by Divorced one like Bush
So, I'm listening to Saturday Night Fish Fry as I'm composing. It's the blues, though the station is a jazz and folk station. Public broadcasting at it's best! Maybe if the economy sinks enough, we'll return to the big bands and swing. No more solo acts of Rockband. And, maybe I'll be supplementing my income playing rent parties.
You have all heard about the IRS release of the top 400 income earners (pdf) stats? Yup, $105.2 billion combined taxable income.
In the first posting, I showed that, all things being equal, as income share goes down for 99% of the population, there is overall less greenbacks (great tune)in the hands of the Many. The astute AB readers said: What about the fact that there is more water in the pool over time? Yes there is. But is it not six to one, half dozen to the other? Did not every numerical factor that acted to raise the pool of greenbacks in the income pool also act on everything else? Well, of course it would be foolish to think the force of economic nature rains equally on all species of greenbacks.
Just a little aside with the band (stepping aside, laying down the Les Paul, black with a maple finger board for those interested), we (Angry Bear) recently discussed velocity as a factor in giving the thumbs up or down to the stimulus package. I forgot about this money concept. It is part of what I'm trying to relay in my model to the average voter. Being that velocity has to do with how many hands a greenback moves through in a given unit of time or over time, I thought with showing that less greenbacks in the hands of the Many over time, the effect would become evident. I mean, how is it we can be talking about the effectiveness of a stimulus package in terms of it's multiplier effect which jams with velocity and miss that the chance of increasing how fast money moves and/or how much money will move and/or how many times it moves increases when you have more people moving more money than when you have more people moving less money? Why are we talking about giving tax cuts to the greatest number of people instead of the fewest this time as part of the stimulus? Why did we give everyone $600 last year?
Ok, the LP is slung and the Ampeg is cranked.
All things being equal is not so much. From 1976 (the low point of the top 1% share of income) to 2005 the disposable income increased by a factor of 6.94. The $1000 in the model is $6940 in 2005. Unfortunately the per capita income (how much for each person) only increased by a factor of 5.13. So people, we just plain have less to begin with. Thus, the $1000 to be true to my model of a never increasing population of 100 is now $5130 in 2005. What do you think this does for velocity? I bet it explains the “historically” low inflation thus “historically low” interest rates.
Let me keep playing. In 2005 using a constant income, the One gets $230, (23%) the 99 get $7.77 each. It is a ratio of 29.6 to 1. But income increased. I'm going to use the increase that mattered, per capita. Per capita income in 2005 is $5130. The One has $1179.90. The Many get to share $3950.10 for a per capita of $39.90. 99people get to have $39.90 each. 5.13 times more than my constant income model. A ratio of 29.6 to 1. How about that! The only thing not equal in my constant income model is the population.
The drums are pounding a driving blues now. If the income share percentages had remained constant to what they were in 1976 the One would have $446.31 (2.6 X less) and the Many would share $4683.69 for an amount of $47.31 each (1.2 X more).
What do you think works better as a jam for velocity and multiplier effects, 99 people sharing $3950.10 or $4683.69?
Solo time.
From the Center for Housing Policy 2006 report (pdf) I learned that 62.9% of income for all families based on 28 metropolitan areas is spent on housing, transportation, food and medical. Now what would help velocity more, 62.9% of $3950.10 leaving $1465.55 for everything else or $2199.14 for everything else because the 99 had more income? (The $2199.14 is assuming people did not just spend more on housing, transportation, food and medical because they had more.) Or hold the expenditure percentage constant to the income increase, you still have more extra greenbacks to riff with. $272.14 to be exact. In the same report, those earning $20,000 to $50,000 are spending 80.1% of their income on housing, transportation, food and medical. Your turn to solo with the numbers.
Ending riff of tax cut squeals.
Using actual, nominal numbers, the dollar amount that would need to be made up to play a tune as in 1976 by a tax cut to the 99 in 2005 is: $1,493,418,800,000. (1.2 of the nominal 2005 99% income – 2005 99% nominal) One trillion, four hundred ninety three billion, four hundred eighteen million, eight hundred thousand dollars. All in one year (not many are into the long 1/2 hour jams any more). Still thinking the stimulus is just right or too big or not enough tax cuts?
Who played that sour tax cut note? Get them out of the band!
Next time, we'll play some jazz and see what various inflation factors do to the Many.
by Divorced one like Bush
(Updated to correct my decimal point. I'm bad.)
When I talk to others about why we're in the mess we're in from a position of income inequality using numbers like $1,025,000,000,000 per year from the 99% to the 1% does impress them, but as I posted a while ago it is hard to really comprehend such a large scale. I had to come up with a KISS model. This model had to also correct a problem many had when I would tell them that the share of income to the top 1% has increased to around 23%. Often they would equate the increase to the over all increase in the economy. That is, the 1% got 23% more because the economy was 23% bigger.
The solution: Scale it down. I used pennies! (Let's not worry about the cost of a penny to mint being more than a penny is worth.)
100 pennies of income generated. 100 people.
In 1976, the share of income to the top 1% was 8.7% rounding up. You can see where I'm going with this? 1 person got 8.7 pennies and 99 received 0.92 pennies. Well, nobody gets a 0.X penny returned to them when they buy something at the store. Consequently, this just confused the issue some more.
1000 dollars of income generated. 100 people.
In 1976 1 person pocketed $87.00 and 99 people each pocketed $9.22. Cumulatively, the nation sees 1 group (the One) having $87.00 worth of purchasing power and the other (the Many) group having $913.00 of purchasing power. At this point some might say, so what, there is still a total of 1000 dollars of purchasing power. Yes, BUT... The One group may or may not spend it all, the Many will spend something in any given year. No matter what the percentage is of income spent, the Many still move more money into the demand side of the economic engine. For my gear head friends, more air flow. More dollars moving through the throttle body.
Ok Sherman, set the WABAC machine for 2005. 
1000 dollars. 100 people
In 2005 the share of income to the One is 23%. (For those wanting a push against Obama I have noted that the fastest rise in income inequality was during the Clinton years. Obama has Clinton years people on staff.)
One pockets 230 dollars. Many pocket 7.77 dollars each. Are you feeling the kiss? The One has 230 dollars of purchasing power. The Many has 770 dollars of purchasing power. Being that we know Many will move more of it's dollars into the demand side of the economy, with this change we have choked the air flow and flooded the fuel. The engine will not rev as high, will not produce as much power, and just like high altitudes where the air is thinner, it will not have the reserve to get you over the mountain. At the same time, the engine is pushing raw fuel out the exhaust. I'm confident the gear heads can explain the analogy.
I'll use this web site to play with the numbers next.
Robert Waldmann
Matthew Yglesias is very smart, but he is not omniscient. In particular he doesn't remember things that happened before he was born and it appears that he has fallen for some Republican propaganda.
He writes
In the late 1970s, it just so happened to be the case that the structure of Great Society programs and of then-widespread union contracts meant that the objective interests of union members with automatic Cost of Living Adjustment (COLA) provisions, African-Americans, and public assistance recipients were quite a bit different from the objective interests of other Americans. By contrast, it was relatively easy for Ronald Reagan to assemble a coalition built around lower taxes and inflation that started with the well-off but expanded deep into the middle class. It was actually Carter who began the effort to fight inflation and deregulate certain key sectors of the economy, but that wasn’t a politically sustainable agenda for a Democrat (as witnessed by Ted Kennedy’s very strong primary challenge).
He's wrong. as I explain after the jump.
The point of his post is that it is hard for Republicans to win elections given widening income inequality that disconnects the experience of their base (the rich) and the majority. True. I'd add that it is hard given high inequality and especially high inequality in (easily taxable hard to hide) W-2 income, since there is so much to be gained for most people from a policy of soaking the rich and spreading it out thin.
