Why Highly Progressive Tax Rates Can Cause Instability

[lawrocket 3]

Should government spending be based on good times or bad times? It’s been argued that the top 1% isn’t doing enough. But this is where reason and thought are lost on the basis of subjective feelings. It’s also an example of how things have gotten where they are.

It is not even denied that the rich are paying the vast majority of individual income taxes. I’ve seen stats about the top 5% paying something like 60% of income taxes. Add the corporate taxes, etc., and the vast majority of earnings taxes come from the top. In boom years, the top pay even a higher percentage because they are making so much more.

What ends up happening? The revenue is redistributed towards the poor and even the not so poor. It’s not argued that the US welfare rolls are decreasing. Instead they are INCREASING. Medicaid cost states and feds $425 billion in 2010 and is projected to increase to $800 billion by 2018. (Note – Medicaid’s recipients will be massively increased by the health care financing law – projected to be about 85 million people by 2015). Food Stamps were a $36 billion program in 2008 – now it’s at over $75 billion.

The roughly 185 means-tested federal programs cost about $700 billion in 2010 – an increase from the roughly $500 billion in 2008. These are wealth redistribution programs that take money from the top and give it to the bottom. Now the giving is looking at expanding to the middle, as well.

What I see happening is what happened in Greece. In Greece, the population of benefit recipients continued to increase. These benefits were funded by continuing to increase taxes, again and again, on the wealthy. Eventually, the benefit recipient population vs. taxpaying funding base reached a tipping point to where the balance leaned too heavily toward the recipients that could not be paid out by those being taxed.

How does this tipping point occur? Think about it – we see this tipping point occur when the economy tanks. By focusing the main sources of revenue on the wealthy and corporations, with capital gains and stocks, etc., when the stock values fall and capital gains aren’t realized, the revenue stream gets blocked. When the wealthy aren’t earning nearly as much (i.e., when Buffett’s worth drops $20 billion) then the taxes paid on that drop tremendously.

This means that government revenues are boom or bust. During booms, the government spends all the revenues it takes – and then some. Then during a bust, the government has to go into more massive debt or cut back. The more progressive the tax collecting is, the bigger the booms and busts will be.

What has this wealth redistribution gotten us? Means tested spending from 1965 to present has been nearly $18 trillion. This does not include such programs as Medicare and Social Security, which are additional wealth transfer programs susceptible to the same problem of the ever steepening balance of beneficiaries to benefactors. And it hasn’t stopped poverty – by all accounts it has increased it while placing the entitlements wholly susceptible to the boom and bust of the markets.
Progressive taxation simply means putting the burdens on each according to their means. The problem is that it is not what’s being done. Those with means to pay something are not and are becoming the beneficiaries. The size and breadth of the population that is receiving entitlements is far more numerous that the class that is paying for it. So what are the effects?

The class of entitled increases while the number of payers decreases. I see it in California, where Governor Moonbeams just made another sweetheart deal with his union benefactors consisting of increasing taxes to pay for “education.” Specifically, he proposes a November ballot initiative to raise Cali’s top income tax rate to 12.3% - the nation’s highest. He’ll also raise the basic state sales tax rate from 7.25% (the nation’s highest) to 7.75%, so he’s looking at soaking everyone with more revenue to go to the state.

Why are businesses leaving California? Why are the wealthy leaving the California? If a state wanted to have a policy to promote exporting businesses and lowering the tax base isn’t this the probably the easiest way to do it? How about a country – if the US wanted to encourage the export of its industrial base, wouldn’t a policy of making he decision to leave our shores a matter of survival be a good way of doing it?

When the tax base is shrunk (as it is by increasingly progressive taxation) and the benefit base expands, it’s a recipe for disaster. But it leaves an entirely economy susceptible to a bust. Sound financial policy requires setting up benefits at a level sustainable during the bust times, a policy that encourages the size of the recipient pool to decrease and a policy that seeks a less-progressive taxation level that ensures some stability in the revenue stream.

My wife is hotter than your wife.

[billvon 2,434]

>When the tax base is shrunk (as it is by increasingly progressive taxation) and
>the benefit base expands, it’s a recipe for disaster.

Agreed. But keep in mind what's happening here in the US. Taxation levels are fixed by the IRS to numeric levels. Thus as inflation drives up prices and salaries, MORE people enter the tax base from the bottom end. This is a natural effect of inflation and fixed brackets. Witness the AMT - it was intended to only apply to rich people, but is now applying to more and more middle class.

So why is the tax base shrinking? It's mainly due to the income divide widening. There are more people at both extremes, and thus they are pulling people away from the "middle" where much of the tax base (by a per-person count) is. This isn't the result of evil government (or evil industry) it's just the natural result of an economic system that favors the rich and allows them to easily become richer.

