Why the Rich Should be Taxed More: Flat Taxes, Progressive Taxes and Income Inequality

Lower Central Park West in New York: one of the most expensive zip codes on earth
Lower Central Park West in New York: one of the most expensive zip codes on earth | Source

This is the last in a series of three hubs justifying progressive taxation. We have seen the moral justification for progressive taxes, and some economic arguments in favor of progressive taxes.

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The rich are not as affected by taxes

The rich, being rich, are not as affected by a rise in taxes as the poor or middle class. They can afford it. This is a seemingly obvious point that is often forgotten in this debate.

Imagine two working people. Joe makes $30,000 and Joseph makes $1 million per year. What happens when each of their taxes are increased by 5 percent? Joe will have to pay an additional $1,500, and Joseph an additional $50,000.

For someone who makes only $30,000, food and housing are major costs. $1,500 could be Joe's entire food budget for several months. But since there is not much of a price difference in the food that a low earner and a high earner buy--a potato is basically a potato--Joseph is not at risk of going hungry. He may need to shop at the gourmet deli for a few months instead of eating at 5 star restaurants, but he will be fine.

In other words, although a low earner spends $1,500 on food in several months, it is unlikely that a high earner spends $50,000 on food in the same time period. The same could be said of housing, travel/ commuting costs and other living expenses. Few multimillionaires are hard-pressed to come up with the rent by the 30th of the month. Public transport costs the same for everyone. And a high earner's car service is an optional luxury he does not need to get to work.

Even in the worst scenario, it will not severely impact the physical health or wellbeing of a millionaire or billionaire to live in a one-level 2 bedroom condo in the suburbs, as opposed to a duplex overlooking Central Park.

In other words, although the incomes grow by orders of magnitude, human needs (food, water, shelter, heating, medical care) do not. So all that extra money left over after our basic needs are taken care of, which is normally spent on luxury items, can be tapped safely without worrying about the physical wellbeing of the higher earner. They can afford it.

This does not justify excessively taxing the rich just because they are rich, and just because they have lots of "unnecessary" money. But it does mean that increasing taxes on the rich is more reasonable than increasing taxes on the poor, other things equal.

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The rich will always pay more in taxes

Some call for a flat tax. A flat tax is a situation where everyone pays the same tax rate. Thus, a person making $20,000 a year and a person making $2 million a year will both pay a 10% income tax rate, for example. There are a number of problems with a flat tax, but that is beyond the scope of this essay. The point here is that even with a perfectly flat tax, the rich will pay much more, total, in taxes than the middle class or poor.

An argument that has become popular among conservatives recently is that the rich collectively pay the vast majority of all the tax revenues the US government receives, and this is unfair. We should try to "level the playing field" and get more lower-earners to "pay their fair share." What they don't realize is that even with a totally flat tax, the rich will still account for the vast majority of tax monies the government collects. The reason for this is simple: the rich have the vast majority of the income. Since the rich will always account for most taxes, this objection to a progressive tax is meaningless.

High inequality and low interclass mobility are bad

Progressive taxation helps to reduce income inequality. A more egalitarian socioeconomic structure has been associated with many positive effects in public safety, health, and other measures of social wellbeing. More equal societies tend to have lower drug abuse, lower teenage pregnancy, lower crime and longer lives, for instance.

Inequality in the US is at historic highs, and interclass mobility is at historic lows (see chart below). Progressive taxation in itself helps to reduce inequality, and the tax revenue enables the government to further reduce it by redistributing some of the income in society toward the poorer classes in the form of healthcare, education, infrastructure, police protection, fire protection, skills training, small business loans, student loans, and countless other tools.

Interclass mobility at historic lows in the US

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The impact of inequality on social wellbeing

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Comments 43 comments

CHRIS57 profile image

CHRIS57 4 years ago from Northern Germany

I aggree with most of your hub.

But before you start talking about taxes, you may have to address trust. If people do not trust in the will and ability of their administration to use the taxes in an agreed manner, people will always see their personal financial contribution to state affairs as some kind of punishment.

That has nothing to do with equality. It has to do with mutual understanding and confidence in spending usage.

The US is way off track in this aspect. Both political parties are not really part of the society, which leads to mistrust.

Of course flat tax rates foster inequality, of course a progressive tax rate has it benefits, especially for the middle income (and lower middle income). Of course progressive taxes hurt the upper income.

And the upper income people are in political power (or close to), which in turn leads to even more mistrust.


Davesworld profile image

Davesworld 4 years ago from Cottage Grove, MN 55016

Progessivity in taxation is one of the things that is hampering upward mobility in the United States. It is easier for the wealthy to avoid the taxation than the more schmuck who is trying to climb up the ladder. This the truly wealth do not mind progressive tax rates.

Income redistribution is equally problematical. Her, the government takes money from the people the government doesn't, and after siphoning off the lion's share for itself, sends what is left over to people the government currently likes. Thus you cede an awful lot of power to a bunch of unelected and largely unaccountable bureaucrats. No thank you.


secularist10 profile image

secularist10 4 years ago from New York City Author

Chris:

Yes, trust and loyalty to the state is an essential component of any stable society. That is what really makes law and order possible, including tax laws. That is a whole other discussion, of course.

I think people still respect the state and its institutions in this country, though that connectedness is certainly not as strong as it was, say, 50 years ago. And there are groups on the margins that simply do not accept the authority of the state or are openly hostile to it.

The inequality of American society, which is as high today as it has ever been, greatly contributes to this sense of disconnectedness and inability to identify with the authorities. A permanent upper class/ aristocracy and permanent underclass are rapidly becoming entrenched in this country, and that is not good going forward.

Tax disputes related to social inequality and disconnectedness between rulers and ruled were the spark for both the American Revolution and the French Revolution.


secularist10 profile image

secularist10 4 years ago from New York City Author

Dave:

I don't see what a progressive tax system has to do with any of that. If we had a flat tax, the wealthy would be just as able to exploit loopholes and tax avoidance schemes as they are now.

The problem is really the loopholes, exemptions, deductions, etc themselves. A progressive tax, flat tax or any other tax is irrelevant on that point.

On income redistribution, again, the problem is not income redistribution itself. The problem is how it is managed and executed. I certainly agree there are countless problems with corruption, fraud, disorganization and everything else in the US government. But that does not have anything to do with the benefits of redistribution per se.

In better-run governments in the rich world, the tax system and income redistribution is much more effective and nowhere near as corrupt.


Davesworld profile image

Davesworld 4 years ago from Cottage Grove, MN 55016

Too lengthy to repeat here, my views on both progressivity and to a limited extent income redistribution as they apply, or don't apply to the wealthy are explained in my hub: http://hubpages.com/politics/Why-are-the-Wealthy-L...


secularist10 profile image

secularist10 4 years ago from New York City Author

You say the wealthy support progressive taxation because by taxing those high incomes, the government prevents people from accumulating enough to break into their wealthy sphere.

It's an interesting theory, but there are a few flaws with it. First it is too conspiratorial, which makes it unreasonable.

You correctly point out the difference between high wealth and high income, but you forget that most or all high wealth people also have very high incomes. There are extremely few individuals who have such enormous wealth that they don't have to work.

If you look just at the highest earning individuals, you will see that they too are largely liberal and support progressive taxation.

And anyway, the progressive tax system will hardly prevent a high earning individual from becoming a member of the wealthy class. There are countless examples of people who made a lot of money, and--surprise, surprise--became rich. A 35% income tax will not prevent someone who makes $300,000 a year from becoming a millionaire after, say, 10 years of work.

The real reason the high wealth/ high income Americans tend to be liberal is because of cultural factors. They mostly live and work in regions of the country that are more liberal--the coasts and the Northeast, and big cities like New York, LA, Chicago, San Francisco and Boston.

The entire performing arts set (actors, musicians, recording artists, entertainers, comedians) are uniformly liberal right off the bat, so the most successful members of that group will be very liberal as well.

The Silicon Valley set also tend to have liberal values, and from their ranks come some of the most innovative and dynamic companies (Facebook, Google, Apple, etc).

Indeed, through history, artists, innovators, creative types, intellectuals and even traders have typically been more liberal, and they have always congregated in large cities. They are more open minded, more critical of tradition, more radical, more experimental, more risk-taking. These are all attitudes that support a liberal outlook. It is poor, rural, more religious people who tend to be more traditionalist and conservative.

It is a common mistake to think that just because someone will not totally benefit monetarily from a policy, that therefore they should be against it. Look at regulations on pollution--everyone supports those, even though they know they make costs and prices rise.

So it is not unreasonable to imagine a very high income person supporting progressive taxation.


CHRIS57 profile image

CHRIS57 4 years ago from Northern Germany

I don´t pay my taxes in the US. I live in a highly progressive income tax situation. Of course it makes my eyes wet when i get incentive payments at the end of the year and find out that it is worth only some 54% (42% max. tax hike + East Germany solidarity contribution). But for that i get (close to) free college / university education for my kids and my wife to say the least, not to forget that part of my own education was even subsidized, coming from a low income family.

That is what i want express with trust. I have faith in our government and administration, that tax revenues are mostly spent in a proper manner and that there is enough transparency to allow insight.

And we have virtually no difference in corporate taxation and personal income taxation. That is also very healthy for social life. There will be no comparison necessary like Mitt Romney´s tax sheet compared to his secretary´s tax rate.

The discussion doesn´t have to be academical. There are other societies and economies (most in Northern Europe) that have highly progressive taxation that works.


chip1775 profile image

chip1775 4 years ago from Atlanta

Class mobility is directly linked to how robust an economy is and how easy it is to start and run a business. Taxation is a deterrent to mobility, especially a progressive tax structure since it discourages growth. I don't see the link you have made, and you support it poorly. The graph you have shown about class mobility shows a correlation between social programs and a dereasing class mobility since government has had a higher role in citizen's personal lives since the 30's. Wouldn't you agree?


secularist10 profile image

secularist10 4 years ago from New York City Author

Chip:

"Class mobility is directly linked to how robust an economy is and how easy it is to start and run a business."

That's true. And a robust economy and ease of running a business is, in turn, related to the infrastructure, education system, healthcare system, protection of property rights (i.e. police and fire protection), safety and security, an efficient financial system, and many other things. All of which require government activity to some degree, which requires taxes.

"Taxation is a deterrent to mobility, especially a progressive tax structure since it discourages growth."

No. Taxation in and of itself is simply a tool. Like a hammer. A hammer can be used to kill someone, or it can be used to build a house. It's all in how you use it. Taxes can hurt or help prosperity, depending on how they are used.

A progressive tax system does not, in and of itself, discourage growth. There is no such relationship in the data, for the US or internationally. Insofar as progressive taxation gives the government more money to help the economy in the ways I mentioned, it helps growth.

"I don't see the link you have made, and you support it poorly."

Well, that's your opinion. If you have something more specific to say on the presentation, then I can respond.

"The graph you have shown about class mobility shows a correlation between social programs and a dereasing class mobility since government has had a higher role in citizen's personal lives since the 30's. Wouldn't you agree?"

That's one factor. Although I'm not entirely clear on what specifically you mean by "government's role in personal lives"--Welfare? Social Security? Medicare? The Voting Rights Act? The FDA? All of the above? Some of these have an influence on people's personal economic decisions, and some do not.

But actually, there was a rollback in that kind of intervention in the 1980s and 1990s and 2000s--and yet class mobility continued to decline. That indicates something else is at work. Something more fundamental. It is no coincidence that income inequality shot up while class mobility declined in the late 20th and early 21st century.


chip1775 profile image

chip1775 4 years ago from Atlanta

I'm not attacking, just disagreeing, I apologize if that is needed. My point is that it is a poor argument that rich people should simply pay a higher percentage because they make more. A more pointed argument would be one that shows how society is benefited by it. From what I see, there is a decline in mobility following the New Deal and then again after Johnson's Great Society. You show a sharp decline after the 40's followed by a continual gradual decline thereafter. If the 80's, 90's are at fault wouldn't that sharp decline be in that period? Remember that despite tax cuts during this period, nothing was done with regards to social programs. Many point to Reagan's ballooning debt, but disregard the fact that he presided over a completely democrat controlled Congress and had no chance ever of reforming or cutting the social programs that are such a burden on our society. Perhaps it is not that taxes are too low, but that government costs are too high? Many people argue that we benefit from roads and education. I agree, but is this an argument for all social programs and their unchecked costs? Also, education has historically been the responsibility of local governments, never a federal one.


secularist10 profile image

secularist10 4 years ago from New York City Author

You are welcome to disagree. I welcome all challengers.

"My point is that it is a poor argument that rich people should simply pay a higher percentage because they make more."

That would be a poor argument, but that is not my argument. Indeed, I do very much consider the social effects. That's really what it is all about.

"You show a sharp decline after the 40's followed by a continual gradual decline thereafter. If the 80's, 90's are at fault wouldn't that sharp decline be in that period?"

My point was simply that over many years, government intervention in people's lives declined, yet class mobility also declined. So your argument was wrong. That's all. I didn't mean that a sharp decline in and of itself was the key to everything.

"Remember that despite tax cuts during this period, nothing was done with regards to social programs."

That's not true. First of all, tax cuts themselves do constitute a reduction in government intervention in people's lives. But more importantly, there was significant welfare reform in the 1990s under Clinton, as well as other, smaller changes. Under Clinton, commercial banks were allowed to merge with investment banks and trading houses (a major reason for the recent financial crisis), for the first time since the 1930s. This is another example of government getting "less involved."

This country is a mishmash of over-regulated and under-regulated components. So, again, it's complicated.

"Perhaps it is not that taxes are too low, but that government costs are too high?"

Yes, of course, the ballooning costs in the government are a major concern. But that is a separate issue.

"Many people argue that we benefit from roads and education. I agree, but is this an argument for all social programs and their unchecked costs?"

No. It's an argument for government intervention and taxation. At what level, and at what cost, is another issue entirely.

And it's not just that we benefit from these things in a general sense. These things actually lead to more prosperity, more class mobility, more job creation, more business opportunities, more economic dynamism. That's why funding them is so urgent and important.


mercuryservices profile image

mercuryservices 3 years ago from Honolulu, Hawaii

Agreed.


LandmarkWealth profile image

LandmarkWealth 3 years ago from Melville NY

Your argument in the context of flat tax versus progressive is flawed. A flat tax will in fact mean that the wealthiest among us will still pay the lion’s share of the tax burden as they do now. But the difference is that the argument for the flat tax is based more on efficiency not a percentage of dollars. The percentage is irrelevant. Tax rates are marginal rates…but not effective rates. Since the end of WW2 the effective rates have not changed. They have only shifted the categories under which they label the revenue source. The treasury collects the same amount of tax revenue as a share of GDP regardless of the historical rates. That is historically between 15-20% depending on the economic output. The revenue was no different when the highest marginal rate was 92% as it was at 28%. This is because people alter their behavior as rates and rules change. When rates increase I defer more income. When they decline I will report more income. Wealthy people can much more effectively control when they choose to take income and from what sources then the poorest among us. So the rate has nothing to do with what they actually pay. Changes in the code can potentially suppress or stimulate capital formation and produce more or less economic expansion. But the revenue as a share of GDP is fairly constant. The argument for the flat tax is rooted in the lack of efficiency in the code. Both wealthy individuals and business devote an enormous amount of time and wasted resources towards maneuvering around the tax code that could and should be utilized for more productive allocation. It contributes towards a reduction in capital expenditures. Case in point…It costs me thousands of dollars in unnecessary accounting fees each year to run my company and file my personal returns. And all for what purpose ??? No matter what the code has been, we end up with the same revenue percentages of GDP. And my effective rate has historically gone down during periods of higher marginal rates. The flat tax argues in favor of more revenue through simplification of the code to arrive at the same percentage. The number is and always has been a percentage of GDP. So the only benefit of the flat tax is to expand GDP by freeing up capital for more productive usage. The year over year revenue is linked to below. But one thing has been proven over and over…The gov’t will not get more than 20% of GDP.

http://www.taxpolicycenter.org/taxfacts/displayafa...

You correct about the income inequality to a certain extent. But the reduction in things such as the decline in the poverty level coincides with the massive expansion of gov’t entitlements under the Great Society. Prior to these mid 60’s policies, the decline was much more rapid. Since these social engineering experiments have expanded, at best the nation has stagnated. It may be quite possible that the nation simply plateaued in terms of minimizing poverty. But clearly there was no improvement after such policies. The other aspect of this divergence is more related to monetary policy than fiscal policy. The devaluation of the dollar has a much more profound effect on those in the lower stratosphere of the income range. Unfortunately, the larger the societal entitlements, the weaker the currency will get. The more gov’t expands its benefits, the less purchasing power those who receive them will have. But taxes are largely irrelevant in this context. As we know, the top 0.1% of earners already carry more of the tax burden than the bottom 80%. That is about as lopsided as the revenue sources have ever been in US history. During the periods of the 40’s and 50’s where there was this greater mobility you speak of, the middle class paid a much higher percentage of the revenue to the treasury then they do today. In the late 50’s the bottom 2/3rds of income earners paid about 30% of all income tax revenue that the treasury collected. By 2010/2011 they paid only about 7% of all the tax revenue collected. So as per the Treasury, the revenue as a share of GDP has not changed, yet who has paid this revenue had shifted dramatically towards the higher earners. And yet at the same time…the disparity among the rich and the poor widened. Clearly there is no correlation between the wealthy paying a higher percentage of taxes, and greater prosperity among the middle to lower class. And there has never been a connection between the total revenue the treasury collects and the marginal tax rates.


secularist10 profile image

secularist10 3 years ago from New York City Author

Landmark:

"The treasury collects the same amount of tax revenue as a share of GDP regardless of the historical rates."

And during that entire time, we have had a progressive tax system. So that is not an argument for a flat tax. Although it is tempting to say that just because the pull is always around the same, therefore why don't we just have one rate, it does not follow that if we had a single rate, that therefore we would get the same result. It's not a math formula.

And in fact, in reality we know it would be different because of all the loopholes and other advantages the rich have, thus rendering a flat tax not actually flat, but rather regressive.

The specific tax rates are up for debate, but it's clear that a progressive system is the best.

"So the rate has nothing to do with what they actually pay."

If anything, this supports changing the tax laws and loopholes that regressively benefit the rich. It is not relevant to the concept of progressive taxation itself.

"The argument for the flat tax is rooted in the lack of efficiency in the code."

No, because you can have a simpler and more efficient tax code than the current one, and still have it be progressive. The argument for the flat tax is rooted in the desire for lower taxes, especially for the rich.

As far as the Great Society--that was a flawed program all the way through. But that does not therefore mean that all government action against poverty or its related problems is doomed to fail. The welfare states of Europe are far more successful by almost every measure.

"During the periods of the 40’s and 50’s where there was this greater mobility you speak of, the middle class paid a much higher percentage of the revenue to the treasury then they do today."

Yes, because they had more of the pie! The more the national income is concentrated in the hands of a few people, the more those few will pay in taxes, relative to everyone else. In the 1940s and 50s, the middle class had a MUCH higher share of total national income, and that is why they paid a greater percentage. They had more money to be taxed, relative to today.

This is precisely why the conservative argument for the poor and middle class to "pay their fair share" is ludicrous. They already are paying it. If anything, it is the rich with their loopholes and deductions that are not paying their "fair share."

"revenue as a share of GDP has not changed, yet who has paid this revenue had shifted dramatically towards the higher earners."

Yes, because the GDP itself has shifted dramatically towards the higher earners.

"Clearly there is no correlation between the wealthy paying a higher percentage of taxes, and greater prosperity among the middle to lower class."

That's because the wealthy paying a higher percentage of taxes is caused by the wealthy having a higher percentage of the total income, which by definition means the middle and lower classes have less prosperity.

I of course agree there should be greater simplification in the tax system because as you said there is a ton of waste at many stages of the process. For that, you should focus your attention on the wealthy companies and individuals (and their lobbyists and allies in the government) that have written, and continue to write, the tax code.


LandmarkWealth profile image

LandmarkWealth 3 years ago from Melville NY

It follows that we would have the same rate because we would eliminate nearly all deductions under a flat tax system if implemented properly. So a 20% rate would mean precisely 20%. The only exclusions to treasury revenue would be what happens in the shadow economy, which will always exist to some degree. But with lower marginal rates that align identically with effective rates, there is far less incentive and ability to manipulate the code, and it does become a simple math formula. There would be nothing regressive about it if in fact the deductions were gone. So in fact the flat tax remains progressive but far more efficient. I would suggest it is even more progressive than the current system. But if you had a 40% top marginal rate as we do now, plus the countless other taxes paid at the Federal and State levels that can bring you to well over 60%, you would get virtually no Cap Ex without the deductions currently available. After all, I can’t possibly ever imagine advising a client to invest in a new venture that may possibly fail, but IF it works out they’ll only keep about 40-50% of the benefit. I wouldn’t stay in business very long with that type of advice. The support for the flat tax is premised on the elimination of complexity. That complexity is not so much the tiered rates as much as it is the deductions that accompany the rates, as well as the parallel tax code under AMT. This principal argument is in NO way based on lower taxes for the rich, but rather the same rate, since they already pay nearly the entire tax burden. I have worked for and with “Rich” people nearly my entire career in the wealth management field. None of them are paying more than a 20% effective rate. There are an infinite number of ways for me to shelter money to lower the effective rates. And when all else fails, we can go partially offshore with assets. When the incentives are there to declare income, we declare it. When they’re not we draft things like Non-Qual deferred comp plans as one such basic example. If we had a flat tax with no deductions at a hypothetical rate of possibly 18%, nobody is rushing to hide assets. I don’t think I have ever met a client that would object to paying the same effective rates they are already paying without the hassle of having to coordinate my services, along with estate and elder care attorneys and an army of CPA’s and tax attorneys. They’d much rather pay their current 18% rate and be done with it, while using their time and resources for more productive activities.

Europe is in a state of total disaster. Aside from the unmanageable budgets they have engulfed themselves in with their entitlement state, they have a GDP per capita and per hours worked that is dwarfed by the US. Outside of Germany they have become a completely unproductive society with double digit unemployment in perpetuity. Unlike the US which has only recently seen such a spike in unemployment, 8-10% is the norm across Europe. I don’t regard that by any means as a measure of success. If your idea of a successful entitlement system is to have a less self-sufficient society that produces less overall wealth and more people dependent on gov’t, than I guess Europe could be cited as a success.

The share of the national income has nothing to do with the tax system. That is an entirely different set of issues. Wealth is not finite, and must be created. Just because one person becomes wealthy doesn’t mean someone else has in turn lost wealth. If I generate a substantially larger income than the vast majority of my neighbors and account for a much greater portion of the regional or national GDP, that doesn’t mean they have been somehow restricted from attaining a similar degree of productivity and wealth creation. I grew up in an extremely impoverished environment, and became quite successful, while most of the people I grew up with ended up far less successful. My share of the national GDP was solely a result of my willingness to go the proverbial extra mile, and make sacrifices that many people around me believed weren’t worth it at the time. But my success did not inhibit their success at any point in time. Unfortunately, we as a whole have become a lazy and less self-sufficient society, although not quite to the extent of Europe. This disproportionate amount of wealth you speak of also coincides with the expansion of the entitlement state and the Great Society like polices that continue to perpetuate the system. There will always be some people with an entrepreneurial spirit. But as gov’t has become a larger portion of our economic lives, more people have become dependent on Gov’t. And as such their portion of the economic pie has shrunk. Anyone who is waiting for a gov’t intervention to increase your standard of living will be waiting a long time.

Even more importantly wealth disparity runs parallel with the currency devaluation that has gone on for the better part of a century. Purchasing power has been substantially eroded over the last several decades. In order for the gov’t to hide the effect of its fiscal profligacy to support our entitlement state, they have simply altered the way we calculate data around inflation. For several decades now, this data has not represented the “constant standard of living method”. Even with the current incredibly flawed methodology, real wages haven’t increased since the 1990’s. But this has nothing to do with “Rich” people getting rich privately. It is the result of the inability to stretch a dollar as far as we once could. But when men like Steve Job’s made billions reinventing the world of technology, they did not make other people poor, or less wealthy.


LandmarkWealth profile image

LandmarkWealth 3 years ago from Melville NY

Another quick point. While I agree there is a growing income inequality, the data is somewhat overstated. Most of the studies around income inequality leave out the significant increase in employer financed benefits which did not exist generations ago in the scope that they do today. They also do not consider existing transfer payments that are already in place. Another component to consider it that those on the highest end of the income spectrum are greatly rotational. The commonly quoted data around top earners includes onetime windfalls of table income. For example…each year all over the country people of relatively reasonable middle income ranges have jumps into the highest range for a brief period because they sold a piece of property, or a business interest that produced a onetime lump sum. But their income is traditionally much lower. This creates a wide distortion of who is receiving this income, and a false reflection of the unequal distribution. This data is way too cyclical to measure by simply looking at gross income across tax returns, and doesn’t look at personal income at an individual level over time. Many people who are in the highest brackets fall back to much lower brackets relatively quickly only to be replaced by someone else. However, when we look at the distribution of total wealth across households, the disparity is not nearly as wide when compared to periods like the early part of the last century. The true disparity among income exists more between levels of marketable skills, and education.


secularist10 profile image

secularist10 3 years ago from New York City Author

Eliminating deductions has absolutely nothing to do with the flat vs progressive issue. As I said, we could hypothetically eliminate all deductions in the current system and it would still be progressive in nature. And of course it would be much more efficient and less wasteful.

"There would be nothing regressive about it if in fact the deductions were gone."

You would have to do a lot more than just eliminate deductions. You would also have to eliminate preferential rates for things like capital gains that overwhelmingly go to the rich. In any case, the rich would always leverage their relationships and connections to get an advantage. A progressive system mitigates that effect, although not entirely eliminating it.

"The support for the flat tax is premised on the elimination of complexity. That complexity is not so much the tiered rates as much as it is the deductions that accompany the rates, as well as the parallel tax code under AMT."

Again, complexity is totally separate from progressive vs. flat. You can have a progressive tax with no deductions and no complexity, and you can have a flat tax with many deductions and tremendous complexity.

"This principal argument is in NO way based on lower taxes for the rich, but rather the same rate, since they already pay nearly the entire tax burden."

They pay nearly the entire tax burden currently, at the current rates. Obviously if the flat tax were introduced at anything below the current effective rates (which are the only proposals on the table), they would pay LESS than what they pay now. So of course that is a major reason why many of them support it. Isn't it interesting that you never hear anybody advocating a flat tax of, say, 35% or 40%?

"I have worked for and with “Rich” people nearly my entire career in the wealth management field. None of them are paying more than a 20% effective rate."

I assume you are talking about unadjusted gross income. Because plenty of people (rich and middle class alike) pay more than that as a percentage of their adjusted gross income: http://www.nytimes.com/2012/02/04/business/at-102-...

And anyway I can certainly imagine plenty of people paying more than 20% of their unadjusted gross income as well.

"If we had a flat tax with no deductions at a hypothetical rate of possibly 18%, nobody is rushing to hide assets."

Yeah, nobody would be rushing to hide assets if that rate were introduced tomorrow. But guess what--memories fade. In time, people would say 18% was way too high. Conservatives are griping that 40% top marginal rate is too high. In the 1980s they were celebrating when Reagan brought it down to 50%!

In other words, it's all relative to what you think is fair and your unique frame of reference at a given point in time. It is EXTREMELY subjective. In certain European countries where rich people pay most of their income to the government, they see it as fair. If you grow up in a world where the highest tax rate is 15%, then one day when somebody suggests raising it to 20%, you will protest in the streets. Yet at today's rates, 20% is a bargain! It's all relative and subjective.

That's why I said that just because you have a flat tax does not in and of itself guarantee that the Treasury would get the same revenues as it has historically.

You will note that conservatives have never in modern history advocated any tax increase of any kind. The bias is always for LOWER taxes. That means that conservatives do not have any kind of "ideal" rate in mind that they desire, their ideal is simply "less than whatever the current one is." If it's 50%, they want 40%. If it's 40%, they want 35%. If it's 35%, they want 18%.

None of this is to imply that liberals are any better, of course.

"...they have a GDP per capita and per hours worked that is dwarfed by the US."

Not true at least for GDP per capita. By the World Bank's calculation, Norway, Sweden, Denmark, Switzerland and Luxembourg have higher GDP per capita than the US. By the CIA World Factbook, Norway and Luxembourg are higher than the US. And for those that are lower, they are not often "dwarfed." For instance, the World Bank puts the US at $50k, and the Netherlands and Ireland at $46k, Germany at $42k, France at $40k, and the UK at $39k.

In any case, most Western European countries outperform the US on almost every social metric (murder, teen pregnancy, teen abortion, obesity, long lives, STD infection, and others). Not to mention income inequality. True, they usually underperform in unemployment and GDP and growth.

But your original point was that welfare in general does not work. I gave the example of Europe to show that it can, and does. You cannot then move the goalpost.

"Just because one person becomes wealthy doesn’t mean someone else has in turn lost wealth."

That's only true in the long run. In the short run, the pie is finite. One business' gain is his competitor's loss. One guy gets a job, that means the other applicant did not.

Sure, the income inequality thing is not perfect. But it does give an idea of the trends over time, which is the main issue. And employers are more and more reducing benefits these days.

And since the vast majority of all assets and investments are held by a small minority of people, any boost that a middle-class person gets from selling a home for example is likely to be VERY insignificant in the grand scheme of things.

Most people do not realize just how much money the rich actually have.

Now, there is nothing wrong with that, in fact it's great. I applaud and admire those like yourself who have worked their asses off and gotten the results. I'm starting some new businesses myself at the moment. So I'm a firm believer in entrepreneurism and rewarding success. Of course, that applies much more to the middle and lower classes because the vast majority of businesses are in those levels, not the top 1%.

It's the middle and lower class entrepreneurs and business owners that are hardest hit by the current tax system in America, not the elite corporations.


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LandmarkWealth 3 years ago from Melville NY

Eliminating deductions has everything to do with Flat vs Progressive as the definition of progressive pertains to tiered marginal rates. I agree at flat tax will still be progressive in terms the proportionate share of revenue paid. But it is impossible to eliminate the concept of itemized deductions and keep the current tiered system while still having a functioning system that provides for capital formation. There is no reason to have a preferential rate at all. If the Flat tax were as an example 18%, it could apply very simply to all forms of income. Capital Gains…Interest income…dividend income etc. The point is Progressive as defined by a tiered system where the highest marginal rates are at levels near 40% would strangle capital formation if not for the numerous forms of deductibility. I am simply stating we can have the same share of revenue to the treasury we have had for the 3/4ths of a century by setting the flat tax with no deductibility in the same range as that corresponding revenue has always been.

How do you arrive at the conclusion that under a Flat tax the wealthy would pay less. They’re not paying much more than about 15% anyway. When I say wealthy, I refer to the people with perennially high incomes, not those that see short term jumps in income and float in a high marginal rate for a year or so. The “Rich” you refer to aren’t paying 35-40% now. They’re paying about half of that now. If you implemented a flat tax with no deductions you would see a complete halt to capital expenditures, and money would simply go offshore. Just look at what that ridiculous luxury item tax did to things like the New England boating industry in the early 1990’s. Wealthy people just went overseas to buy yachts and the industry was crushed. The net result was less tax revenue, not more…with various companies going out of business. There is a very old saying in economics. Capital goes where it is most welcome…and Capital stays where it is treated best.

Yes I was referring to unadjusted gross income in terms of the wealthiest of Americans. As the article you linked to stated, Mr Ross paid 20% on his unadjusted gross income. Qualfied plans such as he referenced are only a small example of ways to minimize the tax burden both unadjusted as well as minimizing MAGI. But the article brings out exactly the point I am bringing out. At the Federal level, whether it’s Mitt Romney, or someone making 750k a year, they aren’t paying 40% anyway, with a few exceptions for people who receive extremely poor guidance. The other examples cited are still quoting only the tax rate on AGI. But that is still not their effective rate. Outside of the AMT penalties, AGI still allows for various itemized deductions, such as capital loss carry forwards, property taxes, passive losses, mortgage interest deductions, and countless other ways to minimize the burden. They all further reduce the effective rate. So quoting the AGI is not a finite picture for the vast majority of Americans.

I seriously doubt that anybody is complaining about an 18% effective rate. And Reagan didn’t really bring down the rate. Yes he and JFK both dropped the marginal rates which bottomed at 28% in the 86 act. But the point is that when the rate was over 70% or 92% in the early 50’s…nobody was paying that rate anyway. It was little more than symbolic. He simplified the code to some degree by eliminating various deductions like credit card interest to offset the decline on the marginal side. How quickly people forgot all the tax loss schemes that existed back then like depreciation for property losses in Real Estate Investment Partnerships that he eliminated. High end earners like Dr’s used to use these techniques to get their income down to close to ZERO each year. It was a real art form. The simplification helped the economy when people stopped spending time figuring out ways to lose money on paper and utilized their resources more efficiently. But the tax revenue paid by the wealthiest of Americans in aggregate dollars went up. And the percentage of income paid on an effective basis was largely unchanged.

I agree that fair is subjective, but the high tax on capital in European economies also goes hand in hand with low capital investment in things like venture capital. Capital has legs, and in a global economy, which we will be in forever, it’s easier to flee. Which is why Europe isn’t exactly leading the world in the latest innovations.

Your comparisons of the countries used is a poor one because these are not economies of the scale and diversity of the EU members that would be more comparable to the US. The data between the nations that are EU members is significant. Germany as an example at $42 is significant when compared to the US, when you consider that these are both developed economies for some time. However, it’s interesting that you cited the countries like the Scandinavian ones that have recently instituted the most free market reforms. Since their tax and spend entitlement state took them to the brink of insolvency in the early 1990’s, they have dramatically cut the size of public spending as a share of GDP and reduced tax rates. In fact the corporate tax rate is a little more than 20%. They turned over the operations of hospitals to private companies to run, instituted school voucher programs and various other free market reforms that are the polar opposite of what the EU members have done. So while the Scandinavian models are not consistent with the rest of Europe, I applaud them for recognizing their profligacy and correcting it. The welfare state didn’t work in those nations, and they corrected their direction. The EU members have yet to change direction away from the welfare state, and things are far from working well.

The vast majority of all assets are really not held by a small minority. Many assets are held indirectly. For example, a teacher who never owned a stock in her life still has significant holdings through her state pension system. About 70% of the NY state teachers retirement system is allocated towards equity holdings. There are a few well documented studies that looked at the rotation in those who entered and exited high marginal rates. There was a significant impact.

The economic pie is not finite in the short run or long run. One person doesn’t get a job, so he has to find a way to be more innovative. He can start his own business, invent a new product or do anything he can to enhance his economic value. At any point in time we are all capable of creating capital. But I agree that the small business owners are the hardest hit. But not because of what they pay. Most of them post a loss the first three years and pay little to nothing in taxes. They are the hardest hit by tax compliance. Which is my ultimate point. It is an unnecessary web of rules that could make all of our lives easier by simply setting a simple rate at what the wealthiest among us are paying anyway. In terms of how much Rich people have. It seems like a lot from the perspective of the average American. But in reality, if we taxed 100% of the income of the top 1% of income earners, we could only pay 25% of the total revenue need to pay the Federal Budgets annual spending. That assuming you could get them to produce the same income for no reward, which is impractical. So clearly the funds need to come from someplace else.


LandmarkWealth profile image

LandmarkWealth 3 years ago from Melville NY

Lastly, many of the social metrics you include pertaining to Europe are flawed. For example, in Britain you’re far less likely to be murdered than in the US. However, you are far more likely to have a violent crime committed against you such as robbery, or have your home burglarized. The longer life expectancy is only partially true. Most of that data comes from reports put out by the WHO and the OECD. Unfortunately many countries don’t use the same standard in terms of calculating things like life expectancy and are permitted to report them any way they wish. As one example is infant mortality, which has a major impact on national life expectancy. The U.S. includes “all deaths after live birth and defines births as live if newborns show any sign of life, regardless of prematurity”. Yet Australia and Germany include only deaths of infants who weigh at least one pound at birth. In both Belgium and France, the deaths of infants born after less than 26 weeks of pregnancy are just simply excluded from the data. The United Nations Statistics Division, which collects data on infant mortality, stipulates that an infant, once it is removed from its mother and then "breathes or shows any other evidence of life such as beating of the heart, pulsation of the umbilical cord, or definite movement of voluntary muscles... is considered live-born regardless of gestational age." While the U.S. follows that definition, many other nations do not. In Switzerland "an infant must be at least 30 centimeters long at birth to be counted as living." This simply excludes many of the most vulnerable infants from Switzerland's infant mortality measure. While the US is including deaths of individuals who may be only minutes to days old in their averages, other nations are not. So as you can see there is a great degree of latitude in how we accept such data. Yet one thing that is certain is that life expectancy is a problem in the US. But it’s a problem because people are living too long and placing an even greater strain on our defined benefit plans both public and private. The best place to get accurate data on this is the actuarial society. They are required to be accurate, and do an amazing job of it. Otherwise life insurance companies would lose a fortune. And according to them, when you reach age 65, you have a better that 75% chance that you will live to age 92. That’s quite an improvement over the years.


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secularist10 3 years ago from New York City Author

Been busy the last few days, as this is my busiest time of the year.

Now, you said:

"Eliminating deductions has everything to do with Flat vs Progressive as the definition of progressive pertains to tiered marginal rates."

What does one thing have to do with the other? Yes, tiered marginal rates are what define a progressive tax system. This has nothing to do with, say, mortgage deductions or student loan deductions.

Here is a hypothetical marginal tax system free of deductions and exemptions and everything else:

Income 0-$10k=0% tax

Income $10k-$50k=10% tax

Income $50k+=20% tax

That's it--no deductions, no nothing.

"But it is impossible to eliminate the concept of itemized deductions and keep the current tiered system while still having a functioning system that provides for capital formation."

That's really going out on a limb, especially since the current American system has such low income tax rates relative to the rest of the rich world. It also largely depends on what your exact definition of "capital formation" is.

"I am simply stating we can have the same share of revenue to the treasury we have had for the 3/4ths of a century..."

And I'm saying that's not necessarily true given what I've said above.

"How do you arrive at the conclusion that under a Flat tax the wealthy would pay less."

Re-read what I wrote. I said if the flat rate was less than the current effective rate, by definition they would pay less. If the flat rate is 18%, and currently they pay 20% (for example), then the flat rate is less.

"If you implemented a flat tax with no deductions you would see a complete halt to capital expenditures, and money would simply go offshore."

I'm assuming this was a mistake on your part, since I don't think you want money to go offshore.

But in any case, yes, the rich often pay less than the 35-40%. That's why, in my opinion, we should raise the rates on the super-rich (those making $10s of millions or $hundreds of millions or more). One of the many problems with the current system is that someone who earns $300,000 is subject to the same rate as someone who earns $3 million, same as someone who earns $30 million. So income increases by orders of magnitude, but the tax rate does not. The tax rate increases from $30k to $50k, or from $50k to $100k, but then it stops.

Notice that it stops increasing right as we enter the zone where the vast majority of the income lies.

This is one of the most significant regressive features of the current American tax system, but that's another conversation.

"There is a very old saying in economics. Capital goes where it is most welcome…and Capital stays where it is treated best."

Well, I've written a number of hubs about the flaws in traditional economics. But in various European countries you have much higher taxes on everything, yet these countries attract plenty of investment, both internally and externally. Why? Because taxes are only one part of the decision-making process. How educated/ skilled is the workforce? How well-maintained is the infrastructure? How safe is the society? How strong is the rule of law and property protection? These are the kinds of considerations that tend to be far more important than just an additional few percentage points to the government here or there.

That's why a country like Sweden enjoys more investment than a country like, say, Belarus, even though the latter has much lower income tax rates. Insofar as taxes go to education, safety, fire protection, healthcare and other good things, they actually *increase* prosperity, and help the society attract investment.

"At the Federal level, whether it’s Mitt Romney, or someone making 750k a year, they aren’t paying 40% anyway"

Of course, but their effective rate is still higher than those that make less income. That's why it's progressive.

"Your comparisons of the countries used is a poor one because these are not economies of the scale and diversity of the EU members that would be more comparable to the US."

I cited Germany, the UK and France. Of course they are comparable to the US. Japan is another huge economy with a GDP per capita that is close to the US, despite having a much more generous welfare state. You can't argue the facts.

"The welfare state didn’t work in those nations [Scandinavia], and they corrected their direction."

What are you talking about? Certainly, their public sectors were gargantuan in the 1980s before the reforms. But they cut it back and streamlined it, introducing the private sector reforms you mentioned. They still have a VERY expansive welfare state compared to the US. No reasonable person can look at those countries and say "the welfare state didn't work or doesn't work." It's clearly working just fine. It is less than it was 30 years ago, but still greater than the US today.

Certainly in countries like France and Greece, the welfare state has been managed extremely poorly. But in countries like Germany and Denmark, it is managed very well. To cite the failures and conclude "therefore welfare does not work" is equivalent to looking at the failings of corrupt dictatorial political systems and concluding "governments don't work; we need anarchy."

"But I agree that the small business owners are the hardest hit. But not because of what they pay. Most of them post a loss the first three years and pay little to nothing in taxes."

I was referring to what they pay. I have seen firsthand the damage that paying ridiculous taxes does to small business that are profitable and successful. All so that we can subsidize the rich and powerful corporations and high-earners through low capital gains taxes, corporate welfare, subsidies and all the rest of it.

"The economic pie is not finite in the short run or long run. One person doesn’t get a job, so he has to find a way to be more innovative."

Well, it's not as if it's feudalism. There is opportunity. But wealth has to be created. Until new wealth is created, there is a limited amount of wealth in existence.

Until that guy finds a way to be more innovative, which could take years, he is an economic loser as his competition earns money from the job he lost.

"in Britain you’re far less likely to be murdered than in the US. However, you are far more likely to have a violent crime committed against you such as robbery..."

I know that. That's why I did not cite robbery or burglary as areas where Europe is better.

If the stats come from an international organization, they usually have a consistent methodology across countries. I did not refer to infant mortality, I don't have anything to contribute on that particular topic, other than to say that it would not surprise me if, adjusting for all the factors you mention, many of these countries still outperform the US simply because of better overall healthcare systems and less poverty.

I agree we cannot sustain the current retirement system. It's my prediction that in the coming years more and more people will continue working productively past the traditional "retirement" age. It's more rewarding and enjoyable, and better for you health-wise, to keep working and keep active anyway.

I have a friend here in NYC who is about 63 years old, looks like he's in his 40s and lives like a bachelor in his 30s. He's in amazing shape and still works full-time in music production. That's as good a model as I have seen for an aging workforce.


LandmarkWealth profile image

LandmarkWealth 3 years ago from Melville NY

That’s ok there is no deadline to share ideas. The problem with you example of marginal tax system (and I realize it was just an example) is that I personally do not want any system in which anyone who has income pays zero. I do not like the idea of people voting without having to contribute to the cost of the services rendered. It is healthy for everyone to have skin in the game. Secondly, I am fundamentally opposed to a system that is progressive and punishes the creation of wealth while simultaneously encourages the creation of debt through tax incentives. It’s counterproductive to sound financial advice.

I am talking about inhibiting capital formation with as an example a 40% marginal rate as we currently have, plus all of the other state and local taxes that are assessed along with payroll taxes and expect to create investment capital. Most small businesses are S-corps and LLC’s. They are taxed at the personal income tax rate. So if their actual effective rate was 40% plus all the additional taxes there would be no reason to form the business entity to begin with. The risk of failure in a new venture is high enough. If half the profit or more is lost there would be no incentive to start the company and take the initial risk. I had a marginal combined rate of over 35% all total last year. If that was what I actually paid, I would have been better off working for someone else and not start the company.

Comparing other wealthy nations is a poor example. Because many of the developed nations have problems raising investment capital because they too have become too bureaucratic. Yet all total, we as a nation have an easier time raising venture capital dollars than most places in Europe because we do have overall lower effective tax rates. There are other factors, but taxation is a big part of any investment decision. If it wasn’t that insurance companies wouldn’t sell ILIT’s and the Muni Bond market wouldn’t exist. Investors do care about the after tax return on dollars.

I still don’t see any evidence that a Flat tax would change the revenue to the Treasury to the negative. On our best most prosperous years in US history the treasury took in a little more than 20% of GDP. Even if the simplicity didn’t increase capital investment (which I think it would and expand GDP at the same time) and GDP progressed at the same rate, then those in the highest brackets like the Mitt Romney’s of the world would still be paying the same rate they already pay without the deductions. They may alter where they realize their income from on paper. But if he is paying 15% now, he would still be paying the same, or whatever the Flat tax rate was without the deductions. As long as it is reasonable and comparable to what our effective rates have always been. Otherwise we might create greater incentive to go offshore. No I don’t want money to go offshore. I am simply suggesting it would if we were foolish enough to institute a flat tax at say 40% and tax away all deductions. I think that would be a disaster for capital investment and productivity. The simple point is that we know from historical data what the treasury takes in. It is fairly consistent. And we know that the wealthiest have always paid the lions share of the tax bill and always will. So rather than create all these inefficiencies in the code, let’s just simplify it and tax them at the same flat rate they are already paying and have been for decades.

I don’t see any reason to increase the tax rate between someone who makes 300k versus someone who makes 30 million. The end result is that the additional taxation is ultimately wasted on nonsense. The tax revenue rarely is spent wisely and is distributed far more effectively in the private sector. That is true whether the money is investment capital in such endeavors as venture capital, or it is distributed to charitable organizations. There is this big misconception that wealthy people are opposed to high levels of taxation out of greed. In some examples that may be true. Then again there are greedy poor people who want other people to pay the way for them. But most wealthy people simply don’t wish to waste their money on the nonsense that politicians dream up to get themselves re-elected. They would much rather direct their money to private and public charities which are far more effective at helping those in need. And as economist Arthur Brooks outlined in his book “Who Really Cares”, that is exactly what they do.

The Nordic countries having dramatically cut back on their welfare state since the debacle of the 1990’s and continue to do so. Many of their so-called entitlements are actually run privately such as their privatization of for-profit hospitals in what most people consider to be a social entitlement. Nevertheless they are not a comparable example to the US and Europe because of the size of their population and the diversity of it. Yes Japan also has sizeable welfare state. And so does the US. And both have anemic growth rates. Japan also has the same size GDP it did 20 years ago. And the US has anemic growth rates that coincide with it’s expansion of entitlements and debt. As Reinhardt and Rogoff demonstrated, there are clear correlations between expanding debt and slow growing economies. And there is a clear correlation between entitlements and debt. The corresponding lack of growth is what creates poverty. The welfare state only creates more poverty. As we have expanded our welfare state here in the US, there has been no change in the rate of poverty. In fact the improvement in the poverty was far more rapid than before our entitlement state.

There is no consistency in the reporting of most of these stats from international bodies. That’s the point. The examples I cited were just a few ways in which things such as life expectancy can be substantially misreported. For example the notion of a better healthcare system. Yet the US has the highest survival rate in the world in the treatment of nearly every major disease, from heart disease, almost every form of cancer, HIV etc. The way in which success is measured by many of these nations and international bodies is not results driven, but their interpretation of what they view to be fair. And there is not less poverty across most of these welfare states. The whole of Europe has an average poverty rate comparable to that of the US. Yet their overall entitlement state for an economy comparable in size and diversity is larger. Comparing, the two again is also a false comparison because different nations measure poverty differently as well. In the US we have people who live below the poverty level that have air conditioning and I-phones. Things that people considered to be middle class don’t have in many parts of the world.

I think the retirement system problem have already begun to be worked out. That will be the transition from defined benefits to defined contributions. Working longer may be beneficial for some, and also more rewarding. But it has its downside. It contributes to youth unemployment. That’s also one of the problems with current Fed policy. The gov’t expansion and larger debt burdens force the Fed to hold rates low and subsidize the deficit through monetary easing. Holding rates lower forces potential retirees to work longer since it’s harder to produce cash flow off of their retirement savings. And as such there is less turnover in the labor force. And youth unemployment rises.


Sanxuary 20 months ago

The state of Washington has the highest middle class tax rate and has the largest decline of the middle class in America. The middle class pays 73 percent more taxes then above middle class. Currently we have the largest increases in minimum wage so we can not decide if a state ruled by Democrats for several decades is a good thing. Since most of them are not middle class we can pretty much bet that the rich favor there only real party everywhere regardless of politics.


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secularist10 20 months ago from New York City Author

"The middle class pays 73 percent more taxes then above middle class."

It still astounds me that people don't realize these realities and/or do nothing about them. The evidence is as plain as day and staring us all in the face.

People just have to look and they will see that rich individuals are treated better than middle class individuals, and large corporations are treated better than small and medium businesses.


LandmarkWealth profile image

LandmarkWealth 20 months ago from Melville NY

If you're talking about Federal income taxes that's is not true.

The top 20% of earners pay about 92% of all the Federal Income taxes.

The congressional Budget office breaks this down annually. The middle quintile pays only about 3% of all Federal revenue. And when you add in refundable credits, the bottom to quintiles actually have a negative tax rate.

http://www.cbo.gov/sites/default/files/cbofiles/at...


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secularist10 20 months ago from New York City Author

He was referring to Washington state. And I understood it to mean that the tax rate is 73% higher for middle income than those above.

When you account for subsidies, corporate welfare and other advantages to the rich and powerful, through their corporations, you get an effectively "negative" rate there too, usually significantly more negative than for the poor. Not all rich, but many of them.

And referring to the "top 20%" is misleading.

Many of those people are essentially middle class (especially when you account for cost of living in a place like New York; it takes six figures to be "middle class" in New York City, as has been documented many times).

For instance a sole proprietor might earn $300,000 in income running a retail business. He has significant expenses. He is hardly a member of the elite. Counting him in the same category as a top Wall Street trader making millions is silly. Yet both are in the "top 20%."

Correct me if I'm wrong, but the PDF you linked to seems to explicitly say that it excludes capital gains from the income figures. Which is just very convenient, don't you think? Given that so much of the wealth of the elite comes from capital gains.


LandmarkWealth profile image

LandmarkWealth 20 months ago from Melville NY

It’s true that incomes that are wealthy in some parts of the country are only middle class in places like NY, which I know too well living here my whole life. That doesn’t change the fact that the breakdowns in terms of Federal income taxes are as stated. That data is based on gross personal income. If you’re a sole proprietor making 300k in revenue, that is not counted as personal income. It’s either schedule C or K1 reporting. So your personal return is only the profit/loss from the business entity. If your self-employed making 300k in revenue but the business profit is 50k…on your personal return…your income is 50k. The 300k doesn’t exist. It is 50k on the K1. If it’s schedule C it is also not part of your AGI.

Including Capital gains would actually skew the data more in favor of the wealthiest paying even a larger portion of the lion shares of taxes. Capital gains requires capital investment. Wealthy people make far more in the way of capital investments and realize an even higher amount of capital income. So counting that would be accurate in terms of representing total Federal revenue, and that is even more titled towards a tax liability supported by the wealthiest to a greater extent. However, it is not included because it’s not wages. Capital income means one must take risk to realize the gain, as opposed to wages which require compensation from labor.

There is no negative tax rate in corporate America. That is political propaganda. The tax foundation released a report on this early this year. The US is one of the least competitive corporate tax environments in the world, which greatly dis-incentivizes global venture capital.

http://taxfoundation.org/article/us-corporate-effe...


secularist10 profile image

secularist10 20 months ago from New York City Author

I never said the tax breakdowns were incorrect. I'm moving beyond that and saying that looking at quintiles alone is misleading because income (and purchasing power) varies significantly among subgroups within the top quintile.

Personal vs business income--fair enough. I'll concede on that technical point. But my general point remains: there are orders of magnitude of difference in income that is hidden by the blanket category of "top quintile." The amount of diversity just within that small segment of the population is staggering.

"However, it is not included because it’s not wages. Capital income means one must take risk to realize the gain, as opposed to wages which require compensation from labor."

And this is exactly the kind of nonsense that allows the wealthy to get away with all sorts of shenanigans. I'm not saying you're BSing--I know you're just stating what's on the books. I'm saying what's on the books is BS.

Income is income. It would make just as much logical sense to distinguish between money earned from physical labor (in a field, or on a construction site) and money earned from mental labor (sitting in front of a computer doing math all day). Or countless other distinctions that we could imagine. Labor is risk too--you're not risking money, but you're risking time, and the opportunity cost that comes with clocking in for 40 hours every week.

The distinctions are arbitrary, and consistently in favor of the highest earners.

Corporate taxes: you have to look beyond the tax rates themselves. The stated tax rates are of course among the highest in the world. Few actually pay that. With loopholes, subsidies, tax breaks, and other special arrangements, they end up paying much less.

To the contrary, the notion that the US imposes confiscatory taxes on its corporations is political propaganda.

Overall, the article you provide is right in line with my thinking: it describes "...an uneven playing field, resulting in a misallocation of capital toward tax-favored activities..."

Further: "The U.S. corporate tax system ... is also non-neutral with effective rates varying by asset and industry."

Exactly my earlier point. Segments of corporate America enjoy benefits that others don't. Benefits which accrue to the biggest corporations much more than to the small and medium. Thus the system overall is unequal and unfair.

Especially so since this paper does not seem to address the countless indirect subsidies and support that the US government gives to big business (many of which cannot be measured within the narrow analytical parameters they are using).


LandmarkWealth profile image

LandmarkWealth 20 months ago from Melville NY

“I never said the tax breakdowns were incorrect. I'm moving beyond that and saying that looking at quintiles alone is misleading because income (and purchasing power) varies significantly among subgroups within the top quintile.”

I don’t disagree with that statement. However, even when you look at the top 1/10th of 1%...they pay about 16% of the Federal income tax bill. And there is not a wide degree of variability in that high of an income range.

Income is not just income. There is nothing related to separating earned income vs capital income that is “shenanigans”. You can’t pay people earned income unless someone first commits the capital to start the business that employs the person receiving the income. Capital income means in order to earn that type of income…you must risk losing something first. And considering the vast majority of new business ventures fail…if we didn’t have incentives for capital investment…we’d never get any capital formation. Nothing would ever begin or be created. When you get hired by an employer, they don’t ask you to front 500k in order to get the job, and then if you get fired you lose the 500k. That’s what separates people who sign the front of the check, versus the back of the check. The willingness to take capital risk. The entrepreneur risks his time and his capital. The employee risks only time. And depending on your skill set…your time may not be all that economically valuable to begin with. Some of the most successful entities where started with very little capital, and the willingness to take risk.

I don’t disagree that the gov’t provides certain economic incentives to certain industries. That is a matter of social engineering by politicians to achieve certain economic outcomes. But the point of the tax foundations analysis is that the notion that few corporations actually pay those rates is false. There is little evidence to support that hypothesis other than citing a few individual instances. They are addressing effective rates, not just marginal ones in the analysis. I personally am not in favor of such incentives at all and prefer a zero corporate tax since the ultimate fiscal burden is simply passed on to the consumer anyway. In reality, no corporation ever actually pays taxes. But there are some among us who wish to see the gov’t achieve certain economic outcomes rather than just incent competition. But on aggregate, the US is extremely uncompetitive even after the so-called loopholes are factored in, which is the point of the tax foundations analysis. Confiscatory corporate taxes is open to interpretation in terms of defining confiscatory. Ultimately, that fact that the US is a less favorable environment in relation to most of the rest of the developed world is confiscatory enough to dis-incent capital formation. Just the cost of maneuvering through the complexity of the tax code in order to lower your effective rate is an astonishing waste of resources for any business entity which could be diverted to much more productive activity.


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secularist10 20 months ago from New York City Author

"top 1/10th of 1%...they pay about 16% of the Federal income tax bill."

And they earn about 10% of all the income (as of 2013).

"You can’t pay people earned income unless someone first commits the capital to start the business that employs the person receiving the income."

And you can't commit the capital to start that business without first earning it through labor or having a successful business that itself required labor to succeed.

It's a cycle, a synergistic system. Not a linear one. Every piece in the system is necessary. Capital is needed to start firms. Labor is needed to run them, and for consumers to earn the money to purchase from them.

Did you ever consider maybe so many businesses are failing because capital is being artificially incentivized by the tax code, creating distortions?

"...if we didn’t have incentives for capital investment…we’d never get any capital formation. "

There were countless businesses formed in the past with much higher cap gains rates on the books.

How? Because again, the economy is not a simple linear, top-down system. Every element feeds off of every other element.

Money is money, regardless of where it comes from. There is no reason to discriminate.

"When you get hired by an employer, they don’t ask you to front 500k in order to get the job, and then if you get fired you lose the 500k."

No, they just ask you to forfeit most of your productive hours, and all other opportunities that you could pursue with those hours, in perpetuity, and they further ask you to give them total power over your financial life. And then if you get fired, you lose your only source of income.

(By the way, few businesses have the luxury of just "passing along" the tax burden to the consumer. That's a common myth. Price decisions in the real world are much more complex.)

The TF article does not demonstrate that many or most big businesses are not mightily advantaged by the government. Because its analysis is narrow and simply does not address many of the direct and indirect forms of support (such as the navy patrolling the Persian Gulf as a subsidy to Big Oil) businesses receive.

Cato estimated about $100 billion in corporate welfare in 2012: http://object.cato.org/sites/cato.org/files/pubs/p...

This is not far from the total revenue the government took in from businesses in that year.

The cost to maneuver the tax code is indeed absurd. But that again supports my general point: the big boys have the luxury of full-time tax lawyers and accountants to minimize their burden. The small and medium guys struggle just to keep the lights on.

For a country that is "extremely uncompetitive" the US seems to be doing just fine relative to other rich countries with respect to capital formation. Where it seems to be lagging is in the income and well-being of the median worker/ consumer.


LandmarkWealth profile image

LandmarkWealth 20 months ago from Melville NY

So if the top 1/10th of 1% earn 10% of all the income, then they should pay only 10% of all the liability. But they pay more like 16%. So they are paying a tax burden disproportionately higher than the amount of proportionate income they earn.

“And you can't commit the capital to start that business without first earning it through labor or having a successful business that itself required labor to succeed. And you can't commit the capital to start that business without first earning it through labor or having a successful business that itself required labor to succeed”.

Nothing could be further from the truth. I started a business without hiring a single person. I eventually took on partners to meet the demand. But we don’t employ anyone even now. And probably never will because of the regulatory burden associated with hiring anyone. Most new small business don’t need employees to get started. They are hired after the demand is realized. And you can commit capital to start a business without earning anything. That is exactly what venture capital is. You come up with a wonderful idea…but you don’t have the capital. So what do you do ??? You find investors…aka capital investment. Of course investors with any degree of business savvy know full well that most new ventures do in fact fail. So if they have a low probability of success, they must have incentives to take such a risk. And that is precisely why there is preferential treatment on capital investments. There is an old saying in economics…”Capital goes where it is most welcome, and capital stays where it is treated best” You might assume that the money held by the venture capitalist originates with labor. That is also a false premise. 95% of the M2 money supply of digital dollars that we have in our bank accounts is simply bank created credit. When you need money for a loan to start a business, the bank simply invents the dollar out of thin air. There was no laborer behind it’s origin. It’s called fractional reserve lending.

Imagine a tax rate of for example 50% on capital gains to be hypothetical. Would you invest your time and money in a business venture with an incredibly high chance of failure. And then if you were actually somehow successful, you’d have to give up a higher percentage of your earnings. Even if the rate was the same rate as earned income…you would have to be mentally deficient to start a business. You can simply stay as the employee and realize a better probability of success.

“Did you ever consider maybe so many businesses are failing because capital is being artificially incentivized by the tax code, creating distortions?”

There is no evidence to support this claim. The vast majority of jobs get created by small business investment. Not at the onset, but after they are eventually successful. The vast majority of small business failure happens because too many people who think they understand the business world and how our economic system functions are actually clueless. And most people know about as much about the business world as I know about how my wife puts on makeup. People preach about things they have no experience in, and then attempt them. Many who fail are not doing it because of a tax incentive, but because they think they want to be the boss, ad don’t know how hard that is in reality. The successful business owners plan properly, take calculated risk, and are incented by tax benefits.

“No, they just ask you to forfeit most of your productive hours, and all other opportunities that you could pursue with those hours, in perpetuity, and they further ask you to give them total power over your financial life. And then if you get fired, you lose your only source of income.”

They don’t ask you do anything. You asked your employer if you could be there. They offer you a job…you don’t have to take it. What exactly is it that you are expecting. Do you wish for an employer to pay you for not being there or producing anything. If you want to pursue something more productive, then do so. The reason people don’t is because they often aren’t that productive to begin with…or they simply aren’t willing to take the risk…but want the reward. Not to mention the amount of hours an employee typically puts in can’t come close to the time spent building a business. You sound like the you want the Super Bowl Ring, but don’t want to step on the field and risk getting hurt. I wasn’t happy with my last employer, so I quit and started my own firm. Nobody forced me to stay, and they didn’t have control over me…because I left. And I did it with a wife on maternity with our 2nd kid. A huge mortgage, and not enough startup capital. If I was wrong…I would lose my home. That’s the chance every business owner takes. The employee simply picks up the help wanted ads and looks for another job.

“There were countless businesses formed in the past with much higher cap gains rates on the books.”

Also a false statement. When we had higher capital gains taxes we had much higher unlimited deductions for passive activity losses. The effective tax rates on capital gains were actually lower before they lowered the marginal rates and simplified the code to some degree in the 1980’s.

“Money is money, regardless of where it comes from. There is no reason to discriminate”

Tell that to the boating industry. When the luxury tax was implemented in the early 1990’s to level out the code and make wealthy people pay their “fair share”, wealthy people bought boats in other countries…and countless New England yacht companies went under.

“By the way, few businesses have the luxury of just "passing along" the tax burden to the consumer. That's a common myth. Price decisions in the real world are much more complex”

It is hardly a myth. I have counseled 1000’s of business owners over the years on exactly how to address this. The cost of everything we buy factors in all the cost associated from the start of production to the net/net profit. If your net/net (after tax profit) is affected, you will either cut wages, cut benefits, let employees go, increase prices, make hedonic quality adjustments to the product…or some combination of all of these. Taxes affect the net, net profit. And any business owner who doesn’t pass that on doesn’t stay in business.

Things such as the navy patrolling the Persian Gulf as a subsidy to Big Oil is frankly ridiculous. If you were to use such a measurement, than we would also have to say that every American worker is subsidized by the Navy patrolling the US coast preventing an invasion that would not allow them to drive to their job. Considering that the revenue derived from big oil pays for the Navy to exist…that is hardly a reasonable argument. Not to mention how vital such industries are in the total supply chain. Especially when it comes to extremely narrow profit margin enterprises like those tied to commodity prices. You seem to be forgetting that gov’t can create only currency. All wealth comes from private creation. Money is not wealth. It is a medium of exchange. That amount of money the govt deploys is not relevant as long as it is used to increase productivity. Unfortunately, that is not always the case. But companies to not regularly have a negative tax rate. Because in order for your rate to be negative…you have to actually get a tax refund for taxes never paid.


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secularist10 20 months ago from New York City Author

There isn't a significant difference between 10% and 16%. Especially for those who have so much purchasing power. Anyway the income in that range fluctuates by multiple percentage pts from year to year.

I'm not addressing every point because I have stuff to do (running my own business here in fact). But that doesn't mean I acquiesce or agree.

"I started a business without hiring a single person. ... Most new small business don’t need employees to get started."

I agree, but you didn't get what I was saying. I was saying that the capital to begin the business had to come from somewhere. Where did it come from? Someone had to earn it.

If not you, then your rich uncle. If he inherited it, who did he inherit it from, and how did they get it? In many cases, labor. If not directly earning it through labor, then it had to come from a business that was using labor.

You don't need any employees because you are the one providing the labor! :)

(It's the same for me. I don't hire any employees, but I am still working--i.e. labor.)

Unless you are just sitting at a desk writing a check to yourself and then collecting a bigger check from yourself 6 months later.

The general point is: capital and labor are in a symbiotic relationship and one is not more important (or more deserving of government help) than the other.

Maybe with a higher capital gains rate it would pay more to work at a business than to start one. So what?

If, by running the numbers, and weighing the expected costs and so on, you figure you make more money by being an employee, that is good for you. And what's good for the individual is good for the economy. More wealth, more purchasing power, higher standard of living.

"[Employers] don’t ask you do anything."

And investors are not asked to do anything either. It's a free person's choice either way. But whatever choice you make, it's a risk. The nature of the risk may change. But it's still a risk.

"You sound like the you want the Super Bowl Ring, but don’t want to step on the field and risk getting hurt."

I could say the same thing about your portrayal of capitalists. According to you they want to make money, but they need the soft hands of daddy government to mitigate the risk for them.

"If your net/net (after tax profit) is affected, you will either cut wages, cut benefits, let employees go, increase prices ... "

First you say companies pass the tax on to consumers (in the form of higher prices). Then you say they might not pass it along to consumers, but rather might cut wages, or fire workers, or change the product, etc. The latter was exactly my point.

The myth is that higher corporate taxes inexorably leads to higher prices for the consumer. In reality, it can have many potential effects, one of which COULD be higher retail prices, but it might not. Pricing is much more complex than that, to which you agree. (Which frankly I'm relieved at, because a business adviser who advises the way to deal with taxes is "just raise prices!" wouldn't be a very good one.)

"Considering that the revenue derived from big oil pays for the Navy to exist..."

You have the causation backwards: the revenue of Big Oil would not exist without the navy. At least not in its current form. Without government subsidizing oil, the market would naturally adjust and would find other sources of energy.

Anyway this is just one example. There are countless examples of pork and kickbacks going to Congressional districts and special interests all day long.

I was not referring to currency, I was referring to actual value. Let me rephrase: value is value; income is income; wealth is wealth.

You're still hung up on this term "negative tax rate." It was a turn of phrase. They are not literally getting money deposited into their bank account from the IRS (although some probably do!)

I was referring to the fact that they enjoy significant support from the government, getting more than they pay in. Thus in many cases not all, an effectively negative tax.

The cozy relationship between big business and big govt is getting to be a cliché at this point.


LandmarkWealth profile image

LandmarkWealth 20 months ago from Melville NY

10%-16%...Significant is not the point. You are arguing that they should pay more, yet they already pay an amount higher than that of their national share of income.

“I agree, but you didn't get what I was saying. I was saying that the capital to begin the business had to come from somewhere. Where did it come from? Someone had to earn it.”

No…It came from credit…which was invented out of thin air by the banking system. The money didn’t exist until I chose to borrow it. When I pay it back…it is extinguished from existence. That is how the broad money supply works.

My labor does in fact produce my revenue. But the capital creates the labor…not the other way around. It never has and never will.

“The general point is: capital and labor are in a symbiotic relationship and one is not more important (or more deserving of government help) than the other”.

The relationship is in fact symbiotic. But not of an equivalent value. Let me give you a basic example. If you were driving a car…a car is also the sum of all its parts. However, some parts are of more value…and others are expendable. If the economic value of your car was 10k…and your rear windshield wiper broke, it would not be fair to charge you 10k for the wiper, because the car can go on without the wiper. And the wiper is largely expendable. If you blew a piston thru the engine block…the car may not be worth fixing anymore. In economics…most labor is the windshield wiper. The clerk at the checkout line in Walmart is the windshield wiper…easily replaceable. The engineer designing a propulsion system is the transmission. He is many times more valuable. One is needed to make the operation work and is vital. The other can be easily replaced…and is little more than a convenience.

The argument for lower capital gains rates is that the capital investment creates the ordinary income that employs us all whom are employed by another. I would argue there should be a zero tax on capital investment and perhaps we would not have what we have today…which is the hoarding of cash…because the incentives are not in line with the risk. Taxing capital investment simply cuts off your nose to spite your face.

Now with regard to incentives…I somewhat agree. I don’t like specific breaks or incentives that target industries either. It distorts capital investment…and creates malinvestment. If an industry can’t be sustained by demand…than let it fail. However, a flat tax on income from wages is in fact still progressive. The more you make, the more you pay in aggregate dollars. That is fair…and simplified.

“Maybe with a higher capital gains rate it would pay more to work at a business than to start one. So what”

Nothing is wrong with that if you are ok with smothering economic activity and job creation. I think most people want the opposite. Capital formation is good for economic expansion. Without it…the jobs that you look for don’t exist.

“And investors are not asked to do anything either. It's a free person's choice either way. But whatever choice you make, it's a risk. The nature of the risk may change. But it's still a risk.”

I agree 100%. And since we have made it harder and less favorable to make capital investments via the tax and regulatory code…it should be no surprise that we are seeing substantially less of it…and the labor market is suffering terribly as a consequence. Once again…cutting off our nose to spite our face.

“Icould say the same thing about your portrayal of capitalists. According to you they want to make money, but they need the soft hands of daddy government to mitigate the risk for them.”

No…they just want the gov’t to get out of the way.

“First you say companies pass the tax on to consumers (in the form of higher prices). Then you say they might not pass it along to consumers, but rather might cut wages, or fire workers, or change the product, etc. The latter was exactly my point.”

What I am saying is the consumer gets the tax burden either way. The consumer makes less…or they pay more…or they see negative hedonic adjustments (less paper in the roll of paper towels for the same price). Either way…the burden was not borne by the company…but the consumer. So in fact companies do NOT actually ever pay taxes. The burden is always passed on…So there is no need for corporate taxes at all. It is an exercise in futility.

“You have the causation backwards: the revenue of Big Oil would not exist without the navy. At least not in its current form. Without government subsidizing oil, the market would naturally adjust and would find other sources of energy.”

No my friend…you have it backwards. All capital is created privately. Gov’t creates only currency, which holds no value beyond the productive capacity of a nation. So there is no gov’t at all unless there is economic productivity. The US military is the largest consumer of petroleum products on the planet. The military couldn’t move from one place to another without the energy sector paying for it to exist and using the very products that they refine. The market has already adjusted. There is an enormous amount of cheap energy available right here in the US…which the gov’t prevents access to outside of a few states in recent years.

I was referring to a negative tax rate early in the discussion in terms of the bottom quintile of income earners…who do in fact get tax refunds for taxes never paid via the income security programs. Roughly about 300 billion annually. You compared that to corporations receive deductions and incentives, which is far from equivalent.


secularist10 profile image

secularist10 20 months ago from New York City Author

I don't know where I said the top 1/10 of 1% specifically should pay more than what they are paying now. But they should pay more than lower income groups in any case.

"...It came from credit"

Then it is not relevant to the previous discussion. We were talking about capital (from investors/ VCs) vs. labor. Not bank financing.

I don't quite follow your analogy. But if the car is the entire economy, then labor cannot be the windshield wiper because the wiper is indeed expendable. Get rid of the wiper and the car runs just fine. But get rid of all labor... and you have no economy.

Yes, an individual laborer is not necessarily more valuable economically than a VC. That's not the issue.

The worker is paid a lower wage because his contribution is less valuable. The investor is paid a higher income (effectively a "wage" in my book) because his contribution is more valuable. That's as it should be.

But that is just an individual worker and investor. When you add up the entirety of labor in the economy, it is absolutely as essential as the entirety of capital.

My point is not that Worker A is as important as Investor B. My point is, labor and capital in general are both equally important, and fulfill different roles for the economic system.

To see how, just look at any place where labor is treated like dirt: kleptocracies, oligarchies, slave states, and so on. They tend not to be very successful economically, to say the least. Sure, the capitalists and elite at the top do great (relative to their peasants anyway). But the economy as a whole is in shambles in every case.

These are extreme examples, but that is the ultimate destination that ever-increasing inequality and disregard for labor leads to.

Capital alone does not create income or jobs. You need consumers to buy your products. Consumers who are, mostly, part of the category "labor."

No labor, no purchasing power. No purchasing power, no sales. No sales, no business. No business, and the capitalist doesn't get a return on his investment.

(Now I'm just trying to convey the importance of "labor." If I was speaking to a socialist, I would be highlighting the importance of capital. But in your case, you under-value labor, so I have to highlight that.)

"Capital formation is good for economic expansion. Without it…the jobs that you look for don’t exist."

And without the jobs/ workers, the capital isn't formed (unless you want the banks to just print money and you think that's how growth is pushed forward... I hope that's not your argument).

We could go around and around like this forever. The point is: neither is more important. They need each other.

Too much labor without enough capital (i.e. socialist and communist states), and the system eventually collapses. Too much capital concentration without enough labor, and likewise it eventually implodes.

"No…they just want the gov’t to get out of the way."

Then apply the same rule to labor income: get out of the way, and they would have tons more purchasing power to buy from those capitalists.

But if we are going to tax people (as we must), it should be the same across the board. Because all pieces of the puzzle are important.

"What I am saying is the consumer gets the tax burden either way."

By the same logic, you could say businesses get the burden of income taxes because all an income tax is, is a restriction on purchasing power. Less purchasing means less sales for business.

So it's not the individual worker that pays the income tax, the income tax is "passed along" to the business in the form of lower sales and lower margins.

Yet we don't hear many capitalists arguing for reducing or eliminating income taxes on their low-wage customers, do we? I wonder why.

Again, they feed off each other.

The corruption in our political system is legendary. Especially in certain states, but absolutely at the federal level too. Big Business and Big Government scratch each other's backs.

Whether you want to call that a "negative" tax or not, is immaterial. The Boeings, the Goldmans, the Exxons and the GEs will get theirs. The small businesses that create most of the jobs are the ones left to fend for themselves. This is a fact, and the evidence abounds.


LandmarkWealth profile image

LandmarkWealth 20 months ago from Melville NY

“I don't know where I said the top 1/10 of 1% specifically should pay more than what they are paying now. But they should pay more than lower income groups in any case.”

And they are…substantially more.

“Then it is not relevant to the previous discussion. We were talking about capital (from investors/ VCs) vs. labor. Not bank financing”

It is highly relevant. If I want to start a business venture which will employ labor…I need financing first. You don’t open a warehouse without it. That financing is invented by the banking system. It doesn’t require someone else’s labor. The labor comes after the startup costs. Since we know that M2 is about 12 trillion dollars…and the monetary base is closer to 4 trillion at current…then the vast majority of startup cash to finance any new venture begins with credit. It is mathematically impossible for it to happen any other way. The capital that this credit is often leveraged against is sometimes a product of someone else’s labor. But the origin of that capital is also credit driven. You cannot get investment into capital without the financing first. In order for someone to build something…they must expect to be paid for their labor…unless we are reverting to the barter system. In order for them to be paid with currency…the credit must first be extended to the initial investor. Once again…capital investment must come first with someone taking investment risk first. If you think that is not the case…try starting a business and hiring someone without buying anything. See how many people you can employ with no inventory, supplies, location etc. You must buy these things first.

“don't quite follow your analogy. But if the car is the entire economy, then labor cannot be the windshield wiper because the wiper is indeed expendable. Get rid of the wiper and the car runs just fine. But get rid of all labor... and you have no economy.”

My analogy is to simply point out that labor is in large supply. It most of the time has less value. On aggregate it may be highly important…and that’s often not even true anymore with technological advancements. I don’t need the checkout clerk at home depot anymore. I scan the item myself. The more advanced labor that built the automated checkout line is of more value…but requires less total labor. Labor is analogous to the wiper because labor is not one functioning unit. It doesn’t work that way. It is many individual components. Some are necessary…many are barely necessary…if not just a convenience. And there is an awful lot of wasted useless unproductive labor for countless reasons that are political in nature which we should do away with.

“But that is just an individual worker and investor. When you add up the entirety of labor in the economy, it is absolutely as essential as the entirety of capital.”

That is disproven regularly. Unskilled labor that has artificially high wages has a lot to do with the incentive for the development of new technologies that require less labor to offset higher input costs. Now granted there will always be some degree of labor required…and the more productive it is, the more labor will be required, just at a higher skill level. But labor being partially essential…doesn’t make it nearly as essential as capital investment. One is in much shorter supply than the other…making it inherently more valuable. Those with capital do not have to invest and expand that capital, and won’t if it’s not opportunistic to do so. They will simply hoard their resources…as we see today. However, labor must have capital investment in order for job creation.

“Capital alone does not create income or jobs. You need consumers to buy your products. Consumers who are, mostly, part of the category labor."

I am not suggesting slave labor. I love free markets. I am simply saying that the capital investment is what creates the consumer…not the other way around. If you punish capital investment…then you get less of it. And consequently less opportunities for labor to be created.

More simply put…rich people don’t need the little guy…because they are a dime a dozen. But the little guy needs the rich guy. And rich people don’t start up new ventures to help the little guy…no matter what they say. That doesn’t mean they are all terrible heartless people. It just means they make investments when they know it makes sense to do so. And if not, they are happy to sit on their resources…pile into debt instruments or other assets that don’t require a high degree of risk. If you want labor to have expanded opportunities…you need to increase the velocity of capital investment. And that will NEVER and has NEVER happened by trying to punish capital investment. If we had a zero % capital gains rate along with some regulatory reforms in the US…capital investment would explode. And the labor force participation rate wouldn’t be at a 4 decade low.

“No labor, no purchasing power. No purchasing power, no sales. No sales, no business. No business, and the capitalist doesn't get a return on his investment”

Once again…they don’t need to invest capital for a return. They can sit on capital for a lot longer than the population can afford to be unemployed. Supply is what creates demand.

“And without the jobs/ workers, the capital isn't formed”

Once again…it doesn’t need to be. There isn’t a wealthy venture capitalist anywhere in the world worried that is going to go broke because he needs labor markets to pick up. The smart venture capitalist won’t take that risk until it makes economic sense for him to do so. Until then…he will sit back and stare at the unemployment lines without a care in the world. That doesn’t mean they like piling into debt instruments and earning lower returns on their capital. But they will in fact do just that rather than make foolish investments in a hostile environment to capital investment.

“But if we are going to tax people (as we must), it should be the same across the board. Because all pieces of the puzzle are important”

I agree. We should have a flat tax on income and a zero % tax on capital investment for everyone. I don’t care if your cap gains liability was $1000 or $1 million. The rate should be zero. If it’s ordinary income...it should also be the same %.

“By the same logic, you could say businesses get the burden of income taxes because all an income tax is, is a restriction on purchasing power. Less purchasing means less sales for business.”

You could say that…and it would be accurate. Which is why the taxing authority should rest on one side of the equation or the other. Either a flat income tax consistent with the historical norm of revenue to GDP ratio’s.…which is still progressive…or a VAT tax. I find the VAT tax much less practical. There is no reason for both sides of the transaction to be taxes other than greedy politicians who want to flow revenue streams they create via deficits back to the treasury under their control. Theoretically, in a fiat monetary system, the gov’t doesn’t need any tax revenue at all. It could spend money at infinitum without ever collecting a dime in revenue feedback. Although I doubt that would work in reality.

“Yet we don't hear many capitalists arguing for reducing or eliminating income taxes on their low-wage customers, do we? I wonder why.”

Why??? because the low wage workers on paying any taxes. They have a negative tax rate. They already pay less than ZERO !!!


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secularist10 20 months ago from New York City Author

“Since we know that M2 is about 12 trillion dollars…and the monetary base is closer to 4 trillion at current…then the vast majority of startup cash to finance any new venture begins with credit. It is mathematically impossible for it to happen any other way”

Cash is not wealth. 2014 US household wealth was around $84 trillion. Wealth is what is needed to fund a business, not necessarily cash. If I already own a laptop and I just start running my new website from that laptop, I have not purchased anything. The monetary value of the firm's assets has increased, but no “startup cash” was needed.

Credit is just one way to finance a business. The data indicates that the vast majority of small businesses are started with personal savings or investment from friends/ family. But it varies from industry to industry.

My parents have made millions over the years from entrepreneurial ventures and have never borrowed a cent from a bank. The starting capital was savings from previous labor, and as the business grew, financing came from reinvestment of income.

“try starting a business and hiring someone without buying anything.”

I have. I run my business from my apartment, personal cell phone and personal computer. I don’t have any "employees" but I do pay some people on a short-term/ per-project basis.

“See how many people you can employ with no inventory, supplies, location etc. You must buy these things first.”

Again, incorrect. You can simply have your brother give you his truck to transport your goods. Or work out of your uncle’s garage. You purchase supplies with your personal savings. You start small, then as sales come in, you reinvest.

The fact that labor at this time may or may not be up to par doesn’t change the vital role of labor, inherently.

Somebody has to flip on the lights. If a robot does it, then somebody has to build and program the robot. Only when robots can do the full suite of all human capabilities will we no longer need human labor.

“The more advanced labor that built the automated checkout line is of more value…but requires less total labor.”

Irrelevant. Even if it’s just one person pressing a button to power the entire economy, it’s still labor.

Moreover if tech advancement killed jobs in this way, then civilization would have collapsed long ago. 100 years ago, with much more rudimentary technology, we had, say, an 8% unemployment rate. Today, according to this theory, we should have unemployment well over 99%. Tech has grown exponentially, thus the number of jobs should have collapsed to almost nothing.

In reality, the horse-and-buggy driver’s job was killed... but the assembly-line worker’s job was created. Later, the assembly worker’s job was killed by a robot... but the software engineer’s job was created, to program that robot.

If an assembly worker is unemployed because his skills are outdated, that simply means the current state of the labor market is bad. It does not mean labor, categorically, is no longer necessary.

Technology does not kill jobs—it kills inefficient or less valuable jobs. And in the process it actually creates new, higher-value, higher-efficiency jobs.

No one is arguing for “punishing” capital investment. That’s just rhetoric.

“...pile into debt instruments or other assets that don’t require a high degree of risk.”

Again, missing the forest through the trees. What do you think those assets are derivatives of? Companies that themselves require labor to operate. It’s symbiosis.

An investor with a pile of cash who chooses to park his cash in Toyota stock instead of a Silicon Valley startup is not betting against labor. He is simply betting in favor of Japanese auto labor instead of California tech sector labor.

If he puts it in German government bonds, he is betting in favor of German labor (from which the taxes that secure those bonds come), among other features of the German economy. (I’m simplifying, but you get the point.)

You simply cannot separate labor from capital no matter how hard you try.

The economy is not a linear system. It’s an ecosystem.

We’ve been showering capital with benefits for decades, at the expense of labor, yet here we are, with a mediocre economy.

Putting cash in debt instruments... who you do think those debt dollars are being lent to? Businesses (who need it to operate their business and to make payroll, i.e. labor) or consumers.

No, we don’t hear the so-called “pro-business” apologists and their talking heads arguing for lower taxes on workers because it’s not in their short-term self-interest.


LandmarkWealth profile image

LandmarkWealth 20 months ago from Melville NY

“Cash is not wealth”

And wealth is not always liquid. Cash is used as currency. So if I own a piece of land, I can gain financing against it for the start up cash to fund operations. There was no pre-existing labor required. Only financing was required. Meaning the capital investment was derived not out of preemptive labor…but my willingness to take risk.

“The data indicates that the vast majority of small businesses are started with personal savings or investment from friends/ family”

Virtually all personal savings is credit. The entire broad money system is credit. 70 cents on the dollar in circulation is credit. Globally it’s more like 95 cents. The loan creates the deposit…not the other way around. So if you used your savings to start a business…the dollars in your savings account are part of the M2 credit supply. That means they didn’t exist until someone chose to borrow it and pay you with it. They are temporary in nature and extinguished daily.

“My parents have made millions over the years from entrepreneurial ventures and have never borrowed a cent from a bank. The starting capital was savings from previous labor, and as the business grew, financing came from reinvestment of income.”

On the contrary…nearly every penny your parents had was a credit dollar. Net money is only created via gov’t deficits. That is what is known as base money. The gov’t spends it into the economy and it sits on the balance sheet of a bank as reserves. It stays there and never leaves unless reserve requirements are changed. Banks are not legally allowed to lend out reserves. So the way we circulate dollars is via credit. Every dollar your parents had in their account outside of physical currency that was minted was a credit dollar created by someone else who borrowed it first.

“have. I run my business from my apartment, personal cell phone and personal computer. I don’t have any "employees" but I do pay some people on a short-term/ per-project basis.”

So you had to buy a computer and a cell phone. That is defined as a capital investment. Which means before you or anyone else was paid…the investment came first.

“Again, incorrect. You can simply have your brother give you his truck to transport your goods. Or work out of your uncle’s garage. You purchase supplies with your personal savings. You start small, then as sales come in, you reinvest”

Does your brother’s truck run on fuel…if so…you made a preexisting investment. Did your brother pay for the truck. If so, the purchase of the truck was a preexisting investment. Just because you didn’t make the investment with your own resources…doesn’t mean it didn’t happen. That is the premise of venture capital.

“Irrelevant. Even if it’s just one person pressing a button to power the entire economy, it’s still labor.”

It is relevant in the sense that it illustrates that labor is much more easily replaceable and can be minimized when it is not economically practical in its expectations. However, Capital investment cannot be eliminated or minimized. It is the lynch pin…and more valuable. Anything in short supply is more valuable.

“In reality, the horse-and-buggy driver’s job was killed... but the assembly-line worker’s job was created. Later, the assembly worker’s job was killed by a robot... but the software engineer’s job was created, to program that robot.”

I am not suggesting that technological advancements hurt labor. I am suggesting it actually helps labor. At least those that are on the more productive end of the labor market. More productivity means more economic activity. No argument there. But when labor overstates its intrinsic value…aka labor unions…they lose sight of their role. And they get replaced. Contrarily, capital investment can never be replaced. Which is why we want to incent more of it, and why it is more valuable.

“No one is arguing for “punishing” capital investment. That’s just rhetoric”

Sounds like you are. You are calling different tax treatments on capital income “shenanigans”. I am simply pointing out that there are very good reasons for this. Incenting capital investment is a good thing…not a bad thing. As far as I am concerned, capital income should have a zero tax rate. We’d all benefit from that. It’s not like the gov’t is hurting for tax revenue. They have been collecting the same share of GDP since the end of WW2.

“Again, missing the forest through the trees. What do you think those assets are derivatives of? Companies that themselves require labor to operate. It’s symbiosis.”

Municipal bonds are not derivatives of corporations, nor are treasuries. Wealthy high income investors pile into tax sheltered investments when capital investment is unfavorable. They are not buying corporate notes to get taxed at ordinary income rates. Either that or they buy tangible assets that require no labor and hold intrinsic value.

“An investor with a pile of cash who chooses to park his cash in Toyota stock instead of a Silicon Valley startup is not betting against labor. He is simply betting in favor of Japanese auto labor instead of California tech sector labor.”

Number one, let me know when you find a wealthy investor who wants to do that when the capital gains rates are less favorable. Secondly, they are hurting labor. Public financial instruments are essential in the ability of a company to go public and raise capital to initially expand. But once stock has been issued, it simply changes hands from one investor to another. It does virtually nothing for the labor markets. That money is many times more productive in the hands of venture capital. Nobody at Toyota is going to expand a new plant and hire people because you sold me 1 million shares of common stock, and the broker got an $8 commission. The number of times the shares turnover have no bearing on the company. The only nominal benefit is the increase in corporate treasury stock for the purpose of leveraging new operations. But they won’t do that unless the environment is favorable. That is exactly what we are seeing today. Cheap money has inflated financial instruments…and done nothing for the labor market. Because the incentive for any company to significantly increase cap ex is simply not there.

“If he puts it in German government bonds, he is betting in favor of German labor”

LOL…you’re not a bond fund manager are you. If you’re buying bonds of a nation…you are doing it because you’re betting against their labor. You buy German bonds because you presume that their economy is getting weaker and the central bank will stimulate. That stimulus will drive bonds up in value and you’ll see price appreciation. If you felt that German workers were doing well, that would be because the German economy was prospering, and rates would eventually rise…so you would steer clear of German debt. Treasury debt is where you go to hide from the capital markets.

“You simply cannot separate labor from capital no matter how hard you try.”

I am not separating the two. I am simply pointing out that one is more expendable than the other. Neither works as a cohesive single unit. They are all independent players operating on their own behalf for their own best interests. But labor is in much greater supply…takes less of a risk…and therefore less valuable…and as such compensated less.


secularist10 profile image

secularist10 20 months ago from New York City Author

I was not talking about getting a bank loan that is leveraged against a tangible asset. I'm talking about using that tangible asset itself.

The money in a personal savings account or checking account is not "credit" in the traditional sense. It was earned by the owner of the account.

You seem to be saying that a company's cash assets does not come from any source other than borrowing. Either the company itself borrows from the bank, or an investor borrows from the bank to invest in the company.

So I say a person can just take money from their personal savings to start operations. Then you say personal savings is itself just the bank lending you money. How so? He is not applying for a loan. He is using money he has already earned from work.

Are you saying the ultimate source of all, or almost all, economic activity is bank loans? That may be true, if we go back far enough to the founding of the country or whatever. Or beyond that to 15th c English barons and so on.

But a bank loan does not create value. Wealth and prosperity comes from value creation. Value can only be created by building something or making something or doing some kind of work or service. So while, chronologically, lending institutions may have kick-started it all, the fundamental source of wealth is work.

We could go around and around and say "The labor needs the bank to fund it" and then "The bank needs to believe the labor will do the work to provide a return on investment." It's a chicken and egg.

It's just the same basic disagreement as earlier, except now instead of "capital" you're talking about lending/ credit.

My point, as always, is that the economy is not a linear system, it's an ecosystem where every piece feeds off of every other piece.

"So you had to buy a computer and a cell phone."

I did, personally. But the business did not buy anything. It was simply given these assets by the investor (me). The same or similar effect is seen with most small businesses.

"Which means before you or anyone else was paid…the investment came first."

Correct. And that investment was not in the form of cash.

“labor is much more easily replaceable”

LABORERS are replaceable. Labor is not.

In the same way, capitalists are replaceable (if I can't get Bill Gates to invest in my startup, I can go to Richard Branson; if he declines, I go to Mark Cuban, etc). Capital is not.

Imagine a society where nobody was doing anything. Everyone is just sleeping. Would there be an economy? Would trillions of dollars in capital accomplish anything? Or does someone need to actually do something with that capital?

If anything, capital is in greater supply than labor, in first world economies. In a place like India, labor is in greater supply. It’s cheaper to hire 1,000 men to move a giant stone than to purchase a machine to do it. In the US, the opposite is true. Because labor (particularly high-skilled labor) is scarce, whereas capital is relatively more abundant.

But the relative scarcity or abundance of one factor or the other, at any given time, is irrelevant. The point is that both are essential pieces of the equation, in whatever form they happen to take. Their relative scarcity determines their price, not their importance to the system.

"But when labor overstates its intrinsic value…aka labor unions…they lose sight of their role. And they get replaced."

And what are they replaced by? Other labor! Lol.

"Contrarily, capital investment can never be replaced."

You keep making this error. When talking about labor, you refer to individual laborers (or labor unions, or individual workers with low skills, etc). But when discussing capital, you then turn around and refer to capital in the abstract.

I am saying labor, in the abstract, and capital, in the abstract, are both necessary. An individual laborer, an individual VC, an individual investor dollar, are expendable.

Labor, as a category, and capital, as a category, are not expendable.

Because neither (as a **category**) is expendable, it makes no sense to tax one less than the other, as a **category**.

Now, it doesn't take a bond manager to answer this question: where does the government get the money to pay its debts? From taxes. Where do those taxes come from? Mostly from workers.

"Treasury debt is where you go to hide from the capital markets."

Because you believe the government has the ability to pay its debts. Which cannot happen if there is no production to tax. You may park your money in bonds if you think the economy will contract, but you still believe there will be an economy in the first place.

"But labor is in much greater supply"

Laborers are in much greater supply than capitalists. Labor, in financial terms, is actually in much less supply than capital.

The GDP (labor) of the US is about $15 trillion. Total US worth (capital) is on the order of at least $124 trillion, years worth of labor.


LandmarkWealth profile image

LandmarkWealth 20 months ago from Melville NY

The money in a personal savings account or checking account is not "credit" in the traditional sense. It was earned by the owner of the account.”

“You seem to be saying that a company's cash assets does not come from any source other than borrowing.”

That’s exactly what I am saying. I am not just saying it…that is just how the broad money supply works. It all originates with credit. The money in your savings account would not exist unless someone else first borrowed it. That’s how it gets in your hands. The banks hold reserves created by gov’t deficit spending. They must keep the reserves created by gov’t deficits on their balance sheets and cannot lend them into the economy. Then someone chooses to borrow money to either invest in something and/or buy something. The bank invents the money is out of thin air, which is lent out based on a multiple of those reserves. The loan gets spent by the person who borrowed it and then paid to someone who then deposits it somewhere else in the aggregate banking system. So while the person who has the deposit may not owe any debt…the origin of the dollar in their account came from credit that was borrowed by someone else. Meaning someone had to first take the risk and borrow the money. That is precisely why the M2 supply can expand and contract daily. Every time you pay a loan payment, you have extinguished a dollar and contracted the money supply. Every time you borrow money, the M2 supply expands.

“Are you saying the ultimate source of all, or almost all, economic activity is bank loans?”

Economic activity takes place because of incentive to accumulate wealth. What I am saying is the mechanism by which we compensate people for that activity is currency, because the barter system is not an efficient mechanism. And nearly all of the broad money supply is created by credit. So since true wealth (assets) is not liquid we need a medium of exchange. And that medium is credit dollars. Some of it is created as credit against existing asset collateral, and some is not. But it is nearly all credit. The only portion that is not credit is the monetary base. The monetary base is bank reserves…which stay on the balance sheet of banks and doesn’t leave. Plus physical currency that is in circulation. (Coins, paper money in your pocket). But that is a fraction of the money supply.

“But a bank loan does not create value. Wealth and prosperity comes from value creation”

The creation of credit is not itself wealth or value. But it is the first step in creating wealth or value. (Capital Investment) Because if I want to build a manufacturing plant…I am not paying my workers in chickens or copper pipe. I must pay them with currency. And that predominately comes from bank created dollars. That is all I have been saying. The investment comes before the labor. It cannot work any other way.

“I did, personally. But the business did not buy anything. It was simply given these assets by the investor (me). The same or similar effect is seen with most small businesses.”

It doesn’t matter who made the investment. All that matters is that the investment happened first.

“Correct. And that investment was not in the form of cash.”

What did you buy the computers and the cell phone with…fruit loops ???

“In the same way, capitalists are replaceable (if I can't get Bill Gates to invest in my startup, I can go to Richard Branson; if he declines, I go to Mark Cuban, etc). Capital is not.”

Capital investment most certainly competes against each other which is a good thing. But my point is Gates, