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It’s about the nation’s equity. We are better than this… by Professor Edward Kleinbard

Videos below the fold.

I caught Edward Kleinbard the other morning on Cspan.  He is a professor of law and business at USC and a fellow at the Century Foundation.  His book: We are better than this: How Government Should Spend our Money.  If you google his name, articles will come up from October 2014.   It attracted my attention because of my thinking as expressed in my article back in February of 2013.   The rest of the dinner table deficit/debt discussion: Equity  His thesis is that we need to be spending more as it is investment that creates the capital needed to grow the nation.  Focusing just from the view summed up in the phrase “tax and spend” misses what government is about.  Government doesn’t tax, government “principally spends money” via investment and insurance.  Spending should be complimentary to the private sector.  When government “invests” the pie gets bigger not smaller.

He worked on Wall Street for “many decades” also.   How he kept his humanity as you will hear in the presentation while being on Wall Street…?

Let me start though with this short video as it is another business person like me who appears to get my posts regarding what is needed in this country to go along with the equity spending.   I first mentioned this position in 2010 regarding the SOTU address.  Here we are 2015 and we small business people are still saying the same thing.  Professor Kleinbard addresses small business too as part of understanding the overall condition and needs.

I give you Dave Boris, owner of Hel’s Kitchen Catering.

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The "Fiscal Cliff" and the Coming Retirement Crisis of the Middle Class

On January 1, Congress approved a tax and spending bill to avert the so-called “fiscal cliff” combination of tax hikes and spending cuts that would have created deflationary pressure on the United States (though Yglesias questioned the conventional wisdom of whether it would necessarily cause a recession). Let’s take a look at the deal in some detail, then proceed to the gruesome details of what will happen around the Ides of March.

From Think Progress, here are some of the more critical parts of the deal.

1) The Bush tax cuts expire on only about 0.7% of households, those earning more than $400,000 per year as an individual or $450,000 for a couple. This brings in $600 billion over 10 years. Since rich people don’t spend as much of their income as the poor and middle class do, this is less deflationary than a tax increase on the middle class, as I discussed in November.

2) With the expiration of the temporary 2% payroll tax cut, 77% of households will see their taxes go up. Indeed, every single income group will, on average, see their taxes increase, as shown below (via Matt Yglesias):

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Since this hits the middle class more directly, the deflationary consequences are larger than they would be for an increase in taxes on the rich. On the other hand, this strengthens the long-run funding of Social Security, an issue I will return to shortly.

3) Unemployment insurance is extended for two million workers. This will get spent and have a definitive stimulative effect on the economy.

However, the second shoe of the fiscal cliff, the automatic cutbacks known as the “sequester” was simply postponed for two months, which is the same time that the Treasury Department will run out of creative ways to keep the country from exceeding the debt ceiling, which it hit on December 31.

Combining these two negotiations, the debt ceiling and the sequester, will be an extremely high-stakes battle where the middle class has a lot to lose. The big problem here is that some Tea Party Republicans really do want to use the debt ceiling to take the economy hostage and force cutbacks in Social Security, Medicare, and Medicaid. Despite the fact that Republicans lost the Presidency as well as both Senate and House seats (with a majority of the votes cast for the House going to Democrats), they see their gerrymandered House majority as giving them license to wreak havoc.

The consensus among most commentators (Krugman, Klein, and Yglesias, for example) is that the fiscal cliff deal will work out okay as long as the President does not cave in to the Republicans’ threats over the debt ceiling.  I agree as far as that goes. But, as Yglesias points out, there is nothing great about what Klein says is the most likely scenario, where the President gets $1 trillion in new tax revenue for $1 trillion in cuts over 10 years. That is still $2 trillion in austerity measures at a time when unemployment is barely below 8%!

The looming problem rarely mentioned, even in the context of the Republican campaign against Social Security, is that my children’s generation (Generation X, if you will) faces a retirement crisis that many of my generation will avoid, based on the end of pension plans. According to one Social Security Administration report, the percentage of private-sector workers with a traditional defined-benefit pension plan fell from 38% in 1980 to 20% in 2008. Over the same period, private-sector workers who only received defined contribution plans rose from 8% to 31%. Note that this means that 49% of private-sector workers are not covered by any pension plan at all. Moreover, while governments have more commonly provided defined-benefit plans than private employers have, they are under attack in many states.

