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Author Topic: progressive consumption tax
Pete at Home
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http://www.slate.com/articles/business/moneybox/2011/12/the_progressive_consumption_tax_a_win_win_solution_for_reducing_american_economic_inequality_.single.html

This article addresses a number of themes I've argued over the years here.

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RedVW on a Laptop
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Fair Tax.
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Pete at Home
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.Scotus has pointed out that the power to tax is the power to destroy.

So what are we willing to destroy?

quote:
. The payroll tax, for example, discourages hiring. The income tax discourages savings. As every mature adult realizes, we have to tax something. Every dollar we can raise by taxing activities that cause harm to others is a dollar less we must raise by taxing beneficial activities.




[ December 29, 2013, 11:33 AM: Message edited by: Pete at Home ]

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LetterRip
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Pete,

it is a pretty poorly thought out proposal.

We already have more savings and investment available than can be productively used.

Even at 100% consumption tax, the wealth would generally pay less in taxes than they do now. It is extremely difficult to spend gobs of money unless you are deliberately trying to maximize your expenditures. Ie someone with 100 times the income of the middle class, probably only spends about 3-10 times as much, not 100 times as much.

Also consumption taxes are easiest to avoid, and by far the easiest to avoid for the wealthy.

There isn't any 'income tax' discouragement for work. That has been the ultimate in idiotic reasoning. There are very few jobs where people have much flexibility in their hours. There are almost no jobs where taxes would have any impact on decision of whether or not to work additional hours. Also who are we afraid that we will discourage from working? We already have a gross excess of labor.

We have no reason to discourage consumption with the possible exception of energy consumption. We could tax based on usage of non renewable energy or such as an externality tax.

A far better substitute for income taxes would be a very modest (.1% or so?) tax on net worth/net assets. It would encourage investment in productive assets.

Also the author misunderstand the reason for 'growing disparities' in income. It is largely a result of changes in tax policy and deregulation and globalization. Essentially we have changed the tax policies to enormously favor capital accumulation and to place most of the tax burden on middle class. Also we have eliminated the laws that protected local labor and encouraged local production with laws that are strongly anti local labor and that encourage foreign production.

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Pete at Home
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By absence of response, I take it that you cant argue with the proposition that payroll taxes discourage hiring, right?
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TomDavidson
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Given that the biggest problem with the economy right now is the amount of money that the wealthy have taken out of circulation, taxing them on the little money they actually circulate would seem to me to be a terrible idea.
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Pete at Home
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I take it someone did not read the article. I just learned how to manage the strange non intuitive process of cutting and pasting from this droid. Do you need me to do that for you? [Smile]

quote:
A progressive consumption tax would not cure all ills. Although it would reduce inequality in consumption spending, it would likely have the opposite effect on wealth inequality, since the rich could better take advantage of the savings exemption. Because the wealthy would die with larger estates than before, it would be important to maintain a strong estate tax as part of the system.

With the unemployment rate still near 9 percent, now would be an inopportune moment to implement a progressive consumption tax. But if we passed the tax into law and scheduled it for gradual phase-in only after the economy had again reached full employment, we’d achieve three goals at once.

First, by committing ourselves to a larger revenue stream in the future, we’d reassure those who worry, justifiably, that the government cannot forever spend more than it takes in. Second, by encouraging additional investment, we’d foster more rapid growth in productivity and income. Third, and most important, knowledge that the tax was coming would stimulate a burst of private spending that would help get the economy back on its feet. Anyone who was thinking about buying a bigger yacht or building a bigger mansion would rush to do so before the tax took effect



[ December 29, 2013, 12:49 PM: Message edited by: Pete at Home ]

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TomDavidson
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The thing is, proposing any economic fix for "after the current Troubles" is like saying "we'll talk about this next year in Jerusalem."
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Charles in Charge
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quote:
Originally posted by LetterRip:

We already have more savings and investment available than can be productively used.

Why do you say that?

quote:

There isn't any 'income tax' discouragement for work. That has been the ultimate in idiotic reasoning. There are very few jobs where people have much flexibility in their hours. There are almost no jobs where taxes would have any impact on decision of whether or not to work additional hours. Also who are we afraid that we will discourage from working? We already have a gross excess of labor.

