Economic Theory: Tax Rate Mythologies
    By Gerhard Adam | January 13th 2013 03:32 PM | 37 comments | Print | E-mail | Track Comments
    About Gerhard

    I'm not big on writing things about myself so a friend on this site (Brian Taylor) opted to put a few sentences together: Hopefully I'll be able...

    View Gerhard's Profile
    Any time the subject of taxes comes up with respect to economics we are invariably treated to examples such as the following, to illustrate how government revenue has an effect on the economy.  Of course, this is all smoke and mirrors nonsense, but nevertheless it seems plausible enough so that many people don't consider the absurdity of these examples.

    In the first instance, we are treated to the supposition of what society would be like without taxation.
    First suppose that we lived in a society without taxation. We'll worry about how the government finances its programs later on, but for now we'll assume that they have enough money to finance all the programs we have today. If there are no taxes, then the government does not earn any income from taxation and citizens do not spend any time worrying about how to evade taxes. If someone has a wage of $10.00 an hour, then they get to keep that $10.00. If such a society were possible, we can see that people would be quite productive as any income they earn, they keep.
    A most excellent argument in support of anarchy or returning to the hunter-gatherer lifestyle.  However, we can immediately see that this isn't true.  Are hunter-gatherer societies more productive?  Would anarchy give rise to higher productivity?

    In the second instance, we are then invited to consider what 100% taxation would look like
    Now consider the opposing case. Taxes are now set to be 100% of income. Any cent you earn goes to the government. It may seem that the government would earn a lot of money this way, but that's not likely to happen. If I don't get to keep anything out of what I earn, why would I go to work? I'd rather spend my time reading or playing baseball. In fact, going to work would risk my ability to survive. I'd be much better off spending my time trying to come up with ways to get the things I need without giving them to the government. I'd spend a lot of my time trying to grow food in a hidden garden and bartering with others for the things I need to survive. I wouldn't spend any time working for a company if I didn't get anything from it. Society as a whole would not be very productive if everybody spent a large portion of their time trying to evade taxes. The government would earn very little income from taxation, as very few people would go to work if they did not earn an income from it.  (1)
    Again, we are expected to believe that somehow people would stop working.  Nevermind that there wouldn't be things like books or baseball to entertain yourself with, but more importantly, why would a government exist?  Doesn't that consist of individuals that also wouldn't make any money?

    In short, the example creates an absurdity by claiming that the "government" takes all the revenue, as if it were some independent entity that could somehow exist by itself, and yet wouldn't entail having people operate it.  By this example, all individuals would have no income.  So, instead of demonstrating that 100% of the income went to the government, it simply indicates that we would have come full circle to a state of anarchy; no government.  However, even if we allowed a magical instance of presuming that a government would actually exist that could collect 100% taxes, then where would the means of production exist?  Effectively it would mean that the government is not only collecting all the revenue, but most equally provide all the goods and services.  Again, no matter how one considers the example, humans must eat, so someone must provide the food, since even the most cynical interpretation would have to allow that the government employees or leaders must minimally eat.

    The reality is that taxes are simply another expense that an individual must pay as part of the cost of living in our modern society.  Revenue to the government is intended to pay for services, regardless of whether we think those services are worth what we pay, or whether we think they are useful.  Those items can certainly be debated, but they are not directly related to the tax rate.

    There is fundamentally no difference between paying x dollars to the government for the military or for police/fire than there is in paying x dollars in charges to a credit card company.  In both cases, there is an exchange of money in return for goods and services.

    Certainly, many people may balk at how those goods and services are provided at the government level, but nevertheless that is the purpose of it.  When we pay interest charges on a credit card, we are spending extra money for the privilege of having been advanced credit.  It doesn't go for the item that we purchased.  It is effectively a "tax" charged by the credit card company to provide that service to us.  Again, we may not like the interest rate, but if we use the card, we are compelled to pay for that service.  Similarly, if we live in a society, we are compelled to pay our share of what it takes to maintain that society.  How that society is maintained is the province of politics; not economics.

    As a result, simplistic notions of 0% or 100% tax rates, tell us nothing about the effect of tax rates on productivity.  An economy depends on the flow of money, so concentrating money in ANY particular place is problematic.  Whether it be individuals or the government.  When money stops flowing, the economy stops functioning.

    I would expect that almost no one reading this article has ever turned down a job or a promotion because it might increase their tax liability.  Neither would one expect that individuals turn down investment opportunities because their taxes might be higher.  In short, no one does it, because such a situation is already one that they could engage in.

    If you wouldn't work if the tax rate were 100%, then why not exercise that option if the tax rate is 50% or 30% or even 5%?  If that is a viable option, then simply move off the grid, become self-sufficient, and don't pay taxes.  The point is that you will always work to obtain the necessities and even the luxuries of life.  No matter how oppressive an economic policy might be, people cannot simply become ghosts and suddenly consume no resources.

    In fact, we have plenty of historical precedence for exactly such an oppressive economic situation.  It was called slavery.

    So, can tax rates become too onerous?  Certainly.  Again, we have historical precedence of where individuals in such situations simply move to more favorable societies or governments (2).  In no instance have we seen someone simply stop working because the tax rate was too high (3).  

    In actuality, we see the oppose occur.  The more opportunities exist, then regardless of the tax rate, people will apply themselves to earn even more to offset the impact of their tax liability.  After all, the more money one makes, even at a constant tax rate, the more income is available to the individual for discretionary use.  Food doesn't become more expensive when you have more money.  Products aren't more expensive, simply because you have a higher income.  So, earning more money is always more beneficial to the individual regardless of the tax rate.  This is all the incentive anyone needs to continue working.  Only in the instances of where people can't make any head-way do we find them giving up.  Even then, they simply become dependent on someone else [i.e. government] providing them the necessary goods to continue living.  

