Ship of Fools: Taxes – where inequality is good

Thread: Taxes – where inequality is good Board: Oblivion / Ship of Fools.

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Posted by Hawk (# 14289) on :

One of the questions brought up in the US campaigning is the ethics of taxation. The liberal watchword is that those who have more should give more. The counter-argument is that this is unfair. Why should someone be punished for working harder, and earning more than others?

This got me thinking about the ethics of taxation in general, and what principles we can use to justify the fairness or otherwise of proportional taxation as opposed to a fixed tax. My thoughts are below.

Point One: Hypothetically, assuming a situation where wages are always egalitarian in allocation, would proportional taxation still be ethical? If hypothetically, you work really hard and get paid accordingly, while your neighbour chooses to work half as hard, and get' paid accordingly, is it still ethical for someone to demand you give half your money to your neighbour?

Point Two: are wages always unfairly proportioned according to exertion, or talent. The redistribution argument claims that those who work hardest in life aren’t always the one who get paid most, and wages are allocated according to unfair classist principles in part. If you’re born into the right family, in the right area, with the right schools and opportunities, you can reach for the top-paid jobs. If not, then however hard you work you’ll still be poor and struggling. This may be true for many. But is this fully correct for everyone?

Point three: Assuming that Point One is answered No, and that point two is not true in 100% of cases – and taking into consideration that there is currently no clause in the tax law that factors in how a citizen comes by their income, how do we justify blanket proportional taxation? We do not know and the tax law does not care, if Mr Moneybags got his wealth by being born into the right family, or by struggling all his life, sacrificing, scrimping and saving. And we don’t know whether Mr Benefits got into his financial straits through working as hard as possible but never having the opportunities or luck to get above the poverty line, or whether he just doesn't care and is happy to smoke pot and watch Oprah than join in the capitalist rat race.

If you accept that some people, however few, are poor by choice only or mainly, and some people are rich by hard work and personal success only or mainly, and that the current system doesn’t discriminate between these people and others, then you must answer Yes to point one. As an example, it must be just as ethical to take half the income from hard-working, successful Mr Bootstraps, and give it to lazy refusenik Mr Feckless, as it is to take it from spoilt rich kid Mr Silverspoon and give it to hardworking, but unfortunate Joe Detroit who’s never missed a day of work in his life. How do you justify this though? What ethical principles can be used?

Is it enforced charity? Is it social engineering in order to level out wealth and prevent hoarding of money by anyone, no matter how hard working (which is pretty communist - though arguably benefical)? Is it just because the rich are in the minority and the taxation of a society should benefit the majority? What do you think?

Or have I got the argument wrong? You can deny that there is ever such a person as Mr Feckless, since no one chooses to be poor, or such a person as Mr Bootstraps, as no one picks themselves up solely by their own hard work – everyone in some way takes advantage of opportunities given to them by others which are not their own choice. But is this true in every single case though? It’s a big question. And how much proportion is given to personal responsibility in this question? Surely individuals have some ability to work themselves out of poverty in some cases? Social and circumstantial factors are not all-defining of a person’s fate

Posted by Crœsos (# 238) on :

quote:
Originally posted by Hawk:
Point One: Hypothetically, assuming a situation where wages are always egalitarian in allocation, would proportional taxation still be ethical? If hypothetically, you work really hard and get paid accordingly, while your neighbour chooses to work half as hard, and get' paid accordingly, is it still ethical for someone to demand you give half your money to your neighbour?

As long as you're working purely hypothetically, why not just stipulate the hypothetical fairness or unfairness or whatever the preferred answer is supposed to be and be done with it? The great thing about hypothteticals is you can hypothesize whatever you want.

quote:
Originally posted by Hawk:
Assuming that Point One is answered No, and that point two is not true in 100% of cases – and taking into consideration that there is currently no clause in the tax law that factors in how a citizen comes by their income, how do we justify blanket proportional taxation?

A couple points. Proportional (or even progressive) taxation can be "justified" in the same way any other government policy can be justified that isn't a perfect fit for "100% of cases" (including hypothetical cases, apparently). The state enacts policies it considers to be the best fit available to the existing situation even if some unfairness may exist in marginal cases.

Secondly, some tax codes (the U.S. in particular) do take into consideration "how a citizen comes by their income". Most specifically, income from capital gains (income earned from having money) is taxed at a different (lower) rate than income from wages (income earned from doing work). Most people would claim that's backwards, but the U.S. Congress (made up predominantly of those whose income is mostly in the form of capital gains) has decided that this is "the best fit available to the existing situation", which illustrates how subjective such judgements can be.

Posted by no prophet (# 15560) on :

Since most of the people who have the largest incomes did not work to get it but either inherited it or made it from investment, I'm rather unsympathetic about the argument that rich people work harder. Sure there are those lucky few who made the right decision based on luck, timing, and hard work, but there is a myth of the self-made millionaire.

I'm also not going to accept that corporations, which apparently 'people' in some jurisdictions, work harder than people and sometimes dodge taxes nearly completely.

Posted by Jay-Emm (# 11411) on :

Taking your hypothetical, case one with a proportional income (and working twice as hard).
And only considering income-tax.

If they pay proportionately the 'harder worker' is still twice as well off.

If they pay flat the 'harder worker' is vastly more than twice as better off.

In a simplified GB's system where tax is proportional on your surplus after necessities the harder worker is vastly better off for luxury money, and better off but not twice as well off in general.

Regarding point 2 (exertion). It might well be that there are many people earning twice as much as you who are doing twice as much (similar) work if e.g. your working part time.
But realistically most people work from 4 to 12 hours a day (or are unemployed). No-one for more than 24. So this would limit you to 3 times the pay from hours.

