Progressive Taxation Act (Failed)

[Badger]

Without commenting for or against this bill, if I wanted to make a case for or against this bill's economic and budgetary impact I would go back to historical periods in time when we had higher marginal income tax rates (90% rates in the 50's have been mentioned thus far; the top rate was 70% for a decade until Kemp-Roth passed in 1981), and then make arguments as to what effect, if any, those higher marginal rates--as well as getting rid of them--had both on economic growth and budget revenues.

That's quite likely what the GM's office is going to do if this bill passes (amended or otherwise). As I'm not really sure right now exactly what the effects of raising top rates would be, I suggest making the case now.

[Badger]

the regions must also collect revenues, so if you raise taxes on this money to 75%, it would mean effective marginal income tax rates around ~80%. 

while such a rate could restrict the ability of the regions to raise revenue, you would at least be promoting investment in Panama and the Cayman Islands.

I'm not taking sides here, but would note that the GM's Office currently assumes the deductability of state regional income tax from federally taxable income applies. Regional rates still increase the overall tax burden of course, but not in direct proportion to simply adding regional rates to federal rates.

What we really need here is some good old fashioned legislative analysis by our esteemed GM. PS did the same for tax law, so if Badger could evaluate the effects, perhaps we could all just settle on his view of things instead of one side saying one thing and one side saying another.

In the meantime though, props to you, Antonio, for not going down without a fight. I like that quality.

Is there a formal request from a member of the Senate? If so, what I'm going to do is request that anyone seeking an analysis start the ball rolling with how you calculate the impact on revenue and/or GDP (whatever you're seeking info on) will be. References to Atlasia's budget and/or historical trends for similar tax rates in the popular government sim known as the USA will be helpful. Don't worry: I will be doing the analysis and research notwithstanding China and the GTO bombing, and the amount (or lack) of detail is up to you, but there should be at least some explanation of how you came up with your numbers. If there are competing proposals, expect that I'll share them among the various authors to be ripped to shreds for further analysis and comment.

All that said, I have a comment to be posted momentarily that may affect this debate.

[Badger]

So, about those tax rates:

When the Budget Process Committee met to determine what the state of Atlasia's current budget is, which was presented to the government and public at large with no resulting objection, the tax rates in place through FY 2010 (which, remember, is based on Atlasia's tax rates for calender year 2009) were essentially those in place in RL 2010 with the 2001 and 2003 Bush tax cuts still in effect (again, just as in RL).

https://uselectionatlas.org/FORUM/index.php?topic=125947.msg2724841#msg2724841

However, under the Fiscal Responsibility Act tax rates increased notably, particularly for higher earners, for personal income earned in 2010, which would accordingly start affecting revenues in FY2011. The Treasury thus began collecting the new increased tax rates for 2010 returns filed in the last month. Yes, I'll be changing the rates listed in the GM's page in the foreseeable future, but not until after this bill is dealt with one way or another.

A minor note: The difference in the dollar figure of tax brackets used by the GM's Office and the FRA is that Marokai Blue used the 2008 tax brackets in his bill while I used the RL 2010 brackets which were increased by two years worth of (low) inflation.

I would note that then GM Purple State estimated the increased tax revenue from the FRA would be approximately $500 Bil. The GM's office currently estimates that those prior estimates will fall somewhat short due to reduced tax receipts resulting from the "double-dip" late year economic downturn which PS of course couldn't forsee 15 months ago. Nor has the GM's Office yet calculated the overall drop tax revenue or the budgetary impact of the recently passed stimulus bill.

My point is I'm not sure to what degree the recently begun impact of these new tax rates will have on the deficit--will they take a notable chunk out of it, or will they merely just break even with the recessionary drop in tax revenue plus new stimulus spending? Regardless I thought it worthwhile to note any increased revenues from the Financial Responsibility Act just started hitting government coffers in the last few weeks.

[Badger]

the regions must also collect revenues, so if you raise taxes on this money to 75%, it would mean effective marginal income tax rates around ~80%. 

while such a rate could restrict the ability of the regions to raise revenue, you would at least be promoting investment in Panama and the Cayman Islands.

I'm not taking sides here, but would note that the GM's Office currently assumes the deductability of state regional income tax from federally taxable income applies. Regional rates still increase the overall tax burden of course, but not in direct proportion to simply adding regional rates to federal rates.

okay - i guess in that case the situation is nearly reverse of what i stated. if it's fully tax deductible,  every regional increase in taxes on high incomes could be taking up to 75% of its additional revenue from the national government. so then with such a high rate, there is an incentive for the regions to raise taxes, because those taxes will be mostly funded by the nation at large.
the same principle would be true of any other tax deduction - the higher the national tax rate, the greater the incentive for people to spend or invest in ways they otherwise wouldn't in order to get the tax deduction. it's like having a 75% off coupon.

of course, instead of raising the rates, you might consider raising revenues by simplifying the tax code.

