Brent Nyitray
Fairlington Blade
Let the mutherfuker burn!
jnc4p
Kevin S. Willis
Michigoose
lmsinca
markinaustin
Arcanaut
novahockey
quarterback
ScottC
yellojktVital Statistics:
| Last | Change | Percent | |
| S&P Futures | 1398.6 | -6.7 | -0.48% |
| Eurostoxx Index | 2541.1 | -15.9 | -0.62% |
| Oil (WTI) | 87.88 | -0.4 | -0.45% |
| LIBOR | 0.312 | 0.000 | 0.00% |
| US Dollar Index (DXY) | 80.24 | 0.052 | 0.06% |
| 10 Year Govt Bond Yield | 1.65% | -0.04% | |
| RPX Composite Real Estate Index | 190.8 | -0.3 |
Markets are lower after last week’s furious rally. Friday’s rally took the S&P 500. Friday was a shortened low-volume day, so take the result with a grain of salt. Today feels a bit like a “risk off” day with bonds and MBS rallying.
The Chicago Fed National Activity Index slowed in October, and has been consistently saying the economy is running at below-trend for 8 months in a row. Put an asterisk next to this one, though – Lower industrial production was the main driver of the index and that was affected by Hurricane Sandy.
The initial read on holiday sales looks promising – weekend and Black Friday sales were up 13% over last year. The National Retail Federation is forecasting a 4.1% rise in holiday sales this year, with the caveat that the fiscal cliff is the wildcard. The consumer confidence numbers lately have been reasonably strong. Of course, even if you have a benign resolution to the fiscal cliff, the posturing and finger-pointing prior to the deal may depress consumer spending anyway, especially if we have a similar dynamic to the debt ceiling crisis of 2011.
One reason for the increased consumer spending? HELOCs are back. The Mortgage Bankers Association is estimating house prices will gain 8% this year and increased equity means more spending. Of course the banks still have yet to write off all of their worthless 2nd liens from the first go around.
The status of the fiscal cliff seems to be increase rates vs limit deductions. Susan Collins is proposing some sort of carve-out for small businesses. Raising the eligibility age for Medicare seems to have some bipartisan support as well. Perhaps an increase in the top rate to something less than 39.6% and some limits on deductions will carry the day.
As part of the backdrop for Euro debt fears, watch closely what is happening in Argentina. Dissident investors from the last debt restructuring (including my old firm Elliott Management) sued to block Argentina from paying anyone until their claims are satisfied. The case is going through the appeals process. Unlike the Greek situation, Argentina has the money to pay their creditors – they just don’t want to. High commodity prices are helping their economy. If Argentina chooses to simply default and not pay anyone, the risk-off trade could come back in a hurry.
Filed under: Morning Report |
All Things in Moderation 
The NYT of all places channels supply side theory:
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jnc, These are people unfamiliar with the concept of marginal rates. It’s kinda sad actually.
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A person must have a pretty finely tuned sense for the value of their time to decide that taking home $6500 for their taxable income between 190&200K is worth it, but $6320 for the next bracket is not. (Assuming we’re talking a rate hike from 35 to 36.8).
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You really just need the excuse to take three weeks off at the end of the year.
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“yellojkt, on November 26, 2012 at 11:50 am said:
jnc, These are people unfamiliar with the concept of marginal rates. It’s kinda sad actually.”
That was the point of some of the public editor comments, but the behavior effects are something that is typically discounted by progressives & liberals. “Dynamic scoring” and all that.
I also think you may underestimate the “I hate taxes” effect as well.
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“bsimon1970, on November 26, 2012 at 12:32 pm said:
A person must have a pretty finely tuned sense for the value of their time to decide that taking home $6500 for their taxable income between 190&200K is worth it, but $6320 for the next bracket is not. (Assuming we’re talking a rate hike from 35 to 36.8).”
You aren’t. A chunk of PPACA surtaxes kick in as well. The offset is escaping the clutches of FICA at $113,700.
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The PPACA surtaxes are just a very convoluted way of counting dividend and capital gain income (i.e. non-wage) as taxable under Medicare rates which are already unlimited for wage income. It just means that since money is fungible, it’s harder to dodge HI taxes by shifting income.
