I recently read an article proposing a “progressive consumption tax.” It made me look at economics and taxation from a totally different viewpoint. On the surface the ideas have merit, but I am a little concerned about the possible unforeseen consequences.
The author, Professor Frank, suggests that the Feds tax consumption rather than the income. You report your total income, the amount you saved, and the amount you spent. Both the amount saved and a pre-determined portion of the amount you spent are not taxed. The “excess” spending is taxed at a progressive rate. To me, it seems a lot more fair than the "fair tax."
The populist side of me has always sought a way to tax the super-wealthy. The article reminded me of Thorstein Veblen’s writings about “conspicuous consumption.” And it occurred to me that if we really want to “soak the rich,” we should find a way that does not penalize earning, but instead punishes wasteful consumption and enables and encourages spending of money on things for the common good. Theoretically, government revenue increases. With this approach, the economy is not driven by an "invisible hand," but by a very visible government.
The article does bother me a little because I believe that the purpose of taxation is to fund government operations, not to control human behavior.
I am including a link to the article. It is fun to see the (almost fanatic) comments it drew from the (somewhat conservative) Cornell alumni.
http://cornellalumnimagazine.com/index.php?option=com_content&task=view&id=483
If you are too dogmatic a conservative to read this with an open mind, please don't append knee-jerk tyrades in your comment. I am looking for calm analytic discussion of the merits and potential dangers of the concept.
Showing posts with label income. Show all posts
Showing posts with label income. Show all posts
Saturday, July 25, 2009
Tuesday, January 01, 2008
The "Fair Tax" is NOT Fair
I will be the first to admit that I have not read a detailed proposal for the so-called "Fair Tax." I understand that the concept is to replace the Federal Income Tax with a Federal Consumption (or sales) Tax.
Its proponents may call it a Consumption Tax, if they wish, but I can think of two reasons that it should not be called a "Fair Tax."
Its proponents may call it a Consumption Tax, if they wish, but I can think of two reasons that it should not be called a "Fair Tax."
- First, a personal one -- a significant portion of my income comprises my contributions to company pension, on which I have already paid Federal Income taxes. That income is reported, but not taxed a second time. If a consumption tax were implemented, I would be paying consumption tax on money that was already subjected to the income tax.
- Second, it appears to me that a consumption tax unfairly benefits high wage earners over lower wage earners.
To illustrate the second point look at two simple examples: one a laborer who earns $50,000 per year; the second an executive who earns $5,000,000 per year.
- The laborer now pays 15% of his earnings ($7,500) in income taxes. If he is frugal, he saves about 10% of the after tax money and spends the rest, $38,500 to live on. Under the so-called "Fair Tax," the laborer will still put $4,250 into savings. He will spend the remaining on goods taxed at a 23% rate ($37,195 in goods and services, $8,555 in federal tax). That means his tax bill has gone up from $7,500 to $8,555)
- The executive now pays about 24% of his earnings ($1,200,000) in Federal income tax, invests about $2,800,000 in savings, and spends the last 1,000,000 to live on. Under the so-called "Fair Tax," the executive will still live on 1,000,000 worth of goods and services, on which he will pay $230,000 in Federal Consumption tax, and he will invest the remaining $3,770,000 in savings, which will earn him even more money next year. His taxes decrease by $970,000. [Now, you rich guys can explain to me that you just can't get by on a measely $1,000,000 per year. But even if you significantly change the spending to investment ratio, the taxes still go down. Moreover, the laborer does not have the latitude to make that kind of adjustment.]
So the Consumption Tax is NOT a fair tax! It benefits the wealthy at the expense of the poor. Most tax laws are written this way because they are written by wealthy people. Then they present the tax in such a way that it appears to be "fair."
Most people will agree that any tax on a person who earns less than "the poverty level" is not really fair. Many will agree that at some point one's earnings are such that he can live comfortably, build his savings, and still have a LOT of money "left over." Just ask Bill Gates or Warren Buffet.
A flat tax on income, or a somewhat progressive variant thereof, is probably the only way to approach fairness in taxation. The variation I suggest is a tax on ALL personal income (regardless of source, no deductions, no adjustments, no credits) -- approximately the first $33,000 of income to be tax-free; from $33,001 to $200,000 of income to be taxed at 12%, and from $200,000 up be taxed at 25%. The break points should be adjusted annualy for inflation. The actual rates can be calculated to make sure that the structural change is "revenue neutral."