That's a pretty strong claim , LR. People don't respond to income taxes?
Most studies I've seen find a significant effect when income taxes are raised:
study
study

Do you have any counter-evidence, besides your own intuition?

From my own personal experience, I would work harder to increase my annual bonus if I got to keep more of it.

quote:

A far better substitute for income taxes would be a very modest (.1% or so?) tax on net worth/net assets. It would encourage investment in productive assets.

Don't we already have that, in the form of inflation?

quote:

Also the author misunderstand the reason for 'growing disparities' in income. It is largely a result of changes in tax policy and deregulation and globalization. Essentially we have changed the tax policies to enormously favor capital accumulation and to place most of the tax burden on middle class.

How do you define middle class?

The top 10% of households pay about 70% of total income taxes. Is that consistent with your claim that most of the tax burden is on the middle class?

income tax burden distribution

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Pete at Home
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quote:
Originally posted by TomDavidson:
The thing is, proposing any economic fix for "after the current Troubles" is like saying "we'll talk about this next year in Jerusalem."

Try again, starting with the sentence third and MOST IMPORTANT.
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Pete at Home
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quote:
Originally posted by TomDavidson:
The thing is, proposing any economic fix for "after the current Troubles" is like saying "we'll talk about this next year in Jerusalem."

Try again, starting with the sentence third and MOST IMPORTANT.
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TomDavidson
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Without knowing what LR meant by "tax burden," it seems to me that having the top 10% -- who hold 90% of the wealth -- pay 70% of income tax might indeed be consistent with the observation that most of the tax burden is felt by the middle class.

I'm curious, Charles: how much are your annual bonuses nowadays?

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Pete at Home
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I'm not interested in shifting more burden to the middle class and poor, so much as shifting it off of activities that benefit those groups. Particularly off of employment and off of activities that lead to medical care, education, etc. I'd like to see products and services coming from offshored jobs getting a higher tax burden. And I would not weep if even the poorest Americans got taxed out of their ability to smoke, drink, dope, whore, or gamble, especially if they got better healthcare, education, and public education in the bargain. (And I say this without self-righteousness as I have already told you that I smoked, drank, and gambled myself into poverty ... although my poverty and vices certainly had other causes, as happens with most if not all poor).
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Charles in Charge
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quote:
Originally posted by TomDavidson:
Without knowing what LR meant by "tax burden," it seems to me that having the top 10% -- who hold 90% of the wealth -- pay 70% of income tax might indeed be consistent with the observation that most of the tax burden is felt by the middle class.

Yes - this was meant to be a clarifying question. It's possible LR was referring to things besides income tax, or besides federal income tax, etc...

This particular 10% refers to those with the highest incomes, which is not the same 10% with the highest wealth.

Considering just income - the top 10% receives about 45% of the income and pays 75% of income taxes. The bottom 50% receives about 10% of income and pays about 2% of tax. Just based on those facts it's not obvious that the middle class bears most of the tax burden. You could argue that it bears a disproportionate share of the burden and maybe that's what LR meant. Hopefully he'll clarify so we don't have to guess.

quote:

I'm curious, Charles: how much are your annual bonuses nowadays?

I've gotten bonuses in the range of $20,000 - $35,000 recently with strong but not stellar performance reviews. 45% gets automatically deducted as tax. I probably end up paying something like 40% once I do my annual returns.
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Pyrtolin
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Consumption taxes areas inane as payroll taxes- they only serve to discourage the fundamental economic activities that are most beneficial across the board.

Saying that income taxes discourage savings isn't quite accurate, though even where it is accurate, that's only a negative statement because of moral attachment to the word "savings", particularly when you realize that one entity's savings is, by definition another entity's debt, be that entity a person, a bank or corporation, or a government. But if you recast the statement as "Income taxes discourage debt," the moral flavor of it changes completely, despite the fact hat you're saying exactly the same thing.

Income taxes, where applied, trim purchasing power- a bad thing at low income levels where the consumer already has trouble meeting there needs, but a good thing at high income levels where the consumer can easily afford more than they want and thus will bid the price up on desirable things that are in limited supply is the process of competing for possession of them. Not a problem for luxury goods, but a serious inflationary pressure when it comes to productive assets, such as land, that are in limited supply.

