“The People’s Budget”

It is endorsed by Paul Krugman and also Jeffrey Sachs, so I thought I would give it a look.  It is from the Congressional Progressive Caucus.  One simple question is to ask how the rich are taxed:

1. There are separate rates in the mid- to high forties for millionaires, with strict limits on itemized deductions.

2. “Raise the taxable maximum on the employee side to 90% of earnings and eliminate the taxable maximum on the employer side.”  With volatile incomes, it’s tricky to translate that into an expected marginal rate or to figure out how much is infra-marginal.  See the technical appendix, p.8, for more details, though I find the entire proposal here poorly explicated.  In any case, it’s a big tax increase.

3. Tax capital gains and dividends at the normal income rates.  (I am not sure how loss offsets are to be treated, though it could make a big difference and significantly boost the demand for volatile stocks.)

4. I’m not sure what happens with state-level income tax rates but there’s certainly, in the proposal, no talk of them going down.  And since they’re probably not free market deregulators at the state and local level, I suppose I expect those taxes to go up, given Medicaid burdens, pension problems, ailing educational systems, and so on.

5. Estate taxes would be raised significantly (sock it to Boy Mankiw!), as would corporate income taxes, there would be new financial transactions taxes, there would be a new bank tax, and tax enforcement would be stiffer.

6. There are, by the way, no proposed cuts in benefits.

What is the final net income and also capital gains rate for wealthy taxpayers?  It’s hard to say exactly, but north of seventy percent for income rates (including state and local rates), and near fifty percent for capital gains rates, is not hard to believe.

Quick quiz #1: What are the capital gains tax rates in the European social democracies?

Quick quiz #2: From the climate change debates we learn the value of scientific consensus; what percentage of Democratic public finance economists would favor top income and capital gains rates in the neighborhood of seventy and fifty percent?  Some of them have read and digested, for instance, this paper by the impressive Raj Chetty.

Quick quiz #3: Does the technical report offer estimated labor supply and investment elasticities in response to these higher tax rates?  (p.s. the answer is “no.”)

I can tell you this: in the technical appendix; the assumption is that the net effect on growth, from investment changes, after all the new public sector investment is called into place, is a positive [sic] 0.3%.

There have been some good criticisms of the funny assumptions behind the Ryan plan, but actually this budget isn’t better, either in terms of its final conclusions, its adherence to best scientific practices, or its transparency in getting to its results.  Should we not apply equally high standards to both the Ryan budget and this?  There are plenty of good arguments that taxes have to go up, but this particular proposal isn’t one of them.  INSERT SNARKY CLOSING OF YOUR CHOICE I WON’T DO IT FOR YOU.

Comments

Europe probably has low capital gains taxes because of the social welfare state, not despite it - as explained in this paper by Peter Lindert: http://www.nber.org/papers/w9869
In brief: if you have redistribution on the expenditures side, it's (politically) easier to have efficiency on the revenue side.

I think U.S. could use a lot more Russian immigrants, since tax evasion is a way of life over here.
Instead of going Galt you could just go Alexandr Koreiko.

"The People's Budget"
for
"The People's Democratic Republic of North Korea"
?

Corporate taxes should be abolished if dividends and capital gains are taxed as income (after loss offsets and inflation adjustment for capital). This would be more transparent for tax incidence purposes... as would culling employer side employment taxes.

On quick quiz one: capital gains in the UK are now taxed at 28% most of the time (the 28% rate kicks in with earnings + capital gain of >£42.5K + £10.4K capital gains allowance, so, 18% no-longer applies for the website's example of 100% gain on $250k).

The most used method of "tax evasion" back in the good old days was for high earners to become corporations and then after 1954 when they started taxing dividends, to become an s-corp. If corporate taxes were reduced to zero even the guy that mows your lawn would become a s-corp. You can make an argument that not taxing dividends if all other income is taxed at the same rate because it really would be double taxing not a tax loop hole for people shifting income.

Any movement of cash or perks going form the corp to the person is taxable. Blows your theory.

No it doesn't. The corporation would retain most of the earnings and reinvest them, while also characterizing many everyday expenses as business expenses (think company car, gas reimbursements, etc.). The corporation would then pay a salary to the owner that is lower than the amount at which the highest tax rates kick in.

It is not just the very rich that can lower tax by being a corporation. Their rates are also progressive and , a married couple's 15% tax bracket ends at $67,900 of taxable income. It then jumps to 25%, However, if you consider that the couple's C corporation has its own $50,000 15% bracket, their overall combined 15% bracket has more than doubled to $117,900. That alone can save several thousands of dollars per year in income taxes and combined with the fact that they only have to pay payroll taxes on the the "wages" they get from the corporation makes up for the 15% they pay on dividends or capital gains when they take the money out from the previous years profits.

