I was listening to Bernake, and then Mr Sanders started the typical leftist propaganda. The Democrats are idiots who are going to self-destruct in about four years. My political leanings are center right liberal libertarian.

The tax cuts that Bush made have raised the hackles of Democrats. Democrats want to nullify the tax cuts. Yet I will argue that Bush was right to make the tax cuts.

I bet you are ready to pounce on me and say, “Only the rich benefit from the tax cuts and they pay so little.” Well, let me tell you a story about morality and being pragmatic.

The moral of socialism and anybody who leans towards the left says it is immoral to give tax breaks to the richest of the rich. The rich should pay more tax than the poor because the rich can afford it.

So a poor person would pay 10% income tax and rich person pays 50%. Many will argue it is ok to tax the rich because they can afford.

Oh really? Tax rates are percentages and thus the rich will always pay more than the poor. So I ask what moral argument do you have to force the rich to pay a higher percentage than the poor? After all the poor are the ones that take advantage of the government services, and the rich don’t. My argument is for a flat tax rate for all (say 14% to 20%).

The reason why the rich are taxed to the hilt is because it is an easy populist thing to do. Let’s face it there are more poor than rich and the politicians can do the math. Yet pragmatically it is the wrong thing to do, and when Bush created the cuts he was being pragmatic.

I live in Switzerland and the taxation levels are extremely low. For example Michael Schumacher who lives in Switzerland earned last year about a 75 million per year and paid about 5 million per year (I am guessing based on a TV report).

Michael is happy and so is the Swiss government. Michael will never take advantage of the Swiss benefits (unemployment, pension, etc). Yet Michael pays unemployment, pension and taxes in Switzerland. Michael’s taxes are being used to pay for services that poor people use.

Now imagine if Michael moved to his native Germany. There the German government would demand 50% of his income. Here is where I ask what right does Germany have to 50% of Michael’s income? Answer, none! Michael is willing to pay taxes as most rich are (Really rich people generally speaking are willing to pay taxes so long as the taxes are moderate.) 

Think about this situation. Germany and their socialists believe they are morally correct to charge 50% income tax. If rich people paid 10% socialists would cry foul and demand rich people pay their fair share (which they do since taxes are percentages.)

Yet Germany with its 50% does not get any monies whatsoever from Michael because he pays his taxes in Switzerland. Switzerland is pragmatic and says, “hey 5 million is better than nothing.”

Now enter Bush and his tax cuts. Until the tax cuts many rich and American corporations put their headquarters in Switzerland. Switzerland benefitted quite a bit and the money kept on jingling in the Swiss coffers. When the Bush tax cut became active the rich and American corporations went back to the US to pay their taxes.

The Treasury said the government actually ran a surplus of $44.5 billion for December, the largest ever for that month. The gain reflected a big jump in quarterly corporate tax payments.

And here in Switzerland they have noticed that they have less revenues! Why? Swiss papers have said because tax revenues went back to the US.

So while you might not agree to the tax cuts from a moral perspective, pragmatically it is the right approach. Gotta give Bush credit where credit is due.

I am one of those guys who believes that wealthy people should pay a higher percentage of taxes. Here is my moral reasoning:

We like in a capitalistic society that benefits rich people. The rich get richer, etc. I think this is great as it encourages people to strive for more.

However, the effect of all of this is that very wealthy people (say making over $400k per year) are making a disproportionate amount of money compared to the amount of “effort” they put in. I would not doubt that a CEO might deserve a $10 million pay day based on how much money he is earning for his company, but I wouldn’t say he is working “harder” than a coal minor working lots of overtime under harsh conditions making $80k per year.

So I see higher percentage taxes as a way of balancing the disproportion in income. In short, in my opinion, wealthy people are making more money than they deserve. We can change the system, so let’s just tax them more to help balance things out.

I’m also not against taking money from the wealthy and spending it on programs that benefit the poor and middle class. I see how society benefits when the standard of living for our poorest people goes up. We see less hunger obviously, but less crime too, and more of the good stuff: art and laughs and smiles.