But even more, as LR points out, the issues of savings rears its head. The excess after that bidding goes into "savings". Which, because the holders of that savings seek to maximize the return on it, tends to mean that the largest portion of it eventually goes into financial products that back private lending and credit.

Reducing the value of income that's redirected toward such savings (and meanwhile proportionally increasing the value, through deductability, of investing it in labor and productive assets instead is, in our current state, a net economic good, because, as LR points out, the current net total of savings- specifically private savings, is well out of proportion to what it economically productive to have available, not to mention very poorly distributed, with at least the lower have of the population tending to represent net indebtedness to a small margin at the top. And ecnoomically, such savings are, at best, a wash to the private sector- against, because every dollar of such private holdings it answered by a dollar of private debt. The only net positive in private savings comes from private holdings of public debt. If we want to encourage the private sector to really save more, we have to offer enough public debt to meet the desired private savings level, and ensure that it offers a sufficient return to make it worthwhile to invest in.

quote:
From my own personal experience, I would work harder to increase my annual bonus if I got to keep more of it.
That's a bit nonsensical, because said bonus is already scaled to account for the fact that a fair portion of the nominal amount will go to pay the transaction costs for awarding it, not to mention that the prices you pay would also be proportionally higher without the tax, because they're largely already set based on what you can afford to pay with your after tax income (particularly at the bonus levels that you're reporting)

quote:
How do you define middle class?
The middle class is an economic group that earns enough from it's labor to be able to be secure in its ability to afford its cost of living with enough of a margin to save or invest some of its earnings, but not so much of a margin that it can afford to live purely off of the income of such investments without needing to work for some portion of its life to build them. (It defines the middle ground between the aristocratic class, which can exist purely on the income from its investments without ever needing to work for income, regardless of whether it chooses to do so, and the serf/impoverished class, which is not secure in its ability to meet the cost of living, and thus cannot reasonably save or invest to any meaningful extent)

quote:
First, by committing ourselves to a larger revenue stream in the future, we’d reassure those who worry, justifiably, that the government cannot forever spend more than it takes in.
Far from being justifiable, this ids dangerously ignorant thinking specifically because it encourages us toward economically self-destructive actions that have no basis except to serve to ward off this imaginary bogeyman. As long as our popuplation continues to grow, and more importantly, as long as our economy needs to gerow to be better able to provide sufficient resources to meet our populations needs and wants, the government must spend more than it takes in to provide both the needed profit potential to the private sector to encourage growth (without net input from the public sector, particularly in a state of trade deficit, the private sector becomes, at best, a zero sum game, if not actively running at a net loss) and to provide a sufficient stock of savings potential to the private sector that's not rooted in the growth of private debt.
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Pete at Home
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" Consumption taxes areas inane as payroll taxes- they only serve to discourage the fundamental economic activities that are most beneficial across the board."

As the article points out, that depends largely on what's being consumed, Pyr.

The economy is not a single entity. Money pumped into buying, say meth, doesn't get recirculated into the same pathways as money sunk into rent, internet, flower delivery. A disproportionate amount of money put into strip clubs ends up going into cocaine. There are some parts of the economy that we'd like to see expanded, others could use a little shrinking and most of us would be happy about that.

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Charles in Charge
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quote:
Originally posted by Pyrtolin:
Consumption taxes areas inane as payroll taxes- they only serve to discourage the fundamental economic activities that are most beneficial across the board.

Focusing on consumption, which seems the popular point of view today, has always struck me as backwards. We can, after all, only consume what we produce. The reason iphones became popular was because we figured out how to produce them, not because we figured out how to consume them. A focus on consumption doesn't seem to account for the new technologies, ideas, etc... that are necessary to a growing economy. And I think income taxes are more likely to discourage such advances than consumption taxes.

