Showing posts with label tax policy. Show all posts
Showing posts with label tax policy. Show all posts

Thursday, July 11, 2013

A low-hanging fruit rant

Re: The Great Stagnation

I've been thinking about low-hanging fruit from changes in political economy. I mean this as a constructive group of points, ideas, questions  . . . I don't mean to go off on a rant here, but nevertheless . . .

There still seems to be low-hanging fruit when we look at certain aspects of government policy. Tax code simplification and ending the war on drugs are two great examples. Immigration expansion and school competition (where tax dollars follow parental choices) would be two others. I'm not saying these would be or should be politically a snap--obviously they are not--but consider simplifying the tax code:

  • Where are the environmentalists on simplification of the tax code? Why can't we free up these resources (labor is the huge one and as we know our precious time is the one resource environmentalists tend to disregard, but still)? 
  • Why can't we get liberal, conservative, libertarian, Democrat, Republican, et al. to agree on this? It can be as progressive as you like. Let me concede to your desire for an intrusive, expansive, colossal government. Just don't make me use a spoon to dig your ditch.
  • How can we not defeat the vested interest on this issue? If your business plan depends on tax policy (tax lawyers and accountants, MLPs (to a degree), some charities, realtors, et al.), you are not adding value to society. 
  • The bootleggers and Baptists on preventing tax code simplification would be those who want to punish others aligned with those who want to advance their own special, vested interest. I'm not sure which group is the bootlegger.
My point is that these changes would be affect massive improvement to society. The magnitudes are strong. There are still low-hanging fruit if we will just pluck them. 

Thursday, April 18, 2013

Greed versus Envy

The White House put out a budget just a couple months late of when it is supposed to, which is a rather good record in comparison to the Senate who hasn't passed a budget in four years. Contained within it was an interesting proposal--capping the amount a person can save for retirement through tax-deferred accounts such as traditional IRAs where taxes are paid only once distributions begin, which is usually during retirement.

The maximum a person could set aside in an IRA would be $3 million--an amount Obama feels is plenty enough. Just when you thought we were doing all we could to punish saving and reward consumption, we get this to up the ante. Here is a voice of concern about the implications for tax-deferred savings accounts in general. Here is another. Seems there might be unintended consequences from the government deciding for us how much deferred consumption is enough.

But you see, deferred consumption amounts to deferred taxation. And that is where the greed angle comes in. Obama would have us believe that greed is good in this case--the greed the government has for tax revenue now rather than later. Yet there are two facts that make me doubt that greed is the true motive here:

  1. The proposal is estimated to generate a negligible amount of $9 billion in tax revenue over the next decade--about 3% of 1% of what the federal government plans to spend over that time. 
  2. If this were really about accelerating tax payments from the future to the present, then part of the proposal would include allowing unlimited Roth IRA contributions where taxes are paid up front. 
The absence of the second component in the budget makes me think this is more about envy than greed.

Monday, April 15, 2013

Taxes are the price we pay to live in an insane society

It's that time of year again. Time for all Americans to take Uncle Sam's annual insanity quiz: if you can get through the tax forms and still think it all makes sense, congratulations, you're nuts! Notice that I'm not even criticizing tax rates or tax burdens for being too high. At this point I'm only complaining that the process is bat guano crazy.

There are lots of ways to raise as much revenue as we raise today while being immensely more efficient not to mention being fairer. We don't even have to give up all those wonderful special interest giveaways. There are plenty of ways to subsidize them and incentivize behavior otherwise to support all the various things without which society would break down--like jobs for tax preparers, mortgage interest rebates, 366-day stock holdings, and trains running to nowhere. Or would straightforward, simple subsidies be too obviously indefensible?

Regardless, here are my top alternatives to our current tax nightmare (each would be a wholesale replacement of all that befuddles us today):
  • A value-added tax (VAT) applicable to all goods and services--no exceptions.
  • A final goods and services sales tax as described here.
  • A total compensation payroll tax (this means all wages and benefits including education/training, equity including stock options, and health insurance, et al. would be taxable benefits).
The whole mess reminds me of this:



Today also marks the infamous 2-year anniversary of Black Friday as it is known in the poker community. That is the day that a US Attorney unsealed an indictment against Internet poker companies sloppily labeling online poker a crime, a baseless charge that was later dropped, and shutting down effectively all online poker in the United States. As the cases against those charged with money laundering and bank fraud continue to play out and millions of dollars in player funds sit in limbo, it is not at all surprising that a government-created, quasi-black market attracted shady characters and suboptimal market outcomes. The Poker Players Alliance continues the fight for freedom.

