hudebnik: (teacher-mode)
[personal profile] hudebnik
So, one vague part of Da Trump's vague plan to come up with a tax plan is "reducing the number of personal income tax brackets", from seven to three. That sounds like a simplification, right? And a simpler tax system has to be good, right?

Well, no. Most Americans figure out how much tax they owe by looking up their taxable income in a table; it makes no difference to them whether the table was generated from three brackets or three hundred. But if you have complicated taxes and a paid tax preparer on speed-dial, it makes a big difference. Tax brackets are discontinuities, thresholds, and every place there's a discontinuity, there's an opportunity to get on the more favorable side of the discontinuity by fudging some numbers, reclassifying one kind of income as another, etc. The bigger the discontinuities, the more incentive there is for people to game the system in these ways, and the more money rent-seeking tax professionals will make by finding opportunities to do so.

Gaming the system not only deprives the government of revenue (which some see as a feature), it also makes the economy as a whole less efficient. If you actually believe in free markets, you want people to put their money where it will be the most productive, which (under certain assumptions that dyed-in-the-wool capitalists believe) is where it earns them the highest return. Discontinuities in tax policy encourage people to put their money where it will earn them the highest after-tax return, which may not be at all where it would be most productive in any other sense.

If we want a tax system that distorts the economy as little as possible, it should treat income as income, no matter whether it comes from interest, dividends, salary, consulting, short-term capital gains, long-term capital gains, inheritance, royalties, etc. And tax rates should be as smooth and continuous a function as possible -- infinitely many tax brackets, ideally, with each "discontinuity" being so small as to not influence behavior. That way people have little incentive to "reclassify" their income from personal to business, to move their stock sales from one fiscal year to another, etc. just to avoid taxes.

Naturally, that's the opposite of what the Trump plan-to-write-a-plan does: it makes the discontinuities bigger, and in particular encourages ultra-wealthy individuals like Trump to reclassify their personal income as business income -- not because it's any less their personal property, not because it's any more productive as business income than as personal income, but just in order to cut their tax rates by more than half.

Date: 2017-04-28 03:59 pm (UTC)
metahacker: (statistic)
From: [personal profile] metahacker
If there was ever a time when "follow the money" was crucial.

The one-page tax "plan" has as its last bullet "give companies a huge retroactive tax break so they can funnel that money to their execs". I mean, it claims it's about capturing pent up overseas profits, but...

Date: 2017-04-29 12:29 am (UTC)
hazard: (Default)
From: [personal profile] hazard
personally , i'm furious about the removal of single parents being able to claim head of household. ( in addition to thinking his new plan is absolute bubkiss )

Date: 2017-05-01 03:39 am (UTC)
cellio: (Default)
From: [personal profile] cellio
That's all true. I have a more basic objection to creating large discontinuities: the government is going to collect a certain amount of money, and we're just talking about how to distribute the load. I don't want the brunt of that load to be born by the people who don't have the means to manipulate things to game the brackets.

There are many things wrong with our tax system, including that we tax income more and consumption less -- i.e. we punish people for saving. "Too many brackets" is not one of the wrong things.

Date: 2017-05-01 01:09 pm (UTC)
cellio: (Default)
From: [personal profile] cellio
For that matter, we talk about the importance and virtue of work, but we tax income that's tied directly to your own work (salary) at much higher rates than "unearned" income, which is based largely on the actions of other people (inheritance and all kinds of investment income).

Excellent point.

Saving is not inherently good, nor inherently bad.

I was thinking of personal saving, not corporate or government saving. Personal saving is good to the level that people can provide for their own future needs. It's oft reported that the average American (worker? family?) has something like $10k saved for retirement. Googling today is providing me inconsistent results, but this oft-cited report says that half of families have no retirement savings at all and shows averages by age range over time, all pretty low. I saw another page saying that the average near-retirement worker, by which they meant age 55-64, has "almost $100k" in savings. I think that was among people with retirement plans, not the general population. Even if it's as high as $100k, that's not going to get you very far through retirement.

So I do want to encourage a certain level of personal savings, because we have to get out of this mindset that the government will take care of all our needs. In a way we punish people for self-sufficiency, not that I'm going to change my own plans on account of that. (But, realistically, you and I are paying for our own retirements in full and other peoples', because the pay-it-forward model broke after the baby boom.)

But I wasn't talking about people/corporations that are sitting on millions and millions of dollars. The considerations are different there. Sorry for the ambiguity.

I agree with what you say about market forces. The market is not always allowed to operate freely. For example, labor unions protect jobs and high salaries even in markets that don't require that level of employment (or, through work stoppages, markets where lower-priced labor is available). For another, in recent years many people have started pushing for laws enforcing "living wages", not because a job is worth a certain income but because the human being holding that job "deserves" that income. Minimum wages (whether the low national one or the higher ones being agitated for in some locales) are complicated, I know, and involve complex social values, not just economic values. I'm just pointing out that many folks don't want the market to operate freely; we want it to operate in our favor. Republicans and Democrats are both guilty there.

If government does the "greedy", "rational" thing of buying stuff when it's cheap, and hiring people when labor is cheap, it'll actually be acting in the best interest of the economy as a whole.

Yup. But, as you say, political maneuvering trumps rational behavior far too often. :-(

Date: 2017-05-01 07:30 pm (UTC)
cellio: (Default)
From: [personal profile] cellio
So was I :-) But I was judging it from the perspective of "what's good for the economy as a whole?" rather than "what's good for this individual or family?"

Ah.

We aren't all altruists, and I don't think that's wrong. We have circles of concern and responsibility; just as on a plane you secure your own oxygen mask before helping your neighbor, I think it's appropriate that we each first make sure that we do what we can to provide for our own, and our own families', needs, even if "objectively" that's not what's best for the global economy. Nobody is going to care more about easing my retirement than I will, after all. Once we take care of our direct needs (including family), we typically broaden our concern to the broader community. (Different people do that in different ways, of course.)

To most of us, too, I think providing for our own retirement consumes most of our resources. I, at least, am not sitting on millions and millions of dollars beyond what I need to maintain a decent standard of living for myself, at least. :-) If I were sitting on that kind of money I hope I'd use much of it in a way that provides broader benefit, but I can't do more than speculate right now.

I didn't mean that credit is bad. I have a mortgage too, and had student loans. For some things I choose to not make the purchase until I have the cash in hand, but the housing and education markets would be very different if everybody did that for everything. Plus, as you say, starting a business. I'm not anti-borrowing, and not even anti-borrowing-when-not-necessary -- I could pay down my mortgage faster than I am, but I have a good interest rate and better uses for the money in the meantime, so why should I? Responsible borrowing and lending is an essential part of the economy. The word "responsible" hasn't always applied recently, alas, but it seems like things are getting back on track from the mortgage bubble.

(That's right, a guy of Jewish ancestry is trying to convince a practicing Jew that money-lending is useful :-)

*laugh* No need to convince; we might just place the "when should I?" bounds in slightly different places. Or not -- hard to tell.

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