Production and consumption are obviously related. You don't normally get one without the other. But to focus exclusively on consumption seems too narrow of a view.

quote:

quote:
From my own personal experience, I would work harder to increase my annual bonus if I got to keep more of it.
That's a bit nonsensical, because said bonus is already scaled to account for the fact that a fair portion of the nominal amount will go to pay the transaction costs for awarding it, not to mention that the prices you pay would also be proportionally higher without the tax, because they're largely already set based on what you can afford to pay with your after tax income (particularly at the bonus levels that you're reporting)

How do you account for the cross-country studies that show higher income taxes reduce hours worked? or for the US studies that show similar results? If it was just a scaling factor you'd expect there to be no effect, right?
quote:

quote:
How do you define middle class?
The middle class is an economic group that earns enough from it's labor to be able to be secure in its ability to afford its cost of living with enough of a margin to save or invest some of its earnings, but not so much of a margin that it can afford to live purely off of the income of such investments without needing to work for some portion of its life to build them. (It defines the middle ground between the aristocratic class, which can exist purely on the income from its investments without ever needing to work for income, regardless of whether it chooses to do so, and the serf/impoverished class, which is not secure in its ability to meet the cost of living, and thus cannot reasonably save or invest to any meaningful extent)


Thanks for the detailed explanation. It's different enough from Wikipedia's to be interesting. And it captures a much larger section of the US population than I would have thought.

Do you consider people who could save, but choose not to, as middle class or impoverished (lower?) class?

Depending on that answer my guess is that your definition would include something like 80-90% of the US population. Does that fit your view?

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LetterRip
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Charles,

the qeustion is 'do higher taxes' discourage working more hours due to reduced marginal utility of working the extra hour.

People do work fewer hours, but it isn't because each hour is worth less, but because it takes fewer hours to achieve comfort. Essentially we seek a basic comfort threshold (provide for the necessities + luxuries) - taxes can achieve that threshold with a much smaller income. For instance in the US you must own a car for almost everyone in order to go to work - on average about 9100$ per year. In Europe there is superb public transport funded by taxes, at a cost of 500$ per capita, and then individuals spend about 3000-4000$ on fares - for a savings of 5100$ - so at 20$ per hour - that is 255 hour savings. For health care it is similar - in the US we pay more in taxes for the public funded health care, but most people aren't covered by the publically funded health care (ie our taxes are higher for health care, which we then don't recieve). The amount extra we pay is another 4000$ or 200 hours. So assuming all else is equal - we require 455 hours to achieve the same baseline comfort level - this comes to 9 hours savings per week. Many nations provide college coming to about 50,000$ worth of services. per person (but that is lifetime payout, so 50000/50 say) = 1000$ per year.

If taxes are used to provide non substitute services (ie military spending) it has the opposite effect, instead of working less, you have to work more. Ie in the US per capita defense spending is about 5000$ (military + military share of deficiet + military spending in non defense budgets, etc.), other countries will be much less than half of that. So that 2500$ or more taken out in taxes, means we have to work 2500$/20 = 125 hours extra to make the same baseline income.

So due to allocating less of the tax base to public services, and drastically more spending on defense - the typical US person needs to work 575 hours more per year to make about the same comfort level as their European counterpart. We actually don't work that many extra hours though. The main reason is that there aren't that many overtime hours available - ie 11+ hours needed per week so either 6 days a week or 10 hour days 5 days a week.

Of course it is more complicated than the above you can forgo insurance and as long as you are lucky and don't get sick or in an accident - that saves you a lot. It is a major gamble since you could be ruined by an illness.

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LetterRip
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I agree with Pyrs definition of middle class,

quote:
Do you consider people who could save, but choose not to, as middle class or impoverished (lower?) class?
Depends on what you mean by 'could save'. If you have a high risk of ruin (ie greater than some percentage chance that all savings can be wiped out by a random life event) - ie greater than say 50% chance - then the savings are actually illusory. So while you can carry out the behaviours associated with 'saving' - you are unlikely to reap any benefit from doing so.
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Pete at Home
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"Do you consider people who could save, but choose not to, as middle class or impoverished (lower?) class"

I'd say lower. I'm un-PC in that I believe it's possible to stooopid oneself into the lower class. Even though I'm too liberal to think this is where most of the poor come from!

I mean think about this: is a rich heiress that runs away from home and becomes a homeless meth whore, a member of the lower class? While she's on her back, in the street, without her cell phone and credit cards, sure.

