How Washington Really Redistributes Income

http://online.wsj.com/news/articles/SB10001424052702303680404579141790296396688

by fjk • 13 years ago

38 66 13 years ago

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al2o3cr• 13 years ago

Shorter hedge fund toolbag: "HEY KIDS - look at those old crabs over there, climbing towards the top of the bucket! PULL THEM DOWN! Pay no attention to me, sitting on top of a pile of money I stole from you via the tax code!"

RandyH• 13 years ago

The Republican Party needs to kick out these guys who lie about how bad things would be if the U.S. were late on its sovereign debt payments. They are in the same category as the birthers. You can't have crazies in your party. They just cause the sane people to leave, then one day you wake up and the crazies are the majority of your party, and then you are in real trouble.

jbigelow762• 13 years ago

This is the result of primaries decided as a result of gerrymandering. All aboard the crazy train!

irons• 13 years ago

Gerrymandering probably isn't as dominant a factor as people think: http://www.bloomberg.com/news/2013-10-09/gerrymandering-didn...

That story is based on 2009 research: http://www.jstor.org/stable/25548144?seq=2

Admitting that gerrymandering isn't the problem puts the solution further out of reach, unfortunately. Generational change is slow and painful.

anonymoushn• 13 years ago

Why would the U.S. choose to default? Its debt service costs much less than it collects in tax revenue.

cpleppert2• 13 years ago

Because the treasury probably doesn't have the statutory authority to withhold payments to appropriated programs. Even if it did, that would mean cutting social security or medicare payments while waiting for an interest payment. So you are certainly hurting people who are depending on those programs(a political nightmare) in the expectation that there will be no debt limit raise. If you think that missing an interest payment will be a catastrophe you paradoxically have no incentive to order these social programs cut to make an interest payment because no one would be so irresponsible as to allow that to happen.

mikeash• 13 years ago

I think that "one day" happened some time ago now.

cpleppert2• 13 years ago

"debt limit denial" is only a small part of the problem. The other half is the expectation that 1) threatening something that hurts the country(which he admits) is a good thing if you can pass your political program and 2) the other party will simply fold and its members will pass your program

1 simply denies that the opposing party should be able to represent itself in the democratic process but 2 is simply bizarre. No one is going to help their opponents pass their agenda on the basis that if they don't the other party will cause the economy to collapse. If that worked, the Soviet Union would have threatened to start a nuclear war anytime they wanted something and would expect the United States to back down.

The line of reasoning that validates such a tactic is just totally bizarre. Even if you can get some type of leverage over the other party you will never get enough concessions to justify the economic damage. Economic damage occurs in the present while entitlement spending cuts occur in the future. Even if the economic damage is minimal it seems quite a stretch to assume that statutory changes today are the only way to stop a future congress from overspending. This hypothetical future congress would be perfectly capable of cutting spending on its own.

cylinder2• 13 years ago

I'm not sure that Social Security and the like for older people is such a bad thing, it seems logical. You can't expect people to work in old age and nobody would want to insure their healthcare without government support. Young people have their youth, energy and the ability and time to work for themselves and save money. Old people do not. I see nothing extravagant about the size of SS payments. Medicare does need to be reigned in, of course. I would say add asset tests to SS, but those are so easily skirted that they'd be unenforceable.

The real ripoffs of the young generation:

* The cost of education caused by free-flowing credit to students

* Housing price inflation by foreign and domestic cash investors, mortgage tax deductions, 30-year mortgages, federal reserve actions creating asset bubbles (not US exclusive, in fact the problem is worse in commonwealth countries like Australia thanks to negative gearing and lack of property taxes)

* Obscenely low taxes on wealth and capital gains

* Absurd amount of defense spending

Young people also bear responsibility to: * Manage money better

* Live within means

* Encourage discussion of serious issues like those above on social media without being labeled as "crazy" for doing so; stop sharing useless BuzzFeed garbage and burying yourselves in Instagram all the time.