BTW: A bit of correction over semantics here. We're not talking about taxing "75%" of "all" earned income, only income above $4 mil a year (and the other proposed rates for single filers, etc). All income earned below that level is taxed just the same with the same deductions. A single filer who breaks into the 35% range is paying just under a fourth of income in taxes, and someone who breaks into the current 41% rate is paying about a third. A married couple earning $5.2 million annually will be paying essentially the same overall tax rate as before. Nothing major, just a point that's been irking me.

BTW: Here's one preliminary bit of analysis I litterally blundered into:

This proposed increase will effect less than 0.03% of taxpayers, or less than 40,000 households nationwide. More effected will be the top 0.01% of taxpayers, about 13,000 households earning at least $6 million a year, and with an average income of over $25 million a year within that hundredth-percentile. Particularly effected would be the top earning 400 households in the nation, each earning in excess of $100 million annually.

Note that an increase in income tax rates, while certainly relevant to these higher earners, would not reap as much of this income revenue as might be expected as these high incomes are disproportionately reliant on dividends and investment returns which are taxed as capital gains rather than ordinary income.

[Badger]

Wait.. Dividends and capital gain aren't taken into account as income for the sake of the tax ?

We must change that. There's no reason for which stockholders should be exonerated from contributing to the social redistribution.

There is a tax on capital gains, Antonio, its just lower than regular income tax.

@ Marokai: I would agree. Accordingly both Atlasian and RL capital gains tax is set at 5% for the lowest two income brackets and 15% beyond that. FWIW it was around 20% until the 2003 tax cuts.

[Badger]

What is the capital gains rate in Atlasia?

Accordingly both Atlasian and RL capital gains tax is set at 5% for the lowest two income brackets and 15% beyond that. FWIW it was around 20% until the 2003 tax cuts.

[Badger]

Without commenting for or against this bill, if I wanted to make a case for or against this bill's economic and budgetary impact I would go back to historical periods in time when we had higher marginal income tax rates (90% rates in the 50's have been mentioned thus far; the top rate was 70% for a decade until Kemp-Roth passed in 1981), and then make arguments as to what effect, if any, those higher marginal rates--as well as getting rid of them--had both on economic growth and budget revenues.

That's quite likely what the GM's office is going to do if this bill passes (amended or otherwise). As I'm not really sure right now exactly what the effects of raising top rates would be, I suggest making the case now.

As an economics student...the reason why these rates are history is not a neoliberal conspiracy like Antonio thinks, it's the fact that politicians realized they could scrap them without losing any revenue.

People with incomes on these levels already have people working for them on tax avoidance. It's a good example of a tax that is unlikely to be paid by everyone and leads to waste of resources on manipulating the tax system.

There is a reason for why no Western country today has a rate higher than about 55% or so.

Interesting. FWIW everyone here's some tables of relative tax rates worldwide (capital gains and corporate tax rates are not included, however). It's Wikipedia, so caveat emptor).

http://en.wikipedia.org/wiki/Tax_rates_around_the_world

[Badger]

What's the Atlasian corporate tax rate? As I recall the US one is about 40%. So in order for a stockholder to get $10 he has to get $10/0.85 (going off of Badger's numbers for the medium and higher income brackets) which is equal to 11.76. Assuming a 40% corporate tax rate the corporation then must earn 11.76/0.6 which is equal to 19.6. Thus, the total amount of tax paid is nearly 50%.

https://uselectionatlas.org/FORUM/index.php?topic=125947.msg2724841#msg2724841

[Badger]

Yes. The best situation for both revenue and for growth is to be as flat as possible. While the best one for income distribution/social engineering is to have it as progressive as possible.

<Dropping the gloves like Brent Johnson>

Okay, I'm still not taking sides in this debate, but that, Yank, is the stupidest thing I've read in a while. Maybe I'm drunk--OK, more than maybe--but kindly explain where how that piece of drek doesn't cross the line from hard-headed fiscal realism into ideological silliness.

Such a sweeping statement just makes no sense, mathematically or otherwise.

[Badger]

Yes. The best situation for both revenue and for growth is to be as flat as possible. While the best one for income distribution/social engineering is to have it as progressive as possible.