In the 1970's government revenues from corporate taxes was about 4% of GDP and since 1980 it has been about 2% The lowering tax rates for individuals that made the use corporate tax shelters less common and decreased the revenues from corporate taxes but left individual tax revenues nearly unchanged, averaging about 8% of GDP over the business cycle, so the net government revenues fell from about 12% of GDP to 10%, Now there is a move to reduce corporate tax rate below the rate for high income people which will start the tax shelter game again.

I don't understand how it's a "tax shelter". If you own a business and you keep the money in the business and do not take it out to spend or add to you personal savings, what is the problem? Sounds legitimate to me.

Also, you realize S-Corps have 0% corporate tax right now? People do exactly what you are saying- pay themselves a salary (which must be reasonable) and then a dividend.

Tyler writes: "There have been some good criticisms of the funny assumptions behind the Ryan plan, but actually this budget isn’t better, either in terms of its final conclusions, its adherence to best scientific practices, or its transparency in getting to its results."

But with the exception of mentioning one point in the technical appendix, all he does is complain about his ox being gored. Saying that this isn't any better than the Ryan plan is a very strong claim: where is Tyler's matching evidence? All I see is his childish displeasure. Isn't he supposed to be smarter than that?

There's plenty of childish displeasure to go around, it would seem. Tyler's critiques (that the plan doesn't look at elasticity of labor supply and investment, and the dubious growth rate) are about on par with critiques of the Ryan plan.

"But with the exception of mentioning one point in the technical appendix, all he does is complain about his ox being gored."

You say that like the "one point" is trivial. Investment and labor elasticity is huge. If the tax rates are raised and the income disappears due to reduced labor and shifting wages into non-taxable areas, then the outcomes are going to be vastly different than what they predict.

Oh, and when marginal tax rates were high in the Eisenhower years, non-taxable perks were all the rage.

You say that like the “one point” is trivial. Investment and labor elasticity is huge.

I assume you mean the *importance of the issue* is huge, not that the actual elasticities are huge, because repeated studies have failed to find *any* elasticity effect. At all. Maybe that's why they overlooked it? Either there is no such effect, or the available evidence indicates that it is too small to matter. Going Galt only happens in works of fiction. (Even if there is a slight labor-disincentive effect, we have lots of surplus labor now anyway, so what harm will it do to lose a little? Reducing the supply of labor at the same time as increasing the demand will only bring it closer to market-clearing sooner, at least up until the point where full employment is in fact reached. At that point, obviously a Keynesian would change his prescription.)

And the primary restraint on effective investment at the moment is lack of demand. Nobody is going to make an investment they expect to be unprofitable, whether they are going to be taxed on it or not. So the primary determinant of investment is going to be the prospect of the investment being profitable, which is driven by demand. Thus, a positive effect on growth of the policies described isn't implausible at all. Supply side analysis may apply when the economy is constrained in how fast it can increase its productive capacity, but clearly not when it's *already* not using its *existing* productive capacity.

I will assume, then, that your response to the government-employee union protests in Wisconsin and elsewhere is also along the lines of "All they do is complain about their ox being gored. All I see is their childish displeasure." Mind if I quote you on that? :-D

And I assume that he leaves the very short leap from his description of various elements of the plan, to actual criticism of "its final conclusions, its adherence to best scientific practices, or its transparency in getting to its results" as an exercise for the reader.

I will also state, for the record, that I have no problem at all with raising taxes, and actually support it, as long as the marginal rates are the same for everyone. It's fair that someone who makes ten times as much should pay ten times as much tax; it's not fair that someone who makes ten times as much should pay *forty* times as much taxes. (Like Milton Friedman, I care about cutting spending, not about cutting taxes.)

"the assumption is that the net effect on growth, from investment changes, after all the new public sector investment is called into place, is a positive [sic] 0.3%."

That's hilarious.

We have an empirical example of what will happen to the US, US growth and US entrepreneurship, Sweden 1968-1993, the functional socialist years. What in Sweden is called the Crazy Quarter of a Century (Det Galna Kvartseklet) 

   We had a spending ratio well over 60 % of GDP. Running inflation 10 % per annum. Marginal taxation rate 85 % and before that after payment of  the FICA tax  35 %. VAT at 18%. A tax on wealth if more than $150 k, 3%. Capital gains tax as income. Unemployment over 10 % per annum. 

The Social Security system was set to collapse in the early 90s. 

Constant devaluations our currency to keep our competitiveness going (1964 1 Swedish Krona equaled 1 Swiss Franc, today the ratio is 1:7). 

