They do, but sovereign debt in the USA is mitigated by automatic stabilizers in progressive taxes. On the other hand, the structural problems come from the increased ability for multinational corporations (like Amazon) with small margins to disrupt the comparative advantage of LOCAL businesses and thus lower demand for a lot of local human labor. All the working conditions we've been legilating for in the past 100-200 years make our population more expensive to hire, and when you are now able to hire people in areas with a lower cost of living, or automate the jobs, the problems are systemic.
If you reqd Stiglitz, he points out how before the great depression 20% of Americans worked in farm related jobs. After -- 2%. Notice the similarity with manyfacturing? This time it's taken longer but it's steadily eroding demand for local labor. Programmers arent hit by this economic phenomenon yet, because we program the machines that "disrupt" industries.
are you making the claim that progressive taxation schemes automatically adjust to mathematically compensate? Because, inflation is a compounding effect, and having first action on created money is so powerful that I doubt that taxing the banking classes at anything but 100% or greater would do much for that. Plus bailouts, contracting work, etc. etc. etc.
I read your essay, and I am not discounting the deleterious effects of inflation on the domestic economy. In fact the growth in the M0 money supply should have us expecting a 3x inflation in the near future:
So yes, this is very worrying. As Milton Friedman said, "inflation is always and everywhere a monetary phenomenon" and argued that it always follows an increase in the mouney supply.
What I am saying is that there are ways to mitigate the transfer of wealth to the rich, which are in place. If you look at inflation as a flat tax on everyone, it can be offset by sufficiently progressive taxation and welfare assistance to the poor (I am a fan of Friedman's negative tax scheme or Basic Income schemes). Overall you are right, income inequality grows during inflations. But at least we can mitigate this with policy.
On the other hand, I am saying that the structural changes are systemic and this is far worse for the population as we have very limited means to "bring manufacturing jobs back" as both presidential candidates promised in this last election. They ain't coming back - not to humans, anyway. The real big shift we are facing is how quickly we can grow our safety nets and redistribution schemes like Basic Income or Negative Tax so that our unemployed class can continue being consumers at some rate which we as a society think they "should afford to be" just by virtue of being human.
but inflation isn't a flat tax on everyone, it's regressive. In the case of the two families in the admittedly extreme inflation example, the poor family takes a 50% tax and the rich family takes a <2% tax.
In your graph, I see a 25% inflation, not a 3x inflation. If prices increase too quickly, there will be a dragging effect from the multiplier effect as stressed consumers default on loans, so if M0 doesn't increase as much, that 25% inflation may be dragged out over a longer period of time... Not to understate my worry about it, however.
But you're right, the technological displacement is a structural problem in our economy, if the populace has a sense of entitlement towards jobs, or "their job" in particular, or even if not - in the case that there are not enough social resources to effect retraining in the labor force, or those social resources are misdirected, for example towards useless college degrees.
In the non-inflationary fantasy universe where I wish I lived, technological displacement wouldn't be such a problem, since it would effect deflation. Yes, people would lose jobs, but they could afford to lose jobs or often, just afford not to work for protracted periods of time if necessary or desired.
Fiat currencies are inherently inflationary. That's because people are forced to accept that currency, and on the basis of the M0 money there is a lot of other money, such as the credit money that far exceeds the amount of M0 money. We regulate how much banks must keep on reserve but ultimately the money supply is inflated not just by governments but by the banks. If every bank issued its own currency, then theoretically its credit would be affected by overextending how much money it lent out. And indeed in the free banking era, many banks failed. (I should point out, though, that even in the so-called free-banking era, the fractional reserve requirements were regulated by the states.) By having a lender of last resort (the Fed), we essentially have replaced a large amount of interbank credit with regulation and a moral hazard. Before computers, it was hard to keep track of so many currencies, but now we might want to revisit that idea.
Anyway, all fiat currencies are inflationary. This in itself isn't bad as log as the inflation matches our GDP or at least matches the inflation of every other currency. The Chinese for example peg their currency to the US dollar so they can continue selling us more stuff. I don't know how long this policy will continue.