* Stop going so far in debt for clearly useless degrees and then wondering why the world is so unfair when you can't make money with it

* Don't glorify urban living to a fault, blowing money at bars for binge drinking well after college, spending too much on rent to be in a "trendy" area. You shouldn't have an iPhone, iPad, and MacBook and spend $1500/mo to live with 4 roommates, latte for breakfast ($4), buy all your lunches ($10), get dinner at the Whole Foods hot bar ($15) when you make $40k, then complain when you're 30 with a negative net worth!

mangala2• 13 years ago

Don't glorify urban living to a fault, blowing money at bars for binge drinking well after college, spending too much on rent to be in a "trendy" area. You shouldn't have an iPhone, iPad, and MacBook and spend $1500/mo to live with 4 roommates, latte for breakfast ($4), buy all your lunches ($10), get dinner at the Whole Foods hot bar ($15) when you make $40k, then complain when you're 30 with a negative net worth!

No one making $40k a year is spending $1500 on rent. This is such a yuppie NYC/SF perspective. Try sitting in actual $40k shoes for a second.

cylinder2• 13 years ago

Plenty of young people here (NY) do. Probably getting some supplementation with their parents' credit cards. I'm not sure how "yuppie" is supposed to be derogatory here considering we are talking about young urban professionals.

nilkn• 13 years ago

To be fair, I really do know people making incomes around that who spend money lavishly: every meal purchased, leased BMW, no retirement savings at all, credit card debt. It's sadly common.

chrismealy2• 13 years ago

Social Security is simple: we take 4% of GDP and cut checks to old people. Whatever the economy's like 40 years from now, you can always take 4% and cut checks to old people. Nobody ever worries about paying for the military 40 years from now.

As for health care costs, all America has to do is copy literally any other rich country's health care system. They all cost half as much or less per capita.

sp3322• 13 years ago

all America has to do is copy literally any other rich country's health care system

This sounds incredibly smug, and it's not helpful.

mangala2• 13 years ago

Plain truth shouldn't be interpreted as smug.

chrismealy2• 13 years ago

No, it is helpful, because it's true.

http://en.wikipedia.org/wiki/Not_invented_here

unclebucknasty4• 13 years ago

This guy is independent, maybe, but definitely right-leaning. And, I don't know that I have heard anyone on the right put forward the ideas of taxing capital gains as normal income and doing away with corporate taxes. They normally want to do the latter, without the former. In other words, they want a no-holds barred tax holiday for the wealthiest (which will eventually trickle down, of course).

But, what he is saying might be workable. I am curious to know how much additional revenue the government would raise by taxing capital gains at normal income rates vs. how much they'd lose by not taxing corporations.

Anybody have a reliable source on that?

Because, in some respects, C-corps would then become more like S-corps, in that a significant amount of untaxed income would flow through as dividends to shareholders where it would now be taxed at the normal income rate.

saosebastiao• 13 years ago

The problem with the corporate income tax is that it is so easy to avoid...because you avoid it by having expenses. Luxury hotel rooms and corporate jets are legitimate business expenses, where they aren't deductible for personal income.

I have no problem believing that tax collections would increase by taxing capital gains as income and removing the corporate tax. And it would certainly be more fair than the current setup, with corporate taxation's terribly regressive incidence. The only kink is that they would have to have foreign investors paying income tax in the US, which might be hard to accomplish.

jandrewrogers• 13 years ago

Short-term capital gains are taxed at income rates. And long-term capital gains are taxed at lower rates to compensate for the fact that they have substantial losses due to inflation that are not deductible. You are taxed on the inflation in addition to the gains and can incur a substantial tax bill even if you lost money on your investment in real terms.

The net effect of greatly increasing tax rates on long-term capital gains is that risky long-term capital investments that may take a long time to pay off, such as tech startups, become much less attractive. Expected returns matter a lot to investors, and factors like taxation rates, inflation, risk, and liquidity factor into that calculus.

Eliminating corporate income taxes would actually encourage companies to realize and distribute profits to shareholders in ways that would generate substantial tax revenue from the individual shareholders, so I don't see it as much of a loss. At a minimum it would eliminate a lot of the incentive to engage in complex financial structuring games to minimize the amount of double taxation shareholders are faced with.

