Gingrich tax ‘plan’ starves government, feeds the wealthy, rests on flawed assumptions
by Linda Beale
Gingrich tax ‘plan’ starves government, feeds the wealthy, rests on flawed assumptions
In case you hadn’t heard about it, Gingrich would offer taxpayers a choice to pay tax under current policy or at a 15% rate, with zero taxation of capital gains, dividends and interest that accrues mostly to the rich and uberrich, while corporate tax rate would be reduced to a mere 12.5%. For the rich, the 15% rate on their ordinary income and the 0% rate on their predominant form of income (capital gains and income from capital) would be a windfall. For corporations, it would practically amount to the elimination of the corporate tax. It should be no surprise that tax revenues would decline substantially: the Tax Policy Center study of Gingrich’s planestimates by $1.3 trillion over a decade. While the lower two quintiles would get an average tax cut of about $440, the top 1% (starting at incomes of about $629,000) would get an average $344,000 cut and the top 0.1% (starting at incomes of about 2.868 million) an average $1.9 million cut. Id.
See also Study: Gingrich Plan would provide big breaks for rich, blow huge hole in budget deficit, Washington Post (December 12, 2011); Rubin et al, Gingrich Plan to Add $1.3 trillion to Deficit, Study Finds, Bloomberg (Dec. 12, 2011).
Gingrich’s rationale is one that the right-wing American Enterprise Institute strongly supports–the tired old reaganomics rationale that eliminating taxes on capital will create new investments. See, e.g., Why Romney is Wrong and Gingrich is Right on Capital Gains Taxes, AEI ( Dec. 12, 2011). This theory is hogwash–lowering the return on investment by the piddling tax (whether 15% or 20%) will not keep folks from investing. Folks will still make profits and they will still invest those profits, even if they have to pay taxes. Paying no tax on dividends and capital gains won’t make the rich suddenly invest in entreprenuerial activities, my friends. (Simply trading corporate stocks on the secondary market is not, by the way, entrepreneurial.)
The Gingrich website also objects that this plan is really good for everybody.
An optional flat tax reform will be simple: Tax returns can be done on one sheet of paper,” the website says. “Subtract from income a standard deduction and deductions for charity and home ownership, multiply the result by the fixed, single rate of taxation of at most 15 percent, and the process is over.” Wash. Post, above (quoting the website).
Folks, the hardest part of the income tax is figuring out whether you have income and how it is characterized (capital or ordinary). Neither of those two difficulties disappears under Gingrich’s system. Furthermore, ordinary fold really don’t have a very difficult time with their tax returns–they have wage income (withheld against), report the standard deduction and personal exemptions, and get a refund of part of the amount withheld. The appeal to simplicity is a cover for the real purpose–to provide an unprecedented tax break to the wealthiest Americans at a time when the right is targeting Medicare and Social Security for cuts. This is just one more example of class warfare from the right wing.
originally published at ataxingmatter
Let me add that with tax software (free for simple returns on line) much of the complexity is taken care of by the software. If one is doing taxes by hand in this day and age well, it is strange. For example the software determines if you are subject to the AMT and if need be automagically prepares the proper forms.
This is just amazing!
“This theory is hogwash–lowering the return on investment by the piddling tax (whether 15% or 20%) will not keep folks from investing. Folks will still make profits and they will still invest those profits, even if they have to pay taxes. Paying no tax on dividends and capital gains won’t make the rich suddenly invest in entreprenuerial activities, my friends.”
How wonderful! You’ve just overturned the basic and primal lesson of economics. That incentives matter.
You really ought to write that up in a formal paper. Stockholm beckons!
Alternatively, you know, you could be wrong? Incentives do matter? Tax rates do affect investment incentives?
Anyone surprised?
That the product matches the customer’s requirements? No.
Tim:
I have tried several times in the blogoshpere to explain managerial accounting models for investment decisions, and have been soundly beaten for being a right wing hack or something.
Tax rates do matter.
(Not an endoresement of Newt or his plan by the way.)
STR,
Reality tends to bite the blogoshrere and AB a lot. Incentives don’t matter – except when they do.
The real issue here is that the Newt plan explodes the deficit even more than Obama has during his tenure. Now both parties don’t seem to believe deficits matter…if they ever did.
Islam will change
“if they ever did” Data regarding GOP administrations who managed to reduce the deficit is forthcoming. I’m sure.
as,
According to data posted on AB by Mike, not one administration has reduced the deficit in the past 50 years. Not one. The closets we got was the last year of Clinton’s term before the dot-com bubble exploded and 9/11.
The current administration has made the claim that the D’s are the party of fiscal restraint laughable. The Rs just give it at least lip-service (now), but in reality neither party has any inclination to stem the arterial bleeding of Federal debt. Obama just ramped it up on steroids.
