Hey look: The whole Federal tax system is progressive

We know that the Federal income tax is progressive, while the payroll tax is regressive, and that these are the main two sources of Federal tax revenue (around 81% in 2012).

The TPI has some interesting stats about the overall progressivity of the Federal tax system.

First, the lowest quintile (20%) of earners pay almost no Federal taxes. Their average income tax rate is negative and almost completely offsets their payroll tax rate. They earn around 4% of income and pay around only around 0.2% of Federal taxes.

Second, the highest quintile of earners earn around 53% of total income and pay around 68% of all Federal taxes.

Before seeing these numbers, I would have said that the regressive nature of the payroll tax makes overall Federal taxes much less progressive than the income tax. But it turns out that the overall Federal tax burden is (too my mind at least) still pretty progressive.

Alternative Maximum Tax

Does the US need an Alternative Maximum Tax?  Prof. Cochrane of Booth at UChicago makes an argument.


They keep coming back, like the villains of a good zombie movie, chanting "more taxes, more taxes." Long ago, Congress passed the alternative minimum tax, or AMT—a simple flat rate to ensure that in an insanely complex tax code, no one escapes paying something. 

Now we need an alternative maximum tax as a simple, rough-and-ready way to limit the tax zombies' economic damage. Call it the AMaxT. With Monday's deadline for filing tax returns looming, let's start a national conversation: How much is the most anyone should have to pay? When do taxes indisputably start to harm the economy and produce less revenue—when government takes 50% of people's income? 60%? 70%?

Are Corporations People?

Video Links

1. Free "Pussy Riot." Because PR is in jail for hooliganism. For doing this.
More info from the Nation (Thanks to R. Balko, via Angry Alex)

2. Baby Boomers Born to Be Wild

3. Oddly angry video on "IRS Fraud." Don't see why it's IRS fraud. Congress be writin' them statutes, bud.

Abolish Inflation Tax

John T. Plecnik writes an interesting piece on the "Inflation Tax"

Abstract:
Inflation erodes the purchasing power of money and distorts some income tax liabilities upward, which in turn discourages savings and investment. When inflation is caused by the central bank “printing” money to fund deficit spending, it results in a transfer of real wealth from the holders of dollars or assets denominated in dollars to the government and, in normative terms, may be conceptualized as a tax. The effect of the so-called inflation tax is regressive, because low-income taxpayers often lack the sophistication or liquidity to invest in hedges against inflation.

Following the double-digit inflation of the late 1970s and early 1980s, the U.S. Treasury Department and a host of legal scholars proposed sweeping reforms to comprehensively index the Internal Revenue Code for inflation. However, their proposals were never enacted into law. Instead, Congress chose to respond to inflation on a case-by-case basis. Many of those responses, such as the preferential rate for capital gains, afford relief to the wealthy, but do little to help the poor and middle class. To counter the pernicious effects of inflation and make the Code more equitable, this article proposes an inflation tax credit. Under the proposal, low-income taxpayers may elect between (i) substantiating the average balance of their bank deposits and treasury bills to receive a credit based on that balance, and (ii) taking a standard credit based on their gross income.

Age-Based Taxes--Age Discrimination?

The Surprising Power of Age-Dependent Taxes

Matthew Weinzierl
Review of Economic Studies, October 2011, Pages 1490-1518

Abstract: This paper provides a new, empirically driven application of the dynamic Mirrleesian framework by studying a feasible and potentially powerful tax reform: age-dependent labour income taxation. I show analytically how age dependence improves policy on both the intratemporal and intertemporal margins. I use detailed numerical simulations, calibrated with data from the U.S. Panel Study of Income Dynamics, to generate robust policy implications: age dependence (1) lowers marginal taxes on average and especially on high-income young workers and (2) lowers average taxes on all young workers relative to older workers when private saving and borrowing are restricted. Finally, I calculate and characterize the welfare gains from age dependence. Despite its simplicity, age dependence generates a welfare gain equal to between 0.6% and 1.5% of aggregate annual consumption, and it captures more than 60% of the gain from reform to the dynamic optimal policy. The gains are due to substantial increases in both efficiency and equity. When age dependence is restricted to be Pareto improving, the welfare gain is nearly as large.

