Investment, Consumption, and Progressive Taxation
Hey remember me? Just a quick driveby to start some discussion.
Classical, neo-classical, and neo-liberal economics all share a common mistaken psychological premise, one that is simple but deep, and in itself explains why they don’t understand the aims of Progressive Taxation.
Label it how you like, the academic discipline that emerged from England in the 18th and 19th century implicitly, hell I’ll make it stronger, explicitly assumed that the goal of capitalism is accumulation, i.e. getting more an more numbers on the right side of the ledger sheet. Which assumption seems blindingly obvious, which is why it is simple and goes so deep. In this model taxation on gains from capital serve to displace investment on the equally simple assumption that if you tax something people do less of it. Again perhaps blazingly obvious.
But it doesn’t hold up well against the historical record either narrowly considered in relation to 18th and 19th century England or more broadly across cultures and across history. Instead in most of those cultures and most definitely in Georgian and then Victorian England the evidence is strong that capitalists saw investment as the means to different ends, those of consumption and display that in turn would lead to societal status. You only have to look at the great Country Houses that were built during this period, with no expenses spared inside or out whether that be on landscape architects or silversmiths. And even a passing familiarity with say English literature of the time shows this on full display, the manufacturing classes rushing to build those country houses and buy their daughters way into society as soon as they could afford it, the facts on the ground clearly show that the driving goal of most investors was to finance consumption and display in the form of dress and habitations. Let us put it this way Scrooge was not then or now considered the hero, and throughout history the miser has been a despised and mocked figure.
Now this runs directly against the “blindingly obvious” assumption that the goal of investment is purely accumulation. So what happens when we substitute ‘consumption and display’? Well a couple of things. First we can recognize that under some circumstances accumulation IS display, rankings on the list of ‘the most wealthy X of Y’s’ being just as important as more explicit displays of status on the British and European pattern. And since the U.S. doesn’t have patents of nobility, this aspect of accumulation as display has an outside importance. But in any case none of it seems to effect the other side of the equation, very few billionaires not named Warren Buffet actually resist the temptation to buy the multiple mansions, the penthouse apartments on Central Park, the yacht, the vacations in the South of France, the jewelry, the trophy or society wives (depending on whether they are new or old money). You just don’t have the MOTUs reinvesting every single penny, instead when given an opening they can and do spend and often in the most conspicuous ways possible, there not being much difference between an American billionaire of today and a 16th century British Duke or more to the point a 19th century Manchester industrialist in this regards. Instead re-investment is often seen as just the vehicle needed to climb to the next consumption level.
So what does this have to do with progressive taxation? Well once you accept the assumption that the fundamental goal of investment among the upper classes is consumption and display and further that in most cases that consumption doesn’t have the multiplicative effects on the wider economy that re-investment would then the goal of progressive taxation becomes obvious, and by the way a lot less socialist than the old shibboleth of redistribution. The goal of progressive taxation in the classical political liberal position dominate in this country from 1913-1980 was to penalize consumption and favor re-investment. After all at least under current law gains on capital are by and large not exposed to federal taxation until they are realized, if instead they are plowed back into productivity improvements they are at the corporate or individual level largely tax exempt. It is only when you take the equity out in the form of interest, dividends or simply cashing out equity that tax is encured.
The logical conclusion of this model is that if we accept the principle that to tax something is to induce people to do it less, if nothing else by increasing its marginal cost, then Supply Side becomes the Voodoo the Elder Bush always said it was. Lowering top marginal rates and taxing capital gains at half the rates of capital income would under my model have the effect of encouraging consumption and discouraging reinvestment. Whereas high rates would have the opposite effect. Which has the advantage of being testable, if we had to constrast the 50s and the 80s in terms of the consumption patterns of the near the top level of capitalists and managers we see a lot less conspicuous consumption among the former than we do in the post Reagan-era. In the 50s and 60s only Greek shipping magnates could afford the kind of consumption patterns that became common in before, during, and after the Enron era and certainly continuing today. From my perspective all Supply Side did was to lower the cost of consumption in pre-tax dollars, purchases that were inconceivable in the days of 90 and then 70% top rates have become routine in the days of 15%.
Which suggests that the current neo-liberal surrender to the idea that any increase in tax on capital inevitably will lead to disinvestment, almost as if it were an accounting identity, when history suggests the effects are the other way around, capitalists wanting to maintain the same level of consumption in a higher tax environment simply needing to intensify their re-investment rather than lazily take those gains out in the form of salaries, bonuses, and dividends.
You could sum up the whole argument by saying that Manchester and allied schools of economics assumes that everyone behaved like a Northern European Calvinist Burgher, or more narrowly that the triumph of capitalism was represented in the premises of Scrooge and Marley.
BTW this substitution of ‘consumption’ for ‘accummulation’ has explanatory powers far outside the narrow confines of capitalist taxation. A great deal about peasant economies that have historically baffled both branches of liberal economics, that which led to Chicago and that which gave us Marx, in my view stemmed from not getting that most peasants even in the strictest systems organized their economic life around consumption targets rather than growing net worth (say by acquiring more fields). You get a strong whiff of this with the modern bafflement that the French would substitute 35 hour weeks with seven weeks of vacation for longer hours that would lead to higher net worth. Do they not want to get rich? Well yes, but to what end? Adopt a consumption based model and lots about the European system and early retirement here starts making perfect sense.
Bruce,
After all at least under current law gains on capital are by and large not exposed to federal taxation until they are realized…..It is only when you take the equity out in the form of interest, dividends or simply cashing out equity that tax is encured (incurred).
This isn’t true. There is the corporate income tax, with a top marginal rate of 35% (same as personal income tax). Then there is an additional 15% to the recipient of dividends or capital gains.
if instead they are plowed back into productivity improvements they are at the corporate or individual level largely tax exempt
This isn’t true either. Capital investment is not tax deductible, it is capitalized and amortized over a number of years, at least 7.
This kind of cuts the foundation out of your theory.
Bruce
it’s even simpler than that. on about page one of the Econ 101 text they have a graph of “the productivity horizon” or some such in which they show the trade off between consumption now and investment for consumption later. the only reason for investment is to increase future consumption. at some point someone has got to do some consuming. or there is no demand for investment.
second point.. when the government taxes, those taxes might be used for “present consumptioin” like feeding the army, or they might be used for “investment” like roads or research or feeding the army.
what’s this? well feeding the army is an investment in being able to conduct your business in the future without having to learn to say yassuh boss in german, russian, or chinese.
the trouble with the true believers is that they are liars. none of them would for a minute hesitate to spend on “consumption now.” but they are hell bent on not letting the poor waste valuable money that could be invested in, say, internet stocks, by buying food or shoes,
and no, they dont know they are liars. they just recite their catechism and then stop thinking.
Sammy
even if you are right about the corporate income tax, it hardly cuts the foundation out of Bruce’s theory.
trouble with most people, not only you, is they think of an argument, then they imagine they have answered the whole question, then they stop thinking.
i don’t know much about corporate taxation, but i’d bet a corporation can do a better job of hiding “income” than the IRS can do of finding it.
and in any case, as you well know, the corporations just pass the tax on to their customers. at least that’s what they tell us when they want us to vote against a tax on corporations.
and to make the point i trying to make to Bruce, below, eveyone who is not an idiot knows that when you tax someone, corporation or person, you reduce the money they have to spend or invest. and you do it anyway because the country needs to invest or spend the money somewhere else.
whether the country’s “needs” are more important, or better investment, is what we have elections and a congress for. but when the congress is full of insane people who believe that NO government spending is as important as the most foolish personal spending, well then you have a country on the way to extreme poverty, where even the “rich” have less than they would have if they understood that “cast your bread upon the waters” is true about money as well as about more spiritual gifts.
Bruce,
But I am willing to be instructed. If you have valid links.
Your open mind is appreciated. But I can’t teach a course in finance, one in accounting, and one in tax in a comment box.
However, I can see the value in using the tax code to encourage investment, which is the point of your post.
What if we were to swap the rates? Lower the corporate tax rate to 15% and raise the dividend/capital gains tax rate to that of normal income (top rate of 35%). This would discourage dividends, and therefore increase the amount of cash in the business, perhaps encouraging investment by osmosis. A 15% tax on marginal income also would improve pro forma returns on future investment.
