Brent Nyitray
Fairlington Blade
Let the mutherfuker burn!
jnc4p
Kevin S. Willis
Michigoose
lmsinca
markinaustin
Arcanaut
novahockey
quarterback
ScottC
yellojktAny serious discussion of top tax rates should start with understanding top rates around the world.
http://en.wikipedia.org/wiki/Tax_rates_of_Europe
http://en.wikipedia.org/wiki/Tax_rates_around_the_world
I began this conversation on our first day with the suggestion that corporate tax rates peaked too high [39%] and too early, dropping off above $350K taxable income. It has continued at times that I could not comment because life, as it were, interfered. My corporate tax argument was based on both the irrationality of taxing small biz at a higher marginal rate than big biz, and at taxing it at a higher rate than our trade partners would.
The same argument applies to the personal tax. There is some point where personal wealth would flee to invest in another nation where taxation was not as burdensome.
However, no matter how low taxes are in Albania, it will not go there. We have experienced capital flight, so we know it does happen and we know what we are up against. On the tax front, we probably need to worry only about western Europe, Japan, Canada, and Australia right now, but the field will expand, as other nations are viewed as safe, with protective judicial processes and as friendly to investment. Russia and China are out, for now.
So we can set our top personal tax rate at the low middle of our most similar competitors without fear of capital flight.
TMW, that would be the extent of my conservative argument here. I suggest the following to you:
If the rate is not prohibitive, if it does not force capital flight to another country, then the highest such rate will not affect employment or decision making in a negative way.
Why?
1] The tax is on net income only and does not affect pricing. Net income is maximized for a competitive business at the same competitive price with or without the tax, although after tax profit is reduced across the board.
2] The reduction of profit across the board could lead to less investment in a future year. Again, as long as the worldwide comparison is favorable to us, we get more than our share of the future investment. I would revisit this aspect if investment in America was stronger than in our trading partners, but we were all suffering from a shortage of private capital, that is, if an inordinate % of net income was replowed into expansion and R&D rather than sitting relatively idle.
3] Think of high marginal tax rates [say, 40%] as high contributions from government for deductible expenses. In other words, each new employee I hire when I am in the forty percent bracket is only 60% paid by me; each new Sec. 179 asset I buy is only paid 60% by me, etc.
TMW, I ask you to think about these points absent the bathtub theory that we can starve big government by removing its revenue stream. About the Norquist theory: obviously, if the idea is to shrink the federal government across the board, that is one way to do it, in theory. It has not worked in practice for reasons you and I have agreed upon before. Both of our political parties are Free Lunchers. They each want to be known to the voters as having supplied something for nothing.
A better plan for reigning in costs is a renewed Gramm-Rudman-Hollings statute. At least it is better than arguing for tax cuts and wars at the same time. It is also better than a constitutional amendment because were we to become fiscally responsible we would be balancing over a business cycle, not in both great years and bad years. As it stands we only reached balance and surplus recently at the culmination of a boom in the late 90s. Rather than either tax cuts or spending increases, we could have simply reduced the ND, knowing we might have to increase it in a bust.
Look at the world info and think of tax rates in that competitive light. I suspect that will be an interesting exercise for each of you, whether you share your conclusions or not.
See y’all again rather late tonight, I fear.
Filed under: Uncategorized |
All Things in Moderation 
Kewl! I'll read this and reply thoughtfully.Also, I have posted a rant. Feel free to ignore.
LikeLike
mark, just wanted to let you know that I've been reading your tax posts and have appreciated all the thought and time that has gone into them. I'm not much of a tax expert, other than my own taxes, but I'm very much interested in the debate, so thanks.
LikeLike
I disagree with your point that the tax rate doesn't impact pricing. Taxes are but one of many cost items that get factored into the price. I worked for a national retail chain for a while and the local sales/income tax rates played a role in setting local prices.Also, tax rates are only part of the story. The prices of raw materials and wages matter a lot, as do financial, environmental and other regulations.As for enacting legislation to reign in runaway spending, I think it's inflexible and ultimately unworkable.