What I am worried about is the trade deficit and the effect of automation and outsourcing on the working class and the general economy. I for example employ developers overseas. Amazon has disrupted bookstores. iTunes has disrupted record stores. The Mac and iPhone, once proudly built in the USA, are now assembled overseas from materials obtained overseas. This is a good thing for the consumer and for flexibility -- supply chains are now all over the world. It is BAD for the environment -- tons of stuff shipped all over the world and wasting fuel merely because capitalism moves things and people around geographically ... producers wanting to produce as much as they can to turn a bigger profit ... this is unsustainable. And it's BAD for the working class, who are in a race to the bottom with people whose cost of living is much smaller, and who -- thanks to recent technological advances -- can take the jobs of local businesses who until now have enjoyed a comparative advantage.
When you can't issue your own fiat currency, you fare worse. Witness the PIGS countries in Europe after they lost the ability to issue their own currency. They're all in the south and their economies are slower-paced. I would wager that their trade deficits were quickly affected as the local businesses lost their comparative advantage, but their own governments couldn't help them by printing money, only by borrowing. So they became at the mercy of German and English banks. A similar situation faces many cities in the USA.
> And indeed in the free banking era, many banks failed
Same is true for the central banking era.
>This in itself isn't bad as log as the inflation matches our GDP or at least matches the inflation of every other currency
No. The only criterion by which it "isn't bad" is if wage prices are in sync with it, or precedes it, which is what happened during a short period in the 50s or 60s. Even still, the mechanism for inflation basically consists of "throwing money in the faces of rich people and telling them to use it".
Inflation ALSO fundamentally forces people to accept an additional layer of upside risk in their day to day transactions. And then we try to monkey-patch society's inability to handle risk by creating things like social security and welfare (which are rather inefficient mechanisms, in terms of overhead, and benefit given). A system of inflation systematically devalues labor done in the past relative to the expectation of labor done in the future. Not only is that a questionable judgement, but it also causes things to get really out of whack (massive crashes) when the future can't meet those expectations.
Instead, if we had a deflationary economy (which is what naturally happens with technology), then laborers of the past can more effectively enjoy the fruits of their labor. Moreover, nonprofit foundations can take care of society's needs more effectively using war chests without having to ask for ever-towering amounts of funding or risking it in managed fund situations, for example.
Inflationary or deflationary, when the price of many people's daily labor is less than the rent (real estate prices do not always shrink like technology) that's when financial trouble starts for them and their families.
Your argument is wrong or poorly articulated. What isn't sustainable is an economy where those whose labor has been displaced by technological or economic advances have no opportunity to meet their basic human needs.
Automation and globalization are sustainable. An increasing population is sustainable so long as it is in lockstep with technology's ability to support it. Malthus would have never imagined in his wildest dreams that 7 billion people could live simultaneously. The reality is, none of us can predict the future, and what kind of advances we will see in the productivity of essential goods. To think otherwise is gross intellectual masturbation.
When was the last time someone from a financial firm on Wall Street went to jail for unscrupulous/illegal actions? Why are financial service organizations allowed to rent seek against the rest of productive society with impunity?
And was soon thereafter arrested on state charges (the first charges were federal) which he is currently fighting. One bright spot: Goldman was just ordered to pay legal fees for his first trial, as their by-laws say they are required to pay legal costs for officers charged for acts taken as part of their employment, and he was a vice-president.
What does a billionaire do after buying a $90M apartment in Manhattan? Remodel it of course. Lots for work for carpenters, electricians, plumbers, interior decorators, and all the people that support and supply them. I don't see this as a bad thing; it's a good thing.
If there's "lots of work" for all of those people to support and supply the newly wealthy, why are the wages and employment rates of people who aren't wealthy going down?
Exactly. The money these billionaires have doesn't magically disappear from circulation (perhaps they keep it under their bed?). They spend and invest it.
And, give it a generation or three or four, and their kids will have blown it all, having grown up thinking $90M apartments are their expected standard of living, and be back to working at McDonalds.
You can apply the same argument to redistributing wealth to the poor. They don't keep it under their bed but spend it. Except the money multiplier is way bigger in the case of the poor, because they:
1) Spend more of their money on what they really NEED, sending price signals into the economy for basics the majority of people need, vs say golden toilets
2) Spend faster and more of their money on themselves PERIOD because their basic needs take up a greater proportion of their money than for rich people
But anyway we need to balance the wealth transfer one way of the other. This is accomplished with safety nets and progressive taxation.