Lowering the corporate rate would also reverse that pesky transfer pricing problem. Currently the US has one of the highest corporate tax rates in the world, so multinationals arrange their internal pricing to show profits in jurisdictions with lower tax rates (for example Canada is at 15%). This is one way the multinationals, like GE, pay so little US tax.
Even worse, this makes overseas investment more attractive (all other things being equal). And even, even worse the US has a 35% repatriation tax, so that those profits are discouraged from being returned to the US for investment here.
If we were to lower the corporate tax rate, we would 1) reverse the transfer pricing games and the multinationals would pay more tax here, 2)en courage investments here, and 3) allow potential investment capital to be returned to the US. To me this is “blindingly obvious.” but it is not often discussed.
btw
you are wrong about capital investment not being tax deductible. even if you spread the deduction over a number of years.
Sammy
it seems to me that one way or another the corps can afford the lawyers to find a way to game the system. or write the rules.
what offends me about this is the whole idea of using the tax code to “encourage investment.” we are not starved for useful investment. we need to use the tax code to pay for the country’s needs… however defined… and if corporations want to play games with off shoring, we need to tax them when they try to sell in this country. smoot hawley days are long gone.
you can’t run a country when all of your congressmen and presidential advisors are whores for the rich…. that is the rich who hire whores. there are plenty of honest rich, but they aren’t the problem.
Bruce, nice to ehar from you again. Drive by more often.
I don’t have the energy to get involved in this debate, but I always wonder if economists would understand all of this better if they were at the conference table when the business and personal decisions were made.
Sammy thanks for that. the only problem is that the average effective rate for corporate taxation is fairly close to 15% anyway and entities like Big Oil and God Help Us News Corp are actually operating at negative tax rates. So I am not convinced your analysis would stand up to real world political reality. Particularly since we have one party willing to default on the debt rather than closing some loopholes for Big Oil.
It seems that support for Flat Tax on the Right extends right up to their own corporate tax credits and then stops. Funny that.
The whole idea that those with capital need encouragement to invest is false. No matter the tax level they will always invest. Why? Inflation. That is the greatest and most cost effective way to encourage investment.
Jim this seems like an elegant way of saying what Kimel says when he tries to account for his statistical findings relating top marginal income tax rates to economic growth. I have become convinced that when top marginal individual income tax rates are high, the high tax rate falls upon what you aptly call “consumption and display” and discourages such behavior in favor of investment, particularly when such investment is taxed at a lower rate. Note that top tax rates on corporate profits were much lower than the top individual income tax rate prior to the 1980s. When the rates are similar, like today, other tax incentives to encourage investment are weaker: investment tax credits, depreciation rules, and rules regarding the categorization of spending as capital investment versus expenses (all of which have varied over time) and deductable expenses that are investments but not so-categorized by the IRS.
I was looking at some IRS data the other day and noted that the top 1 percent of income tax filers in 2007 averaged AGI of $1,400K, and paid 22.5 percent in income tax. The top 1 percent in 1980 averaged (inflation adjusted, using the BLS calculator) $373K, and paid 34.5 percent in tax. Average real after-tax annual income increased by a factor of 4.5. That’s $1.3T in gain for 2007 available to the highest earners to invest anyplace (real estate, off-shore, whatever) or to use for real added consumption/display. This enhanced freedom arguably hasn’t been as beneficial to the economy as many had hoped.
If you look at the numbers for big oil, the effective tax rate including foreign taxes but not royalities is above 35%, it is shown in the annual report. Yes the US tax rate is low but partly that is because 30% or less of their business (and declining) is done in the US, there is not the demand in the US to justify more investment else why did Marathon and Conoco Phillips decide to split up, the E&P makes more money than the refining and marketing part. I keep wondering why the big US companies don’t move their HQ to Bermuda or the Carribean, and only pay US taxes on the US business.
I am glad to have read this entry. To me it’s quite obvious that lowering marginal tax rates leads to decreased business investment. I guess I visualize it in a slightly different way, not so much from the consumption-centered perspective.
Money, much like electricity, follows the path of least resistence. The resistence for money is risk and taxation. Profits can either flow out as income, bonuses, and dividents; or they can flow back into the company for expansion, improvements, etc. When we lower marginal tax rates, we incentivize profit taking at the expense of building up the equity side of the business. If invensting into expanding your business carries the risk of 50c on the dollar, and the marginal tax rate is 35c, you would take the profits. To consider a degenerate case: there’s no tax on profits at all. Why would you want to expand or improve your coffee shop? Why would you want to spend the money on the new espresso machine? You’re taking the money directly out of your pocket. Without taxation, there are no deductions; with low marginal tax rates, the value of deductions decreases.
This post is great, Bruce! And fits in well with at least one of Krugman’s posts today, debunking the Reagan Miracle. I’ve seen similar arguments before (I was most impressed by James K Galbraith’s book Predator State) and historical records as presented today by Krugman and previously here at at Presimetrics. In short, lower tax rates to not grow the economy or provide positive social benefits, though they do permit some people to waste money on a grand scale to impress their friends, while others get little, nothing, or even less from increases in productivity due to technology, etc.
I’ve linked both your post and Krugman’s in a debunking of movement conservative economics.
http://verydeepleft.blogspot.com/2011/07/best-graph-debunking-movement.html
Bruce Webb – “Sammy thanks for that. the only problem is that the average effective rate for corporate taxation is fairly close to 15% anyway…”
The following tax analysis sources among others disagree:
U.S. MULTINATIONAL CORPORATIONS
Effective Tax Rates Are Correlated with Where Income Is Reported
GAO
August 2008
http://www.gao.gov/new.items/d08950.pdf
– “The average U.S. effective tax rate on the domestic income of large corporations with positive domestic income in 2004 was an estimated 25.2 percent.” This excludes any consideration of overseas income and applicable effective tax rates.
– “The average U.S. effective tax rate on the foreign-source income of these large corporations was around 4 percent, reflecting the effects of both the foreign tax credit and tax deferral on this type of income.”
– “To estimate the average effective tax rates faced by U.S.-based businesses we used data that the Internal Revenue Service’s (IRS) Statistics of Income division (SOI) collects from a variety of corporate tax forms and schedules.”
– “The weighted average U.S. effective tax rate on the domestic income of large corporations with positive domestic income in 2004 was 25.2 percent, while the median effective tax rate for this population of corporations was 31.8 percent. However, as figure 1 shows, under these two summary measures there was considerable variation in effective tax rates across taxpayers. At one extreme, 32.9 percent of the taxpayers, accounting for 37.5 percent of income, had average effective tax rates of 10 percent or less; at the other extreme, 25.6 percent of the taxpayers, accounting for 14.8 percent of income, had effective tax rate over 50 percent. The average effective tax rates for the remainder of the taxpayers were fairly evenly distributed between these two extremes.”
Global Effective Tax Rates
April 14, 2011
http://businessroundtable.org/uploads/studies-reports/downloads/Effective_Tax_Rate_Study.pdf
– “Companies headquartered in the United States faced an average effective tax rate of 27.7 percent…” during 2006-2009
– “For example, the average effective tax rate faced by U.S.-headquartered oil and gas companies for the period was 42.1 percent, compared to a 32.2 percent rate for non-U.S.-headquartered oil and gas companies.”
– In 2006, the average effective tax rate was 28.5% for U.S.-headquartered companies.
– In 2007, the average effective tax rate was 28.8% for U.S.-headquartered companies.
– In 2008, the average effective tax rate was 27.6% for U.S.-headquartered companies.
– In 2009, the average effective tax rate was 25.7% for U.S.-headquartered companies.
The Effective Corporate Tax Rate Is Falling
originally published in Tax Notes on January 22, 2007
http://www.tax.org/www/features.nsf/Articles/9B96723BDBA236078525744B0060BAFA?OpenDocument
– “The five-year average effective corporate tax rate for 1997- 2001 was 29.7 percent.”
– “The average for 2002-2006 was 25 percent.”
– “The recent surge in corporate tax revenue has been accompanied by a decline in estimated effective corporate tax rates that is not explained by changes in tax law.”
Corporate Tax Reform Must Come at a Price
Martin A. Sullivan | Jan. 21, 2011
Congressional Testimony
Classical, neo-classical, and neo-liberal economics all share a common mistaken psychological premise, one that is simple but deep, and in itself explains why they don’t understand the aims of Progressive Taxation.
Label it how you like, the academic discipline that emerged from England in the 18th and 19th century implicitly, hell I’ll make it stronger, explicitly assumed that the goal of capitalism is accumulation, i.e. getting more an more numbers on the right side of the ledger sheet.
Err, no. As Adam Smith pointed out, the purpose of all production is consumption. Not accumulation. It was Marx who went on about accumulation and us classical liberals tend not to get our insights from him.
“Instead in most of those cultures and most definitely in Georgian and then Victorian England the evidence is strong that capitalists saw investment as the means to different ends, those of consumption and display that in turn would lead to societal status. You only have to look at the great Country Houses that were built during this period, with no expenses spared inside or out whether that be on landscape architects or silversmiths.”
Umm, it wasn’t, generally, the manufacturers who built the great country houses. It was the landed gentry. The Frys, Cadburys, potteries owners, steel magnates etc weren’t the people building the great mansions. It was the landowners.
Worstall the mistake made here is to cast the actual philosopher/author Adam Smith as the founder of modern academic economics. You would do far better to give that role to Vulgar Adam Smithists who much like Vulgar Marxists never got beyond the sound bites of the first couple of books of Wealth of Nations just as the latter never got to vols 2 and 3 of Capital.
I am always amused when economists ‘explain’ that the ‘real’ Adam Smith, the ‘real’ Malthus, and the ‘real’ Ricardo were not as simplistic as the doctrines that emerged under their names even as they don’t actually seem to require their undergraduate or even graduate students to engage with the full range of the ‘masters’ masterworks. There is more than a whiff of Plato’s Philosopher Kings as mediated by Leo Strauss. Gosh if you only knew what I knew!
In other words live by the cartoon version, die by the cartoon version.
For example I am not as interested in the qualifications made by the early Hayek in the full version of his work or the modifications in his theory made by the latter Hayek as I am in the literal cartoon version he authorized to be distributed under his name: http://www.mises.org/TRTS.htm Which has turned into the play book for the Tea Party whose understanding starts and stops with those 18 cartoon panels.
Back to accumulation vs consumption. The logic of Supply Side is that economic decision making is crucially dependent on changes at the margin which in turn implies that everyone has an ROI calculator hard wired into their brain that decides that 33% rates are barely tolerable but 35% rates means pulling up stakes and moving to the Cayman Islands. Or Galts Gulch. This only works logically if you believe that all of these decisions are resting on a knife edge of ROI and that the results that matter are the ones on the ledger and not the ones in the larder.
Or not. Hey it was a blog post. But one based on an actual study of the agricultural economy of pre-industrial England which shows that Homo Oeconomicus simply didn’t behave in ways that the theory under Supply Side would require that he do. To summarize drastically (which I case would make me a Vulgar Bruceist) medieval peasants and lords alike tended to work just enough to achieve particular consumption goals, and even those with a little more ambition were mostly not motivated by Scrooge like tendencies but instead by a desire to move up a consumption level.
I am perfectly willing to admit that Adam Smith is right. I am not as willing to concede that anyone in the Chicago School of Business actually read book 5 of Wealth of Nations or equivalent sections of Ricardo or for that matter Marx. Most economists seem to have internalized ‘Invisible Hand’ and ‘comparative advantage’, rejected ‘Labor Theory of Value’ and then moved onto the calculus. With regrettable policy results in such varied areas as minimum wage, trade and tax policies.
On the country house issue I may have projected behavior more attributable to late medieval and early modern merchants to actual industrial magnates of midland England. But I hardly think that most of those folk were content to live in the equivalent of semi-detached council housing.
The question would be how many of those manufacturers aspired to be landed elites. In this country that impulse was pretty strong with urban elites rushing to build large estate properties in what were then rural areas of Connecticutt and upstate New York and/or to build equivalent mansions/apartments in the City. But whether country house or town house the argument from consumption doesn’t change much.
PJR’s argument proves the conservative case: lowering the top tax rate actually increased tax revenue from the top 1%. His statistic shows that this average filer now pays 2.45 times more in income taxes than they did in 1980 (315k vs 128.7k). The question now becomes, “Is tax policy about revenue or perceived fairness?”
Great post, though I am as suspect of some of the a priori assumptions here as in all “modern” and classical economic thought.
I am not an economist though had the great good fortune to take several graduate courses with Michael Hudson and Robert Heilbroner many years ago.
I believe that the rational expectations model used by many economists have it all wrong. And I believe you nail that fairly squarely. First, the notion that the ultra-wealthy either invest in any meaningful sense or do anything to create jobs is sheer nonsense. They primarily buy pieces of paper that represent existing assets – buying ten thousand shares of existing Apple stock produces nothing. Lowering taxes actually agressively disincentivizes investment because it increases wealth for the very wealthy by allowing them to simply “clip coupons” or sell appreciating existing assets for capital gains to maintain and expand their wealth. Real investment in tangible productive assets involves risk – often real risk. Thus the rational thing to do when taxes are lowered is to not invest. I am able to keep more of my wealth without real investment risk.
The beauty of the multiple step income tax charts of the era before Reagan was what many rational expectations folk saw as its weakness: so-called bracket creep. Small step tax increases as income increased was a positive good. It only increased taxes by relatively tiny marginal amounts as incomes increased. All that was needed to eliminate the inflation component was indexing to inflation. Instead, we reduced the number of brackets in 1986. guaranteeing marginal rate shock when incomes rosefrom bracket to bracket.
Small (one or two percent) small increases in top marginal rates ($10 or $20 dollars per $1000) would have an almost negligable effect on the vast majority of people’s consumption, especially if rate were indexed for inflation. Those at the top of the tax rate pyramid would be asked to pay less in nominal terms on income from risk capital, hopefully encouraging real investment.
Kevin –
It proves nothing. You have not adjusted for inflation, so your comparison is meaningless.
Inflation of 3.04% for 30 years causes an increase of 2.45 x.
CPI Inlation from Jan. ’80 through April ’11 has averaged 3.63 %*, which would have resulted in a 2.91 x increase. The difference between 2.45 x and 2.91 x is excess wealth accumulation by the top 1%, simply due to tax policy, and ignoring everything else that has skewed income to the top.
You have put forth a typical right wing argument: shallow, poorly thought-through, and ultimately flat-asses wrong.
Cheers!
JzB
* My calculations, Data from http://research.stlouisfed.org/fred2/series/CPIAUCSL
Bruce and Walter –
Bravo! Very cogent.
Cheers!
JzB
jazzbumpa,
The income was adjusted for inflation already. Maybe you don’t know what “inflation adjusted, using the BLS calculator” means. Better do your “calculations” again. LMAO.
Kevin it is about economic growth, not just about revenue and fairness. And those IRS statistics show your “conservative case” to be 99 percent wrong: average real income taxes paid by folks in the bottom 99 percent went DOWN, not up. Their real AGI rose 0.67 percent per year over those years (compared to 5.09 percent for the top earners), so maybe the “conservative case” applies only to the highest incomes levels when they grow rapidly.
jazzbumpa,
The income was adjusted for inflation already. Maybe you don’t know what “inflation adjusted, using the BLS calculator” means. Better do your “calculations” again. LMAO.
“Kevin it is about economic growth, not just about revenue and fairness.”
And to that end, the facts MAY support your case. My point is that, contrary to the rhetoric we hear today, descreasing the top tax rate has not resulted in decreased revenue from the top income earners. Instead, it increased revenue from the top brackets.
“And those IRS statistics show your “conservative case” to be 99 percent wrong”
To be fair, the average real income tax paid by folks in the top 20% went up substantially (much higher than the rate of inflation), as did their income. Up to this point, I think we can agree on a couple of points: Since 1980, income inequality has increased. Also, tax revenue from the wealthiest income tiers has also increased (per capita and as an overall group), even though their tax rate decreased.
Bruce,
See, now you’ve done it. You put up a thought provoking, though erroneous, post and now you have well meaning but financially illiterate, acolytes holding up shoes on a string like in Monte Python.
Google “UFOs built the pyramids” and you will find numerous supporting articles.
Google “Elvis is alive” and you will find numerous supporting articles
Google “Higher tax rates increase investment” and you get crickets.