Your 'half your money' claim is practically impossible for less than 11 times salary. So it means you have to be constantly almost 4 times as productive for a long day. Which is pretty near impossible (until we allow talent to mess things up)

In the real world, the basic band of pay goes from £8,000 to £50,000 with a tax rate of 20% from the difference.. So assuming all these are exertion/talent we can see what the actual demands on the hard working are.

Posted by Schroedinger's cat (# 64) on :

This is UK perspective, which is different, but might give a useful insight.

We have proportional taxation, to an extent. This means that people who are earning very little are not expected to contribute to the running of the country, while those who do earn significantly are expected to contribute. I pay higher rate tax, which is fine, because I earn well, so I should be making a greater proportional contribution.

The truth is that the graduation is not punative. If you are earning 100K a year, after taxation, you are still very well off. End of.

What does get me is that the higher earners actually tend to pay less tax, because they avoid or evade it. I am convinced that, if everyone payed the taxes that they should on all of their income, the entire levels of taxation would be lower, so everyone would pay less. JK Rowlings recent comments about being happy to pay UK tax is an example to everyone.

Posted by Dafyd (# 5549) on :

quote:
Originally posted by Hawk:
Point One: Hypothetically, assuming a situation where wages are always egalitarian in allocation, would proportional taxation still be ethical? If hypothetically, you work really hard and get paid accordingly, while your neighbour chooses to work half as hard, and get' paid accordingly, is it still ethical for someone to demand you give half your money to your neighbour?

Before I address the actual point, a quibble about your phrasing:
Most redistributive taxation doesn't consist of taking money from one person and giving it to another less well-off person. Yes, most tax spending is spent as safety net benefits, but that's given on the basis of need rather than on the basis of being less well-off. Much of the rest is used towards things that are of benefit to both of you - roads, police, defence spending, backing the currency, health services, and so on.

Addressing the point: if two people are joint purchasing something that they both use then the fair split would be 50:50.

That said, do we really want a society that encourages anyone to work longer hours than is healthy for them or productive? Someone who works twenty hours a week (without also doing childcare or other non-work productive activities) may deserve only half as much as someone who does forty, but that doesn't mean that someone who works sixty deserves half as much again.

quote:
Point Two: are wages always unfairly proportioned according to exertion, or talent.

I'd say they're unfairly proportioned on the basis of effort sufficiently often that it's not a question that the law need concern itself with. Nor would I trust the law to concern itself with it - attempts to make divisions into the deserving and undeserving poor quickly become problematic and wide open to abuse. Also, it's not immediately obvious that talent is relevant to arguments based on justice. A lot of unpleasant and hard work jobs are low paid precisely because all the people with the talent are doing more pleasant jobs. But the people with low talent still need to eat, travel to work, relax, have a stake in society, etc.

Posted by Soror Magna (# 9881) on :

quote:
Originally posted by Hawk:
... The counter-argument is that this is unfair. Why should someone be punished for working harder, and earning more than others? ...

There is no connection between making lots of money and working hard. In fact, the truly wealthy don't work at all, because they are living off trust funds, dividends, rentals, etc.
Conversely, binners in my city work long hours under the most awful conditions and make only a few dollars a day.

Class war, you say? Too late. The rich won, and they have some nerve claiming they are are being "punished" when they've never had it so good and the rest of us are working harder and making less money than our parents.

Posted by orfeo (# 13878) on :

quote:
Originally posted by Hawk:
Why should someone be punished for working harder, and earning more than others?

Others have already pointed out the massive assumption involved in linking the first half of this sentence with second, but let me echo it again.

I also find it fascinating that anyone sees taxation as "punishment". It takes a certain mindset to see it that way, rather than as a means of paying for a whole range of functions and services.

And as a matter of law here in Australia, a tax and a penalty are different things. The taxation power can't be used to support something that is in fact a punishment.

Posted by no prophet (# 15560) on :

The question of who gets to spend the taxes is another one isn't it? Does it really ultimately matter who pays more or less? Invariably it's very rich people who pretend to represent the average person isn't it? The current pair of millionaires running for USA president are not average people are they? You'd be hard pressed to find anyone of our western political leaders or want-to-be leaders who actually believed that it is difficult for a rich person to get into heaven.

This quote comes to mind.

quote:
Will Rogers

The money was all appropriated for the top in hopes that it would trickle down to the needy. Mr Hoover didn't know that money trickled up. Give it to the people at the bottom and the people at the top will have it before night, anyhow. But at least it will have passed through the poor fellow's hands.

Posted by Marvin the Martian (# 4360) on :

quote:
Originally posted by orfeo:
I also find it fascinating that anyone sees taxation as "punishment".

It's paying a higher percentage than someone else that's the punishment, not the tax per se.

quote:
It takes a certain mindset to see it that way, rather than as a means of paying for a whole range of functions and services.

If you have a tax system that says "we'll take 20p out of every pound that someone earns in order to pay for our functions and services", then that's fair enough. Everyone pays according to their ability to pay - those on lower wages pay less than those on higher ones in due proportion.

If, on the other hand, you have a system that says "some people get the functions and services for free, and other people will pay more tax to subsidise them", that's less fair isn't it?

Posted by orfeo (# 13878) on :

quote:
Originally posted by Marvin the Martian:

quote:
Originally posted by orfeo:
I also find it fascinating that anyone sees taxation as "punishment".
It's paying a higher percentage than someone else that's the punishment, not the tax per se.

quote:
It takes a certain mindset to see it that way, rather than as a means of paying for a whole range of functions and services.
If you have a tax system that says "we'll take 20p out of every pound that someone earns in order to pay for our functions and services", then that's fair enough. Everyone pays according to their ability to pay - those on lower wages pay less than those on higher ones in due proportion.