So how do you fix that? You can "tax people poor" which is a bad idea. You can tax poor people more which is an equally bad idea. There's no easy answer.

[kelpdiver 2]

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So how do you fix that? You can "tax people poor" which is a bad idea. You can tax poor people more which is an equally bad idea. There's no easy answer.

the solution lies in not creating new taxes to find your pet projects. The rich, and before that, the damn smokers, are seen as fair game in CA for funding education or day care or [random]. The tobacco taxes are especially concerning as the stated intent is to get people to quit, but when that succeeds your welfare program is now underfunded.

California needs to find a way to smooth out it spending between the boom/bust years. Arnold tries to get something in place, failed badly. But we can't racket up spending and buy all the projects we can think of during the good times, always forgetting that a few years later a financial drought will come, forcing us to either slash those new programs, or tack on a new tax on some minority deep pocket.

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At the federal level, it's written that we're at our lowest tax rates in a very long time. I wonder if that's true for all quintiles, or just because half aren't paying anymore. But if it's really low, it's fair to talk about lifting that rate in the interests of deficit reduction (only!). But California certainly isn't in this situation - we just see an uptick with every recession.

[billvon 2,434]

>The tobacco taxes are especially concerning as the stated intent is to get people
>to quit, but when that succeeds your welfare program is now underfunded.

That's a pretty basic problem with sin taxes. Success in decreasing the sin means loss of funding for something else. A sin tax that is directly tied to treating the outcome of the sin is probably the only way this works - have all cigarette taxes go to lung cancer treatment or anti-smoking programs. Once income decreases from the tax due to people not smoking, the project being funded is no longer needed.

[kelpdiver 2]

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>The tobacco taxes are especially concerning as the stated intent is to get people
>to quit, but when that succeeds your welfare program is now underfunded.

That's a pretty basic problem with sin taxes. Success in decreasing the sin means loss of funding for something else. A sin tax that is directly tied to treating the outcome of the sin is probably the only way this works - have all cigarette taxes go to lung cancer treatment or anti-smoking programs. Once income decreases from the tax due to people not smoking, the project being funded is no longer needed.

yes - the original 25cent tax in the 90s used to pay for media ads to discourage smoking (the ones so effective the industry started lobbying hard to stop them) - good use of a sin tax. Head start funding for poor kids - lousy use.

I would generally oppose the use of sin taxes for general fund spending, but if it were going to be done, it should be for capital improvement projects rather than running the org spending.

[DaVinci 0]

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have all cigarette taxes go to lung cancer treatment or anti-smoking programs. Once income decreases from the tax due to people not smoking, the project being funded is no longer needed.

Perfect, sane, and makes total sense.

[lawrocket 3]

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Perfect, sane, and makes total sense.

Yep. But the taxes often go to fund education and then the general fund. The legislators often will tap into the taxes to make up for the general fund.

It's unfortunate but that's what happens when politicians run money. They'll take it from one place and move it to another.

My wife is hotter than your wife.

[kallend 1,648]

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Perfect, sane, and makes total sense.

Yep. But the taxes often go to fund education and then the general fund. The legislators often will tap into the taxes to make up for the general fund.

It's unfortunate but that's what happens when politicians run money. They'll take it from one place and move it to another.

ALL financial transactions involve moving money from place to place.

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The only sure way to survive a canopy collision is not to have one.

[lawrocket 3]

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That's a pretty basic problem with sin taxes. Success in decreasing the sin means loss of funding for something else. A sin tax that is directly tied to treating the outcome of the sin is probably the only way this works - have all cigarette taxes go to lung cancer treatment or anti-smoking programs. Once income decreases from the tax due to people not smoking, the project being funded is no longer needed.

I was thinking about a sin tax. There are several arguments that people look to with regard to sin taxes. Among the primary arguments is that they seek to change a person's behavior by taxing it. By making the behavior more expensive, it is intended that people will not engage in that behavior. For those that do, they can hep cover some form of societal cost.

So let's take a look at taxing the wealthy, shall we? It's agreed that taxes make people wish not to engage in certain behaviors because of the increased costs. By taxing increased wealth, aren't we discouraging its creation?

And aren't we creating a black market of sorts by encouraging people to put their wealth and money outside of the country? Or to keep it under the proverbial mattress?

Why do people think that increasing taxes on the wealthy is somehow beneficial instead of a sin tax on wealth?

My wife is hotter than your wife.

[billvon 2,434]

> By taxing increased wealth, aren't we discouraging its creation?