Guvante• 13 years ago

Eliminating corporate income taxes would actually encourage companies to realize and distribute profits to shareholders in ways that would generate substantial tax revenue from the individual shareholders

Only problem with this is the growth stocks, how long was Microsoft making a profit before it started paying dividends?

I believe the US government would be fine playing the long game by dropping capital gains tax, but I don't believe they have the stomach for the short term loss of revenue.

unclebucknasty4• 13 years ago

Short-term capital gains are taxed at income rates. And long-term capital gains are taxed...

Of course. I used the generic term "capital gains" as a stand-in for "long-term capital gains", since the latter is the one that realizes the different tax treatment and is thus relevant to this discussion.

My apologies for not being clearer there.

Eliminating corporate income taxes would actually encourage companies to realize and distribute profits to shareholders

I agree. I think this can be a "healthy" behavior change as a result of tax code changes.

Still, I would be curious to know how much the additional individual tax revenue would serve to offset the loss of corporate tax revenue. On the face, there would seem to be a gap--one that may be filled by a simultaneous increase in the long-term capital gains rate.

I'm sure this info is available. Just need to stop being lazy!

jpmattia• 13 years ago

Because, in some respects, C-corps would then become more like S-corps, in that a significant amount of untaxed income would flow through as dividends to shareholders where it would now be taxed at the normal income rate.

Some respects yes, but not in one important aspect: With an S-Corp, the income must flow on an annual basis.

If you removed C-Corp taxation, there would be no reason to have an S-Corp. You can just leave the net gains in the C-Corp (tax-free!) and take it out whenever you want.

rayiner8• 13 years ago

As a theoretical matter, capital gains are indistinguishable from other kinds of income and should be taxed as such. Corporate income taxes, moreover, are just the simple consequence of the fact that a corporation is a distinct legal person and is taxed as such. These are two incredibly obvious points that get buried beneath the bullshit on these subjects.

harryh3• 13 years ago

As a theoretical matter, I'm afraid that you are incorrect.

There are essentially zero theoretical arguments that support taxing capital gains at the same rate as ordinary income and many economists have found that a 0% tax on capital gains is the least distortionary. (see the Chamley-Judd Result).

AnthonyMouse5• 13 years ago

It's basically a fact that all forms of taxation cause problems and they interact with each other to cause subtle and exploitable problems.

Take corporate income tax, capital gains tax and taxation of dividends.

The entire concept of corporate income tax is completely nonsensical for international corporations because they don't need to do much more than rearrange their books and they can report the bulk of their profits in a lower tax jurisdiction, which is what all of them do and there is almost nothing you can do to stop them if you insist on taxing "profit" but allowing profits to be taxed non-uniformly based on international tax jurisdiction. Which means that "corporate income tax" in practice means "tax small and medium sized corporations at a much higher rate than large international corporations." Which is obviously totally inane, so lets get rid of corporate income tax, right?

At this point you've just handed the rich a trivial method of deferring taxation of dividends indefinitely. Instead of issuing profits as dividends at all, corporations can hold the capital internally which causes share price appreciation, and have stock splits as necessary to keep the share price from getting out of hand. Then the shareholder pays no taxes until the shares are sold, which can be put off indefinitely. The disadvantage is that you have a corporation that makes e.g. iPads which holds more cash than they can possibly have a productive internal use for, so they end up investing it perhaps quite inefficiently in sectors of the economy outside of their expertise because doing so is more profitable than issuing dividends and causing shareholders to incur massive taxation. Which is naturally what we see the corporations frequently doing when they have a de facto lack of corporate income tax through tax avoidance.