If, on the other hand, you have a system that says "some people get the functions and services for free, and other people will pay more tax to subsidise them", that's less fair isn't it?

I don't think that's valid. There's a certain amount that people need in order to live at a given standard, and that doesn't change in absolute terms just because it changes in terms of a percentage of your income.

We have a sliding scale in Australia that means a certain amount of income per year isn't taxed at all, then the next chunk is taxed at a certain rate, then the next chunk is taxed at a higher rate. I can't recall how many different rates there are now, as in recent years the number of tiers was decreased considerably. There many in fact be only 2 or 3 tiers now.

But it makes perfect sense to me, because the reality is that I need a certain amount of income to live at a decent standard, and the income after that is for the purpose of luxury. If more is taken from the 'luxury' chunk, it will still hurt me far less than taking from someone who doesn't even have a 'luxury' chunk to play with.

[ 30. October 2012, 16:06: Message edited by: orfeo ]

Posted by Karl: Liberal Backslider (# 76) on :

quote:
Originally posted by Marvin the Martian:

quote:
Originally posted by orfeo:
I also find it fascinating that anyone sees taxation as "punishment".
It's paying a higher percentage than someone else that's the punishment, not the tax per se.

quote:
It takes a certain mindset to see it that way, rather than as a means of paying for a whole range of functions and services.
If you have a tax system that says "we'll take 20p out of every pound that someone earns in order to pay for our functions and services", then that's fair enough. Everyone pays according to their ability to pay - those on lower wages pay less than those on higher ones in due proportion.

Except they don't - someone on £12,000 a year cannot afford to lose 20% of that; they have far less ability to pay 20% than someone on £120,000

quote:
If, on the other hand, you have a system that says "some people get the functions and services for free, and other people will pay more tax to subsidise them", that's less fair isn't it?

Maybe, but it's the only way it's going to actually work, for reasons I just outlined.

Posted by tclune (# 7959) on :

quote:
Originally posted by Marvin the Martian:

quote:
Originally posted by orfeo:
I also find it fascinating that anyone sees taxation as "punishment".
It's paying a higher percentage than someone else that's the punishment, not the tax per se.

FWIW, this is simply not a property of progressive taxation. It may is a property of tax deductions, but not of progressive taxation. Under a progressive system with no deductions, everyone pays the same amount on the first, say, $25K, everyone pays the same amount on the next $25K, etc. It's just that, at some point, most folks don't have the next next $25K. If they did, their progressive tax burden would be the same as anyone who earned that amount. So, in reality, to address the question of fairness in progressive taxation one must first address the question of the fairness of progressive income, as it were.

--Tom Clune

Posted by Crœsos (# 238) on :

quote:
Originally posted by tclune:

quote:
Originally posted by Marvin the Martian:
It's paying a higher percentage than someone else that's the punishment, not the tax per se.
FWIW, this is simply not a property of progressive taxation. It may is a property of tax deductions, but not of progressive taxation.

This seems to be beside the point of the OP, which was about the unfairness of any type of proportional tax, as opposed to a fixed amount tax scheme.

quote:
Originally posted by Hawk:
This got me thinking about the ethics of taxation in general, and what principles we can use to justify the fairness or otherwise of proportional taxation as opposed to a fixed tax.

In other words, Hawk seems to be making the argument that even a fixed percentage tax (based on income) is "unfair", while a fixed amount tax policy would be "fair".

Posted by no prophet (# 15560) on :

I did a quick calculation of stated tax rate and real tax rate for myself. I am self employed, owning one company, partner in another, and we closed a third last year.

The stated rate is on the salary I pay myself as a self employed person. It is the product of good advice from an accountant and financial planner (whose fees are 100% deductable as a business expense by the way).

Thus my personal tax rate on salary is a blend of the 1st and 2nd tiers of progressive taxation in Canada, so somewhere around 35% post deductions. I could have paid myself more out of company as salary, but this would bump the marginal tax rate to near 50% so I dodge the tax and leave it in the company.

Companies can retain $250K at the lowest rates of taxation for companies, which is a little less than the lowest rate for individuals. So there's an incentive to leave money in the company. Plus I can deduct all sorts of interesting things from the company's income, more so than as an individual, lowering the amount it reports to the gov't for taxation. Last year, my company paid a real tax rate of just under 13%. Is it fair? I guess it doesn't matter, because it is legal.

Further the company can decide (well it's really me who decides) to not give money out as salary but as dividends or as capital gains. The interesting tax dodge is that capital gains are 50% taxable. With the second dodge, that I can pay dividends to any share holder, like unemployed children. Thus is it possible to take out the 50% of non-taxable capital gains with no tax at all, and defer the 50% that is taxed, so no tax payable.

Thus, as a relatively 'rich' person, my actual rates of taxation are actually in the vicinity of 10%.

Posted by Jane R (# 331) on :

Schroediger's Cat, on UK taxation:

quote:
This means that people who are earning very little are not expected to contribute to the running of the country...

Not true. Everyone pays VAT. Any poor people who have to use a car to get to work also pay petrol tax and road tax (if they use public transport they pay it indirectly through their bus/train fares). The TV licence fee is effectively a tax. Unless they're on income support or have a medical exemption certificate they also have to pay prescription charges.

There's more to tax than income tax. VAT hits the poor proportionately harder than the rich.