[ December 30, 2013, 02:29 PM: Message edited by: Pete at Home ]

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LetterRip
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Regarding inflation versus a net asset or net worth tax. I'm entirely comfortable moving to a primary inflation substitution for income/sales/etc taxes. I'd still like externality taxes or the equivalent since without them it makes markets improperly price many goods.
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LetterRip
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Pete,

I don't think that is UN PC - I think many people share your belief that it is possible for ones choices to lead to poverty/lower class and likewise believe that most individuals in poverty didn't arrive their via poor choices per say, but more due to structural factors.

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Pete at Home
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quote:
Originally posted by LetterRip:
Pete,

I don't think that is UN PC - I think many people share your belief that it is possible for ones choices to lead to poverty/lower class and likewise believe that most individuals in poverty didn't arrive their via poor choices per say, but more due to structural factors.

Glad to hear it. Had a FB moment this week where two folks were arguing choice vs. society, and felt like I was talking to a tornado.

I think David Ramsey is sincere and does more good than harm by laying out steps to success, even if many/most of those steps aren't accessible to a lot of poor folks right now. (hard to listen to self-improvement CDs as I drive when I don't have a car, for example). The harm comes when the wealthy use Ramsey's material to feel more smug or anesthetize their consciences about not reaching out and helping. I gauge Ramsey's sincerity because he does actually argue for structural changes to avoid screwing the poor, e.g. gambling stuff that targets the poor, etc.

I think that the degree to which the poor are responsible for their lot varies from society to society. I reckon that in Victorian England and prerevolutionary France, that social mobility was lower than it is here and now. Outward forces dominated more. OTOH I think that in the early 1960s, that there was more social mobility and fewer economically trapping forces then than now. No, I'm not waxing nostalgic ... there are many legal freedoms and changes that make this a more moral nation now than then ... but if you look at strictly ECONOMIC forces, that even African American males were better off then than now. Less likely to end up in prison, for example. More likely to live with their kids. Anyone who pretends that I just said that those economic forces in any way counterbalance blacks not being able to vote in part of the country, or other civil rights issues, will be told to get off my leg 'cause that ain't what I'm saying. I think that as a liberal I should be able to say that economic segregation and 3 strikes have dampened the liberation of political desegregation and legal civil rights.

Ramsey's point, and I think it's valid, is that knowledge is power. Part of the structure that holds the poor down, particularly minorities, is lack of knowledge of the keys to success. When knowledge is missing from a broad swath of the population, that's a *structural* problem, not having to do with individual choice. Ramsey seems to understand that, but some of his tea party followers don't, or don't want to get that a kid isn't responsible for what he's never had a chance to learn.

But that's a two-edged sword. When well-meaning liberals shout Ramsey down because of what the Tea Party is making of his lists of good ideas, instead of making this knowledge available to those that need it, they are perpetuating a systemic problem, as much as the Tea partiers.

[ December 30, 2013, 05:17 PM: Message edited by: Pete at Home ]

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Charles in Charge
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quote:
Originally posted by LetterRip:
I agree with Pyrs definition of middle class,

Where should most of the tax burden lie, then?

By Pyr's definition, the upper class can easily avoid an income tax by not working. And according to your model of human behavior they will actually do so since they can achieve comfort without working. That implies any income tax on the upper class will raise no revenue.

The lower class doesn't have enough income to bother taxing. So that just leaves the middle class.

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Charles in Charge
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LetterRip,

Thanks for laying out your model of human behaviour in such detail. I'm a big fan of actual numbers.

I think your model makes the following predictions:
  1. Income taxes would not reduce labor. If anything they would increase labor.
  2. The upper class will not work, since they can live comfortably off their investments.
  3. Their will be very few people earning incomes above the "comfortable" level.
  4. Time spent working will be highest among the lower class, followed by the middle and lower class.
  5. Most Americans are less comfortable than most Europeans.
  6. Lotteries would offer pots no larger than the necessary size for a person to live comfortably for the rest of their life.

Do you agree that those follow from your model?

Based on my own observations I'm pretty sure (2), (3), (4) and (6) are not true. I'm not sure about (5).

Given that your model doesn't agree with reality in many cases I don't place much confidence in (1) being true.