But maybe Reagan was right, deficits don’t matter…yea, I can’t keep a straight face either.
And for coberly – remember when Greenspan said that he would garentee the SS checks would go out, just not how much they would buy?
Islam will change
Of course incentives matter. Defining them and giving proper weight to them is not well researched….just mostly chatted up,
Yes, at least Newt isn’t shy about his ideas, bad as the ideas may be.
At the enterprise level the incentives and disincentives are quite clear. Plugging different capital costs and tax rates into NPV discounted cash flow is about as close to science as accounting can get.
First, the idea IS to starve the government, reduce its power and push the cash flow back to the states.
Second, there shouldn’t be a corporate tax in the first place because it’s simply passed on to consumers.
Third, direct sourcing of revenue by the fed govt from the citizens is what has caused the degradation of our liberties. It enables the feds to take from one state and give to another, and support socialist programs that many states have no interest in supporting. We should return to the method where each state pays its share of the federal budget based upon its representation in the House.
Forth, while controlling money flow is the method, the objective is to return our govt to the principles spelled out in the Constitution and explained in the Federalist Papers (that would be the actual written Constitution not some make-believe constitution created by judges.
Get used to it.
BP,
Gee, it seems that it has been pretty clearly shown on this site and many others that the continuing debt increases are far and away the result of Bush policies (2 unfunded wars, tax cuts, MedicareRx) and the dramatic drop in revenues as a result of the Bush recession…..all of it over an 8 year period causing more than $6T added debt. The additions to the debt from the Obama admin has been @ $2.4T from UI benefits, tax cuts and continued revenue decline.
If you want to go all anti-Keynes and say “don’t extend UI benefits” while complaining about lack of D’s “restraint”, well there you are. If you claim that these temp policies are the rule and can be extended out into infinity, causing greater levels of debt than the Bush years, well there you are.
Plain and simple, people invest if they believe they can make a profit. They pay taxes on profit, no investment, no profit, no taxes. Profits are the incentive, there is nothing else.
The corporate tax is being passed on to consumers, wages and salaries paid by corporations will be passed on to consumers, expenses invested in equipment, and all the other overhead expenses will be passed on the consumer. And where would the sales tax be passed on to if not the consumer.
After all the corporations eliminate taxes, reduced wages and salaries, reduce employment, relocate to China and God knows where, cut health insurance and retirement how and where will they sell their products and make a profit?
When there are no consumers, there will be no sales tax left. With low or no income there is not enough income tax, no property tax. In other words, they cut their nose to spite their own face. They are so greedy, they can’t see straight.
It does not help to twist the Constitution just to justify greed and nothing else.
Seeing the Republican candidates debate is watching a bunch of very wealthy people who don’t give a damn about the nation and the people. All they want is more wealth and power for themselves. They do not know what hardship is, they do feel entitled and they do believe they are the better than normal, average people. That is why they talk trash and feel no shame ever.
Worstall
you are an idiot. of course incentives matter. but they are hardly the only factor. and as linda says if you make 85 dollars on an “investment” instead of a hundred, your incentive to invest is unlikely to be destroyed.
rusty
good that you explain to us the reason the market goes down… it’s because taxes went up that day.
who couldda knowd?
and i’m glad to know about all those investment opportunities out there just waiting to create jobs if only they don’t have to pay taxes.
my god! how simple it all is!
buff
glreenspan was lying. SS checks are wage-indexed. that means that inflation is taken care of automatically. if he didn’t understand that, he was dumber than he sounded.
Gary T
yep.
rusty
“as close to science” which means not any closer than voodoo.
the trouble with accountants is that the believe that because their arithmetic checks they have done something clever.
Vin
well, as long as the tax will be passed on to consumers, why should the corps object?
consumers will pay what the product is worth to them. it’s called the free market.
and no the free market does not me “no taxes.” you can’t run a country with no taxes… except in libertarian dreams. but a tax system that can’t be gamed would be a closer approximation to the “free market” than one that tries to “optimize growth” or “incentivize investment.”
lys
it is greed at bottom, i guess. but mostly it’s simple stupidity.
well, they also know it appeals to the simple minds and hearts who vote Republican. you can always tell people they are smarter than the government, that they don’t need no burdensome regulations, and that their taxes should be a lot lower.
they will vote for you because they are too dumb to count on their fingers.
don’t imagine that the R’s are working for the rich, and the D’s are working for the poor. They are both working for power and for their own special rich friends. The rhetoric is just the result of how their pollsters have guessed the people will vote. It means nothing at all to them. As we have seen beyond a shadow of a doubt with the O man.
It’ll be changed though, won’t it?
