Mike Kueber's Blog

November 11, 2012

Oppressive taxation

Filed under: Economics,People,Politics — Mike Kueber @ 12:41 pm
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There has been a lot of talk about the rich wanting to pay higher taxes.  President Obama and the Democrats defend this position by pointing to my hero Warren Buffett, who, indeed, has said the rich should be taxed more.  Republicans argue that a tax increase on the rich will cost the economy 700,000 jobs, while the Democrats counter that their proposal will merely return the tax rate on the rich to the amount it was during the Clinton boom times – i.e. 39.4% on income over $388k.

Although the Democratic proposal is anathema to Grover Norquist and the TEA Party, I think it makes sense for the following reasons:

  1. Income inequality is getting outrageous in our nation, and until we can find the economic levers to reduce it, a higher marginal income tax rate for the rich will suffice. 
  2. Under our system of progressive taxation, individuals with a 7-figure income should have a higher marginal rate than those with a 6-figure income. 
  3. Because of our nation’s huge deficit, every little bit of revenue can reduce our borrowing from China. 
  4. Increased taxes on the rich will not dampen job creation.  The real engines of job growth are export-oriented businesses, which usually pay the corporate tax rate.  The world’s highest corporate tax rate of 39% needs to be reduced, and both parties appear to agree on that.

But there are limits to how much taxes can be raised effectively without killing the Golden Goose, and some states might be approaching that limit.  Because Texas doesn’t have a state income tax, we haven’t felt the pain of voters in states like CA or NY.  Despite the pain of a state income tax, however, the voters of CA earlier this week voted to increase the state income tax on the rich from 10.3% to 13.3%. 

Wow!  If the federal rate goes up to 39.4% and the state rate is 13.3%, that is 52.7%.  The Bloomberg article reporting on this development says that hundreds of thousands of people are voting with their feet to leave CA and this tax increase will only speed the development. 

Texas governor Rick Perry has often extolled the virtues of federalism, with the state governments being able to experiment with solutions to problems – e.g., RomneyCare in MA and recreational marijuana in Colorado.  I agree.  Give states the latitude to try something new.  Let California see if increased taxes are a solution to their budgetary problems.  Then we can use that experience to decide what is best for Texas or America.

January 25, 2012

Double taxation

Filed under: Business,Issues,Politics — Mike Kueber @ 4:44 am
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I confess that because I was preoccupied with a Happy Hour, I missed President Obama’s State of the Union address.  But prior to the address, I heard that a major part of the address was the so-called Buffett rule, which focuses on the fact that some secretaries paid taxes at a higher rate than their bosses.  I agree with this criticism of the American tax code.

Mitt Romney recently disclosed that his tax obligation was less than 14% even though he made about $20 million a year.  Based on news reports, President Obama was prepared to highlight that many secretaries not only paid taxes at a higher rate than 14%, but also had to pay social-security taxes of more than 7%, which the multimillionaires were not required to pay on the bulk of their income.

I agree that rich people should not be allowed to pay reduced income-tax rates simply because their income comes from capital gains.  The argument that such a tax amounts to double taxation doesn’t make sense.  Just because someone pays taxes on earned income doesn’t mean that additional income earned on that income shouldn’t be taxed.  America’s tax system is based on levying a tax on each transaction (e.g., sales tax is assessed every time your car is sold), and that is completely consistent with taxing a person on earned income and then taxing them again when those assets are used to generate capital gains.  The tax rate on capital gains should be at least at much, if not more, than the tax rate on earned income.  This concept would also work with estate taxes, where there is a tax on income earned and then another tax on the assets when they are tranferred to a beneficiary.  

To suggest that people will be reluctant to invest their capital because capital gains will be fully taxed is ludicrous.  That’s like saying you will decide to stop earning income above $250k just because the marginal rate on income over $250k is increased to 40%.

August 23, 2011

Increase the capital-gains rate and balance the budget

Filed under: Issues,Politics — Mike Kueber @ 6:33 pm
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As the federal government struggles with its deficit and debt, an item that has escaped much public attention is the preferred treatment of capital gains.  As Warren Buffett recently pointed out, this preferred treatment enables him to pay taxes at a lower rate than his secretary:

  • “Some of us are investment managers who earn billions from our daily labors but are allowed to classify our income as ‘carried interest,’ thereby getting a bargain 15 percent tax rate. Others own stock index futures for 10 minutes and have 60 percent of their gain taxed at 15 percent, as if they’d been long-term investors.”

James Stewart, a business/finance columnist for the NY Times, recently elaborated on Buffett’s argument about carried interest:

  • For most hedge fund and private equity partnership managers, carried interest is compensation in the form of a percentage (usually 20 percent) of any gains they generate for investors. If a hedge fund manager generated $1 billion for investors by betting against mortgage-backed securities before the real estate market collapsed, the hedge fund manager is entitled to keep $200 million as compensation. The tax code treats that as a capital gain, taxed at a lower 15 percent rate. (The top rate on ordinary income is 35 percent.) The argument that this should be ordinary income rests on the notion that hedge fund managers earn these fees from their labor, just like other workers get a salary for theirs and are taxed at ordinary income rates.

Although managers of private equity and hedge funds provide a (un)popular target for tax reform, the far richer target is the complete elimination of a separate, reduced rate for capital gains.  If the capital gains rate were the same as an individual’s income tax rate, Warren Buffett wouldn’t pay taxes at a rate lower than his secretary.  Furthermore, the elimination of the reduced rate is not an extreme idea.  In fact, it was included in the estimable report of the bi-partisan Simpson-Bowles commission.

The aspect of this reform that fascinates me is the prospect of implementation would surely motivate millions of people with locked-in capital gains to claim those gains at 15% before the new 35% rate kicks in.  I have searched high and low to find an estimate of how much capital gains are waiting to be taxed, but I have been unable to find an estimate.  Although the capital-gains tax plays a relatively small part in supporting the federal government (see below), I suspect that the surge of activity to avoid a higher rate would go a long way toward balancing the federal budget that year.

Table 1 Sources of Federal Revenue (billions of 2003 dollars)

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Capital gains tax 45

Corporate income tax 132

Individual income tax 794

Social Security taxes 713

Total revenues 1,782