Kevin,
Part of the argument of cutting taxes on the top income groups was that it would increase economic growth.
Now, what we’ve observed is this:
1. annualized real economic growth from 1950 to 1980 was about 3.8%, and from 1980 to 2010 it was about 2.8%. Simple subtraction shows the economy grew an average of 1% a year faster in the 30 years before 1980 than in the 30 years since.
2. gross federal debt (see OMB historical table 7.1) shrunk from about 94.1% of GDP to 33.4% of GDP in 1980. By 2010 it was back up to 93.2%. I would characterize some amount of the growth we’ve observed from 1980 to the present to be not real growth but rather borrowed money.
3. Tax receipts as a percentage of GDP were equal to 14.4% in 1950, 19% in 1980, and 14.9% in 2010. Essentially, whatever increase occurred from 1950 to 1980 disappeared between 1980 and the present, even accounting for the fact that growth was so much slower as noted earlier. The obvious conclusion – the increased tax collections from the top marginal tax payers comes as a result of their taking a bigger piece of the pie. Nothing wrong that if it increases growth and makes everyone better off, but the evidence doesn’t point to that being what happened.
No, I just need to read more carefully.
Cheers!
JzB
Kevin I checked the numbers before agreeing with your point about average real income taxes rising for the top 20 percent, not just the top 1 percent. The IRS provided data on the top 25 percent, so that’s the closest I can get. The average amount of taxes paid (inflation adjusted) by the top 25 percent minus the top 1 percent: $15,211 in 2007, up $62 after 27 years. I consider the difference clearly to be in the noise. You may be correct for the top 10 percent or top 5 percent, but I’m too lazy to check right now and I don’t think it would significantly change my general point about the “conservative case” applying only at the very top. Essentially the “conservative case” is wrong, except insofar as it is mathematically true that if the income of a person quadruples and he pays half the tax rate, he will double his total income tax payments–something roughly like this happened for the highest earners between 1980 and 2007, but obviously not for most people.
“Kevin it is about economic growth, not just about revenue and fairness.”
And to that end, the facts MAY support your case. My point is that, contrary to the rhetoric we hear today, descreasing the top tax rate has not resulted in decreased revenue from the top income earners. Instead, it increased revenue from the top brackets.
“And those IRS statistics show your “conservative case” to be 99 percent wrong”
To be fair, the average real income tax paid by folks in the top 20% went up substantially (much higher than the rate of inflation), as did their income. Up to this point, I think we can agree on a couple of points: Since 1980, income inequality has increased. Also, tax revenue from the wealthiest income tiers has also increased (per capita and as an overall group), even though their tax rate decreased.
This arguing over corporate effective tax rate is a divergence from the focus of Bruce’s post. What ever rate is the final effect on corporate tax it is income that is being taxed, not capital. Corporations want individual identity rights. One of those is tax on income. That doesn’t change the validity of Bruce’s argument. The behavior of the extremely wealthy is well documented and consumption is a primary motivator. The motivation to accumulate is only evident when the conversation is focused on the need to raise revenue through taxation. The less tax an individual or a corporation pays the more capital each will accumulate and the result will be the greater the level of consumption. It’s still consumption that is the driver and every method to accumulate, including bogus arguments regarding the effects of taxation, will be brought to bear. Those may include financial skulduggery as in the recent past. Also included will be out right theft on a grand scale ie Madoff’s Ponzi, Enron, lobbying the Congress, control of the media, etc.
Dimm makes an that an excellent point and to build upon that point let’s not lose sight of the fact that with the very limited level of taxation currently enjoyed by those of significant wealth there is sufficient funds available for both reinvestment and grand scale consumption.
I’ve noted here previously and it bears repeating, there appears to be little sign of recession amongst the very rich. Check RE in major cities. Check the sale of $100,000 + automobiles. Look at the ads on the first several pages of section A of the NY Times. There are no ads there for Timex. I’m not talking about chump change income below $300,000. The top One Percenters know better than the rest of us.
Hold on a moment. You’re leaving out one of the more significant effects of higher tax rates relative to reinvestment. Taxes on new income are a hedge against losses on reinvestmed capital. Granted that the two have to have a link to one another, but how often did we once read of one corporation’s interest in purchasing the losses of another? Higher tax rates make reinvestment a no brainer. One needs to produce more income to over come the effect of paying higher taxes. Any such reinvestment for that purpose enjoys the effect of the Treasury sharing any losses resulting from that reinvestment.
Kevin’s point is also misleading in that it disregards the fact that though collected taxes may have increased that increase is not in tandem with the increase in income and GDP. Give me 50% more income and I too will be happy to point out that I paid 10% or even 20% more taxes. What’s the old story about statistics and the truth? Numbers don’t lie, but the analysis is ripe for distortion.
Jack,
Yeah, as usual you imply that any statements which are made on this thread that can’t be supported by facts, analysis, or researched documents don’t matter. All part of your normal BS routine on an economics blog no less.
No one forced Bruce to make his “average effective rate for corporate taxation is fairly close to 15%” claim. Bruce can provide evidence to support his claim if he so desires.
the average effective rate for corporate taxation is fairly close to 15% anyway
For an investment analysis you don’t use average tax rate, you use marginal tax rate, as the investment would be an incremental increase in profits.
Sammy
Reread the replies to your comments. They are cogent when yours are not. Your last comment, above, proves the point as you no additional argument to make other than silly analogies that only you would understand given that they are not valid.
If individual upper income earners are taxed at higher marginal rates and net tax revenues from those individuals decrease, what is the explanation?
If individual upper income earners and corporations are taxed at higher rates in the United States and if both groups increase their investments overseas as opposed to domestically, how does that help the United States in terms of employment, infrastruture updating, and general domestic investment?
An assumption that higher tax rates for individual upper income earners and multinational corporations will result in larger private investments in the United States may not have any truth to it. Presently, there are indications that many of the increased investments by both groups are occurring overseas, not in the United States. This type of problem was observed with some of the stimulus spending, both with U.S. Government contracts and by others.
U.S. Government incentives for increasing investments in private enterprises in the United States need to be addressed in my opinion. Absent that effort, those counting on major increases in domestic investment by individual upper income earners and multinational corporations resulting from higher taxation may be in for a shock.
These questions are raised to offset the normal closed economy thinking that many tax proposals by laymen appear to embrace. There isn’t a guarantee that increased taxation for billionaires, millionaires, and multinational corporations will spur higher levels of investment in the United States when offshore investments provide a higher return on investment. The potential for vastly improving domestic investment with or without increased taxation will be driven in part by government taxation initiatives which offer significant net tax benefits for domestic investment.
Kevin –
Despite my embarrasing gaffe above, your argument is still erroneous.
First, it is ex post reasoning. You are explicitely contending that the rate decrease caused the revenue increase. For this to be true, the revenue increase would have to result from greater economic growth – a rising tide that ought to raise all boats, which it most emphatically has not. (If your argument hinges on something else, please point it out.) But, as Mike has indicated repeatedly, including further down this thread, decreased rates correspond to lower economic growth, so that line of reasoning is refuted.
Your argument is pure Laffer curve – an idea that has never been validated. Granting that it might possibly be correct, there is no reason to believe that either marginal or effective rates in the 22 to 35% range are on the high tax side of the peak. In fact, Mike has also repeatedly indicated a likely GDP max (which ought to more or less correspond with a resulting tax revenue max) in the range of 60% or more.
Further down you acknowledge that the top 1% have captured a far greater slice of the pie. Here lies the entire explanation – it simply falls out of the math. Of course the top 1% is paying more in taxes — they are making a hell of a lot more in income. While their income has increased by 3.75x, their tax burden has increased by only 2.45x.
Simply put, their income increase has swamped the tax rate decrease.
“Is tax policy about revenue or perceived fairness?”
This is a false choice, and stated in a skewed way. It is absolutely about tax policy – which should be set to maximize the general economic well-being, stability and security of the nation. It is also about fairness – real fairness, which does not favor rentiers over people who actually do real work work and generate wealth. It is also very seriously about the stability and security of the country, which can be severely compromised by extreme wealth dispairty.
http://www.washingtonmonthly.com/magazine/julyaugust_2011/editors_note/playing_chicken_with_history030506.php
Cheers!
JzB
It’s obvious that Jack didn’t Google “Higher tax rates increase investment”.