    So, despite the rhetoric claiming that higher taxes rates will reduce or eliminate jobs, the reality is that no job has ever been created simply because a company or individual has cash on hand.  A business must be selling products with an increasing demand, at which point they will look to employee more people to foster growth.  Without growth, regardless of how much money an individual holds, they won't hire a single employee.  What would be the point?

    Even so, the argument goes that with higher tax rates, then companies or individuals will avoid hiring people and therefore it will stifle growth.  Yet, this also doesn't make any sense, since investments and expenses are not taxed.  Only profits, or returns on investments are taxed, so therefore higher taxes can actually promote investments.  Much of the supposed complexity that is alluded to, is irrelevant, since it only relates to specific tax laws.  In general, the point is that any action that results in more income to you [from whatever source] is likely subject to some taxation.  The rest of the process is simply how one can maneuver around the tax code to protect that money.  So, if I invest $10,000 then I will not be taxed on that money until I cash out.  At which point it becomes income to me again, and any amount over the original $10,000 would be a capital gains [and there can also be capital losses].  

    So, what effect is the higher tax rate?  That, as well as the debate over capital gains, is when someone chooses to no longer invest, but rather wishes to cash out their investment.  Again, we find that the lower tax rate tends to promote individuals cashing out their investments and creating a reluctance to invest, since they get to keep most of their personal income without penalty (4).

    In short, with low tax rates, there is no incentive to invest any income to protect it from taxation.  

    It is important to remember that economics isn't mechanics.  There is no equivalent to Newton's laws to accurately predict any particular action or reaction.  However, we do have indicators in history that we can use as examples that may provide some insight, and what we find there is that when those with economic means retain it, then they simply become lords over their serfs.  Concentrated wealth has never produced freedom nor economic growth (5).

    (1) Of interest in this economic post, is that the rationale for lower taxes is to avoid people creating black markets and engaging in illegal tax evasion strategies.

    (2) This is an argument often used to explain off-shoring or outsourcing, but that is incorrect.  Those actions don't impact the tax liability, they simply reduce expenses by attempting to utilize cheaper labor in lower cost-of-living markets. In fact, if profitability increases, then so does the tax liability, which is another argument indicating that profits are significantly more important than the tax bill.

    (3)  There is an interesting thought experiment that illustrates that for any tax rate less than 50%, there is still an incentive to work to earn more money.  In fact, if there were a 50% tax ceiling, then the incentive is quite high and attractive.  Let's assume that for every $100,000 in earnings, the tax rate increases by 10%.  So, for $100,000, the tax liability would be $10,000 [10%).  Our net would be $90,000, so it's not bad.  If we increased this to $200,000, our tax rate would go to 20%, etc. until we got to 50%.  At 50% we would be earning $500,000 and half of our earnings would go to taxes.  However, this would still be more net income than we earned at any previous level.  From this point, if we would retain whatever we earned [even at 50%], then our income could keep growing and while the tax rate would be quite high, our income is also essentially unlimited.  After all, from a financial perspective, who wouldn't willingly pay $5 million in taxes, to retain $5 million for personal use?  This becomes quite relevant when one considers that the $5 million tax liability could be significantly reduced by investing that money which would stimulate economic activity, as well as providing even more income.  It's hard to see a down-side to this situation.  [NOTE: Even a loss is, according to U.S. tax laws, something that can be used to offset future tax liability, so even such an event has a positive income impact].

    (4)  That's not to say that things like the capital gains taxes aren't important considerations, especially for individuals that may be depending on their investments for retirement, but that is a separate issue from the role of investments in job creation and economic growth.

    (5)  As a simple example, consider who contributes more to the economy.  Ten individuals that each purchase a $20,000 car (10 cars) or one individual that purchases a $200,000 car?


    Steve Davis
    "Concentrated wealth has never produced freedom nor economic growth."
    Exactly Gerhard!
     Gerhard for President, I say!
    Ok, I'm going Galt after reading this mindless piece of mumbling. Good luck on finding food to eat and machines to use after more people like me (Superior in every sense and that's why we should be more privileged than everyone else). And for the record, I did not use any goverment functions or help from society to get where I am, I'm totally self-made-man!

    Fine words and good article.

    Also, for the same reason as taxation, higher level of inflation (about 4-5 %, to be safe) encourages more of actual development and production when combined with the right kind of taxation (stick and carrot one could say). While many people may think that over-inflated house prices and over construction of houses is the most stupid use of wealth, actually in the long run it's much more useful than the affluent pumping their wealth into commodities (increasing food prices, gas prices).
    We should somehow orchestrate over building of solar-cell farms and water purification systems. If we are going to build something too much and end the boom with a crash, let's build something that will be useful after the crash.

    To be a bit more concrete, the most economically productive parts of the United States, like San Francisco, Los Angeles and New York City have the highest state and local tax burdens, while jurisdictions with very low state and local tax burdens like Alaska and Nevada where taxes on a major industry finance almost all government operations are not particularly productive in their untaxed sectors.

    Likewise, we have a number of examples of countries where there is no taxation or negative taxation, such as the oil rich monarchies of which Saudi Arabia is the most famous example. These states operate on a no taxation and no representation political bargain with government financed from the personal wealth of the monarch who owns all of the oil in the kingdom, who then shares some of that wealth with his people. These nations have much weaker non-oil economies than countries like Syria (pre-civil war) and Iraq (pre-Iraq War) that had smaller oil resources and much higher taxes on economically productive people.

    In another comparative example, developed countries consistently have higher taxes than developing countries which in turn have higher taxes that third world countries.

    Furthermore, time series data on the U.S. GDP growth v. tax rates show that the U.S. economy has been more productive during periods of high taxes than during periods of low taxes.

    In short, the empirical evidence consistently shows that high taxes are associated with higher productivity, rather than lower productivity, theory be damned.

    I don't know I agree with a lot of this, but I don't really care.

