6 ms·

Sure the mortgage deduction exemption is horrendous, but I think income source discrimination is a bigger issue. We have different rates for wages, long-term ca

by bhickey 11y ago

Sure the mortgage deduction exemption is horrendous, but I think income source discrimination is a bigger issue. We have different rates for wages, long-term capital gains, bonus income. Don't even get me started on carried interest. I'd also like to see social security contributions get uncapped. After $118k in income, your average tax rate falls until $189k. Even then, your mean tax rate will still be lower than someone earning $118k until you earn in excess of $411k.

harryh 11y ago
1) Wages and bonus income aren't taxed differently. 2A) When you take into account corporate taxes, inflation, and risk the difference between tax rates on wages and cap gains aren't as big as you might think. 2B) Many economists argue that there should be no capital gains taxes at all as they create a distortion between consumption and saving behavior. https://en.wikipedia.org/wiki/Optimal_capital_income_taxation https://en.wikipedia.org/wiki/Optimal_capital_income_taxatio... is as good of a place to start as any on this discussion. I also like http://www.thebigquestions.com/2010/01/27/a-quick-economics-lesson/ http://www.thebigquestions.com/2010/01/27/a-quick-economics-... if you prefer things in parable form. 3) With respect to carried interest I generally agree with you but this piece will make some people question their opinions on the matter: http://www.nytimes.com/2012/03/04/business/capital-gains-vs-ordinary-income-economic-view.html http://www.nytimes.com/2012/03/04/business/capital-gains-vs-...
- bhickey 11y ago
  1) It looks like I'm mixing up the California withholding rate with the tax rate. Thanks. 2A) Granted. If I had a magical tax wand, I'd obliterate corporate taxation. 2B) It's an argument I've heard, but I'm more interested in avoiding arbitrage. My preferences might be mistaken. :) 3) If I hold the belief that we shouldn't tax income differently based on its source, Mankiw's argument doesn't have much force. His reasoning is sound, sure, but I'm not sold on the premise.
  - harryh 11y ago
    1) Yes. This is true and annoying especially if you care about short term cash flow. If you super care about this you can play games with your W4 to cut down your withholding and instead pay quarterly tax payments. Though if you screw up and underpay you'll owe penalties. 2A) Indeed I agree. Though personally I put the chance of this ever happening at precisely zero due to the political optics. 2B) The difficulty of determining what is a capital gain and what is income is, in fact, one of the biggest theoretical arguments against a zero cap gains rate.
  - newman314 11y ago
    Why remove corporate taxation? From my perspective, corporations already pay a lower effective tax rate and have access to tax avoidance strategies that not available to the individual. I've read the argument that eliminating the corporate tax would spur growth but that's like saying eliminating individual income tax would spur consumer spending.
    - harryh 11y ago
      Because all taxes are taxes on people. Corporate taxes are just a convoluted and bad way of doing so.
      - newman314 11y ago
        Are you proposing that eliminating corporate taxes would mean that somehow you would make more at the end of the day and be taxed less overall? I'm not sure I see that happening.
        harryh 11y ago
        If you eliminate corporate taxes then the shareholders of the corporation would make more money(1). You can then make up for the lost corporate tax revenue by taxing those shareholders more. It would be a simpler and more efficient system overall. 1. Probably also the employees would make more and the customers would pay less for products as well. This has to do with something called tax incidence.
- wutbrodo 11y ago