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Pyrtolin
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quote:
Where should most of the tax burden lie, then?
There's a false assumption there that it _should_ lie on any general class of people. Taxes should be applied where they're needed for their economic effects.

quote:
By Pyr's definition, the upper class can easily avoid an income tax by not working.
Investment returns are still a source of income that can be taxed. IT's reasonable to tax the portion of them that are rolled over into further financial investments (into generating more private debt) and not the portion of them that are spend on real capital investments- money that is spend on resources for production and labor to execute that production to the degree that it's necessary to encourage people with such investments to shift their behavior.

Similarly, it's worth applying some degree of tax pressure on high levels of income to the degree that they're useful in containing inflation and preventing financial bubbles.

Putting income taxes on the middle class is not much more useful that putting them on the poor, unless we are facing an issue of long term resource shortages that require purchasing power to be curtailed. (In the face of short term shortages, such as happened during WWII, when domestic resources were in short supply due to the war effort, using special bond offerings, such as war bonds to delay consumer demand instead of completely curtailing it until after the shortage had been resolved becomes a far better solution)

If there is not productive behavioral modification to be had from applying a given tax, then odds are the tax is useless, if not counterproductive. Keeping tax policy rational and functional like that would help to ensure that the federal deficit (rate of money production) can better automatically adjust as needed by the economy to support real growth while keeping inflation minimal.

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Pyrtolin
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quote:
Money pumped into buying, say meth, doesn't get recirculated into the same pathways as money sunk into rent, internet, flower delivery. A disproportionate amount of money put into strip clubs ends up going into cocaine. There are some parts of the economy that we'd like to see expanded, others could use a little shrinking and most of us would be happy about that.
Sure, but that has nothing to do with a general consumption tax, rather, such tuning is the province of sin and luxury taxes.
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Charles in Charge
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I've been trying to figure out the actual wealth distribution in the US. It's not as easy as I would have expected. But I have learned a couple interesting things I thought I'd share:

  1. About 13.5% of households have a net worth over $500,000. $500,000 isn't enough to qualify for upper class, but this places an upper bound on how many households would qualify.
  2. I personally have more net wealth than the bottom 45% of US households combined. (And so do you).
  3. The bottom 20% of US households combined have a net wealth of negative $760 billion.

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Pyrtolin
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quote:
. The reason iphones became popular was because we figured out how to produce them, not because we figured out how to consume them. A focus on consumption doesn't seem to account for the new technologies, ideas, etc... that are necessary to a growing economy. And I think income taxes are more likely to discourage such advances than consumption taxes.
No, iPhones became popular because someone with a good sense of potential market demand designed them to appeal to a market that had sufficient money to spend to acquire them. Steve Jobs didn't design the phone and then cross his fingers hoping people would like them. He identified a market with a certain set of demands and funding, then designed a product to meet those demands (and to be certain, Apple does a lot of work to make "Produced by Apple" be a specific demand in and of itself)

Very few people find success by making something and hoping it catches on- most success, even in innovative fields, comes from those who stand back and watch more experimental efforts fail, collect data on what elements were best received, and then put that information together to align with real demand.

quote:
How do you account for the cross-country studies that show higher income taxes reduce hours worked?
I think that's irrelevant to my point. "Hours worked" is not a worthwhile goal, in any case- in fact we should be looking to actively reduce total hours worked in relation to overall output. There's no use in making it a goal to work just for the sake of logging extra hours for something that could be accomplished more efficiently.

Hours worked should correspond to the amount of work necessary to meed current demand; it's pointless to make it a goal or indicator of anything in and of itself. (And I'll note that the studies you pointed to both confounded the issue- in one case by evaluating a combination of social supports, consumption, and income taxes, and in the other by only really stating that lower taxes on very high income levels means more cash in the pocket of high income makers, and said nothing about generalized economic effects. If GDP is higher because it reflects people making too much to use productively making even more money beyond what they can put to productive use, then it's not a meaningful measure of real economic benefit, just of an increasing financial bubble.

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LetterRip
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Charles,

I don't agree that those are logical predictions derived from my model.