But the facts about the 70s are the facts. I was there.
Yglesias seems to be under the impression that AFDC benefits were indexed to inflation. They weren't. The real value of AFDC benefits declined sharply under Carter. The idea that "public assistance recipients" had less of an interest in fighting inflation than your average non-union worker is simply false. AFDC benefit levels were set by state legislatures and not indexed to inflation. National average real AFDC benefit levels declined sharply during the Carter and early Reagan years, then the decline ended (for a while) around 1984. AFDC plus food stamps declined less sharply (but declined a lot) plus there was a sharp drop 81 to 82 (food stamps are federal). Overall, the recipients of AFDC+food stamps appear to have suffered much more during the Carter years than your average non-union worker.
See here (PDF), page 12.
From 1977 to 1981 the union non union wage differential in the USA decreased from 19% to 16% (17% in 1980) (all very roughly) It is true that inflation crept up during the Carter years. It is not true that this helped Unionized workers relative to non-unionized workers. See here (PDF), page 40.
The Kennedy challenge to Carter had a lot to do with the fact that Carter was generally immensely unpopular (Iran and a recession). Carter's deregulatory efforts were generally not controversial, mildly popular and barely noticed (I remember I was there). I don't recall any criticism from Kennedy.
Robert Waldmann
Matthew Yglesias is very smart, but he is not omniscient. In particular he doesn't remember things that happened before he was born and it appears that he has fallen for some Republican propaganda.
He writes
In the late 1970s, it just so happened to be the case that the structure of Great Society programs and of then-widespread union contracts meant that the objective interests of union members with automatic Cost of Living Adjustment (COLA) provisions, African-Americans, and public assistance recipients were quite a bit different from the objective interests of other Americans. By contrast, it was relatively easy for Ronald Reagan to assemble a coalition built around lower taxes and inflation that started with the well-off but expanded deep into the middle class. It was actually Carter who began the effort to fight inflation and deregulate certain key sectors of the economy, but that wasn’t a politically sustainable agenda for a Democrat (as witnessed by Ted Kennedy’s very strong primary challenge).
He's wrong. as I explain after the jump.
The point of his post is that it is hard for Republicans to win elections given widening income inequality that disconnects the experience of their base (the rich) and the majority. True. I'd add that it is hard given high inequality and especially high inequality in (easily taxable hard to hide) W-2 income, since there is so much to be gained for most people from a policy of soaking the rich and spreading it out thin.
But the facts about the 70s are the facts. I was there.
Yglesias seems to be under the impression that AFDC benefits were indexed to inflation. They weren't. The real value of AFDC benefits declined sharply under Carter. The idea that "public assistance recipients" had less of an interest in fighting inflation than your average non-union worker is simply false. AFDC benefit levels were set by state legislatures and not indexed to inflation. National average real AFDC benefit levels declined sharply during the Carter and early Reagan years, then the decline ended (for a while) around 1984. AFDC plus food stamps declined less sharply (but declined a lot) plus there was a sharp drop 81 to 82 (food stamps are federal). Overall, the recipients of AFDC+food stamps appear to have suffered much more during the Carter years than your average non-union worker.
See here (PDF), page 12.
From 1977 to 1981 the union non union wage differential in the USA decreased from 19% to 16% (17% in 1980) (all very roughly) It is true that inflation crept up during the Carter years. It is not true that this helped Unionized workers relative to non-unionized workers. See here (PDF), page 40.
The Kennedy challenge to Carter had a lot to do with the fact that Carter was generally immensely unpopular (Iran and a recession). Carter's deregulatory efforts were generally not controversial, mildly popular and barely noticed (I remember I was there). I don't recall any criticism from Kennedy.
Will post-autistic economics review (who have, sadly imnvho, renamed themselves "real-world economic review) or The Economists' [sic] Voice be the first to publish Robert Waldmann's paper (a readable version of this blog post, which now also links to the paper)?
Only Brad DeLong may know for certain. But you should read it now.
Will post-autistic economics review (who have, sadly imnvho, renamed themselves "real-world economic review) or The Economists' [sic] Voice be the first to publish Robert Waldmann's paper (a readable version of this blog post, which now also links to the paper)?
Only Brad DeLong may know for certain. But you should read it now.
“Taxation is in fact the most difficult function of government – and that against which their citizens are most apt to be refractory” Thomas Jefferson
First, I apologize for taking so long to get back to this. But....I needed to work on some leads/songs (it's not really work), get a new singer up to speed (hope this one stays around, it would be a first), deal with temporarily replacing my office manager (medical leave) and of course Valentines (the other business). Oh yeah, get some tax stuff done: W2's, fed and state reports, blah, blah, blah.
Well Jeff Beck is playing Going Down, next is Situation on a compilation CD I made so...
I left off with Mr. Avi-Yonah stating:
A society is a community with a shared culture and shared interests that transcend the interests of its individual members and extend back to its historical roots and forward into its future. Thus, it is necessary to look for affirmative reasons for taxing the rich that are rooted in a broader social and historical understanding of the vital function of taxation in maintaining such a community over time.
He list 3 common “excuses” shall we say, for answering the “why”.
A: That is where the money is. A presentation is made of the inequality numbers which I have taken every opportunity to put in front of the AB reader and then states:
While these facts demonstrate the potential for large redistributive gains by increasing taxes at the very top of the income distribution, they also illustrate the importance of the rich to the economy and thus the potential cost of taxing them. Thus, any argument for taxing the rich must depend on more than mere income or wealth distribution numbers.
I could take issue with the first sentence, but I agree, we have to depend on something more than “that's where the money is”. Although, considering our nations debt and who has benefited from such, it makes a very strong number 2 at least if not a co-number one for the present.
B. “I Took All of It from Them”
Another argument for taxing the rich can be summarized in department store mogul Edward Filene’s explanation of why he approved of the income tax: “Why shouldn’t the American people take half my money from me? I took all of it from them.”
Getting beyond the simplicity of Edward Filene's argument, Mr. Avi-Yonah presents this as a case of partnership between the individual's contribution and the government's contribution thus, taxation is the government receiving it's share. Government also can do with it's share as it want including giving it to others. The problems he sees with this are:
First, since it is as focused on individual taxpayers as optimal tax theory, individual taxpayers can object that the partnership does not apply to them. Second, even if one accepts the partnership model, it is still unclear that it justifies progressive taxation of the rich rather than mere proportionate taxation.I don't think he captures the error of the argument correctly here. Being that we are the government, we are all in a partnership. That one would argue the partnership does not apply is purely selfish want verses civic understanding and rightly should not be a serious consideration of argument. But as he notes, that still does not get us past the issue of progression over proportion.
C: “Money is the measuring rod of power.”
Mr. Avi-Yonah note it is a quote of Howard Hughes. He develops the argument that the rich go beyond acquiring money for consumption needs and wants and thus pursue wealth for it's own sake.
Wealth confers power beyond its consumption value.74 This power is economic, social, and political. The economic power of the rich derives primarily from their ability to use their wealth to invest in enterprises that employ thousands of people and can dominate large sectors of the economy. The social element derives from the knowledge other people have of the potential ability of the rich to use their wealth to acquire goods and to contribute to charities, which leads them to court such acquisitions and contributions even without such consumption taking place. Finally, the political power of the rich stems not just from their actual donations or their ability to finance runs for political office, but, more importantly, from politicians knowing that they have the excess funds to donate.The problem as he views it is:
A fine Catch 22.As the eminent public finance economist Richard Musgrave has stated, a consumption tax is deficient because it “ assumes that consumption, current or future, is the only benefit that income provides. This overlooks the benefits derived from the accumulation and holding of wealth, whether in terms of security, power, or social standing.”
