Taxes

An Interesting “Collapse” Hypothetical

by

Dr. Paul Craig Roberts, the famous Reagan administration economist and now an embittered and cranky paleoconservative social critic, penned a short but intriguing American “collapse” scenario set in the near future. Some of what Roberts writes fits neatly with the thesis in Joseph Tainter’s The Collapse of Complex Societies:

The Year America Dissolved

….As society broke down, the police became warlords. The state police broke apart, and the officers were subsumed into the local forces of their communities. The newly formed tribes expanded to encompass the relatives and friends of the police.
 
The dollar had collapsed as world reserve currency in 2012 when the worsening economic depression made it clear to Washington’s creditors that the federal budget deficit was too large to be financed except by the printing of money. With the dollar’s demise, import prices skyrocketed. As Americans were unable to afford foreign-made goods, the transnational corporations that were producing offshore for US markets were bankrupted, further eroding the government’s revenue base.
 

Read more

Swapping a VAT for failing income tax is good policy

by

Check out Bruce Bartlett on the VAT here. Rather than surrender, as Bartlett does, why not win?
___

Premise 1 – As our Federal government runs away from the entitlement mess they themselves created, some states are starting to see bankruptcy looming on the horizon. As the left clamors for tax increases to feed the beast, the right sits back and says “no” to everything, ignoring the fact that the left is going to get their tax increases by simple operation of time and demography. This may be good strategery in the short term, but the right is setting itself up for miserable failure, as they will forced to become the “tax collector for the welfare state.”

Premise 2 – The reliance on the income tax as a revenue generator has failed miserably. First, the right, since the 1980s, has been so successful in removing much of the working poor and middle class from the tax rolls. This makes much of the electorate immune to what is now pretty much a siren song for “tax cuts.” This has resulted in dramatically weakening one of the right’s most powerful political tools.

Second, the income tax is a horrible way to collect revenue. When times are good, only the rich now pay, and when times are bad, revenues collapse, as we can see in places that rely on the steeply progressive income tax (CA and National Budget). Add to this fact the negative impact that progressive income taxation has on investment and incentives, and you have a very destructive tax.

Premise 3 – The right, and this includes the libertarian and conservative think tank sector as well as the Republican party, is making a substantial strategic error in ignoring the potential (political and economic benefits) of a massive tax swap. By dissing every proposal for revenue increases (and No, tax cuts aren’t going to work with a $1.4 trillion deficit and a hangover from a 25 year spending/debt/tax cut binge), the right is falling for the trap of arguing for tax cuts for a shrinking class of people while arguing against a superior policy – namely broadening the tax base and making everyone pay for the welfare state that still has substantial political support.
___

If the above premises are substantially true – and I can make an extended and extensive case that they are – then our “center-right” leadership is failing us in merely saying “no” to all tax proposals, and gambling on the ability to drag this cycle of stupidity around one more time.

Read more

Taxes and the (Sporting) Rich

by

The core principles of a well designed tax system are to 1) raise the dollars that are intended 2) not drive non-economic behavior.  In the case of state taxes, there is an additional difficulty because high-income earners can often choose where they want to live and state tax rates are one of the few items that they are under their control, all else being equal.  For example, it is no accident that the hedge fund industry sprung up in (relatively) lower tax Connecticut than in brutally high New York City (which has both city and state taxes at incomes that are progressive and rise with your income), and now that income has permanently migrated away from NYC.

For sports figures, there are two elements to taxes; if you are on the road you have to pay taxes in all of the cities you visit at local rates.  These dollars are collected and I’m sure all the major sports leagues have processes to ensure that this occurs (through withholding).  Athletes are high profile individuals and they will be spotted if they don’t comply with a policy that is otherwise observed only in the breach (the fact that if you spend more than a few days in a state you need to pay taxes on the apportioned days at local rates).

Thus half of your taxes as a sports star depend on the cities you visit and half depend on your “local” city.  Beyond that, any endorsement income you earn (which is a much greater component for many athletes) is taxed at your “home” rate.  It is no accident that Tiger lives in Florida where there is no state income tax.  He would have been insane to set up shop somewhere like NYC.

This article in the WSJ is titled “LeBron’s Tax Holiday” and it describes the tax benefits from living in Florida compared to other states.  While there is tax information in the article I am choosing just to use the excellent resources at The Tax Foundation where on this page you can see rates by state.

– Ohio 5.925% on all income beyond $200k
– New York State is 7.85% on all income beyond $200k plus 1.7% for NYC and it gets complicated… so let’s just say the burden is beyond 10%
– New Jersey 8.97% on all income beyond $500k
– now if he chose to be like the hedge fund people and live in Connecticut (hard to believe, but more efficient from a tax perspective) he’d be taxed at 6.5% above $500k (but he would still pay taxes at NYC rates at all home games so he’d only be better off for endorsement income)
– California 10.55% on all income beyond $1M
– Illinois 3% (NOTE this is one of the FEW things that Illinois does correctly, and our legislature seems committed to raising this rate since we now have the worst credit rating in the nation)
– Florida has NO state income taxes

If you took the “advanced” class you might want to locate yourself in a state with low taxes and then near a conference with other states that had local taxes; perhaps a league heavy in Texas cities and Florida cities would compete for the tax-savviest athletes.  Stay out of NYC and NJ and ALWAYS California.  This would give you the “home” bonus and also the “road” bonus.

This could have been a “teaching opportunity” on the effect of high taxes (that are controllable, Federal taxes are inescapable) but it was mostly lost in other elements of the public spectacle.

Cross posted at LITGM

Tax Update

by

When Dan and I were first invited to join Chicago Boyz Jonathan mentioned my high quality posts on energy and taxation.  Recently I have not been writing too often about taxation because the news from the US perspective has been almost universally negative.

Two core principles of taxation are:
1) the tax should be effective, meaning that if it intends to raise a certain amount of revenue that it should be designed to achieve that end
2) the tax should minimize negative impacts on overall economic behavior

Japan Considers Lowering Its Corporate Tax Rate

There was an old joke that Arkansas’ motto was “thank god for Mississippi” because else Arkansas would have been #50 in the rankings by state on various metrics.  In that same vein, when ever I talk corporate taxes and about how the United States is the least competitive corporate tax environment in the world, they would say that in fact, Japan was worse.

Now even Japan has woken up to the fact that high corporate tax rates push investment overseas (since companies can choose where to invest in new plants, subsidiaries and businesses) and are a relatively poor way to raise incremental tax revenues.  According to this Wall Street Journal article titled “Kan Seeks Cuts in Japan’s 40% Corporate Tax Rate” the newly installed Japanese government is considering reducing this punitive rate, which would take away our “Mississippi” per the analogy above.

Read more

Paul Revere’s Ride, April 18, 1775

by

paul revere

… For, borne on the night-wind of the Past,
Through all our history, to the last,
In the hour of darkness and peril and need,
The people will waken and listen to hear
The hurrying hoof-beats of that steed,
And the midnight message of Paul Revere.

God bless America.

Read more