Yes, that is a good thing. The bad part is that they aren't using the other 99.99..% of their wealth, essentially taking everyone else's labor and ending the cycle of trade that would otherwise help keep an economy going.
And that's not to mention broader macroeconomic issues which are more worthy of essays than HN comments.
They're not stuffing that money under their mattresses. The vast majority of this money is invested in other businesses in one way or another, whether directly in stocks and shares or indirectly through a bank.
Of course. But compared to actually spending money directly on goods that are produced by the average person, they may as well be stuffing it under their mattress.
Thanks to less than 100% reserve requirements on banks, the money the rich keep in American banks is theoretically reinvested through loans back to various enterprises.
The problem arises when the banks don't lend the money and just sit on it... or when companies like Apple siton their huge cash reserves...
To fix this we must boost aggregate DEMAND. Investors and banks give money to businesses when they see demand.
Boosting aggregate demand will not solve the unemployment issue when you consider that one person with automation can produce enough goods to satisfy the demand more than one person.
Right - automation presents a big and growing challenge to the structure of the economy
But redistributing money to people on the bottom to give them safety nets (and allow them to do things like re-educate themselves for some other career) as well as spend it back into the economy is a way to keep them from going completely bankrupt. When a company goes bankrupt, it's one thing. When a human does, it often results in starvation and homelessness.
Right, the real issue is with the lenders. I would argue that giving money directly to the people so they can send price signals back into the economy -- via Basic Income or a Negative Tax -- is much more effective at increasing aggregate demand.
99.99% where did you get the figure from? So you expect Gates to sell his shares in Microsoft, Bezos in Amazon and Musk in Tesla? Aren't they already using 100% of their money? What am I missing here?
True and people conveniently ignore that the money not given to the government in taxes buys goods and makes investments which create jobs.
There is an entire economy built around the wealthy spending boatloads of money on luxury goods, cars, 2nd and 3rd homes, vacations, renovations and the like.
Just look at those comments. The readers of the NYTs place the blame for poverty squarely on two groups: The rich, and Republicans. The first are guilty of "not sharing"--which implies they (the readers) believe in a zero-sum economy. The latter are guilty for not wanting higher taxes, ie, for not forcing the rich to share. So, a single fallacy rules their world view.
The US GDP does grow but at 2% - 3% a year. Just because something is not totally a zero-sum game doesn't mean no one is losing money. As a simple example, if I sell you a stock and it goes up, that's money you made and I lost out on. And if vice versa, then it's money I made instead of you.
Things can happen that transfer wealth way faster than the GDP grows. For example, repeal of Glass-Steagall caused much risky speculation by banks with funds that were backed by depositors at banks. So depositors and shareholders has to be bailed out by the taxpayer. Or the 1980s CORBA bill that says emergency rooms must treat everyone regardless of ability to pay. These things add up.
Many of these billionaires are undeserved and unearned billionaires because of the carried interest tax dodge. That needs to go ASAP. Over five years into a Democrat presidency and all these tax issues (low taxes on dividends, double irish corp tax dodge, etc) that protect the uber wealthy persist.
It's not about taxing the wealthy, it's about fairness. $85K earned by a teacher, $150K earned by a developer, $20M earned by Brad Pitt and $200M earned by Steve Schwarzman should all be taxed the same way.
And the same goes for corp earnings. F Apple! Pay your taxes.
Without addressing the issue of tax loopholes in general, there is a logical rationale for lower taxes on capital gains (for Schwarzman, Buffett & co):
- It's a double tax, as money that was invested had already been previously taxed.
- It does not account for inflation. If an investment grows only with inflation, capital gains taxes still need to be paid on that growth.
A capital gains tax is not double-taxation, as the tax applies only to "gains" on a capital investment, and these gains have not yet been subject to tax. Moreover, most capital investments are made using untaxed amounts (i.e., "reinvested" income), as part of transactions designed to avoid paying taxes.