Posted by Amorya (# 2652) on :

quote:
Originally posted by Jane R:
There's more to tax than income tax. VAT hits the poor proportionately harder than the rich.

It's supposed to only apply to luxuries…

Although we all know that's not how it works in practice.

Posted by Dafyd (# 5549) on :

quote:
Originally posted by Marvin the Martian:
It's paying a higher percentage than someone else that's the punishment, not the tax per se.

Unless the tax rate goes over 100% it can't be called punishment without terminological inexactitude.

Posted by no prophet (# 15560) on :

My point is that income tax hits the rich less hard as well, and they pay less than they are 'supposed to' pay or are reported to pay. I think it is set up this way on pupose

Posted by Bullfrog. (# 11014) on :

Income isn't tied to hard you work. It's tied to how easy you are to replace. One might work hard to get to a position of irreplacability, but that's not the same thing, I think, as merely working hard. At least this is what I've seen in life so far.

And as posted, that's not considering inherited wealth or invested income where it's just a matter of knowing how to game the system, or just getting lucky. And even with hard work, you need some not-so-hard luck to really get ahead.

ETA: Also, when people at the top get taxed, in terms of business owners and such, don't they just pass the costs on down anyway to consumers?

[ 01. November 2012, 02:09: Message edited by: Bullfrog. ]

Posted by Doublethink (# 1984) on :

quote:
Originally posted by no prophet:
Is it fair? I guess it doesn't matter, because it is legal.

Essentially, that view is the cause of the current global economic crisis. As in - if it maximises profit/personal gain, and its legal, nothing else matters.

Posted by mousethief (# 953) on :

quote:
Originally posted by Bullfrog.:
Income isn't tied to hard you work. It's tied to how easy you are to replace.

This is a brilliant insight.

Posted by no prophet (# 15560) on :

quote:
Originally posted by Bullfrog.:
ETA: Also, when people at the top get taxed, in terms of business owners and such, don't they just pass the costs on down anyway to consumers?

Yes. What the business does is see what portion of the increased costs can be passed on. which if a small amount, 100% immediately. If a large amount, in progressive steps of amounts, or in change of size of the thing sold, whether this is a tangible product, billing for time, or an added fee. It is also possible to over represent the added costs and increase profits via this.

Posted by Bullfrog. (# 11014) on :

quote:
Originally posted by no prophet:

quote:
Originally posted by Bullfrog.:
ETA: Also, when people at the top get taxed, in terms of business owners and such, don't they just pass the costs on down anyway to consumers?
Yes. What the business does is see what portion of the increased costs can be passed on. which if a small amount, 100% immediately. If a large amount, in progressive steps of amounts, or in change of size of the thing sold, whether this is a tangible product, billing for time, or an added fee. It is also possible to over represent the added costs and increase profits via this.

This seems to imply a double tax to consumers.

Posted by Ruudy (# 3939) on :

Misread title as "Texas - where inequality is good"

Posted by mousethief (# 953) on :

quote:
Originally posted by no prophet:

quote:
Originally posted by Bullfrog.:
ETA: Also, when people at the top get taxed, in terms of business owners and such, don't they just pass the costs on down anyway to consumers?
Yes. What the business does is see what portion of the increased costs can be passed on. which if a small amount, 100% immediately. [etc]

I don't understand this. If they can raise the prices without affecting the bottom line, why don't they raise them now, before the costs go up? Aren't the prices supposed to be optimized to get the greatest possible return, to where if you raised them you'd lose customers and lose revenue, and if you lowered them, you wouldn't gain enough customers to make up for lost revenue?

If there is still room to raise prices and have that raise revenue, and the company has not already done so, then what you're saying is that this business is so stupid they don't know how to set their prices.

Posted by Ruudy (# 3939) on :

quote:
Originally posted by mousethief:

quote:
Originally posted by no prophet:

quote:
Originally posted by Bullfrog.:
ETA: Also, when people at the top get taxed, in terms of business owners and such, don't they just pass the costs on down anyway to consumers?
Yes. What the business does is see what portion of the increased costs can be passed on. which if a small amount, 100% immediately. [etc]
I don't understand this. If they can raise the prices without affecting the bottom line, why don't they raise them now, before the costs go up? Aren't the prices supposed to be optimized to get the greatest possible return, to where if you raised them you'd lose customers and lose revenue, and if you lowered them, you wouldn't gain enough customers to make up for lost revenue?

If there is still room to raise prices and have that raise revenue, and the company has not already done so, then what you're saying is that this business is so stupid they don't know how to set their prices.

You are correct. Microeconomics says that product pricing is a given set by supply and demand in the market, not the costs of production. If the market price dips below the costs of production, production by the marginal cost producer ceases, supply goes down and price is buoyed.

[ 02. November 2012, 03:14: Message edited by: Ruudy ]

Posted by Jade Constable (# 17175) on :

quote:
Originally posted by Jane R:
Schroediger's Cat, on UK taxation:
quote:
This means that people who are earning very little are not expected to contribute to the running of the country...
Not true. Everyone pays VAT. Any poor people who have to use a car to get to work also pay petrol tax and road tax (if they use public transport they pay it indirectly through their bus/train fares). The TV licence fee is effectively a tax. Unless they're on income support or have a medical exemption certificate they also have to pay prescription charges.

There's more to tax than income tax. VAT hits the poor proportionately harder than the rich.

EXACTLY. I am a student who was previously on Income Support when homeless/vulnerably housed so I haven't paid income tax for some time. I was still paying tax! When your food budget is £10 a week, paying 20% VAT on food is a huge tax. Not to mention the VAT on women's sanitary products which are very much essentials and not luxuries...