A few notes: (1) I said personal income. Taxes on corporations are never paid by the corporations; they are passed on to the consumers in the form of higher prices. (2) The highest rate of 25% may seem low to some ultra-liberals, but remember it applies to ALL income (i.e. no more 15% rate for capital gains). (3) ALL income may be hard to determine, because some people receive many types of income and do not report portions of it that are not salary, wages, or interest. (4) The consumption tax is even more cruel to the poorest of wage earners who now pay no income tax. Suddenly, they will see their buying power decrease by 23%.
I know this is all overly-simplified. The discussion is meant to be conceptual, as opposed to specific. But one of the keys to solving the tax problem is to simplify it. One important concept is that taxation should be used to fund the operations of government, not to control people's behavior. A typical governmental abuse of "consumption" taxes is to increase the consumption tax on "undesirable" products and services. A tax that is simply based on total personal income avoids that kind of abuse.
Sunday, June 24, 2007
Income Inequality
I have been subscribing to The Week magazine for a couple of years now. It summarizes news articles from all over the country and all around the world on major issues and events. The diverse articles offer the closest thing I have found to "balanced coverage" on current events. But last week the magazine missed the mark on one topic.
Under the heading, Best Columns, the Business section of last week's magazine titled its issue of the week "What's causing income inequality?" The four columns summarized either glossed over the real causes, or missed them completely.
First, they quoted Roger Lowenstein of The New York Times Magazine, who defined the issue: "In 1979, the top 1 percent of the population collected 9% of the national income. In 2004, their share had jumped to 16 percent. Or look at it this way: Since 1979, the incomes of the bottom 20 percent of earners have grown only 2 percent, adjusted for inflation. But during that same period, the incomes of the top 20 percent have increased a whopping 63 percent...[W]hat may be the most pressing domestic issue of our time: 'Why isn't prosperity spreading more equally?'"
Next they excerpted an article by Tyler Cowen in The New York Times: "The most commonly cited culprits" are outsourcing, immigration, and greed. But those are "diversions from the main issue," and that's education--or the lack thereof...The focus should be on giving more people access to a decent education, at all levels.
Then they cite Jared Bernstein and Lawrence Mishel in Huffington post.com, who in turn point out that that the wage growth of college grads is no longer outpacing that of less educated workers. These authors blame the growing inequity on the Bush administration's tax cuts for the wealthy and on weak unions, aggressive outsourcing and offshoring. The lack of education, they say didn't cause the inequality, and while a more highly educated work force is a worthy goal, it won't reduce it.
Finally, they quote George Will in the Washington Post, who says that income inequality is not really an issue, because economic burdens and benefits have never been spread evenly. We should look instead at the fact that the economy has been growing at a robust pace with more than 8 million jobs created since the Bush tax cuts were enacted.
As I have said, the articles cited in The Week either understate the income inequality issue, or they overlook the true root causes. I will try to set the record straight.
FIRST, INCOME INEQUALITY IS A REAL ISSUE: Roger Lowenstein is right, and George Will is wrong. It's just fine that millions of jobs have been created since 2002. But you just cannot get away from the fact that roughly 5 percent of our wage earners received nothing because they are out of work, and 94 percent of the earners are struggling to keep even with inflation while that top 1 percent is receiving incomes of anywhere from $1 million to $60 million, or more. Frankly, there are very few individuals whose real contributions to society are worth anywhere near those values. The individual incomes are rightly referred to as "obscene."
SECOND, THE SUGGESTED CAUSES ARE NOT THE REAL CAUSES: Many of our wealthiest 1 percent do not even have college degrees. If I recall correctly, Bill Gates is a college dropout, as are many executives. And not many of our highest paid entertainers have college degrees. The IRS statistics on income show that since the Bush tax cuts, the wealthiest earners are in fact paying a larger portion of their total income in federal taxes. Unions may be weaker precisely because their revenue from union dues no longer gives them the political leverage they need against the obscenely wealthy corporations and executives. As much as our workers despise the use of outsourcing and immigrant labor, those business decisions are just a portion of the activities and schemes that the people who are obscenely wealthy use to increase the inequality. They too are symptoms, not root causes of the income equality problem.
THERE ARE JUST TWO REASONS FOR INCOME INEQUALITY-- GREED AND MIS-DIRECTED SOCIAL VALUES: We don't want to accept these reasons because we have no idea at all about how to abolish greed, and because we are in a state of denial with regard to the fact that each and every one of us has such distorted values.
