tax Hike
Why the new $450,000 income threshold is a political fiction. .
 
Anyone still need a reason to abandon "grand bargains" and deals negotiated between this President and GOP Congressional leaders? Here it is: The revival of two dormant provisions of the tax code means the much ballyhooed $450,000 income threshold for the highest tax rate is largely fake.

The two provisions are the infamous PEP and Pease, which aficionados of stealth tax increases will recognize immediately as relics of the 1990 tax increase. Those measures, which limit deductions and exemptions for higher-income taxpayers, expired in 2010. The Obama tax bill revived them this week. It isn't going to be pretty.

Under the new law, some of the steepest tax increases may fall on upper-middle class earners with incomes just above $250,000. Here's why:

During the negotiations, the White House won a concession from Republicans to allow phaseouts for personal exemptions and limitations on itemized deductions, starting at an income of $250,000 for individuals and $300,000 for joint filers.

The Senate Finance Committee informs us that in effect the loss of the personal exemptions, currently $3,800 per family member, can mean a 4.4 percentage point rise in the marginal tax rate for a married couple with two kids and incomes above $250,000. A family with four kids in that income range faces about a six percentage point marginal rate hike. The restored limitations on itemized deductions can raise the tax rate by another one percentage point.

High-income Americans with incomes of more than $1 million may lose up to 80% of their itemized deductions for home mortgage payments, health care, state and local taxes—and charities. Cue the local symphony's development office.

Add it together and families in the 33% tax bracket could see their effective marginal rate paid on each additional dollar earned rise to above 38%.

A store manager married to a dentist with a combined income of, say, $350,000 may pay a higher tax rate under the new law than if the tax code had simply reverted back to the Clinton-era rates that Mr. Obama championed. Those earning more than $450,000 would see their de facto tax rate rise to about 41% under the new law, not 39.6%. Add in the new ObamaCare investment taxes and the tax rate on interest income is close to 45%.

How did this happen? Recall that early in the fiscal-cliff negotiations House Speaker John Boehner offered to cap itemized deductions to raise $800 billion, in lieu of raising tax rates, if the President would agree to spending cuts. The White House rejected that.

Mr. Obama then insisted on reviving PEP and Pease, thereby recapturing much of the income he claimed to be "compromising" away by agreeing to a higher income threshold for the top bracket. But instead of using phaseouts to offset higher rates as Mitt Romney proposed, Mr. Obama insisted on raising tax rates too.

Democrats are advertising the higher $400,000-$450,000 threshold as a victory for affluent taxpayers in blue states. But with PEP and Pease these Democrats are hammering their own constituents via the backdoor.

Taxpayers in blue states claim roughly twice as much in itemized deductions as those in red states. Income tax rates are steeper in California and New York than Texas and Utah. Chuck Schumer just put a tax bull's-eye on upper-income Manhattanites, and Barbara Boxer whacked Silicon Valley. Some $150 billion, about one-quarter of all the money raised by this tax bill, will come from this stealth tax hike.

Mr. Obama purports this is merely "a return to the Clinton-era tax rates." But capital-gains rates will be about three to five percentage points higher than in the 1990s, the Medicare tax is higher, and his stealth tax will raise personal rates higher than advertised. Forget the golden Clinton memories. Mr. Obama is pushing the U.S. back to the Carter era.

[ccp]

I read the reasons proposed.

There is just no end to the imagined wasy to make people cough up more money.

It appears to be limitless.   

[DougMacG]

Former Vermont Governor and Democratic Party Chairman Howard Dean conceded in December on MSNBC that "this may seem like heresy" but "the truth is, everybody needs to pay more taxes, not just the rich."
http://online.wsj.com/article/SB10001424127887324581504578231721868759336.html?mod=WSJ_Opinion_LEADTop

Nancy Pelosi declared on January 6 on CBS's "Face the Nation" that the fiscal-cliff deal was "not enough on the revenue side."

Michigan's Sandy Levin, the ranking Democrat on the Ways and Means Committee, recently reassured his liberal colleagues on the House floor that "additional revenues" are sure to come in future budget deals and that "this [tax hike] sets that important precedent."

[Crafty_Dog]

http://www.journalofaccountancy.com/News/20137209.htm

FATCA final regulations cover all the bases
By Sally P. Schreiber, J.D.
JANUARY 18, 2013

On Thursday, the IRS issued final regulations providing rules on information reporting by foreign financial institutions (FFIs) and withholding on certain payments to FFIs and other foreign entities (T.D. 9610).

Under the Foreign Account Tax Compliance Act of 2009 (FATCA), enacted as part of the Hiring Incentives to Restore Employment Act of 2010, P.L. 111-147, U.S. withholding agents are required to withhold tax on certain payments to foreign financial institutions (FFIs) that do not agree to report certain information to the IRS regarding their U.S. accounts and on certain payments to certain nonfinancial foreign entities (NFFEs) that do not provide information on their substantial U.S. owners to withholding agents.

The regulations finalize the proposed rules issued last February (REG-121647-10), making a number of changes in response to comments. As a result, the 389-page proposed regulations have become 544-page final rules, with a lengthy discussion of which comments prompted changes from the proposed regulations.