LikeLike
Mark,A thoughtful piece and one that is hard to argue against. Obviously, some level of taxation is proper, I don't want to sound like (more of) a freak about it. And setting the highest marginal tax rate to be in the middle of our competitive pack is certainly a viable option. I further agree that the "starve the beast" attempt has failed, and was ridiculous to have even been tried. Much as people are clever at hiding income from taxation, politicians are good at hiding spending. The WaPo had an interesting article over the weekend about the impact of deductions in the income tax code and it was determined that something like a trillion dollars in personal income tax deductions are occurring every year. Not corporate but personal, with the vast majority coming from the middle class. Ultimately, voters, like corporations, end up “rent seeking.” What makes sense to me then, is to reduce the need of corporations to lobby Congress about taxes by eliminating the corporate income tax. If there is no need to influence Congress over the tax code, then corporate influence over Washington would be decreased a great deal (not eliminated obviously) and American taxpayers would have a more realistic view of what their tax dollars are getting them. I suspect there would be, among the voting electorate, a rethinking about the current size and scope of government.The point I want to keep making is that I think the government is too big and does far too much. I'd be happy to discuss tax increases on everybody (and I know it'll be needed) just as soon as I see our elected representatives demonstrate fiscal discipline. That is what's great about the Tea Party, maligned for political expedience though it is. It is rewarding politicians for voting for fiscal sanity, as in reduced spending, versus rewarding them for handing out continued (tax) benefits. What I want is to change the paradigm of politics. Milton Friedman wrote: “I do not believe that the solution to our problem is simply to elect the right people. The important thing is to establish a political climate of opinion which will make it politically profitable for the wrong people to do the right thing. Unless it is politically profitable for the wrong people to do the right thing, the right people will not do the right thing either, or if they try, they will shortly be out of office.”You’re arguments make eminent sense in a world in which we are not in a debt spiral. I think we are.That being said, I can’t argue the logic is the policy you advocate. I would push towards being a country that is most friendly to money, especially now, so if we have to tinker around the edges, then why not be ranked #1 rather as middling in terms of money friendly?
LikeLike
MsJs wrote:I disagree with your point that the tax rate doesn't impact pricing. Taxes are but one of many cost items that get factored into the price. I worked for a national retail chain for a while and the local sales/income tax rates played a role in setting local prices.*******************************I understand local sales and franchise taxes as variable costs. But I do not understand how federal income taxes can be, because they are imposed on net profit, not on volume. Now I understand how a monopoly could raise prices unilaterally, but even there THE PRICE WHICH MAXIMIZES PROFIT does so whether the profit is taxed or not. So if you recall how a net profit tax was accommodated by the cost accountants I am curious to know the methodology. I will pass it along to my clients if there is one!***********************************Also, tax rates are only part of the story. The prices of raw materials and wages matter a lot, as do financial, environmental and other regulations.*******************************ABSOLUTELY! Here we are trying to isolate taxation as a factor. I chose the competing nations based on their overall similarity of policies to us to minimize non-tax disadvantages in the comparison.*******************************As for enacting legislation to reign in runaway spending, I think it's inflexible and ultimately unworkable.***************************I thought G-R-H worked until it was discarded by a Congress that wanted more flexibility, as you put it. Your point is pessimistic, but well taken. I just cannot think of a better mechanism unless Congress were willing to turn the whole budget over to the base closing commission :-).***************************TMW,thanks for that reply. I appreciate it for its logic and its candor. I favor eliminating the itemized deductions, which indeed are close to a trillion dollars a year, in favor of a standard deduction that is larger, and a flattened tax. This debate, in the 70s, was brilliantly expounded by Jack Kemp and Bill Bradley, in actual books that people read! But I do not think eliminating the corporate tax, or the transfer taxes [estate and gift], will have a benefit greater than the cost. In this we must agree to disagree. But I am adamant that we should not be placed at a competitive disadvantage by these taxes. So we have a partial meeting of the great minds.Others may disagree.
LikeLike
TMW, and ultimately I would favor moving to transaction taxes, as we have also discussed.
LikeLike