Taxes

[Al_U_Card]

The only real problem with any taxation system is......avoidance and exemption.

I disagree. The administrative overhead, the effects on income distribution, as well as the stimulation of behavior favored by the tax scheme, are important as well.

Disagreement stimulates discussion so its all good. Remember I have been speaking "ideally" because we all know that humanity always chooses to complicate things...usually because they are adding "specifics" for their own personal benefit.

 

In my system there would be minimal overhead (just enough inspectors to check a small fraction of the taxees)

 

Income distribution? For those that wish to languish at the bottom, they receive the minimum....

 

The only behavior (successful) that I have seen stimulated by the application of taxes IS avoidance. :angry:

 

Ready for round 2? :P

[helene_t]

If a teacher needs to have a separate office in his home (because he doesn't get an office in school), then in effect he has a lower salary, because he has to spend some of his income towards his home office.

Well, if you accept that, there is a similar reason for every other deduction or subsidy...

You example is ok but I don't believe that all subsidies can be justified in that way. The subsidies on housing (which is one of the biggest treasury drains in many countries including Germany) is clearly beneficial for richer households who spent a larger proportion of their income on housing and also are more likely to own their houses.

 

As I see it, the problem is that those who recieve a subsidy feel it directly, while all those who don't receive it but only pay for it just get an overall tax bill, so it's not so obvious to them how much they pay for all those subsidies.

 

My monthly salary specification only says that so-and-so-many Euros where withheld for taxes. Suppose it said specifically how the taxes I payed were build up: so many Euros for keeping the milk prices artificially high, so many Euros for subsidizing owned houses etc. etc. Maybe the taxpayers/voters would be less easy to fool.

[mike777]

I love the mindset of phrases such as:

 

1) financing of tax cuts

2) drain on treasury, treasury drain

3) good luck on that whole fairness issue,

4) Just tax the top 5% or 1% a whole lot more and the rest zero for income taxes.

 

:angry:

[Al_U_Card]

I kind of like flat myself as it sounds so innocuous.

[mike777]

1) Make death taxes 100% rate.

2) No foundations to pass on money tax free. Full 100% rate at death. See Gates Buffett.. Ford, and Rockafeller, etc.

3) Make life insurance 100% tax rate in full.

4) All gifts taxed at 100% rate.

5) Raise sin taxes and taxes on gambling winnings.

 

I make no claims that this will solve all tax avoidance schemes but it is a good start.

[mike777]

I should add another huge treasury drain is allowing the trading in pension plans and other retirement accounts on a tax free or tax deferred basis. Talk about unfair, if you are poor and do not have one of these accounts too bad...another break for those better off.

[Winstonm]

Emotionally, I favor a consumption tax or a national sales tax rather than an income tax, but am aware this has no chance of succeeding; the U.S. economy is based on consumption and debt creation, so to actual reward saving and penalize spending would be the last thing the Fed would want to happen.

 

Of course, inflation is another hidden tax that sends money to the rich while exposing the poor - or in bridge terms, a Taxes Transfer.  :)

Minor points I know, but the treasury department is in charge of taxes (with the IRS being enforcement and many policies actually determined by Congress). The Federal Reserve is in charge of money supply and interest rates. You may have heard the terms fiscal and monetary policy which are related to the two departments above.

 

Inflation is a hidden tax in that the government is a net debtor to its people. Thus as inflation rises, the real value of debt the government owes is lowered. When used as a policy it is called seignorage. It is said it is useful in economies with large black markets as although some can avoid government taxation, no one can avoid inflation!

Thanks, and you are right, of course - I meant to use "the fed" as an expression of the federal government as a whole and not the Federal Reserve Board, as such.

 

I know you are a macroeconomist and I am not - I've never had a single class in economics, so I am ignorant except for self-education. Perhaps you can help with more inflation information.

 

Let's keep it to the U.S., please, to help me grasp it. I can understand that if the population is expanding at 5% then money supply will generally need to expand at the same rate and products and services also. But when money supply outpaces the need, doesn't that dilute the value? Isn't inflation more of a monetary problem than the Keynesian ideas of actual demand creating a bottleneck? Doesn't excess money create artificial demand and urgency to consume when the money value is lessening over time?

 

I don't remeber when the change occured, but I read recently that the old siliver quarter could buy one gallon of gasoline when gasoline was $0.25 per gallon, but the oddity is the silver in the quarter is now worth $2.67 so the old quarter could still buy a gallon of gasoline - the currency is what has changed value.

 

I know I am gettin more and more cynical in my old age, but I view the job of the Federal Reserve as creating a fictional estimation of inflation so as to keep COLA expenses manageable while assuring there is enough cheap debt creation to continue to fuel consumption - without consumption, what does the U.S. economy have? 70% of GDP is consumer spending, real savings are now negative, and debt per person is at all time highs - isn't this a Ponzi scheme simply waiting to come undone?