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The offset is escaping the clutches of FICA at $113,700.
Which is not insignificant. It’s the reason effective rates stay relatively flat and actually fall right around the two-income FICA cut-out, miraculously the $250k threshold for being ‘wealthy’.
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” You aren’t. A chunk of PPACA surtaxes kick in as well.”
Any idea on the rates? Being able to quantify the effect would add clarity.
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If I’m reading the various descriptions correctly, it’s 0.9% on income above $200k/$250k single/joint and 3.8% (basically the current combined employee/employer rate) on investment income over the $200k/$250k thresholds.
Here is a more detailed analysis.
The investment income 3.8% is the subject of a lot of uninformed fear mongering among the real estate community.
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I tried to detail them here:
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Thanks for that link to the old ATiM article which is much more comprehensive. My one question is that I think the 0.9% Medicaid surtax only applies to income over the $200/$250k limit. My link gives an example where two individuals would each fall below it but get hit by it if they filed joint. Yet another hidden marriage tax and a reason for marriage equality. Why should gay people get more tax breaks?
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Sounds like my example uses the wrong rates, but the point stands. In my opinion, the notion of choosing not to work because subsequent income is taxed at a slightly higher rate is comical.
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Somehow the public perception is that one can end up paying more in taxes than additional gross income. Like I said before, the concept of marginal rate and effective rate baffle people.
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But there can be a real effect for the self employed. Two times during the Clinton years when I had reached the 39.6% bracket I stopped billing until January 2 of the succeeding year, to defer income into a year when my top margin was likely to be 33% or less. My clients all thought it was great not to be billed until after the holidays were over. I still got paid.
I also did that one time in the late 70s, when my top rate was very high.
Many lawyers, especially, have income variation from year to year, and deferring can be advantageous.
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“In my opinion, the notion of choosing not to work because subsequent income is taxed at a slightly higher rate is comical.”
There are also other alternatives to not working to minimize the tax impact, such as Mark’s post. In the worst case, you pack up and leave the country like the Rolling Stones did rather than pay 90% on income over a certain threshold. No amount of argument about marginal vs effective rates changed their calculus.
For small business owners, if you are already working over 40 hours a week, I suspect the trade offs that involve working less are real and the income tax brackets simply provides a nice place to draw the line.
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It is well-established that as taxes increase, people substitute leisure (which is untaxed) for work.
Europe is a prime example, because of high taxes, people choose to take compensation in more vacation time. That is why 6 weeks of vacation time (including the entire month of August) is commonplace.
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“In the worst case, you pack up and leave the country like the Rolling Stones did rather than pay 90% on income over a certain threshold.”
Indeed.
There is, of course, a significant gap between 39.6 & 90%.
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Once you count the ACA surtaxes, it’s more than 39.6%. Add in state income taxes and you get to around 50% or so which is when the serious efforts at tax avoidance kick in.
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“Once you count the ACA surtaxes, it’s more than 39.6%.”
Yes, that has been noted. Left uncalculated is what that final rate is. Which ignores the myriad loopholes, deductions and other tax avoidance schemes that people pursue far before their effective rates approach 50% – which itself is not quite 90%.
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Two times during the Clinton years when I had reached the 39.6% bracket I stopped billing until January 2 of the succeeding year, to defer income into a year when my top margin was likely to be 33% or less.
Two things here. First, it seems like ultimately Mark performed the same amount of work. Isn’t the argument against higher tax rates that people simply won’t do the work. Mark just did the work a few weeks later. Obviously Mark’s delay led to less tax revenue for the government, but I don’t think that’s the focus of the story that led to this discussion. Second, Mark’s clients or the chiropractor’s patients can just go somewhere else to obtain the services they desire. Are the patient’s simply going to stop getting adjustments or will they go to a chiropractor who has a a lower tax rate or who is fine with paying the higher marginal rate? Doesn’t the decision to forgo opportunity by the chiropractor create opportunity for someone else? Is the argument that the opportunity for growth or to provide services which are in demand just disappears?