Also remember, that wealthy people didn’t make their money in a vacuum. They made it in part because of the society they live in. They can pay a little (even a lot) of it back to society.

So that’s the moral argument. I’m interested in practical thinking too. I’m a little lost on your argument at the end though. Are you saying that the Bush tax cuts were a good thing because they resulted in HIGHER taxes being paid? That doesn’t make sense to me.

I can see how higher earnings has caused higher taxes despite the tax cuts. But you don’t specifically state that the higher earnings are themselves due to the tax cuts. That’s a harder argument to make I think.

“Are you saying that the Bush tax cuts were a good thing because they resulted in HIGHER taxes being paid? ”

Not in terms of rates, but more companies are willing to be based in the US at lower tax rates therefore increasing the amount of revenue taken in.

Capitalistic society rewards individualism, creativity, and efficient production. That coal miner you refer to just hops in line and does nothing to make himself stick out or differentiate himself from his fellow coal miners. If he takes his intimate knowledge of the coal mining industry and puts it towards a better way/safer way/cheaper way of doing something he’ll thusly be rewarded. If he continues to strive for mediocrity he’ll be rewarded with a wage that the market believes is fair for the unspectacular work he does.

A CEO has put in the work to get an education and be the best he or she can to get to that position of leadership. It’s not necessarily easy – I know people working to pay their way through college to get business degrees or engineering degrees who will be paid accordinly for the amount of value they create after they graduate. They may need to work 2 or 3 jobs while in school which won’t be easy, but they’re willing to do it because they realize it will help them in the long run even though it sucks in the short. They might come out with a shit load of debt even, but it’s still a worthy investment.

Just because someone is rich doesn’t mean they’ve inherited or not earned it – they may not be doing back breaking labor to earn that wage (which seems to be how you judge value, based upon physical effort), but that doesn’t mean that haven’t in the past to get to that point or that they haven’t made sacrifices to get where they are.

Capitalism isn’t meant to be easy, it rewards those who strive for greatness and try their best regardless of setbacks. Those sitting around and waiting to be rich will not be rewarded. It’s simple. You’re not entitled to anything.

Morally, I don’t think anyone deserves anything more than what they’ve proven themselves capable of. If you’re only capable of mining coal, you’ll be paid thusly. If you’ve impressed enough people to be a CEO and proven your skills, you deserve the pay that you receive. You’re also always welcome to start your own business if you feel you aren’t being compensated fairly or whatever. But, again, that’s not necessarily easy.

If you’re disabled, that’s a different story, but if you’re just looking to flip burgers all your life, it isn’t my responsibility morally to do anything for you if you’re not trying to do anything for yourself. It’s absolutely possible to move up in the world if you’re willing to sacrifice and take the hard road.

Chris: Nice answer…

Jason: I would like to add one thing. I don’t like the simple hard work argument. All work is hard. I see three elements to what your compensation should be; risk, responsibility, and skill. With increasing difficulty of each you get more rewards because fewer and fewer people are capable of mastering those elements.

You have to ask yourself how many people can become CEO’s? I know I can’t because I have been a manager and could not master it. My wife on the other hand is a very capable manager, and she is rewarded for her abilities.

About the rich getting rich, well yeah, but guess what there are also rich getting poorer and going bankrupt. For example the Reichmanns in Canada lost everything. We tend to forget those cases, but they do exist.

The argument, “We can change the system, so let’s just tax them more to help balance things out.” is what caused this mess in the first place. Please note that I agree that a certain amount of socialism must exist to ensure the welfare of a society. People have hard times, and have situations where they need a helping hand.

But we need to keep things in perspective because we have abused the system from getting a helping hand to expecting a helping hand.

The pragmatic approach of socialism and such started with Bismarck and his pension idea. Bismarck came up with the populist idea that everybody should have a pension when they retire. This pension would be the monies that a worker saves during their working years. The idea was an instant hit.