A capital gains tax is not intended to account for inflation--the persons that pay the capital gains tax (companies and wealthy individuals) are least subject to inflation. The lower rate was intended as an incentive to make capital investments in businesses. Unfortunately, due to the way capital assets are defined (or rather, is not defined) in the tax code, the lower rate has instead resulted in excessive investment in real properties, illusory assets (i.e., derivatives), and other passive investments rather than in businesses.
Say you have a business worth $100k. It earns another $100k and pays 35% corporate tax on it. The rest goes into the bank. The company is now worth $165k. If you sell the company for $165k, you pay cap gains taxes on the $65k gain - at 20% qualified cap gains rate, you walk away with a gain of $52k.
That's what double taxation means. You paid taxes twice on the earnings of $100k.
[edit: it might shock some of you to discover that this is a simplified example to illustrate the point.]
No. Cash earned by a corporation does not affect the basis of its shareholders. If such cash earnings were distributed as a dividend, it would not affect the basis of its shareholders but would be taxable as income to the shareholders.
(Cash distributed by a corporation but which is not earned, i.e.,if the corporation has negative earnings at the time of the distribution, would reduce the shareholder's basis.)
If you were dealing with a partnership/LLC, the $65k would generally increase its partners' basis in the partnership/LLC. However, in such case you wouldn't be dealing with double taxation in the first place.
> That's what double taxation means. You paid taxes twice on the earnings of $100k.
You paid 48% on the $100K, and that is all that matters in the end - the fact that it was a two step process, and that different steps have different credit/exemptions consideration is not really important.
And you generally can pay just your marginal rate - don't set up a corporation, and list everything on your own return - singular taxation goodness!.
However, no one likes to do that, because it makes them personally liable. So actually the higher rate (which people like to call "double taxation" even though that's not informative) turns out to be the fee you have to pay to separate your finances and legal status from the business - and by the fact that the vast majority of businesses choose it indicates that, in general, it's not expensive and might even be too cheap for what it provides.
I don't think you understand what double taxation means. Double taxation refers to a specific item of income.
You own a company, X. It earns income of 100 doing whatever. That income is taxed. This is the first level of taxation. The company then distributes that income as a dividend to its shareholder, you. That dividend is income to you. Thus, it is subject to tax again. This is the second level of taxation. If you had performed the income-generating activity directly (i.e., not through the company), it would not be subject to this second level of tax. However, at the same time, the use of the corporate entity provides significant legal and tax benefits. Thus, the double taxation is mitigated but not eliminated.
Another example: Company X, based in the U.S., does some business in France. France taxes that income. That is the first level of taxation. The U.S. also taxes that income, due to its worldwide taxation system. That is the second level of tax on the same income. In this particular instance, we have a treaty with tax to eliminate the double taxation of that same income. (This is not true of all countries, for example, we don't have a tax treaty with Taiwan.)
In your example, you ignore the basic system of US and EU capital gains taxation. When you sell a business, you are generally taxed based on the difference between [sale price] subtract [your "cost basis"] in the business. (Cost basis generally means the amount you paid to acquire the shares, or which you contributed to the business.) It is irrelevant that your business was worth $100k before it made another $100k--the tax code doesn't look at intermediary valuations, and it doesn't care about earnings when determining the tax on the sale of a capital asset. What matters is whether you have a "cost basis" in your shares of the business. If you acquired your shares for $0 (for example, you contributed your labor to earn those shares), then upon selling the business in your example you would recognize capital gains of $165k, not $65k. Usually, capital gain from the sale of a business relates to "goodwill" (i.e., brand value) rather than cash from earnings (and for property or other capital assets, capital gains are usually due to simple appreciation.) Double taxation is not usually a problem with capital assets, so the capital gains rate does not reflect a discount to remedy double taxation. Rather, capital gains rates are discounted to encourage investment in capital assets.
If you acquired your shares for $0 (for example, you contributed your labor to earn those shares), then upon selling the business in your example you would recognize capital gains of $165k, not $65k.
Yes, I was assuming you purchased at $100k to illustrate the cost basis. I should have been more clear on that point.
If you want to argue that double taxation is justified as the price of limited liability, go ahead. But it's silly to compare the capital gains rate to the income tax and then ignore the corporate tax rate. Combined they amount to a lot more than personal income taxes. This is why the wealthy contribute such a disproportionate amount to the US treasury.
> the wealthy contribute such a disproportionate amount to the US treasury.