I think many people think of such taxes as "those snooty rich are wiping their asses with $100 bills anyway, why not just use those $100 bills instead of flushing them down the toilet?" It's almost more "putting them in their place" or "they don't need it anyway" than trying to discourage any specific behavior.

[lawrocket 3]

That's my thought, too. But there are people who know better that say things like "we are merely asking the rich to pay a little more."

First, he isn't "asking." He's trying to command them to pay more.

Secondly, won't increasing taxes on wealth (and on labor) discourage it?

My wife is hotter than your wife.

[SkydiveJonathan 0]

Romney and Ryan say that lowering tax rates and reducing or eliminating taxes on capital gains and dividends, while letting huge fortunes pass untaxed to heirs, will boost economic growth and mean prosperity for all.

We already tried parts of that, starting with Ronald Reagan in 1981 and doubling down with George W. Bush in 2001. Empirical result: Flat to falling incomes for the vast majority, weak job growth, but skyrocketing incomes for the top one percent of the top one percent, including Romney.

[billvon 2,434]

>Secondly, won't increasing taxes on wealth (and on labor) discourage it?

Yes, and taxes on the middle class will discourage people from rising out of poverty. There are no taxes that people want to pay.

Unfortunately, taxation is a reality if we want things like a military, or a highway system, or an FDA. So the question becomes - how do you tax people while damaging the economy (which is where all taxes ultimately come from) the least? And while taxing the rich damages the economy by taking money away from them (thus "disincentivizing" them to a degree) taxing the middle class and poor damages it more by taking money away from people who are more likely to spend it. And consumer spending is what ultimately drives our economy.

[kallend 1,648]

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Secondly, won't increasing taxes on wealth (and on labor) discourage it?

I've yet to meet a wealthy person who chose to become poor in order to avoid taxes.

Jesus would love them, though.

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The only sure way to survive a canopy collision is not to have one.

[lawrocket 3]

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Romney and Ryan say that lowering tax rates and reducing or eliminating taxes on capital gains and dividends, while letting huge fortunes pass untaxed to heirs, will boost economic growth and mean prosperity for all.

It doesn’t mean prosperity for all. The alternative is prosperity for few. Indeed, if you want to empower corporations, the best way to do it is the estate tax. Corporations don’t get killed, so they can continue operating without having to sell off to pay the government when it comes due. The mom and pop cattle feed store? Passing that on to the kids means the kids have to pay taxes for it. Usually the only way is to liquidate and sell off to, oh, a corporation – who NEVER has to worry about that.

It boggles my mind how much you argue for policies that will result in what you claim to despise.

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We already tried parts of that, starting with Ronald Reagan in 1981

Yes. I recall the economy when Reagan started as president. Turns out they tried your way, too, and Reagan was the result.

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and doubling down with George W. Bush in 2001.

Don’t forget Clinton! Recall, there was a “mini-recession” in 2001 on the heels of the tech bubble bursting.

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Empirical result: Flat to falling incomes for the vast majority,

But there was employment!

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weak job growth

Are you high?

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but skyrocketing incomes for the top one percent of the top one percent, including Romney.

Yes. Everybody did better during Reagan, Clinton and Dubya. As least for a large portion of their presidencies. Can’t say the same about Carter. Or Nixon. Johnson had the highest wages under his Administration, but lots of kids were being shipped off to die in Nam.

My wife is hotter than your wife.

[kallend 1,648]

I don't recall many millionaires choosing to become paupers during Eisenhower's administration , when the top marginal tax rate was 92%

I don't recall many millionaires choosing to become paupers during Nixon's term when the top marginal tax rate was 77% and the tax rate on Long-Term Capital Gains was 27.5% - 36.5%

Your position has absolutely no basis in history.

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The only sure way to survive a canopy collision is not to have one.

[lawrocket 3]

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I've yet to meet a wealthy person who chose to become poor in order to avoid taxes.

I've known people who were fairly wealthy who relocated because costs were prohibitive. In fact, lots of them now find it cheaper to open whole new plants in places like China and ship the goods here. Or why high taxes and labor costs move manufacturing from some states in the US into different states.

A story was just posted of a guy leaving France to save more of his money. France's high taxes just cost them a significant taxpayer. Belgium gained.

The wealthy can - and do - go elsewhere.

My wife is hotter than your wife.

[kallend 1,648]

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I've yet to meet a wealthy person who chose to become poor in order to avoid taxes.

I've known people who were fairly wealthy who relocated because costs were prohibitive.

But did they choose not to be wealthy in order to avoid taxes?

All you are saying is they try to hold the nation to ransom if they don't get their way. Like the rich kid who takes the ball and goes home if he doesn't like the referee's decision.

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The only sure way to survive a canopy collision is not to have one.