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Nate Silver talks about policies under consideration where to get the top taxpayers effective rate up to 35% would require marginal rates of 50% or in some cases 2,300,000% if the dollar was the one between $399,999 and $400,000.
Clearly, that isn’t going to happen, so there will be phase-ins where the marginal rate is much higher on the affluent but not the uber-wealthy. Paul Krugman calls this the 1% versus the 0.1%.
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@ashot: “Isn’t the argument against higher tax rates that people simply won’t do the work”
That’s one argument, one I’ve never cared for, as there are lots of people “not doing the work” well before it’s a tax liability. Productivity tends to involve a lot more incentives that just how much money productivity will produce: that is, how might I rather spend my time? This can be a much more pressing incentive. There are lots of people, short on cash, who could find a better job where they have to work harder, or could obtain new skills and better their financial situation, who do not, because they would rather have the leisure time. And that’s just one incentive in a whole stew of ’em.
Rather, I think the argument is that you can’t project tax revenues, based on tax increases, statically. People will change their behavior, and shelter or defer their income, to avoid paying the additional taxes. The more gentle you make the curve (thus, why we have marginal tax rates), the more likely you are to find compliance.
Oppressive taxation might discourage productivity: if Mark could not defer his income to the next year, or shelter it, it might truly not be worth it to him to do the work, and he’d decide he’d rather enjoy his leisure time. Similarly, if we were all taxes at a rate of 50% or 60% or 70%, we might decide working hard and being more productive and bettering ourselves in the job market isn’t worth the return, so be less productive. But I think most incentives on productivity are closer to the ground: what are the rewards and penalties as regards productivity in our immediate environment? That is, a company or agency you work for can do a lot to encourage or discourage productivity, right there, well before you worry about the tax bite in the paycheck.
Also, high taxes tend to increase non-income compensation and benefits, to attract and keep employees without paying them more (and thus losing much of the extra money to taxation). Which flattens wage growth, and can have a drag on the economy as there is less disposable income, but better employee-sponsored health insurance and retirement plans.
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@yellojkt: ” Why should gay people get more tax breaks?”
I think that’s the wrong argument. That is, why should single people, or co-habitators, get more tax breaks?
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That is, why should single people, or co-habitators, get more tax breaks?
That’s a superset of my question. When you get into the logic of joint rates being higher than the equivalent of two single rates or when children are involved, the head of household rate, you get into some bizarre disincentives. The Bush Tax Cutz supposedly eliminated many of the ‘marriage penalty’ situations, but I doubt it captured them all.
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That is a sensible argument. What I am criticizing is this notion that a return to Clinton era tax rates will cause some kind of mass exodus of the wealthy. (To which I also say “so what?”)
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if Mark could not defer his income to the next year, or shelter it, it might truly not be worth it to him to do the work, and he’d decide he’d rather enjoy his leisure time.
Right, but provided there is a demand for legal services (there must be if Mark is deferring work) then someone else will simply fil the gap, right? I doubt a corporation or individual is just going to forgo legal advice entirely. This focus on individuals forgoing business opportunity due to higher taxes does not mean the opportunity is lost forever. Someone else is likely to take advantage.
Rather, I think the argument is that you can’t project tax revenues, based on tax increases, statically.
Like bsimon, I think this makes sense. Everytime tax increases are mentioned we are told businesses will close, fire people, not hire people and/or raise prices. I’m sure there is some truth to each of these things, particularly on a individual or single business level. But has this been borne out in the aggregate? Not to mention, is the reverse true? If we lower taxes, will pries go down, unemployment go down etc? That pretty clearly has not happened with th Bush Tax cuts.
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Completely agree with Tim and Brian. I mainly deferred billing from TG until January, not work.
No one in small biz I ever met or knew laid anyone off or hired anyone based on marginal tax rates, and I am talking hundreds of small businesses over 45 years. However, deferral of income, and in many cases, investment timing in equipment, were tax driven. Just remember that labor is always deductible, but capital improvements and equipment are sensitive to write-off periods and special credits.
However, that is assuming rates that top off well under 50%. I haven’t seen higher rates than that in a long time – when personal rates were sky high, C corporate rates were lower, and everyone was a C corp.
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Warren Buffet seems to agree with us as well.
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