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Do Stronger Age Discrimination Laws Make Social Security Reforms More Effective?

David Neumark & Joanne Song, NBER Working Paper, September 2011

Abstract: Supply-side Social Security reforms to increase employment and delay benefit claiming among older individuals may be frustrated by age discrimination. We test for policy complementarities between supply-side Social Security reforms and demand-side efforts to deter age discrimination, specifically studying whether stronger state-level age discrimination protections enhanced the impact of the increases in the Social Security Full Retirement Age (FRA) that occurred in the past decade. The evidence indicates that, for older individuals who were "caught" by the increase in the FRA, benefit claiming reductions and employment increases were sharper in states with stronger age discrimination protections.

(nod to Kevin Lewis)

My Dog Owns My House? I don't think so...

If I need security, I get a dog. If a group of us need security, we might sign a contract and get a really big, strong dog. Let's call it...I don't know... GOVERNMENT. It's big, stupid, poops in places it shouldn't and wastes a lot of time sleeping and licking its "Representative Wiener", because it can.

But, suppose that big smelly dog also does a reasonably good job protecting my house, and yours. We build factories, we create wealth, we do a lot of useful things.

And it's true that we needed the dog, for security, so we could concentrate on things that idiotic, lazy dogs can't do.

For some reason, Elizabeth Warren concludes from all this that our dog...OWNS OUR HOUSE! That is just a non sequitur. It's a DOG. But here is what she says.

“There is nobody in this country who got rich on his own — nobody! You built a factory out there? Good for you. But I want to be clear. You moved your goods to market on the roads the rest of us paid for. You hired workers the rest of us paid to educate. You were safe in your factory because of police-forces and fire-forces that the rest of us paid for. You didn’t have to worry that marauding bands would come and seize everything at your factory — and hire someone to protect against this — because of the work the rest of us did.

Actually, you didn't pay for them, ma'am, the factory owner did. Why would my dog own my house?

The full, surprisingly idiotic video...

(Not sure where I first heard the "why should your dog own your house?" formulation, but my good friend Tony de Jasay is a likely source)

Jersey Sure

This article is a bit funny. I have never seen the show "Jersey Shore" (or is that the "show" Jersey Shore ?), but I am assured that it is entertaining in a not-very-demanding way.

The disturbing thing is the comments. "Natale," obviously educated in the NJ public school system, thinks she has a smackdown argument.

Sorry NYMag, but this is a shitty article. The tax credit is based on only what the entire production SPENT in New Jersey.. camera rental, lodging, food, transportation.. all during filming that specific season.. the production is entitled to a 20% rebate based on locally hired crew and monies actually spent solely in NJ AND only if reviewed by a qualified CPA and then approved by the NJ Film Office.. they usually use it towards satisfying the NJ corporate business state tax. If the total refund was only $420,000, that means MTV spent $2.1 Million dollars ALONE in NJ (that counts as revenue for local businesses as well as job creation!!) .. do your homework.

So, the reason that it is okay to rebate a large chunk back to this horrible show is that it creates a lot of the tax dollars that are being rebated.

Um...Natale, how about this: lower the taxes in the first place. Then you wouldn't have to tax the companies that create jobs (and that is what ALL companies do, Natale, not just "Jersey Sore), and you would have more jobs.

(Nod to Anonyman, who has started referring to his ass as "The Distribution")

Ho Tax

Tax meter for street walkers, or street standers, in Germany.

As Anonyman said, "the Germans are so organized."

Plus: consummation areas. Nice.

Madeline the prostitute explains how it all works.

Corporate [ TAXES ] are [ PAID BY ] People

Not sure why the goofy lefties are so gleeful about Romney's "corporations are people" statement (gaffe, they would say).