And do remember the basic lesson of neoclassical economics: everything happens at the margin. There will be some investments which people will make for a $100 return but which they won’t for an $85 return. Thus a tax on investment returns will reduce the amount of investment done: and thus the future wealth and income of everyone.
How important this is, whether the tax raised being spent will lead to a better outcome than the investment that didn’t happen: those are all good arguable points. But “taxes on investment returns do not affect levels of investment” is flat out wrong, stupidly so.
worstall
not as stupidly so as your simpleminded idea that taxes destroy incentives. it is entirely possible that a person would prefer a 100 dollar profit to an 85 dollar profit, but if he doesn’t invest he won’t get any profit.
the hundred dollars is not guaranteed. there is more money looking for investment opportunities than there are investment opportunities, and a functioning government is likely to lead to a safer investment environment than your low tax no regulation teenage fantasy. or “neoclassical economics,” which is the same thing.
nor is there any reason to suppose that “more investment” leads to more future wealth for everyone. i’d say the recent bubbles ought to be evidence of that. but that’s too hard to explain to someone who has a theory to keep him warm.
you see, tim, as long as everyone is paying the same tax, the difference between the hundred dollar imagined profit and the 85 dollar imagined profit depends on the merits of the investment.
meanwhile, since there are “tax free investments” we might look and see what the market actually does about them instead of prating about the magic of lower taxes on investments.
(hint: it settles for a lower return.)
No one ever lied with a forecast……………………..
Just saying about science and such.
as for neoclassical economics
gee that’s a classy name. give sophomores something that tells them how smart they are about money and you never have to worry about them thinking again.
but i seem to remember something in the first part of the book about the fallacy of composition, and also about “choices.” as in we have to make choices about present consumption and investment for future (higher) consumption. choices. nothing about “sacrifice everything for the highest growth you can imagine.”
but our educated man… left and right… can think of only one thing at a time, so if he learned a rule in skool about “incentives” or, as we know, “regressive taxes,” he becomes incapable of learning from history or even what is in front of his eyes.
four legs good, two legs baader.
“How wonderful! You’ve just overturned the basic and primal lesson of economics. That incentives matter.”
Tim, you use the term primal lesson rather than basic law of economics. Are you fearful that laws of all social sciences are known to be little more than temporary afflictions of a psuedo-science? And how does one predict the consequences of what is thought to be an incentive that may turn out to have unintended consequences? You and some others suggest that taxation will dissuade investors from making efforts to create new (read that as more) wealth for themselves. What else have they to do with their excess capital? They can buy T-Bills, but that only encourages the government to spend more than it needs to, anathema to any good capitalist. And if the tax on income, all forms of income earned and otherwise, is too dear for the capitalist he will invest his excess wealth in an effort to increase the amount of after tax income. What is it that capitalists did with their capital when tax rates were much higher?
The one certain and basic lesson of economics is that too much wealth in too few hands leads to economic chaos and/or stagnation. Investment in new strategies of wealth accumulation suffer. Industrial growth slackens. Demand ebbs from too little wealth in too many hands. Only in Chicago is sequestered wealth thought to have some good purpose. Not surprising considering Chicago’s founding benefactor. Wealthy individuals have known for many years that they can create knowledge so that it conforms to their personal preferences. Those primal lessons of economics don’t all lead to the same conclusions. That’s the beauty of economic science. As one of the social sciences it can rely heavily on the error inherent in all social observations and their measurements. All interpretations of the data can be said to reflect the reality of the phenomenon.
Jack
too much wealth in too few hands leads to the wealthy refusing to pay taxes. and that leads to your friend Robespierre.
“as in we have to make choices about present consumption and investment for future (higher) consumption.”
Quite. And taxing the two outcomes changes the choice we would prefer.
Which is exactly my point. This is hardly rocket science you know. We put taxes on cigarettes so that people will make the choice to consume fewer of them. We put taxes on gasoline so that people will consume less of it.
Doesn’t take a genius to work out that if you tax investment returns people will invest for returns less.
sure doesn’t take genius.
if everyone is paying the same tax rate, it won’t affect the investment, other things being equal.
or if it does, it may be telling us that people are choosing whatever it is their taxes will buy (government investment) over whatever “returns” they might expect from private investment.
the danger here is that you take a simple minded idea and project it as one rule to rule them all.
actually, i am giving you too much here.
try to make your case without “it doesn’t take a genius” or “it isn’t rocket science” or
simply restating your assumption and then claiming that you have proved it.
you are amazed that someone has made a claim that violates one of your fundamental beliefs, but you have offered to evidence, or even argument, for that belief.
it’s as if someone told you there was no santa claus. but, but, you sputter, if there is no santa claus then children will have no reason to be good.