Jack’s normal attacks on sammy are the same old bullshit, short on facts and general investment knowledge. Jack has no clue as to sammy’s professional background.
Sammy there are plenty of websites on how a business can reduce its taxes. Some of the methods are investments for growth/modernization/efficiencies, and some involve paying more compensation to yourself and employed family members (some types of added compensation would amount to shifting the money into individual income taxes–not necessarily a good idea if this meant shifting into higher rates, but that hasn’t been the case in over 30 years). BTW and FWIW, Cato Institute noted 3 years ago that, because of tax law changes, half of business income is now going through the individual income tax system.
“ annualized real economic growth from 1950 to 1980 was about 3.8%, and from 1980 to 2010 it was about 2.8%. Simple subtraction shows the economy grew an average of 1% a year faster in the 30 years before 1980 than in the 30 years since.”
a. Simple multiplication makes me question your growth rates. The real GDP (in 2005 dollars) for 1950 is 2.006 billion. An annualized growth rate of 3.8% for 30 years is much higher than 1983’s GDP, not even mentioning 1980’s.
b. The total inflation from the beginning of 1951 to the end of 1980 was 239.7%. The U.S. inflated its way out of debt during the period. This was at the expense to the average American who had to fight inflation in food/home/energy costs and to their saving. [Total inflation from the end of 1980 to the beginning of 2011 was 151.9%]
c. Annualized population growth in the earlier time period was much higher than the growth rate in the latter era. Factoring in this condition, annualized growth rates for GDP per capita was not very different. Also, look at GDP per capita growth rates for other time periods.
Again, if you’re argument is “Increase the top tax bracket to REDUCE the burden on the wealthiest American tax payers and we think it’ll return us to the economic conditions of the 70s”, go ahead as this will mark a significant demarkation in the tax rate argument.
PJR, there are over 38,000 pages of U.S. Government tax code and the large corporations in the USA employ individuals who have considerable knowledge of the tax code and they work on issues related to it all the time. It’s their focus.
I have no clue as to Sammy’s professional background, either, nor does it matter. He has been immune to facts and data for as long as I have been reading here. Right-wingery transcends both professionalism and career choices.
And, I guess you would have to include Joseph Stiglitz among the “financially illiterate.”
But one big part of the reason we have so much inequality is that the top 1 percent want it that way. The most obvious example involves tax policy. Lowering tax rates on capital gains, which is how the rich receive a large portion of their income, has given the wealthiest Americans close to a free ride. Monopolies and near monopolies have always been a source of economic power—from John D. Rockefeller at the beginning of the last century to Bill Gates at the end. Lax enforcement of anti-trust laws, especially during Republican administrations, has been a godsend to the top 1 percent. Much of today’s inequality is due to manipulation of the financial system, enabled by changes in the rules that have been bought and paid for by the financial industry itself—one of its best investments ever. The government lent money to financial institutions at close to 0 percent interest and provided generous bailouts on favorable terms when all else failed. Regulators turned a blind eye to a lack of transparency and to conflicts of interest.
When you look at the sheer volume of wealth controlled by the top 1 percent in this country, it’s tempting to see our growing inequality as a quintessentially American achievement—we started way behind the pack, but now we’re doing inequality on a world-class level. And it looks as if we’ll be building on this achievement for years to come, because what made it possible is self-reinforcing. Wealth begets power, which begets more wealth.
http://www.vanityfair.com/society/features/2011/05/top-one-percent-201105?printable=true%3Fmbid%3Dsocial_mobile_FBshare&t=Society+
Cheers!
JzB
Just a quick general comment – I think we need more people to study accounting and finance, let alone taxation.
In order to earn a degree in accounting or finance one must study at least through basic economics. In order to earn a degree or be educated in economics one usually need not study accounting or finance. Perhaps that is a flaw.
jazzbumpa – “I have no clue as to Sammy’s professional background, either, nor does it matter. He has been immune to facts and data for as long as I have been reading here. Right-wingery transcends both professionalism and career choices.”
More of the usual leftist ignorant bullshit. sammy has posted plenty of facts and data in his many years at AB, much of which has been roundly ignored or condemned by leftists who at this blog who seldom if ever refer to published data or hard facts. For you to pretend (imply) that only leftists and Democrats promote facts and data on Dan’s blog is an outright joke. I say that as an independent voter. And, yes, I cite plenty of government and commercial economic data that you and others can’t refute with hard facts.
It’s highly unlikely that you can hold a candle to sammy’s expertise on investments. You just don’t know who he is, as arrogant as you are.
I could care less about the political ideologies of any participants at Angry Bear. It’s far more important to stick to facts instead of the emotional, know-it-all, ideological chest beating that some engage in at Angry Bear. And, yes, you do it, too as evidenced in your previous comment. Then you attempt to change the subject of the main post. More typical distraction. All part of the ideological BS toolbag…put down the other political camp at all costs.
It would appear that you also didn’t Google “Higher tax rates increase investment”. Or you lack the courage or decency to acknowledge what Google indicated.
sammy is correct about his Google remarks.
The IRS provides data for quintiles (although frustratingly inconsistent in studies). The tax burden for the top 20%, as a total of taxes paid including social security, has increased since 1979 where it was only 58%. Here are links to their studies: the first is thru 1999, the second is for the latter period.
[Page 5 on this report: http://www.irs.gov/pub/irs-soi/04asastr.pdf%5D
jazz,
The title of Bruce’s post is “Investment, Consumption, and Progressive Taxation.” None of those words even appear in Stiglitz’ comment. So if this is an example of my being “immune to facts and data” I would have to admit that I do ignore information that is not relevant to the discussion.
PJR,
because of tax law changes, half of business income is now going through the individual income tax system
This is the major problem with my idea of lowering the corporate tax rate. If the corporate tax rate is lower than the personal tax rate, many highly paid professionals, (think doctors, lawyers, consultants, athletes) will file as corporations. So this would have to be addressed lest we lose too much tax revenue.
“I say that as an independent voter” MG
You haven’t posted one comment here at AB that would imply an independent voter frame of mind. Are you really that blind to the bias that so obviously pervades all of your opinions and those of sammy or CoRev for that matter. In fact it is becoming impossible to tell the difference between the three of you.
As Coberly said up stream, let investment decision be based upon the quality of the investment exclusive of tax considerations. Taxation is not intended to spur or reduce investments, but, instead, taxation is a revenue mechanism required by a government to fund its activities. If you don’t like those activities then vote for an alternate group of representatives. Then see what your political preference has wrought. Sammy is repeating the same disproved catechism of the right wing having to do with Supply Side economic theory. A theory that just happens to reap benefits to the wealthiest tax payers at the expense of the rest and at the expense of good government.
“I could care less about the political ideologies of any participants at Angry Bear.” MG
Yet you persistently describe ideas that you disagree with and/or disapprove of as “left wing, leftist” or some such form of the term.
“It’s highly unlikely that you can hold a candle to sammy’s expertise on investments. You just don’t know who he is, as arrogant as you are.” mg
Is that to suggest the rationale behind Sammy’s continuous demonstration of fealty to the very rich, that he serves them in their efforts to garner more as the expense of all others? Wasn’t it Warren Buffet who had stated that he and his super rich buddies, including Bill Gates, didn’t really need the Bush tax cuts, at the time that that tax legislation was first being debated in Congress? Assume for the moment that Sammy is a brilliant hedge fund manager earning himself and his investors billions of dollars. That doesn’t in any way validate his commentary regarding the social, political or economic value of tax legislation. It only means that he doesn’t want to pay his share of the cost of running the government. No surprise there if he’s really the investment guru that you suggest. Your entire argument is asinine. In effect the two of you are saying that the rich should be allowed to be as rich as they want to be without paying a higher rate of tax because that will interfere with their becoming richer. And if we allow them to be richer they will trickle down some of that additional wealth to the rest of society. That Laffer crap hasn’t yet been demonstrated to have the slightest hint of validity for any theory other than how to make the rich richer still.
Jack,
In effect the two of you are saying that the rich should be allowed to be as rich as they want to be without paying a higher rate of tax because that will interfere with their becoming richer.
This is not what I am saying. What I am saying is that taxing the rich more will reduce private sector investment and the jobs that that creates, and if you tax them even more you drive them into uneconomic tax shelters or overseas.
