Wednesday, October 12, 2005

Conservative tax plans

While engaging in all this artsy fartsy talk about taxes and all it's good to keep in mind what representatives voted in by actual real life conservatives do with tax code. Via Daily Kos we find a report that Republicans are eliminating the AMT, a tax that the rich can never get out of paying no matter how many lawyers they have. Granted, this tax will start affecting regular people (re: people who *earn* their money) soon so it should be reformed so it goes back to working how it should. But I guess Republicans know that they can use this opportunity to help the rich sneak out of their taxes yet again and the conservatives back home will keep voting for them. Aren’t conservatives grand!

But wait. Its gets better.

Apparently, the Republican congress has been reading DTI’s posts here on Caljunket because they’re going to offset the money lost from the AMT by simplifying the tax code! That’s right; they’re getting rid of deductions on mortgage interest and health insurance! You know, deductions that are small for rich people but which are a godsend for the middle class. Thank god conservatives managed to get their congressmen elected so that they could cut taxes on the wealthy and raise them on the middle class – oh wait – did I say that? I meant to say “get us closer to a flat tax”.

Congrats, DTI!


Actually Tommaso, those tax proposals come from the President's Tax Advisory Commission.

They aren't new. They've been around for many years, but Congress has never taken the bait, and I doubt it will this time. Home Mortgage deductions are prized by too many people (including lots of Republicans) to tamper with; and eliminating the AMT would create such a large tax hole that most elected officials (especially those even nominally concerned about budget deficits) have been unwilling to touch it with a ten foot pole.

I think you can rest easier, and DTI better not gloat yet.
Thanks. I think the basic point is the same though. When Conservatives talk about simplifying the tax code, what they mean is "Wow! Rich people found all those loop holes we put in the tax code for them? Well, I guess we better not bother taxing them and shift their taxes onto the working middle class".
You know, rereading my post I make it sound like conservatives like DTI *want* to screw the middle class. I don't actually believe that. I think DTI just hasn't done his homework on how tax policy really works. Why else confuse getting rid of deduction with getting rid of tax brackets? Why else take such plainly wrong positions like "the rich will always find ways out of taxes" when counterexamples in other developed countries are the rule?

There are many powerful (idealy wealthy) interests who would benifit greatly from lowered tax rates on the rich. They are very powerful in the conservative commentariat and the seak to enlist well-meaning people by half-truths and confusion.
Thank you, Tommaso. I guess there's no more room to appreciate what fiscal conservatives like JFK did for our country. On the cotnrary, President Bush has done very little to make the tax structure more flat and less progressive. His tax cuts, being across the board, only left us with similar tax brackets, just all much smaller.

I wasn't confusing gettign rid of deductions and getting rid of brackets; I would actually like to see both. You can't have it both ways, and the flat tax seems moire equitable, at least for those of us that make enough money to be taxed.

"There are many powerful (idealy wealthy) interests who would benifit greatly from lowered tax rates on the rich."

And like the examples you proved, there are a lot of examples of wealthy powerful people who staunchly defend the progressive tax. If the rich and powerful controlled everything and wanted a flat tax, why do we still have a progressive, graduated income tax?
Tommaso wrote, "Why else confuse getting rid of deduction with getting rid of tax brackets? Why else take such plainly wrong positions like "the rich will always find ways out of taxes" when counterexamples in other developed countries are the rule?"

Well, the flat tax proponents I know are relatively innumerate and like simplicity. I think they have difficulty following complex trains of thought. So, even though they personnally might end up paying more and losing services they depend on, they feel more comfortable with the idea of filling out a postcard rather than a 1040 or 1040ez. Now, I don't know DTI, so I don't know if he fits the profile of the flat taxers I do know, but that's been my observation.
I agree that there are certain rich people who support progressive income tax and some who support flat tax. The question is: which tax system benefits them personally. I don't know of anyone, left or right, who doesn't agree that a flat tax would be great for the wealthy.

What is interesting is to compare the rich who support flat taxes to the rich who support progressive taxes. Bill Gates and Buffet *earned* their money and so have no problem with paying their dues to the society that made it possible. Conservative flat tax proponents like Forbes by and large *inherited* their wealth and obviously don’t want to be made to work for a living. This is also why they oppose the estate tax.

The “fairness” argument always seems to be the last one conservatives cling to. But they never really explain *why* flat tax is supposed to be fairer than a progressive tax. A flat tax after all, still asks for more money from the rich than from the poor. If we wanted our tax system to treat everyone equally, a head tax (a flat rate for every man woman and child) would be unassailable. Yet clearly conservatives have bought into this idea that a “variable amount proportional to the amount you own” is some kind of platonic ideal. Why not “a variable amount proportional to the square of what you own?” or “an amount proportional to the difference between what you own and the average owed by other citizens”. It makes no sense to me.

