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01/29/2012

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Michael Sherrin

Your argument ignores how the progressive tax system is implemented. If taxes were increased for people making over $1 million, than only the income over the $1 million would be taxed at the higher rate. Meaning if you're taxed at 20% over $250,000 and 25% over $1 million, and you make $2 million, then your income from $250,000-$999,999 would be taxed at 20% and only $1 million would be taxed at 25%. This is how our current tax system works and it keeps in place the incentive to always make more money. Further, the top tax rate is at historic lows at the same time as income inequality is rising and GDP is stagnating. This compared to the 1950s and 1960s when GDP was rising, income inequality was incredibly low, and the top tax rate was 97%, yet rich people still existed and jobs were still created. Further, capital gains taxes were 47% compared to 15% today. History shows high taxes can actually improve the income and make rich people richer.

Robert Paulsen

Michael, the top tax rate is already over 30% (it's 35%). President Obama was not saying that he wants to make the top rate 30%; rather, he was referring to the "Buffett Rule" and implying that the effective rate (income tax/gross income) for people who make over a $1M a year should not be less than 30% . Therefore, Mr. Posner is correct in his analysis.

Orlin Todorov

It is not that we need to tax the rich more, but that we need to tax the poor and middle class less! Our government is wasting enough as it is. We should not feed it more.

Actually a government does not just waste, it uses its revenues to inflict further damage by taking away productive people from the private sector and by continuously creating more (paralyzing) regulation.

writer jobs

i think money didn't you happy i had 48 millions and now i have 50 millions and my happy are same!

TANSTAAFL

Welcome back to the blogosphere, Judge Posner. A characteristically pragmatic post. Nicely stated.

Jim

You could take all of the income of the top 1 or 2 percent and it wouldn't be a significant amount in terms of the debt, the deficit or operating the government. So the only force behind the tax the rich movement is envy and anger, hardly laudable virtues for human progress. Take all of their land as well and what would you do with it. Ask President Mugabe how that has worked out for him.

Jack

Both Posner and Becker seem to miss the point.

Stated simply we have two big problems: One that of our bills not getting paid in the post war recession with the Bush tax bennies largely for the rich still in place.

The second and closely related, but larger problem IS the very income inequality that is spurring the effort to claw back a bit of what most of us have lost over the last 30 years.

http://lanekenworthy.net/2008/03/09/the-best-inequality-graph/


Mathematically the solution is fairly simple. Were the "rising tide of productivity" distributed at the ratios of the 60's and 70's most households would have $10,000 more of income and with our existing tables pay a higher rate of taxes. Having $10,000 more in spendable income would create a lot of demand for our the product of our excess capacity thus raising overall GDP.

We'd still have to cap off the scams employed by hedge funds and those selling firms back and forth the if they produce anything at all, it's certainly not enough to justify the cancerous growth of the "financial sector".

Politically? Unlikely.

Tom Kelly

Great to have you both back -- economic and legal analyses that cut through the cant of politicians and the media.

Christian Louboutin Sale

Encrypting the transfer adds one more layer of safety that can guard your knowledge from an "inside job".

Pradeep Despandee

Absence of envy was the one cultural element that set Americans apart from the rest of the world. It was the essential element upon which the unmatched American prosperity was built upon (no, it was not the world renowned sophistication of the average American, in case you wondered). With that element gone, and with the once cultural outlier American voter reverting to the worldwide norm of class envy, America’s exceptionalsim and competitive advantage compared to the rest of the world will evaporate, and a flatter effort-reward curve will settle in. America will find itself in the same elephant pit with European nations, which under flat effort-reward curves are reaching the end of their lines, declining along an anemic two percent growth trendline (at best), in a world that grows two three times more on average. Since things move ever faster in this 21st century, this American decline will be very swift by historical standards, to be experienced within one single generation.

Pradeep Despandee

The economic stress induced envy will trigger lower economic performance and thus additional economic stress that will cause even more envy, thus unleashing a vicious cycle. This vicious cycle is irresistible and America will find itself France-fied in short order; a once vibrant economy fading away into worldwide averagedom, like France and virtually every European nation whose severely sub-par growth is totally incapable of keeping up with average world growth.