Though Bismarck was a clever fox. He made the retirement age such that most people would never be alive to take advantage of a pension. This worked out well because the state collected huge sums of monies that could be invested for other purposes. From my research, if we were applying the Bismarck retirement ages we would retire at 87 to 92 instead of the current 65.

The second point relates to Keynes and spending yourself out of a recession or depression. What people and politicians forget is the second part of his point. When times are good you dramatically reduce spending so that you can pay down the debt you created during the recession or depression. Keynes never supported the idea of the government spending the way governments do now.

Regarding safer society. A safer society is not directly related to taxation or socialism. If taxation and socialism were directly related then France, and Italy should be the safest countries in the world, and France is not. Remember the demonstrations. Freakecomics, and Guilliani’s broken window theory are illustrations of how to create safer societies without taxation.

Overall my point is that governments have stopped being pragmatic and to justify their tax increases they dupe us into believing the “moral” argument. Think about this one, most governments in the world take when everything is done and said about 40 to 60% of your hard earned dollar. Where does that money go?

Great discussion.

For the record, I am not saying that hard work is the only thing that matters with regards to compensation. But it is one of the things that matters.

I have great respect for people who do well and make a lot of money. I think our society is great in how it rewards people who take on risk, come up with new ideas, and build companies and industries that benefit everyone. People should be rewarded for that. I even think that people should be rewarded for that more than they are rewarded for hard work, since that is how progress is made in our capitalistic society.

However, taxing these people at a higher rate doesn’t bother me one bit. They still have incentive to earn. In most cases, their quality of life isn’t going to change one bit. In my opinion, they are making proportionately more than they “deserve”.

What if at the end of someone’s careers, we looked back and decided based on their contribution to society how much money we should give them and their family. How could we possibly reason giving someone $100 million. That’s more money than their family could ever possibly need for the rest of time. Maybe that’s naive. Maybe these rich people need the motivation to invest these huge sums to build even bigger businesses.

I’ll have to look more into those cases of rich people going bust. I think it could be pretty informative and helpful for thinking about these things. Why is it so hard to feel sorry for rich people who lose money? Why is it so easy to disregard the efforts of people who make a lot of money for themselves.

I think of the saying, “The first million is hard. After that is get easier.” And why is the second million easier to get? It’s partially due to the society that our government ensures remains profitable for the wealthy. As thanks for making it easy for you to make a bunch of money, we’re going to tax you at a higher rate. Is this a jaded way to think of things?

I guess that is the moral argument that goes against arguments of the “everyone should pay the same amount” variety. It’s a moral argument against another moral ideal. I like thinking pratical though. I think it’s commonly the duty of government in these morally fuzzy situations to choose the path that is most practical.

We should always question where the tax money goes. I’m not for taxing for no reason. I’m not for taking money from one rich guy and giving to some other rich oil company. However, if I had the choice between giving a tax break to the wealthy or middle class, I would give it to the middle class every time. I believe it would be better for society and better for the economy. I think we discuss the merits of this all day. Maybe I could change my mind.

I see the points about companies going to countries with better tax advantages. Makes sense. We read about it on the local level all the time: laws which allow big companies to come into a town paying lower taxes. The payoff is that the company still comes in and pays taxes they wouldn’t have and they create jobs to boot. Nice plan. Maybe these tax cuts aren’t so bad. I could be wrong.

Here’s a thought too. Arguments for giving money to the middle class is that they are more likely to spend the money than a wealthy person. $1000 to a person making $30k per year is not going to be saved. It’s going to be spent. But then, maybe that person was going to spend it anyway, but they would have had to put it on credit or taken a loan, etc. So withholding tax cuts (proportionately) for the middle class means more banking business!

What does the typical wealthy person making $300k per year do with the $10k they save? Put it in the stock market? Does that help the economy more than letting 30 of the little guys buy more food, rent, cars, movie tickets, or trips to Disney World?

Thanks for provoking some thought for me.

What makes any person worth US$200,000,000 a year?

Nothing. No risk no skills no contribution to society. Go and look at the share price of Home Depot and tell me you need to have skills to be a CEO.