If this analysis is true, what does it imply for taxing the rich? From an optimal tax perspective, arguing that the rich derive added utility from their wealth that is not available to people for whom (because of their lesser means) money only has consumption value is an argument against taxing the rich. That is because any redistribution in the optimal tax model derives from its assumption of the declining marginal utility of money, and the “ riches mean power” model militates against this assumption.
I have stated that we have to ask: When is enough, enough? I ask this from a reference of consumption. Beyond that, the utility of further acquisition is no longer a need of material wants. It is a need of intangible wants. Considering my post on the World Bank's finding that true wealth is from intangibles, a reason for progressive taxation has to address the intangible such as power.
Thus the reason for progressive taxation via some history as presented by Mr. Avi-Yonah:
The American Revolution likewise was founded on the conception that while people have natural, Lockean liberal rights to their property, undue concentrations of private power and wealth should be discouraged.81 This view found its expression in the republican creed of civic humanism, which emphasized public virtue as a balance to private rights. A virtuous republic, the Framers believed, was to be free from concentrations of economic power that characterized England in the eighteenth century.82 Therefore, from the beginning of the Republic, federal and state legislators used taxation to restrict privilege and to “ affirm communal responsibilities, deepen citizenship, and demonstrate the fiscal virtues of a republican citizenry.”
The idea of progressive taxation is part and parcel to achieving the ideals set out in our constitution in that our constitution is a formulation for assuring a disbursement of power. Though I wonder if in this “virtuous republic” we are finding the mantra of the Republican's intrusion into one's personal life, be it as usual a bastardized use by them.
There is a political lesson presented in the history of how we got our income tax that I was not aware of:
There was another agenda at play as well in the early years of the federal income tax: the desire to use progressive taxation as a way to “ stave off more radical calls for industrial democracy.” 97 This explains why even some high-income Republican groups supported the Sixteenth Amendment.98 Andrew Mellon, Secretary of the Treasury in the 1920s and one of the wealthiest Americans, “ believed that keeping tax schedules graduated (albeit flatter) would mitigate radical demands for restructuring the capitalist system.” 9Interesting. It was a time when those with the economic power were actually feeling threatened of a greater loss. This is a very important aspect of the debate that I don't believe the citizenry appreciates. Perhaps if the citizenry knew that in the past they were able to instill the fear of greater loss, today the message of change would take on a more definitive tone than just “hope”.
Mr. Avi-Yonah summarized the need to be concerned with the inequality of income/wealth:
There are three arguments why extreme concentrations of wealth are undemocratic.
The first two are obvious: In the American system of government, great wealth can buy political favors (often at minuscule expenditures) and finance runs for office (at somewhat greater but still quite limited costs).114 The third is more subtle—that vast inequality of wealth is socially destructive because it degrades relationships among people (cultural, social, and political) and eventually undermines the sense of community on which a democratic polity must rest.115 This argument is particularly true in a country like the United States, which is not bound together by ties of ethnicity, culture, or language.116...that extreme concentrations of power resulting from extreme concentrations of wealth in the hands of private individuals who are unaccountable to the majority is an unhealthy phenomenon in a democracy. Such private individuals exercise degrees of power and influence that run counter to the ability of the government of the people to govern the country in accordance with the people’s wishes, as expressed in democratic elections.
As to where the responsibility belongs for presenting this argument:
As a professional, I can understand the argument to separate the two issues via 2 professions. The concept of a profession is that it is specialized. As a thinking person and a citizen, the public discussion should not allow the issue of efficiency to dominate one profession's focus while the issue of equity dominates another profession. We have to assure both equity and efficiency are discussed and decided upon in order to stay true to the preamble of the Constitution and minimize Thomas Jefferson's observation of the citizens response.As Slemrod writes,
The approach of mainstream modern public finance economics to these issues has been to accept, for the sake of argument, the right of government to redistribute income through the tax system (and other means); to sidestep the ethical arguments about assessing the value of a more equal distribution of economic outcomes; and toinstead investigate the implications of various value judgments for the design of the tax system.126Such an attitude to distributive issues may be fine for public finance economists, although it did not characterize the economics profession before the 1950s and still does not characterize some of it today.127 But it does not excuse the abdication of equity in favor of efficiency by most legal tax academics, especially in some of the elite law schools...It is time for legal tax academics to redress the balance.
Part 1 is here.
Update:
In response to Dmerek question regarding what Thomas Jefferson thought:
"I approved from the first moment of... the power of taxation [in the new Constitution]. I thought at first that [it] might have been limited. A little reflection soon convinced me it ought not to be." --Thomas Jefferson to Francis Hopkinson, 1789. ME 7:300Being that President Jefferson believed in the will of the people and the people passed the 16th amendment, the issue becomes a question of how much for what expenditures and not whether we can tax.
There is much more on what President Jefferson had to say.
“Taxation is in fact the most difficult function of government – and that against which their citizens are most apt to be refractory” Thomas Jefferson
First, I apologize for taking so long to get back to this. But....I needed to work on some leads/songs (it's not really work), get a new singer up to speed (hope this one stays around, it would be a first), deal with temporarily replacing my office manager (medical leave) and of course Valentines (the other business). Oh yeah, get some tax stuff done: W2's, fed and state reports, blah, blah, blah.
Well Jeff Beck is playing Going Down, next is Situation on a compilation CD I made so...
I left off with Mr. Avi-Yonah stating:
A society is a community with a shared culture and shared interests that transcend the interests of its individual members and extend back to its historical roots and forward into its future. Thus, it is necessary to look for affirmative reasons for taxing the rich that are rooted in a broader social and historical understanding of the vital function of taxation in maintaining such a community over time.
He list 3 common “excuses” shall we say, for answering the “why”.
A: That is where the money is. A presentation is made of the inequality numbers which I have taken every opportunity to put in front of the AB reader and then states:
While these facts demonstrate the potential for large redistributive gains by increasing taxes at the very top of the income distribution, they also illustrate the importance of the rich to the economy and thus the potential cost of taxing them. Thus, any argument for taxing the rich must depend on more than mere income or wealth distribution numbers.
I could take issue with the first sentence, but I agree, we have to depend on something more than “that's where the money is”. Although, considering our nations debt and who has benefited from such, it makes a very strong number 2 at least if not a co-number one for the present.
B. “I Took All of It from Them”
Another argument for taxing the rich can be summarized in department store mogul Edward Filene’s explanation of why he approved of the income tax: “Why shouldn’t the American people take half my money from me? I took all of it from them.”
Getting beyond the simplicity of Edward Filene's argument, Mr. Avi-Yonah presents this as a case of partnership between the individual's contribution and the government's contribution thus, taxation is the government receiving it's share. Government also can do with it's share as it want including giving it to others. The problems he sees with this are:
First, since it is as focused on individual taxpayers as optimal tax theory, individual taxpayers can object that the partnership does not apply to them. Second, even if one accepts the partnership model, it is still unclear that it justifies progressive taxation of the rich rather than mere proportionate taxation.I don't think he captures the error of the argument correctly here. Being that we are the government, we are all in a partnership. That one would argue the partnership does not apply is purely selfish want verses civic understanding and rightly should not be a serious consideration of argument. But as he notes, that still does not get us past the issue of progression over proportion.
C: “Money is the measuring rod of power.”
Mr. Avi-Yonah note it is a quote of Howard Hughes. He develops the argument that the rich go beyond acquiring money for consumption needs and wants and thus pursue wealth for it's own sake.
