Relevant and even prescient commentary on news, politics and the economy.

A Non-Distortionary Tax

Dead people aren’t allowed to drive.  They aren’t allowed to vote.  They aren’t allowed to testify in court, acquire weaponry, check out books from the library or acquire a pilot’s license.  This makes sense.  After all, dead people don’t have a functioning brain.  As a result, we wouldn’t want them driving or voting or wandering around the local library.  But there is one thing dead people are allowed to do.  They’re allowed to dispose of assets, or rather, to direct how assets should be disposed of.  We call that bestowing an inheritance.

Now, you might argue that the dead people aren’t actually disposing of assets.  Instead, pre-deceased people are disposing of their assets, with the disposal being on hold until expiry is complete.  The time in between can often be measured in many decades.

But this just makes the concept even less logical.   After all, you don’t get to decide that someone else can use your driver’s license when you run out the clock, or vote on your behalf when you croak.

A second, bigger problem is that the concept of inheritance is anti-capitalist.  The beauty of capitalism as described by Adam Smith is that the magic of the free market, guided by the Invisible Hand, moves resources in the direction of their highest marginal product use to society. This works through everyone’s personal greed, or enlightened self-interest.  Each person faces benefits and costs, and they try to maximize the difference between the two.  But for dead people, there are no costs or benefits when disposing of assets.  Cadavers don’t care.  (In that respect, they’re sort of like the honey badger, but quite a bit more so.)

The process of inheritance also causes the Invisible Hand to break down with live people.  A person making decisions in the construction of his/her will or trust bears no cost for their decision.  They might gain a benefit in the form of a sense of satisfaction for taking care of their heirs, or derive some enjoyment from the groveling of would-be heirs, but without a cost, that amounts to a free lunch.  And a free lunch is a violation of the Invisible Hand.  It is, or it generates, an inefficiency.

So what would be an alternative to inheritance and bequest?  Whatever it is, it would need to fulfill the point of inheritance, which is for someone to benefit their loved ones by bestowing assets on them.  And it turns there is just such a thing:  a gift.  In other words – if you want to give someone something, give it to them.  Now, later, whenever.  But do it when you’re alive.  If you give it to them when you’re dead, you literally had your cake and ate it too.

Actually, to keep the Invisible Hand operating, outright gifts aren’t strictly necessary.  Simply stick the name of the beneficiary on the asset as a co-owner.  Make them part owner of the business you want to pass on to them, or give them check writing and withdrawal privileges on your bank account.

The argument against it – “but I don’t trust that person and I need that money/business/farm/collection of Davy Crockett figurines” – is, quite frankly, disingenuous.  If you don’t trust them with your business or your money when they’re alive, but you do when you’re dead, it’s a sign you don’t care about what happens when you’re dead.  Which is another way to say the Invisible Hand breaks down when it’s pointing at you.

All of which raises one more question – if a more capitalist system was adopted, what would happen to the assets held by a person who died?  Well, if the assets were held jointly, with both parties having equal decision making power, then the surviving asset-holder would simply gain sole control over the asset.  Thus, those who wish to pass their assets on to their children would simply give their children equal rights to their assets while still alive.

But if a single person held an asset in its entirety in its entirety and passed away, then the asset would revert to the government. Call it a tax.  A 100% estate tax.  (Small exceptions could made in the case where the pre-deceased chose to create a trust to benefit minor children, the severely disabled, or other special cases. Or maybe more effective ways to transfer and protect minors and the severely disabled could be found.)

The winner would be government tax coffers.  (More on this in a moment.)  The losers would be those would-be heirs that aren’t quite liked enough or trusted enough by today’s asset holders to receive joint ownership of the property.

Whatever the government collects in this way could be sold off to the highest bidder.  Among other benefits, that reduces the need for other taxes.  And those other taxes are collected from live people.  If the goal of taxes is simply to fund government operations, less taxes need to be collected from the living if some is being collected off the dead.

And here I note that a tax on dead people  has one big advantage over a tax on live people:  it is closer to non-distortionary than any other I can name.  Non-distortionary taxes are taxes that don’t change people’s behavior, and don’t prevent people from doing what they otherwise would do simply to avoid the tax.  Income taxes and consumption taxes and VAT and all other types of taxes in use today cause people to engage in all sorts of acrobatics to pay less in the way of taxes.  But the dead never change their behavior to avoid taxes.  Ever.  And if the pre-deceased want to give their money to their children or their friends or relatives or favorite charity, they can do so simply, out in the open, by passing on assets while they are still alive.