We had Keynesianism run amok, huge debt, a tripling of the public sector and a doubling of the tax burden. 

In 1993 Sweden had a similar housing crisis as now,  all banks went bust. All but 2 were taken over by the government. The  other 2 got guarantees. 

So what did Sweden do? Hard core Keynesianism as the Obama administration did ballooning the debt or asset liquidation advocated by Hayek, Mises?

Sweden did hard core asset liquidation. 

Cut the debtload from over 65% to today's 45%, going down. 

Wiped out bad banks that had done reckless lending. Wiped out bad equity. Cut Social Security, SS, by up to 1/3 for everybody over 55. ( I lost 30 % of my already paid for SS). Under 55s got a 401k privatized account for 6 % of their FICA. The rest of the  FICA tax went into a fully funded system outside the Swedish political system.   The first fully stable SS system in the world. Secured for all time. 

Wealth taxes abolished, capital gains taxes at 30 %, halved the top marginal tax rate. Abolished all itemized deductions and cut nearly all government subsidies to private housing. 

Unfortunately Sweden as a function of it's semi-socialist Keynesian experiment 1968-1993 has 60 % dependent on the government so we can't cut spending much lower than to 40 % but that said Sweden was the first country out of the 2008-2009 recession, the US isn't even close. The Swedish budget is balanced, inflation is low, interest rates are medium high and Sweden has stated cooling down, raising rates. What's the US doing more fiscal stimulus in the firm of Quantitative Easing, higher taxes and probably a surtax/wealth tax as well as increasing the debt. 

We have an empirical study over the effect. Compare Sweden and Switzerland, everything equal. Same natural resources, untouched after WWII, same hard core Lutheran work ethic, same welfare system but the huge difference was that the Swiss system us fully funded and fully privately owned and the Swedish PayAsYouGo. 

So how is it today. Sweden has a spending ratio of 45%. the Swiss is stable at 30-35%. The Swiss has PPP GDP 70 % higher than the Swedes. They're still the worlds 3-4 strongest economy, Sweden fell to 17 but is now 12. (US is today just above the Swiss, will they fall as Sweden ( Krugmans way) or retain it as Switzerland (Paul Ryans way)?

   In Sweden up until 2000 not 1 single net job was created in the private sector. All medium sized business were eradicated. All entrepreneurs left Sweden or was hounded out by politicians and the IRS. The IRS functioned like the Stasi, hunted high income earners in general and business owners in particular. This is still the case but they've become fair almost neutral. 

Ps. I moved to the US 2001 to give my children a better life, not to relive the functional socialist years when I grew up and worked 1968-1993. Ds

Interesting story, just one quible: the Swiss are calvinist not lutheran.

I know that but my post was already to long to get into detail. Calvinism is an offshoot of Lutheranism. Nobody outside Swizerland understands the difference but nearly everybody understands Lutheran work ethics. By that I don't mean that religion in general or Lutheranism/Calvinism creates work ethic, it's in fact the opposite. Its the underlying evolution of beneficial behaviors in Swedish and Swiss society that has created the work ethic. The Swiss never lost it, the Swedes was on their way to lose them and after 1993 stopped the deterioration.

I guess you'll have to move back then.

Yes I'll move if the Krugman/Obama plan comes into play but not to Sweden

A key difference is that this is not tax reform legislation introduced by the administration or a "policy wonk" democrat in the House. We should scrutinize everything, but this will receive far less blind support from members of Congress than Ryan's proposal is receiving. They wouldn't even consider making this their the basis for their policy approach to the deficit, as the Republicans have with Ryan's more dishonest proposal.

Excellent point! They key point in this comparison (Peoples budget vs. Ryan budget) is the fact that this budget will, most likely, receive very little traction amongst the Democratic party. Therefore, it effectively serves as nothing more than the liberal response to the Ryan budget – also making the case that the budget can be balanced, far quicker (2021), by implementing broad tax increases.

I would take it a step further by suggesting that if the House democrats supported this budget, using it as the left-most starting point for negotiations, then we would most likely end up with a budget along the Bowles-Simpson/Obama plan.

Of course, this would likely never occur because it is not politically feasible for House democrats to back a budget plan which raises tax rates so sharply.

Would be in favor of eliminating Corp income tax because it currently discriminates against US domestic manufacturers to the benefit of multinationals who have a very wide variety of tax avoidance and jurisdictional avoidance mechanisms available to the.
Your proposal, however, to eliminate cap gains would not work in that regime because there are numerous ways to convert ordinary income Ito a cap gain. The result would be discriminatoy ordinary income rates for those who obtained income by work, and those who both worked and owned and who could convert ordinary income into cap gains.
If tou eliminate Corp tax, you have to tax cap gains at ord Income rates.