Wealth confers power beyond its consumption value.74 This power is economic, social, and political. The economic power of the rich derives primarily from their ability to use their wealth to invest in enterprises that employ thousands of people and can dominate large sectors of the economy. The social element derives from the knowledge other people have of the potential ability of the rich to use their wealth to acquire goods and to contribute to charities, which leads them to court such acquisitions and contributions even without such consumption taking place. Finally, the political power of the rich stems not just from their actual donations or their ability to finance runs for political office, but, more importantly, from politicians knowing that they have the excess funds to donate.The problem as he views it is:
A fine Catch 22.As the eminent public finance economist Richard Musgrave has stated, a consumption tax is deficient because it “ assumes that consumption, current or future, is the only benefit that income provides. This overlooks the benefits derived from the accumulation and holding of wealth, whether in terms of security, power, or social standing.”
If this analysis is true, what does it imply for taxing the rich? From an optimal tax perspective, arguing that the rich derive added utility from their wealth that is not available to people for whom (because of their lesser means) money only has consumption value is an argument against taxing the rich. That is because any redistribution in the optimal tax model derives from its assumption of the declining marginal utility of money, and the “ riches mean power” model militates against this assumption.
I have stated that we have to ask: When is enough, enough? I ask this from a reference of consumption. Beyond that, the utility of further acquisition is no longer a need of material wants. It is a need of intangible wants. Considering my post on the World Bank's finding that true wealth is from intangibles, a reason for progressive taxation has to address the intangible such as power.
Thus the reason for progressive taxation via some history as presented by Mr. Avi-Yonah:
The American Revolution likewise was founded on the conception that while people have natural, Lockean liberal rights to their property, undue concentrations of private power and wealth should be discouraged.81 This view found its expression in the republican creed of civic humanism, which emphasized public virtue as a balance to private rights. A virtuous republic, the Framers believed, was to be free from concentrations of economic power that characterized England in the eighteenth century.82 Therefore, from the beginning of the Republic, federal and state legislators used taxation to restrict privilege and to “ affirm communal responsibilities, deepen citizenship, and demonstrate the fiscal virtues of a republican citizenry.”
The idea of progressive taxation is part and parcel to achieving the ideals set out in our constitution in that our constitution is a formulation for assuring a disbursement of power. Though I wonder if in this “virtuous republic” we are finding the mantra of the Republican's intrusion into one's personal life, be it as usual a bastardized use by them.
There is a political lesson presented in the history of how we got our income tax that I was not aware of:
There was another agenda at play as well in the early years of the federal income tax: the desire to use progressive taxation as a way to “ stave off more radical calls for industrial democracy.” 97 This explains why even some high-income Republican groups supported the Sixteenth Amendment.98 Andrew Mellon, Secretary of the Treasury in the 1920s and one of the wealthiest Americans, “ believed that keeping tax schedules graduated (albeit flatter) would mitigate radical demands for restructuring the capitalist system.” 9Interesting. It was a time when those with the economic power were actually feeling threatened of a greater loss. This is a very important aspect of the debate that I don't believe the citizenry appreciates. Perhaps if the citizenry knew that in the past they were able to instill the fear of greater loss, today the message of change would take on a more definitive tone than just “hope”.
Mr. Avi-Yonah summarized the need to be concerned with the inequality of income/wealth:
There are three arguments why extreme concentrations of wealth are undemocratic.
The first two are obvious: In the American system of government, great wealth can buy political favors (often at minuscule expenditures) and finance runs for office (at somewhat greater but still quite limited costs).114 The third is more subtle—that vast inequality of wealth is socially destructive because it degrades relationships among people (cultural, social, and political) and eventually undermines the sense of community on which a democratic polity must rest.115 This argument is particularly true in a country like the United States, which is not bound together by ties of ethnicity, culture, or language.116...that extreme concentrations of power resulting from extreme concentrations of wealth in the hands of private individuals who are unaccountable to the majority is an unhealthy phenomenon in a democracy. Such private individuals exercise degrees of power and influence that run counter to the ability of the government of the people to govern the country in accordance with the people’s wishes, as expressed in democratic elections.
As to where the responsibility belongs for presenting this argument:
As a professional, I can understand the argument to separate the two issues via 2 professions. The concept of a profession is that it is specialized. As a thinking person and a citizen, the public discussion should not allow the issue of efficiency to dominate one profession's focus while the issue of equity dominates another profession. We have to assure both equity and efficiency are discussed and decided upon in order to stay true to the preamble of the Constitution and minimize Thomas Jefferson's observation of the citizens response.As Slemrod writes,
The approach of mainstream modern public finance economics to these issues has been to accept, for the sake of argument, the right of government to redistribute income through the tax system (and other means); to sidestep the ethical arguments about assessing the value of a more equal distribution of economic outcomes; and toinstead investigate the implications of various value judgments for the design of the tax system.126Such an attitude to distributive issues may be fine for public finance economists, although it did not characterize the economics profession before the 1950s and still does not characterize some of it today.127 But it does not excuse the abdication of equity in favor of efficiency by most legal tax academics, especially in some of the elite law schools...It is time for legal tax academics to redress the balance.
Part 1 is here.
Update:
In response to Dmerek question regarding what Thomas Jefferson thought:
"I approved from the first moment of... the power of taxation [in the new Constitution]. I thought at first that [it] might have been limited. A little reflection soon convinced me it ought not to be." --Thomas Jefferson to Francis Hopkinson, 1789. ME 7:300Being that President Jefferson believed in the will of the people and the people passed the 16th amendment, the issue becomes a question of how much for what expenditures and not whether we can tax.
There is much more on what President Jefferson had to say.
"Servers, labourers, and workmen of different kinds make up the far greater part of every great political society. But what improves the circumstances of the greater part can never be regarded as an inconveniency to the whole. No society can be flourishing and happy, of which the far greater part of the members are poor and miserable. It is but equity, besides, that they who feed cloath, and lodge the whole body of the people, should have such a share of the produce of their own labour as to be themselves tolerably well fed, cloathed, and lodged."
“ [h]ow much and how to tax high-income individuals are questions at the core of many recent proposals for incremental as well as fundamental tax reform. The right answers depend in part on value judgments to which economic analysis has little to contribute.
Let me give a little bit of my philosophy here. A long time ago I figured out that in the end, after all the pros and cons are lined up, the research is done, the discussion had, the reason anyone does anything is because they wanted to do it. Why did I do X? Because that is what I wanted to do - period. Decisions are made based on values held at the time of decision not on changing values during the decision. Secondly, I am only as free as I allow you to be. Before someone starts thinking “libertarian talking here”, I understand that if in my freedom I accumulate enough money such that you have to rent a toilet from me verses buying your own, I'm not free because now I have to make sure the toilet is always available at the time of your need. If I don't accommodate your timing, then I am at risk of retaliation by you (and maybe a few of your friends).
I have presented in the past that the goal of our economy is defined in the Constitution:
We the people of the United States, in order to form a more perfect union, establish justice, insure domestic tranquility, provide for the common defense, promote the general welfare, and secure the blessings of liberty to ourselves and our posterity, do ordain and establish this Constitution for the United States of America.
Specifically but not exclusively “domestic tranquility”, “general welfare” and “posterity”. An economy has been developed to serve our purpose. In the crudest terms of economic purpose; to create capital, as in "a company exists to create profit". But for me, the crude answer begs the question: why create capital? Because I want to... because of my values. I see taxation as how money comes into play in meeting the goals as stated.
Mr Avi-Yonah starts the second part of his argument with a review of other lawyers' work concerning the question of progressive taxation:
...Walter Blum and Harry Kalven published a classic article entitled The Uneasy Case for Progressive Taxation. [They] used most of the article to demolish systematically all previous arguments for progressivity made in the name of “ ability to pay” and “ equal sacrifice.” ...they concluded that any remaining case for progressivity must be made in the name of redistribution, or an inherent objection to social inequality,...This is the same type of “ aesthetic” argument that motivated Henry Simons’s oft- quoted conclusion in Personal Income Taxation (published in 1938 at the height of New Deal progressivism) that sharply graduated rates are defensible only because there is something inherently “ unlovely” about inequality.
