Peter Diamond, Emmanuel Saez, Paul Krugman and Me!! Looking at Optimal Tax Rates
by Mike Kimel
Peter Diamond, Emmanuel Saez, Paul Krugman and Me!! Looking at Optimal Tax Rates
Via Paul Krugman, I learned of this paper by Peter Diamond and Emmanuel Saez. Diamond, of course, is a Nobel Laureate. I will be shocked if Saez isn’t one too in ten or fifteen years.
Long story made very short, Diamond and Saez jump through a lot of hoops and find that the optimal top marginal income tax rate (all in, that is, including federal, state and local), which they define as maximizing social welfare, is about 73%.
Now, long time readers may recall I’ve been doing this sort of analysis for years, though of course I’ve been looking at tax rates that maximize real GDP growth. Simply put, you cannot maximize long run social welfare if you aren’t maximizing economic growth.
My approach is much simpler than that followed by Diamond and Saez. I like to think its much more intuitive and easier to explain. I note that US data shows a simple quadratic relationship between real GDP growth from one year to the next and tax rates:
growth in real GDP, t to t+1 = f(top marginal tax rate, top marginal tax rate squared, other variables)
One recent post on the topic is here. (Unlike the Laffer curve, the coefficients come out statistically significant and with the right signs.)
I mention all this to note that no matter what I throw into the equation, I find that the top marginal tax rate that maximizes economic growth is somewhere around 65%. Of course, I’ve focused only on federal tax rates… add in state and local it comes pretty close to what Diamond and Saez have found.
As I noted above, my approach is somewhat simpler, and easier to follow than that of Diamond and Saez. Part of the reason is that they come at it from a point of view of elasticities. But with all due respect to my betters (Diamond and Saez, and Krugman as well considering the explanation in his post) I think this is the wrong way to consider the problem. It requires all sorts of assumptions and generalizations about people’s behavior, some of which are both false and create resistance from folks on the right.
For example, there is a notion that raising tax rates will reduce people’s willingness to work… which is only true above certain thresholds. (That threshold, of course, varies per individual.) As anyone who has ever had a business will tell you (when they’re not busy demanding tax reductions), you don’t pay taxes on income from the business if you turn around and reinvest that income. (An accountant would talk to you about decreasing your tax liability by increasing expenses which amounts to the same thing.) You only pay taxes on that income you take that income out, presumably for consumption purposes.
So to simplify, consider an example…. is a successful businessperson more likely to take money out of the business if his/her tax rate is 70% or if its 25%? In general, a person is more likely to take that money at 25%, as there’s less of a penalty. At 70% tax rates, there is more of an incentive to reinvest in the business, creating more growth in the business in subsequent years, and more economic growth thereafter. 70% tax rates are more likely to generate faster economic growth than 25% tax rates precisely because people are self-interested and the higher tax rates induce people to continue investing in things they do well.
(Of course, tax rates can get too high. At 95%, people will reinvest almost every dime… even if they have exhausted every good investment opportunity they have. Thus, to avoid taxes they’ll be making lousy investments which in turn slow economic growth.)
Still, its gratifying to see others who are more, er, credentialed doing similar work. If I might end on a digression, though, I can think of a number of examples of work being done on blogs by people who are essentially hobbyists which is somewhat ahead of the academic literature. However, to a large extent, if something wasn’t published in the academic literature, for all practical purposes it didn’t happen. Which is a shame, because most of us who aren’t academics don’t have time or the resources required for such publication (such as access to econlit). That inevitably slows economic development three ways:
1. the lack of recognition discourages hobbyists who have the potential and otherwise would have the willingness to improve on the existing literature
2. should such hobbyists persist and do the research, that research will not be widely disseminated even if it is an improvement over the academic literature
3. it maintains an insular attitude among those who are not hobbyists. As smart as Diamond, Saez, and Krugman all are, none of them are thinking the way someone running a business thinks of they’d have realized immediately how people who are running a business react to higher and lower tax rates. I have read a lot of academic papers on taxation and have yet to stumble on one that gets it right.
—
Thanks to Steve Roth of Asymptosis and Jazzbumpa of Retirement Blues for notifying me of Krugman’s post.