In addition, since class warfare is almost universally associated with more top down state control of industry, wealth will increasingly correlate less and less with merit and effort and more and more with political connections, being in the “right” industries, “right” subsidies, “right” tax credits, knowing the “right” city council member (since many activities will be forbidden and only accessible to select few) etc., in general making the right political rather than the right business decisions. This will trigger not only envy towards the rich but also outright resentment as meritocracy breaks down. This triggers intensifying public anger and renewed desire for further popular revenge against the rich at every new election. The vicious cycle deepens and economic decline becomes unstoppable.

Pradeep Despandee

I have thus been advising my wealthy overseas clients (many of whom worked hard for their money, and many of whom while barely richer than the average American, are considered well healed in their respective countries) to start pulling their investments out of the US in the mid-long term. These people, who represent the emerging economic juggernaut of three billion people rising in the increasingly important developing world, have better things to do than lose their hard earned wealth at the altar of American class warfare. They can find that investment environment and associated mediocre growth prospects in many other places in the world. There is nothing keeping them in American investments. If Americans are seeking the same reduced effort shortcuts to prosperity as the Europeans, they will meet the same fate.

Occupy protesters may indeed find themselves living in an environment of flatter outcome in a couple of decades. But they will also find that their per capita relative prosperity compared to the world average will have declined from 6x world average to 3x or some lower multiple. The top American 1,2,5,10% will be mostly gone, but Americans as a whole would have descended from their current top 10% worldwide to 30% 40% etc. The American middle class will no longer be amongst the privileged humans of this planet.

Pradeep Despandee

We are now finally living in a very mobile (i.e. much freer) world, and while true mobility is still available to only a small part of the world’s population, this is only the beginning. Productive people will find shelter somewhere in the world, one way or another. If the voters of western democracies cannot keep the pitchforks in the storage bin, the shelter may eventually be provided by a host of competing authoritarian regimes -- and that would be a sad outcome,… though not as sad as it would have been in the past. After all, in our newly mobile world, even dictatorships are starting -- and will increasingly have to -- compete to attract and retain productive people by offering them attractive environments (e.g. Singapore, Dubai and a few others now, but the circle will expand).


As one can easily see when looking from above the myopic day to day noise of an increasingly politicized America (in central planning, everything eventually becomes politics, and this is a new phenomenon for America):

The newly awakening three billion people emerging world juggernaut, has neither the desire nor the patience to wait and see how the western world’s experiment with the flat effort/reward curves of mandatory collectivism ends. They already know — they have already experienced the outcome.

K. Lima

The notion that people can be handed money to generate demand does not pass the most elementary IQ test…

Demand is always there. With over five billion people in the world living on a fraction of what Americans consume, demand is enormous. Everybody wants more, even the American middle class, which has over five times more than the average world citizen, STILL WANTS MORE. The problem is that those who want (everybody) do not produce enough in exchange. Money is only the medium of this exchange of goods and services.

Even if one accepts Keynesian standard theory (i.e. that such artificial infusion can be used in the VERY SHORT TERM to correct a supposed economic deadlock) using such mechanism in perpetuity is akin to hoping to finally have discovered a perpetual motion machine.

Distributing money to encourage buying is like a group of people, say a company, distributing its proceeds (cash) to people who are willing to buy its products. Basically the company’s employees work for nothing. It is like a store owner approaching homeless people on the street and proposing “I’ll give you $100 if you spend it in my store”. What does the store owner accomplish other than working for free?

In the end, competent people, especially competent people, cannot be either convinced, tricked or coerced to work for others, distant unknowns. Many one cultures have fallen for such naive fallacies and Americans are about to do the same.