    I do want to make one point about wealth collection, if wealth was a finite commodity it all accumulating into a single person would be bad, I agree, but wealth isn't finite (well maybe at some point it is, but as compared to now, it's almost unlimited).
    Never is a long time.
    Gerhard Adam
    For practical purposes, wealth is finite at any particular economic moment.  Yes, I get that you think that there is an infinite potential for growth, but reality says otherwise.  This is precisely why despite all this "infinite" wealth we still find that we are having to subsidize industries, provide bail-outs, and accumulate a national debt, while arguing over how this is going to be reconciled in a congressional fantasy of further reducing revenues [i.e. sustaining tax cuts].
    ... it all accumulating into a single person would be bad...
    What would be better?  Two people?  a hundred?  A million?  An entire country?  I don't care if the entire nation consisted of millionaires, because without the flow of money, the economy would be just as dead, and those millionaires could use their money as kindling in the winter to keep warm.

    Just as the concept of infinite space suggests that humanity can keep expanding, in principle.  In practice, it's an entirely different matter, so unless and until such "infinite" wealth is actually created, it is nothing.
    Mundus vult decipi
    We're barely out of the stone age, but there are hints to where we can go, Microsoft, Oracle, Google, Facebook, MS was suppose to have made more Millionaires than I think had existed to that point. All of these companies were started with an idea, and evolved into bits of data, that sells for incredible amounts of money because they add value to the people who leverage their use.

    As more things become nothing more than software and maybe some cheap raw materials, products will become cheaper. We already have people writing shareware, i expect to see essential goods becoming cheaper and cheaper, to a point where we can "grow" someone a home, clothes, etc. Sure designer things will be expensive, but generic's will be "dirt" cheap, at the same time the value of hand made things will skyrocket.

    Money is a proxy for work in a barter system of trade. So what if everyone is a billionaire, there will still goods to trade for, there will still be smart people designing goods for those with less, and those who have more.
    Never is a long time.
    Gerhard Adam
    Never happen.  While it sounds like an optimistic appeal to the future, it simply isn't true.  If everyone were a billionaire, that would be the ultimate disaster, since it would render everyone at the same economic level, leaving them to be no different than hunter-gatherers.

    Value is established precisely because of an item's relative scarcity. 

    There is no question that economics will always exist, given that there are more than two people that want something.  However, your notion of diminishing costs is an illusion. This has never happened, except for those goods that are still on a development path until they hit their final commodity status.  Goods don't get cheaper, because with continued human population growth, resources become more scarce, not more abundant, and increased competition will always drive prices higher.  So, there will be an increased disparity between individuals, not less.

    The notion of creating something from nothing [i.e. wealth] is such a limited feature of economics, that it is hardly worth a mention.  Your point regarding software precisely misses the point because it presumes that human ideas have intrinsic value.  They don't, unless the human already has a means of subsistence, and there is someone/something available that can translate that idea into an actual resource-consuming good. 

    Mundus vult decipi
    Never is a long time. And I simply disagree with you, it's already happening.
    And hardly worth mentioning? At least 2 of the top 5 richest people in the world have done exactly that, made their fortunes by arranging a series of bits on media, let alone all of the musician, and writers who have done much the same.
    Human ideas are going to be the only thing that has value in the future.
    Never is a long time.
    Gerhard Adam
    Yes, we will just disagree.  I simply don't accept the idea that we can conclude much by examining statistical outliers.  Ideas are indistinguishable from wishes until the means to act on them is present. 
    Mundus vult decipi
    Ideas are indistinguishable from wishes until the means to act on them is present.

    Have you been paying attention to the world around you? Sure many of the tools that will make this happen are still expensive today or are yet to be developed, but super computers when they came out were affordable by few, yet an iPhone 5 is handheld, battery powered, contains it's own communication network, display and many time the performance of that same supercomputer, for a few hundred dollars, and a couple year wireless contract.
    Rapid prototype systems are already making functional parts at the track for F1 cars. How soon till a rapid prototypers can make a robot, or another prototyper? How long till a designer can design something on a computer and then make it without human intervention? We use computers to make better computers, how soon till the computer does most of that work?
    Which is really a trick question, as they do now. Sure humans are still involved, but at higher and higher levels of abstraction.

    Human wishes have been becoming concrete things for decades.
    Never is a long time.
    Gerhard Adam
    Yes, I figured you'd go for the electronics example, however that is meaningless.  You're simply dealing with a product that is still progressing through development and will become cheaper as economies of scale evolve.  This isn't a demonstration of something getting cheaper in the economic sense, but rather a product development cycle.

    By your reasoning the products that have been around longer should practically be free, but they aren't.  Instead we see those prices steadily climbing.  
    How long till a designer can design something on a computer and then make it without human intervention?
    Never.  At the very least the human will have to provide the raw materials with which the computer will make it.  These things aren't assembled by molecules out of the air.  The resources to produce the computer, the workplace the designer is operating in, and the device that will produce the goods all require resources, not the least of which is power.  These are all human-intervention based.  Your example doesn't exist and will never exist.

    I can appreciate your optimistic view of things, but that doesn't make it realistic.  

    In fact, I'll climb out on a limb and make my own prediction.  Economically, we've managed to create a society that we can no longer afford to operate.  Despite all the rhetoric [and even with serious effort], we will not see deficits go away, instead they will continue to increase [with fluctuations, but no long-term solutions].  We will abandon many of our efforts at technological solutions because they are not economically viable [i.e. space exploration].  Even those that hold great promise, are already under the cloud of affordability, and consequently they won't likely occur with any large scale implementations.

    Presently the big political hope is to bring things under control by reducing entitlement spending.  While there is certainly waste that could probably be eliminated, these entitlements exist as a stark reminder of just how poorly our economy provides for most of its members.

    Capitalism [certainly as we know it] will likely collapse, but I have no idea what flavor of economics would replace it [but assuredly it will NOT be one of the current "isms" in the world].  My biggest concern is that we are heading towards a type of corporatism that could result in the worst possible outcome.  We are already seeing evidence of these influences on governments where the decisions and outcomes are determined by those that are "too big to fail", and consequently whatever illusion of control once existed is rapidly crumbling away.  This latest fiasco with HSBC clearly sends a signal to future businesses, that they can do whatever they like because they truly are above the law.  

