Taxes and Tax Rates–give me a break

The debate on taxes and tax rates is mind numbingly stupid these days.  Take a look at Social Security, Medicare, and Medicaid; is there any doubt that taxes need to increase?  Not that I like paying more, not that I want to pay more, but give me a break; the money is already spent and so we must tighten the belt and get ready to pay more. 

How much?  See my earlier post of how to salvage Social Security.  I don’t have a tax/entitlement calculator, but if we increase the retirement age for those of us under 55 years and ratchet to life expectancy at our birth dates, and likewise for Medicare eligibility I would guess maybe 1% more on average than today to balance, and another 1% to start chipping away at the debt.

But there is a catch.  Tax increases do over the long haul negatively impact economic growth and so we need an offsetting stimulus.  And we have one, lower the maximum personal and corporate tax rate. 

Lower rates do need to be “paid” for, and for that we reduce/phase out the various tax deductions.  Obama in his SOTU address proposed adding several new deductions and adding several new surcharges.  The first to incentivize investment and job creation in the US and the second to penalize investment and job creation overseas.  While I like the intent I challenge that adding tax code complexity is the best way.

Instead I advocate dropping the US corporate tax rate to be among the lowest in the world.  This alone will incentive US investment and job growth over overseas investment.  And then to “pay” for the rate reduction eliminate tax deductions and preferences. 

Same on the personal side.  Reduce or eliminate deductions for medical expenses, taxes paid, charitable contributions, home mortgage interest, etc.  And treat all income as income with no preference for capital gains over wages and tips or vice-versa.  If we had a flat tax of 15% with no deductions then the so called “Buffet Rule” would keep capital gains taxed at a 15% rate; problem solved.  15% may not be enough, but 20% surely so. 

And if we want to protect those below the poverty line, then exclude all income below $20K or so and tax the rest.  But I argue don’t; I think it a good thing that all pay taxes.  I think it a good thing that all have “skin in the game.”  We should focus the safety net on the most needy and can do so by means testing, but all should pay in.

Republicans tend to argue always for lower taxes, and sometimes for both lower taxes and lower tax rates.  Democrats tend to argue for higher taxes and higher tax rates.  And so both miss the boat.  Let’s acknowledge the need to increase taxes, but then offset the economic drag by eliminating preferences and lowering tax rates.

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One Response to Taxes and Tax Rates–give me a break

  1. ed says:

    Assumption: Taxation hurts the economy
    It is a false argument to state taxation hurts the economy. The non technical proof of this are the Norwegian nations which are highly socialized, and maintained a better standard of living than us for the past 20+ years. But don’t get me wrong, I am not a shill for any particular economic model; the manner in which the pieces fit together affect outcomes more than adhering to any particular dogma. But I digress.

    The technical problem with generalizing that taxation hurts the economy is twofold. First off this assumption ignores that the government IS part of the economy. Policemen and other government employees provide services and goods we consume, and they likewise participate as consumers. The principal difference is who cut their paycheck, and the source of these goods and services. But just because it says Uncle Sam on the paycheck, and property of government on the pavement, doesn’t automatically mean these goods are inferior or inefficiently produced (more on this shortly). This withstanding, provided whatever taxes are spent on ends up benefiting society directly. Ironically conservatives, the chief proponents currently for lower taxes, are also the biggest proponents for the largest discretionary item on the budget, that being the military. And a large military for its own sake is arguably not the best value for our buck, particularly given all other nations budget for this expense at a tiny fraction of their GNP, relative to our apportioning of the budget to this item.

    The other argument assuming taxation harms the economy is the notion that the government is more inefficient that private enterprise. This is largely an archaic claim. The majority of goods and services the government provides are contracted out to private businesses. The government usually is only a small percentage of the overhead of any project. Those guys you see leaning on their shovels may have been government workers a generation ago, but now they are working for private industry under government contract. To argue that government permits the contracting process to be inefficient is to argue the owners of that construction company don’t mind their employees leaning on shovels, milking the clock out of what would have been company profits. To argue all government contracts are padded because the system is being gamed by contractors is to argue private enterprise is in conspiracy, and not so competitive after all. Thus I don’t buy any of the typical assumptions proclaiming private enterprise is inherently more efficient. Lastly I have worked in both government and private enterprise, and am currently a business owner. Trust me, the government has no monopoly in slacker employees, ineffective management policies, and Byzantine bureaucratic procedures.

    Assumption: Flat tax will be better for the economy
    There are several problems going with a flat tax. You identified one of them: that the poor will be shouldering a financial burden they currently are excused from. You suggest we in fact do exclude them from this schema. Well there goes the flat tax idea! It is illogical to have an abrupt cutoff point, for example everyone making less that $X pays nothing, but those making more pay 15%. The problem is those just above the limen end up netting less income than if they settled back into the poverty wage. Thus you create an artificial step in wages, which surely will inversely affect the economy. That is why the current system has an incrementally progressive tax rate.

    As far as corporate tax rates go, these are only one of the expenses corporations contend with. They also have payroll taxes, other revenues schemes governments impose, and regional market price fluctuations in labor rates, cost of raw goods, etc. In fact from a corporate view all expenses are just overhead, be they taxes, technology, wages, shipping or fuel costs. To cite corporate tax as a problem without considering the aggregate burden of the cost of doing business in a given region is taking issues out of context. For example Syria has cheaper taxes and labor, but then they have this little revolution problem. Can’t make widgets when the natives are restless… Taxes are part of a bigger picture. If you want to help business, keep the entire picture in perspective. The US can compete with any nation’s economy, despite our taxes, when all costs are considered. What really needs attention are screwed up trade policies and tariff inequities.

    You refer to something you call economic “drag.” I love to try to tie human endeavors back into the laws of physics; it makes sense. But what is economic drag? If we are making parallels to thermodynamics and such, taxation is not drag, it is the funding mechanism of the alternatives to private industry for providing services. That puts us back into the above argument about the relative efficiencies of government versus private industry. If you want to address real economic drag it is real gravity! Though absurd on first blush, gravity costs money to overcome, to move stuff about. Shipping costs are what makes bottled water expensive. Change the ways things are done to reduce the cost of gravity and you will vastly improve the economy. Ok that is a bit overreaching. Another chief drag on economy more pragmatically addressed is management activities that are not worth the materials and efforts squandered. For example, as a project manager you probably once worked under management that demanded time consuming project status updates at a frequency level that drew significant resources away from the core project objectives; meanwhile the cost of monitoring far exceeded the waste that would have resulted from unmonitored activities. My experience indicates such ineffective management practices combined with lack of individual accountability are the chief drags on the economy.

    Lastly you make a comment about people should have skin in the game. I agree, but we have very different observations about how we go about this, and what that means. Making people pay for something creates ownership only if they see a perceived value resulting. If you are poor due to matters largely beyond your control (indeed a whole different topic – the barriers to class mobility) no amount of taxation will give you the sense of ownership in a system that is rigged to keep you dispossessed. If you want buy-in that is best accomplished when people believe they can actually improve their lot, if they are at the bottom – or maintain a status quo or better if they are already comfortably accommodated. This has almost nothing to do with who pays taxes. Haves see equity in who shoulders the tax burden, while Have-nots see equity in who benefits most from the system. Furthermore there is more than one way to have skin in this game. Based on my own personal observations the laborers at the bottom of the economy worker harder than most of us; they work longer hours, later into life, and die earlier due to the toll hard labor exacts on their persons. Given this observation I am not sure why you think they need to put more skin into this game, nor understand how this is supposed to change their status in a system that looks more and more like a caste system with every passing day.

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