So you say, fine, corporate income tax sucks and taxing dividends doesn't work, but at least we can really stick it to them with capital gains tax when they sell the shares, right? And now you have a different problem, which is that you're making shares inalienable. If you own a million dollars of shares which you bought for a thousand dollars, you're not going to sell the shares if selling them causes you to lose half of your capital to taxation, even if the stock is clearly under-performing the market. Which causes huge market inefficiencies because capital is tied up in under-performing businesses which can't be sold without incurring significant tax liabilities. There is a trivial way to solve this, which is to allow stockholders to defer capital gains tax when they sell one investment only in order to change what they're investing in by purchasing another investment. But the result is a "weird" tax -- it isn't a capital gains tax anymore, what it really is is a consumption tax with a different rate for spent income derived from investments if the "capital gains" rate isn't set at the earned income rate. Certainly not what most people think of when they discuss a capital gains tax, and on paper allowing investments as a deduction would cause it to not generate nearly as much tax revenue (though it may in practice given tax avoidance).

So all of that is quite irritating if you're trying to extract tax revenue from corporations and the wealthy. The problem is, at bottom, that taxing something discourages that thing and you don't want to discourage investment.

The remaining major tool in the tax box is a normal consumption tax. The problem there is that it's obviously regressive -- the less money you make, the larger a portion of it you have to consume rather than invest, so taxing consumption will cause the rich to pay an unavoidably large amount of taxation (unless they intend to stop buying cars and mansions and air travel), but will disproportionately also tax those less fortunate who must spend a higher percentage of what they make.

As far as I can tell the best solution is to get rid of all taxes other than a consumption tax, and then deal with the fact that consumption taxes are regressive by combining it with a basic income which you can make arbitrarily progressive by increasing its size. This has the additional advantage that the basic income can subsume the plethora of programs like social security which impose arbitrary constraints which (like "retirement age") or are "need based" which, if you consider the programs as a form of negative taxation, turn out to be preposterously regressive because the marginal tax rate of increasing your income and thus becoming ineligible for the programs can approach or even exceed 100%.

The "problem" with flat consumption tax + basic income is that it takes all the horse trading out of the equation, removes all the tax loopholes and pork and treats everyone equally regardless of their lobbying strength, even though you can make it as progressive as you like. K-Street will not be a fan. Everyone else probably should be though -- anyone want to explain how I'm wrong?

yetanotherphd6• 13 years ago

The main problem with your system is that you can't produce any pre-tax vs post-tax curve that you like (as you can with progressive income tax). It has to be a straight line. Now I'm not sure if this is really such a bad thing, but it is important to think about what the implications are.

unclebucknasty4• 13 years ago

It's basically a fact that all forms of taxation cause problems and they interact with each other...

Much of your post reminds me of the oft-repeated fallacies regarding the supposed "massive" effects that taxation have on behavior. Sure, there are some, but I believe predictions and discussion regarding those effects to frequently be greatly exaggerated or completely unrealistic.

Instead of issuing profits as dividends at all, corporations can hold the capital internally which causes share price appreciation...

Corporations would still have strong incentive to pay dividends. Dividends are a more direct means of providing participation in the company's success (i.e. distributing profits) than stock appreciation (which is obviously a function of many other factors, including psychology). Solid dividends can thereby drive demand for the stock, and hence its price.

Shareholders might say, "Don't give me an increase on paper. Give me a payment on my current holding, while I maintain that holding". This is especially so if, as you say, shareholders are more reluctant to sell shares and trigger a larger personal tax event. However, again, I think the latter prediction is generally overstated.

The short is that each company is still competing for shareholders. Accruing cash well-beyond what the company can deploy to grow revenue is not in the interest of the company or its shareholders.

This is part of the fallacy around taxation and how it drives behavior. Companies aren't just going to start doing things that are bad for them (e.g. making bad investments), simply to avoid taxation. And, they won't withhold the dividend simply to prevent shareholders from incurring a tax event. This is profit that is being distributed to shareholders, just as now. No one is coming to take the investors' previous wealth (as is often implied). These taxes are simply deducted from what is otherwise a "windfall".

The problem is, at bottom, that taxing something discourages that thing

Yes, but again, I believe that many give too much weight to the degree to which it discourages, as well as to its "distorting" effects overall. People do not choose to opt out of investment (or profit-taking) altogether due to taxation. If I have a million dollar gain on a thousand dollar investment, then sure I'm going to cash out at some point. This, of course, is already happening on a regular basis. Even if you take half of it, it's still a massive gain. And, what else I'm going to do with it? Hold it on paper forever where it has zero value? That's not rational.