Let's first look at greed. Has it ever occurred to you that many of our wealthiest people set their own salaries and benefit programs? Elected officials, whether they are city councilmen, county supervisors, state or federal legislators, set their own salaries. The salaries and benefits of CEO's and members of corporate boards set their own salaries because together they control enough stock to do so. So all of these wealthy folks are in a position to say, "I will have a 15 percent pay raise next year, but Joe the carpenter will have to accept a 3 percent raise so our company can stay competive. Not only that, but since the company's earnings dropped by 10 per cent last year, our CEO will only get a 10 percent raise instead of a 15 percent raise." The CEO will tell us that he earns the big bucks because he solves the big problems and takes they big risks. But if a CEO performs really badly, he is first paid, then asked to resign, and then given a juicy severence package." There is no risk for him in that, although hundreds of employees may have lost their jobs in the process. It's just as much fun for legislators. They can increase the minimum wage a few percentage points every 10 years or so while voting themselves much more lucrative increases in wages and benefits. At one time, average CEO salaries in this country were 22 times as great as the average employee salaries. Now they are 152 times as great. The workers in our country did not agree to that, but they have had to accept it. The greedy wealthy folks gave it to themselves. We have spent 40 years in this country devising legislation to outlaw bigotry. Maybe we realize that greed is as difficult to outlaw, or even more so.
The second cause, mis-directed values, is even harder for us to accept, and to deal with. An engineer spends a year designing a bridge that will take thousands of workers to and from their jobs everyday. For his one year effort, he may be paid $80,000. A heart surgeon saves the lives of 50 people one year, and is paid $200,000 for the service. A nurse helps hundreds of people to recover from illness or surgery and receives $50,000 for the effort. A lady sings ballads to an audience of two thousand people for 2 hours one evening and walks away with $2 million. A man throws a little white ball at another man holding a stick all year long and takes home $5 million. Another guy stars in one motion picture and gets $15 million. Folks groan every time I mention these examples. Just to be clear: I appreciate talent. Entertainment is an essential part of a heathy society. Singing, athletics, and acting are hard work. The final performances are good only because of the many hours of practice that precede them. These income disparities have nothing to do with tax cuts, weak unions, lack of education, outsourcing, or immigration. Instead, they are the logical results of the decisions that each of us makes with his wallet every day. Can we ever convice ourselves that a concert seat is only worth $65, and a visit to our doctor is worth $130, rather than the reverse? "The pursuit of happiness" has become so important to us that we short-change the basic fundamentals of survival to carry it out.
Are there any solutions to income inequality? Lenin had one, and it did not work. I don't have any right now. I can and do decide how many concerts and professional athletic events I attend (many fewer than I would like to), but I don't think that will affect the salaries unless everyone else does it too. We can't legislate peoples' buying habits any more than we can legislate away individual greed. Is it possible that, when it comes to income inequality, the cures are more painful than the disease? Maybe we just have to live with it. The wealthiest 1 percent of the people gave themselves a 63 percent pay raise over the last 25 years--they would sure like us to accept that, along with our own 2 percent.
Under the heading, Best Columns, the Business section of last week's magazine titled its issue of the week "What's causing income inequality?" The four columns summarized either glossed over the real causes, or missed them completely.
First, they quoted Roger Lowenstein of The New York Times Magazine, who defined the issue: "In 1979, the top 1 percent of the population collected 9% of the national income. In 2004, their share had jumped to 16 percent. Or look at it this way: Since 1979, the incomes of the bottom 20 percent of earners have grown only 2 percent, adjusted for inflation. But during that same period, the incomes of the top 20 percent have increased a whopping 63 percent...[W]hat may be the most pressing domestic issue of our time: 'Why isn't prosperity spreading more equally?'"
Next they excerpted an article by Tyler Cowen in The New York Times: "The most commonly cited culprits" are outsourcing, immigration, and greed. But those are "diversions from the main issue," and that's education--or the lack thereof...The focus should be on giving more people access to a decent education, at all levels.
Then they cite Jared Bernstein and Lawrence Mishel in Huffington post.com, who in turn point out that that the wage growth of college grads is no longer outpacing that of less educated workers. These authors blame the growing inequity on the Bush administration's tax cuts for the wealthy and on weak unions, aggressive outsourcing and offshoring. The lack of education, they say didn't cause the inequality, and while a more highly educated work force is a worthy goal, it won't reduce it.
Finally, they quote George Will in the Washington Post, who says that income inequality is not really an issue, because economic burdens and benefits have never been spread evenly. We should look instead at the fact that the economy has been growing at a robust pace with more than 8 million jobs created since the Bush tax cuts were enacted.
As I have said, the articles cited in The Week either understate the income inequality issue, or they overlook the true root causes. I will try to set the record straight.