Further, realize that the top 1% (130,000 tax payers, a scant number out of 300 million people) account for 40% of Federal tax revenues. If you even lose 60,000 of them you will leave a 20% hole in the budget.
My bad… I added one additional year.
I get redid it and using data from the BEA (http://www.bea.gov/national/xls/gdplev.xls) got precisely 3.6% and 2.7% for the two periods. My bad – that’s a difference of a mere 0.9% a year rather 1% a year! Now I feel much better of the Reagan era now.
Using real GDP per capita from NIPA table 7.1 I get 2.2% and 1.6%. Still a pretty big difference.
Inflation isn’t going to excuse the inflation adjusted difference. Regardless, real economic growth has been slower and real debt growth has been much faster during the period with the policies you tout than during the period with the policies you don’t like. I personally would prefer faster economic growth and less debt, but the that’s me.
MG you and Sammy both make good points about some of the potential reactions to a rise in the top marginal income tax rate for individuals. I believe it’s easy to overstate some of these, but also believe that it would be unwise to ignore them in a serious analysis of impacts.
Sammy just a factual thingy. There were 141.1 million individual tax returns filed in 2007. The number in the top 1 percent ($410.1K AGI and above) was 1,411,000, not 130,000. Your data point corresponds to the top 0.1 percent 2004.
PJR,
Ooops.
The significant differentiation is not the top 20% from the bottom 80%. What needs to be examined is the top 5%, and that in one percent divisions, to see where the burden lies. My guess is that the 80th to the 85th bracket is way over their fair share and hiding the holiday enjoyed by the top 2%.
Sammy replies, “What I am saying is that taxing the rich more will reduce private sector investment and the jobs that that creates, and if you tax them even more you drive them into uneconomic tax shelters or overseas.”
But that reply ignores what Kimel and others have said and demonstrated repeatedly here and else where. Trickle down economics has been discredited by facts in evidence. Taxation is only one small parameter in the measurment of an investment’s economic potential, especially investments in other than strictly financial paper. Investments that create jobs have to do with factories, products and services, not stocks and bonds. Laffer was laughed out of serious economic thought over the past twenty years. Only an economist with a direct tie to a cash cow might still profess to believe such discredited economic policy.
The more central problem with “taxing investments results in less investment” is the lack of a substitute.
The theory is: if the price of something goes up, you might buy something else, or save the money instead of spending it.
But this *is* saving. If you want to store money, there’s no alternative to financial “investment” except buying real assets — real investment.
So you’ve got some money you want to store for the future. What do you do with it? No matter what the tax regime, if you don’t want to buy real, productive assets (which have the unfortunate property that they decay), all you can do is save/”invest” it.
Associated with this is the confution, by almost every economist (notably including Marx), of financial capital with real capital. As if they’re one homogeneous entity. Hence the confusion of “investment” with investment.
So taxing financial investments actually *encourages* investment in real assets. Amazing how most economists have this exactly backwards.
I don’t usually watch Chris Matthews, but I apparently missed a shocker segment with Bruce Bartlett giving his opinions about taxation. I guess Sammy and MG probably know better than Bruce, but I’ll let the crowd judge for itself. I thank Bob Somerby at the Daily Howler for saving this segment of the Bartlett conversation:
“On this occasion, Matthews’ guest was Bruce Bartlett, “former deputy assistant treasury secretary under the first George Bush and a policy adviser to Ronald Reagan.” Before long, Bartlett also endorsed a return to the Clinton tax rates:
MATTHEWS (7/27/11): It gets back to the numbers. A $14 trillion debt, half of it is from Bush, and almost half of that is from the tax cut. Another portion is from the prescription drug bill. And the whole rest of that really is from a lousy economy under Bush and these two wars he came up with.
BARTLETT: Well, that’s right. We—the Republicans keep saying that tax cuts are the key to prosperity. Well, the 2000s is evidence that that’s not true. And also we raised taxes in 1982. They said it would be a recession. We raised taxes again in 1993. They said it would be a recession. We had booming economies in the 1980s and 1990s. I think if we went back to the taxes we had the 80s and 90s, we’d be a lot better off.
MATTHEWS: What is the argument against the kind of tax policy— Well, let’s just say it again. It seems to me we had a heck of a great economy in the 90s, with a tax rate for people in the higher brackets of about 39.6, as opposed to 35, right?
BARTLETT: Right.
MATTHEWS: And that is the one that the rich bitch about, to use a crude term. And yet that didn’t hurt the economy and it helped balance the budget.
BARTLETT: Well, that’s right. And don’t forget also that Ronald Reagan raised the capital gains tax rate to 28 percent in 1986 and now it’s only 15 percent. And of course, the wealthier you are, the more of your income comes from capital gains.
MATTHEWS: Yes. Last night, we showed the 400 richest people in the country, whose average income is $270 million a year, pay about the same as a poor person pays. They pay about 18 percent.
BARTLETT: That’s right, of income taxes, that’s right.
MATTHEWS: Whereas the middle class and the upper middle class, who think they are the majority of the country, and they actually are, they’re paying a higher rate.
BARTLETT: That’s right. I don’t think there is any question that we would have positive economic effects if we went back to the Clinton-era tax rates.
“I get redid it and using data from the BEA got precisely 3.6% and 2.7% for the two periods.”
You’re actually shortchanging the second figure now, especially since you’re prone to rounding.
“Using real GDP per capita from NIPA table 7.1 I get 2.2% and 1.6%. Still a pretty big difference.”
Better check your calculations again. GDP per capita, in 2005 dollars, for 1980 is 25640.46 (according to the BEA stat divided by population. Why change sources midstream?) An annualized growth rate of 1.6% returns just 41,279.75, short of any GDP per capita given for the U.S. in 2010 by all the sources I checked. Using BEA’s most recent numbers for 2010 (calculated to be 46,843 which is near other estimates), the annualized growth rate is 2.0%
“Now I feel much better of the Reagan era now.”
Glad to have you aboard. 2.4% annualized growth rate in his presidency, a heavier tax burden for the wealthiest Americans while they paid a lower tax rate, AND no major war or economic bubble. Pretty good.
“Inflation isn’t going to excuse the inflation adjusted difference.”
Inflation is the reason for the decrease in debt to GDP to 1980. Look at bond rates in the late 70s/early 80s to combat the rampant inflation. Alternatively, we can do the math as that inflation rate destroys the value of the dollar by a near 2/3rds. The U.S. didn’t reduce its debt burden thru fiscal measures….
Yes Sammy it is always safer to stick to well tested talking points derived from Right Wing Think Tanks than trying to do some thinking outside the box.
Jack I suspect that income has migrated further to the top than you guess. Actually, further than I would have guessed. I checked the income level where the 90 percent break occurs. In 2007, the break was at $113,018 and in 1980 the break was (inflation adjusted) at $88,246. That would be an increase of just under 1 percent per year over the 27 years. At the 95% break ($160K in 2007), the annual real increase was 1.4 percent, not bad but still not huge. The number is 0.06 percent per year at the 50 percent break point. Total AGI reported grew 2.7 percent per year during those years, as a point of comparison. (As I noted earlier, it’s over 5 percent for the average of the top 1 percent.)
sammy,
I agree with that point. I know a number of individuals who are prepared to do just that. It will be important for the tax policy writers to close that hole. I have no idea how they will pull that off, though.
You’re a dishonest person, Jack.
More than that, you don’t know how to reply to the right comment post. None of what you cited was stated in the post that you tried to wreck with your usual lies. All part of your stupid misdirection game.
PJR,
If such issues aren’t raised by someone, how will they ever be discussed?
The millionaires and billionaires aren’t stupid. Their investment portfolios are well managed, primarily by professionals who get a good cut. Where are best investments on the planet right now? I expect that they know.
It’s easy to fall into the trap of thinking that all or most U.S. citizens and residents primarily invest in U.S. located operations. I listen to this stuff all the time among my friends and associates. Yet, I see very little evidence that the financial heavies are holding off investing abroad. Jimmy Rodgers, as an example, has addressed these points repeatedly.
Let me provide an example of domestic yet global investment. A friend of mine has been increasing his shares in GE. We discussed it. His decision boiled down to GE Healthcare and the direction it is taking globally. As you probably know, GE announced that it is relocating its X-ray business headquarters to China. This is part of a broader $2 billion investment in China by GE.