Overall US taxes (from all sources) are approximately flat taxes, if considered relative to wealth, as you seem to be doing. The wealthy contribute roughly the same share of their wealth to the treasury as the less wealthy do. The 90th-percentile-and-above of richest Americans own about 75% of the country's assets in aggregate, and pay about 75% of the country's taxes in aggregate.
> It's a double tax, as money that was invested had already been previously taxed.
Everything has, in some form of another, been previously taxed. "Double taxation" is a good sound bite, but it doesn't actually say anything. yummyfajitas gives a computation below that shows the overall tax rate is higher (48%). That is an actual argument (which I will respond to there). But other than that, "double taxation" means nothing other than "different rates", which is generally always the case.
The carried interest tax loophole is not about taxing investment gains at a lower rate, it's about letting PE/HF/VC types turned earnings realized from money management services into fake long term capital gains.
Furthermore, HF managers pay less taxes on their earnings than their investors do b/c HF investment gains are short term capital gains but the fees collected for managing such short term gains get taxed at the lower long term rate.
My understanding is that the low nominal tax on dividends is on top of the high corporate tax, which is 35%, so that dividends are taxed at a higher rate than earned income.
Yes, it is on top of the 35%. However, the 35% is on pure profit -- if the business has more expenses, the profit goes down and there is less tax. Whereas, if it was earned income, there are much fewer relevant deductions.
Also, being a corporate does indeed cost that 35% corporate tax - however, it does limit the shareholder, director and officer liability. If the corporate structure wasn't there, these people would have to arrange for e.g. insurance - and the overall cost would be at least as high.
I would infer from the fact that most small business owners choose the "limited liability" path, that the overall cost (corporate tax + dividend tax) is worth the limited liability. It might, in fact, be too cheap for what it provides.
The LLC form provides the best of both: limited legal liability, while eliminating the double taxation burden. This is one of the reasons the form has been taking off over the past 2 decades, especially for small businesses.
If you want to tax everyone the same, eliminate taxes on corporations and have an income tax when money moves from a corporation to a human. This would drastically simplify many things - loss carryforwards, depreciation schedules, etc.
But comparing the 35% corporate income tax + 15% long term capital gains (less inflation) [1] that Steve Schwarzman pays to the roughly 30% that the teacher pays is silly. The teacher pays far less, but these facile comparisons ignore most of what's really happening.
[1] Or 35% corporate income tax + 39.6% dividend, since you specifically singled out dividends. Or maybe 35% corporate income + 20% qualified dividend, depending on how it all works out.
Don't worry the ACA is there to help those who make less, oh wait its not, its the biggest transfer of wealth from the young and able to the rich and old in generations.
Corporate tax rates are too high in the US, however those are balanced out by far too many write offs. Drop the rate, remove the deductions, and that should help.
That is only one definition of fairness. Another definition of fairness would declare: "No Mr. Multi-millionaire, you really don't need a 5th Ferrari, just because you won the genetic lottery." I see the merit to both sides, because I can see myself on both sides. But nonetheless, your proposal would be an improvement, because right now, the system we have is neither fair nor sustainable.
I'm curious if the author bothered to check what percent of most expensive NYC apartments are bought by Americans (unlike Russian or Middle East kleptocrats).
Money from quantitative easing goes to the wealthy and connected first. The rest of the country doesn't see it until its value has been inflated away, which is why you'll see the wealthy benefit from the recovery and the poor stay exactly where they are.
67 comments
[ 3.0 ms ] story [ 97.2 ms ] threadDespite that, the author is right. Something has to give.
https://docs.google.com/document/d/137cC3inVNcfof44Pq1nMiyz1...
If you reqd Stiglitz, he points out how before the great depression 20% of Americans worked in farm related jobs. After -- 2%. Notice the similarity with manyfacturing? This time it's taken longer but it's steadily eroding demand for local labor. Programmers arent hit by this economic phenomenon yet, because we program the machines that "disrupt" industries.
http://www.tradingeconomics.com/united-states/money-supply-m...
So yes, this is very worrying. As Milton Friedman said, "inflation is always and everywhere a monetary phenomenon" and argued that it always follows an increase in the mouney supply.