How about Bush himself? You think he we would have got where he is today if it wasn’t for his parents’ social connections?

Why should any one person control wealth equivalent to an entire state of the USA?

Stick to advice on how to become rich, rather than social commentary.

Last time I checked, Switzerland wasn’t running the worlds largest twin deficits, nor engaged in a war in Iraq, nor spending more on the military than close to the rest of the world COMBINED, nor sending satellites to the far reaches of the solar system, nor maintaining an extensive coastline, nor maintaining an extensive network of infrastructure…

Need I go on?

“If you’ve impressed enough people to be a CEO and proven your skills, you deserve the pay that you receive.”

Exactly my point – CEO compensation is often set by those who can be impressed (a non-impartial board) and the skills are often untested. Nor is there any shortage of people willing and capable of being CEOs – the supply is often defined by the board i.e. “we need Jack”, rather than an objective review of the people available.

Again, explain to me how any one person is worth $200,000,000 a year for running a company THEY DID NOT START.

The 200 million USD salary taken by *former* CEO of Home Depot is an outlier on the bell curve of CEO pay. Average pay in 2005 was more like 11-12million according to: http://www.faireconomy.org/press/2005/EE2005_pr.html. The shareholders also blasted the former HD CEO for his ridiculous pay, hence the market straightening out outliers like his salary.

Pop stars make significantly (see Britney Spears estimated net worth @ 150 million and she hasn’t been around more like maybe 7 or 8 years I’m guessing) making her yearly take home pay probably more than the average CEO’s. What entitles her to be worth that much? The people. People have decided her records are worth that much to go out and purchase them time after time.

The shareholders at HD eventually realized that their CEO was not worth the 200 mill a year since he was not delivering the leadership and growth the company needed. He was replaced justly.

Just because arbitrary beliefs in what you think someone “deserves” doesn’t match what the crowd thinks doesn’t mean the system is flawed or that you’re wrong, even. It just means individuals have decided, en mass, the value of an individuals efforts to whatever their end goal happens to be.

Would HD shareholders be willing to pay someone who actually was doing a good job as CEO 200 million? Sure, if they deemed that his performance was worthy of it. Obviously it’s not an easy job if someone being paid 200mil couldn’t perform as expected (ie: that same coal miner couldn’t do it, I’m betting). The market is neither moral nor immoral. It simply is.

Chris, you’re right. The market is going to determine salaries and record sales and the price of the iPhone or Apple stock.

I’d be careful to call our reasoning around what people deserve “arbitrary”. Market prices can seem pretty arbitrary at times. On the other hand, I think I’ve given some good arguments (hopefully) around how we might think about the compensation that people deserve vs. the compensation the market gives them.

The truth is still that with the way our society is built and run, the generation of wealth is skewed towards those who already have more wealth. Taxing wealthier individuals and entieis at a higher rate is one way to skew things back to a more balanced level.

This is complicated stuff and there is a lot of circular reasoning, but my intuition is that this can be done without affecting those things important to capitalism: motivating people to generate wealth and prosperity for all of society, etc.

“Deserves” is not a term we should shy away from. I don’t feel like I am pushing my moral opinions on anyone. Well maybe I am, but I shouldn’t feel bad about it. The bill of rights is all about what we “deserve” as humans and citizens.

““Deserves” is not a term we should shy away from. I don’t feel like I am pushing my moral opinions on anyone. Well maybe I am, but I shouldn’t feel bad about it. The bill of rights is all about what we “deserve” as humans and citizens.”

I’ll concede it’s your right to your opinion and to your vote, but also remember the Bill of Rights doesn’t say anything about what people “deserve” monetarily from the economy, just like it doesn’t grant people a right to not be offended. Hell, even the Declaration mentions “life, liberty, the pursuit of happiness” which the free market doesn’t disagree with, yet over taxing the rich could easily be construed as going against some of the fundamental words of our forefathers.

