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On tax simplification
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.
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.
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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...
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And there's something to be said for increasing the standard deduction: in itself, that should make the system more progressive, and allow a lot of people to file simpler returns, which would reduce the rent-seeking burden of the tax-preparation industry. The question is what to raise in exchange for that.
I'm not sure how I feel about the deduction for state and local taxes. I live in New York City, so it benefits me "bigly", and one can certainly see eliminating it as a punishment aimed at the parts of the country that didn't vote for Donald Trump. The deduction makes it more politically palatable for states and localities to tax their citizens and provide services; if we buy the traditional Republican principle that different states really should be free to provide different levels of service in exchange for different levels of taxation, Republicans should support it. (OTOH, if we buy the Republican-in-practice principle that different states should be "free" to provide LESS services for LESS taxes, but it's outrageous that any state should try to provide MORE service for MORE taxes, they shouldn't.)
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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.
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Saving is not inherently good, nor inherently bad. There are times when it's in the public interest for a lot of people to save and invest money -- when there's a shortage of investment capital -- and other times when it's in the public interest for a lot of people to spend their money -- when there's a shortage of consumer demand. Fortunately, the former situation normally means interest rates are high, and the latter normally means interest rates are low, so people acting greedily in their own best interest actually leads them to do what the economy as a whole needs. Sometimes it works out that way -- not always, but sometimes.
Likewise, government spending and government hiring are not inherently good, nor inherently bad. Government spending is bad when there's a shortage of stuff to buy, because it drives up prices for the private sector; government hiring is bad when there's a labor shortage, because it "crowds out" private hiring that could have done the job just as well. Conversely, government spending is good when there's an excess of stuff to buy and a shortage of buyers; government hiring is good when there's high unemployment. Fortunately, the former situations are associated with high prices, high wages, and low unemployment, and the latter with the opposite. 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.
The country-club wing of the Republican party believes we are ALWAYS in the shortage-of-investment-capital, shortage-of-stuff-to-buy, shortage-of-labor situation, so it's ALWAYS better to save than to spend, it's ALWAYS better for government to save than spend, and it's ALWAYS better for government to lay people off than hire them. Of course, government spending and hiring are politically popular, so Republicans especially don't want to do those things when a Democrat might get the political credit for it, which is why in 2010, with the economy just barely out of recession, Republicans decided that our most urgent problem was not unemployment but deficits and, in the name of "running the government like a business," forbade it from doing what any rational business-owner would have done.
When Republicans are in political power, they suddenly have a bit of cognitive dissonance: many of them still believe that it's always better for government to save and lay off than spend and hire, but for political reasons many of them want to do the opposite. Hence the current tax debate within the Republican party.
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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. :-(
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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?" It could well be that a particular family would be better off increasing their savings (and thus their sense of financial security, which has knock-on benefits to the economy as a whole), even though the economy as a whole needs more people to spend money right now to get out of a recession.
In fact, that's exactly what happened in 2008: LOTS of businesses and families suddenly felt financially insecure, and decided to increase their savings or pay down their debts, all at the same time. Unfortunately, it's mathematically impossible for everybody to increase net savings at the same time. When you pay down your accounts-payable, you're also decreasing somebody else's accounts-receivable by the same amount, and when you cut your spending, you're also cutting somebody else's income by the same amount. The total net savings rate of the whole economy is always exactly zero. If businesses and families all want to increase their savings at the same time, SOMEBODY has to run a deficit, or the economy will fall into a self-perpetuating spiral of negative inflation, negative interest rates, and negative employment growth. Normally the Federal government falls on that sword, but this time it wasn't allowed to do as much as it probably should have. (Some European governments were more steadfast in refusing to run deficits, and their economies went into double- and triple-dip recessions.)
This is an example of where local "rational" behavior does NOT necessarily produce globally good results.
Absolutely -- if your future needs are likely to be more than your current needs. But there's a lot to be said for debt, too. How many people would ever own a home if they had to save up its full purchase price before moving in? How many people would ever start a business if, before they started, they had to save up enough to run it until it was consistently profitable? How many people would ever go to college if they or their families had to save up the full price before starting?
(That's right, a guy of Jewish ancestry is trying to convince a practicing Jew that money-lending is useful :-)
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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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No argument here; I was just pointing out that, in this case, a bunch of people acting "responsibly" for themselves, combined with a government acting "responsibly", led to an unnecessarily protracted economic downturn, and economic suffering for many of those same people (and millions of others around the world). One can take several lessons from this:
1) locally optimal economic choices DON'T always lead to a globally optimal solution (which should be obvious, but a lot of Republicans seem to think that statement equivalent to Stalin-worship); and
2) "responsible" behavior for a government is not the same as "responsible" behavior for an individual, a family, or a small business. The government's responsibility is not to make as much quarterly profit as possible, but rather to improve the lives of ALL of its inhabitants as much as possible, in a sustainable way. Cutting the deficit this year by destroying millions of jobs, or cutting the deficit this year by eliminating millions of people's access to health care, or preserving a thousand jobs for a few years by making millions of people physically ill and screwing up the global climate for billions, are not triumphs to brag about; they're net losses.
"Running the government like a business" is not obviously a good idea, because the government isn't a business -- or if it is, it's a business with hundreds of millions of ostensibly-equal shareholders.