[mike777]

I agree Winston, if consumption in the USA drops to zero, we are in trouble.

If consumer spending falls to zero we are in trouble.

We can only hope that increasing the tax rates and getting rid of all these tax breaks on the rich can help us.

[Winstonm]

QUOTE (Winstonm)

Emotionally, I favor a consumption tax or a national sales tax rather than an income tax, but am aware this has no chance of succeeding; the U.S. economy is based on consumption and debt creation, so to actual reward saving and penalize spending would be the last thing the Fed would want to happen.

 

 

Consumtion tax does not favor saving. You save because you intend to spent the money in the future so you will end up paying your taxes anyway. VAT versus income taxes is largely an implementation issue. (Edit: if savings are subject to taxation, whether by mean of a fortune tax or by means of taxation of the interests earned, then you're right. )

 

 

You lost me, Helene. Of course, sending something flying over the head of an intellectual midget is no great feat, so don't be smug. :)

 

How can a consumption tax not favor present savings? As long as I am not spending the money now it will build interest and I won't be taxed on either the money or the interest earned. A consumption tax, or national sales tax, would replace all other taxes, and revenue for government is only generated when money is spent. This seems a more equitable tax, as well, as everyone buys staples and therefore is taxed on those consumptions, but not everyone can afford flat screen T.V.s, nights at the opera, and season tickets to the Knicks games; also, a 3-year old Ford doesn't cost as much as a new Lexus, so the better offs end up paying a greater share of the burden.

[Winstonm]

I agree Winston, if consumption in the USA drops to zero, we are in trouble.

If consumer spending falls to zero we are in trouble.

We can only hope that increasing the tax rates and getting rid of all these tax breaks on the rich can help  us.

Mike, you are well-educated - Chicago, I believe? Perhaps you can help me grasp how an economy, seemingly based on debt creation, can hope to continue to exist?

 

Has any experiment with a fiat currency ever in history been a success? To my simple mind, debt is an obligation to pay - it must at some point be satisfied. But when money is simply tied to the value of other currency, all you can get in exchange for the debt owed is another I.O.U., and more debt to the borrower. Isn't the inevitable result of such monetary policy hyper-inflation?

[mike777]

1) I agree an economy based on debt creation cannot exit for long if at all.

2) I forget what is a fiat currency?

[Winstonm]

1) I agree an economy based on debt creation cannot exit for long if at all.

2) I forget what is a fiat currency?

From Wikpedia: In economics, fiat currency or fiat money is money that enjoys legal tender status derived from a declaratory fiat or an authoritative order of the government.

 

In other words, paper currency the state declares is of value but is not backed by a commodity.

[mike777]

Ok I agree an economy cannot be based on debt and/or on a fiat currency.

[hrothgar]

Ok I agree an economy cannot be based on debt and/or on a fiat currency.

So you're in favour of what?

 

The gold standard?

[mike777]

I do not think the USA economy is based on debt or a fiat currency. As I stated I doubt any economy could be.

 

I think we have real assets and real productivity, making real things that people want.

[Winstonm]

Ok I agree an economy cannot be based on debt and/or on a fiat currency.

So you're in favour of what?

 

The gold standard?

I obviously do not know as much about this situation as you, but I would prefer any commodity - corn, gold, wheat - something of value as a basis for what printed money is worth. Richard, I can't argue with you on either an intellectual level or a scholarly level - I only hold a associate degree - so take this from the prespective of a fairly ignorant argument, but one that makes sense to me from a more logic/common-sense-based concept.

 

I have heard the definition of money that it is a medium of exchange, which makes it simply a barter tool in a barter system, does it not? How can the dollar be backed by the "full faith and credit of the United States" when that dollar's value is determined by barter in a money exchange? What is the guarantee of that "full faith and credit", that I can exchange my used dollar that was worth 1.87 pound for a new dollar tomorrow that is worth less?

 

My view is a better definition of money is that it is a representation of value. The deed to a house represents the value of ownership of the house, but is much simpler to tote around, stamp, copy, and such. Without this representation of value, money is nothing more than a representation of an obligation, or a debt bill, the debt being satisfied by replinishment with new debt - but this is not the type of debt that creates real value, such as debt taken on to replace infrastructure, to build factories, or build houses - this is debt as accounts receivable/accounts payable - of no true value except to the appearance of the balance sheet.

 

If somehow the Euro were to replace the dollar as the international standard of trade, especially in oil, the value of holding dollars would plummet, the exchange markets would be flooded with dollars, the dollar value would plummet, meaing interest rates would soar, and the U.S. economy would collapse in a heap - and that to me is the greater national security risk than a bunch of poor Muslims blowing themselves up now and again.