Posted by Ruudy (# 3939) on :

What irks me is the argument by investors and business owners that capital gains or dividends should be taxed at a lower rate than ordinary income. Their argument usually runs along the lines of "We took risk. We bet the farm to get this company going and therefore should be taxed at a lower rate."

I find this argument crazy weak. Last I checked we had bankruptcy laws that kept you out of debtor prison. The risk for the business owner is the same as it is for everyone: that you might end without income, without health insurance and having lost your home and looking for a job. If your business goes bust that's the risk your line workers take. Your prospects at failure are no worse than those of your employees. Everybody's risk is the same from the owner down to the line worker.

It's the lower tax rate on capital gains and carried interests that is the reason Romney paid only 13% of his income in taxes while Buffet's secretary had to pay a higher percent than Buffet.

It's madness and the people know it's madness. Why they continue to allow congress to keep it this way is beyond me. To me it is one of the greatest inequities of our society today.

Posted by Ruudy (# 3939) on :

quote:
Originally posted by Jade Constable:

quote:
Originally posted by Jane R:
Schroediger's Cat, on UK taxation:
quote:
This means that people who are earning very little are not expected to contribute to the running of the country...
Not true. Everyone pays VAT. Any poor people who have to use a car to get to work also pay petrol tax and road tax (if they use public transport they pay it indirectly through their bus/train fares). The TV licence fee is effectively a tax. Unless they're on income support or have a medical exemption certificate they also have to pay prescription charges.

There's more to tax than income tax. VAT hits the poor proportionately harder than the rich.
EXACTLY. I am a student who was previously on Income Support when homeless/vulnerably housed so I haven't paid income tax for some time. I was still paying tax! When your food budget is £10 a week, paying 20% VAT on food is a huge tax. Not to mention the VAT on women's sanitary products which are very much essentials and not luxuries...

VAT and US sales taxes are REGRESSIVE taxation. They are an egregious form of taxation.

Posted by Dave W. (# 8765) on :

quote:
Originally posted by Ruudy:
Everybody's risk is the same from the owner down to the line worker.

When a business fails, both workers and owners lose their source of income, but owners also lose all the money they had invested in the business. This may not justify a different tax treatement, but it's a real difference in risk.

Posted by mousethief (# 953) on :

quote:
Originally posted by Dave W.:

quote:
Originally posted by Ruudy:
Everybody's risk is the same from the owner down to the line worker.
When a business fails, both workers and owners lose their source of income, but owners also lose all the money they had invested in the business. This may not justify a different tax treatement, but it's a real difference in risk.

And in times of high unemployment the workers go on welfare or become dumpster-divers, and the owners dust themselves off, and start a new firm.

[ 02. November 2012, 06:50: Message edited by: mousethief ]

Posted by Dafyd (# 5549) on :

quote:
Originally posted by Dave W.:

quote:
Originally posted by Ruudy:
Everybody's risk is the same from the owner down to the line worker.
When a business fails, both workers and owners lose their source of income, but owners also lose all the money they had invested in the business.

We're frequently told that people without work should move to places where there is work. If they then lose their job, they've then lost whatever they invested by moving to their current location. So either government needs to invest in bringing work to where the workers are and support the workers' stability; or else the workers are indeed losing their investment.

Posted by Dave W. (# 8765) on :

quote:
Originally posted by mousethief:

quote:
Originally posted by Dave W.:

quote:
Originally posted by Ruudy:
Everybody's risk is the same from the owner down to the line worker.
When a business fails, both workers and owners lose their source of income, but owners also lose all the money they had invested in the business. This may not justify a different tax treatement, but it's a real difference in risk.
And in times of high unemployment the workers go on welfare or become dumpster-divers, and the owners dust themselves off, and start a new firm.

And when unemployment is low, the workers find new jobs without too much trouble - but in either case, the owners have lost everything they put into the business. (And having lost whatever savings they put in the business, it's not at all obvious they'll find it easy to start a new one.*)

Again - not necessarily an argument for favorable tax treatment. The owners also get the profits if the business is successful; you could argue that that's quite enough to compensate them for the risk.

* I suspect we're writing with very different images of "owners" in mind; if you think of the owners of a struggling mom and pop corner store in an otherwise thriving city, does their increased risk vs. that of their employees seem more believable?

Posted by Marvin the Martian (# 4360) on :

quote:
Originally posted by mousethief:
I don't understand this. If they can raise the prices without affecting the bottom line, why don't they raise them now, before the costs go up? Aren't the prices supposed to be optimized to get the greatest possible return, to where if you raised them you'd lose customers and lose revenue, and if you lowered them, you wouldn't gain enough customers to make up for lost revenue?

Thing is, if one company chose to put its prices up for no reason its competitors could - and would - keep their low and hoover up its disaffected customers. Unless all the companies are running a cartel or otherwise in cahoots, of course - but there are laws about that sort of thing.

But when tax goes up it goes up by the same amount for every company, and that means that all of them can raise their prices by that amount safe in the knowledge that their competitors will be doing exactly the same thing.

Posted by Ruudy (# 3939) on :

quote:
Originally posted by Dave W.:

quote:
Originally posted by Ruudy:
Everybody's risk is the same from the owner down to the line worker.
When a business fails, both workers and owners lose their source of income, but owners also lose all the money they had invested in the business. This may not justify a different tax treatement, but it's a real difference in risk.

According to free market economic orthodoxy you are correct. But I would disagree.

First. I think we should look at true risk. True risk is more about absolute states of possible outcome. like where you can end up and what condition you'll be in (without a job, without income, without a house, without your family). True life risk is not about how high you were before you lost everything.