According to Locke, governments only exist to guarantee citizens “lives, liberties, and estates” (note the similarity to the Declaration) – more specific and to the point than Jefferson in terms of finances. Over taxing the rich completely defeats one of the cornerstones which government was built upon, reversing its role to a predatory entity which doles out inequality (in the form of tax rates).

It absolutely is a tight rope to walk.

My personal feeling is that you’re not truly “rich” unless you’re at millionaire status and beyond in terms of salary at which point marginally higher taxes could seem reasonably. (This from a guy whose family makes ~

Jason: You bring up an interesting point where the impression and logic are the problems. Here is what you said.

“I think of the saying, “The first million is hard. After that is get easier.” And why is the second million easier to get? It’s partially due to the society that our government ensures remains profitable for the wealthy.”

The saying is flawed! In my opinion, and I am being harsh here, it is propaganda plain and simple!

Let’s do the logic here. Let’s say you start off with 10,000, to turn that 10,000 into 1 million you need to increase your wealth by a multiplier of 100. Now once you have your million to turn it into 2 million you only need to double your money. Ask yourself which is easier? Well its easier to double your money. I think the better saying would have been how hard is it to turn 1 million into a 100 million. Answer as difficult as turning 10,000 into a million.

Phil: “Last time I checked, Switzerland wasn’t running the worlds largest twin deficits, nor engaged in a war in Iraq, nor spending more on the military than close to the rest of the world COMBINED, nor sending satellites to the far reaches of the solar system, nor maintaining an extensive coastline, nor maintaining an extensive network of infrastructure…”

That is a BS argument dude!

The US has 300 million people and Switzerland has 8 million. You have to look at the proportion of things. So in absolute monetary terms sure the US spends more, but in per capita terms the differences are not that dramatic.

But your point is an interesting point because it illustrates the issue of morality. Many things that countries spend on don’t actually need to be. As one of the founding fathers said (I think) the role of the people is not to bail out the government when it overspends. What has happened is that in many of the larger population countries to justify expenditures the issue of morality is raised. EG We have to do X because it is a moral or fair thing to do.

I counter and ask, if countries with larger populations have larger budgets why can’t they take advantage of economies of scale?

Take road building as an example. Canada, and Switzerland have some of the most expensive road systems in the world because they have less people and harder environmental conditions. YET I think the roads in Canada and Switzerland are better than the roads in their big brother country. Why is that?

I also have a theory why the morality argument is being raised more often (eg democrats and Mr Sanders). The problem is that smaller countries went through a very harsh period of unsustainability. People were leaving smaller countries to live in the larger countries. This was causing problems.

The smaller countries had to do something, and that something has been to start a tax war. For example Ireland has 10% corporate taxs, Switzerland has low taxes, and all of the Former East Bloc have low flat taxes. This has put quite a squeeze on countries because multi-national corporations and rich people play the tax game. Now the big population countries are caught in a vice because they did not make the hard decisions that many of the smaller countries did. So what do politicians do? Most politicians in Europe started talking about how the rich should pay more. Bush on the other hand became pragmatic and created tax cuts.

As Bernake said to Mr Sanders, “Low taxes, and tax cuts are not the problem. The problem is if you spend more than you take in with taxes.”

Bernanke is right. If we want to reduce consumer debt (specifically of the credit card variety), consumers need to start living within their means. That takes education and personal fiscal accountability rather than some sort of a nanny-state solution.

I *would* like to see a mandatory high school course nationwide on managing your finances to show kids how quickly and easily you can drive yourself into an incredible amount of debt that will take years of strict budgeting to get out of. People need to stop pissing away their money on designer clothes and expensive cars they can’t afford for the sake of their personal financial health and that of our nation.

At the same time, there’s no way to stop them, besides educating them.

“As Bernake said to Mr Sanders, “Low taxes, and tax cuts are not the problem. The problem is if you spend more than you take in with taxes.”

AGREED!!!

I am disappointed the republicans did not reduce government spending. As they haven’t though, I favour taxing the rich over a flat tax.

My arguments are based on morality, as you pointed out.