<Dropping the gloves like Brent Johnson>

Okay, I'm still not taking sides in this debate, but that, Yank, is the stupidest thing I've read in a while. Maybe I'm drunk--OK, more than maybe--but kindly explain where how that piece of drek doesn't cross the line from hard-headed fiscal realism into ideological silliness.

Such a sweeping statement just makes no sense, mathematically or otherwise.

You shouldn't drink to excess, its bad for your health.

I suggest you first sober up. Then re-examine the post again and see if you were in fact assuming an exaggerated meaning for my broad statement. If not, we can talk. If so, I doubt we will speak much again.

I am really sick and tired of this liberal tactic. It is okay to not know what someone means or to have multiple "potential meanings" in mind for what a person said, which you can then seek to get clarified. In fact I would prefer that as it is far more respectfull and far less insulting then to assume the worst and fly off the handle in a drunken rage.

In general, the lower and flatter the taxes are made, the better for growth and revenue as a result, however you have diminishing returns. Cutting from 70% to 40% has more impact then a 40% to 35%. Also, there are numerous other considerations including "stability and sustainability long term of the growth and revenue. Nobody said anything about a "flat" tax, no one said anything about top tax rates in the teens. So please put the your ideologically driven hysteria out to pasture, badger. I do suggest you also reread the third sentence which you conveniently cut out of the quote.  It calls for "balance".


And, one more thing.

"Drop the bottle."

I wasn't that drunk Yankee.

I'm sober now, and your comment about flatter tax rates being better for economic groth and revenue still make zero sense. Could you elaborate?

[Badger]

Thanks for distorting again what I said.
I still can't understand what in the world justifies that the government rewards investment more than labor.

You don't seem to understand much about economics in general, I'm afraid.

1. You seem to think that taxes can only be avoided by fleeing the country. That's not the case. Whether the French government knows this or not, I don't know.

2. Investment returns are risky is one point. The more crucial point is probably that capital is mobile, why labour isn't. If you tax investment too highly no one will invest in your country. Also, investment is a choice in a way that working isn't. If you raise taxes on working too much eventually people will not work. But the bar there is pretty high, because people who don't work will have to survive on welfare and even in welfare states that's not too good.

On the other hand, no one HAS to invest. If you're going to get taxed to hell, you might as well sit on the money, consume it or invest it elsewhere. So it is more tax sensitive. Which is why income from work is taxed higher than income from capital in every country I know (except those with flat rates of course!).

3. I don't see why providing capital to the productive process should somehow be morally inferior to providing labour.

This seems like typical misinformed populist nonsense. Most grown up people (luckily) learnt the lesson of the 70s to not pursue stupid economic policies for ideological reasons. I hope this forum won't force us to go through the painful process of restructuring the economy again after introducing poor economic policies.

Here's my question Gustaf: At what point are capital investments truly more risky than labor ? As much as we may consider the dashing entrepreneur to be making an educated gamble on their new patent or invention, the vast majority of capital gains seem to be fundamentally safe investments. Preferred Stocks. Bonds. Even most interest  baring devices are subject to lower capital gains taxation than regular income.
 
While an actual small business entrepreneur may actually be risking much with the start of a new business, their income is frequently taxed at regular rates. But for the tiny tiny percentage of persons earning over a mil a year with a disproportionate share coming from capital gains, there income is far less "risky" or unassured than a wage earner subject to possible layoffs or loss of business. As an example, Sam Walton's kids don't have to worry about their Wal-Mart preferred stock not paying very very VERY handsomely through their grandkids lives.

I realize populism has its share of false arguments, but neither must we ignore the reality that often talk of "economic efficiency" and "pro-growth policies" can sometimes be a smokescreen for the extremely mindbogglingly wealthy using their grossly disproportionate political influence to justify paying less of their income in taxes than their secretaries or doormen. That's not "populism", but simple economic reality.

Again, no position taken on the actual proposal at hand to kick the top rate up to 70%.

[Badger]

Yes. The best situation for both revenue and for growth is to be as flat as possible. While the best one for income distribution/social engineering is to have it as progressive as possible.

<Dropping the gloves like Brent Johnson>

Okay, I'm still not taking sides in this debate, but that, Yank, is the stupidest thing I've read in a while. Maybe I'm drunk--OK, more than maybe--but kindly explain where how that piece of drek doesn't cross the line from hard-headed fiscal realism into ideological silliness.

Such a sweeping statement just makes no sense, mathematically or otherwise.

You shouldn't drink to excess, its bad for your health.

I suggest you first sober up. Then re-examine the post again and see if you were in fact assuming an exaggerated meaning for my broad statement. If not, we can talk. If so, I doubt we will speak much again.