 

And the only reason this risk exits is because the U.S. does not control the value of its own dollar.

[mike777]

How much is the value/productivity of the people of the USA?

How much is the value of the land?

How secure and true is that value?

Is the value greater somewhere else given the risk?

How much is the future value discounted back to today?

 

However you answer these questions is how much the buck is worth.

[Winstonm]

How much is the value/productivity of the people of the USA?

How much is the value of the land?

How secure and true is that  value?

Is the value greater somewhere else given the risk?

How much is the future value discounted back to today?

 

However you answer these questions is how much the buck is worth.

So what you are saying is the value of the dollar is a judgement based on GAAP estimations of the world's accountants? Are you saying the currency cannot collapse due to the value of the country? What does the long term debt do to the valuation? What value does the U.S. produce to justify its valuation?

 

If today there were (x) dollars in circulation and tomorrow there were (x2) would the values you suggest have suddenly changed or would the dollar value simply have fallen?

[mike777]

Sure the current value may be too high, low or just right. Your guess is as good as mine.

[helene_t]

How can a consumption tax not favor present savings?

Suppose Vanesa lives in VAT-Land and Indira lives in Income-Tax-Land. Both have a tax pressure of 20%, anual interests of 10% and zero inflation. Both earned 100 monetos last year.

 

Vanesa could choose between spending her money imediately and getting 80 monetos worth of stuff (20% of the 100 monetos she payed for the stuff was VAT). Alternatively, she could put the money in the bank, withdraw 110 monetos this year, and buy 110-20% = 88 monetos of stuff.

 

Indira payed 20 monetos tax and could spent the remaining 80 monetos on stuff, getting full value. Alternatively, she could put the money in the bank, withdraw 88 monetos this year and buy stuff for full value.

 

So until now, the award for saving is the same for both.

 

However, if Indira has to pay taxes on the interests as well, she has less motivation for saving. In practice, many kinds of interests (value increase of real estate, Swiss bank accounts, accumulating equity funds) are not taxed effectively in most contries so it doesn't matter much.

 

If we imagine a country in which interests are taxed effectively, then you're right. Especially in the face of inflation: if real interests are 10% and inflation is 10%, the nominal tax base is 20% of which you pay taxes. Back in the seventies living in Denmark, I effectively payed more than 100% taxes of the interests on my bank account. Fortunately, as a child I only saved the anual 20 kroner (3 Euros) I got from my grandma with Christmas so it hasn't impaired my financial position up to this day.

[helene_t]

If somehow the Euro were to replace the dollar as the international standard of trade, especially in oil, the value of holding dollars would plummet, the exchange markets would be flooded with dollars, the dollar value would plummet, meaing interest rates would soar, and the U.S. economy would collapse in a heap - and that to me is the greater national security risk than a bunch of poor Muslims blowing themselves up now and again.

 

And the only reason this risk exits is because the U.S. does not control the value of its own dollar.

I agree with your assesment of the security risk. But I don't think it's related to the fiat economy. Inflation has been very low for decades, in spite of an exploding dept of the U.S. goverment as well as of the U.S. economy as a whole.

 

Even if the dollar was bound to something more substantial than paper (be it corn, oil, gold or terrabytes of disk capacity in data warehouses), I think the same scenario could happen. As soon as the US$ collapses, its tie to the chosen commodity would collapse as well.

[Winstonm]

If somehow the Euro were to replace the dollar as the international standard of trade, especially in oil, the value of holding dollars would plummet, the exchange markets would be flooded with dollars, the dollar value would plummet, meaing interest rates would soar, and the U.S. economy would collapse in a heap - and that to me is the greater national security risk than a bunch of poor Muslims blowing themselves up now and again.

 

And the only reason this risk exits is because the U.S. does not control the value of its own dollar.

I agree with your assesment of the security risk. But I don't think it's related to the fiat economy. Inflation has been very low for decades, in spite of an exploding dept of the U.S. goverment as well as of the U.S. economy as a whole.

 

Even if the dollar was bound to something more substantial than paper (be it corn, oil, gold or terrabytes of disk capacity in data warehouses), I think the same scenario could happen. As soon as the US$ collapses, its tie to the chosen commodity would collapse as well.

Helene, I appreciate your responding to my posts. I understand the value, dedication, and intelligence required to reach your level of education - alas, I was too ignorant in my youth to apply myself.

 

But I have a question - how could a currency cause the collapse of a commodity? I don't think it possible. Regarding the U.S., the debt creation is only possible due to the fiat currency - a gold backed dollar, for example, would limit the borrowing possible ad debt could not be financed with additional debt. In U.S. history, prior to the repeal of Britton/Woods, war was the only valid reason for the U.S. to incur debt. This was real war, declared by Congress, and supported by the nation's people - not military actions scattered around the globe.