Let’s do the math. With 49% of private workers having no pension, and another 31% having an on-average less generous defined contribution pension, how will seniors support themselves if Social Security is cut? Hint: It won’t be pretty.

Get ready for a bumpy March.

Cross-posted from Middle Class Political Economist.

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The Effect of Capital Gains Tax on Investment – Appendix

In comments to my previous post, Robert requested the unsmoothed data from Graph 3.  Here it is.   GPDI is plotted against the Capital Gains Tax Rate.

Since the Capital Gains Tax Rate (X-axis) is quantized, the result is columns of data.  Compared to the smoothed version, there is little change in either the slope or intercept of the best fit straight line.  R^2 is, of course, much lower.

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The Effect of Capital Gains Tax on Investment

Matt Yglesias, servitor to our corporate overlords, suggests that the reduced capital gains tax rate paid by rentiers like Willard Romney is really a very, very good thing.  To wit:

The main reason Romney’s effective rate is so low is that the American tax code contains a lot of preferences for investment income over labor income.
. . .
But this is definitely an issue where the conservative position is in line with what most experts think is the right course, and Democrats are outside the mainstream.
.  .  .
That’s the theory, at any rate. It’s a pretty solid theory, it’s in most of the textbooks I’ve seen, and it shapes public policy in basically every country I’m familiar with. Even researchers like Thomas Piketty and Emmanuel Saez (see “A Theory of Optimal Capital Taxation”) who dissent from the standard no taxation of investment income position think capital income should be taxed more lightly than labor income. Empirically, it’s a bit difficult to verify that variations in capital gains tax rates and the like really are making a material difference to investment levels. But then again the data is noisy.

Scott Lemieux at LGM demurs.

Sure, if you 1)accept the premise that reducing or eliminating capital gains taxes will result in productive infrastructure investments rather than worthless accounting tricks, 2)ignore the economic benefits created by consumption, 3)assume that significant numbers of people will forgo money for doing nothing just because the profits will be taxed , and 4)ignore the fact that in most jurisdictions consumption is also “double taxed,” then reducing capital gains taxes looks good.   But since all of these assumptions are (to put it mildly) highly contestable, it’s just question-begging.

My response to Matt is that in my jaundiced opinion, you might as well consult The Necronomicon of Abdul Alhazred as an economics textbook for an issue like this; and that in a world that has on the one hand Krugman, Thoma and Delong, and on the other Fama, Cochran and Cowan, a consensus among experts is about as likely as lions lying down with lambs for some purpose other than a quick snack.

To Scott I say, why assume or ignore anything when that oh-so-noisy data is readily available?

Graph 1 shows the capital gains tax rate and year-over-year growth in gross domestic private investment (GPDI,) each presented as a percent.  If Matt and what he calls “the mainstream” are right, then there should be a negative correlation between the tax rate and investment growth, since higher taxes would be a disincentive to investment.

Graph 1  C G Tax Rate and GPDI, 1954 – 2011

Instead, what we find is that over time, as the capital gains top rate has gone down, so has GPDI.  This is indicated by the downward slope of the best fit straight lines through each data set.  The best fit lines are based on the data through 2008, so the huge 2009 negative in GPDI is not represented.

One way to handle noisy data is to superimpose a moving average.  The dark heavy line that snakes up to a top in 1978 is an 8-Yr moving average.  This top corresponds exactly with the last year of the 40% Cap Gains Tax rate.  The purple horizontal line is the period average of GPDI YoY growth from 1954 through 2011.   Note that until 1986, the 8 Yr line is mostly above the long average line, and since 1986 it is mostly below.

This is not because the bottoms in the GPDI data set are lower since 1986.  A quick look shows that, except for the 2009 plunge, they are not.  It is because the peaks are lower.  The table gives a count of extreme data points for GPDI growth, before and after 1982, the year the Cap Gains rate was reduced to 20%.

Even at a detail level, it appears that a higher tax rate corresponds with a higher rate of investment growth, as both curves peak in 1978.

Graph 2 provides a close-up view of 1985 through 2005.