I am really sick and tired of this liberal tactic. It is okay to not know what someone means or to have multiple "potential meanings" in mind for what a person said, which you can then seek to get clarified. In fact I would prefer that as it is far more respectfull and far less insulting then to assume the worst and fly off the handle in a drunken rage.

In general, the lower and flatter the taxes are made, the better for growth and revenue as a result, however you have diminishing returns. Cutting from 70% to 40% has more impact then a 40% to 35%. Also, there are numerous other considerations including "stability and sustainability long term of the growth and revenue. Nobody said anything about a "flat" tax, no one said anything about top tax rates in the teens. So please put the your ideologically driven hysteria out to pasture, badger. I do suggest you also reread the third sentence which you conveniently cut out of the quote.  It calls for "balance".


And, one more thing.

"Drop the bottle."

I wasn't that drunk Yankee.

I'm sober now, and your comment about flatter tax rates being better for economic groth and revenue still make zero sense. Could you elaborate?

groth? That sure is some wicked sobreity you got there.


I don't see how I can explain such a clear and concise statement any further. Perhaps you are inquiring for something else but "elaborate" was the only such request you could make. You sure you aren't drunk?

What, you've never forgotten to hit spellcheck before posting, douchewaffle?
And how does that prove my lack of "sobriety"? Please Yank, put down the bottle.

Seriously though, other than noting the very true law of diminishing returns, you didn't explain at all how flatter tax rates lead to greater economic growth or (especially) revenue.

[Badger]

Thanks for distorting again what I said.
I still can't understand what in the world justifies that the government rewards investment more than labor.

You don't seem to understand much about economics in general, I'm afraid.

1. You seem to think that taxes can only be avoided by fleeing the country. That's not the case. Whether the French government knows this or not, I don't know.

2. Investment returns are risky is one point. The more crucial point is probably that capital is mobile, why labour isn't. If you tax investment too highly no one will invest in your country. Also, investment is a choice in a way that working isn't. If you raise taxes on working too much eventually people will not work. But the bar there is pretty high, because people who don't work will have to survive on welfare and even in welfare states that's not too good.

On the other hand, no one HAS to invest. If you're going to get taxed to hell, you might as well sit on the money, consume it or invest it elsewhere. So it is more tax sensitive. Which is why income from work is taxed higher than income from capital in every country I know (except those with flat rates of course!).

3. I don't see why providing capital to the productive process should somehow be morally inferior to providing labour.

This seems like typical misinformed populist nonsense. Most grown up people (luckily) learnt the lesson of the 70s to not pursue stupid economic policies for ideological reasons. I hope this forum won't force us to go through the painful process of restructuring the economy again after introducing poor economic policies.

Here's my question Gustaf: At what point are capital investments truly more risky than labor ? As much as we may consider the dashing entrepreneur to be making an educated gamble on their new patent or invention, the vast majority of capital gains seem to be fundamentally safe investments. Preferred Stocks. Bonds. Even most interest baring devices are subject to lower capital gains taxation than regular income.
 
While an actual small business entrepreneur may actually be risking much with the start of a new business, their income is frequently taxed at regular rates. But for the tiny tiny percentage of persons earning over a mil a year with a disproportionate share coming from capital gains, there income is far less "risky" or unassured than a wage earner subject to possible layoffs or loss of business. As an example, Sam Walton's kids don't have to worry about their Wal-Mart preferred stock not paying very very VERY handsomely through their grandkids lives.

I realize populism has its share of false arguments, but neither must we ignore the reality that often talk of "economic efficiency" and "pro-growth policies" can sometimes be a smokescreen for the extremely mindbogglingly wealthy using their grossly disproportionate political influence to justify paying less of their income in taxes than their secretaries or doormen. That's not "populism", but simple economic reality.

Again, no position taken on the actual proposal at hand to kick the top rate up to 70%.

I don't mean risky as in "I might not get anything." Of course, bonds are less risky than stocks but both still carry risk. I'm assuming we will not start to differentiate between different types of capital gains. Wage payments are usually fixed in contracts which means that the wage is guaranteed (at least if inflation is under control). Capital providers typically pick up all of the risk involved with business enterprises.

That is more to explain why investments will not be made if people are taxed too heavily on them. The same doesn't really go for work. You do see capital gains taxes and taxes on labour being equal in countries with really low taxes (typically flat taxes) but if you have capital gains tax rates of say 50% you won't see a lot of investment being done. Both because it will flee the country but also because people might not find it worth the while to risk their money if the pay-off will not be as high.