If tou eliminate Corp tax, you have to tax cap gains at ord Income rates.

If you eliminate corporate tax you have created tax-deferred entities, since profits can be retained in the corporation, and paid out as convenient. That bears some thought.

One thing you have to do is tax dividends as ordinary income as well, but I think it's more complex than that.

Tax dividends at ord income rates too

Dividends should be taxed at regular rates, but capital gains should not. If I invest $100 in a company 10 years ago, and it is worth $200 now, then the bulk of the 'profit' is inflation. I should not be taxed on that. With other incomes the value of time is not significant, but with capital gains it is.

Too easy to convert ordinary income to cap gains unless you want an ownership class never to pay tax on ordinary income that is converted to cap gains. Would have to reinstate Corp tax.

I don't see why there couldn't be an adjustment that accounts for some inflation and a tax on the remainder of that.

As a first reaction, I see nothing wrong with allowing basis to be adjusted for inflation, provided that rates are brought in line. Low rates but no inflation-adjusted basis just makes the tax liability vary weirdly with inflation. (Maybe this is partly responsible for the investor class's intense pressure on the Fed to hold down inflation even at the expense of creating or worsening recessions?)

The tax deferred nature is irrelevant if the shareholders aren't consuming, and you should be indifferent to when they do. Yes, dividends and capital gains should be treated alike (they are different, but politically, it would be difficult to treat them differently in a zero corp.income tax proposal). In any case, there will always be shareholders selling and realizing gains on profitable companies. The one thing that would definitely have to be done is to eliminate step up in inherited stock.

Agree on stepped up basis, even today. Too easy, if you hire a lawyer, never to pay taxes.

Whig: Was that the deal with IKEA moving its headquarters to the Netherlands?

IKEA and TetraPac (the inventors of the paper milk carton machine) left Sweden because of the consequences the combined heavy taxation had on family owned businesses.

A (in)famous case in Sweden at the time was the death of the owner of Astra, today AstraZeneca, the estate went into bankruptcy because of the 70 % inheritance tax but mostly because of the capital gains tax when selling to pay the estate taxes.

Kamprad, IKEAs owner, and the Rausings, TetraPak, owners didn't want to loose their company to outside interests or to the government as in Astras case, nor did they want to have their companises socialized. In Sweden at that time a legislation was passed that would have created an extra corporate tax of 20%. The peculiarity, intentional, was that it was to be paid in form of shares in the company abs the recipient wasn't the government treasury but the trade unions. It was calculated that after 20 years the trade unions would hold majority shares in all Swedish larger corporations (in Sweden it didn't exist or even exist today many medium sized business, in fact the lowest within the OECD).

So the move was for IKEA self defense. Many small business people followed suit. Extreme aggressive tax planning became the norm for any medium wealthy and small business owner. As a result Sweden has the largest per capita wealth in offshore havens, 90 % of it legal tax planning.

The further result of the high taxes is whilst Sweden has the worlds lowest income inequality, GINI, it has the western worlds highest wealth inequality, GINI. Its hard to understand this but if you think about it it becomes self evident. The already rich, before the tax hike get their wealth locked in. The aspiring inventor cannot make enough money to start a business because of the high income tax. No new businesses is started and no small business can grow from small to medium to large.

"2. “Raise the taxable maximum on the employee side to 90% of earnings and eliminate the taxable maximum on the employer side.” With volatile incomes, it’s tricky to translate that into an expected marginal rate or to figure out how much is infra-marginal. See the technical appendix, p.8, for more details, though I find the entire proposal here poorly explicated. In any case, it’s a big tax increase."

Which do the self-employed get? (Considering that the self-employed tend to get the "best" of both worlds as things stand.)

Most if not all EU countries have value added taxes which generate huge amounts of income at the state level and cannot be evaded. During the 1950s when we had huge marginal tax rates, growth was pretty darn good so I don't think you can automatically use the argument that high taxes are bad for the economy (similarly during the Clinton years though marginal rates had come way down). Anyone who thinks that we can dig our way out of this mess with only cuts and no revenue enhancements is a fool or beholden to some bizarre cult. The Switzerland/Sweden comparison is not really a good one as Sweden has a much broader manufacturing economy that was impacted adversely vs the Swiss.

Sweden and Switzerland are perfectly comparable. You forget that Switzerlands banking sector was much more hit than the Swedish industrial base. The industrial base i wotukd guess is today about the same you forget the pharmacurical business as well as the food industry, Nestle, as well as the industrial giants, ABB. No Sweden and Switzerland can be compared side to side from 1945-1993 as well as from 1994-2011.