    You may think I'm simply pessimistic, but I consider myself to be pragmatic.  All the promise of capitalism never materialized, and left to its own devices, would have enslaved most of the country.  It was only with more "socialist" interventions [i.e. unions, social programs, etc.] that the U.S. was actually able to survive and enter a period of higher production and creating a real middle class.  However, that didn't last, and we are now seeing considerable effort directed towards dismantling this middle class.  Every year we see fewer and fewer benefits accruing to members of society by being participants.  Why do you think our society is as polarized as it is?  This is the hallmark of people that no longer believe anybody.

    What isn't discussed is that there are now two economies in operation in the U.S.  The economy of business [which measures its success by Wall Street] and the economy of the individual that actually has to survive in our society.  These are becoming increasingly separated.  However, regardless of what occurs, the latter will always exist because that is human social interaction.

    I expect that you probably reject most of my ideas, and that's understandable.  I'm certainly no oracle, but I see little reason to believe that our future is an optimistic one.  Even the most favorable reading of events in the world, suggests that whatever success is garnered will be the result of extremely hard work and difficult times.  I don't have much hope that we will control those events. 

    We need to stop pretending that somehow our societal future is assured, simply because we can't conceive of anything else.  Our country was created precisely by those that saw an alternative, not by those that simply sought to support the status quo.  For good or ill, that's how the world will continue to operate, so unless and until we manage to get our act together as humans, I don't see any basis for this hubris.
    Mundus vult decipi
    Gerhard, seems like you merely stated an over-obvious point about the very necessity of the taxes, while neglecting to address the key issue - the distribution of taxes...
    One of the most essential factors in economic growth is spare income - free cash that remains in people's pockets after paying for the necessities. In the poor and middle class taxe rates affect this free cash to a great degree. However, for someone making over 450K (approximate example) that spare cash will always be available, no matter how much he/she is taxed... And for someone making millions taxes will never really affect either lifestyle or spending habits. Under Eisenhower the top rate bracket was somewhat over 70% - and not a single millionaire went starving... However, what millionaires are supposed to do with their unspent income is wisely invest it, stimulating progress and creating jobs. As this recession (as well as a number of crises before) blatantly demonstrated - it's not always the case. In fact, most of them purposely divest money from the economy and keep it in cash: either fearing losses, or advancing their malthusian agenda and trying to starve to death the "less evolved" ones (a very plausible scenario - if not now, then in the nearest future)... In situation like that - isn't it governments job to stimulate the economy by shifting the tax burden from the middle-class to the super-rich? I mean, there's no other possible way to revive consumer spending...

    However, for someone making over 450K (approximate example) that spare cash will always be available, no matter how much he/she is taxed... And for someone making millions taxes will never really affect either lifestyle or spending habits.

    This is absurd.
    Never is a long time.
    Gerhard Adam
    What's absurd?  That the higher incomes are less affected by tax rates than poorer segments?
    Mundus vult decipi
    He didn't say less effected. And having paid a half million in taxes one year, I'd say I was effected. As I was the next year when I lost my remaining million in investments when the stock market blew up, and the following economic funk that caused me to be laid off for 2 years the year after that.

    So, yeah, absurd.
    Never is a long time.
    I'm not sure how paying that half million in taxes could affect your lifestyle (unless you blew through all your earnings right away like american football players tend to do and later realized you owe shiteload of taxes - but you don't strike me as someone who would do that)... There's only so much a person can sanely spend. Switching from Dom Perignon to Veuve Cliquot is not a change in lifestyle.
    Collapse of stock market and loss of job is a whole different story.

    "we have historical precedence of where individuals in such situations simply move to more favorable societies or governments"

    True. But that will be a hard case for the States, since the US taxes its nationals living abroad. Which makes it a perfect country to establish fair progressive tax brackets. Which, again, was the case under Truman and Eisenhower...

    A nice stimulating article at the appropriate time. I am now involved in my annual ritual of attempting to reduce the cost of my share of the goods and services that I obtain.

    One of my enduring fantasies is that individuals wouldn't pay taxes. The profit-making companies would pay them all. Of course that leads one to wonder how much the price of goods and services would increase. But Hey, I wouldn't be paying taxes. ;-)

    Nice post. I don't really see anything to argue with.
    Let me answer some of your questions.
    There are certain requirements to pay quarterly taxes, but if your previous years withholding were within iirc 10% of your tax liability, you're not required, and I don't believe there's any penalty. The gov charges a very minimal interest rate if there is, and interest and penalty would have been less than my mortgage interest if I had to pay them. I don't remember if I did or didn't, but I don't think so. Because I didn't exercise my options when I got them (I took a small paycut when I took the job because of the upside), short term capital gains were taxed at the income tax rate, plus because of the amount most of my itemized deductions were canceled out. Also, once you exercise you owe taxes on the value at that time, regardless of their value at the end of the year, unless you sell them. A lot of people get really hosed by this, they exercise, then hold them till the next year, then if they drop, they can't sell them for enough to pay their taxes. Also any lose you have, you can only deduct those losses at $3,000/year, and you can only deduct short term capital losses against short term capital gains.

    While the house was spacious, I had a child for every bedroom, but it was selected for a number of other features, it was new, had a large lot, and dark skies. Plus real estate is always considered a good investment, at the time I referred to it as my piggy bank.

    Lastly, I don't make a million a year, I'm not even close to President O's original $250k you're rich and need to pay more line. I don't remember thinking about t-bills, and at the time of the original plan, I still had a large amount of options left that would vest in the time frame I would need them.
    But the economy was in the process of melting down starting early 2000, a number of corporate scandals, Greenspan's attempt at a "Soft landing" (which was stupid, raising interest rates to slow ipo's by companies that don't borrow money from banks), the DoJ's attack on MS, followed by hanging chads. This was the last year of the Clinton Presidency. I paid a lot of attention to the market and business news that year.