One area of simplification in the final regulations is the integration of model intergovernmental agreements into the reporting requirements of the regulations. There are two types of intergovernmental agreements: reciprocal agreements and nonreciprocal agreements (see “Treasury Releases Model Intergovernmental Agreement for FATCA”), which are called Model 1 IGAs and Model 2 IGAs. A jurisdiction signing a Model 1 IGA agrees to adopt rules to identify and report information to the IRS that meets the standards in the Model 1 IGA. FFIs that are in Model 1 IGA jurisdictions report the information about U.S. accounts required by FATCA to their respective governments, which then exchange this information with the IRS. FFIs in Model 2 IGA jurisdictions must comply with the FATCA regulations except to the extent the relevant IGA provides otherwise.

The IRS announced that, to date, seven countries have entered into model agreements with the United States: Norway, Spain, Mexico, the United Kingdom, Ireland, Denmark, and Switzerland. Discussions with more than 50 countries are ongoing, and more agreements are expected to be signed in the near future.

In recognition of the burden that complying with FATCA entails, the final regulations, among many other things:

•   Phase in over an extended transition period the timelines for withholding, due diligence, and reporting and align them with the IGAs.
•   Expand and clarify the types of payments subject to withholding, particularly for certain grandfathered obligations that are not subject to the rules and certain payments made by NFFEs.
•   Expand and clarify the treatment of certain low-risk institutions, such as government entities and retirement funds, provide that certain investment entities may be subject to being reported on by FFIs with which they hold accounts rather than being required to register as FFIs with the IRS, and clarify the type of passive investment entity that financial institutions must identify and report.
•   Streamline the compliance and registration requirements for groups of financial institutions, including commonly managed investment funds.

The regulations will be effective when published in the Federal Register (scheduled for Jan. 28, 2013).
—Sally P. Schreiber (sschreiber@aicpa.org) is a JofA senior editor.

[Crafty_Dog]

The Grip Gets Tighter, IRS Finalizes FATCA
by Nick G, International Man
January 22, 2013

Dear fellow International Men and Women,

The grip continues to get tighter.

Last week the IRS finalized the widely unpopular FATCA regulations, a monstrosity of 544 pages.  Unpopular with everyone but the US government and the financial advisers who are set to profit from the stacks of paperwork that FATCA creates. "Stimulating" the economy I suppose.

The final regulations include a step-by-step process for identifying US accounts, information reporting, and withholding by foreign financial institutions.  The ability to threaten cutting off access to the US financial system and the world's most important reserve currency is the main reason why the US government can get away with absurdities like FATCA and others governments cannot.

Imagine if Mexico decided to implement a FATCA-like law, requiring all foreign financial institutions to incur large compliance costs to disclose certain information about Mexican clients, regardless if such disclosures would violate local laws. Those countries that refused this dictate from the Mexican government would be cut-off from the Peso and the Mexican financial system. I imagine not many countries would comply in this hypothetical scenario.

The circumstances are quite different if the government in question controls the world's premier reserve currency and the de facto access to international trade that it entails. I suspect that the US will be able to continue to get away with forcing other countries to comply with FATCA and other overreaching regulations as long as it retains this status.
These costly regulations make the world a smaller place for Americans. Most foreign banks want nothing to do with American clients and it is no wonder why. The benefits do not outweigh the costs; any rational business owner would make the same decision.

Perhaps it is a desired effect.

Edicts like FATCA serve as an indirect form of capital controls, as they effectively create significant barriers for capital to leave the US.

We shouldn't be surprised that broke governments everywhere are finding all sorts of dastardly creative ways to squeeze their citizens more and more.
Take California for example, which is seeking to hit businesses with an absurd retroactive tax going back 5 years.

You'll find these stories and other current events you need to know about below, as well as a couple of interviews with Doug Casey.

Also, new IM articles include an overview of the best offshore banks used for business or personal purposes written by an international consultant, an overview of why gold royalty companies have good risk/reward profiles, and Jeff Thomas' take on one of the most overlooked factors by expats when choosing a suitable country for expatriation.

[DougMacG]

Continuing our conversation about tax rates and economic performance...

In the 1950s in the US, the U.S. had a very high top marginal rate that almost no one paid and we had relatively good economic performance.  Since it will be hard to replicate the rest of the factors of the 1950s, decimated global competitors, stronger work ethic than now, intact families, very little welfare etc., it might be more interesting and informative to take a look around the globe right now.

The country we are most emulating right now is France where they just raised the top tax rate to 75% and the richest person just moved to Belgium where it is only 50%!  Leftists are winning elections with similar themes to Obama's.  The unemployment rate in France is over 10%, just slightly worse than California.  http://articles.latimes.com/2012/dec/28/world/la-fg-wn-jobless-climbs-france-20121228

Meanwhile, unemployment is 1.9% in Singapore.  Why?

Tax rates in Singapore for individuals range from 0 to 20% max.  Corporate tax rates are less than half of those in the U.S.  Capital Gains taxes are ZERO. 

Above are only two examples.  There are exceptions, places where relative prosperity co-exists with high tax rates, Norway comes to mind.  Good luck duplicating Norwegian economic culture here.

[Crafty_Dog]

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From "One From One Leaves Two" (1934), by American poet Ogden Nash (1902-71):


Abracadabra, thus we learn

The more you create, the less you earn.

The less you earn, the more you're given,

The less you lead, the more you're driven,

The more destroyed, the more they feed,

The more you pay, the more they need,

The more you earn, the less you keep,

And now I lay me down to sleep.

I pray the Lord my soul to take

If some Soul Commission hasn't got it before I wake.