There is not automobile or aircraft industry in Switzerland. Pharmaceutical industry is not labor intensive (I used to work in this sector) and in any event there is a Swedish industry that is now part of AstraZeneca (Astra) and Pfizer (Pharmacia). Food industry is dispersed for logistics reasons so Nestle is not huge in Switzerland.

I'm afraid your argument don't hold water. Sweden and Switzerland are completely comparable over the time span we talk about. Between 1945-1968 completely equal and between 1968-1993 completely divergent economically. It was only due to the fact that Sweden was and probably still is the first empirical example of the Laffer Curve. From the example of Sweden we now that taxes and government spending over 50 % of GDP reduces growth and taxes over 60 % destroys growth.

The US can follow the suit of Finland, Sweden in the 90s and the Baltic states now. Hard core austerity. Cutting taxes and deregulate on a grand scale. Cut government spending by a third. It took Sweden and Finland about 5 years to balance budgets and the Baltic states less than 2.

So if Sweden, Finland and the Baltic states could do it by asset liquidation and harsh austerity why is it impossible for the US?

Are the Americans that weak and degenerate that they can't even stand a little pain? Maybe it's the case. Its like my US friends. When they get hurt and are in pain they demand from their doctor Vicodin. I for the same pain wait until I can't stand it and then take an advil.

We have a saying in Sweden as regards to not being able to stand lain in the short run and instead die in the long run, similsr to the prescriptions of Keynesian economic policy:

"In a sub zero blizzard it feels good to pee in your pants, unfortunately it will kill you as soon as the warmth is gone."

Are there any parts of the proposal that you do like?

One has to love Kurgman's plan: destroy defense contracting as a good career, destroy health care as a good career, destroy finance as a good career. Maybe one could go back to look at NYC in the 1970's and see what the U.S. would look like: high crime, high poverty, zero business expansion, corruption, and misery. Of course, there will still be a few elites that would employ the Ivy League professors but the rest of us would be suffering.

I agree with Krugman but for different reasons. Defense contracting and health care carreers, extreme profitability and extreme profits due to them being created government regulated virtual oligopolies.

Both are parasites on the private sector. In Sweden health care workers cannot majestic more than 80 % of equivivalent private sector workers and the defense sector is audited harshly and constantly made to produce more efficiently. A Swedish doctor earns less than a US nurse and a Swedish CEO earns less than a US doctor.

Now the costs of defense spending in general and defense contract costs must be cut by more than half as well as drastic cuts in the costs of health care provisions, mainly driven by staff costs and the use of extremely expensive equpiement with little or no marginal utility or benefit.

The difference in Sweden and the U.S. is that in the Sweden a lower middle class individual does not end up living in a crummy neighborhood filled with blacks and hispanics. In the U.S. that is where the lower middle class lives. That is why cities like DC, Baltimore, NYC, LA, and SF do not have lower middle class whites living in them.

Krugman and his type hate and detest middle class whites and want to punish them for existing. That is why all of Krugman's budget ideas lower the pay of healthcare, finance, manufacturing, and defense workers while doing nothing to lower the pay of government workers.

One of the problem is why would the U.S. need more Ivy league trained economist is Krugman's world when all of the fiance jobs, manufacturing jobs, and corporate jobs have moved off-shore and the service workers and healthcare workers are so low paid that only the desperate take them?

In the first place, it's not "Krugman's plan." In the second place, his "endorsement," as Tyler calls it, consists of:

None of this is economically outlandish. Marginal tax rates on high incomes would rise substantially — enough to make even liberal economists slightly uncomfortable — but the historical evidence suggests that the incentive effects wouldn’t be too severe.

In the third place, why should defense contracting be any more of a guaranteed "good career" than anything else? Sounds like you are advocating for continued spending on defense, regardless of actual need. And how does the plan "destroy" finance and health care?

"3. Tax capital gains and dividends at the normal income rates."

I really don't care what you do with Warren Buffet, but I am not voting for this unless there is an exclusion on the first $X of income. I am not rich and I do not want the fruits of my savings to gather in the dilapidated households of one-marshmallow eaters.

We did before and no one ate marshmallows

I've always wondered how it is that some politicians and those who should know better can suggest that relatively tiny tax increases can be used to make substantial modifications to behavior (e.g. taxes on soda, cigarettes, etc), yet income and capital gains taxes are somehow magical and have very little, or no such affect?

I don't have a Nobel in Econ, so can someone please explain this to me?

You need a Nobel in Orwellian Psychology.