Next up was the introduction in 1987 by Joseph Bankman and Thomas Griffith of optimal tax theory “developed by economist James Mirrlees”. Mr. Avi-Yonah describes the theory as:
“Optimal tax theory seeks to answer the following question: Given that income taxes generate a disincentive effect on work, what is the ideal tax and transfer system if the ultimate goal is to maximize the sum of the utilities of individuals with identical preferences?
As described here, considering the findings suggested in the first post, there is a problem with the assumption. At least as it relates to the tippy top of the earning pile. Googling “optimal taxation theory” will bring up lots of information so I leave more in-depth discussion to you. Surfice-it-to-say, there are issues with the theory when one like Mr. Avi-Yonah is looking for reasoning in support of progressive taxation. He quotes Larry Zelenak and Kemper Moreland:
Regardless of the results of any simulation, optimal tax analysis can never prove that the income tax should have progressive marginal rates. Even if a simulation indicated gradual rates were optimal, and even if the simulation’s factual assumptions were unassailable, an opponent of progression could still dismiss the results by rejecting the philosophical basis of the simulation. If the premises of the simulation are utilitarian or Rawlsian, no amount of sophisticated mathematics will convince someone who objects to those premises.
He continues:
Fundamentally, the problem with optimal tax theory is that, like any welfarist theory, it focuses completely on the well-being of individuals.
Before we go further, let me introduce you to this paper: Taxes and Torts in the Redistribution of Income by David A. Weisbach, THE LAW SCHOOL THE UNIVERSITY OF CHICAGO
He puts the issue of law vs economics as a bases for redistribution discussion thusly:
The thesis is that the presence or absence of the tax system completely changes how one thinks about basic subjects.
The reason why this is so is because the tax system plays a central role in the redistribution of income or wealth. In thinking about legal rules, we must ask whether they should be designed to redistribute or whether they should merely be efficient...Taking these arguments altogether, the double distortion argument and the problems with contracting around and haphazardness, I believe the case against using legal rules to redistribute to the poor becomes almost overwhelming. The tax system is a dedicated system designed to measure the variables relevant to redistribution and act only on those margins. It is hard to imagine that legal rules are likely to do a better job. One key point to note is that I have not argued that legal rules should be efficient. All the argument has shown so far is that legal rules should not be used to redistribute income.
But income is not the only source of inequality. Race, gender, disability, or health all mightbe sources of inequality in our society. If we value equality of all sorts not just income equality, we might want to redistribute based on other sources of inequality.
We are talking 2 different aspects of equality and redistribution as the morality applies to life. One concerns our relationships to each other as individuals exclusive of money. It is nature. It is the place for law. The other concerns our relationship inclusive of money. It is a human added event to nature. Money is based on value which is from our inherent concept of values, but I argue that there is no inherent concept of money. All else being equal, money is the only thing that can create an inequality not found in nature. There is nothing that can substitute for money when trying to equalize the effect of money. This is the place for taxation. I believe the conflating of these two distinct relationships becomes the means to argue against redistribution/progressive policy related to income. The conflation is in denying that collectively we have agreed on, consequently assigned the properties of money within the scheme of life unlike an event of nature.
Mr. Avi-Yonah leads into his reasoning in support of progressive taxation with:
A society is a community with a shared culture and shared interests that transcend the interests of its individual members and extend back to its historical roots and forward into its future. Thus, it is necessary to look for affirmative reasons for taxing the rich that are rooted in a broader social and historical understanding of the vital function of taxation in maintaining such a community over time.
Sounds to me that Mr. Avi-Yonah is talking about the founding ideology manifest in our constitution: We the people...
To be continued...
"Servers, labourers, and workmen of different kinds make up the far greater part of every great political society. But what improves the circumstances of the greater part can never be regarded as an inconveniency to the whole. No society can be flourishing and happy, of which the far greater part of the members are poor and miserable. It is but equity, besides, that they who feed cloath, and lodge the whole body of the people, should have such a share of the produce of their own labour as to be themselves tolerably well fed, cloathed, and lodged."
“ [h]ow much and how to tax high-income individuals are questions at the core of many recent proposals for incremental as well as fundamental tax reform. The right answers depend in part on value judgments to which economic analysis has little to contribute.
Let me give a little bit of my philosophy here. A long time ago I figured out that in the end, after all the pros and cons are lined up, the research is done, the discussion had, the reason anyone does anything is because they wanted to do it. Why did I do X? Because that is what I wanted to do - period. Decisions are made based on values held at the time of decision not on changing values during the decision. Secondly, I am only as free as I allow you to be. Before someone starts thinking “libertarian talking here”, I understand that if in my freedom I accumulate enough money such that you have to rent a toilet from me verses buying your own, I'm not free because now I have to make sure the toilet is always available at the time of your need. If I don't accommodate your timing, then I am at risk of retaliation by you (and maybe a few of your friends).
I have presented in the past that the goal of our economy is defined in the Constitution:
We the people of the United States, in order to form a more perfect union, establish justice, insure domestic tranquility, provide for the common defense, promote the general welfare, and secure the blessings of liberty to ourselves and our posterity, do ordain and establish this Constitution for the United States of America.
Specifically but not exclusively “domestic tranquility”, “general welfare” and “posterity”. An economy has been developed to serve our purpose. In the crudest terms of economic purpose; to create capital, as in "a company exists to create profit". But for me, the crude answer begs the question: why create capital? Because I want to... because of my values. I see taxation as how money comes into play in meeting the goals as stated.
Mr Avi-Yonah starts the second part of his argument with a review of other lawyers' work concerning the question of progressive taxation:
...Walter Blum and Harry Kalven published a classic article entitled The Uneasy Case for Progressive Taxation. [They] used most of the article to demolish systematically all previous arguments for progressivity made in the name of “ ability to pay” and “ equal sacrifice.” ...they concluded that any remaining case for progressivity must be made in the name of redistribution, or an inherent objection to social inequality,...This is the same type of “ aesthetic” argument that motivated Henry Simons’s oft- quoted conclusion in Personal Income Taxation (published in 1938 at the height of New Deal progressivism) that sharply graduated rates are defensible only because there is something inherently “ unlovely” about inequality.
Next up was the introduction in 1987 by Joseph Bankman and Thomas Griffith of optimal tax theory “developed by economist James Mirrlees”. Mr. Avi-Yonah describes the theory as:
“Optimal tax theory seeks to answer the following question: Given that income taxes generate a disincentive effect on work, what is the ideal tax and transfer system if the ultimate goal is to maximize the sum of the utilities of individuals with identical preferences?
As described here, considering the findings suggested in the first post, there is a problem with the assumption. At least as it relates to the tippy top of the earning pile. Googling “optimal taxation theory” will bring up lots of information so I leave more in-depth discussion to you. Surfice-it-to-say, there are issues with the theory when one like Mr. Avi-Yonah is looking for reasoning in support of progressive taxation. He quotes Larry Zelenak and Kemper Moreland:
Regardless of the results of any simulation, optimal tax analysis can never prove that the income tax should have progressive marginal rates. Even if a simulation indicated gradual rates were optimal, and even if the simulation’s factual assumptions were unassailable, an opponent of progression could still dismiss the results by rejecting the philosophical basis of the simulation. If the premises of the simulation are utilitarian or Rawlsian, no amount of sophisticated mathematics will convince someone who objects to those premises.
He continues:
Fundamentally, the problem with optimal tax theory is that, like any welfarist theory, it focuses completely on the well-being of individuals.