Furthermore, most entrepreneurs start businesses with large amounts of other peoples money - not just their own. Often the business owners' pool of disposable capital is large enough that they are investing amounts which they can reasonably afford to lose. Most investments are a passive investment where the investor continues working at their regular job and is not taking any risk of losing their ordinary income. Yes owners and investors may lose disposable investment money but that is no greater risk than a line worker investing his life in a company (barely able to pay his rent and feed his kids) only one day to be made redundant. The line worker and the entrepreneur who loses his business are no worse off than one another.

Second. The fact that business owners are losing all the money they had invested means [i]de facto[/] that the business owner has/had surplus funds to invest. These funds came from either: inheritance or disposable income. There is NO valid reason I can see that investment income should be taxed at a rate lower than Buffet's secretary has to pay on her ordinary income. None.

Capital gains and dividends and interest should all be taxed progressively at the same rate as any other ordinary income.

quote:
Originally posted by Crœsos:
Most specifically, income from capital gains (income earned from having money) is taxed at a different (lower) rate than income from wages (income earned from doing work). Most people would claim that's backwards, but the U.S. Congress (made up predominantly of those whose income is mostly in the form of capital gains) has decided that this is "the best fit available to the existing situation", which illustrates how subjective such judgements can be.

I suspect Croesos is correct about the real reason for the greatest current tax inequity.

Many of Congress are also lawyers which is also why I am not holding my breath for tort reform as a component of health care reform in this country.

In the end though, it is the American people who are responsible for the inequities of the tax code. It is we who keep electing the same type of cronies into office and then expecting positive change.

Posted by Eliab (# 9153) on :

quote:
Originally posted by tclune:
So, in reality, to address the question of fairness in progressive taxation one must first address the question of the fairness of progressive income, as it were.

I think that's exactly right. If we see income inequality as essentially a question of organising society's resources (do ‘we' generally benefit from the social arrangements that allow Mr Silverspoon to accumulate all that cash, or might it be put to better use if he were required to pay more?) then what appears to be a fair tax will be very different than if our starting point is that someone's income is genuinely their own property (albeit property from which we can legitimately ask them to make a contribution to the common good).

At the moment, and in the UK, social custom and law is that my income belongs to me. It is NOT a share of a wider social pot of money of which share I am the allocated custodian, it is MINE. While that system remains basically a private-property model than a socialist one, the question of what is a fair contribution for me to make ought to start with the principle that society does not have a blanket moral right to appropriate my stuff according to best economic practice. The tax system should start by respecting my property rights, and treating me fairly and proportionately with everyone else. And it makes no difference to that whether I got my income by skill, hard work, luck, inheritance, gift or whatever, so long as it is genuinely my property. It is morally right to require me, as a good citizen, to contribute to the society of which I am a part and whose institutions help to secure my property, but it would not be morally right without a fundamental change of principle in the way society is organised to tax me on the basis that it is wrong for me to have as much as I do.

Posted by Ruudy (# 3939) on :

quote:
Originally posted by Dave W.:
The owners also get the profits if the business is successful; you could argue that that's quite enough to compensate them for the risk.

Thank you Dave. That is the real point isn't it. The state should not be in the business of compensating for perceived risk taking, let the market do it.

Posted by no prophet (# 15560) on :

quote:
Originally posted by Ruudy:
Thank you Dave. That is the real point isn't it. The state should not be in the business of compensating for perceived risk taking, let the market do it.

Except if you are a banker or investment "professional" who gambled in sub-prime mortgages, or if you are a auto manufacturer who can't make cars that people want to buy, or if you're an oil company which needs a war somewhere to install the gov't for you that will allow you to drill and export without leaving any monies in the country, or a manufacturer which gets tax abatement for the promise of creating jobs, or an industry where input tax credits mean you can evade taxes partly or entirely, or if you can off-shore profits so they are invisible to the tax system.

Posted by tclune (# 7959) on :

quote:
Originally posted by Eliab:
It is morally right to require me, as a good citizen, to contribute to the society of which I am a part and whose institutions help to secure my property, but it would not be morally right without a fundamental change of principle in the way society is organised to tax me on the basis that it is wrong for me to have as much as I do.

Where I disagree is on the notion that society actually is organized from the individual up. We are as thoroughly social animals as are ants and bees. You didn't create the language that you speak, the arithmetic with which you count your income, the money that is your income, the materials that comprise your goods, or just about anything else you can name. The notion that you are the locus of value is sociopathic. The extent to which you are anything of any interest above and beyond the sum total of humanity around you is so small as to be imperceptible. That isn't an ideological assertion: it is a blindingly obvious fact of life.

--Tom Clune

Posted by Marvin the Martian (# 4360) on :

If that's so obvious, why does virtually everyone in the entire world have (and agree with) the concept of personal property?

Posted by Ruudy (# 3939) on :

My thoughts exactly.

Posted by Eliab (# 9153) on :

quote:
Originally posted by tclune:
Where I disagree is on the notion that society actually is organized from the individual up.

I didn't say it was. I said that it recognises private property as real. Which it does.

That might be a legal fiction, but it is nonetheless a fiction that the laws of such countries as the US and UK actually employs (and shows no immediate prospect of changing.

quote:
We are as thoroughly social animals as are ants and bees.

No we aren't. We're social in a completely different way.

quote:
You didn't create the language that you speak, the arithmetic with which you count your income, the money that is your income, the materials that comprise your goods, or just about anything else you can name.