Here is a NOT goofy lefty, my PhD student Tom Schaller, going ballistic, even planetary orbital, over Romney. Tom is a smart guy. But like most people on the left, almost entirely innocent of economic knowledge. I submit that is the only reason they COULD be on the left, since an understanding of basic economics moves one over to the center right position, almost by definition.

Good lord. Let's do this. Corporations are owned by stockholders. Corporations don't pay taxes, stockholders pay taxes. They pay taxes on income, and they also pay an implicit tax in the form of reduced stock prices when gov't taxes corporate income separately. (Consumers may also pay corporate taxes, if the taxes are on inputs, raise prices of production, etc. I submit, without further discussion, that consumers are people).

Every intro econ book, even Samuelson, noted that the corporate income tax is "double taxation," and therefore inefficient. It restricts investment and reduces employment. Better to have a lower corporate income tax, and much more progressive income tax system.

The US has corporate income tax rates that are 5-10% higher than almost any other country we compete with. If you add fed and state CIT, our rates are 50% or higher; Germany is 30%; France is 33%.

Corporations can move around; stockholders won't move around, at least not as much.

So, Romney meant, "Corporate taxes are paid by people, my friend." And it was absolutely clear that that is what he meant. People misspeak in the heat of the moment. IT. WAS. CLEAR.

Look, I am not a Romney fan. He's an unprincipled gas bag. But this whole "corporations are people" kerfuffle really shows why our center left folks cannot understand even basic economics. The Obama admin, and as far as I can tell the entire Washington press, thinks corporations are just cows to be milked. Instead, they are geese, laying golden eggs. BUT GEESE CAN FLY. Why are "jobs" leaving the U.S.? Because our corporate tax rates are too high, and our regulatory policies too stupid.

And, in any case, corporate taxes are paid by people.

Church! Congress Must Stop Selling Indulgences

We need a Reformation....or perhaps a different church?

My column in today's Durham Herald Sun

Veronique!

I have always liked Veronique. A tough lady. And quick with the whole numbers and evidence thing.

Question: Why Do Liberals Favor Tax Increases?

Why do lefites favor tax increases?

Because they assume that the law doesn't actually APPLY to them.

Eric Holder the latest Obamatron to say, "Who, me? You actually wanted ME to pay?"

I suppose there's no reason the Atty General should have to obey the law.

No Quixotes! Munger v. Google Rejected by NC Supreme Court

Damn! Munger v. Google has such a nice ring to it. But it was rejected by the NC Supreme Court.

Sure, it was actually "Munger, et al. v. State of North Carolina." But it was Google that took all that cash and built a "server farm." (That's basically an insulated warehouse with some extra HVAC, btw)

We had brought suit, and I was lead Quixote...um... lead plaintiff. (Robert Orr did all the work, of course. I was just eye candy. Or maybe BOB was Quixote, and I was Sancho Panza. That's more like it.)

But the NC Supreme Court today smashed all my dreams. Went so far as to say that the very idea of reviewing the review of the appeals decision was "improvidently granted." Oh, that hurts. Improvidently granted? "Sorry, nothing to see here folks. Just an everyday violation of the NC Constitution. Move along, citizens, move along. Because there is NO STANDING! NO STANDING."

They should have stuck with import substitution

From Argentina (one of my very favorite countries) comes a great story on how tax collectors are innovating to find unreported income.

Briefly, they are counting the number of imported breast implants to get an idea of the income of plastic surgeons. They claim that given the number of these imports, there is at least $10 million of unpaid taxes floating around the industry.

People, these poor surgeons are just the latest victims of globalization!

Oldie but goodie....Capital Strike

You have likely seen this.

But I want to make sure you have ALL seen this...(Thanks to CG for the update)

Bar Stool Economics
Suppose every day, ten men go out for beer and the bill for all ten comes to $100 and If they paid their bill the way we pay our taxes, it would go something like this:
The first four men (the poorest) would pay nothing.
The fifth would pay $1.
The sixth would pay $3.
The seventh would pay $7.
The eighth would pay $12.
The ninth would pay $18.
The tenth man (the richest) would pay $59.)
So, that's what they decided to do.