Before we go further, let me introduce you to this paper: Taxes and Torts in the Redistribution of Income by David A. Weisbach, THE LAW SCHOOL THE UNIVERSITY OF CHICAGO
He puts the issue of law vs economics as a bases for redistribution discussion thusly:
The thesis is that the presence or absence of the tax system completely changes how one thinks about basic subjects.
The reason why this is so is because the tax system plays a central role in the redistribution of income or wealth. In thinking about legal rules, we must ask whether they should be designed to redistribute or whether they should merely be efficient...Taking these arguments altogether, the double distortion argument and the problems with contracting around and haphazardness, I believe the case against using legal rules to redistribute to the poor becomes almost overwhelming. The tax system is a dedicated system designed to measure the variables relevant to redistribution and act only on those margins. It is hard to imagine that legal rules are likely to do a better job. One key point to note is that I have not argued that legal rules should be efficient. All the argument has shown so far is that legal rules should not be used to redistribute income.
But income is not the only source of inequality. Race, gender, disability, or health all mightbe sources of inequality in our society. If we value equality of all sorts not just income equality, we might want to redistribute based on other sources of inequality.
We are talking 2 different aspects of equality and redistribution as the morality applies to life. One concerns our relationships to each other as individuals exclusive of money. It is nature. It is the place for law. The other concerns our relationship inclusive of money. It is a human added event to nature. Money is based on value which is from our inherent concept of values, but I argue that there is no inherent concept of money. All else being equal, money is the only thing that can create an inequality not found in nature. There is nothing that can substitute for money when trying to equalize the effect of money. This is the place for taxation. I believe the conflating of these two distinct relationships becomes the means to argue against redistribution/progressive policy related to income. The conflation is in denying that collectively we have agreed on, consequently assigned the properties of money within the scheme of life unlike an event of nature.
Mr. Avi-Yonah leads into his reasoning in support of progressive taxation with:
A society is a community with a shared culture and shared interests that transcend the interests of its individual members and extend back to its historical roots and forward into its future. Thus, it is necessary to look for affirmative reasons for taxing the rich that are rooted in a broader social and historical understanding of the vital function of taxation in maintaining such a community over time.
Sounds to me that Mr. Avi-Yonah is talking about the founding ideology manifest in our constitution: We the people...
To be continued...
My hunt for Obama's econ advisor lead me to a paper that incorporates a review of a book: Does Atlas Shrug? The Economic Consequences of Taxing the Rich. It caught my attention because the paper is written by a tax lawyer.: Reuven S. Avi-Yonah, the Irwin I. Cohn Professor of Law and director of the International Tax LL.M. Program... He also served as consultant to the U.S. Treasury on tax competition and OECD on tax competition, and is a member of the Steering Group of the OECD's International Network for Tax Research and chair of the American Bar Association's Tax Section Committee on Consumption Taxes.
I never really thought about it, but laws are the means by which we create taxation. They do reflect our reasoning. So, maybe we need to consider law arguments as we discuss taxes?
This will be presented in multiple parts in order to not hog the blog space here (or bore those not interested). My intent in presenting this review is to move the question of taxation beyond the simple rhetoric. We are at a time that is being implied will be a mark on our historical time line of national personality; the coming presidential election. For the best of our personality to come through, we need more than focus group tested conversation about money. We need to do the work to not only understand the physics of money but, also the philosophies of money. We have experienced 3 distinct approaches: pre-income tax, New Deal and Reaganomics. Time we start being responsible for the decisions made and look at what we decided, how we justified them and what those decisions gave us. Now is the time to ask: Just what the hell was I thinking here?
The paper is actually a discussion by Mr. Avi-Yonah that uses a review of Does Atlas Shurg for his lead in to his title: Why Tax the Rich? Efficiency, Equity, and Progressive Taxation. We here at AB have tossed around the short answer “because the richer you are the more benefit you get”. Mr. Avi-Yonah sets up his paper's question:
“Thus, the question of whether high marginal tax rates come with an unaffordably high cost to the U.S. economy remains unsettled. Does Atlas Shrug?,...attempts to answer this question.
Part I begins with an excellent historical survey by W. Elliot Brownlee of the rates facing the rich from the beginning of the U.S. income tax in 1913 to the present. He indicates that effective rates during the high marginal rate years of World War I reached 15.8%, and that during the high marginal rate years of World War II they reached an astonishing 58.6% in 1944. After the war, while the top marginal rate remained extremely high at 91%, the effective rate for the rich declined to 32.2% in 1952, then 24.6% in 1963, rising to 28.9% when Ronald Reagan took office and declining to 22.1% following the 1986 tax reductions. The conclusion drawn by Brownlee is that the rich can be taxed at very high effective rates during times of national emergency, but that at other times their political clout ensures that effective rates are much lower than marginal rates.”
Well, guess we don't need to worry about the nominal rates, they mean squat. But the question; do high rates cost us? The summary answer:
“In general, they provide a mixed answer... While there is some evidence of behavioral responses, it is quite limited and seems to depend crucially on the authors’ chosen methodology. Importantly, most of the findings of behavioral response relate to the use of various tax avoidance techniques—and even there the evidence is mixed, with some obvious techniques being used less than they should be in a world in which tax minimization is very important to the rich. Real behaviors, such as labor and saving, seem much less affected by taxation. This distinction is important because while both tax avoidance techniques and real behavioral changes cause deadweight losses, the former can be partially prevented by changing the law, while the latter are less amenable to legal change since one cannot force the rich to work or save more.”
As to the evidence, Mr. Avi-Yonah states that the 9 studies are reported in 3 groups. The first being limitations of past research such as noted by Goolsbee. The second group:
“...support the view that behavioral responses by the rich to taxation are quite limited. A study by Moffitt and Wilhelm investigates the labor supply decisions of the rich based on responses to the 1986 Tax Reform Act and finds essentially no responsiveness of the hours of work of high-income men to tax reductions...But the studies also suggest that high-income men are unlikely to decrease hours worked as tax rates go up...Other studies in this group suggest that even financial behaviors, which are less “ real,” and therefore more likely to be tax-motivated than labor or saving decisions, do not respond much to taxation.”
He specifically notes evidence that portfolio choices do not significantly change, there is not “judicious” sheltering of capital gains and that “inter vivos giving” are “much lower” than would be expected if “households were taking full advantage of this estate tax avoidance technique.”
So far, nominal rates mean squat and the rich don't really play the tax rate game as has been implied by those offering tax rates as an excuse for our sorry condition. But, they do play:
“The third and final group is made up of studies that do find some behavioral responses to taxation. For example, Auten, Clotfelter, and Schmalbeck find that the current tax system does stimulate some charitable giving by the wealthy, compared with a system in which contributions are not deductible, but that the sensitivity of giving to tax changes is smaller than suggested by previous researchers. They also find that current law does encourage the wealthy to engage in elaborate estate tax arrangements associated with their charitable donations. Alm and Wallace examine a wide range of taxpayer reporting decisions by the rich in the wake of tax law changes and suggest that they show increased responsiveness due to their larger control over the form of their compensation. Finally, Carroll, Holtz-Eakin, Rider, and Rosen investigate the behavior of entrepreneurs in response to tax rate increases and conclude that individual income taxes do have a large negative effect (a five percent increase in marginal tax rates decreases mean capital expenditures by approximately ten percent).”
My theory on this last info, they like to make sure they settle their conscience in the end but only if they get a break and if they earned it with their own business they will sacrifice the business to keep up the income.
“I would also add that most of the evidence for behavioral responses in the book relates to tax avoidance strategies (e.g., charitable giving techniques, shifting income from corporations to individuals, and the timing of receipts), rather than to real activities (labor and saving decisions).”