The market does assign the values. In my opinion the process is neither representative, nor free from corruption, but my main objection stems from a moral one.

I can see no justification for not taxing an individual who has amassed wealth similar to a feudal King more than a mere peasant.

Morally, I do not like flat taxes, because I believe that a person is entitled to only so much wealth. After that, the benefits should be shared with society.

That said, I think the tax rates are about correct right now. What needs to be done now is a rationalisation of spending.

I still maintain that Switzerland has far lower costs per capita. It is a tiny country, without the desire to participate militarily or globally in the same way the USA does. Plus it has the advantage of being a financial centre that would bring more money per capita due to their low popullation (it must do or they would be going bankrupt).

Phil

I’ve been a silent reader for some time but this latest article sparked me to respond:

Chris’ argument for not taxing the wealth at a higher rate is based on cafeteria-style fact picking. The arguments he uses are based on half-truths and fail to tell the whole story. Even the link used at the bottom of the article provides a strong rebuttal for how the tax cuts are doing more harm than good (if you read the whole article- deficits are growing even higher despite increased corporate tax revenue). What’s more important, a sound federal budget or lower tax rates? I realize the chicken and egg argument here but it’s a little like cutting of the nose to spite the face- to stay with the analogy-thing).

A couple of things to consider (and debate):

1. The wealthy take advantage of numerous hidden financial advantages that are not available to the poor. Things like knowledge, access, privilege- all of which provide opportunities for enhanced financial security and advancement. The poor simply do not have these things (or do not have them in the quantities that the wealthy do). The fact that someone makes $1m elevates them into a higher socioeconomic level. Because of this higher level of access, they have little need for many of the gov’t visible programs. However, the wealthy take advantage of many other financial assistance programs that are not as visible as many “entitlement” programs (corporate write-offs, connections to gov’t to influence legislation that will enhance their wealth, etc.) In my opinion, a higher tax rate further balances the tax equation because it compensates for these unquantifiable levels of safety and opportunity.

2. Impact: Chris mentions that tax rates are just percentages and therefore, the rich will always pay more than the poor. He’s right about the numbers but again, consider the impact. If someone is making $1m and is taxed at 50%, the actual personal impact is easier to withstand and to still persevere in society than someone who makes $20,000 and is taxed 10%. Just thinking beyond bottom line dollars and consider financial power shows that this is true.

3. Punishment: to say a wealthy person is “punished” is cliché and taking advantage of a loaded word. What exactly does “punishment” mean for someone who is wealthy? Opportunity lost through taxation is not always considered “punishment”. It’s in how the argument is framed. What about framing the argument so that a wealthy person has a higher level of responsibility due to their fortune and therefore, they are given more privilege to benefit society through their tax dollars? Taxation doesn’t always equal punishment.

4. Bush tax cuts: I am miffed by the position that many people take on the Bush tax cuts. Not only do many write about them as thought it’s an inalienable right to have reduced taxation but there is also a lack of acknowledgement for timing. Sometimes tax cuts just simply do not make since- especially when there is a significant increase in spending on the horizon (Iraq, anyone?). How many of you would take a pay cut/loss revenue while increasing your spending without having solid knowledge if you’ll recover the lost income in the future? So, why would Bush cut taxes and then significantly increase federal spending/debt? Until the US financial order can be rearranged, the Bush tax cuts should be eliminated/sunset.

Again, as a first time poster, I realize that many of my points are based on morality but so is all policy. I wanted to just try my hand at rebutting a well-written article. Thanks for the great content and thanks in advance for any counter points.

Andrew:

I agree that if you overspend cutting taxes is a bad thing. As Bernake has said, “tax cuts are not the problem. Spending more than you have is.” I agree whole heartly that you cannot and I stress cannot spend more than you have.

My beef is that governments have massively overstepped their roles such that the very poor and very rich take advantage of the government. If you look at many government systems throughout the Western world there are those that collect welfare cheque after welfare cheque, and those that take advantage of tax loophole after tax loophole. Who pays for all of this? The middle income person who is trying to make a living for themselves!