As the WSJ explained, “GE has long placed high hopes on China, with CEO Jeffrey Immelt in 2008 calling it the company’s “second home market.” In January, the company finalized a deal with state-owned Aviation Industry Corp. of China to inject much of GE’s civilian avionics business into a 50-50 joint venture based in China.”
On January 21, 2011, “in Schenectady, New York, President Obama” announced “the President’s Council on Jobs and Competitiveness – a board to get Americans back to work and strengthen our economy that will be chaired by Jeff Immelt, the CEO and Chairman of General Electric.” During the ceremony, President Obama stated, “Jeff Immelt’s experience at GE and his understanding of the vital role the private sector plays in creating jobs and making America competitive makes him up to the challenge of leading this new Council.”
Ok, here’s the reality. GE has been trying to gain a better foothold in China for years. GE is not going to pass up any opportunity to expand any of their operations in China or seek certain joint ventures. All fine and good from a corporate perspective. But Jeff Immelt is President Obama’s lead guy to take the helm of “President’s Council on Jobs and Competitiveness – a board to get Americans back to work and strengthen our economy.” What the hell is up with that selection?
There are plenty of other examples whereby U.S. sourced investments are driven by overseas investments and operations. Are we supposed to cheer when U.S. billionaires and millionaries invest in U.S.-based corporations that are moving operations overseas or improving their investment returns on overseas operations? I can’t support that kind of thinking.
I am suggesting that we should open our eyes to where the heavy investors in the U.S. are parking their money. If targeted in support of U.S.-based projects, all the better. If targeted to U.S.-based corporations relying on profit growth from subsidiary overseas operations, then let’s not cheer so loudly out of ignorance.
Who will Obama appoint next to help get the U.S. out of its economic hole? Another China heavy investor or corporate leader?
Jack,
I have recommended elimination of ALL Bush II era tax cuts (now Obama era tax cuts). I was the first individual on Angry Bear to make that recommendation. I have never waivered from that position.
Other bloggers and I have explained repeatedly with published Treasury data that eliminating only the Bush II/Obama era tax cuts doesn’t raise enough additional tax revenue to offset projected future deficits through 2020 or 2021. Instead of focusing solely on that smaller slice of revenue as many Democrats and bloggers have done, I am recommending capturing it all to the tune of roughly $3.675 trillion over ten years according to the U.S. Treasury.
Those huffing and puffing endlessly about the elimination of only the upper income earners share of the Bush II/Obama era tax cuts are chasing $679 billion over ten years, leaving $3 trillion on the table.
Don’t try to lay off any opposition to letting ALL of the Bush II/Obama era expire on me. I have made my position very clear to you and others. No more faking it, Jack.
Your dishonesty in attacking others is pure bullshit. You just make stuff up from day to day.
The cartoon version? OK, fair enough. Given that I’m a Fellow at the Adam Smith Inst I tend to think more about the subtle version.
“The logic of Supply Side”
This is something of a linguistic problem for me. I know that in the US “supply side” means a cartoon version of nothing but ever lower tax rates. But that’s not what it means in English English, nor what academic economists would call it. It means, quite simply, reform of the suppply side of the economy. The breaking up of AT&T was supply side, airline deregulation (yes, I do know this happened under Carter), trucking deregulation, getting rid of the ICC, ……and yes, I’d say there’s still an awful lot of this that needs to be done in the US. Tax rates not so much…..
Kevin,
I didn’t change sources midstream. I used figures from the BEA each time. (Who exactly do you think produces the NIPA tables? Where do you think the GDP and real GDP and real GDP per capita figures come from?) The BEA also produces a few shortcut files for their most popular series such as real GDP. Hence, I linked directly to the shortcut excel file rather than tell you look at NIPA table 1.1.6. But since they don’t have a similar shortcut table for real gdp per capita, I had to reference the NIPA table where the data sits.
And I’d much prefer to use the official real GDP per capita figures than yours, thank you very much. They make a point of dividing through the GDP calculated from the midpoint fo the period by the population divided from the midpoint of the same period. My guess is that if you’re not getting the same results as the BEA, you’re not using period midpoint for the population, thus dividing apples by oranges.
“You’re actually shortchanging the second figure now, especially since you’re prone to rounding. “
Ah, rounding. OK. So let’s say I rounded the 1950 to 1980 down and rounded the 1980 to 2010 up for giggles. There’s still a huge difference in growth rates between the two periods.
“Glad to have you aboard. 2.4% annualized growth rate in his presidency, a heavier tax burden for the wealthiest Americans while they paid a lower tax rate, AND no major war or economic bubble. Pretty good. “
Already discussed the numbers. As to economic bubbles, suggest you look up Plaza Accord (and take a look at the value of the dollar at the same time), and the Resolution Trust Corporation (keep an eye out for what was happening to S&Ls). Also, suggest you look at the the national debt. I think that makes three easy bubbles.
“Inflation is the reason for the decrease in debt to GDP to 1980. Look at bond rates in the late 70s/early 80s to combat the rampant inflation. “
Amazing how inflation worked its way backward in time and led to reductions in debt/GDP in the 1950s and 1960s too.
I am done with shallow and unthinking comments….quoting the official marginal rate as proof of anythings is a political statement and does not belong on an econ site…there are plenty of redearched posts on the issue for global based and large companies that make the staement false, and you know it sammy. This is becoming a simple hi jacking and nonsense.
Cantab and Aaron, both in a single thread. Is this the second and third comings all at once? Is the world of AB facing the “end of times?” Whose missing? Where is CoRev? Or, is he one of those alternate persona? When old and misleading information is being passed around may as well double or triple the incidence. What’s the old saying about twice told lies?
Jack, just to assure you, I have been on the road, and just read this interesting thread. Thanks for your concern, though.
Welcome new and infrequent posters
Bruce,
I actually liked the post. I found it thought-provoking at least. Thanks for coming back – I was wondering were you went off too.
Let me see if I got this correctly though. Your saying that it’s more helpful (in country level GDP terms) for these rich guys in England to push there profits back into expanding their companies than to use it to build palatial estates? We get a better velocity of money?
The reason I ask is a lot of people employed in building and maintaining these places – look at the Hampton’s in the US today for example. All those bricklayers, carpenters, silversmiths etc etc are getting paid and then, in turn, using that money to buy goods and services for themselves. People make good money building those extravegant yatchs and private jets today. This transfers this money directly from the rich to the poor (?) and you even get taxes on the transaction.
So is idea is to use the tax structure to penalize using profits to buy luxery items (consumption) which drives a consumption based economy,but make it ‘smarter’ to invest in your capital equipment, say buying better machines/robots to make your factory more efficient (by reducing labor costs), thus generate greater profits (or lower price on your goods).
Am I getting this all correctly?
Or maybe your saying that since its a primal urge to move up the social ladder, and show that through displays of wealth, that by making it increasingly difficult to become rich people will work harder/better to get there and generate higher tax returns to do it. This will also tend to freeze the current elite in position (close the door behind them since we arn’t talking wealth taxes here just income). Thus by plowing money into their industries the rich will generate more velocity of money than if they just spent the money direct.
I hate to say it, but your whole point seems to be another form of ‘soak the rich’ argument.
Islam will change
Jack consider deleting this comment, for reasons that should be obvious. In this case A = C and doesn’t equal CR. We know that for sure, Dan solved that equation long ago. A & C is/are gone and CoRev for now is still here, all as a result of deliberate decision making.
“Your dishonesty in attacking others is pure bullshit. You just make stuff up from day to day.” MG
Well if we agree on the sunset of the tax holiday, now going on ten years, and I’d include retoration of historically higher capital gains taxes, and limiting just what is a capital gain as it applies to hedge fund short term profits, then what are we arguing about? You had already professed to believe that SS should be left untampered with. So what is it that I’ve said that you disagree with. It sounds to me that we’re on the same page.
Yes, the government should stop wasting money. The question is how is it that one defines waste? After all of those steps are taken the deficit can be re-examined. If there’s no waste, and Medicare and Social Security are both funded through dedicated tax
streams and we’re back to 2002 tax levels and there is still an unacceptable deficit, I guess then the revenue streams need to be raised still higher. What other answer is there?