    I still feel very fortunate, and scared by the whole process at the same time. I avoid complaining, what do I have to complain about? and can easily repress the bitterness, until people start talking about paying a "fair share", I think I paid more than a fair share.

    But here's what most don't realize, the biggest things keeping people from becoming "rich" besides a little bit of luck, are themselves and taxes.

    I missed it by this much.
    Never is a long time.
    Mi Cro, so, what you probably meant then, is not that "not everyone who makes a million is a millionaire", but "not everyone whose total estate equals a million is a millionaire by lifestyle" - which makes much more sense, of course...
    Also, I would agree that, while 250K is definitely a more than comfortable wage, it is too low to consider someone a truly "rich" and shouldn't be where the top tax bracket starts. Also, I do believe that Clinton's tax brackets for that range were rather fair - I don't think people earning that much should have paid more.
    However, annual income of over 800K and then - over 1.5 million definitely deserve additional brackets, even up to 70%. Not to mention - 85% tax on any inheritance of publicly traded stock, bonds and cash over 500K - to prevent clan oligarchy from forming. It should not hurt any traditional family owned businesses in any way - only oligarchy. That's what personally I would call a "fair share" - and it implies no additional burden for moderately wealthy people at 250K...
    And then - I'm not even sure why capital gains are taxed at a lower rate than regular income. Again - taxing those earnings at regular income rates, together with over 70% top bracket rate didn't prevent people from becoming rich in 50-ies, under Truman and Eisenhower...
    It's not because I "hate rich", as laissez-fair fans and other economic anarchists may think. After all, I see these taxes as an anti-crisis measure - first and foremost, to relieve tax burden for people earning less than 30K and secondly - for those with under 50K. For them it's not an "abstract wealth" - it's food and other necessary commodities. Hunger is a terrible motivator. In fact, it is one of the worst demotivators. That's why shifting burden from poor and lower middle class to super rich will stimulate failing economy: 1) It will provide better motivation for workers, and 2) It will boost consumer spending. Once economy is stabilized and we can afford lower tax rates for the super rich again - sure, why not?

    "the biggest things keeping people from becoming "rich" besides a little bit of luck, are themselves and taxes"
    This I can not agree with. It may have been the case in late 90-ies, but not now... It's luck, first and foremost. Themselves - on the second place. Because a lad, who was in the same college fraternity with the kids of big shareholders of some company inevitably will become their CEO no matter how dumb he is. A hard working lad who has talent and relevant experience and expertise - only might become a CEO of the same company. It's all "I-know-this-guy-well-so-lets-lets-hire-him"-type of culture. Not in 100% cases, sure enough, but way too much of it is going on these days... And I'm not even talking about the tremendous amount of luck involved in getting truly rich via stock market (and, in any case, you experienced it yourself). So, yes, lack of talent or hard work will prevent many people from becoming rich, while lack of luck in this environment will keep even the most talented person in the world away from money.
    And taxes? People were still becoming rich under Truman and Eisenhower...

    It seems from your other post that our difference in views stems from the fact that you believe that wealth is infinite. However, world economy is a closed system. It currently goes nowhere beyond low-Earth orbit. The main foundation of economy are resources, the most important of which is energy, which flows from what can be compared to "high entropy states" (fuels, raw materials) to "low entropy states" (products, services). Eventually it will reach "thermal equilibrium" and the whole civilization will collapse. Technological progress (which is merely an optimization of the use of these resources) can only slow this process down... (I may be wrong applying thermodynamics to economy, but so far I haven't seen any reason why it would be incorrect)... Sure enough, there are very long-term energy sources like the sun (either directly via panels or indirectly via algae), as well as a possibility of space expansion for raw materials. However, those ideas have been around for over half a century and barely any progress in their implementation has been made. Xcel Energy still gets no more than 5% of their output from solar panels. BP announced that it "came close" to making algae based fuel "economically feasible" almost five years ago. No news since... This all, along with the visibly slowing down pace of technological progress, tells me that we are currently very close to the point when no more wealth can be produced. The more you gain - the more someone else loses. And all the money lost in the recent crisis - it didn't magically "vaporize": someone else has it now. US Treasury, exploiting dollar's status as the world's currency, is managing to maintain the visibility of "wealth being produced" via uncontrolled currency emission now. It surely doesn't help the situation. Also, I do have a suspicion, that stock prices going up these days merely mean that dollar is devaluating - the actual "wealth" and "growth" are stalled...
    I hope I managed to keep my thoughts straight, without rambling too much...

    I think anything over 50% total taxes is too much, including inheritance. I suspect we'll have to disagree on that though.
    Capital Gains, shouldn't be taxed at a higher rate, first because the original investment was already taxed, but more importantly because you can lose it, and sure you can deduct your losses, which saves you your tax rate, you still lost 50-80% out of pocket.
    But you're right it won't stop people with lots of money from investing (though maybe not as much), but it raises the bar on who can afford to risk their money.
    Sure there were millionaires in the 50's, but there were a lot fewer, and more of them came from Daddy's money, probably most of them did.
    And sure the CEO might be hired by one of Dad's friends, can we stop the President from handing out cabinet posts and ambassadorships to campaign donors? Probably not, but if they're idiots and some surely are, it makes it easier to start your own company to compete with them. How many of the top 5 Forbes richest people got there because their Dad gave them the job/money?

