Tax Reform Thread

[scott]

Okay, so I decided to start a new thread devoted specifically to the discussion and philosophy of tax reforms. Specially, I wanted to remove it from any thread that deals with any specific candidate or story. I think this discussion should exist outside of the ideas of Obama and Romney, or anyone else, making it a purely philosophical discussion of what the ideal tax policy should be.

One thing that is critically lacking from the current tax policy debate, and something I've complained about on this forum and elsewhere, is that the debate lacks any objective. What is it we are trying to achieve with our tax policy? Certainly it is more nuanced than picking one objective and going in that direction, but so many arguments conflate arguments based on objectives that are otherwise in conflict with one another.

So, what is the objective of our tax policy? Here are some possible objectives that a tax policy can achieve:

1) Revenue Maximization (which is not necessarily the same as Rate Maximization)
2) Economic Growth
3) Income Equality
4) "Fairness" (I couldn't think of a better word for this - but essentially the idea that everyone should pay the same % of their income in taxes)
5) Fiscal Stability
6) Rate Minimization (which is not necessarily the same as Revenue Minimization)

The problem is that each of the potential objectives carries vastly different approaches for achieving success.

So, what are we trying to do here?

[Clipper Nation]

The most important tax reform we could make is finally reining in inflation - the hidden tax on the middle class, tbh.... inflation devalues our currency, which hurts purchasing power especially for the middle class.... end the Fed, and reinstate sound money...

Also, I think the income tax should be abolished.... I remember reading a while back that by abolishing the income tax and replacing it with nothing, the federal budget would only revert back to the mid-'90s.... Excise taxes, highway tolls, user fees, tariffs, etc. provide plenty of money to fund the government's activities without needing to decide how much we get to keep of what we earned, tbh....

The government has to do their part, too.... simplify the tax code, get rid of the entangled mess of loopholes, and most importantly, stop spending so damn much.....

[scott]

Meh. Nevermind.

[boutons_deux]

[ElNono]

some of those go hand in hand... for example, income inequality normally stunts economic growth, so you would think you might want to prioritize some of those aspects.

[TeyshaBlue]

Okay, so I decided to start a new thread devoted specifically to the discussion and philosophy of tax reforms. Specially, I wanted to remove it from any thread that deals with any specific candidate or story. I think this discussion should exist outside of the ideas of Obama and Romney, or anyone else, making it a purely philosophical discussion of what the ideal tax policy should be.

One thing that is critically lacking from the current tax policy debate, and something I've complained about on this forum and elsewhere, is that the debate lacks any objective. What is it we are trying to achieve with our tax policy? Certainly it is more nuanced than picking one objective and going in that direction, but so many arguments conflate arguments based on objectives that are otherwise in conflict with one another.

So, what is the objective of our tax policy? Here are some possible objectives that a tax policy can achieve:

1) Revenue Maximization (which is not necessarily the same as Rate Maximization)
2) Economic Growth
3) Income Equality
4) "Fairness" (I couldn't think of a better word for this - but essentially the idea that everyone should pay the same % of their income in taxes)
5) Fiscal Stability
6) Rate Minimization (which is not necessarily the same as Revenue Minimization)

The problem is that each of the potential objectives carries vastly different approaches for achieving success.

So, what are we trying to do here?

I think alot of these objectives can be/are intertwined. Income Equality is often linked to the flat tax "fairness" meme. Revenue Maximization/Fiscal Stability.

If I were the fair, but permanent ruler of Merica, aside from free Teysha Southern Fried Chicken Sandwiches™, I would shoot for Fiscal Stability via approach 1 & 2. Approach #1 could very easily co-opt #4 as a methodology,

[clambake]

"aside from" lol

[Clipper Nation]

Not VLWC enough for you, B?

Guess I should have proposed an 100% income tax on the rich and no taxes at all for the poor, tbh.....

[mercos]

Historically, my main agenda would be number 5, fiscal stability. Though the problem is exaggerated now, the public debt could become crushing in the future. Taxes should be high enough to cover expenses that the country needs. Deficit spending can and should be used when needed, but not perpetually.