FIRST, INCOME INEQUALITY IS A REAL ISSUE: Roger Lowenstein is right, and George Will is wrong. It's just fine that millions of jobs have been created since 2002. But you just cannot get away from the fact that roughly 5 percent of our wage earners received nothing because they are out of work, and 94 percent of the earners are struggling to keep even with inflation while that top 1 percent is receiving incomes of anywhere from $1 million to $60 million, or more. Frankly, there are very few individuals whose real contributions to society are worth anywhere near those values. The individual incomes are rightly referred to as "obscene."
SECOND, THE SUGGESTED CAUSES ARE NOT THE REAL CAUSES: Many of our wealthiest 1 percent do not even have college degrees. If I recall correctly, Bill Gates is a college dropout, as are many executives. And not many of our highest paid entertainers have college degrees. The IRS statistics on income show that since the Bush tax cuts, the wealthiest earners are in fact paying a larger portion of their total income in federal taxes. Unions may be weaker precisely because their revenue from union dues no longer gives them the political leverage they need against the obscenely wealthy corporations and executives. As much as our workers despise the use of outsourcing and immigrant labor, those business decisions are just a portion of the activities and schemes that the people who are obscenely wealthy use to increase the inequality. They too are symptoms, not root causes of the income equality problem.
THERE ARE JUST TWO REASONS FOR INCOME INEQUALITY-- GREED AND MIS-DIRECTED SOCIAL VALUES: We don't want to accept these reasons because we have no idea at all about how to abolish greed, and because we are in a state of denial with regard to the fact that each and every one of us has such distorted values.
Let's first look at greed. Has it ever occurred to you that many of our wealthiest people set their own salaries and benefit programs? Elected officials, whether they are city councilmen, county supervisors, state or federal legislators, set their own salaries. The salaries and benefits of CEO's and members of corporate boards set their own salaries because together they control enough stock to do so. So all of these wealthy folks are in a position to say, "I will have a 15 percent pay raise next year, but Joe the carpenter will have to accept a 3 percent raise so our company can stay competive. Not only that, but since the company's earnings dropped by 10 per cent last year, our CEO will only get a 10 percent raise instead of a 15 percent raise." The CEO will tell us that he earns the big bucks because he solves the big problems and takes they big risks. But if a CEO performs really badly, he is first paid, then asked to resign, and then given a juicy severence package." There is no risk for him in that, although hundreds of employees may have lost their jobs in the process. It's just as much fun for legislators. They can increase the minimum wage a few percentage points every 10 years or so while voting themselves much more lucrative increases in wages and benefits. At one time, average CEO salaries in this country were 22 times as great as the average employee salaries. Now they are 152 times as great. The workers in our country did not agree to that, but they have had to accept it. The greedy wealthy folks gave it to themselves. We have spent 40 years in this country devising legislation to outlaw bigotry. Maybe we realize that greed is as difficult to outlaw, or even more so.
The second cause, mis-directed values, is even harder for us to accept, and to deal with. An engineer spends a year designing a bridge that will take thousands of workers to and from their jobs everyday. For his one year effort, he may be paid $80,000. A heart surgeon saves the lives of 50 people one year, and is paid $200,000 for the service. A nurse helps hundreds of people to recover from illness or surgery and receives $50,000 for the effort. A lady sings ballads to an audience of two thousand people for 2 hours one evening and walks away with $2 million. A man throws a little white ball at another man holding a stick all year long and takes home $5 million. Another guy stars in one motion picture and gets $15 million. Folks groan every time I mention these examples. Just to be clear: I appreciate talent. Entertainment is an essential part of a heathy society. Singing, athletics, and acting are hard work. The final performances are good only because of the many hours of practice that precede them. These income disparities have nothing to do with tax cuts, weak unions, lack of education, outsourcing, or immigration. Instead, they are the logical results of the decisions that each of us makes with his wallet every day. Can we ever convice ourselves that a concert seat is only worth $65, and a visit to our doctor is worth $130, rather than the reverse? "The pursuit of happiness" has become so important to us that we short-change the basic fundamentals of survival to carry it out.
Are there any solutions to income inequality? Lenin had one, and it did not work. I don't have any right now. I can and do decide how many concerts and professional athletic events I attend (many fewer than I would like to), but I don't think that will affect the salaries unless everyone else does it too. We can't legislate peoples' buying habits any more than we can legislate away individual greed. Is it possible that, when it comes to income inequality, the cures are more painful than the disease? Maybe we just have to live with it. The wealthiest 1 percent of the people gave themselves a 63 percent pay raise over the last 25 years--they would sure like us to accept that, along with our own 2 percent.
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