Personally, I would like to get rid of the brackets all together and use a simple tax=A*e^(B*X) formula. Banks have been using e for over a century now and it’s seriously three buttons on a calculator. Hell, we could give away free calculators where you just type in your total income and out pops the answer. There’s no need to make it a set percentage.
Also, JFK's tax cut was a great idea and a great example of liberal tax policy and fiscal responsibility. There really was extra money to go around and JFK gave it to the bottom tax bracket.

But please. Don't dare call JFK a fiscal conservative. That's an insult. A fiscal conservative wants to cut taxes on the rich and cut the social safteynet which keeps our economy humming. If you don't believe me, check out the guys conservatives voted into congress.

As I said, fiscal responsibilty in not a left or right issue. it's just common sense.
So what are the variables in the equation?

Ohhh I see. Everything that the Democrats do is right! Tommaso, your claim makes no sense. JFK cut the top tax bracket from 90% to 70% and somehow this constitutes to giving to the poor? WTF?

Do you realize you're making stuff up to make JFK look like a fiscal liberal? Might as well say WWII never happened.
X is the variable, A and B are the scaling and rate constants, respectively, in such equations. I assume he was joking, though, because otherwise, if you make enough money, you'd actually have to pay more than your income.
Yes you are right, Repblast. JFK cut the top rate from a comical 90% to a still high 70% but the other parts of the tax cut were aimed at regualr folk like raising the top deduction for child care expenses and closing tax loop-holes. At the root, it was a classic Keynsian economic stimulous.

And thanks for the sharp eye, BAD. I worked out a "equitable tax" a while back on scratch paper but I forgot the formula. How about this:
tax = A*x*arctan(B*x)

"A" will have to be scaled so the function tends to something less than or equal to one.
Ohh! ohh! Let's call it "The Geometric Tax". That makes it sounds like even more of a platonic ideal!
What are your axioms of equitability? I'd imagine Income - Tax(Income) would have to be strictly increasing. Probably also concave. Both flat tax and the bracket system satsify those conditions, though. What else? Or what's the measure or equitability?
Well, the obvious restrictions on a tax (expressed as a fraction of income) are:

1 > f(x) >= 0

But there are other ones. For example, the brackets in the current system violate the rule that making more money always leaves you with more after taxes:

f(x) > f(x+deltaX) (which is bad)

(that is, it coule be that getting a raise of delataX dollars could end up making you owe more than delataX more taxes). That leads us to this rule:

f(x) < f(x+deltaX)

which can be stated

0 < f(x+deltaX) - f(x)


0 < (f(x+deltaX) - f(x))/deltaX

or taking the limit as delataX gets small:

f'(x) > 0

(brackets violate this becuase the derivative of the step function has a plus infinity peak and a negative infinity peak)

Of course, these rules apply only to the base part of taxes. There are very good reasons to have deductions (though maybe not so many as we have now) and those should be based on what society wants to encourage.
That's the increasing requirement. Maybe I've been reading my tax forms wrong (I don't worry about high brackets, after all), but my understanding was that the brackets work by taxing "The first $X" at a certain rate, and "The next $Y" dollars at a higher rate, etc., which does satisfy the requirement.

Note that if f(x) is your tax rate (as you suggest by your limits of 1 and 0), then you need to multiply x to get the total tax, and then subtract from x to get the total amount kept.

The arctan formulation has some convergence properties. If you set A to 2/pi (i.e. you want the tax rate to approach 100%), then you set an absolute maximum on the net amount after taxes, no matter how high your gross is. If you set A to less than 2/pi, you essentially split income into two portions: A certain fraction of everyone's income is not subject to tax, and the other fraction is subject to a tax that again has convergence.

Another idea, for instance, might be to set the tax to be (x-ln(x)). In this case, tax rate goes to 100%, but net income diverges (i.e. If there's a net income you want, there's always a gross income high enough to get it).

My question, though, is given two tax systems, what would make one system "more equitable" than another?
Good question. I suppose I would start by appealing to the work of that great Liberal Philosopher John Rawls. The “original position” thought experiment would have us ask not what tax system is good for us personally, but which one we’d prefer not knowing how much we are going to make. But that opens up a whole ‘nother can of worms because people would probably still disagree.

I guess in the end it depends on how much luck figures into making money. If our entire GDP revolved around finding bags of money in the street then there is no reason not to have a 100% tax and redistribute the money equally. On the other hand, if the economy was a perfectly efficient capitalist society where there was no inheritance and no luck whatsoever (not even the luck of being in the right place at the right time… this is a thought experiment so it doesn’t have to be realistic) then the same amount should be asked of each person regardless of how much they make.