Most of the people talking about the latest Important Political Issue are mouthing talking points, double-thinked with their Blue or Red religion, obfuscated by scholasticism, and subordinate to experts playing with the latest new techniques.

The behavioral effects you cite are all on consumption; they increase attractiveness of substitutes which have close marginal costs. With taxes on income and capital gains, you do not immediately distort the incentive to work. You will only substitute leisure for work (or take fewer investment risks) to the extent your income is sufficient. As long as your risk-neutral after-tax return from marginal effort/investment is greater than the next best alternative (leisure/sitting on cash), you will still work hard and invest.

We are all Warren Buffett now.

OK, we have a conservative budget that won't work financially, but conservatives like; and a progressive budget plan that will work financially but no one will like to pay for. Neither has any chance of becoming enacted. Have we finished talking about this yet?

What's the next step to convincing independents they should vote for [insert ideology here]... and I'd suggest it be better than anything we've seen so far.

No, we're still waiting for a progressive budget plan that will work financially

Fair enough, but it doesn't change my question:

What’s the next step to convincing independents they should vote for [insert ideology here]… and I’d suggest it be better than anything we’ve seen so far?

Rather thann a capital gains tax (which will only force people to fnd ways to avoid that), I'd prefer to see an annual wealth tax (with a generous exclusion level). The advantage here is that it forces people to invest their wealth in a manner that outearns the tax in order to stay ahead. Someone who just wants to leave their millions in a bank (or other low return, but safe investment) will see their wealth erode over time. In this manner, they have a direct incentive to grow the overall economy to create investment opportunities.

A wealth tax is how you create and aggravate asset class bubbles and crashes. A tax level that will make a difference relative to the existing wealth tax known as "inflation" will force money into asset classes that do not have the capacity to constructively absorb that capital. A good example is venture capital, which has a track record of creating a very good average rate of return (it beats the S&P500) but has long droughts as well, usually following a bubble.

In the US, the venture capital industry can deploy about $25-35B per year without chasing too many low quality deals, a pittance in the scheme of the economy. During the dotcom boom, venture capital deployment went up to around $100B per year, most of which was wasted. As a consequence, there was a ten year drought on returns afterward where no one made money on average while the side effects of the dotcom bubble worked their way through the system. Venture capital is a healthy industry once again, puttering along at its traditional level of capitalization.

In an economy that has a growth rate of 3%, nothing good will come of forcing everyone to chase average rates of return of 6-7% just to stay even, never mind realize a decent return. It does not encourage intelligent deployment of capital.

In the first place, I doubt that the tax rate would be so high that only high risk, VC like investments would the preferred option. I also don't understand why you think this activity would be wrose for aggrevating asset class bubbles relative to the mess the Fed has made with ultra-low rates. Currently, there is too much opportunity for tweaking and gaming the system of taxes that detracts from the a focus purely on the investment prospects.

Currently, we expend quite a bit of brainpower figuring out ways to dodge taxes and creative "innovations" in financial asset management that only leads to disaterous consequences (subprime as an example). I'd rather our physicists and mathematicians work for industry creating new stuff that people want to buy (because they are useful), than work for Wall Street developing new ways to extract wealth from the economy.

I would also set the entry point for this tax quite high (like $5-10M) so that below that level, there is none. This way anyone who absolutely wants to let all of their money sit in a low yielding MMF will be gradually eaten away until they drop below that level and it stops. As for why anyone cares about preserving Waren Buffet or Bill Gates' extreme wealth is beyond me.

I'd do the same with banks BTW and install a sliding scale so tha tthe bigger banks become the more they have to pay as a means of encouraging smaller entities to avoid TBTF.

People are already chasing large rates of return in their savings plans, regardless of inflation: Why would someone that isn't retiring in 10 years do anything but chase high rates of return?

The public's capital is already not being deployed intelligently. Individual investors stick their 401k and IRA savings on funds that can't really match indices in the long run, or end up just using an index fund, which is by definition an investment that adds no information to the market. And with less and less confidence that social security will be there to provide a retirement, contributions have to increase: Individuals that know nothing of what they are investing on and funds managed by people investing other people's money and taking a cut regardless of performance is a recipe for making bubbles grow, and we will be in that situation even if the target rate of inflation was 0.

MGK,

Do you dismiss fractional reserve banking so easily? Millions of dollars "sitting" in a bank means millions of dollars being lent out by banks.

Tyler is getting really nasty in his old age. He put this post in the religion category :).

The budget sounds great.

LOL comparing economists to climate scientists. The latter are scientists and the former, well, they aren't.

The latter aren't either, and at least the former have a clue about the use of statistics.

Isn't the Progressive Caucus the left wing of the Democratic party in the House? Approximately the left fifth of the House? Isn't what they want a lot further from what will eventually pass than what the right half of the house wants?

