Andrew Tobias tries to sketch out what a tax bill that would be good for the country would look like. I think he's right:
Posted by DeLong at January 16, 2003 12:16 PM | TrackbackAndrew Tobias - Money and Other Subjects: Burton Malkiel's Wall Street Journal piece on the Bush dividend proposal last week makes the case for freeing dividends from tax – not the macroeconomic case as relates to the budget deficit, but the case as it relates to corporate behavior. A lot of us who oppose the Bush proposal agree with Malkiel’s case, at least in fair measure. As I argued last week, if tax-free dividends had been Bush's one great gift to the wealthy in 2001, well, that might not have been such a bad idea. But wanting now to make permanent and even to accelerate last year’s gargantuan cut for the top 1%, adding this to it is just ridiculous. Shocking. Depressing. And – because of the massive deficits we're headed for – irresponsible. So the best solution, actually, might be this unlikely compromise: accept tax-free dividends, but, as part of the bargain, repeal rather than accelerate any further reduction of the top tax bracket (and reform rather than eliminate the estate tax)....
Shouldn't the other part of this "unlikely" compromise be to restore full taxation of capital gains (i.e. treat them like ordinary income)? Eliminating the "double taxation" of dividends still will not put it on a par with the reduced tax on capital gains, so there is still a tax-code-induced incentive toward pumping up stock prices through buy-backs, etc., instead of paying out dividends.
I'll believe the Republicans are interested in a less distorting tax code when I see this added to their proposal. Maybe it would be a good counter-proposal for the Democrats (although I'm sure the Republicans would successfully brand it as just another Democratic tax increase).
Posted by: Curt Wilson on January 16, 2003 12:32 PMhttp://www.nytimes.com/2003/01/16/business/16SCEN.html
Berkeley's Hal Varian has an interesting article on the proposed dividend tax cut in the NYTimes.
Posted by: on January 16, 2003 12:33 PMLest anyone forget Bush's own words revealing his real agenda - http://www.nytimes.com/2001/08/25/politics/25BUSH.html
CRAWFORD, Tex., Aug. 24 [2001] — President Bush said today that there was a benefit to the government's fast-dwindling surplus, declaring that it will create "a fiscal straitjacket for Congress." He said that was "incredibly positive news" because it would halt the growth of the federal government.The deficits are intentional. The deficits are the goal.
Issuesguy, I want to add that Milton Friedman says precisely the same thing on the WSJ editorial page (1/15/03). There are dozens, no,
hundreds of examples of supply side government haters touting numbers purportably showing increased revenue from tax cuts (even cuts to 0%)
from one side of their mouths while smirking out of the other side that government will be restrained, cut, starved, eliminated by the same tax cuts.
Grover Norquist's plan to halve the size of the Federal government by firing half of all Civil Service employees, privatizing Medicare, Social Security, and Medicaid, increasing the Defense budget by an extravagant amount, and "drowning all other agencies in the bathtub" is the Bush plan.
I sense in your post that you, like me, are also
completely frustrated and angered by the inane expressions of puzzlement, disturbance, bewilderment, and befuddled future deficit number-crunching by most moderate and liberal economists,
editorialists, local, state, and Federal representatives, letters to the editor, etc. as they wonder what motivates Republicans and their ilk.
It is plain: the Republicans hate our government with the same fury that Al Qaeda hates our government. The Republicans are just another enemy of our government. Their destruction of our government is traitorous.
Yes, harsh, bloviating words. But there needs to be a storm in response to these people that trumps their anger and hate by some exponential amount.
Good, virtuous, moral people like Brad Delong and many others will continue to persuade with rational rhetoric, but an angry, dangerous, threatening rhetoric is the only kind of talk people like Norquist, Limbaugh, North, add whatever names, will understand.
Friedman drives on roads I helped pay for, drinks clean water I helped pay for, breathes clean air I helped pay for, is protected by weapons I helped pay for, and probably has a catheter or two
I helped pay for. He considers this arrangement to be theft. He's convinced me.
Let's change "purportably" in the previous post to "purporting to show". I agree, too, that the pie should be higher.
Thanks.
1. Capital gains should not be treated as ordinary income. They should be indexed for inflation and they should be written against losses to the full extent possible. There could be a small exemption to benefit smaller investors (and to cover the not insubstantial costs of research, broker's fees, etc). THEN they should be treated like ordinary income. The rationale for this is fairly obvious. Investment is an occupation, a business. Losses are a cost of doing business. Inflation amounts to depreciation of an asset. This analysis is perfectly applicable to stocks or to houses.
2. We really have to stop fooling around with the income tax. This mostly annoys the upper middle class/lower class. A wealth tax is needed. We should also probably write into the Constitution some guideline about wealth. In that regard:
3. Alexander Hamilton wrote in The Federalist Papers that the wealthy would pay all the taxes. It could be argued that there would be no Constitution and hence no nation but for that promise. This is a useful anti-whining point, if nothing else.
4. If economists wanted to make themselves useful, they could develop a tax system based on marginal utility. How much pain is inflicted on the millionaire by that extra dollar of taxation? How much is inflicted on the pauper? When the two marginal dys-utilities match, the tax system is fair.