Mr. Avi-Yonah closes this part of his argument noting that the book did not address the issue of illegal tax avoidance:
“Slemrod is not to be blamed for not focusing on this issue because no recent data exist, but it is high time for Congress to study the question of illegal tax evasion by Americans.”
So, if the nominal rates don't matter as the tax code is currently set up and the rich don't respond to higher rates by working less or lower rates by working more and they will cheat the game to the benefit of them self, then the question of "why" and "how much" tax needs a reasoned answer verses a mechanized answer. We have to justify our taxing with words and use the research to tell us if our reasoning is getting us to our goal. We have to accept that money is and does as we say it is and will do. It is the entity created in our own image. It is a medium of personal creative expression.
To be continued...
My hunt for Obama's econ advisor lead me to a paper that incorporates a review of a book: Does Atlas Shrug? The Economic Consequences of Taxing the Rich. It caught my attention because the paper is written by a tax lawyer.: Reuven S. Avi-Yonah, the Irwin I. Cohn Professor of Law and director of the International Tax LL.M. Program... He also served as consultant to the U.S. Treasury on tax competition and OECD on tax competition, and is a member of the Steering Group of the OECD's International Network for Tax Research and chair of the American Bar Association's Tax Section Committee on Consumption Taxes.
I never really thought about it, but laws are the means by which we create taxation. They do reflect our reasoning. So, maybe we need to consider law arguments as we discuss taxes?
This will be presented in multiple parts in order to not hog the blog space here (or bore those not interested). My intent in presenting this review is to move the question of taxation beyond the simple rhetoric. We are at a time that is being implied will be a mark on our historical time line of national personality; the coming presidential election. For the best of our personality to come through, we need more than focus group tested conversation about money. We need to do the work to not only understand the physics of money but, also the philosophies of money. We have experienced 3 distinct approaches: pre-income tax, New Deal and Reaganomics. Time we start being responsible for the decisions made and look at what we decided, how we justified them and what those decisions gave us. Now is the time to ask: Just what the hell was I thinking here?
The paper is actually a discussion by Mr. Avi-Yonah that uses a review of Does Atlas Shurg for his lead in to his title: Why Tax the Rich? Efficiency, Equity, and Progressive Taxation. We here at AB have tossed around the short answer “because the richer you are the more benefit you get”. Mr. Avi-Yonah sets up his paper's question:
“Thus, the question of whether high marginal tax rates come with an unaffordably high cost to the U.S. economy remains unsettled. Does Atlas Shrug?,...attempts to answer this question.
Part I begins with an excellent historical survey by W. Elliot Brownlee of the rates facing the rich from the beginning of the U.S. income tax in 1913 to the present. He indicates that effective rates during the high marginal rate years of World War I reached 15.8%, and that during the high marginal rate years of World War II they reached an astonishing 58.6% in 1944. After the war, while the top marginal rate remained extremely high at 91%, the effective rate for the rich declined to 32.2% in 1952, then 24.6% in 1963, rising to 28.9% when Ronald Reagan took office and declining to 22.1% following the 1986 tax reductions. The conclusion drawn by Brownlee is that the rich can be taxed at very high effective rates during times of national emergency, but that at other times their political clout ensures that effective rates are much lower than marginal rates.”
Well, guess we don't need to worry about the nominal rates, they mean squat. But the question; do high rates cost us? The summary answer:
“In general, they provide a mixed answer... While there is some evidence of behavioral responses, it is quite limited and seems to depend crucially on the authors’ chosen methodology. Importantly, most of the findings of behavioral response relate to the use of various tax avoidance techniques—and even there the evidence is mixed, with some obvious techniques being used less than they should be in a world in which tax minimization is very important to the rich. Real behaviors, such as labor and saving, seem much less affected by taxation. This distinction is important because while both tax avoidance techniques and real behavioral changes cause deadweight losses, the former can be partially prevented by changing the law, while the latter are less amenable to legal change since one cannot force the rich to work or save more.”
As to the evidence, Mr. Avi-Yonah states that the 9 studies are reported in 3 groups. The first being limitations of past research such as noted by Goolsbee. The second group:
“...support the view that behavioral responses by the rich to taxation are quite limited. A study by Moffitt and Wilhelm investigates the labor supply decisions of the rich based on responses to the 1986 Tax Reform Act and finds essentially no responsiveness of the hours of work of high-income men to tax reductions...But the studies also suggest that high-income men are unlikely to decrease hours worked as tax rates go up...Other studies in this group suggest that even financial behaviors, which are less “ real,” and therefore more likely to be tax-motivated than labor or saving decisions, do not respond much to taxation.”
He specifically notes evidence that portfolio choices do not significantly change, there is not “judicious” sheltering of capital gains and that “inter vivos giving” are “much lower” than would be expected if “households were taking full advantage of this estate tax avoidance technique.”
So far, nominal rates mean squat and the rich don't really play the tax rate game as has been implied by those offering tax rates as an excuse for our sorry condition. But, they do play:
“The third and final group is made up of studies that do find some behavioral responses to taxation. For example, Auten, Clotfelter, and Schmalbeck find that the current tax system does stimulate some charitable giving by the wealthy, compared with a system in which contributions are not deductible, but that the sensitivity of giving to tax changes is smaller than suggested by previous researchers. They also find that current law does encourage the wealthy to engage in elaborate estate tax arrangements associated with their charitable donations. Alm and Wallace examine a wide range of taxpayer reporting decisions by the rich in the wake of tax law changes and suggest that they show increased responsiveness due to their larger control over the form of their compensation. Finally, Carroll, Holtz-Eakin, Rider, and Rosen investigate the behavior of entrepreneurs in response to tax rate increases and conclude that individual income taxes do have a large negative effect (a five percent increase in marginal tax rates decreases mean capital expenditures by approximately ten percent).”
My theory on this last info, they like to make sure they settle their conscience in the end but only if they get a break and if they earned it with their own business they will sacrifice the business to keep up the income.
“I would also add that most of the evidence for behavioral responses in the book relates to tax avoidance strategies (e.g., charitable giving techniques, shifting income from corporations to individuals, and the timing of receipts), rather than to real activities (labor and saving decisions).”
Mr. Avi-Yonah closes this part of his argument noting that the book did not address the issue of illegal tax avoidance:
“Slemrod is not to be blamed for not focusing on this issue because no recent data exist, but it is high time for Congress to study the question of illegal tax evasion by Americans.”
So, if the nominal rates don't matter as the tax code is currently set up and the rich don't respond to higher rates by working less or lower rates by working more and they will cheat the game to the benefit of them self, then the question of "why" and "how much" tax needs a reasoned answer verses a mechanized answer. We have to justify our taxing with words and use the research to tell us if our reasoning is getting us to our goal. We have to accept that money is and does as we say it is and will do. It is the entity created in our own image. It is a medium of personal creative expression.
To be continued...
As noted in my last post, I have been playing with income data. I believe that for us to be able to properly understand just where we have been and where we are going, we need to look further back than say the 50's through Reagan's time. That is, if the data is around. I view the Great Depression as a defining point in this countries economy, kind of like BC vs AD. I'm not convinced that the 90's were all that good as far as policy for the masses. Sure we had a boom, GDP went up and the budget was looking better, but the Clinton's come from the “conservative” or for the rest of the world “neo-liberal” side of economic policy. As much as his time period produced faster growth than the 2 prior presidents and the current one, it was not what we had seen in the past.
At the same time, income inequality rose by more points than through the Reagan/Bush terms. Specifically 4 points in 12 years verses 6 points in Clinton's 8 years. It is to say, the Clinton's come from a side of management that is closer to Reagan/Bush than Roosevelt/Kennedy. (This link gives an alternative review of Clinton's policies.) Thus, to see what true progressive policy results look like we need to go back to a time before Roosevelt and then follow the results going forward to see the changes.