Graph 2  C G Tax Rate and GPDI, 1985 – 2005

When the Cap Gains tax rate was increased from 20 to 28% in 1987, the rate of investment growth increased from 1.4 to 5.2%, and stayed at about that level until it was derailed by the 1990-91 recession.  Then from 1992 through 2000, 8 of 9 years had GPDI growth above the long average (purple line,) an unprecedented occurrence.  Granted, the last three of these years were at the lower C G Tax rate of 21.19%, instituted in 1998.  But also note that this decrease did absolutely nothing to spur increased investment.

Cutting across the data in a different way, Graph 3 presents a scatter plot of the C G Tax Rate and YoY GPDI growth, each presented as an 8 Yr average.

Graph 3 Scatter Plot of GPDI Growth vs C G Tax Rate, Smoothed

Even with smoothing, there’s a lot of scatter.  No surprise, since many other factors can affect investment: business cycle, commodity price shocks, wars, etc.  I’m tempted to say the obvious relationship is that a higher C G Tax rate leads to higher investment, but I don’t want to get into a correlation-is-not-causation brouhaha.  So I’ll simply say that the idea that lowering C G taxes leads to increased investment – and therefore increased economic growth – is not only unsupported by the data, it is refuted by the data, and therefore contrary to fact.

So, once again, we find a mainstream economic idea that is only valid in some imagined alternate reality.

Capital Gains Rate data can be found here (Returns With Positive Net Capital Gains Table, 1954-2008) and here.  There are a few slight discrepancies between these sources, mostly in transition years.  I have used the maximum tax rate, column farthest to the right in either table.
Gross Domestic Private Investment is FRED series GPDI.

Cross posted at Retirement Blues

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Define Rich, Part III. What the tax tables of yore say.

 By Daniel Becker

Randolph Duke: Money isn’t everything, Mortimer.
Mortimer Duke: Oh, grow up.
Randolph Duke: Mother always said you were greedy.
Mortimer Duke: She meant it as a compliment.
A while ago (an understatement) I posted on the question of what is rich. The first dealt with what issues to consider in defining rich. The second was looking at the issue of getting rich if that is even what one wants to do. The “rat race”. I don’t believe most people really want to be rich. I believe most people when thinking about being rich are thinking about what it would take to remove the fears of events that would make one’s life either very difficult in a world that requires money to remove risk or drastically different from what one’s life was. I’m thinking things like losing a job, debilitating injury or illness possibly resulting in physical disability or Louis Winthorpe III.
This all ties into “The American Dream”. The “Dream” is not just an ideology of governance and social philosophy. It is also a life style and thus requires a specific level of income. I have posted on this issue also and noted just how high in income we have driven this “Dream” such that two people with bachelor’s degrees just starting life together may not be able to have it.
Now that we have entered a period where taxes are on everyone’s minds such that there is serious consensus to raising taxes, maybe we need to see what we had in the past to know what we need now. I am sure most readers are aware of Mike’s work defining what rates appear to effect economic growth the best. If I recall correctly the number for the top 1% was around 65%. I have also suggested that there is a range as to how large a share of the income the top 1% should have. That number for the top 1% is not to be above 15% and not to much below 10%.
I should also mention my postings on taxation’s purpose. Specifically I looked at taxing from the perspective of the legal profession as oppose to the economic profession. The conclusion was that there was one main reason for taxing. It is to fulfill the directive of our constitution: equality of power. It is to assure the concept of one voice one vote. If there was ever a time in our history to raise taxes in order to assure this directive it is now in the age of the Citizens United ruling. President FDR referred to the issue and those with the one voice multiple votes do to their monied power as “economic royalty”. I like that phrase and I wonder why it is not used as are retort to those who use “class warfare” as a guilt trip.
Let’s get started.


I have constructed 4 sets of data using the tax rates of 1936/37, 1945/46, 1965/67 and 2010. I chose 1936 because it is a tax rate increase after the economy had turned north based on Mikes posting. I chose 1945/46 because it is another adjustment that happens right after after WWII. I chose 1965/67 because it is the decrease often spoken of fondly. Of course 2010 is because that is where we are at.