    And I'm not even talking about the tremendous amount of luck involved in getting truly rich via stock market (and, in any case, you experienced it yourself).
    But I came really really close, and it wasn't from investing, it was from taking a risk, and going to work for a startup company, accepting a smaller paycheck for equity, my third such attempt. In the last 20-30 years there have been a huge number of companies like this who have made many of their employees very rich, many of them from software, a 15 year old with a good idea can do this, More and more of the things that have value are mostly intellectual property making it even less expensive to start your own business, except for the 1,000's of rules, regulations and laws the government has enacted. You can get operating systems, programming tools, cad tools all for free, technological progress isn't slowing down, productivity isn't slowing down. But labor jobs are being squeezed, and sooner or later most all of them except handcrafted work will be rare to find. Many will have to learn new skills to find valued employment. Money is a proxy for work, to make trade easier, more people, more work, more money. If you provide value to your boss or your customer, you can make money, the more value you provide the more you can make. The harder you are to replace the more money you can make.

    And as a society we have to become space fairing. If we don't sooner or later we'll all be dead.

    I don't expect you to change your mind, any more than you're going to change my mind on some of this.
    Never is a long time.
    Gerhard Adam
    Capital Gains, shouldn't be taxed at a higher rate, first because the original investment was already taxed...
    I hear this kind of rationale alot, but what's the basis for it.  The original investment isn't being taxed on the sale.  That's why it's a "gain".  This also applies to anything to which you may have added value, since that is also not subject to gains.

    Capital gains are not doubly taxed. 
    Mundus vult decipi
    Besides that you can lose your investment, and this is an incentive, investing capital into business is good for society, a reduced tax rate is a way the Gov can encourage it.
    You also don't get taxes at income rate on gains in your home, property, car collection, etc, etc.

    I suspect that the higher investment gain taxes are the more unintended consequences there will be. For instance Obamacare is going to drastically reduce the number of low wage full time jobs, impacting those who need full time wages the most, because if you work less than 30, you're exempt from the requirement.
    Never is a long time.
    Gerhard Adam
    ...Obamacare is going to drastically reduce the number of low wage full time jobs, impacting those who need full time wages the most...
    Sorry, I don't buy it.  This is something that has gone on for a long time already, people being held to part-time hours for corporations to avoid paying benefits.  I will virtually guarantee that even without Obamacare, these same people weren't full time. 
    Besides that you can lose your investment...
    Yes, you can lose your investment, which also offsets your tax liability.  Many investment returns are not taxed if they are re-invested.  That's the incentive.  However, providing reduced tax rates for individuals that simply "cash-out"?  That only creates the incentive to avoid investing.

    I can appreciate that there are people that are marginal investors [i.e. they can't really afford a loss], so I don't have a problem with a differential tax approach in those cases.  However, while I can appreciate someone with an asset value of a million dollars being cautious, I'm not particularly interested in listening to someone with a hundred million dollars whining about the hardships of their life.  I'm not suggesting that they aren't entitled to their money, but I am saying that it is important that the proper incentives are in place to compel them to invest.
    Mundus vult decipi
    I've heard a couple of different CEO make statements that where they normally hire full time, they're changing that policy to under 30 hr's because of the added healthcare costs, that their business can't afford(and yes I know how this happened in the past, and really for the same reason, it' worse now though).
    Yes it offset's your taxes, but you only recover the tax rate, You still lost 50-70% of your investment that you don't recover!

    It's easy to argue that someone who makes some amount more than you do, deserves to pay more, Make $50k, and those pricks who make $150k should pay more, make a Million, and it's the guys making 10 million, make a 100 million and it's the billionaires, that's human nature. We already have one of the most regressive tax codes in the world, the top 10% already pay way more than half. And most people making less than $50, pay little to no income taxes (and don't jump up and down complaining about payroll taxes, those are not income taxes, they pay into your own SS and Medicare funds, though feel free to rail against the Dem's(LBJ) who decided to give it all away).
    Never is a long time.
    Gerhard Adam
    Human nature?  You make it sound as if it's simply a matter of petty jealousy, instead of recognizing that the gap between the lower incomes and upper incomes keeps increasing.  One can hardly argue that taxes on a salary of $25,000 has the same impact as the taxes on $10 million.

    Also, the idea of these CEO's claiming they can't afford the costs is simply ludicrous.  The fact is that a corporation isn't going to hang on to that money anyway, to avoid paying corporate taxes, so it will either be spent on employees, re-invested back into the company, or paid out in dividends. 

    It would be a bit more believable, if CEO's were awarding themselves the highest salaries and bonuses ever.  It is also hard to believe when one often sees companies [in specific industries] enjoying record profits.  Bear in mind, that we're not talking about revenue.  So, it is just a bit hard to reconcile how record profits can be earned, but no one has any money to compensate employees.

    BTW, someone currently working 35 hours, getting cut back to 30 will likely still come out ahead, because they won't have to pay their own health insurance.  After all, if corporations can't afford it, then how are individuals working at those wages supposed to?  Between the original issues of pre-existing conditions and premiums, the health insurance options for a private individual were paltry at best.  Premiums alone, could easily run $6,000 - $7,000+ per year for an individual, so even at $20/hr, a reduction of 5 work hours per week makes them come out ahead.
    Mundus vult decipi
    So let's just mandate a minimum wage of $1,000,000 per year. And you're right about the impact, someone making $25k probably isn't paying income taxes, while at $10 million in income (not capital gains) you're paying $3-4 Million.

    Also, the idea of these CEO's claiming they can't afford the costs is simply ludicrous.  The fact is that a corporation isn't going to hang on to that money anyway, to avoid paying corporate taxes, so it will either be spent on employees, re-invested back into the company, or paid out in dividends.

    No, no it's not. Reinvesting back into the business, hiring new employees or paying out to investors, oh the humanity!

    So, it is just a bit hard to reconcile how record profits can be earned, but no one has any money to compensate employees.