The last 30 years has saw a rapid increase in income inequality, so now I believe number 3 on the list has become equally important when it comes to tax policy. A vast majority of the new wealth created in the last 30 years has gone to the top. Given the importance of fiscal stability (IMO) new revenues should obviously come fro the top, and fund programs that help those on the bottom. The Preamble to the Cons ution itself calls for promoting the general welfare.

These two priorities are both important, and fortunately, both can be achieved.

[vy65]

This is probably a dumb question but why is income inequality a bad thing?

[2centsworth]

Not too long ago, like most, I believed federal tax revenue directly paid for federal liabilities and what we didn't raise in revenue we had to borrow. Come to find out I was completely wrong in my way of thinking. In fact, our federal taxes pay for squat.

For example, if u go to the IRS and pay your taxes in cash the irs would shread the money and the federal reserve would just award you "points".
Federal reserve just awards and deducts points every single day. The Fed actually can award as many points as they want. The debt limit is just aan arcaic legislative restriction. US doesn't need to borrow a penny to award "points". We can argue all day about the risk of awarding too many points, but the simple fact is that's how our money works. This is the crux of Modern Monetary Theory (MMT)

Hence, if we are not restricted in our spending by the tax revenue we collect,
what do I believe is proper tax policy?

1. Policy consistent with increasing aggregate demand
2. Policy consistent with controlling inflation


To inrease aggregate demand we need to focus on another technical concept called the velocity of money, which in a nuts means who will spend the money faster. In my opinion,the people or en ies that would spend the money faster are the upper middle class and below. Hence, cuts and incentives should be given directly to those groups.

Now as a matter of fairness, those in the upper classes may feel discriminated against. Let me explain why what I propose doesn't discriminate, but before I do, I do believe those who propose tax hikes on anyone just don't understand how money works or worst want to stoke the flames of class warfare, but I digress. Those in the wealthy classes benefit dearly when those in the lower classes spend money, because those in the lower classes are the customers of those in the wealthy classes. The money usually ends with the wealthy, which supports my velocity of money claim.

As far as government spending, there is nothing slower and less efficient. I rather the money go directly to families.

Inflation is another conversation, but understanding the sovereignty of our money gives us lots and lots and lots of monetary wiggle room.

My 2cents and also using iPad, so forgive me too.

[ElNono]

This is probably a dumb question but why is income inequality a bad thing?

It's not a bad thing, but when it gets severely concentrated on a very small group, you end up having a very tiny group having huge control of the economy. More people with more disposable income means more buyers for goods, a growing economy, more demand, less unemployment and you also get more tax revenue to boot.

There's always going to be some making more than others, and there's nothing inherently wrong with that. The problem is more about the growing gap than inequality in itself.

[scott]

Not too long ago, like most, I believed federal tax revenue directly paid for federal liabilities and what we didn't raise in revenue we had to borrow. Come to find out I was completely wrong in my way of thinking. In fact, our federal taxes pay for squat.

For example, if u go to the IRS and pay your taxes in cash the irs would shread the money and the federal reserve would just award you "points".
Federal reserve just awards and deducts points every single day. The Fed actually can award as many points as they want. The debt limit is just aan arcaic legislative restriction. US doesn't need to borrow a penny to award "points". We can argue all day about the risk of awarding too many points, but the simple fact is that's how our money works. This is the crux of Modern Monetary Theory (MMT)

Hence, if we are not restricted in our spending by the tax revenue we collect,
what do I believe is proper tax policy?

1. Policy consistent with increasing aggregate demand
2. Policy consistent with controlling inflation


To inrease aggregate demand we need to focus on another technical concept called the velocity of money, which in a nuts means who will spend the money faster. In my opinion,the people or en ies that would spend the money faster are the upper middle class and below. Hence, cuts and incentives should be given directly to those groups.