This posting would be hugely long if I post on all 4 periods at once, so I have broken it up. Let me first and I think most importantly note that we people today have no idea just how much we were willing to tax ourselves to have the society that we now refer to as “the good old days”. Not only did we have the tax tables of 1936, that table eventually had a 10% surcharge added to pay for the war. Yes, another reason to consider the generation that fought the 1st and 2nd world wars the greatest generation. There was a 7% surcharge for the Vietnam war, though that number became less as time passed. Still, we knew that if we wanted to do exceptional things, we had to tax ourselves exceptionally. Also, the early taxation made no distinction for single or married, never mind filing joint or separate. Everyone paid the same rate. Most interestingly, with the current table, the people who comparatively get screwed are those who are married and file separately. All the rates kick in at a lower income than even those who are single. The other thing we don’t seem to understand is that all the tax rhetoric we have been hearing since Reagan we’ve heard before virtually to the word.
Andrew Mellon, Treasury Secretary 1921 to 1932 :
Generally speaking, Mellon argued that tax burdens were too high. Steep rates, he insisted, served only to stifle incentive and foster tax evasion. “Any man of energy and initiative in this country can get what he wants out of life,” he wrote. “But when initiative is crippled by legislation or by a tax system which denies him the right to receive a reasonable share of his earnings, then he will no longer exert himself and the country will be deprived of the energy on which its continued greatness depends.”
Worse yet, Mellon argued, high rates didn’t even raise money. By encouraging both legal tax avoidance and illegal tax evasion, they eroded the tax base and reduced overall revenue. Lower rates, he said, would actually raise money by spurring economic growth and reducing the incentive for tax avoidance. “It seems difficult for some to understand,” he complained, “that high rates of taxation do not necessarily mean large revenue to the government, and that more revenue may actually be obtained by lower rates.” In particular, Mellon insisted that high rates distorted investment decisions, boosting the popularity of tax-free state and local government bonds. Indeed, Mellon made these tax-free bonds a regular target of his reform attempts, but Congress resisted his plans to eliminate them.
Atlas Shrugged wasn’t even written then!  What we don’t hear much of are the original concerns and reasoning for progressive taxation. Teddy Roosevelt:
1906…We should discriminate in the sharpest way between fortunes well-won and fortunes ill-won; between those gained as an incident to performing great services to the community as a whole, and those gained in evil fashion by keeping just within the limits of mere law-honesty.
1907 regarding an income tax:…while in addition it is a difficult tax to administer in its practical working, and great care would have to be exercised to see that it was not evaded by the very men whom it was most desirable to have taxed, for if so evaded it would, of course, be worse than no tax at all; as the least desirable of all taxes is the tax which bears heavily upon the honest as compared with the dishonest man.
No advantage comes either to the country as a whole or to the individuals inheriting the money by permitting the transmission in their entirety of the enormous fortunes which would be affected by such a tax; and as an incident to its function of revenue raising, such a tax would help to preserve a measurable equality of opportunity for the people of the generations growing to manhood. We have not the slightest sympathy with that socialistic idea which would try to put laziness, thriftlessness and inefficiency on a par with industry, thrift and efficiency; which would strive to break up not merely private property, but what is far more important, the home, the chief prop upon which our whole civilization stands. Such a theory, if ever adopted, would mean the ruin of the entire country–a ruin  which would bear heaviest upon the weakest, upon those least able to shift for themselves.
At this moment, I want to mention corporate taxes. There are lessons to be learned from it’s history. I think it is a factor in understand more completely the issue Mike is focusing on: taxation and GDP growth. Wrap your minds around the fact that from 1936 to 1943 there were 6 years that corporate tax collections were greater than personal income tax collections. 1943 was the best year for this as personal income tax collections were 68.1% of the corporate tax collections. Just one year later it flips to corporate tax collections being 75.3% of personal income tax collections. In 1944 $34,543 million in total for the two taxes was collected vs 1943 $16,062 million in total.  In fact, personal income taxes remain in the mid to high 40 percent of total revenue collections from 1944 to present. The corporate share of total revenue peaks in 1943 at 39.8% and declines to hover around the 10% level with a few ventures into the single digits. Most notably 1983 the corporate share was 6.2% and 2009 it was 6.6%.
First up is our current tax table. I used the “married filling jointly” as that would be consistent with the other tables. One big rule of this series of postings: DO NOT concern yourself or me about the deductions that exist. They do not matter for this presentation and for all intent and purposes we can consider the income to have already gone through the deduction calculator and is now ready to have the tax table applied. This is because, these tables only apply to adjusted gross income.
You will notice that the table is calculated out to $,1,000,000 of income. I did this in order to keep all the tables going to the same income level. The 1936 table actually has rates for incomes up to $8 million. That is $8 million in 1936. (Using my favorite money converter that would be $301,000,000 in unskilled labor or $573,000,000 in GDP/capita.) Going to $1,000,000 in income also allows one to see what happens at the top when the rate no longer rises.
A very important concept to understand is that not every dollar is taxed at the single percentage rate as you go up the income ladder. Thus, there are two columns in my charts. The “Marginal Tax” is the additional money paid at the top of the bracket for the corresponding rate. The “Total tax” is the actual money paid up to that level. It is the “effective rate”. In simple terms, if you are at the 35% level, you 
are not paying 35% on all that you earn. Instead you are paying the amount based on your income being divided up into the number of brackets that exist. For 2010, there are 6 brackets, thus you have six different incomes so to speak.
This is what it looks like as a graph.
When the rate maxed out, I divided the range to $1 million into even parts so that the tax paid for each additional income level is the same. For the 1945/46 and 1965/67 data sets I converted the net income to 2010 dollars. I used the “unskilled labor” and GDP/cap as those are the 2 factors suggested as being the best for knowing what income equivalents are over time. The 1936 data set is converted to 1967 dollar because the numbers just get crazy. For example, a net income of $3840 is $145,000 in unskilled labor and $275,000 in GDP/cap. Though it is only $60,400 via the CPI. Which doesn’t say much for today’s median family income. It also gives us a clue as to just how much money is considered “rich”.
Next posting, I will start presenting the historical data sets. I’m still thinking about the best way to do it as what is important is the comparison among the data sets.  Maybe post just the data charts and later the graphs or maybe one data set and it’s graphs at a time. 