    First, this has to be on a case by case basis, second, a salary is usually based on an employee's value, as it should be(see the first sentence). Lastly in many cases (one of the CEO's was Papa John's pizza), what's the margin on selling pizza's? You have to sell a lot of pizza's to spend  $4-6k/year on the 10-15 people per store ($40,000-90,000/year) times how many stores across the US? 10,000?, 50,000? $75k times 50,000 stores is $3.7 Billion. So, let's take this to the conclusion, who pay this? Customers, prices go up, customers even if they feel it's worth the price, can't afford to buy as many pizza's as they might at the lower price, store profits drop, marginal store close, some of those people who lose their jobs might go to work for another store, but many won't. Since this will happen across all sectors for unskilled labor, more people on the edge get their teeth kicked in. As Gordon Ramsey says, you can't chase profits by raising prices, a stupid chef (no offense Gordon) even get's it.

    It would be a bit more believable, if CEO's were awarding themselves the highest salaries and bonuses ever.  It is also hard to believe when one often sees companies [in specific industries] enjoying record profits.  Bear in mind, that we're not talking about revenue.  So, it is just a bit hard to reconcile how record profits can be earned, but no one has any money to compensate employees.

    It's the math (see example above). At this point, I expect a lot of waving of hands, the picking of examples that aren't the same (for instance many larger corporation already provide these benefits, but most of those employees are not the low end unskilled kind).

    BTW, someone currently working 35 hours, getting cut back to 30 will likely still come out ahead, because they won't have to pay their own health insurance.  After all, if corporations can't afford it, then how are individuals working at those wages supposed to?  Between the original issues of pre-existing conditions and premiums, the health insurance options for a private individual were paltry at best.  Premiums alone, could easily run $6,000 - $7,000+ per year for an individual, so even at $20/hr, a reduction of 5 work hours per week makes them come out ahead.

    I'm not sure, I expect even with it being a requirement, there will be a cost involved, and many of these people won't be buying it now, this is one of the issues, young people who don't need coverage don't buy it, until they get sick or get injured, and need $10's of thousands of care, and want to then buy insurance @$400/month so they don't have to pay for their care. Personally I think it has to be a mandate, but I'm not sure the Gov (regardless of the SC) has the right to require it, I think it needed to be a direct vote.
    BTW, I've always carried Ins, and during my 2 year vacation, COBRA cost me over $1,000/month but I have a pre-existing condition in the family, and couldn't afford to not pay it.
    Never is a long time.
    Gerhard Adam
    Lastly in many cases (one of the CEO's was Papa John's pizza), what's the margin on selling pizza's? You have to sell a lot of pizza's to spend  $4-6k/year on the 10-15 people per store ($40,000-90,000/year) times how many stores across the US?
    Oh yeah ... Papa John's.  The same company that has no problem giving away 2 million pizzas as a promotion.  Yet, they somehow have to claim poverty when it comes to paying employee health care.  Yeah .. I can see how they might encounter difficulties.  Let's see ... 2 million free pizzas, that might normally sell for $10/pizza.  That's $20 million dollars that the company just gave away.

    BTW, $20 million is what Papa John's estimated it would cost them to comply with Obamacare and that they simply couldn't afford it.
    Mundus vult decipi
    Do you see the difference in the math here?
    I guess obviously not, or you wouldn't have posted this lame :) reply.

    Let's see, $20 million in real costs, vs $4-5 Million in raw materials, except probably half of those orders included another pie, maybe some wings, a cinni-pie, so let say half bought a second $10 pizza, with a profit of $5-6 million, off setting the complete cost of the free pizza's, plus you now have exposed your brand and food to additional people who might have bought their pizza's from someone else (who probably did their own sale), So Papa's probably ends up making a profit on those pies, and every one of their customer saved a little money that went somewhere else. vs $20 million in loses.

    But, maybe the employees of Papa's doesn't like this, and go find another job, but without valuable skills, and since other business on the margin are not hiring, or worse closing their doors, that poor sap is worse off than when he didn't have insurance, cause at least he had a job.

    But, you're free to disagree (ain't America grand!), we're running a big experiment to see how much like Greece and Italy we can get before unemployment skyrockets.
    Next we can legislate oil prices to be $30/barrel, I mean it's not fair to be any higher! Oh, wait, that didn't work out so well the last time we tried it.
    Never is a long time.
    Gerhard Adam
    Well, we could simply go back to the robber barons and child labor.  That worked out pretty well. 

    It used to be that business people simply did whatever was necessary to make things work.  Now those with the most money and resources simply whine about how unfair everything is, despite the fact that they've had more given to them than at any previous point in our recent history.

    Personally I'm tired of this ... "all employees are the enemy" mentality.  Let them all move overseas.  Then when Papa John's doesn't have any customers, he can move there as well.

    From Papa John:
    Now that the election is over, he’s doubling down on his claim that the health care reform will force his company to increase pizza prices by 10-14 cents a pie.
    Does anyone really expect me to believe that the over-estimated 10-14 cents per pie is a deal-breaker?

    Mundus vult decipi
    Hey, all that those little buggers were doing is sitting in school wasting air!

    It used to be that business people simply did whatever was necessary to make things work.
    And the business people did that until they started going bankrupt because Union Janitors were making close to 6 figures, and getting 90% retirement benefits (yes, yes they agreed to those contracts).

    Employee's are not the enemy, they're employees who provide a valued service, when their value is over whelmed by their compensation, companies go out of business. Some of this was caused by employees, some by the competition.

    But if you think your average CEO is over paid, start your own company, and become the CEO.
    From what I've seen of your pictures it looks like you run a farm, are you not aware of every penny you spend, trying to make sure you have the funds to pay for all of your expenses, even ones that you know are going to show up next year? Are you frivolous with your spending, even on the good years? You don't seem to be the wasteful type to me.
    The CEO I've worked around work non-stop, travel all the time, sacrifice their personal lives trying to make their business successful, and yeah at the end of the day they want to be well paid. Are all CEO's like this no, but neither are they all like the caricature you've described.
    Never is a long time.
    Gerhard Adam
    I'm not saying that all CEO's are crooks.  However, this picture of corporations in dire straits because of employees, or even taxes, is a fairy tale.  In the past few decades we seen the most abuse of corporate power, and present trends indicate that it will only get worse.  After all, when corporations can even engage in criminal activities, and no one is held accountable, then we've just sent a message [the wrong one, but a message nonetheless].