Let's take a simple example: I can invest $100. Either it goes well and I end up with $250. Or it goes badly and I lose everything. Let's say that both of these things happen with equal probability. Thus, the net expected gain from the investment is 250*0.5-100=25. It would thus be beneficial for society if the investment is done - we gain $25 from it. But, let us now assume there is a 50% tax on capital gains. So, if the investment goes well I will get 150*0.5=75. If it goes badly I lose 100. In other words, my expected gain is now 175*0.5-100=-12.5, a negative number. Thus, I won't make the investment because I won't gain anything from it. Since the fundamentals of the project are the same as when I assumed there were no taxes, this is bad, because as we saw then the project was good for society as a whole.

One way to think about it is that you will see investment in risky businesses go down if it is taxed too highly.

I think that you're probably using risk as in "risk of becoming poor." But if you look at volatility I do think wealthy people have risky wealth. How much did Bill Gates' fortune decline when the dotcom bubble burst, for instance? When I say risky I mean in the economic sense of volatile, not that Gates runs a risk of becoming poor.

Another way to think of the problem is to consider a company earning $100. They can either pay it out to the suppliers of labour, in which case the supplier of labour will receive 100*(1-labour income tax). Or they can pay it out to the providers of capital, in which case the provider of capital will receive 100*(1-corporate tax)*(1-capital gains tax). It is usually assumed that it's a good idea to keep this equation balanced so that companies do not have an incentive to avoid taxes by manipulating the corporate structure (such as hiring stockholders into phony positions and pay them wages instead of dividends).

I'm not saying that it would be wrong to increase the capital gains tax you have (it sounds low, then again, that's partly because you have such as freakishly high corporate tax rate), merely that I think it's a red herring to think that the rate should be equal to the one on income.

I still say this argument underestimates the "risk"---and not just of becoming poor, but of simple loss of income---that capital gains income entails. For higher income dividend/bond/interest recipients the greatest risk to interupted income flow is the mailman possibly slipping on ice en route to deliver their trust checks.

Yes, Bill Gates "lost" a tremendous amount of wealth in stock value during the recession, but his income was still phenomenal. But how many persons in the recession lost income---and a much more significant portion too---by layoffs or decline in business? We can't underestimate the risk "regular" income earners take in the modern economy either.

For that matter, the "double taxation" argument is something of a myth. Much (most?) income is subject to multiple sources of taxation. A wage earner has payroll taxes like Social Security and Medicare taken out, and then the remainder gets hit by income taxes. Then that income is taxed further a second or third time when one purchases anything hit with sales taxes, or excise taxes like gas. No, those latter examples are not direct taxes on income, but these regressive taxes reduce one's wallet as much as any other "double taxation" more commonly complained of like capital gains and estate taxes.

This isn't a "populist" argument, but simply a different view of hard economic facts. People ultimately invest in the stock market or a business venture for the same reason they take a job with good wages; to make money. People are drawn to income producing plans whether its a good job or a good investment. I believe your argument, Gustaf, is a cogent analysis as to why capital gains shouldn't be taxed at a higher rate than ordinary income, and I understand there are differences between taxation of short term and long term capital gains (or at least there were before 2003 ). But we'll have to continue this fascinating debate for a bill that actually raises capital gains taxation.

[Badger]

I was confused largely because this tax doesn't even exist in Sweden.

Please tell me that you're at least applying the same tax rate to gifts?

Anyway, an estate tax is a bit of a silly tax. I'd probably remove it if I were in charge. And why do Americans love insanely complex tax systems? I guess employing tax lawyers is something you get off on?

There are taxes on "gifts", though again there are exempted amounts that can be transferred as gifts without taxation.

The idea behind an estate tax is sound enough, especially from a fiscal standpoint. The number of estates it effected even before the Bush tax cuts was decidedly modest, and truly hit only the very, very wealthiest, and not even particularly hard after legal deductions and exemptions were included.

The concept is simple meritocracy: Rather than let the Paris Hilton's of the world collect vast fortunes tax free they should pay a portion of that to support the same society that allowed that fortune to grow and multiply. Better to support such things as well-funded public education to allow the next generation of millionaires and billionaires to rise and prosper than create a tax structure that rewards old money to simply pass from generation to generation.

Not to mention that among the options for raising whatever taxes are needed, an estate tax is among the most defensible economically or otherwise. Notwithstanding the mantra of paying for tax cuts with "decreasing wasteful government spending", whatever level of government spending is appropriate--be it $1 Trillion or $1 Billion annually--on what basis should such taxes be collected more from the middle class instead of an estate tax to relieve the middle class tax burden? The fact is eliminating or reducing an estate tax paid by the very very wealthy ultimately requires either additional taxes paid by the middle class or more government debt incurred for the next generation.