Stan in Michigan

Let's suppose that removing corporate taxes would increase the value of Universal Widget (UW) stock by a factor 1 + x. Let's suppose an investor buys 1000 shares of UW at $100 a share and sells a year and a day later for $110 a share. This is scenario A, in which the corporate taxes are those currently in effect. After paying a 15% capital gains tax, our investor has made $8500 on an investment of $100,000. In scenario B, in which there are no corporate taxes and in which the current price of a UW share is $100(1+x), our investor buys 1000 shares and sells a year and a day later at $110(1 + x), so his after tax profit is $8500(1+x) on an investment of $100,000(1+x). In both cases he has made an after tax percentage profit of 8.5%. In what way did the corporate taxes on Universal Widget increase the investor's tax rate?

Jeff

This is still a question of tax fairness, should the person making $65,000 a year pay %30 and a person making 30 Million pay 15%
Is this progressive?

Stan in Michigan

The calculation I make in my 07:47 am post is so elementary that I was sure I was making a mistake and that some savant would correct my logic. This hasn't happened yet. Can it be that I was right?

TANSTAAFL

"In scenario B . . . there are no corporate taxes and . . . the current price of a UW share is $100(1+x) . . . ."

Stan errs in assuming that x at the point in time he specifies accrued to the benefit of no earlier investor. He also chooses statistics to fit his preferred conclusion, that is, by referring to "an after tax percentage profit of 8.5%" as a constant result in the two scenarios. Anyone can see that the two results differ if the raw number of actual dollars realized by the investor is the point of comparison.

Stan in Michigan

In my example I did not assume a change in the corporate tax during the period between the purchase and selling of the stock. Obviously if the stock is low at the time of purchase because a pre-existing high corporate tax and then the tax is removed right after the purchase, it's very nice for the investor. But this happens only in your dreams.

Regarding TANSTAAAFL's second point, the one regarding the raw number of dollars realized by the investor, I feel this is invalid. If I invest $1 in scenario A and $1,000,000 in scenario B, I'll make more in the second case. This proves nothing. Percentage profits must be used for valid reasoning.

I did not pick a case that supports my preferred conclusion. I simply don't understand the reasoning showing that Mitt Romney is actually paying a higher rate on his capital gains because of corporate taxes. Posner doesn't supply this reasoning, and I don't accept an argument based on an appeal to authority, either his or the Wall Street Journal's. I still don't understand his reasoning.

TANSTAAFL

"Percentage points must be used for valid authority." What is that but an appeal to Stan's personal authority? On my first critique, in making the case for lowering taxes to spur economic growth, John F. Kennedy said that "a rising tide lifts all the boats." JFK was right, and, by overlooking this fact, Stan misses the boat.

Stan in Michigan

Percentages count, not total amounts, and whatever you say in this exchange I'm positive that in your own financial management you choose banks depending on what percentage interest rate they pay.

Regarding taxes, the correct path for the country depends on whether the times demand more investment or more consumer spending. Put more money in the hands of the well off and the balance is tipped towards investment, put it into the hands of the working poor and the middle class and you'll get more present day spending and more pay down of debt, which translates into future spending. At the present time corporations are flush with cash but won't spend it because demand is weak. So I support stimulating consumer demand by lowering or at least not increasing taxes on lower income wage earners. Since I don't want to add to the debt and since I feel that cutting spending now would depress an already weak economy, I favor higher taxes on the well off.

JFK's tax reduction took place in the early 60's. That was 50 years ago, and times have changed.

RJ Erffmeyer

I do not believe that legitimate concerns over financial wheeling and dealing can simply be chalked up as "envy". As the current economic recession has shown, risk-taking is not the equivalent of value-making.

So, why not implement a simple a tax on financial transactions? Such a tax will not only raise much needed revenue in a pragmatic fashion, but will have the added benefit of discouraging high-frequency traders and other brazen financiers from making unnecessary transactions and profiting off of the friction of the market.

TANSTAAFL

Stan, as a practical matter, banks today don't pay interest to their depositors at any noticeable percentage rate. They did so 50 years ago, but times have changed. That said, your points are well stated even if I may not share your conclusions.

Stan in Michigan

TANSTAAFL, thank you for your kind remarks, and I hope I haven't been discourteous in our debate.

lee

not bad! thank you for your kindly sharing!

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