Yes, I'd wish there were no taxes (just as we wish there are no income taxes), but we are still going to work and invest to maximize our return, given the current environment.

yetanotherphd6• 13 years ago

Here's my take on the two main issues:

Social Security: he is probably right. The most obvious social security system (ignoring welfare) is that you save money yourself, or the government saves it for you, and you get it back when you retire (this is Australia's system). Some clever economists figured out that since the total value of everything produced for the rest of time is infinite, you can make every generation better off by having each generation "borrow" from the next one. This results in the US PAYG (pay as you go) system where our generation is taxed to pay the last generation. PAYG allows people to receive a higher rate of returns on their "savings" than the market would provide. However, because demographics aren't growing at constant rate like in mathematical models used to justify PAYG, this is extremely expensive. This is how I interpret his statements about boomers who expect our generation to pay a higher tax rate than they did.

In short: demographics broke the PAYG model and so it's reasonable that current retirees get less than they might have expected under the original promises of the social security system.

On capital gains tax: he is wrong. If all capital gains were people investing in the stock market at arms length, then capital gains should be 0% because they are just a way to shift money forwards in time. A person who invests has more money in the future, but it is worth less to them because it is in the future. The reason we tax capital gains is that some kinds of capital gains are really income in disguise, like people who own 90% of a company and do a lot of work to increase its value. This should be taxed at the income tax rate.

So the current system is a hack, putting the capital gains tax between 0% and the income tax rate. But it is not a subsidy for people who have more wealth, it is a subsidy for people who can disguise income as capital gains.

dragonwriter3• 13 years ago

Capital gains are income, pure and simple; insofar as there is a justification for taxing long-term capital gains less than other income, its because it is income earned over period of greater than one year, which would thus be over-taxed in a progressive tax system if it were simply taxed as income in the year it is realized.

Of course, a flat lower rate for long-term capital gains results in them being under taxed compared to other income; a simpler and fairer solution is to tax capital gains as normal income in the year realized, but to allow taxpayers to optionally recognize gains (or, really, any income) for tax purposes in advance of realizing it.

yetanotherphd6• 13 years ago

Consider the following thought experiment: Person A earns $100 and spends it in year 1, then earns $100 in year 2 and spends it in year 2. Person B earns the same, but invests the $100 earned in year 1 at 10% interest, and spends $210 in year 2. I claim that that $10 interest earned by person B should not be treated as income, and should not be taxed.

The reason is that all person B did, was exchange consumption in year 1 at the market rate, for consumption in year 2. The fact that they got to consume more in year 2 wasn't because they were particularly advantaged in being able to save more than person A, but rather because they preferred to spend more later than earlier.

Economically speaking, interest earned is not income.

Now for other kinds of capital gain, it is generally considered that people earn some compensation for risk (again, not income) plus some small premium (the "equity premium") that might possibly be considered income.

rayiner8• 13 years ago

Income = net change in wealth (that's the Haig-Simons definition underlying the theory of the income tax). Capital gains are income as much as any other net change in wealth.

yetanotherphd6• 13 years ago

No matter what definition you have heard of, the claim that the capital gains tax should be zero is basic economic theory that is taught to undergrads (I know cause I taught it as a TA). If you define "income" to mean "what economists think should be taxed" then your equality is incorrect.

I added my own comments on why we do tax capital gains, because I prefer real life to theory.

cam_l• 13 years ago

I always thought the reason capital gains are taxed (and more importantly, should be taxed higher) is that most capital gains are essentially rent-seeking in nature. As in, they add no further wealth to the system but through successively higher valuations, extract money from it.