  > When you take into account corporate taxes, inflation, and risk the difference between tax rates on wages and cap gains aren't as big as you might think. This doesn't make any sense. All of these things (with the exception of corporate taxes, which shouldn't exist) are priced into the return of the investment[1] and have nothing to do with taxation. Why would you take risk into account for purposes of taxation? Should gambling income be taxed at a commensurately lower rate? [1] More precisely, investments with a lower return are less desirable and their price tends to drop until the return (including risk, inflation, etc) is.
  - bhickey 11y ago
    > Why would you take risk into account for purposes of taxation? Should gambling income be taxed at a commensurately lower rate? There's actually some bizarreness in the English tax code around this. Most taxpayers are subject to a 28% levy on investment returns. Gamblers themselves aren't taxed on winnings while the house pays 15% on their profits. (The treatment of professional gamblers is a conversation for your accountant.)
  - harryh 11y ago
    If I buy an asset that only appreciates at the rate of inflation, then I end up paying taxes on what amounts to a fake gain. Even if it appreciates faster my effective tax rate is higher than the actual number used to calculate my taxes.
    - wutbrodo 11y ago
      > If I buy an asset that only appreciates at the rate of inflation, then I end up paying taxes on what amounts to a fake gain. Even if it appreciates faster my effective tax rate is higher than the actual number used to calculate my taxes. The same is true of getting a raise and paying higher taxes on a "fake gain" (i.e., your effective tax rate slowly rises as each boundary shifts lower in real terms). That being said, I guess my main complaint wasn't with the inflation claim but rather with the idea that the risk/return line is somehow relevant to taxation.
- brownbat 11y ago
  I really liked the discussion of the Chamley-Judd model, especially in parable form. Question though: I worry that some individuals have the ability to recharacterize their earnings as either income or gains by shifting their contracts and methods of compensation.[0] If so, then you end up with odd results. Scenario 2 (a 50% tax on wages) turns into Scenario 1 (no taxes) for that subset of the population. Looks like a well studied topic, so I'm sure someone tackles this? [0] Say I build machines that make widgets, and your new widget factory wants such a machine. You could hire me as an machine-building employee, I could own my own business and you could buy the machine from me, or you could give me shares of ownership in your factory. Each of these could result in the same actions and changes in wealth for all parties, but would be taxed under completely different systems. CEO compensation packages are the most transparent real world example of compensation structuring I can think of. On the other hand, Jon Ronson interviewed a woman making 1.5-3 million per year who claimed she paid 35%, that she wasn't rich enough to restructure to avoid income taxes. This was in a piece on income inequality, maybe for GQ. So maybe this is non-trivial until you start getting near the top...
  - harryh 11y ago
    Indeed if you look at the Wikipedia link I posted you'll find a section on "Avoidance of tax arbitrage between capital and labor incomes" which is exactly the problem you describe. Incidentally, when people talk about "tax shelters" and "complicated schemes the rich use to avoid paying taxes"(1) they're mostly talking about this. Though often they don't make that as clear as they should. 1. http://www.nytimes.com/2015/12/30/business/economy/for-the-wealthiest-private-tax-system-saves-them-billions.html http://www.nytimes.com/2015/12/30/business/economy/for-the-w...
    - brownbat 11y ago
      Yup, right there citing Reis (2007). Good stuff, thanks.

