![[personal profile]](https://www.dreamwidth.org/img/silk/identity/user.png){kind=small}
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.
no subject
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.
no subject
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.