Wednesday, January 16, 2013

Partial list of my favorite things . . .


Partial List of My Most “Controversial” Views
(in no particular order and subject to change)
  1.  Government should ideally exit fully from the activity of funding, administering, sanctioning or otherwise engaging in education. As a second-best solution, the government should only facilitate the funding of education by fixed-amount vouchers issued directly to parents and redeemable by any entity that can demonstrate to a non-government third party that they are an education provider. A qualified third party would be one that a significant number and variety of education providers themselves would recognize as being a legitimate if not desirable third-party evaluator.
  2. Free movement of people into and out of the United States of America should be allowed unencumbered and unlimited except for those who are known felons or who are carriers of highly dangerous communicable diseases.
  3. As a corollary to the previous, the free movement of goods, services, and investment should also be free of encumbrance except for the most extreme cases of vital national interest with great burden of proof put upon the justification for any such limitation. 
  4. The federal government of the United States should eliminate fully the income tax (both personal and corporate), all taxes on capital including dividends and capital gains (short and long term), all excise taxes, and all taxes on estates. There are two desirable replacements for the current tax structure: One is a payroll tax of a certain and consistent (i.e., flat) rate applicable to all employment arrangements whereby the tax is assessed on the fair market value of the total compensation (salaries, wages and benefits) earned by an employee. Another perhaps preferable solution would be a certain and consistent (i.e., flat) rate of sales tax applied to the purchase of all final goods and services. As a method to reduce regressivity, a federal tax rebate could be created whereby all adult citizens are issued a refund equal to the sales tax rate multiplied by the dollar value of the poverty level of consumption and all citizens claiming a dependent would be issued a refund equal to 25% of the sales tax rate multiplied by the dollar value of the poverty level. To aim further in adding progressivity to the system, a marginal 10% payroll tax could be applied to all total compensation above $100,000 with this threshold indexed to grow with inflation. 
  5. All narcotics and other drugs should be completely legalized.
  6. Nearly all if not all zoning laws should be discontinued and dissolved.
  7. Prostitution should be legalized.
  8. The state should cease and desist from all activities involving sex offense registries and notification requirements.
  9. Copyright laws and rules should be very significantly reduced in scope and scale.
  10. Patent protection should be considerably rethought with the aim to greatly reduce their anticompetitive and antidevelopment characteristics.
  11. There should be no occupational licensure enforced by law.
  12. Most not-for-profit, charitable activities are slightly counter-productive at best, highly destructive at worst.
  13. Price controls are an extremely poor solution that fails on efficiency as well as liberty grounds. They should be avoided to every extent especially in times of emergency and crisis. 
  14. Central banking should be replaced by free banking (first-best solution), replaced by a gold standard as described by George Selgin, et al. (second-best solution), conducted with fixed rules in a regime of NGPD level targeting as described by Scott Sumner, et al. (third-best solution).


Wednesday, December 19, 2012

What if the Fiscal Cliff solution were to actually get us out of this fine tax mess?

As mentioned previously, I would like to briefly sketch out an approximation of what a terrifically better tax system would look like. This is a second-best solution since I start with the assumption we need a tax burden so massive as to accommodate a government nearly as massive as the one we have today.

If I were asked, "explain taxes to me like I'm a four-year old," I would struggle. Ron Swanson (below) does a decent job striking the emotional chord many of us feel, but this is obviously an emotional appeal designed around the tight confines of satirical comedy. For if it were a comprehensive approach, the tax code would come out looking much worse.



Swanson only gets at the raw theft of it all. He leaves out the destructive properties of bad incentives and resources wasted in compliance and avoidance and evasion.

If we have to have a taxes, we at least should have them with minimal impact both direct and indirect. Directly we waste resources complying and seeking to avoid. Indirectly the effects are much more severe. By taxing capital, we discourage work, risk-taking, and saving. By taxing consumption, we discourage work, risk taking, and consumption. By taxing work, we discourage work, risk taking, consumption, and saving. Work, risk taking, consumption, and saving are all desirable things. But saving has added desirability as it creates opportunities for more of all the other desirable things. Saving is deferred consumption. The reward for the deferring is more later. So it should be obvious, but sadly is not to too many that taxing (discouraging) saving has a compounding negative effect. Which brings me to my proposal for greatly improving upon this fine mess of a tax system we have.

First, we must eliminate all capital taxation (capital gains with its ridiculous long-term/short-term distinction, dividend and interest income, estate taxation, et al.). A flat-income tax would be a big, BIG improvement over were we are today. But we can do better still as this would still be an income tax with the associated negative effect on saving.