TLDR:  tax the dead, so the living can be taxed less.

A couple notes…

1. Is this essay meant to be taken seriously?  Sort of.  I believe the idea is mostly sound though I’m sure it would benefit from a bit more thought.  But do I think there is a snowball’s chance in Hades that such a proposal has legs?  Nope.  Most people like the “have your cake and eat it too” model, at least when they own the cake.

2. Parts of this post first appeared December 2006.  At the time I wrote it, I was unmarried, had no children and almost no assets.  Now my situation is different along all those dimensions.  And I have less hair.  But I like to think I am still just as adorable as I was back then.  Regardless, the other day I thought about the old post and I asked myself…  do I still feel the same way now that my situation has changed?  So I sat down to write…  and came to the same conclusion. The conclusion was so similar that I inserted a few sentences from the old essay into the new one as it fit quite well.  Is that bad or good?

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Inequality: Obama’s Speech, Detroit’s Bankruptcy, Taxes

by Linda Beale

Inequality: Obama’s Speech, Detroit’s Bankruptcy, Taxes
Was Obama’s speech on inequality really what Michael Lind claims in “The Day the Right Lost the Economic Argument” Salon.com (July 25, 2013)?

The right, both here and internationally, has been pushing for austerity for most while those at the top reap unparalleled rewards from upward-moving stocks and their interests in private equity and other financial assets.  The problem with austerity is that it puts all the burden on those who can least bear it, and rewards those with capital assets (mostly, people who grew up from birth onwards with incredible advantages).  The problem with austerity as the prescribed path to prosperity is that it doesn’t work.

Obama’s speech, says Lind, gave “a capsule summary” of mainstream progressivism.

In the period after World War II, a growing middle class was the engine of our prosperity. Whether you owned a company, swept its floors, or worked anywhere in between, this country offered you a basic bargain – a sense that your hard work would be rewarded with fair wages and benefits, the chance to buy a home, to save for retirement, and, above all, to hand down a better life for your kids.

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The importance of redistribution

by Linda Beale

The importance of redistribution

I have dedicated ataxingmatter to a concept I call “democratic egalitarianism”–the idea that individuals flourish best in a free society that allows them to choose democratically the rules that govern their lives, with the understanding that the institutions must be sustainable and must allow all individuals to flourish, not just a select few. It is that latter idea that supports a view of egalitarianism–not that everyone is always “exactly” an equal of others, but that the society’s resource allocation provisions have to counter the tendency for resources to concentrate in the hands of a powerful few. Since there can be no absolute equality, society’s institutions must counter the tendency for wealth and power to aggregate in the hands of those with more wealth and power by mandating downward redistribution of wealth and power.

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If I were writing that piece

Here is an interesting way to deal numbers, with the complete post to be read from the link:

Obama taxes us into recession  (Mish’s musings)

Withheld income and employment taxes have been running about 8.3% higher year over year, comparing the same 33 business days between Tuesday, January 8 and Monday, February 25.

Regardless, there is no doubt that the Obama Administration has taxed us into a recession. Congratulations.

Lifted from several e-mails in response to the link being sent:

Ken Houghton:    If I were writing that piece, it would be about how the cuts in taxes last year are the only thing that allowed people to pretend we were in a recovery, which has otherwise been jobless. (Check out YoY for 2009 to 2010 or 2010 to 2011.) Krugman is probably right not to dismiss out of hand the idea that you can sustain economic growth with a plutocracy, but it’s not at all an even odds bet.

Personal income was just released; down 3%.

The game with numbers was to treat the employer side of SocSec tax as if it would otherwise be circulating. It’s more accurate to think of that as I than C. (I would argue all of SocSec payments are I–a “forced savings” program, as it were–but that’s a sidebar.)

And we know that those monies were not being reinvested last year. (See Steve Roth’s post a couple of days ago.). Will be interesting if we see Excess Reserves start to fall when those tax payments all come due.

And a sad thank you, Mike. You and I may have improved our lot last year, but that was the exception, not the rule, and not without painful transition.

How we call extended joblessness and growth based on consuming savings a “recovery” befuddles me.