The ten men drank in the bar every day and seemed quite happy with the arrangement, until one day, the owner threw them a curve. "Since you are all such good customers," he said, "I'm going to reduce the cost of your daily beer by $20." so drinks for the ten now cost just $80.

The group still wanted to pay their bill the way we pay our taxes so the first four men were unaffected...They would still drink for free...But what about the other six men - the paying customers? How could they divide the $20 windfall so that everyone would get his 'fair share?'...They realized that $20 divided by six is $3.33..

But if they subtracted that from everybody's share, then the fifth man and the sixth man would each end up being paid to drink his beer. So, the bar owner
Suggested that it would be fair to reduce each man's bill by roughly the same amount, and he proceeded to work out the amounts each should pay.

And so:
The fifth man, like the first four, now paid nothing (100% savings).
The sixth now paid $2 instead of $3 (33% savings).
The seventh now pay $5 instead of $7 (28% savings).
The eighth now paid $9 instead of $12 (25% savings).
The ninth now paid $14 instead of $18 (22% savings).
The tenth now paid $49 instead of $59 (16% savings).
Each of the six was better off than before...And the first four continued to drink for free...

But once outside the restaurant, the men began to compare their savings.
"I only got a dollar out of the $20," declared the sixth man. He pointed to the tenth man," but he got $10!" "Yeah, that's right," exclaimed the fifth man. "I only saved a dollar, too. It's unfair that he got ten times more than I!" "That's true!!" shouted the seventh man. "Why should he get $10 back when I got only two? The wealthy get all the breaks!"

"Wait a minute," yelled the first four men in unison.
"We didn't get anything at all. The system exploits the poor!"
The nine men surrounded the tenth and beat him up.

The next night the tenth man didn't show up for drinks, so the nine sat down and had beers without him. But when it came time to pay the bill, they discovered something important. They didn't have enough money between all of them for even half of the bill!

And that, ladies and gentlemen, journalists and college professors, is how our tax system works. The people who pay the highest taxes get the most benefit from a tax reduction. Tax them too much, attack them for being wealthy, and they just may not show up anymore. In fact, they might start drinking overseas where the atmosphere is somewhat friendlier.

For some reason, this little internet meme is usually attributed to Prof. David Kamerschen, at UGA. But he did NOT write it, and disavows either knowledge or opinion of the piece. So....there.

Fiction Writer P-Kroog

Two NYT articles.

First, a sensible one, with good examples, by G. Mankiw.

Second, a remarkable one, truly remarkable, by fiction writer P-Kroog. The second paragraph...how does he get paid to make s**t like this up?

(nod to Angry Alex)

Dems punt on tax vote

Maybe it's just me, but these guys (and gals) are really bad at their jobs. "Middle-class tax relief" (which in bizarre Dem-speak means continuation of the status quo for all but the top earners) was supposed to be a campaign plus for them, right? The president is still a Dem, right? Both houses are Dem right? Inaction raises taxes on everyone and they get to write the bill, so they have the Repubs by the proverbial S&Cs, right?

And they punt?

The only explanation I can think of is that the Dem leadership absolutely refuses to not raise taxes on the rich and they don't think they can get their rank and file to go for that before the election.

I guess they think that a bunch of lame ducks will be more likely to do the leaders that cost them their jobs one more favor in December before heading back home for good?

"Counties have needs...."

I call bullish.

Counties do NOT have needs, in spite of what is said here, and in which I try to rebut the claim in an interview.

The fact is that CITIZENS have needs, and counties exist to serve those needs. That is the only reason counties exist.... to serve citizens. If counties have needs let 'em take up a voluntary collection, not take the money at gunpoint.

The worst thing is the idea that it is okay to use taxpayer resources to run an ad campaign in favor of taxes. (Same column, on CJO)

Tax Links

Here's a couple of long but interesting posts on tax incidence and tax "equity". One by Steve Landsberg and one by Scott Sumner. They are self-recommending.