    The only thing that's happened is that corporations have continued to grow, CEO and corporate salaries have sky-rocketed, and more and more people overseas have jobs while the U.S. economy continues to stagnate.

    All, because corporations think that charging 10-15 cents more for a product is going to drive away customers.  They are clueless.  What drives away customers is the lack of customer service, so businesses think that they will hang on to market share by keeping their prices low, because their customer service sucks.  Perhaps if they figured that out, then they would realize that people don't object to higher prices.  They simply object to higher prices, while still being treated like shit.
    Mundus vult decipi
    from your link:

    The IRS Statistics of Income provides some interesting data to show what has happened to the profitability of American corporations between 1999 and 2007 (right before the recession hit). Despite including the mild recession of 2001 and the dot com bust, these years were good ones for corporate America. The net income of the average American corporation increased by more than one third (34.1 percent) in real terms, reaching $252,396 (in 1999 dollars). That sizeable increase begs the question: Why? The data suggest that one reason was by keeping costs in check. The average American corporation’s revenues increased only slightly in real terms between 1999 and 2007, but costs increased even less.
    10-15 cents a pizza is $20 million per year. And regardless of what you think most people consider prices...................... So instead of my opinion, I went looking.
    Here are a few I found.

    The rising price of food is the number one consideration among 16 factors measured by Nielsen that influence consumer’s choice of grocery purchases.
    Consumers around the world continue their broad efforts to save money at the checkout counter, but while low prices are important to shoppers, getting a good value for their money takes priority.
    The Money shot:
    Consumers around the world make it clear that quality is not to be compromised. Producing slightly lower quality products, but keeping prices the same is the least favored option among consumers in all regions. Raising prices is also a strategy that consumers do not embrace.

    We've had this argument a number of times, and I end up sticking up for corporation not because I like them all, I don't, but while you say you don't hate them all, your list of bile is long and never ending, I know there's some sort of personal story that includes some corp dropping you on your head as a child and then laughing about it. :)

    I heard this guy getting interviewed:

    In 1978, John Mackey and his girlfriend used $45,000 in seed money to start "Safer Way," a natural-foods store in Austin, Texas, that was supposed to offer shoppers an alternative to "evil" profit-seeking corporations.
    I'm also a conscious capitalist—I believe economic freedom and entrepreneurship are the best ways to end poverty, increase prosperity, and evolve humanity upward.
    Never is a long time.
    Gerhard Adam
    ... are you not aware of every penny you spend, trying to make sure you have the funds to pay for all of your expenses, even ones that you know are going to show up next year?
    Funny thing about that.  Whether it be the guy growing alfalfa, or the cable company, or the power company, not one of them has ever asked me if it was OK to raise rates.  In my line of work, that's called the "cost of doing business".

    That's what this is.  If the CEO's need to scale back on something, then do it.  Stop whining about it, because the only reason they're even discussing it, is because they want to use it as a political lever to try and garner public support, by trying to create fear.  I'm not telling them how many people to hire, nor am I telling them what to pay them, nor am I telling them how many hours to give them.  That's their business decision.  The mere fact that there is a new category of expenses, is simply what ALL businesses [not just the one's whining] will have to integrate, and if that means higher prices, then so be it.

    Prices have been steadily rising in virtually every area for decades.  In fact, as long as I can remember, prices have been going up.  Yet, every time there's the possibility of a price increase it's all doom and gloom from the business perspective.  Despite all the bitching and moaning, none of the most vocal businesses are in danger of closing down, simply because of healthcare costs.  If there are problems in their business, I can virtually guarantee, that it's due to poor customer service or poor quality [poor management goes without saying in those instances].  The two are virtually inseparable in today's business models.

    Anyone producing a quality product with good customer service will continue to do business, and if their prices go up, it's unlikely that customers will bail on them, because their competitors will have the same expenses. 
    Mundus vult decipi
    Yes, Obamacare will lead to less full time low wage jobs. But is Obamacare itself to blame, or CEOs and upper management of the corporations, who, instead of taking pay cuts themselves, prefer to cut jobs? Hell, during the crisis many CEOs even used economic turmoil as an excuse for layoff - and then pocketed the saved money as bonuses (I have no idea why shareholders voted in favour of that - probably, they were mislead and lied to)... John Thain "saved" one of the investment banks (by simply selling it to a bigger one) during the crisis and then demanded a bonus, which, if paid in full in cash, would've led to massive layoffs and if paid in stock - would've crashed the stock price... Greed + total lack of basic mathematical abilities - that's people who are glorified as "productive" "successful" "leaders"... In many cases it seems that interests of CEOs are conflicting with the interests of employees, shareholders and customers of their companies, since the majority of them (at least. according to their actions) only ravage companies they are in charge of... I find it rather funny when they are called "leaders" - reminds me of Monty Python's Life of Brian - "There's a man we call a leader..." :))) Of course, it's not the case in 100% of companies - in a banking institution I've been working at, upper management took pay cuts mirroring the rate of lay offs during the crisis... But still - majority of "leaders" are there only to cash in: the bigger the company and the worse it is doing - the better are their chances to scavenge it...

    Steve Davis
     "Revenue to the government is intended to pay for services,.."
     And for the building of infrastructure, Gerhard.
    One of the consequences of flooding the media with free market myths for 30+ years is that after a while significant sections of the population, and the legislature, start believing the lies.
    One such article of faith is that private enterprise will fill the gap wherever there is an economic need.
    That can occur at the village level, and some higher levels, but modern developed economies are so huge and complex that this is virtually an oddity overtaken by history.
    But because it is still widely believed in the US, one outcome we see now is that in comparison to Europe and the rising Asian economies, where governments are pouring money into development, the US has an aging infrastructure that will increasingly become a drag on the economy.