 

It seems to me that the only things holding down interest rates in the U.S. is a somewhat artificial demand for U.S. treasuries created by foreign central banks holding of dollars - they have to do something with them. For example, the GSEs in the U.S. are basically being sponsored by FCBs - the huge mortgage companies of Freddie Mac and Fannie May have 44% of thier total paper bought by FCBs - this huge amount of buying has kept prices artifially low. Even now, if the FCBs simply rolled over their buying out of GSE paper, the interest rates on these bonds would skyrocket, meaning home mortgage interest rates would skyrocket, meaning a further collapse of not only the home building market but also a crisis for the financial institutions as well.

 

Surely this is a national security problem.

 

The difference, as I see it, is that a commodity-backed currency puts an inherent limitation of the debt a nation can assume, as that debt must be repaid through higher taxes and not just with more debt creation.

[Winstonm]

How can a consumption tax not favor present savings?

Suppose Vanesa lives in VAT-Land and Indira lives in Income-Tax-Land. Both have a tax pressure of 20%, anual interests of 10% and zero inflation. Both earned 100 monetos last year.

 

Vanesa could choose between spending her money imediately and getting 80 monetos worth of stuff (20% of the 100 monetos she payed for the stuff was VAT). Alternatively, she could put the money in the bank, withdraw 110 monetos this year, and buy 110-20% = 88 monetos of stuff.

 

Indira payed 20 monetos tax and could spent the remaining 80 monetos on stuff, getting full value. Alternatively, she could put the money in the bank, withdraw 88 monetos this year and buy stuff for full value.

 

So until now, the award for saving is the same for both.

 

However, if Indira has to pay taxes on the interests as well, she has less motivation for saving. In practice, many kinds of interests (value increase of real estate, Swiss bank accounts, accumulating equity funds) are not taxed effectively in most contries so it doesn't matter much.

 

If we imagine a country in which interests are taxed effectively, then you're right. Especially in the face of inflation: if real interests are 10% and inflation is 10%, the nominal tax base is 20% of which you pay taxes. Back in the seventies living in Denmark, I effectively payed more than 100% taxes of the interests on my bank account. Fortunately, as a child I only saved the anual 20 kroner (3 Euros) I got from my grandma with Christmas so it hasn't impaired my financial position up to this day.

Thanks again Helene.

 

As you noted, my hypothesis is based on only a VAT with no other tax from a federal government - i.e., no tax of the savings.

 

Instead of an income tax, simply a national sales tax of X% that applies to any and all purchases and with no tax adjustments of any kind, i.e.. no deductions (with the possible execption of medications and medical expenses for the poor - and that is only because the uninsured must buy their drugs while the insured have them provided.)

[mike777]

VAT, like all sales taxes are very regressive, hurt the poor the most.

 

BTW interest is taxable in a nonretirement account.

btw the insured pay for drugs....lol...they are not free, we pay in one form or another or do you work for free?

 

To imagine no other federal tax is fantasy.....who can even count all the different federal taxes/fees/charges...call themwhatever you want? Why do you ignore all other taxes, state, county and city, etc....

 

What source do you have that says treasuries are in artificial demand? What does that even mean?

[Winstonm]

VAT, like all sales taxes are very regressive, hurt the poor the most.

 

BTW interest is taxable in a nonretirement account.

btw the insured pay for drugs....lol...they are not free, we pay in one form or another or do you work for free?

 

To imagine no other federal tax is fantasy.....who can even count all the different federal taxes/fees/charges...call themwhatever you want? Why do you ignore all other taxes, state, county and city, etc....

 

If you will read the original comment, I said I "emotionally support" a national sales tax but know it is an impossibility.

 

I am not ignoring other taxes - I never said "no federal tax". I am talking only of U.S. income tax. Instead of an income tax, I would prefer a national sales tax. The end.

I am aware that interest in a non-IRA is taxable? You seem not to have read what I wrote. My response to Helene was if there were no tax on interest - but if is a little word and easily overlooked. :P

 

The corporation you work for pays a huge part of medical insurance, so when you pay your $20 co-pay it is a lot easier on you than the poor guy with no insurance that has to pay $175 for the same prescription - sure, someboy pays for the insurance cost, but who is damaged the most - insured worker or non-insured?

 

You seem to want me to justify a national sales tax - and I said at the start I think it an impossibility - but on an emotional level, I feel it to be the most fair of all taxes as both rich and poor pay the same percentage and can make the decision whether or not to make extra purchases above what life demands - and thus encourage savings in a non-taxed savings account. ;)