by bhickey 11y ago

harryh 11y ago

1) Wages and bonus income aren't taxed differently. 2A) When you take into account corporate taxes, inflation, and risk the difference between tax rates on wages and cap gains aren't as big as you might think. 2B) Many economists argue that there should be no capital gains taxes at all as they create a distortion between consumption and saving behavior. https://en.wikipedia.org/wiki/Optimal_capital_income_taxation https://en.wikipedia.org/wiki/Optimal_capital_income_taxatio... is as good of a place to start as any on this discussion. I also like http://www.thebigquestions.com/2010/01/27/a-quick-economics-lesson/ http://www.thebigquestions.com/2010/01/27/a-quick-economics-... if you prefer things in parable form. 3) With respect to carried interest I generally agree with you but this piece will make some people question their opinions on the matter: http://www.nytimes.com/2012/03/04/business/capital-gains-vs-ordinary-income-economic-view.html http://www.nytimes.com/2012/03/04/business/capital-gains-vs-...

bhickey 11y ago
1) It looks like I'm mixing up the California withholding rate with the tax rate. Thanks. 2A) Granted. If I had a magical tax wand, I'd obliterate corporate taxation. 2B) It's an argument I've heard, but I'm more interested in avoiding arbitrage. My preferences might be mistaken. :) 3) If I hold the belief that we shouldn't tax income differently based on its source, Mankiw's argument doesn't have much force. His reasoning is sound, sure, but I'm not sold on the premise.
- harryh 11y ago
  1) Yes. This is true and annoying especially if you care about short term cash flow. If you super care about this you can play games with your W4 to cut down your withholding and instead pay quarterly tax payments. Though if you screw up and underpay you'll owe penalties. 2A) Indeed I agree. Though personally I put the chance of this ever happening at precisely zero due to the political optics. 2B) The difficulty of determining what is a capital gain and what is income is, in fact, one of the biggest theoretical arguments against a zero cap gains rate.
- newman314 11y ago
  Why remove corporate taxation? From my perspective, corporations already pay a lower effective tax rate and have access to tax avoidance strategies that not available to the individual. I've read the argument that eliminating the corporate tax would spur growth but that's like saying eliminating individual income tax would spur consumer spending.
  - harryh 11y ago
    Because all taxes are taxes on people. Corporate taxes are just a convoluted and bad way of doing so.
    - newman314 11y ago
      Are you proposing that eliminating corporate taxes would mean that somehow you would make more at the end of the day and be taxed less overall? I'm not sure I see that happening.
      - harryh 11y ago
        If you eliminate corporate taxes then the shareholders of the corporation would make more money(1). You can then make up for the lost corporate tax revenue by taxing those shareholders more. It would be a simpler and more efficient system overall. 1. Probably also the employees would make more and the customers would pay less for products as well. This has to do with something called tax incidence.
wutbrodo 11y ago
> When you take into account corporate taxes, inflation, and risk the difference between tax rates on wages and cap gains aren't as big as you might think. This doesn't make any sense. All of these things (with the exception of corporate taxes, which shouldn't exist) are priced into the return of the investment[1] and have nothing to do with taxation. Why would you take risk into account for purposes of taxation? Should gambling income be taxed at a commensurately lower rate? [1] More precisely, investments with a lower return are less desirable and their price tends to drop until the return (including risk, inflation, etc) is.
- bhickey 11y ago
  > Why would you take risk into account for purposes of taxation? Should gambling income be taxed at a commensurately lower rate? There's actually some bizarreness in the English tax code around this. Most taxpayers are subject to a 28% levy on investment returns. Gamblers themselves aren't taxed on winnings while the house pays 15% on their profits. (The treatment of professional gamblers is a conversation for your accountant.)
- harryh 11y ago
  If I buy an asset that only appreciates at the rate of inflation, then I end up paying taxes on what amounts to a fake gain. Even if it appreciates faster my effective tax rate is higher than the actual number used to calculate my taxes.
  - wutbrodo 11y ago
    > If I buy an asset that only appreciates at the rate of inflation, then I end up paying taxes on what amounts to a fake gain. Even if it appreciates faster my effective tax rate is higher than the actual number used to calculate my taxes. The same is true of getting a raise and paying higher taxes on a "fake gain" (i.e., your effective tax rate slowly rises as each boundary shifts lower in real terms). That being said, I guess my main complaint wasn't with the inflation claim but rather with the idea that the risk/return line is somehow relevant to taxation.
brownbat 11y ago
I really liked the discussion of the Chamley-Judd model, especially in parable form. Question though: I worry that some individuals have the ability to recharacterize their earnings as either income or gains by shifting their contracts and methods of compensation.[0] If so, then you end up with odd results. Scenario 2 (a 50% tax on wages) turns into Scenario 1 (no taxes) for that subset of the population. Looks like a well studied topic, so I'm sure someone tackles this? [0] Say I build machines that make widgets, and your new widget factory wants such a machine. You could hire me as an machine-building employee, I could own my own business and you could buy the machine from me, or you could give me shares of ownership in your factory. Each of these could result in the same actions and changes in wealth for all parties, but would be taxed under completely different systems. CEO compensation packages are the most transparent real world example of compensation structuring I can think of. On the other hand, Jon Ronson interviewed a woman making 1.5-3 million per year who claimed she paid 35%, that she wasn't rich enough to restructure to avoid income taxes. This was in a piece on income inequality, maybe for GQ. So maybe this is non-trivial until you start getting near the top...
- harryh 11y ago
  Indeed if you look at the Wikipedia link I posted you'll find a section on "Avoidance of tax arbitrage between capital and labor incomes" which is exactly the problem you describe. Incidentally, when people talk about "tax shelters" and "complicated schemes the rich use to avoid paying taxes"(1) they're mostly talking about this. Though often they don't make that as clear as they should. 1. http://www.nytimes.com/2015/12/30/business/economy/for-the-wealthiest-private-tax-system-saves-them-billions.html http://www.nytimes.com/2015/12/30/business/economy/for-the-w...
  - brownbat 11y ago
    Yup, right there citing Reis (2007). Good stuff, thanks.