It seems to me that should limit the amount of attention given to the proposal. I also wonder if some of the people that endorsed it saw it primarily as a way to widen the Overton window leftwards.

I'm reading it now. It's . . . something.

1. "Taxing all capital gains as regular income". This will likely lead to some serious money movement into lower tax areas, particularly by the richest. The Brits do it, though, so maybe it's not dumb.

2. The "Financial Crisis Responsibility Fee" and "Financial speculation tax" are disasters waiting to happen. You'll just see banks and FXCM move their trading to London, or somewhere else.

3. Raising the amount of income taxed by Social Security is a good idea.

4. Lots of infrastructure spending on this. I'm not wholly opposed, but it's not as easy as simply allocating money to it.

5. More housing support props. The last thing we need is more support for housing - it's one of the reasons we got into the housing crisis in the first place.

6. They want to cancel a bunch of next-generation weapons systems. Such as the F-35, at a time when most of our fighter fleet is ancient. Say "Bye Bye Air Superiority".

They already have something like, if not exactly the same as, a financial speculation tax in Britain, so I don't see the levying of such a tax here as something that would cause firms to rush to London, unless it's truly outrageous.

I imagine they can find a think tank to fill in some numbers on a spreadsheet. Heritage will do it for a fee but I am sure there are cheaper alternatives.

Matt Yglesias has a much better solution for progressives; a progressive consumption tax.

This capital gains proposal is especially silly. I'm 99% sure they won't allow unlimited write-offs of capital losses, which means the effective cap gains rate would be even higher, and risk-taking would be discouraged. And why even have a corporate income tax system? Even from a progressive perspective it makes no sense at all.

This proposal taxes rich guys who live a hedonistic lifestyle at a much lower rates than equally rich guys who are thrifty, and leave something for others. That's progressive?

A progressive consumption tax system composed of a mixture of modestly progressive VAT and steeply progressive payroll taxes and carbon taxes and land taxes. That's all you need. K.I.S.S.

Like my risk taking in investing in emerging markets. Let's not forget that cap gains and reduced div rate apply to foreign as well as domestic investment or stock

The corporate tax is a completely unnecessary tax since profits are shared between employees in form of wages and benefits and shareholders in form of dividends. It means that if you get rid of the corporate tax there is no need to tax shelter profits either in offshore havens or in domestic tax shelters. The treasury will not loose revenue since the profits will be redistributed in the form of dividends and wages i.e. taxed as income as well as FICA taxes applied.

But from a personal point of view I agree with Scott Sumner that progressive consumption taxes are most optimal. However I disagree on progressive payroll taxes. I find any hidden tax an aberration since I come from Sweden and Swedish politicians are world champions in hiding taxes taxes should always be in the open and paid directly by the tax payer not withheld at source.

I have a job that I am passionate about. I work hours that seem ridiculous to many people, but those hours are a joy to me. As a happy coincidence, I am very well paid for my efforts. I spend much more of this pay on other people (charity, family, friends in that order) than I do on myself. If my tax rates were substantially raised, I would consider that a primary motivation of doing something that's always intrigued me: live abroad. I don't care about the pay, but I care deeply about the principle. I wonder if the people who would significantly raise marginal tax rates have ever experienced work that (a) they were passionate about, so much that (b) they spent most of their waking hours at, where (c) their compensation was derived from private sector demand. If not, I think they grossly misjudge the productivity impact (and other consequences) that a leap in marginal tax rates will produce.

Clearly there aren't that many people who know (b), you said yourself most people find the hours you work are ridiculous... and there are probably even fewer people who have (a)/(b)/(c) and would also actually leave/stop working like you are suggesting if taxes were raised. This means that the impact on productivity would be expected to be pretty small if these people were to leave or stop working.... assuming their productivity is within an order of magnitude of ordinary folks. There is also the question of how much slack could be picked up by others that are currently excluded from work that have the skills and need for compensation. To the extent the work you do is not replaceable the impact of this small population of workaholics protesting could be near zero.

"assuming their productivity is within an order of magnitude of ordinary folks"

A physicist, a chemist and an economist are stranded on an island, with nothing to eat. A can of soup washes ashore. The physicist says, "Lets smash the can open with a rock." The chemist says, "Let’s build a fire and heat the can first." The economist says, "Lets assume that we have a can-opener..."

Share the pain, tax the rich.

"From the climate change debates we learn the value of scientific consensus" ????

Another classic Tyler Cowen WTF moment.

I can't tell from your comment what you imply by your statement, but it seems obvious to me that Tyler is being, well, acerbic and sarcastic here...