1) Depending on where income taxes are allocated (does it produce goods/services that are of immediate benefit to the individual or does it produce services that are of little or no marginal and/or immediate utility to the individual. Does it produce those services cheaper than the market would provide them). In Europe the government is providing services that the market provides at much higher costs in the US. Thus the European taxes shift towards reduced labor. Income taxes can discourage labor that is for purely consumptive behavior since each dollar has marginal utility and your labor is apportioned between work and leisure. The consumptive earnings are making your 'leisure' labor more 'productive' (ie leisure can be a lot more fun with extra cash, than when cash strapped).

2) Being seen to 'work' has social value, not just economic value - and a lot of 'work' is not really work (There are many jobs that are primarily social in nature).

3) We work for other than purely economic reasons, allieviation of boredom, social consciousness, and social status becomes a driver after one has enough wealth that the economic reasons cease. (Indeed they can result in individuals who aren't wealthy to engage in far lower paying jobs than they otherwise might have).

4) Depends on the labor - many forms of 'lower class' labor have upper limits due to how physically and mentally draining they are, and also due to availability of employment and coordination factors (ie two jobs a day plus four hours of commute and juggling can provide 12 hours related to work for 8 hours of pay). Generally people are willing to put lots of hours into enjoyable jobs, but enjoyable jobs are generally only available to those who have high skill but less need of the income.

5) Agreed for OECD countries - depending on definition of 'comfortable' (GINI index, various hapiness indexes, etc.)

6) Disagree - lotterys are primarily about selling fantasies.

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Charles in Charge
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quote:
Originally posted by Pyrtolin:
quote:
Where should most of the tax burden lie, then?
There's a false assumption there that it _should_ lie on any general class of people. Taxes should be applied where they're needed for their economic effects.

quote:
By Pyr's definition, the upper class can easily avoid an income tax by not working.
Investment returns are still a source of income that can be taxed.

You're right, Pyr. I missed that now obvious point. And I was feeling all clever, too.

So you're preferred way for the government to control resources is by expanding the money supply? What us non-MMT folks would call taxation via inflation?

[ December 30, 2013, 08:08 PM: Message edited by: Charles in Charge ]

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LetterRip
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Charles,

I generally favor a 'taxation via inflation' + externality taxes to eliminate distortions + wealth transfer taxes.

1) It generally becomes a flat tax on net worth.
2) It isn't a tax that can be 'cheated' so the dishonest have no major advantage over the honest
3) It taxes groups who depend on US resources that normally escape any taxation
4) It is has no enforcement overhead and isn't intrusive.
5) It doesn't result in significant economic disincentives on production, hiring, or consumption, which are an issue with most other taxes.

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DonaldD
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Expanding the money supply does not necessarily mean inflation, Charles. In practice, a growing economy normally requires an expanding money supply to avoid deflation.
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Charles in Charge
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quote:
Originally posted by Pyrtolin:
quote:
. The reason iphones became popular was because we figured out how to produce them, not because we figured out how to consume them. A focus on consumption doesn't seem to account for the new technologies, ideas, etc... that are necessary to a growing economy. And I think income taxes are more likely to discourage such advances than consumption taxes.
No, iPhones became popular because someone with a good sense of potential market demand designed them to appeal to a market that had sufficient money to spend to acquire them.


But a market and great designer is not sufficient, agreed? For the iphone to be possible you need batteries, computer processors, displays, new manufacturing processes and literally a million technical breakthroughs bundled up in a single product. And the overwhelming majority of those technical breakthroughs came from people who didn't have Steve Jobs' vision of a potential market for a mobile phone.

I can sit on my couch and define the technical requirements for a dozen products that I know would sell well. Everybody wants a personal robot assistant to do their dishes, make their meals, fold their laundry, clean up after their pets or something similar. But the work to make that a reality isn't market research. It's years of science and engineering.

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LetterRip
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Charles,

the years of science and engineering was the processor, battery industry, and screen industry. Everyone knew there was a need for this device, largely knew the form factor, battery life, etc. It was just a matter of Moores law catching up to what designers had envisioned 30+ years ago.

A very similar touch phone had won a design award a year before the iPhone was announced, for instance.