This post is to present the basic info. I will break it out in later posts. I used BEA table 2.1. They were kind enough to include a conversion of disposable income to 2000 dollars. This is why it's in 2000 dollars. I have found a site that will convert any year to any year and may play there too. I used the ratio for each year to the 4th decimal place to convert the other numbers. This is the chart of the chaining variable as a percentage of the 2000 dollars. (nominal/chained)
I used data from Professor Saez for the share of income. It's a big file.
This table is of the share of income to the top 1%.
This brings us to the results. First is the nominal.
This is the chained picture.
I'm not going to say anything now. But I do give you these two charts because, well...we're talking income here. Specifically two groups; the top 1% and everyone else.
As noted in my last post, I have been playing with income data. I believe that for us to be able to properly understand just where we have been and where we are going, we need to look further back than say the 50's through Reagan's time. That is, if the data is around. I view the Great Depression as a defining point in this countries economy, kind of like BC vs AD. I'm not convinced that the 90's were all that good as far as policy for the masses. Sure we had a boom, GDP went up and the budget was looking better, but the Clinton's come from the “conservative” or for the rest of the world “neo-liberal” side of economic policy. As much as his time period produced faster growth than the 2 prior presidents and the current one, it was not what we had seen in the past.
At the same time, income inequality rose by more points than through the Reagan/Bush terms. Specifically 4 points in 12 years verses 6 points in Clinton's 8 years. It is to say, the Clinton's come from a side of management that is closer to Reagan/Bush than Roosevelt/Kennedy. (This link gives an alternative review of Clinton's policies.) Thus, to see what true progressive policy results look like we need to go back to a time before Roosevelt and then follow the results going forward to see the changes.
This post is to present the basic info. I will break it out in later posts. I used BEA table 2.1. They were kind enough to include a conversion of disposable income to 2000 dollars. This is why it's in 2000 dollars. I have found a site that will convert any year to any year and may play there too. I used the ratio for each year to the 4th decimal place to convert the other numbers. This is the chart of the chaining variable as a percentage of the 2000 dollars. (nominal/chained)
I used data from Professor Saez for the share of income. It's a big file.
This table is of the share of income to the top 1%.
This brings us to the results. First is the nominal.This is the chained picture.I'm not going to say anything now. But I do give you these two charts because, well...we're talking income here. Specifically two groups; the top 1% and everyone else. I've been doing some numbers concerning personal income. Breaking out share of income, savings, GDP, etc based on BEA data and Saez's data. I'm playing with it, have converted it to year 2000 dollars and will be looking at per capita relations too. Even thinking of converting it all to 1929 dollars. I plan a few posts on it all.
But, considering the post today concerning the dollar, I thought these two charts would be of interest. These two charts are in 2000 dollars. There is an interesting hump around WW 2, I'll get to that in a later post. But for now, look at the 3 lines and pay attention to what crosses what.
Now, look at this chart.
See anything of interest? Something around 1996? Now, Sherman, set the WABAC machine to 1929 and look forward. I've been doing some numbers concerning personal income. Breaking out share of income, savings, GDP, etc based on BEA data and Saez's data. I'm playing with it, have converted it to year 2000 dollars and will be looking at per capita relations too. Even thinking of converting it all to 1929 dollars. I plan a few posts on it all.
But, considering the post today concerning the dollar, I thought these two charts would be of interest. These two charts are in 2000 dollars. There is an interesting hump around WW 2, I'll get to that in a later post. But for now, look at the 3 lines and pay attention to what crosses what.Now, look at this chart.
See anything of interest? Something around 1996? Now, Sherman, set the WABAC machine to 1929 and look forward. One of my issues with our economy and the shift in share of income has been the tax code. I have consistently stated that something other than the tax rate changed in the code back in 1981 or so when the first change took place. Labor went from being an asset to a liability and thus the rush to reduce all cost related to employees. Messing with the rates won't do it. In fact, during Clinton's term the share of income to the top 1% rose 6 points. It only rose 4 points with Reagan/Bush.
Well I was right...sort of. Bill # H.R.3876:
To amend the Internal Revenue Code of 1986 to limit the deductibility of excessive rates of executive compensation.
Income Equity Act of 2007 - Amends the Internal Revenue Code to: (1) deny employers a tax deduction for payments of excessive compensation to any employee (i.e., more than 25 times the lowest compensation paid any other employee); and (2) require such employers to file a report on compensation paid to their employees with the Secretary of the Treasury.
This will be put in under
:(a) In General- Section 162 of the Internal Revenue Code of 1986 (relating to deduction for trade or business expenses) is amended by inserting after subsection (h) the following new subsection:
So, back in 1986 when they raised the rates they also allowed the top to shift the income they were paid so that it would be taxed less. Yup that was real "fair" sharing of the Reagan debt.
It's not just about rates and it never has been. It is about definitions, and this makes me wonder what else is not in that tax code that use to be. All this bickering about entitlements, and the transfer of income, and welfare etc, etc, etc is just smoke and mirrors. The truth is we can solve our problems as soon as we go back to (return to the pre 1981 code) making it more profitable for the company to pay the help as oppose to keeping it for them self. And when I say for them self, listen to the big CEO's refer to the company as their company! It also means that any arguments suggesting there is a free market idealism practiced in the labor market are wrong. What is part of determining what a fair wage should be comes from the sections of the tax code that control the definitions of taxable income to whom.
I still believe there were things done in the first change. You can read the reps statement here.
Update: To be clear, the bill linked to here will undo the tax break of 1986 that promoted paying excessive income to the upper company employees. It is a start toward removing the economic royalty of our nation.
One of my issues with our economy and the shift in share of income has been the tax code. I have consistently stated that something other than the tax rate changed in the code back in 1981 or so when the first change took place. Labor went from being an asset to a liability and thus the rush to reduce all cost related to employees. Messing with the rates won't do it. In fact, during Clinton's term the share of income to the top 1% rose 6 points. It only rose 4 points with Reagan/Bush.
Well I was right...sort of. Bill # H.R.3876:
To amend the Internal Revenue Code of 1986 to limit the deductibility of excessive rates of executive compensation.
Income Equity Act of 2007 - Amends the Internal Revenue Code to: (1) deny employers a tax deduction for payments of excessive compensation to any employee (i.e., more than 25 times the lowest compensation paid any other employee); and (2) require such employers to file a report on compensation paid to their employees with the Secretary of the Treasury.
This will be put in under
:(a) In General- Section 162 of the Internal Revenue Code of 1986 (relating to deduction for trade or business expenses) is amended by inserting after subsection (h) the following new subsection:
So, back in 1986 when they raised the rates they also allowed the top to shift the income they were paid so that it would be taxed less. Yup that was real "fair" sharing of the Reagan debt.
It's not just about rates and it never has been. It is about definitions, and this makes me wonder what else is not in that tax code that use to be. All this bickering about entitlements, and the transfer of income, and welfare etc, etc, etc is just smoke and mirrors. The truth is we can solve our problems as soon as we go back to (return to the pre 1981 code) making it more profitable for the company to pay the help as oppose to keeping it for them self. And when I say for them self, listen to the big CEO's refer to the company as their company! It also means that any arguments suggesting there is a free market idealism practiced in the labor market are wrong. What is part of determining what a fair wage should be comes from the sections of the tax code that control the definitions of taxable income to whom.
I still believe there were things done in the first change. You can read the reps statement here.
Update: To be clear, the bill linked to here will undo the tax break of 1986 that promoted paying excessive income to the upper company employees. It is a start toward removing the economic royalty of our nation.