What I am saying is that there are ways to mitigate the transfer of wealth to the rich, which are in place. If you look at inflation as a flat tax on everyone, it can be offset by sufficiently progressive taxation and welfare assistance to the poor (I am a fan of Friedman's negative tax scheme or Basic Income schemes). Overall you are right, income inequality grows during inflations. But at least we can mitigate this with policy.
On the other hand, I am saying that the structural changes are systemic and this is far worse for the population as we have very limited means to "bring manufacturing jobs back" as both presidential candidates promised in this last election. They ain't coming back - not to humans, anyway. The real big shift we are facing is how quickly we can grow our safety nets and redistribution schemes like Basic Income or Negative Tax so that our unemployed class can continue being consumers at some rate which we as a society think they "should afford to be" just by virtue of being human.
In your graph, I see a 25% inflation, not a 3x inflation. If prices increase too quickly, there will be a dragging effect from the multiplier effect as stressed consumers default on loans, so if M0 doesn't increase as much, that 25% inflation may be dragged out over a longer period of time... Not to understate my worry about it, however.
But you're right, the technological displacement is a structural problem in our economy, if the populace has a sense of entitlement towards jobs, or "their job" in particular, or even if not - in the case that there are not enough social resources to effect retraining in the labor force, or those social resources are misdirected, for example towards useless college degrees.
In the non-inflationary fantasy universe where I wish I lived, technological displacement wouldn't be such a problem, since it would effect deflation. Yes, people would lose jobs, but they could afford to lose jobs or often, just afford not to work for protracted periods of time if necessary or desired.
Anyway, all fiat currencies are inflationary. This in itself isn't bad as log as the inflation matches our GDP or at least matches the inflation of every other currency. The Chinese for example peg their currency to the US dollar so they can continue selling us more stuff. I don't know how long this policy will continue.
What I am worried about is the trade deficit and the effect of automation and outsourcing on the working class and the general economy. I for example employ developers overseas. Amazon has disrupted bookstores. iTunes has disrupted record stores. The Mac and iPhone, once proudly built in the USA, are now assembled overseas from materials obtained overseas. This is a good thing for the consumer and for flexibility -- supply chains are now all over the world. It is BAD for the environment -- tons of stuff shipped all over the world and wasting fuel merely because capitalism moves things and people around geographically ... producers wanting to produce as much as they can to turn a bigger profit ... this is unsustainable. And it's BAD for the working class, who are in a race to the bottom with people whose cost of living is much smaller, and who -- thanks to recent technological advances -- can take the jobs of local businesses who until now have enjoyed a comparative advantage.
When you can't issue your own fiat currency, you fare worse. Witness the PIGS countries in Europe after they lost the ability to issue their own currency. They're all in the south and their economies are slower-paced. I would wager that their trade deficits were quickly affected as the local businesses lost their comparative advantage, but their own governments couldn't help them by printing money, only by borrowing. So they became at the mercy of German and English banks. A similar situation faces many cities in the USA.
Same is true for the central banking era.
>This in itself isn't bad as log as the inflation matches our GDP or at least matches the inflation of every other currency
No. The only criterion by which it "isn't bad" is if wage prices are in sync with it, or precedes it, which is what happened during a short period in the 50s or 60s. Even still, the mechanism for inflation basically consists of "throwing money in the faces of rich people and telling them to use it".
Inflation ALSO fundamentally forces people to accept an additional layer of upside risk in their day to day transactions. And then we try to monkey-patch society's inability to handle risk by creating things like social security and welfare (which are rather inefficient mechanisms, in terms of overhead, and benefit given). A system of inflation systematically devalues labor done in the past relative to the expectation of labor done in the future. Not only is that a questionable judgement, but it also causes things to get really out of whack (massive crashes) when the future can't meet those expectations.
Instead, if we had a deflationary economy (which is what naturally happens with technology), then laborers of the past can more effectively enjoy the fruits of their labor. Moreover, nonprofit foundations can take care of society's needs more effectively using war chests without having to ask for ever-towering amounts of funding or risking it in managed fund situations, for example.
Automation and globalization are sustainable. An increasing population is sustainable so long as it is in lockstep with technology's ability to support it. Malthus would have never imagined in his wildest dreams that 7 billion people could live simultaneously. The reality is, none of us can predict the future, and what kind of advances we will see in the productivity of essential goods. To think otherwise is gross intellectual masturbation.