Dale Coberly: As I may have tediously tried to point out elsewhere, rescinding the tax holiday is not a tax raise.. it is the end of a government “stimulus” funded by borrowing, unnecessarily attached to the payroll tax for devious political purposes. the SS “tax” is always circulating… it goes to benefits to the otherwise poor elderly who spend it right away. unless you are going to fund those benefits by borrowing or taxing the rich, reducing the payroll tax would reduce “circulating” by the extent to which people “saved” that money for their eventual retirement… assuming they could find a way to “save” it, given the fact that no one is “investing.” i guess we could go back to gold coins buried in jars in the backyard. that should be good for the economy.

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Negative externality or just raising money

Lifted from one of David Zetland’s Aguanomics musings on how our conversations mix things up:

Gasoline taxes are often justified as the response to a “negative externality” of pollution from cars, but the money from those taxes rarely (never?) goes to people who suffer from pollution. So is it really a tax on an externality or is it just a way of raising money?

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Romney Says He’ll Shoot Farm Price Supports, Draught Relief and Veterans’ Benefits, Right Along With Big Bird!

Slate’s William Saletan has a terrific article there today, with a terrific title: Tax Evasion: Romney’s preposterous arguments for not telling you which tax breaks he’d abolish.  And, yes, elsewhere, too, mainstream-media folks are showing some morning-after queasiness about their debate verdict, by getting into the “um … huh?” stuff now.
But in pointing out that Nixon really doesn’t have a plan to end the Vietnam War—er, I mean, that Romney doesn’t really have a plan to balance the budget—they’ve been talking mostly about Romney’s refusal to identify the tax loopholes and deductions he’ll end. They haven’t mentioned much Romney’s other demonstration of, um, willingness to be specific about extremely important budget matters: His statement that he’ll end all programs that, in his opinion, aren’t worth borrowing money from China for. 

Which include Medicaid and Sesame Street.  But what other programs?

The effective end of federally supported Medicaid is obviously too serious a subject to joke about, and it needs much more attention from the news media than it’s getting—as well as from the Obama campaign, which should put up ads featuring nursing home residents and nursing home owners; i.e., small-business owners who are jobs creators, to explain the issue.

But Obama also should say—yes, say—when he’s campaign in, maybe, Iowa, eastern Colorado, Wisconsin and North Carolina that Romney doesn’t think farm subsidies, flood insurance, hurricane and tornado disaster relief are worth borrowing money from China from. 

And when campaigning in North Carolina, Virginia, Ohio and, well, everywhere else, he should say that Romney doesn’t think veterans’ benefits are worth borrowing money for China for.  And that that might make it harder to recruit those additional 100,000 people into the armed services that he says he wants to add, although of course he might just have a military draft in mind.  You never know; he’s not all that keen on revealing specifics, after all.  (Does Romney ever think beyond the end of whatever sentence he’s mouthing at the  moment?)

Seriously. The only way to start to nail down Romney’s plans is to start actually filling in his blanks.  Say, outright, that Romney plans to end farm price supports, drought relief, disaster relief and veteran’s benefits.  Romney then will have to say that he has no such plans.  Great! Then say that Romney plans to shut down the FDA and the National Transportation Safety Board; a few hundred deaths from dangerous medications and airplane crashes each year aren’t worth borrowing money from China to prevent.  Not when you have more important needs, such as incessantly spiraling tax cuts for the wealthy. 

Which, despite his Wednesday protestations, he does think are worth borrowing money from China for.

Or here’s another idea: Let’s develop a contest in which the winner accurately predicts Romney’s selections for Programs Worth Borrowing From China For.  And a bonus contest in which the winner correctly calls the tax loopholes and deductions eliminated in Romney’s tax-code revision plan.

The winners will be announced on the same day as the announcement of the Publishers Clearinghouse winner for 2015. The prize?  We can have another contest to guess that.

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Spain. Please, Mr. Obama, talk about Spain. Please.

ROMNEY: Look, the revenue I get is by more people working, getting higher pay, paying more taxes. That’s how we get growth and how we balance the budget. But the idea of taxing people more, putting more people out of work, you’ll never get there. You’ll never balance the budget by raising taxes.

Spain — Spain spends 42 percent of their total economy on government. We’re now spending 42 percent of our economy on government. I don’t want to go down the path to Spain. I want to go down the path of growth that puts Americans to work with more money coming in because they’re working.