And since I always offer… if anyone wants any spreadsheets showing the quadratic relationship between tax rates and economic growth or anything else I’ve done, drop me a line. I’m at my first name (mike) then a period then my last name (kimel – with one m only!!!) at gmail.com.
“70% tax rates are more likely to generate faster economic growth than 25% tax rates precisely because people are self-interested and the higher tax rates induce people to continue investing in things they do well.”
A virtual truism which is unsurprisingly supported by historical data. And all of this is good work in that it demonstrates yet again that the political class allied with the wealthy have another agenda having little to do with the long term good of the economy as a whole. They are focused on the effect on the individual wealth of each of them. The disconnect with their own long term good is over shadowed by their focus on the accumulation of current wealth. And they have a point. They know that economic principles are little more than philosophy with a heavy dose of ideology which can be purchased cheaply.
The fight over what may be the best means of encouraging economic growth for all members of the community will not be won in academia. The board room, the Capitol Bldg and even the editorial desks are allied with cheaply bought academic conceptualization. The only means to defeating such an unholy alliance is to replace one of the quartet. The people only have their vote as a fighting tool. The political class must be replaced by individuals who see the value of representing the whole of the participants in our economy. The people need an education. That is a serious problem given that the media is part of the effort to distort the truth.
Jack,
Sadly, that virtual truism is what Diamond, Saez and Krugman have all missed. In fact, as I noted, I haven’t seen any academic papers get that right, and its vital to understanding what is going on. It seems some professors are able to understand how finance people think, but I have yet to stumble on one who can think the way those of us who live in the corporate world think on this issue.
“you don’t pay taxes on income from the business if you turn around and reinvest that income.”
Huh?
Sorry Mike, you flunked tax accounting. Assuming you want a top personal rate of 70%, that still leaves (or not) the corporate rate at 35%. Are you going to raise them both to 70%. Do away with pass thru entities? Allow a retained earnings increase credit? Really confusing here.
Not to mention the excess E&P rules. How are you going to change that?
To follow up my own point, I guess something I didn’t articulate all that well in the post: there is a world of difference between assuming that at a tax rate of X, the resulting disincentives to working are outweighed by other benefits versus assuming that at a tax rate of X, people are incentivized to work more. It leads to a lot of different conclusions about how to structure the tax system.
STR,
I keep coming back to this. My wife has a small business. We’ve been lucky in that we have rarely had to live on the proceeds of the business as we can usually live on my income. So we have a choice, most of the time: consume a bit more by taking profits out of the business or don’t consume a bit more and reinvest.
If we take some or all of the profits out, we pay taxes on it. If, on the other hand, we reinvest that income into the business, we don’t pay taxes on it. By reinvesting the gains, we’re not just avoiding paying taxes on the gains, we’re creating more income in subsequent years.
We’ve had two acountants since we started the business, and my wife has an MBA so she pays a lot of attention to these details. Neither of the accountants, nor my wife, are acting like we’re doing anything odd or pushing any sort of an envelope here. Note that all our reinvestments are legitimately used in bringing in revenue or reducing costs. We have not purchased a “company refrigerator” or a “company trip” or a “company meal at a nice restaurant.”
Mike, getting confused here. Is this only a partial part of teh paper? Historical effective rates seem to be ignored in your linked piece. Don;t effective rates tell the story of wildly different deductions over time?
I found this Saez paper that covers some of this – seems to be a different part of same paper?
Page 17 is interesting
http://elsa.berkeley.edu/~saez/piketty-saezJEP07taxprog.pdf
Also not sure I follow well how payroll taxes are accounted for, and those have steadily increased since teh early 80’s.
I found this chart on historical effective rates, and unfortuantely it only goes back to 1979.
http://www.taxpolicycenter.org/taxfacts/displayafact.cfm?Docid=456
I always find the federal tax code to be fairly progressive, when accounting for EITC etc… But state tax codes are usually regressive.
Mike
i am your biggest fan. But I think there is a simpler “explanation”: The government CAN spend your money better than you do. At some times. Government investment in a new highway system is going to be more “productive” than private investment in a new casino… or just taking your money to the old casino. or, of course, keeping your money under the mattress because it’s safer than the bank.
Meanwhile “Simply put, you cannot maximize long run social welfare if you aren’t maximizing economic growth. “
is a little over simply. it’s like saying… you can’t maximize your height if you aren’t maximizing that tumor on your head.
we are long past the point where blind growth maximizes human welfare.
oh btw
your observation about the lack of real world experience among our best and brightest economists is right on. sadly, there are many businessmen, usually the louder ones, who can’t see their own experience through the forest of the ideas they picked up in econ 101.
They can, but don’t – not with what we spend on military. When that part of spending goes down, or shifts somehwere else i’ll agree with you.
I did not read that Mike was talking “blind growth” if by blind growth you mean forever continous extraction of raw materials from the planet turned into ever shorter life cycle waste and polution.
STR:
The reinvestment analysis applies at the level at which the income is earned. So if a corporation reinvests its profits in business – hires new people, buys new plant and equipment or (most likely in today’s world) advertises like hell, it’s tax bill goes down becauses all of these expenditures produce either current or future deductions. On the other hand, if it just sits on its cash, or invests it in stocks or other investment products, or distributes it as dividends, the tax bill does not go down. I don’t see why this is a confusing concept.
And in the case of pass-through entities, the same analysis applies. If the entity reinvests in the business, the member’s tax bill goes down. If it doesn’t, the tax doesn’t go down. Again, I don’t see what is so confusing to you.
The only legitimate question you raise is whether the optimal corporate rate is different than the optimal individual rate. Having not seen the papers I don’t know if this has been addressed. I’m a believer in full integration myself (I think the rates should be the same and the double-tax should be eliminated by allowing the full deduction of dividends paid by corporations), and I would think in my ideal world it wouldn’t make a difference, but in the absence of full integration I can at least understand that the optimum corporate rate might be different.
mcwop,
Your confusion, I think, is part and parcel of item 3. Papers in economics are getting stranger and stranger. We live in a world where one of the most celebrated papers on tax policy in the past few years involved determining the effect of changes to tax rates based on what politicians expected the outcome of those changes would be. In a normal world, that sort of data would be used to compare what actually happened to prior expectations, not as a substitute for what actually happened.
As to the Diamond and Saez paper, it has the feel you described, I think, because its tackling the question in a very strange way.
coberly,
I would hope the 16 month old is my biggest fan, though the herd of cats around of cats around the house seem to collectively come close to the top of the list too.
You open up a can of worms I wanted to avoid. The question of the efficiency of gov’t spending v. private spending (when it comes to generating growth) is one of “at the margin.” There are things the gov’t can do that the private sector won’t and vice versa. (That list is shorter in, say, Singapore or Sweden than here, but that’s a different post.) But when gov’t gets “too big” the marginal gov’t dollar becomes less efficient. When gov’t gets “too small” the marginal private dollar becomes less efficient.
I had a post a long time ago estimating the point where the marginal dollars are equalized. I can’t remember what I found and can’t find the post. Maybe its time to redo.
As to blind growth… I don’t believe that life on this planet, and that includes us, can successfully manage stagnation or shrinkage forever. Things that do so go extinct, and that includes societies. Growth doesn’t necessarilly mean more factories and more pollution and whatnot, but it does mean “more of stuff what people want.” Some of that could well be intangible. My life is happier than it otherwise would be because when I hop on the exercise machine in the morning, I can watch a dvd. Watching a dvd on my little player takes less energy than watching a super 8 film on a big projector, I imagine.
And yes, I’m ignoring (for now) the question of distribution.
cactus-can you define “maximizing social welfare”? I’ll bet Mr. Chomsky’s definition is a little different than Mr. Koch’s.
Yeah. Mr. Koch’s is: “Good. Now I really do have it all!”
JzB
little john,
There’s a reason when I do a study I stick to real GDP or real GDP per capita or something along those lines. The mention of social welfare comes from the Diamond & Saez paper. Best to take it up with them.
That said, as I pointed out, for any definition you’re likely to hear, you can’t maximize social welfare (whether that is Mr. Chomsky gets it all, Mr. Koch gets it all, or everyone gets the same amount, or anything in between) if you don’t maximize economic growth over the long haul.
Think of it this way. Say we can maximize social welfare in any given period by giving everything to the illegitimate love child of Mr. Chomsky and Mr. Koch, by way of an odd experiment involving Nazi doctors. (I’m trying to keep all ends of the spectrum satisfied here.)
But… if that isn’t growth maximizing, eventually some periods out you’ll reach a point where the size of the pie that goes to that illegitimate love child is smaller than the piece of the pie that he would get under a different division of the pie approach that produced a faster growing pie.
Yes Rusty, the tax system is convoluted in a purposeful manner. Corporate 35% is a fiction. What’s the term? De facto vs de jure? Corporations are a means to the preservation of personal wealth of the stake holders. Unfortunately not all the stake holders carry the same weight and the public corporation has become a means by which significant, though minority share holders, can walk home with the bulk of the earnings. Most individual stake holders are represented by institutional amalgams and the controling stake holders are represented by the Board and their bankers. It is little different when we look at the broader relationship between the corporation and its place of incorporation. In effect there is no allegiance to a political entity. There is only concern for the individual’s gain regardless of long term or societal loss.
Yep. The notion that welfare and growth are synonymous in the long run is crude, and almost certainly not just untrue, but far from true.
You maximize welfare by maximizing welfare. Telling yourself that maximizing growth maximizes welfare lets you turn you attention from the target variable and concentrate on a proxy. If you choose to measure welfare through a proxy, you won’t have welfare as a goal. The proxy will be the goal.
It’s just a little bit ironic to see you going on about what economists are missing (again), and then have you miss that. Yes, there are plenty of bought-and-paid-for economists who would agree with you, but the ones thinking for themselves pretty much all know that welfare and output are loosely related, even over the long run.
Once you get down to output per hour, and account for externalities and personal liberty, you get a lot closer to equilibrating output and welfare, but those are mighty big wedges.
Mike, you are engaging in argument by assertion. You’ve convinced yourself that something (the long-run equivalence of welfare and output) is true, or at least heard yourself think it often enough that you think you’ve convinced yourself, and are now telling a bunch of other smart people that you are right and they are wrong, as if your own view on the matter is the weightiest fact you can offer.
You won your spurs with data, but have on a number of occassions slipped into unsupported assertions of belief – sometimes in a loud textual voice. Don’t do the pundit thing. Do the work, show the results, and keep your priors from ever getting aquainted with your ego. All other paths tend toward intellectual ruination.
kharris,
I’m not sure I “won my spurs.” Part of the point of this post is that what I write isn’t real because I don’t publish in academic journals.
But let me put some numbers on the statement to which you objected. Let us say we have a ten person economy with a total of $1,000 woth of income in it in year 0. Social welfare accounts for one thing: the income of the tenth guy. Everything else counts for nothing at all.
Now, consider two scenarios. In scenario one, the tenth guy is awarded all the income in the land, and the economy grows at 1% a year.
In scenario two, you have a completely equitable distribution of income each year (so the tenth guy gets a tenth of the national income rather than the whole pie) but income grows at 10% a year.
After 26 years, welfare (as measured entirely by the income of the tenth individual) is greater in scenario two than it is in scenario one, even though in scenario one he gets the whole pie and in scenario two he gets only a tenth of the pie.
I can, actually, think of scenarios where growth maximization is not necesary for welfare maximization, but they seem to require people to have motivations that seem somewhat alien to me. I cannot think of scenarios where growth maximization is not necessary for welfare maxmization in ways that would be conducive toward understanding the world we live in a bit better.
So both you and Krugman, et al. argue for somethig about 65 or 70 top marginal rate. That’s what I have intuitively thought for a long time without doing any analysis-basically the rate when Reagan came in and dropped it from 70 to as low as 28.
It’s unrelated but I would love to see analysis on a fiscal idea I think might be a good idea-what would be the effect if a State were to get rid of the sales tax-as I’m in NY it would be great if the analysis was for this state. If Diamond or EPI or you Mike or anyone could put togehter sucn an anaysis it would be awesome.
If the bat there would be a chorus that it will kill NY as we would lose so much revenue. My answer is of course that we should get revenue elsewhere-for onie thing there was Cuomo’s misguided property tax cap. Taxes on teh wealthy should go up and prehaps we could in concert raise the luxury tax. I’d also be interested in maybe NY bond issue-many people would buy for instance “NY Public School Bonds” I think.
Then too it would put money in people’s pocket and create demand boom. Overall the point would not be to lower overall NY revenue-but to shit it; actually net, I think we dont reaise enough revenue but we have seen this cyclical shift to consumption taxes in recent years which are deeply regressive. One more idea to reaise revenue is something like the finance tax but for the state in this case.
Nanute-and other interested parties-in case you didnt see it in the comments for Kimels post from yesterday about stimulus during the Derpression please follow the link here
The dangers of misleading economic arguments http://diaryofarepublicanhater.blogspot.com/2011/11/danger-of-misleading-economic-arguments.html
This is a follow up in partiuclar the controversy about whether Hoover really spent more than FDR.
kharris,
See my 12:31 comment downthread please.
Mike Sax,
I haven’t written about sales taxes. I have limited bandwidth (this is unpaid work, after all) so I’ve been focusing on three or four topics that I know best in my writing. If someone were to hire me to do a study, I have no doubt I can do the work but for free I don’t have the time to develop that sort of knowledge basis.
Sorry.
Rusty, I think you are the one confused about tax accounting. In this scenario you have three choices:
1. Take out profits from your company and pay 70% in personal taxes.
2. Leave the money in your company as retained earnings and pay 35% in corporate taxes.
3. Reinvest the money in business improvements and pay 0% in taxes.
Which do you choose? The fact is that higher personal and corporate taxes encourage reinvestment in companies. Reinvestment is the best way to avoid taxes.
Rusty, I think you are the one confused about tax accounting. In this scenario you have three choices:
1. Take out profits from your company and pay 70% in personal taxes.
2. Leave the money in your company as retained earnings and pay 35% in corporate taxes.
3. Reinvest the money in business improvements and pay 0% in taxes.
Which do you choose? The fact is that higher personal and corporate taxes encourage reinvestment in companies. Reinvestment is the best way to avoid taxes.
Rusty, I think you are the one confused about tax accounting. In this scenario you have three choices:
1. Take out profits from your company and pay 70% in personal taxes.
2. Leave the money in your company as retained earnings and pay 35% in corporate taxes.
3. Reinvest the money in business improvements and pay 0% in taxes.
Which do you choose? The fact is that higher personal and corporate taxes encourage reinvestment in companies. Reinvestment is the best way to avoid taxes.
No I mean anyone have any ideas doesn’t have to be you,; point is that I haven’t seen any study like that but that’s because now everyone believes that consumption taxes are even preferrable.
Anyone who has even half intelligent speculation is welcome to weigh in LOL
By the way Mike you may well me aware of it but Sumner is attacking this idea today in a piece called “Saez and Diamond Explain Taxes in the Journal of Economic Propaganda”
http://www.themoneyillusion.com/?p=12054
Mike Sax,
Sumner and I have very different views of the world. I realized that when I found myself incredulous about his claims that Singapore constitutes a libertarian economy. I guess if you leave out the 60% of the economy that the government controls, or that the government decided to start any number of companies because it didn’t feel the private sector was doing the job in those industries, it is. But that’s like saying “I’d eat a ham and cheese sandwich if I had ham. And cheese.”
There must be research available on relationships between the states of Oregon and Washington, which could be instructive. You know that Washington has no income tax Or used not to) and Oregon no sales taxWhen I lived there 30 some years ago, I believe Oregon had managed to tax the salaries of Washingtonians who worked in Oregon.
Even now, I usually wait for an Oregon visit before I buy a new computer or similar item.
Just to make my point again which is not only hobbyist, but arm chair hobbyist, tax rates affect risk taking and do so in two ways. First, taxes could be the tipping point in deciding not to expand one’s business. In theory, a business will hire a worker if it can make one dollar of profit from that worker regardless of whether the tax will be 35% or 70% on that dollar. The problem is that we do not live in a risk free world so before hiring that extra worker, the business must anticipate substantially more than 1 dollar profit to account for risk. Here the tax rate could be what causes the businesses on the margin not to hire. This holds more for payroll taxes, but if there are no good ways to keep the expected profit from being taxed, then it applies to income taxes as well. The second way that tax rates affect risk is that too low a rate encourages highly risky activity. There is a reason that the Wall Street speculators took enormous risks–the rewards were astonomical. Who cares if you lose your job or crash the world economy in a few years if you can make $20million a year for a few years and only pay 15% capital gains to the government? So your bankrupt employer and every person on earth thinks you are an absolute a**hole, you have $50 million after tax to buy some friends. Now if you ended up with only $15 million or so in after tax dollars maybe you would worry a bit more about the consequences if your luck runs out and hedge your bets more effectively. Maybe you would even think about your employer and co-workers a little bit and perhaps even humanity as a whole. The one thing I do know is that the idea that productive, creative , driven people will just walk away from business opportunities because the government takes a bit more of the profits is sheer and utter nonsense. Those people would want to prove how smart they are if they were working for matchsticks. The people who that argument might apply to are middle class wage slaves and they can not afford to quit.
Sumner argues against them on the grounds that it goes against his common sense. Also check out this post:
http://www.themoneyillusion.com/?p=12014
1) My theory says
2) My theory says
3) My theory says
He simply won’t respond to empirical evidence.
I don’t normally find myself agreeing with kharris, but this is a pretty spot-on comment.
terry
not entirely sure i follow your argument here, but maybe after i think about it..
but meanwhile the payroll tax is the workers money “most economists” say. so i don’t see the payroll tax disincentivizing hiring, whatever “most economists” are saying now.
mike
my life is happier when i go fishing. and i don’t even own a fishing pole.
and i can take the dogs for a walk without buying an exercising machine… and have a whole lot more fun.
and if i owned a dvd player i’d throw the damn thing away.
i would also hope your 16 month old and your cats are bigger fans than i am. but i was talking about your research.
i agree about stagnation. i think it is possible to have innovation without the kind of growth that is now measured by gdp and contributes to the sum of human misery.
Cahal,
I recently had the, er, opportunity to hear one of the individuals who participates in the poll which Sumner mentions speak. To be honest, I hope he’s an outlier as he seemed impervious to evidence too.
I will also say I wouldn’t mind seeing more monetary stimulus, but as I’ve been pointing out since 2008, monetary stimulus done the usual way won’t help as it only goes to fill a hole in the spreadsheet of banks that may be bottomless, and which, even if filled, benefits nobody but banks which made very bad bets.
But even when he’s partly right, a discussion with Sumner is very difficult. He has a vision of reality that is very odd. We’ve had a bit of a back and forth via e-mail, and suffice it to say that he had some questions that indicate he didn’t get what I was talking about at all.
Mike does the Saez-Diamond work in any way weaken your argument (actually, much more of an assertion) that “the culture has changed” and therefore a 60-70 percent top marginal tax rate is no longer optimal? Just to be clear, I think that claim flows not from your excellent economic analysis but from something else and, though I’ve been tempted by the notion myself, I am unconvinced that it’s supportable.
PJR,
Excellent question, and one I was hoping to bypass for the moment. I spend enough time pointing out that my betters are making mistakes and ignoring important points in this post (and elsewhere), and piling on further, well… let’s just note that usually people who keep tilting against windmills are nuts.
OK. Consider that the caveat. Now here’s the answer.
I’ve been looking at this question for a long time. First pseudonymously then under my own name. I’ve been blogging about it for years, and with bloggging you get immediate feedback. Plus you can experiment, making changes (and getting immediate feedback to that). So I’ve tried a bunch of different things already years ago, some of which I never wrote up because at the time I couldn’t figure out how to explain it easily in a blog form. Yes, in the past year I’ve come back to version 1.0 to try once again to get people to pay attention, but go back to the archives and you’ll find recently I’m actually recovering ground I’ve covered before, albeit more systematically this time around – it helps that my old computer crashed so I have to rebuild the entire structure I had built). The point is (and here’s the arrogant statement) – Diamond and Saez are discussing version 1.0, but I know what version 2.0 and 3.0 look like because I’ve done them before.
The Raagan post was – well, call it 1.1 or 1.2. I never had the time to write the follow-up to it that I intended before getting sidetracked by Scott Sumner.
Here’s what the Reagan thing tells us, by analogy. In the analogy I’ll discuss sailboats, though everything I think I know about sailboats I got from a five minute conversation with a boat owner more than twenty years ago. I have been told that there is a theoretical maximum speed at which a sailboat can sail. But I don’t know what that is. So I have data on a bunch of sailboats built from 1929 to 2010. I do some analysis and conclude: catamarans built a certain way outperform other sailboats we’ve seen people build.
Now, Reagan came along and convinced everyone that a catamaran is a bad idea. Instead, single hull sailboats and only single hull sailboats should be built and raced. (“I’m here to tell you that a second hull is the problem, not the solution.”) Now, looking at data from the Reagan years to the present only, there is no way to reach a conclusion that a catamaran would do better. You reach conclusions about what is best based on a single hull shape.
So… we’ve moved to a single hull environment. Unless and until the public can be convinced to build catamarans again, the best shape we can pick is different than the best shape we can pick if catamarans are not off the table.
Happy Thanksgiving all! Eat turkey and watch football! Or whatever makes you happy
http://diaryofarepublicanhater.blogspot.com/2011/11/happy-thanksgiving-to-all-my-readers.html
Ah… what I figure this time around, was that giving the curve a name (i.e., the “kimel curve”) might help it catch on.
The first time I had an exchange with him I felt like I was sitting on a piece of lego. All the embedded assumptions and theories in his head make for a weird experience. I have caught him admitting that he
a) Doesn’t understand the banking system
b) Doesn’t understand finance
This despite his continued commentary on the 2008 crisis!
I feel like it is not worth engaging with him.
kharris:
“You won your spurs with data”
Mike’s data and analysis does point in a particular direction. His belief is hardly unsupported as taken from his analysis and data. We do the sam for LSS and then explore the direction the analysis points
Ah, what sort of entity are you using?
IT depends how you reinvest the money and the current menu of credits – but as a general rule this is not a general rule.
“hires new people, buys new plant and equipment or (most likely in today’s world) advertises like hell, it’s tax bill goes down becauses all of these expenditures produce either current or future deductions.”
Ok, uasing that logic “investment” does cut taxes, but only during the period the new expenditures are not producing top line growth.
Sometimes the government can spend the money with great efficiency and effectiveness.
Sometimes the government spends money with reckless abandon and lack of any common sense whatsoever.
The trick is more of the former and less of the latter.
I’m not certain how very high marginal rates will work in a global economy. Remember in the 50s, 60s and 70s we had very little competition, finance and business were much more of a USA-centered operation.
I would be tempted to reopen my CPA practice though, because medium sized businesses (say top line of $500,000 — $5 million) are gonna have some real huge problems.
I’m not certain how very high marginal rates will work in a global economy. Remember in the 50s, 60s and 70s we had very little competition, finance and business were much more of a USA-centered operation.
I would be tempted to reopen my CPA practice though, because medium sized businesses (say top line of $500,000 — $5 million) are gonna have some real huge problems.
STR,
Was merely a “doing business as” and now its an LLC.
“Sometimes the government spends money with reckless abandon and lack of any common sense whatsoever. “
Correct. But you can replace government with most private companies and the statement reads just as true.
STR,
Not quite. As long as you keep reinvesting “revenues – costs” you keep your profits = revenues – costs – costs from reinvestment at zero. That means no taxes, and the business grows.
Rusty
Paying one’s taxes are only a problem, huge or otherwise, if the business is profitable or your personal income is high. In order to pay for the support and protections offered by the government some portion of that income has to be paid in taxes. Think of it this way, the more you earn, the more you get to keep. After tax income on $500,000 annual income is always going to be a good deal larger than after tax income on $75,000. Which will be more than after tax income on $35,000.
What the government spends the tax receipts on is a sociopolitical issue. How the government raises those tax receipts is an accounting issue, not an economic issue. How much in the way of tax receipts is needed is determined by how much the government spends rather than what some group of social scientists may prognosticate regarding the effect of this on that. The effect of taxation is to cover the expense of government activities. Argue the activities side of the ledger all you like, but the need to raise funds is essential and not open to argument or philosophical conjecture regarding the complex interplay of income, costs, economic activities, etc.
Pay your taxes. It’s the patriotic thing to do. The Norquist way borders on treason.
Except how exactly do you feed your family during this period of time?
“How the government raises those tax receipts is an accounting issue, not an economic issue.”
Actually, it is an economic issue, as well as a legal and political issues. Accountants only execute what many others have done. If we believe economists when they say incentives and disincentives matter, this is an issue.
You mean now while I am between jobs? Well, some consulting work has come my way, though lately consulting has been slow. Fortunately, last time I was a consultant I saved a fair amount of money. It won’t last forever, but I assume I should be able to land the right job some time soon. FWIW, my wife’s business wouldn’t be able to cover all our bills just yet. If she can keep expanding it at the same rate, perhaps in five to ten years. But not right now.
Mike, i wasn’ t trying to be personal. I was referring to anyone who starts a business and then does expense amd investment timing to minimize income and taxes. At some point if the business is successful that becomes near impossible.
STR,
Think of it this way. Say you have two individuals. One has a salary of X. One has a business that makes a profit of X.
The former pays taxes on everything he gets paid not counting what goes into tax avoidance/postponement vehicles available to him such as (depending on his company and where he is on the foodchain) like 401-K, or executive pay deferment programs. Thus, even if he chooses and is able to save most of X, he will still pay taxes on just about the whole thing.
Now take a business owner whose business had a profit of X. He chooses and is able to save most of X. He takes out what he needs and pays taxes on it, plus both sides of the payroll tax which is something the employee doesn’t have to do. What’s left after that, if it gets ploughed back into the business, is literally tax free. Its like a big self-directed IRA, but one where the only limit of how much you can contribute is the amount of cash you control.
Now, take a small
Here’s where you cheat, though you may not realize it:
“Social welfare accounts for one thing: the income of the tenth guy…”
You have defined social welfare as income, in that simple statement. As I said, you are engaging in argument by definition. It doesn’t make you right. It just means you’ve decided how you want to look at the world and imposed that view on the discussion. Math is not the issue, so you don’t need to try to wow me with math. Social welfrae includes all kinds of non-income stuff, not just in my view, but in the view of lots of folks who think about social welfare issues. You don’t get to choose the definition. If you want to make an argument for your definition, feel free. Before you get started, though, you are aware that economists often substitute income for welfare, but initially began doing so because income is mathematically tractable and welfare is not. The substitution was acknowledged. The substitution, like a lot of other assumption-y sorts of things in economics, became so common as to be accepted as reality by subsequent generations.
Now, you’ve kinda fallen into a trap here. Being wrong about what constitutes welfare doesn’t make your larger argument wrong. Often, when we ramble, we ramble into error. Your mis-statement about income and welfare is not central to the argument about tax rates. No need to dig yourself into an unfortunate stance. Just go with the data-based tax argument.
kharris
if you will allow me… i think you are entirely correct here.
rusty
fundamentally (fundamentally) i don’t believe economists when they say incentives matter. it is usually special pleading, dishonest at its core.
of course incentives matter. but not in the way economists or politicians talk about taxes.
tax incentives are a way to destroy the economy… as any free market analysis ought to tell you. a simple tax, progressive so that the people who have the most pay the most, will allow the free market to adjust to the taxes and sort itself out from there. “tax incentives” distort the market and you end up with game playing that destroys both the economy and the government.
jack
in case it’s not clear, i think you are exactly right.
Depends when and how it is ploughed back. I think what you are saying is the reported income is X – ploughback funds.
Unless the business can grow steadily ploughing back can be very difficult. And business owner still probably has a family to feed.
Simplicity is good, but not likely in this political environment.
“If we believe economists when they say incentives and disincentives matter, this is an issue.”
And if my grandmother had had balls she’d have been my grandfather. I would sug gest that we can get any number of economists to argue either side on any incentive arguement in regards to corporate or individual taxation. Philosophy and ideology don’t count if we’re looking for objective opinions based on observable behavior. Corporations have incentives for what they do. We call those incentives profitablility. Individuals have the incentive of being paid an income for what they do. The disincentive is being broke or out of busiiness. The taxes are a sociopolitical necessity. It’s not that complicated unless one is trying to obfuscate the issue.
I think the Kimel curve deserves to “catch on” in part because I am highly skeptical of the discoverer’s apparent claim that it is an irrelevant historical curiosity regarding economic behavior. I’ll go back in AB time to see how your (characteristically excellent) economic analysis leads to your conclusion about economic behavior today. In the meantime, I am with apologies sticking to my conclusion that you discovered something important to know.
What if the $2600B in the SSTF (and the $400B in Medicare TF) were used for infrastructure rather than war and tax cuts?