And? With the possible exception of money, neither did the government. And that one exception, money, was created for the purpose of allowing individuals to own it - it is the embodiment of the principle of private ownership, not the refutation of it.

quote:
The notion that you are the locus of value is sociopathic. The extent to which you are anything of any interest above and beyond the sum total of humanity around you is so small as to be imperceptible. That isn't an ideological assertion: it is a blindingly obvious fact of life.

You exaggerate to make a point. It is not at all obvious that individuals have no or imperceptible distinct value. All of our important relationships are based on the contrary observation.

The sound point underlying this is that no one does, or ever could, stand apart from or free of debt to the society in which they live. That's quite true. And it may well be possible to construct a fair and happy society (as distinct from a 'like ants and bees' SF dystopia) in which that is the foundational truth, and private ownership has no place. But that would be a fundamental change from the society I live in, which does in fact allow be to claim that this is mine.

And therefore a tax system which fails asks "how much of society's money should we let you keep" rather than "how much of your money is it fair for you to contribute" would right now be unjust, because it is inconsistent with accepted principles. Taxation with practical equality of outcome as the goal requires FIRST a change of principle so that we start to see property as a share of resources and not as privately owned.

Which is what I thought you were saying, and why I started by saying that I agreed with you.

(I'm centrist rather than right wing in my politics, BTW. I think that the private property model is what we're stuck with barring a revolution, which rules out any redistributive model as unfair under established principles. Under the private property model I'd prefer a tax system based on socially responsible citizenship to one based on sociopathic libertarianism.)

Posted by leo (# 1458) on :

quote:
Originally posted by Marvin the Martian:
If that's so obvious, why does virtually everyone in the entire world have (and agree with) the concept of personal property?

Original sin - selfishness and greed.

Posted by mousethief (# 953) on :

quote:
Originally posted by Ruudy:
Thank you Dave. That is the real point isn't it. The state should not be in the business of compensating for perceived risk taking, let the market do it.

I've never understood this blind worship of "the market" or the idea that what "the market" dictates is what is right and best for society as a whole, or what society should automatically accept. "The market" would have 99.999% of us in grinding poverty and 0.001% in unfathomable luxury.

Posted by no prophet (# 15560) on :

quote:
Originally posted by Marvin the Martian:
If that's so obvious, why does virtually everyone in the entire world have (and agree with) the concept of personal property?

I would change "virtually everyone" to "virtually everyone except hunter-gatherers and their descendants who've not lost the connection to the environment". There is, from the perspective of an aboriginal person, an implication of imposition of ideas of property so deeply imbedded into the psyche of non-aboriginal peoples that it will usually seem ridiculous to understand that land and personal effects are merely locations and not owned. The concept has a partial expression in Canadian laws. A person with "treaty status" has the freedom to wander, to hunt and to fish, to camp, virtually anywhere at any time. It is also not possible to own a body of water, a stream, or the shore of a lake etc. All wildlife are also not property of anyone.

Posted by tclune (# 7959) on :

quote:
Originally posted by leo:

quote:
Originally posted by Marvin the Martian:
If that's so obvious, why does virtually everyone in the entire world have (and agree with) the concept of personal property?
Original sin - selfishness and greed.

As good an answer as any, I suppose. ISTM that we are such recipients of grace -- both Divine and human -- that we would reasonably be expected to live in a constant state of gratitude. In fact, it is extremely rare for us to so much as acknowledge our debts. I don't know about you, but I am much more likely to hear some low-life say that no-one ever gave them anything than to hear an equally unsolicited and heartfelt expression of thanks.

--Tom Clune

Posted by Eliab (# 9153) on :

quote:
Originally posted by leo:

quote:
Originally posted by Marvin the Martian:
If that's so obvious, why does virtually everyone in the entire world have (and agree with) the concept of personal property?
Original sin - selfishness and greed.

And yet "Thou shalt not steal" made it into the big ten. As well as "Thou shalt not covet...anything that is thy neighbour's".

Either the decalogue is 20% redundant, because those commandments have no content if your neighbour owns nothing to be stolen or coveted, or there is a concept of private property which is consistent being fair, honest, not greedy, not selfish and not envious.

Posted by Ruudy (# 3939) on :

quote:
Originally posted by mousethief:

quote:
Originally posted by Ruudy:
Thank you Dave. That is the real point isn't it. The state should not be in the business of compensating for perceived risk taking, let the market do it.
I've never understood this blind worship of "the market" or the idea that what "the market" dictates is what is right and best for society as a whole, or what society should automatically accept. "The market" would have 99.999% of us in grinding poverty and 0.001% in unfathomable luxury.

No blind worship of the market here. We are talking specifically about whether the state should compensate for risk taking by lowering taxes on returns from risk taking. With regard to putting savings or investment capital at risk, the market supplies returns for taking those risks, so I see no need for further assistance/tax incentives from the state.

Posted by Gwai (# 11076) on :

quote:
Originally posted by Eliab:
Either the decalogue is 20% redundant, because those commandments have no content if your neighbour owns nothing to be stolen or coveted, or there is a concept of private property which is consistent being fair, honest, not greedy, not selfish and not envious.

On the other hand, there are other rules in the bible that are apparently there because humans need them. There's the whole bit about how Moses allowed divorce because your hearts were hard. Perhaps private property is similarly just around because of our hard hearts.

Posted by Jay-Emm (# 11411) on :

quote:
Originally posted by Dave W.:
....
I suspect we're writing with very different images of "owners" in mind; if you think of the owners of a struggling mom and pop corner store in an otherwise thriving city, does their increased risk vs. that of their employees seem more believable?

Possibly, although if they are struggling then they ought to be gaining from a progressive tax.