No problem, but I have to be home to do so. The delete is machine specific. Sorry CR if I’ve cast an undeserved aspersion.
Jack,
“then what are we arguing about?”
Because you keep advocating for more government, more regulation, and refuse to even entertain any cuts besides defense. The problem here is for the 100th time.
#1.) We are not going to be able to tax our way out of recesssion and into high enough growth to solve our long term deficit issues.
#2.) Defense cuts, and I will agree some are necessary, are small beans compared to the larger long term problem
#3.) If your gonna advocate any tax increase, the top brackets do nothing. Raising their taxes is fine, but it does nothing to solve the problem. If you are gonna advocate increaseing taxes, the real money is at the bottom. You will not be able to raise the top brackets taxes enough to do anything but harm.
So Darren, what is your solution. I’ll skip over the fact that you have totally misrepresented what I have said here repeatedly, a combination of serious military spending reductions and a sunset of the Bush/Obama tax holiday. No one thing is enough? Try the both and get some better bang for the buck.
And your recommendations? Is it Social Security, the only fully funded government program on the map? No connection to the deficit other than as a creditor to the Treasury. Don’t honor the Trust Fund Treasuries? Fine, then let’s skip all outstanding Treasury notes, including foreign held and those held by the banks and insurance industry.
Maybe we should close down the Veteran’s Administration. They only service those who have served us and sacrificed too much. Let’s empty out the nursing homes of all the elderly that have nothing left after their first one or two years of care. At $80,000 annually its easy to go through the family savings. And why the devil are we spending so much on education. It apparently has no good effect on most Americans. Wealthy school districts can afford $25,000 per student per year. Louisianan and Arkansas can get by on half that number. You can tell by the impressive results. And that’s no different from so many other state educational systems.
So Darren. Where’s the fat? Military/Industrial? I’ll go for that. Corporate welfare, oil and gas depletion, ethanol support, farm subsidies. Are those the waste areas you’re focused on?
Sammy
lets say that you are correct: taxing the rich more will reduce private sector investment.
at what point do you stop “taxing the rich more”? when they pay zero percent taxes?
i don’t know what the tax rate “should” be. but i do think we ought to pay for the stuff we already bought. i KNOW that Social Security doesn’t have a damn thing to do with taxes on the rich or the national debt. and I can usually tell when I am being lied to.
as Jack suggests above, whatever your qualifications as a tax advisor, investment consultant, or corporate accountant, nothing I have read of yours… and still less of MG’s… has convinced me that you even understand the questions at hand, let alone have “answers” that won’t plunge the country into poverty… and that includes most of the now rich.
and i am not saying this to be mean.
Jablonsky above makes a good point. I know that just like the rich man, I scream at a ten dollar tax I didn’t expect. but it would take some serious thought before i decided to move to the cayman islands because of it.
buff
and people still see what they expect to see. that is a law of cognition not a put down.
i don’t know what Bruce “meant”, but all he said was that rich people like to consume, and cutting their taxes leads to more consumption as surely as more investment.
now i am trying not to read into Bruce’s post… because i would have added that investment is driven by opportunity more than by tax policy. though our tax consultants here are surely right that someone with a high enough tax to justify paying the lawyers will look for tax dodges. the problem of government is not to give them any. the other problem of government is to find a decent balance between spending for needs, and leaving the people as much freedom to do with “their own money” (a concept that is not fully examined) as they wish.
the arguement here has not touched Bruce’s point. instead it wandered off instantly into the “facts” of tax rates… which really has nothing to do with the argument (Bruce’s) against the perennial argument that “if you tax the rich you will kill investment”… itself an argument that may have some validity at the margins and in certain circumstances, but which is plainly nonsense both as to the fact of investment and the need for taxes.
try to work quantities into your thinking, especially marginal quantities. your “let me see if i got this correctly” here is … it seems to me… another example of nightmare thinking… where a tiny thing, harmless in itself… grows to threatening proportions because of the emotional energy attached to it by largely symbolic free association.
and i should add on my own behalf… i think the drive for “more wealth” and “growth” is insane.
we need to change.
coberly,
i think the drive for “more wealth” and “growth” is insane. we need to change
Ah yes, finally, now we get to the nub of it.
sammy
nothing finally about it. i have been saying this for years. right here on angry bear.
once again you leap to confusions. my personal feelings about the insanity of “growth” as a justification for doing bad things really has nothing to do with the argument that “taxing the rich leads to less investment” is not true. nor does it have anything to do with my question to you: even if “taxing the rich more leads to less investment” where do you draw the line? zero taxes?
Great post, Bruce. I wonder why nobody cites Thorstein Veblen these days. With his ammple evidence of conspicuous consumption and the behavior of the predatory class, he had it figured out years ago. You have carried his ideas one giant step further into the realm of macro economices.
Again???!!??? 😉
It should be obvious, folks. Tax rates, unless extreme, simply don’t affect the economy that much. That’s why you are all sitting here arguing about signals that don’t stand out from the noise enough to be measured. But if the signals are that small, is it all that important which way the signal points?
Another point: In almost all scenarios, marginal government dollars provide more good than marginal private dollars, which have largely spent on cheap junk from China, McMansions in the desert, and SUVs and fuel to haul said junk to said McMansion. The government could hire a blind deaf monkey to chose projects by tossing darts at a dartboard, and would have a pretty difficult time coming up with anything that provided less value that what the private sector spends its last dollars on.
Jack,
Yes….Cutting and Taxing are important! But the real solution lies in growing the strength of the economy. Everything should be on the Table…no sacred cows.
Get rid of ObamaCare…..Tap more of our resources….across the board deregulation…..tax reform and increase taxes on everyone, and get rid of every single loophole…..decrease the size of government, and if no one is willing to budge than cut the exact same amount of every single agency and administration….gut the New Financial Regulations, and kill the bureacracy that is beginning to be formed out of it……..cut homeland security and defense spending big time……etc.etc.etc.
The thing that bothers me the most about the left is that they pretend that these large cuts are not going to happend regardless. That is simply not going to be the case. It would be better for everybody to tackle the problem head on and recognize the reality, than it would be to put heads in the sand and wait till the last min.
Chad,
“marginal government dollars provide more good than marginal private dollars.”
Couldn’t disagree more.
Who would care what you agree or disagree with?
Buff a couple points.
One it is the supply eiders who argue that tax cuts lead to higher reinvestment, you know that whole ‘job creator’ jive, which they tout as a reason for workers to accept higher levels to taxation and/or lower service levels, they certainly are not making the argument that such cuts will increase the job market for pool boys and jewelers.
Two velocity isn’t everything, productivity matters too, plus money that is just rocketing around the upper class, say among collectors of fine art buying and selling masterworks, isn’t generating the same kind of tax revenue spinoffs that those same millions would do if applied to payroll.
Three in the nineteenth century as now large parts of luxury consumption ultimately sends those dollars out of the domestic economy to the foreign suppliers of those goods, indeed a good part of the display function is precisely in bragging about the foreign sources of those goods, that is china actually from China having more value than a near identical product from the factories in the Midlands of England.
That said there might be an argument that the velocity of money created via conspicuous consumption has the same ‘rising tide’ effect as assumed reinvestment generated by the higher ROI resulting from loer marginal rates. But that is not the argument being advanced. It not being easy to sell the argument that Ken Lay’s three different homes in Vail (or was it Aspen?) just being his contribution to money velocity and actually a favor to people living out of their cars if the latter only knew it.
Thanks all. Since the stated intent of this ‘drive by’ was to ‘start some discussion’ I am going to declare ‘Mission Accomplished’ and retire to my hidden headquarters to plot out how to make the argument tighter.
Again thanks for playing. I’ll be back soon. Or not. Who knows?
Better yet, just close down the entire government bureaucracy. We don’t need no stinckin’ government. We don’t need no stinkin’ financial regulations. We can trust the banks and bankers to do the right thing. Like they did after Gramm/Rudman.
You’re an idiot.
Yes, lowering tax rates would lead to higher corporate profit. (this entry summarized in one sentence)
No, it would not lead to wages that more closely tracked the rise in productivity, which means lower tax rates for the rich would not “trickle down” unless consumption patterns changed so that productivity gains could benefit the average person (and not just increase the amount of wealth that can be captured from government stimulus).
CoRev not all aspersions are undeserved. just sayin’.