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Carried Interest: prospects?

by Linda Beale
crossposted at Ataxingmatter

Carried Interest: prospects?

At the ABA Tax Section meeting in Washington last weekend, there was surprisingly little talk about the carried interest proposal. Carried interest, for those who don’t work often in the partnership area, is the way that managers of real estate, hedge, and equity partnerships receive a generous payment for managing the fund–usually a “2 and 20″ 2% of the assets under management annually and 20% of profits fee for services. The 20% is claimed to be gains from asset dispositions rather than services (providing a preferential rate in some cases, as well as no payroll taxation) and often has been deferred through offshoring.

Various tax experts have called for taxing both the fee and carried interest as ordinary compensation subject to payroll taxes and always taxable at ordinary rates. That proposal has been suggested in Congress at various times as a revenue raiser, but it has not yet been enacted as part of a bill, since the Senate has not included the House-passed version. The Real Estate Roundtable has lobbied strenuously against the carried interest provision in past years and successfully joined with private equity, hedge fund, and venture capital firms to defeat the idea.

There is talk now of including it in the jobs bill that Congress hopes to pass before the end of May. See Real Estate Group PUshes to Soften ‘Carried Interest’ Tax Rise, Bloomberg, May 8, 2010. Naturally, lobbyists are busy trying to eliminate or modify the provision. The head of the Real Estate Roundtable noted that the group is arguing for a “blended” tax rate that would provide a rate between the capital gains preference and ordinary rates, or a provision that would apply the capital gains rates for gains from investments that the partnership holds for at least 2 years. A spokesperson for the National Venture Capital Association siad that “we’re not accepting this as a fait accompli…we have not waived from our position.” Id.

The argument for taxing the carried interest of “profits” partners as compensation income, however, is strong: there is little justification for further complicating the Code with blended rates or a new long-term holding period for the capital gains rate. These managers should pay tax at ordinary rates and should also be liable for the ordinary payroll taxes on their full compensation income. Sure, they won’t like it and they “won’t waiver” from trying to push the Senate to ensure their cozy deal. But that is not a satisfactory argument for failing to make this change which is required for fairness’ sake.

(2 and 20 corrected by Rdan)

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