Here is the idea (not at all original to me): tax consumption (a sales tax). Let's assume the rate is 20%. We will apply this rate to the purchase of all final goods and services. Income taxes and payroll taxes (save for a new one outlined below) are gone. No longer will we need to turn in an annual term paper on our income to the IRS. No more manipulations of charitable giving and loss carry forward. No more shelters, loopholes, deductions, exemptions, forms 8166 sub A worksheet nine, math that you never can get to add up to the same total twice. Buy something and a tax is built in (this is preferable rather than being added on after the fact). The business submits sales data and taxes due. Most of this infrastructure is in place already. And notice how little opportunity there is for tax evasion save for the ever-dwindling cash side business.

"But what about the poor?" I hear you say. We rebate to every adult the amount of consumption tax that a spending level near the poverty level would imply. Let's target $20,000 (about $5,000 below the official poverty level of income). 20% of $20,000 is $4,000. That amount is payable to every adult American citizen.

"But what about poor children?" I hear you cry. We rebate to every adult claiming a unique dependent (someone cannot be claimed twice as with the current regime) some amount of consumption tax an incremental amount of spending would imply. Let's target $10,000. 20% of $10,000 is $2,000.

"But what about the 'rich' who are now getting checks from the government?" I hear you shriek. That's where the low-impact payroll tax comes in. I think of it as "low impact" because it will be handled by employers similarly to how they handle payroll taxes now. We will maintain the benefit of not having individuals have to play guess how many toothpicks are on the floor with Uncle Sam. The payroll tax will be a marginal rate of say 10% applied to total compensation (wages and benefits) starting at $100,000 with this threshold indexed to inflation.

The structure is the major source of the benefits. The rates and levels are negotiable. Here is what it looks like for a family of four:


Notice that it is progressive. Notice that it is straightforward. Notice that it is not of this world . . . yet.

Update: Some might ask how housing should be treated: as a capital good excluded from taxation or a consumption good subject to taxation. The answer is it depends but can work well in either case. As a capital good making the assumption (probably a bad assumption, that housing is always an investment), it would be excluded. As a consumption good, it would lower the overall tax rate necessary to generate appropriate revenues. The most logical treatment in my mind is to treat any sale or rental of real property as a capital good. Although this increases the tax rate otherwise applicable to consumption, it is a much more straightforward and less manipulable arrangement.

Wednesday, December 12, 2012

Dollars,Taxes

As we continue to hurtle ourselves toward the fiscal cliff as the Mayans predicted, the prospects for meaningful tax reform dwindles. I thought I'd take a second to reflect on some brief ideas about what good tax reform should encompass.

  • Simplification - this is the lower-hanging fruit. We need fewer exemptions, deductions, rates, categories, etc. Unfortunately, this reform has some of the biggest obstacles since so many vested interests are at stake. 
  • Eliminating the worst tax policies from an economic-desirability standpoint - this is where economics needs to trump emotion. We need to stop taxing capital--capital gains (both individual and organizational), dividends, interest, corporate profits, etc. These taxes are economically destructive. They discourage savings and lower the trajectory of economic potential. The economic distortion from taxation is no where more insidious than in capital taxation. There is certainly crossover between this reform group and the next. 
  • Eliminating the worst tax policies from a justice/fairness standpoint - this is where justice and ethics need to trump envy. We need to stop taxing estates. Death should not imply an additional tax liability. Not only does this tax unfairly tax wealth that has been repeatedly taxed already, but it also causes economic resource distortions as people go to great lengths to avoid the tax. Additionally, we need to stop taxing so progressively. Taxation that compounds as success increases assumes that property rights have a diminishing marginal validity. I fail to see how that can be a reasonable principled position. 
In a later post I plan to sketch out my idea of the tax policy I would most like to see replace our current nightmare. 

Thursday, October 25, 2012

Cliff Hanger


I mentioned in a post awhile back about writing a post concerning the spending side of the so-called Fiscal Cliff we are approaching. This is that post. Promise kept.

Don’t expect that same kind of responsiveness from Washington regardless of who wins the election. My expectation is that Rombama will deliver as much and as little as it takes to lie with a straight face that, "In the face of an epic challenge, the American people came together to forged a grand compromise. While this solution does not match the ideal of any one party or interest group, it does satisfy many of those goals and all of our greatest needs…." Disaster avoided, I am your savior. Or something to that political effect.