Similarly for the iPods - apple bought the hardware design from one company (that was in negotiations to supply quite a few different hardware companies including IBM) and UI and OS from a different company (again was on the verge of contracts for supplying multiple existing companies), then did polishing work. The equivalent of the iTunes store was in the works before Apple bought the hardware and software for the iPod. Apple's primary skill has been in its negotiating with content producers and with hardware supply chains.

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Pyrtolin
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quote:
But the work to make that a reality isn't market research. It's years of science and engineering.
Which is exactly why, outside of academia, they only draw rational investment if there's a clear promise of a return from working on them. (And even within the academic world, some degree of perception of demand for deeper knowledge plays into directing efforts). Most of the components that go into a phone are products and technologies that have wider markets than just phone making, and were developed because it was profitable to try to meet that demand. The rest are ones that were developed in direct response to phone makers fielding requirements for certain parts, or in direct anticipation of requirements that were going to emerge. There's not one piece that was designed on a lark because a company happened to have a pile of cash sitting around that they weren't doing anything else with.

There are certainly cases where various conditions come together to interfere with production, but those are almost completely moot in the context of the US market, and certainly on the issue of marginal, profit-based taxes. If we were facing sharply rising inflation and labor or resource shortages, then production fators would be important, but those aren't anywhere remotely on the horizon in our current situation where we continue to hover on the brink of deflation with perpetually high unemployment rates and huge amounts of production slack.

Our market is so over-saturated with productive capacity that it's being left intentionally idle in order to limit supply of goods to keep prices up. No amount of supply-oriented policy is going to suddenly make it worth while to hire people to produce goods that are already in excess supply. (In fact, such policy will tend to shift the market in favor of fewer, higher margin goods, since there's less of a penalty on taking profits by way of high margins over deferring profits by way of tighter margins and higher production volumes) The only way to encourage that production to come back on line is to circulate enough money among those who would be consumers but can't currently afford it to make it profitable to produce more.

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Pyrtolin
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Also, in the relevant context a product concept that is impossible to actually produce is a bad design, not a good one. You might be very imaginative, but you're effectively engaging in linguistic trickery by distorting the sense in which the word "design" was used in the statement that you were replying to.
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Charles in Charge
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quote:
Originally posted by LetterRip:
Charles,

I don't agree that those are logical predictions derived from my model.

Thanks for further explaining your model. Allowing additional motivations for work, beyond achieving comfort, makes it more realistic. Two reactions:

Social status is often correlated with income. Income taxes that reduce the marginal income per hour can reduce marginal social status gained per hour. So this model allows for at least the possibility that taxes reduce the marginal utility of work. The question then becomes how strong is that effect - which becomes an empirical question.

Your model still predicts some dropoff in the income distribution at the "comfortable" level. If alternate motivations required higher salaries then, similar to social status, that is a channel by which taxes can reduce the marginal utility of working. If alternate motivations don't require a higher salary then you'd expect salaries to not rise above the "comfortable" level.

I have to say I'm not convinced that reducing the gains from labor doesn't reduce the motivation to labor at all levels of incomes. It goes against the biases ingrained in me from Econ 101. Besides outlining a reasonable model I'd have to see some empirical evidence.

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Charles in Charge
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There are certainly resource and labor constraints which hold back production. In my own industry there is a "shortage" of quality software engineers. This benefits me personally, since it causes wages to get bid up quite high, but it places a bottle-neck on the productivity of technology companies who add fewer features and launch fewer new products as a result. It wouldn't matter if the market was half its size or twice its size - finding qualified engineers is the constraint that matters.

To put this another way, adding a 1,000 engineers to the production side of the world economy would do much more good than adding a 1,000 consumers to the consumption side. It's not just a matter of consumers having enough money to buy products. It's also about reducing the costs of products so consumers can buy them. And in today's world of almost global markets, a single engineer can improve the lives of a billion people.

Rather then trying to turn people into more ravenous consumers I'd much rather turn them into more effective producers. We need more doctors, engineers, teachers, scientists, etc... not more shoppers with high credit limits.

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Charles in Charge
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quote:
Originally posted by Pyrtolin:
Our market is so over-saturated with productive capacity that it's being left intentionally idle in order to limit supply of goods to keep prices up.

Could you list or point to some examples of this?
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