Granted, we don’t live in either of those worlds. Work should be rewarded (because society values it) but unearned wealth should not. Therefore the structure of the tax code should reflect it.

And it’s important not to get hung up on income. Personally I would ask more of people who don’t work for a living but rather just live off and inheritance or vast savings (exceptions would have to be made for the old and other such cases). Obviously that tax shouldn’t be so high as to discourage investment but it contrasts with the Conservative’s desire to tax earned wealth and not tax unearned wealth.
I remember original position. I never could figure out how the conclusion was somehow maxmin.

My question was more specific, actually. How can a tax code reflect the earned/unearned distinction? IRS investigators searching every individual's financial status is pretty infeasible, for instance.
Beetle asked, "How can a tax code reflect the earned/unearned distinction?"

Income such as interest, dividends, and inheritance are considered unearned. They are reported separately from wage and salary income. Hard as it may be for many to believe, ours is considered a voluntary system of tax reporting.

The vast majority of what is reported is not verified, it is taken on faith that people will be honest. In fact, very few audits are done, and those mostly of people with low incomes - those without the means to tie the IRS up in court for years over the results. Of course, that means that the major cheats are not ususally discovered.

Does that answer your question?
Well, let's not get ahead of ourselves Thinker. Interest and stock gains could be unearned, but then again if the investor helps society (which investing in new and wondrous gadgets surely does) then that is surely something we should reward. The question of course is: how much.

As for BAD, I am no tax expert (though I comfortable in claiming to be light-years ahead of any flat-tax advocate). Calculating a perfectly equitable tax for each person is infeasible and would require a great number of value judgments which would be impossible to make in reality. The best we can hope for is to make some broad observations based on a few key figures (a person's income, their wealth, their capital gains, etc.) and tax accordingly. In the real world, this needs to be weighed against the burden of the paperwork which, when multiplied by each individual tax payer, is not trivial.

I personally like Ralph Nader's tax policies, they seem to tax unearned income far more than earned income.
Tommaso wrote, "Well, let's not get ahead of ourselves Thinker. Interest and stock gains could be unearned, but then again if the investor helps society (which investing in new and wondrous gadgets surely does) then that is surely something we should reward."

I don't think the question of what is earned or unearned income has anything to do with what sort of activity we should reward. I was simply trying to explain how they are distinguished.

As for using the tax code to reward certain behavior over others, that is done by determining the rate at which a given type of income is taxed. For example, the rate at which earned income is taxed is currently based on the amount of total taxable income one has in a given year. Likewise for unearned interest and dividends (at least up to a certain level of dividends). Capital gains on the other hand are taxed at lower levels. However, if one falls into the AMT category, a completely different set of rules apply.

I guess that if you spoke with those who voted for elements of the current tax code (liberal or conservative politicians), you'd find that most believe that individual elements are about as equitable as can be developed given the complexity and diversity in our society.
Ralph Nader has gone into some pretty weird area's iodeologically, but his heart remains purely liberal on tax matters.

As for Thinker, let me phrase it this way. Warren Buffet makes all his money through investing. He works hard all day studying the markets. He is occupied the whole day. And the fact that his work is benificial to society is important. He's not working out at the gym or playing tennis. He's *working*. And in that sense at least he is to some degree earning it. (though of course there's always an element of luck)

Now, the question of tax is: How much does he owe society. Ideally, we should go after unearned wealth only, but if civilization costs more than that, we'll have to ask people to contribute in such a way that brings the least amount of cumulative discomfort. Well, now I'm getting into a whole other can of worms. Better not do so tonight.
I wouldn't describe Ralph Nader as "purely" liberal on tax matters. He supports a very modest (more modest than the current) inheritance tax, as well as a very small federal income tax.

Pat Buchanan shares a lot of these beliefs as well. Whatever that means for being right/left wing.
Tommaso wrote, "Warren Buffet makes all his money through investing."

I doubt that is true. I imagine that most of his yearly income comes through investment, but he also serves on corporate boards (for which is probably paid), and runs his own investment company, through which he is paid as a money manager for other people's money - the investors in his firm. Likewise Bill Gates and other founders/executives of lucrative companies, who are paid for their management services, but make most of their money in any given year through investments of their accumulated fortunes.
Well the point is the same. It is *possible* that money made through invest is partially earned unlike say money made by gambeling at a casino. The difference is that one *may* be contributing to society and the other is not.

Since most gamblers lose, and their gambles support all of those people employed by the casinos (most in low wage jobs); shouldn't that count as much as socially valuable as the money one spends to buy a ticket to a movie? Just because the odd person might make something back, why is that a reason to condemn the expenditure as socially useless?

Likewise investing. People whose sole income is from investing support huge numbers of wage earners, accountants, lawyers, etc. from their investment expenditures. Isn't that a social good?
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