The spending side of the equation, forced spending cuts disproportionately affecting the Defense Department (because that is where the discretionary money is), is arguably the less concerning part of the equation. This is especially so in the long run. The short run effects of sequestration can be mostly if not entirely offset through proper monetary policy. The monetary authority must change expectations to demonstrate a willingness to accommodate any fiscal reduction. The political will for this is weaker than it should be, but it probably is strong enough and will strengthen in the put up or shut up point of fiscal cliff diving. The added bonus would be that monetary policy arguably has much less distortionary effects than does fiscal policy—the former says demand increases somewhere and the market guides the where, the latter says demand increases through government. Unfortunately, I don't think this will happen as I don't think we will fall off the spending fiscal cliff.

The tax side of the fiscal cliff remains the more imposing part and has the more important long-run considerations. The uncertainty alone is a source of reduced economic growth. I'm cautiously optimistic about the chances for tax simplification and otherwise meaningful reform. I'm more optimistic about tax rates and incidence not being as severe as a full plunge over the cliff would be. Here I think there will be a decent compromise, but most of the benefits will be in terms of certainty rather than good policy--we'll at least know how badly taxation will be moving forward.

Back to the spending, I am very pessimistic about the chances of substantial spending reform or reduction. That means the fiscal cliff is avoided from the spending side—we don't get the big cuts, hence we don't fall off the cliff with the associated risks to short-term growth. But the manner in which we avoid the cliff is in no way a sustainable path to fiscal prudence. For evidence supporting my view on spending and the compromise to come, look at how Obama defines a "grand bargain".

Wednesday, October 17, 2012

Causes of the Great Recession and the Slow Recovery

My views on the macroeconomic landscape in America and abroad over the past five years, much like the landscape, have been in flux. Here is my current view as to the approximate causes of the Great Recession itself and the reason the recovery has been so poor. I'm limiting my evaluation to the more immediate and direct causes--therefore, the notable absence of multi-decade-long TBTF bailout contributions and regulatory failure including subsidization of housing, et al.

Causes of the recession:

  1. Federal Reserve policy failure allowing NGDP growth to fall extraordinarily below trend (the tightest money policy since Hoover). This is the shorter-term portion of the causes. For this I'd approximate 50% of the responsibility. (HT: Scott Sumner)
  2. Structural problems perhaps best understood through a Patterns of Sustainable Specialization and Trade (PSST) framework. Included in this grouping is malinvestment playing a major role. This is the longer-term portion of the causes. For this I'd approximate 40% of the responsibility. (HT: Arnold Kling)
  3. Everything else. 10% responsibility.
The combination of factors 1 and 2 created the perfect storm for this event to be so damaging. A recent post by Scott Sumner relates to this. Either 1 or 2 would have been sufficient causes for a recession or recession-like events. Cause 1 creates much more acute, short-term pain. Cause 2 creates much more hidden dead-weight loss by changing the fundamental glidepath of growth. Perhaps we lose one-half to one percent off of average annual growth for 10-30 years. This would be a truly colossal loss--remember, growth is a compound number that affects results with many orders of magnitude. 

The reason the recovery has been so poor:
  1. Federal Reserve policy failure to get us back to or toward trend NGDP levels. Our inability to close the potential-real gap will make future generations both laugh and cry. I'd give this 55% responsibility.
  2. Prolonged PSST difficulties. This is hard to avoid given how bad the PSST problem was. Some good portion of it, mind you, was an unavoidable consequence of free market growth in a less than free market world. Government makes creative destruction less creative and more unnecessarily destructive. I'd give this 25% responsibility.
  3. Regime uncertainty and undesirableness, which has many facets. Tax policy is a mess. Government spending is on an unsustainable trend with no likely solution or solver to be found. Regulation continues to respond on cue--more complications and gamesmanship (Dodd-Frank), more intrusions and forced bargains (Obamacare). Minimum wage increases and unemployment benefits extension get the incentives backwards from the goal. I'd give this 15% responsibility.
  4. Everything else. Surely there is something else, or are these categories jointly exhaustive? Potentially 5% responsibility. 
As with any economic period, there are many contributing factors and some are and may remain hidden.

Wednesday, August 22, 2012

Fiscal thrill seeking

I'm sure I'll have more to say about the Fiscal Cliff, as the kids are calling it, in the weeks to come. First I'd like to point out a prediction that is itself a logic puzzle. For the moment I am considering only the tax policy possibilities.

  1. I believe that the most likely outcome is that no legislative changes occur (the tax increases, resets, etc. are allowed to transpire). 
  2. I believe that it is most likely that there is legislative action that alters or avoids the tax increases, resets, etc. in some fashion. 
These two statements may seem to the casual observer to be contradictory. They are not. Re-read them and then check below the fold for my reasoning.