And, oh yes, that former Goldman Sachs high-frequency-trading programmer (who may have only taken open source code).
http://nypost.com/2012/02/17/ny-appeals-court-orders-acquitt...
And, give it a generation or three or four, and their kids will have blown it all, having grown up thinking $90M apartments are their expected standard of living, and be back to working at McDonalds.
1) Spend more of their money on what they really NEED, sending price signals into the economy for basics the majority of people need, vs say golden toilets
2) Spend faster and more of their money on themselves PERIOD because their basic needs take up a greater proportion of their money than for rich people
But anyway we need to balance the wealth transfer one way of the other. This is accomplished with safety nets and progressive taxation.
And that's not to mention broader macroeconomic issues which are more worthy of essays than HN comments.
The problem arises when the banks don't lend the money and just sit on it... or when companies like Apple siton their huge cash reserves...
To fix this we must boost aggregate DEMAND. Investors and banks give money to businesses when they see demand.
But redistributing money to people on the bottom to give them safety nets (and allow them to do things like re-educate themselves for some other career) as well as spend it back into the economy is a way to keep them from going completely bankrupt. When a company goes bankrupt, it's one thing. When a human does, it often results in starvation and homelessness.
How does it help the USA working class when billionaires channel their money overseas
True and people conveniently ignore that the money not given to the government in taxes buys goods and makes investments which create jobs.
There is an entire economy built around the wealthy spending boatloads of money on luxury goods, cars, 2nd and 3rd homes, vacations, renovations and the like.
Things can happen that transfer wealth way faster than the GDP grows. For example, repeal of Glass-Steagall caused much risky speculation by banks with funds that were backed by depositors at banks. So depositors and shareholders has to be bailed out by the taxpayer. Or the 1980s CORBA bill that says emergency rooms must treat everyone regardless of ability to pay. These things add up.
ugh, no thanks. I find the comments sections in news articles destroys my faith in humanity even more than youtube comments these days....
It's not about taxing the wealthy, it's about fairness. $85K earned by a teacher, $150K earned by a developer, $20M earned by Brad Pitt and $200M earned by Steve Schwarzman should all be taxed the same way.
And the same goes for corp earnings. F Apple! Pay your taxes.
Top 10 Private Equity Tax Loopholes http://dealbook.nytimes.com/2013/04/15/the-top-10-private-eq...
- It's a double tax, as money that was invested had already been previously taxed.
- It does not account for inflation. If an investment grows only with inflation, capital gains taxes still need to be paid on that growth.
A capital gains tax is not intended to account for inflation--the persons that pay the capital gains tax (companies and wealthy individuals) are least subject to inflation. The lower rate was intended as an incentive to make capital investments in businesses. Unfortunately, due to the way capital assets are defined (or rather, is not defined) in the tax code, the lower rate has instead resulted in excessive investment in real properties, illusory assets (i.e., derivatives), and other passive investments rather than in businesses.
That's what double taxation means. You paid taxes twice on the earnings of $100k.
[edit: it might shock some of you to discover that this is a simplified example to illustrate the point.]
(Cash distributed by a corporation but which is not earned, i.e.,if the corporation has negative earnings at the time of the distribution, would reduce the shareholder's basis.)
If you were dealing with a partnership/LLC, the $65k would generally increase its partners' basis in the partnership/LLC. However, in such case you wouldn't be dealing with double taxation in the first place.
You paid 48% on the $100K, and that is all that matters in the end - the fact that it was a two step process, and that different steps have different credit/exemptions consideration is not really important.
And you generally can pay just your marginal rate - don't set up a corporation, and list everything on your own return - singular taxation goodness!.
However, no one likes to do that, because it makes them personally liable. So actually the higher rate (which people like to call "double taxation" even though that's not informative) turns out to be the fee you have to pay to separate your finances and legal status from the business - and by the fact that the vast majority of businesses choose it indicates that, in general, it's not expensive and might even be too cheap for what it provides.