Mary said it best, as she posted in the wrong blog entry: (https://www.investorgeeks.com/articles/2007/01/15/some-interesting-details/#comments)

“The flat tax is the fairest way of dealing with equality. ”

With the flat percentage tax EVERYBODY pays their fair share regardless whether you are rich or poor.

I would like to pick at one of your arguments:

“If someone is making $1m and is taxed at 50%, the actual personal impact is easier to withstand and to still persevere in society than someone who makes $20,000 and is taxed 10%”

You know where this situation occurs? Farmers! Many farms are held by generations of families. Farmers often have very good years and often very bad years. The difference in good and bad years often are decades. In the good years they make millions upon millions. But if they are not careful they can loose all of that money in bad years.

So I ask how do you tax farmers? Be careful with your response because you don’t want to seem contradictory and have a bias for farmers and against “rich” people.

If you have a bias for one set of people, why not the other? Well this is my point regarding the tax code and why a flat percentage tax is the fairest thing possible for everybody.

This issue of responsibility is pie in the sky argument because rich people ARE LEAVING. They leave to live in places like Monaco, Andorra, Switzerland, Dubai, Cayman islands, etc. And these places earn oodles of tax dollars that are depriving other countries of real monies.

Did you know that France recently cut its capital gains tax to 14%? The other taxes are still 50 to 60%. Regardless of how much money you make via capital gains (which is what most rich people earn) you pay 14%. They did this as a pragmatic measure to attract rich people. It works because it is pragmatic…

Thanks. The farmers example is a great one. However, in talking about them, we have to consider multiple policies outside of basic tax. Let me dissect:

Farmers under a flat tax could suffer more than the average person. The reason? If the elimination of the current tax structure included many of the other tax benefits that farmers receive (subsidies), then they could become financially ruined in a more “balanced” market because corporate farms and foreign farmers would now have a huge one-up on them.

However, farmers could benefit with a flat tax if the benefits (some of them are the unquantifiable ones that I referenced in my first post) stayed intact. Benefits such as price controls, gov’t contracts, trade agreements, etc. all help alleviate those difficult times for the farmer by bringing consistency to their annual returns. A flat tax scenario has listed above could be absolutely ruinous to farmers without those “balancers”.

As for the wealthy leaving “high-tax” countries, it would be interesting to see how many people we’re talking about. I must confess some ignorance but I’m thinking that only the super rich are going elsewhere, which in the scheme of things wouldn’t equal to a large amount loss tax revenue that couldn’t be recovered elsewhere. If corporations are the ones fleeing the US, then this is another issue outside of this current debate.

Finally, I referenced in my first post the ability to frame certain arguments. Whoever successfully frames the argument, wins. I think Bernake’s comments are trying to do exactly that. If we eliminate looking at the program/policy implications of tax cuts, then opposing them becomes a bottom line decision (who wouldn’t be in favor of more money without any perceived harm?). However, policy is based on morality and therefore, financial policy must consider the moral implications. Doesn’t that mean if we want a lower national tax burden then we must trim or eliminate “entitlement” and other social programs? If you take the bait and respond to that last question, then I have just successfully re-framed the argument (something that Bernake was trying to do).

I’ll end it there since this is investorgeeks, not policygeeks. I’ll continue to read the site. Keep up the great work!

Great post and discussion To Andrew’s point in his last post, yes, entitlements, which are supposed to be for the middle class, are the basic problem with government commitments. They apply to a broad segment of the population, because FDR didn’t want to admit that he was creating a welfare system and as a result (and very intentional on his part, as they were the cornerstone of his electoral majority). Because their application is so broad, however, it has become politically impossible to eliminate them.

Among the least fair elements of taxation today are the special tax breaks you get for being old. If you are 65 you get a special tax deduction from federal income tax (and from many state taxes as well). If you are old, you get special property tax rebates, because, well, just because. Here, the rich old, who own real estate, get their taxes subsidized by poor renters, who are usually younger professionals. This sort of taxation, in which the poor subsidize the rich should be stopped.

However, I agree with Chris’ basic assumption that high income people generally should pay taxes in proportion to their income, not out of proportion to it. High tax rates encourage the excessive use of tax favored investments, like municipal bonds, which funnel money to projects of lower value than those projects which might otherwise receive that funding (thus the need for the tax subsidy, which results in lower capital costs for municipalities to funnel to contractors and other political supporters).

Capital is the engine of the system. People who can manage large amounts of it are going to receive more of it. The relative “effort” excerted in a job isn’t the issue, it is the combination of the leverage that a job has (decision making vs. repetitive action) and the availability of people who can do the job at the margin. Many people may say, “I’d do that job for a fraction of the cost and be happy,” but when push comes to shove, they wouldn’t really want the job, and in any event, they don’t have the skills.

Hmmm…. Ok here is the math. Let’s say that we have a population of people who pay taxes. Let’s say that the population is normal distributed, and we use a progressive tax system where the rich pay more. In THEORY the tax income structure would be as follows.

People Tax Rate Income Tax Revenue
10 0.05 10000 5000
20 0.1 25000 50000
30 0.2 30000 180000
50 0.25 50000 625000
30 0.35 120000 1260000
20 0.45 250000 2250000
10 0.45 1000000 4500000
170 8870000

In theory there would be 8.8 million currency units, with 17% carrying about 75% of the load.

The reality of the tax revenue system is more like the follows:

People Tax Rate Income Tax Revenue
10 0.05 10000 5000
20 0.1 25000 50000
30 0.2 30000 180000
50 0.25 50000 625000
20 0.35 120000 840000
8 0.45 250000 900000
1 0.45 1000000 450000
139 3050000

Now we have half the income, and the burden is being carried by middle income (sound familiar?) The rich have parked their money elsewhere and are not paying their taxes in the country because many other countries are attracting the rich.

Here is the tax income structure with a flat percentage tax that even rich people could digest (20%).

People Tax Rate Income Tax Revenue
10 0.2 10000 20000
20 0.2 25000 100000
30 0.2 30000 180000
50 0.2 50000 500000
30 0.2 120000 720000
20 0.2 250000 1000000
10 0.2 1000000 2000000
170 4520000

In this calculation the rich are carrying the load again, with the middle income and above enjoying a tax break. In comparison to the actual there is 150% more tax revenue, but less than the “theoretical.” But the reality is that you will never reach the theoretical because the rich will move away and end up not paying taxes locally.

I think Bush and his economic team knows this and did something that worked because people did move back. But I guess it is easier to say “tax the rich, tax the rich, no?” BTW I am nowhere near to being rich. I just find it interesting how smaller countries throughout the world have fixed their deficits.

I question more so the cap on Federal Withholding tax at $97,000.
If I make $100,000 a year then I recieve $3,000 a year that that is not taxed opposed to someone that makes $400,000 a year and see’s $303,000 a year untaxed. They reap the benefit more than I do yet recieve the same benefits. How is that fair? Trust me, you can say that it is only the “poor” who benefit from federal tax dollars but the last time I went to my local Industrial Show, these large companies sure enjoyed using the convention center that our tax dollars paid for.

Hoot, I am not sure I understand your comment.

First, there is no $97,000 cap on witholding tax. There is a cap on social security contributions. I will assume that this is what you meant.

You seem to think that not paying taxes is a “benefit” somehow. As though people should be thankful that they get to keep any of their money.

The convention center of which you speak was likely paid out of local property or state income tax dollars. This has nothing to do with Social Security.

Social security “premia” are capped because, as an “insurance” program, charging higher premia would mean having to pay higher benefits. I know that some people want to simply soak higher income people to pay for overly generous benefits for present and near-future retirees, but this hardly seems fair.

If you are complaining htat their social security check is likely to be a similar size, well, hey, call your congressman and demand that the social security administration be forced to release its benefits formulas, so we can see the people who are really ripping off the system.

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