Uh, 'consensus doesn't mean crap' was my interpretation

Funny, with the People's Budget we don't get a number, yes a number, regarding how much extra revenue this would bring in (if any). Lots of qualitative demagoguery but not revenues expected. Is this an economic site or a NYT op-ed adjunct?

I guessed you missed this: http://grijalva.house.gov/uploads/The%20People%27s%20Budget%20-%20A%20Technical%20Analysis.pdf

Is there any good estimation of how much increased revenue an increase in immigration might bring in if it were to happen? I can imagine all of the reasons such an estimation would be difficult to compute and how it would be even more difficult for the government to implement such a policy, but it seems like a worthy theoretical exercise. After all, in addition to raising taxes, we can always add more taxpayers. It'd be interesting to see the trade off and how much lower rates might be were there to be more people paying taxes into the system.

Yeah, because clearly, one million immigrants a year is just not cutting it. Up it to two million and the government will be rolling in tax dollars. Five million, and the government can just take care of everybody.

California in particular has taken this idea and run with it. I wonder how that's working out for them?

In a numerical sense, taking in those who would consume more than they produce isn't wise, at least in the short term. But those aren't the only people we can take in.

There are clearly a lot of variables that go into these calculations, making it very hard if not impossible for a lay peson such as myself to figure it out, which is why I asked about any studies that were done.

Net tax producers lack 'vibrancy.'

A while back Krugman told the Asia Times that the US is "a banana republic" and said US taxes should be increased by 65%...

what would he do to extricate the US from this mess? "No more budget deficits," he says. "We should be running surpluses." Tax increases: "We should be getting 28% of GDP in revenue. We are only collecting 17%."

I don't know why he's never had the courage to say that in his own column here in the USA where it might have made a difference.

Of course, that was when the Republicans controlled the government (and the deficits were much smaller than today). As soon as the Democrats took over his published opinions rather starkly changed.

Now with the added cost of Obamcare, the extra trillions of debt, and a points-of-GDP increase in baseline deficits going forward, presumably more than 28% of GDP is required in his mind. Maybe via the Peoples' Budget he's backing under cover in that direction

The added debt isn't that big of a deal as long as we stop adding it in such a big way and as long as GDP starts growing faster.

When the Republicans controlled the government, there wasn't nearly as big of an economic problem. The stuff really hit the fan right before Obama took office, and the resulting deficits were hardly his fault. The problem wasn't so much that Bush was constantly running deficits; it was that the deficits were used for poor reasons.

As for Krugman, while he may never have used such a figure so explicitly in his column or on his blog, you can't say he's been shy when it comes to advocating for higher taxes. He's written about how he felt the Bush tax cuts were poorly designed for years.

The rich are a tempting target. Warren Buffett in particular has expressed how troubled he is about his low tax rates so I say sock it to him.

Howevah,

I think it's hard to pry more than a third of anybody's income out of them. Much past that and there's too much at stake for people not to cheat. And you can make the IRS as big and bad as you want but people are either going to hide income, leave the country, or increase their net tax consumption.

To their credit, the CPC wants to cut defense spending and trim our overseas obligations. (We'll see how long that survives the next NYT story about how how Gaddafi ran the Libyan football team's second side through the shredders). But they don't want to cut government bennies and propose to pour yet more money down the eternal black holes of edumacation and million-dollar-a-mile highways, etc.

How does this compare to the Mirrlees Review, a systematic look at taxes and incentives? http://www.ifs.org.uk/mirrleesReview

Abolish all deductions. Cut tax rates by 50%.

Yes it's a very good idea. Sweden did it in the 90s.

How doe the proposed tax rates compare to what we had in 1986 under Reagan and before Bradley-Gephardt? Are they much more "radical" or progressive?

And while all this is happening, Canada will be sitting next door with a 29% top marginal tax rate, a federal 12.5% corporate tax rate, no estate tax, lower dividend and capital gains taxes, a sound retirement system, a small or nonexistent deficit, a sound banking system and one of the strongest economies in the world.

How can this not result in massive capital flight to Canada, and a brain drain of the smartest and wealthiest people?

The fact that the U.S. once tolerated high marginal rates is irrelevant to today's world. In the 1950's and 1960's, the U.S. strode as a colossus of manufacturing in the world. Capital did not move as freely. People did not move as freely. Barriers to trade existed everywhere. The Asian Tigers had not yet risen. Communication and travel were more limited. Computers did not exist to coordinate markets and smooth the flow of information and capital.

Today's a different world. If the U.S. winds up with 70% marginal tax rates and a massive government, it will start a decline that will eventually leave it a minor player in the world economy.

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