LEHRER: But — but Mr. President, you’re saying in order to — to get the job done, it’s got to be balanced. You’ve got to have…

(CROSSTALK)

Romney doesn’t want to go down the path to Spain?  Oh?  Well, since, actually, the percent of Spain’s total economy that they spend on government has nothing at all to do with Spain’s situation now, and instead has everythingto do with the fact that they had a huge, huge housing bubble, worse even than ours, and since their housing bubble is—like ours—the main cause of their economic problems, and since Romney wants to repeal the Dodd-Frank Wall Street and Mortgage-lending regulations and replace them with regulations that favor Wall Street … then, yes, Romney does want to go down the path of Spain. 

Or at least down the path we took during our deregulation juggernaut.

OK, here’s the thing: Romney and his campaign aides recognized that that debate forum would present a perfect opportunity for him to just rattle off statements without any challenge.  Just a steady stream of nonsense, without any real risk of being confronted with actual challenges to any of it.  They knew, as I did, that Lehrer—I still remember his nauseating role in the first Bush/Gore debate in 2000—does nothing but ask the candidates to state their positions on whatever.  Open-ended questions in which each one is supposed to state his policy proposal on, say, taxes, or “jobs.” There’s no actual questioning about the proposal.  None.  None.

So, Romney gets to state, free and clear, a completely false inference of fact about the cause of Spain’s economic problems.  And he gets to say, free and clear:

Look, the revenue I get is by more people working, getting higher pay, paying more taxes. That’s how we get growth and how we balance the budget. But the idea of taxing people more, putting more people out of work, you’ll never get there. You’ll never balance the budget by raising taxes.

Really?  You’ll never balance the budget by raising taxes?  Oh? Didn’t we do exactly that during the Clinton administration?

And, the revenue he gets is by more people working, getting higher pay, paying more taxes?  Oh? Through the same policies as George W. Bush did?  Really?

And so forth. 

Like, that Romney is going to cut tax rates across the board by 20%.  But he’s not going to lower tax revenue from the wealthy at all.  And so forth.

What Obama needs to do—really, really needs to do—is put up a series of ads juxtaposing Romney’s earlier statements with his gibberish from last night. (I strongly urge using a clip from Romney’s speech to the Detroit Economic Club in February, and a similar speech that same week in Arizona; Michigan and Arizona had their primaries on the same Tuesday.)  But rather than just suggesting that Romney is a slippery liar who’s trying to trick voters into putting into office a team that would put in place drastic, basic changes that he knows a substantial majority of the public doesn’t want, Obama should pretend that Romney just doesn’t know the facts and can’t do simple math.  He is, in other words, not very smart, or at least not very well-informed. 

The public, of course, will recognize that Romney’s a sleaze bucket. But Obama can just say, for example, that if Romney doesn’t know that during the Clinton years, we had a balanced budget, he’s too ill-informed to be president.

And, about that Spain thing: The final debate will be about foreign policy.  Which, Obama should point out, requires some knowledge of such things as what actuallycaused Spain’s economy to crash. And then he should educate the public about it.  He can do that in two or three sentences of medium length.  If he wants to see how it’s done, he can read any one of several Paul Krugman columns in which Krugman did exactly that.  It’s not rocket science.  It’s not even economic science.  It’s simple, established fact.  Of exactly the sort that not long ago Romney’s pollster said the Romney campaign wouldn’t trouble itself about, and that it would instead continue to make up its own facts.

Speaking of good way for the Obama campaign to get a message across in an ad ….

The bottom line: Obama can easily turn Romney’s performance last night into a plus. 

Easily.  Really.

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Typo-corrected 10/5.

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Romney says he never paid less than 13% in taxes for any of the last 10 years. But how much would he pay each year once the Ryan plan is passed?

… And when, exactly, did he pay that at-least-13% per year?  Might some of it have been paid under the 2009 IRS amnesty plan for people who’d been hiding money in secret overseas bank accounts, after the Swiss banks suddenly agreed to reveal to the IRS the identities of American account holders?

Just wondering. 

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Romney says he likes straight talk. Just not from him.

Washington may not like straight talk, but I do.

— Mitt Romney, yesterday

Sooo, Governor, about those massive tax cuts for the wealthy ….  You know, including the elimination of all incomes taxes on capital gains and stock dividends, which your running mate’s budget proposal includes?  How, exactly, do you plan to balance the budget despite that loss of revenue?

No, no, no.  I mean, how, exactly, do you plan to do that?

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