Now as a matter of fairness, those in the upper classes may feel discriminated against. Let me explain why what I propose doesn't discriminate, but before I do, I do believe those who propose tax hikes on anyone just don't understand how money works or worst want to stoke the flames of class warfare, but I digress. Those in the wealthy classes benefit dearly when those in the lower classes spend money, because those in the lower classes are the customers of those in the wealthy classes. The money usually ends with the wealthy, which supports my velocity of money claim.

As far as government spending, there is nothing slower and less efficient. I rather the money go directly to families.

Inflation is another conversation, but understanding the sovereignty of our money gives us lots and lots and lots of monetary wiggle room.

My 2cents and also using iPad, so forgive me too.

Good take.

We've traditionally observed the velocity of money to be relatively constant over time, but is this endemic of the nature of monetary velocity or of our economic policies?

Given the Quan y Theory of Money (QTM) where M x V = p x q;

And then assuming monetary neutrality where changes in M can affect nominal variables in the long run;

We are then left with a conclusion that real GDP growth must be a function of V.

There are, of course, a few criticisms of QTM, namely challenging monetary neutrality and QTM's nature of ignoring the demand for money's influence.

[scott]

This is probably a dumb question but why is income inequality a bad thing?

Great question, and it kind of begs another.

When deciding upon the ideal level of income equality/inequality, what is the object?

Is it some subjective standard like "fairness" or can we apply objective standards?

One approach that I am especially fond of is the correlation between income equality and various quality of life indices.

What we've seen is that there is a happy medium between total income equality and excessive inequality. I don't think this comes as a shock to most people, as we can acknowledge the flaws of total equality where everyone earns exactly the same amount regardless of their skills, talents, abilities, or chosen professions. On the flip side, we all generally agree that the extreme scenario of 1 member of society controlling the vast majority of that societies wealth creates social problems and isn't viable.

The question becomes "where is that happy medium?".

[CosmicCowboy]

Okay, so I decided to start a new thread devoted specifically to the discussion and philosophy of tax reforms. Specially, I wanted to remove it from any thread that deals with any specific candidate or story. I think this discussion should exist outside of the ideas of Obama and Romney, or anyone else, making it a purely philosophical discussion of what the ideal tax policy should be.

One thing that is critically lacking from the current tax policy debate, and something I've complained about on this forum and elsewhere, is that the debate lacks any objective. What is it we are trying to achieve with our tax policy? Certainly it is more nuanced than picking one objective and going in that direction, but so many arguments conflate arguments based on objectives that are otherwise in conflict with one another.

So, what is the objective of our tax policy? Here are some possible objectives that a tax policy can achieve:

1) Revenue Maximization (which is not necessarily the same as Rate Maximization)
2) Economic Growth
3) Income Equality
4) "Fairness" (I couldn't think of a better word for this - but essentially the idea that everyone should pay the same % of their income in taxes)
5) Fiscal Stability
6) Rate Minimization (which is not necessarily the same as Revenue Minimization)

The problem is that each of the potential objectives carries vastly different approaches for achieving success.

So, what are we trying to do here?

You forgot to mention that our tax system has also become a social instrument to stimulate and reinforce "desired" behavior...be it purchasing a house, buying an electric vehicle, caulking your house, subsidizing farmers through ethanol subsidies, etc. Congress is constantly voting in new ones.

[scott]

some of those go hand in hand... for example, income inequality normally stunts economic growth, so you would think you might want to prioritize some of those aspects.

But income equality equally stunts economic growth if you go to far.

My favorite graph is the "too little/too much" parabolic curve that you can apply to just about anything.

In this case:

[scott]

You forgot to mention that our tax system has also become a social instrument to stimulate and reinforce "desired" behavior...be it purchasing a house, buying an electric vehicle, caulking your house, subsidizing farmers through ethanol subsidies, etc. Congress is constantly voting in new ones.

Add it to the list.

7) Behavior modification/incentivizing

[scott]

Sorry for the giant picture above. That's the size of it at it's source and I don't know how to modify here (or if we even can)

[ElNono]

But income equality equally stunts economic growth if you go to far.

Oh, I agree. I was referring to the current situation, where there's high concentration at the top and it's only getting more concentrated.