You own a company, X. It earns income of 100 doing whatever. That income is taxed. This is the first level of taxation. The company then distributes that income as a dividend to its shareholder, you. That dividend is income to you. Thus, it is subject to tax again. This is the second level of taxation. If you had performed the income-generating activity directly (i.e., not through the company), it would not be subject to this second level of tax. However, at the same time, the use of the corporate entity provides significant legal and tax benefits. Thus, the double taxation is mitigated but not eliminated.
Another example: Company X, based in the U.S., does some business in France. France taxes that income. That is the first level of taxation. The U.S. also taxes that income, due to its worldwide taxation system. That is the second level of tax on the same income. In this particular instance, we have a treaty with tax to eliminate the double taxation of that same income. (This is not true of all countries, for example, we don't have a tax treaty with Taiwan.)
In your example, you ignore the basic system of US and EU capital gains taxation. When you sell a business, you are generally taxed based on the difference between [sale price] subtract [your "cost basis"] in the business. (Cost basis generally means the amount you paid to acquire the shares, or which you contributed to the business.) It is irrelevant that your business was worth $100k before it made another $100k--the tax code doesn't look at intermediary valuations, and it doesn't care about earnings when determining the tax on the sale of a capital asset. What matters is whether you have a "cost basis" in your shares of the business. If you acquired your shares for $0 (for example, you contributed your labor to earn those shares), then upon selling the business in your example you would recognize capital gains of $165k, not $65k. Usually, capital gain from the sale of a business relates to "goodwill" (i.e., brand value) rather than cash from earnings (and for property or other capital assets, capital gains are usually due to simple appreciation.) Double taxation is not usually a problem with capital assets, so the capital gains rate does not reflect a discount to remedy double taxation. Rather, capital gains rates are discounted to encourage investment in capital assets.
Yes, I was assuming you purchased at $100k to illustrate the cost basis. I should have been more clear on that point.
If you want to argue that double taxation is justified as the price of limited liability, go ahead. But it's silly to compare the capital gains rate to the income tax and then ignore the corporate tax rate. Combined they amount to a lot more than personal income taxes. This is why the wealthy contribute such a disproportionate amount to the US treasury.
Overall US taxes (from all sources) are approximately flat taxes, if considered relative to wealth, as you seem to be doing. The wealthy contribute roughly the same share of their wealth to the treasury as the less wealthy do. The 90th-percentile-and-above of richest Americans own about 75% of the country's assets in aggregate, and pay about 75% of the country's taxes in aggregate.
Everything has, in some form of another, been previously taxed. "Double taxation" is a good sound bite, but it doesn't actually say anything. yummyfajitas gives a computation below that shows the overall tax rate is higher (48%). That is an actual argument (which I will respond to there). But other than that, "double taxation" means nothing other than "different rates", which is generally always the case.
Furthermore, HF managers pay less taxes on their earnings than their investors do b/c HF investment gains are short term capital gains but the fees collected for managing such short term gains get taxed at the lower long term rate.
There is no fairness, or logic in that scenario.
My understanding is that the low nominal tax on dividends is on top of the high corporate tax, which is 35%, so that dividends are taxed at a higher rate than earned income.
Yes, it is on top of the 35%. However, the 35% is on pure profit -- if the business has more expenses, the profit goes down and there is less tax. Whereas, if it was earned income, there are much fewer relevant deductions.
Also, being a corporate does indeed cost that 35% corporate tax - however, it does limit the shareholder, director and officer liability. If the corporate structure wasn't there, these people would have to arrange for e.g. insurance - and the overall cost would be at least as high.
I would infer from the fact that most small business owners choose the "limited liability" path, that the overall cost (corporate tax + dividend tax) is worth the limited liability. It might, in fact, be too cheap for what it provides.
But comparing the 35% corporate income tax + 15% long term capital gains (less inflation) [1] that Steve Schwarzman pays to the roughly 30% that the teacher pays is silly. The teacher pays far less, but these facile comparisons ignore most of what's really happening.
[1] Or 35% corporate income tax + 39.6% dividend, since you specifically singled out dividends. Or maybe 35% corporate income + 20% qualified dividend, depending on how it all works out.
http://en.wikipedia.org/wiki/Basic_income
Corporate tax rates are too high in the US, however those are balanced out by far too many write offs. Drop the rate, remove the deductions, and that should help.