Posted by: Charles Utwater II on January 16, 2003 08:34 PMAgreed with indexing cost basis for inflation. I'd also convey corporate earnings (distributed or not) to shareholders, and tax them progressively as current personal income. We still have a problem with cap gains: recognition (by sale) triggers the taxable event, which asset-holders may be motivated to avoid, thereby doing diseconomic things with their assets.
Equalizing marginal utility is a harder problem -- standard model foundations deny that we can make meaningful utility comparisons across persons. Counterintuitive, evasive, and probably stupid, but standard. [Even one-person utility theory is pretty damn shaky.]
Posted by: RonK, Seattle on January 16, 2003 10:14 PMIf you start indexing, you lose a powerful anti-inflation constituency. Also, you make the calculations horrendously complex, especially for any fund that you make regular contributions to. And as we've seen lately, asset inflation has virtually no relationship to the consumer price index. I've spent enough time as it is on my Schedule D's. If you do tax capital gains as ordinary income, then capital losses can be fully deductible against ordinary income.
CW has a good point. During the tax change debate, the focus has been on investments in financial instruments, but do we want to treat them differently than other forms of investment. Your broker can go through the steps to inflation adjust the stuff in your portfolio, but if we bring non-corporate business entities and real estate and art and stamp collections in for inflation adjusted tax treatment, then individuals get involved in calculating those inflation adjustments. This could complicate matters.
Posted by: K Harris on January 17, 2003 07:31 AMI would not apply indexing at all until the holding period were significant (maybe 3 years, maybe 5), I'd make it applicable on a whole-year basis only, and I'd certainly make it an optional treatment (it always favors the taxpayer, but it's not always worth the trouble.
"Complification" was never a bar to tax gimmickry. BTW did you know the K Street crowd is floating a 60% first year "depreciation" of business assets?
Posted by: RonK, Seattle on January 17, 2003 09:06 AMTell ya' what Mr. Thullen, when taxes are solely being collected in order to pay for roads, clean air and water , weapons for national defense, and people who have the ability to pay for their catheters are made to do so, and we frankly acknowledge that nobody gets out of here alive, so therefore rationing of medical care will take place, as it does in even single-payer nirvanas, then it is conceded that taxes are too low if deficits exist. We're a long way away from that.
First of all, why are taxes being collected to pay people to play golf or watch daytime T.V., if they are physically able to work, or have substantially greater wealth than those who are having their wages taxed? Why is it assumed that the existence of a deficit is indicative of insufficient taxation, as opposed to excessive spending? Why are those who avoid advocating spending cuts, out of a desire to gain votes, any worse than those who advocated spending programs not essential to a functioning society, out of a desire to gain votes? Is a Senator, like Tom Harkin, who funnels forcibly taken money to Archer Daniels Midland any better than a Senator, like Bill Frist, who allows a person to keep more money gained through voluntary transaction? Of course, many Senators, Frist included, do both, but why is obtaining votes by allowing people to keep more of what they have obtained through voluntary transaction morally offensive, but it is not morally offensive to obtain votes by forcibly taking property from one citizen, and give it to the one from whom the vote is desired, for no purpose related to the prevention of anarchy or tyranny? By the way, this would include defense spending which has it's primary purpose the purchase of votes, or entitlement spending which assists those who have the ability to support themselves, either through continued labor, or consumption of assets acquired while working. One does not have to a radical libertarian to observe that govt. spending which has it's primary purpose the acquisition of votes is more potentially morally offensive than gaining votes by allowing people to keep more of what the have gained though voluntary means, since the first action utilizes implicit violence for purely personal benefit, and the latter action simply allows people to interact via mutual agreement.
Posted by: Will Allen on January 17, 2003 09:56 AMCharles Utwater:
What Federalist Paper are you talking about? I'd love to find a quote that says that!
Posted by: Adam on January 17, 2003 10:12 AMWill: Amen. I was amazed by Thullen's diatribe but didn't think it was worth answering. Anyway, it's factually wrong. If only Norquist's agenda was the administration's!
Posted by: JT on January 17, 2003 10:59 AMFrom the Steve Cecchetti thread:
>>...the existence of the baby-boom generation, rising medical costs, and the belief that everyone ought to be able to see a doctor together
more-or-less force federal government spending up from its current twenty percent or so of GDP to somewhere between twenty-five and thirty percent
over the next generation.<<
Score: Milton Friedman 392, Deficit Hawks 0.
Posted by: Patrick R. Sullivan on January 17, 2003 12:48 PM>>>>...the existence of the baby-boom generation, rising medical costs, and the belief that everyone ought to be able to see a doctor together
more-or-less force federal government spending up from its current twenty percent or so of GDP to somewhere between twenty-five and thirty percent
over the next generation.<<
Score: Milton Friedman 392, Deficit Hawks 0.<<
??????
It's going to happen. We're not going to default on Social Security obligations (to any great extent). We're going to contain the growth of Medicare and Medicaid spending, but they are still going to grow rapidly.
Hence we either (a) run big surpluses over the next twenty years to pay down the national debt, so that when the baby-boom generation retires we can fund their retirement without raising taxes to rates significantly higher than they are today, or we (b) find ourselves with much higher taxes in a generation as the balance of political power shifts to the AARP.
The third alternative--to reform entitlement spending programs now--is not on the table, even though Mike Boskin assured me back in 2000 that it was "one of Governor Bush's highest priorities."
Posted by: Brad DeLong on January 19, 2003 01:52 PM