The reason we do NOT tax capital gains (and shouldn't) at a much higher rate is that to some degree you want investment in the future and also "that some kinds of capital gains are really income in disguise" - ie. that not all wealth creation is appropriately valued through trade (or appropriately timed).

rayiner8• 13 years ago

I think the phenomenon he mentions will have an important political ramification. The current Democratic Party, with its awkward alliance of socially liberal young people with teachers and union workers is going to fragment. Right now, young people are getting a bad shake, between skyrocketing tuition and bad job prospects. Yet, in a few years when they finally have jobs, their taxes will skyrocket to support rising healthcare costs and underfunded pensions. I bet you will see a resurgence of republicanism among young people, though it'll look very different from what the party looks like today.

redthrowaway3• 13 years ago

Socially liberal young people are an even worse fit with the rich and white or white, old, and socially conservative Republican coalition than they are with the Democrat's immigrant, urban, and public sector coalition. The phenomenon described in the article is one of the interests of the elderly being in direct opposition to those of the young, and the GOP has only further entrenched itself in favour of the former and against the latter.

The only large demographic shift I can see happening in American politics is if the GOP sheds its anti-immigrant elements and embraces a browner base than it currently enjoys. Immigrants tend to be more entrepreneurial, more distrustful of government, and more socially conservative than the average American, and so it would be a good fit if the GOP can shake the veiled racism expressed by many of its louder members.

philwelch• 13 years ago

Even the Republicans are a shaky coalition of big business, religious nuts, and quasi-libertarians, along with the racists (though the generation that swung with the Southern Strategy is aging, and most of the segregationists are out of Congress now, thankfully).

AnthonyMouse5• 13 years ago

What I find interesting is that people who are, essentially, libertarian-leaning are consistently found attempting to make the Republicans more socially liberal and almost never found attempting to make the Democrats more fiscally responsible.

The Republican demographic skews older than the Democrats. I would have thought the younger demographic would be more inclined to support sensible reforms of social security, like converting it to a basic income for everyone eligible to vote.

rayiner8• 13 years ago

You can't assume the existing alignments will stay in place. I'm thinking of what happens in say Chicago when the current generation of 20-somethings are politically-powerful 30-40-somethings. Homosexuality will be normalized by then, and the most virulent racists in the Republican party will have died off. That will leave the Democratic party a class of educated, urban younger people and a class of older public sector folks. Now, Chicago might have to find an extra $1 billion in its budget starting next year to bring its pension funding up to required levels. What happens when these younger urban folks see their taxes go up just as they start to earn some money, school services cut just as they have kids, etc, all to pay for these retired public sector employees? That coalition is going to fracture, catastrophically.

Nutella4• 13 years ago

Druckenmiller is lumping Social Security and Medicare together, which is obviously wrong.

Medicare is definitely a problem that needs to be fixed with more health care reform so we're no longer paying double what every other first world country pays for health care per capita. Social Security is fine for current and future generations. Means testing for either of them is idiotic, unless your goal is to kill them slowly by converting benefits for everyone to a welfare program.

He is trying to distract people from worsening income distribution that benefits 1%-ers like himself with sleight of hand to make a class war look like a generational war.

If he really gave a shit about the economic plight of young people he'd be talking about solving the student loan clusterfuck.

adventured• 13 years ago

There have been all sorts of unusual and immense wealth redistributions to boomers recently.

For example: the Fed stealing purchasing power - by devaluing the dollar - from the poor who can least afford to lose it, and giving it to middle and upper class home owners in the form of trillions worth of housing bailouts (by buying up toxic mortgages and dramatically reducing inventory; bailing out Fannie, Freddie etc; using QE to hold down interest rates and thus keeping mortgage rates artificially hyper low - all of which have massively and completely artificially increased the value of housing assets).

And that doesn't even touch on the trillions in stock market value that has been re-inflated by the Fed's policy of intentionally creating asset bubbles to fake a wealth effect (again). Most of the people benefiting from all this money chasing risk are the middle class and the rich, and they're disproportionately boomers.

Of course, then comes the (at least) equal but opposite reaction.

jellicle• 13 years ago

Right-wing billionaire advocates for elimination of social security and lower taxes on the rich. Color me surprised.

Only interesting thing about it is that he's trying a message he hopes will resonate with young people.

How Washington Really Redistributes Income

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