My favorite graph is the "too little/too much" parabolic curve that you can apply to just about anything.

I saw that from your blog (I think it was yours?). Completely agree. I'm just analyzing it from the current situation.

[CosmicCowboy]

That could be the Laffer curve with different labels.

[scott]

Oh, I agree. I was referring to the current situation, where there's high concentration at the top and it's only getting more concentrated.



I saw that from your blog (I think it was yours?). Completely agree. I'm just analyzing it from the current situation.

Yeah, that's a blog I keep for students.

[2centsworth]

Good take.

We've traditionally observed the velocity of money to be relatively constant over time, but is this endemic of the nature of monetary velocity or of our economic policies?

Given the Quan y Theory of Money (QTM) where M x V = p x q;

And then assuming monetary neutrality where changes in M can affect nominal variables in the long run;

We are then left with a conclusion that real GDP growth must be a function of V.

There are, of course, a few criticisms of QTM, namely challenging monetary


neutrality and QTM's nature of ignoring the demand for money's influence.

I totally believe in the function of V and the problem right now is M is concentrated and sits in banking deposits. With credit as tight as it is, direct payments to the people who would affect V the most is my proposal.

Hence, I favor a steeper cut in FICA taxes and romneys zero cap gains for those under 250k

[scott]

That could be the Laffer curve with different labels.

Absolutely. The Laffer Curve is an interesting animal, because it's often used by folks on opposite sides of the debate to try to prove their point on whether taxes are too high or too low. The Laffer Curve (and the one I posted above) is a beautiful thing because it doesn't actually provide guidance as to the coordinates of any point along the curve. The Laffer Curve simply states that there are some instances in which raising taxes will raise revenue and there are some instances in which lowering taxes will raise revenue (and vice versa). Rarely do we see quantified scientific evidence of where we happen to be on the Laffer Curve (and the Curve is difficult to apply to our country, because our tax structure isn't as straight forward - it's the combination of a lot of different curves existing on different planes).

[scott]

I totally believe in the function of V and the problem right now is M is concentrated and sits in banking deposits. With credit as tight as it is, direct payments to the people who would affect V the most is my proposal.

Hence, I favor a steeper cut in FICA taxes and romneys zero cap gains for those under 250k

So am I fair in saying you ascribe to the Keynesian view (and I don't use this as a bad word - Keynes has lot of great contributions to the world of theoretical economics, and a few that weren't so great) that changes in the money supply CAN in fact have an effect on real variables (in other words, monetary neutrality does NOT hold)?

Because, in theory, if we have monetary neutrality, then the quan y of M will direct affect P by the exact corresponding amount, and thus cannot affect V.

[SnakeBoy]

Add it to the list.

7) Behavior modification/incentivizing

I'd say that's the primary objective of our current tax code mess.

My thoughts on tax reform from a previous thread...

in any form?

why wouldn't getting rid of special preferences and ridiculous complexity in the tax code be worth it, in your view?

It would be worth it but we don't need to eliminate the income tax to do that. A national sales tax would be the most regressive form of taxation, is an unreliable source of revenue, and the most difficult to enforce.

or otherwise, is there some simpler system that meets similar ends without offending your sensibilities?

I favor a flat progressive income tax. Just pulling numbers out of the air I'd say the rate should go from about 6% to 25%. No personal exemptions, child credits, mortgage deductions etc. This would make the tax code strictly a form of revenue collection and eliminate using it as an ineffective welfare/social engineering program as it currently is. It would also require our politicians to actually do their jobs and create effective welfare/social programs.

Short term capital gains would be taxed as ordinary income. Long term gains would taxed from 20% down to 5% depending the length of time with >5 yrs tax at the 5% rate. Earnings from dividend payments would be taxed at or near zero.

I'm sure other forms of taxation need to be revamped as well but I don't know enough about them to support any particular changes. Bottom line is I think the tax code should be simpler but a simple tax code just isn't going to work in an economy as large & diverse as ours. And using the tax code for purposes other than revenue collection is the reason our tax code is so screwed up.