Posted by Ruudy (# 3939) on :

quote:
Originally posted by Dave W.:
I suspect we're writing with very different images of "owners" in mind; if you think of the owners of a struggling mom and pop corner store in an otherwise thriving city, does their increased risk vs. that of their employees seem more believable?

Marginal income of all business owners - whether mom and pop or large corporation - should be treated the same as the marginal income of workers. If the original capital invested in the business was after-tax capital then they should not have to pay taxes on the return of that capital, but returns on that capital should be taxed at the same progressive tax rates as ordinary income.

Posted by no prophet (# 15560) on :

quote:
Originally posted by Ruudy:
Marginal income of all business owners - whether mom and pop or large corporation - should be treated the same as the marginal income of workers. If the original capital invested in the business was after-tax capital then they should not have to pay taxes on the return of that capital, but returns on that capital should be taxed at the same progressive tax rates as ordinary income.

Which to a degree happened in the 1970s, with major changes to business/corporate income tax with the Reagan/Thatcher/Mulroney/others era. The brilliant idea was to reduce gov't services and provide small income and other tax cuts to the average individual taxpayer, and massive cuts to corporate tax. The ideology was that businesses would use the money they keep for 'innovation', 'job creation' and society and everyone would be better off as that all gushed down. Instead, the result was increased corp income, privatised gov't services and other things like railways and utilities which resulted in increased consumer costs, reduced real wages (what income can purchase), and the beginnings of off-shoring of jobs because free trade was also part of the ideology. They also massively increased military spending. We're all still paying for their conservative international debts and mismanagement.

My point is that you'd have to reverse 35 years of ideology, globalisation and received wisdom.

Posted by Bullfrog. (# 11014) on :

quote:
Originally posted by Eliab:

quote:
Originally posted by leo:

quote:
Originally posted by Marvin the Martian:
If that's so obvious, why does virtually everyone in the entire world have (and agree with) the concept of personal property?
Original sin - selfishness and greed.
And yet "Thou shalt not steal" made it into the big ten. As well as "Thou shalt not covet...anything that is thy neighbour's".

Either the decalogue is 20% redundant, because those commandments have no content if your neighbour owns nothing to be stolen or coveted, or there is a concept of private property which is consistent being fair, honest, not greedy, not selfish and not envious.

Original sin precedes the Decalogue. It's what makes law necessary.

Posted by Dave W. (# 8765) on :

quote:
Originally posted by Ruudy:

quote:
Originally posted by Dave W.:
I suspect we're writing with very different images of "owners" in mind; if you think of the owners of a struggling mom and pop corner store in an otherwise thriving city, does their increased risk vs. that of their employees seem more believable?
Marginal income of all business owners - whether mom and pop or large corporation - should be treated the same as the marginal income of workers. If the original capital invested in the business was after-tax capital then they should not have to pay taxes on the return of that capital, but returns on that capital should be taxed at the same progressive tax rates as ordinary income.

As I've said, I'm not arguing that differing risk justifies different tax treatment - just that the risk actually is different.

And on reflection I'd agree that the risk isn't always greater for an owner, though it may be. My first real job was for a startup founded by a fellow grad student. He put all the money he could scrape together, plus a fair amount of what he would have been paid as an employee, into the company. That money was at risk - he would have lost it all had the company failed, as it nearly did at one point. As an employee, I would have been (at least) very seriously inconvenienced - but at least my savings weren't tied up in that company, so it wouldn't have been nearly as bad for me.

As it happens, the company was bought by one of its customers. (And there was much rejoicing.) The purchasing company had an employee stock purchase plan. Eight years after leaving, I still have some shares left, so I'm now an "owner" and not an employee. But now, because of the diffuse nature of ownership of a publicly traded company, I'd say the risk of a failure is far more serious for an employee than for me or the vast majority of the other owners.

Finally, I don't think that the idea that investors somehow deserve to be rewarded for taking risks is the standard argument for lower tax rates on dividends and capital gains - at least, it doesn't appear to be the one that economists use. According to Wikipedia

quote:
...the most common argument is that it encourages investment, which creates jobs and helps the economy grow, even providing more revenue than a higher rate.

The connection is disputed, however - that article includes a plot from a study arguing that changes in the capital gains tax rate appear to have no discernable effect on GDP growth.

Posted by Soror Magna (# 9881) on :

quote:
Analysis of such data suggests the reduction in the top tax rates have had little association with saving, investment, or productivity growth. However, the top tax rate reductions appear to be associated with the increasing concentration of income at the top
of the income distribution. The share of income accruing to the top 0.1% of U.S. families
increased from 4.2% in 1945 to 12.3% by 2007 before falling to 9.2% due to the 2007-2009
recession. The evidence does not suggest necessarily a relationship between tax policy with regard to the top tax rates and the size of the economic pie, but there may be a relationship to how the economic pie is sliced.

Posted by Soror Magna (# 9881) on :

quote:
Analysis of such data suggests the reduction in the top tax rates have had little association with saving, investment, or productivity growth. However, the top tax rate reductions appear to be associated with the increasing concentration of income at the top
of the income distribution. The share of income accruing to the top 0.1% of U.S. families
increased from 4.2% in 1945 to 12.3% by 2007 before falling to 9.2% due to the 2007-2009
recession. The evidence does not suggest necessarily a relationship between tax policy with regard to the top tax rates and the size of the economic pie, but there may be a relationship to how the economic pie is sliced.

Taxes and the Economy: An Economic
Analysis of the Top Tax Rates Since 1945,
CRS Report for Congress
Prepared for Members and Committees of Congress

The report the Republicans don't want you to read. (PDF)

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