[pirana 0]

Yes, it has utterly destroyed the Scandinavian countries.

" . . . the lust for power can be just as completely satisfied by suggesting people into loving their servitude as by flogging them and kicking them into obedience." -- Aldous Huxley

[pirana 0]

Don't know how the rich can even begin to whine when they are paying less a percentage of their gross than middle class working stiffs.

I'm not saying we need 50 or 70% brackets like some have; but how about 30% of net income - with no loopholes to hide income. How can any of them even use words that rhyme with fair share when they pay less % than average?

" . . . the lust for power can be just as completely satisfied by suggesting people into loving their servitude as by flogging them and kicking them into obedience." -- Aldous Huxley

[rehmwa 2]

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Don't know how the rich can even begin to whine when they are paying less a percentage of their gross than middle class working stiffs.

I'm not saying we need 50 or 70% brackets like some have; but how about 30% of net income - with no loopholes to hide income. How can any of them even use words that rhyme with fair share when they pay less % than average?

a straight flat tax with no loopholes, credits, exemptions, deductions, etc....

that would do a LOT to clearing away the free ride that the poor and the rich are taking on the backs of the middle class. It's never the ends vs each other, no matter how the politicians want to sell it - it's always been the ends vs the middle. It's nefarious, because the arguments distract us from the reality while our pockets are getting picked.

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Driving is a one dimensional activity - a monkey can do it - being proud of your driving abilities is like being proud of being able to put on pants

[pirana 0]

The positive about capitalism is it is very effective at wealth generation. The negative is that it funnels most of that wealth to a very small elite while sharing only scraps with the labor that produced it. Capitalists then use that wealth to shape laws that assist them in accumulating more wealth.

In 40 years labor has increased productivity by 50%, increasing corporate profits by 600 to 800% (depending on source). For that effort capital has rewarded labor with a 20% increase overall (hiding the fact that the majority of labor has seen flat wages for at least 20 years, some sectors for more.

Our system of governance combined with our economic system are a recipe for the disaster we are experiencing because it allows capital to purchase the government. The corruption is so obvious and in our face the majority are totally desensitized to it and just see it as the way the system is and needs to be.

Hope and change my ass.

" . . . the lust for power can be just as completely satisfied by suggesting people into loving their servitude as by flogging them and kicking them into obedience." -- Aldous Huxley

[weekender 0]

>The negative is that it funnels most of that wealth to a very small elite while sharing only scraps with the labor that produced it.

ok comrade, so the proletariat produced the wealth and the bourgeoisie has it funneled to them. got it, wealthy people did not labor for their monies. only the working class man actually works.

I'm amazed that so many people in the country feel its so unfair. I just do not see it that way compared to other states and historically speaking. i still see plenty of opportunity. i also see a poor and working class that has a lifestyle that is envied by billions today. And a life that the historic poor could not even imagine. My dad had no electricity nor plumbing as a child. I never heard him complain about his wealthy boss. He was glad for what he had and was not driven by jealousy of others. But he educated himself and wore a suit to work. so i suppose many posters here would not call him a working man.

"The point is, I'm weird, but I never felt weird."
John Frusciante

[lawrocket 3]

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The negative is that it funnels most of that wealth to a very small elite while sharing only scraps with the labor that produced it. Capitalists then use that wealth to shape laws that assist them in accumulating more wealth.

I have no idea why such rhetoric is put out there when we have labor laws, minimum wages, etc. as laws. The fact that such laws are there necessarily disproves your statement.

The point is that laws have been set up to benefit the wealthy and the poor. Note - LAWS are set up. I don't blame the poor for the laws that allow them to such the public teat. Nor do I blame the wealthy for the laws that allow them to go on hosing.

I blame the people that pass the laws, who are shifty bastards that criticize the very laws they draft and vote for.

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In 40 years labor has increased productivity by 50%, increasing corporate profits by 600 to 800% (depending on source). For that effort capital has rewarded labor with a 20% increase overal

Yes. When building a car took 500 people and 100 machines, then productivity per man hour was one thing. But when the same job is done with 100 people and 500 machines, then you can easily see how productivity increases 500% right there.

Of course, labor fights automation tooth and nail. The union dirtbags harassing people outside the Fresh and Easy down the street are evidence of that.

My wife is hotter than your wife.

[SkydiveJonathan 0]

It's how the increase in wealth from the increase in productivity is distributed. In this historical cycle the bulk of the increase in wealth (due to an increase in productivity) has gone to the already very wealthy. Must be discouraging to the average worker to see their productivity gains sucked away by the rich who have hacked into the money printing machine - it's almost like a tax on the worker imposed by the rich.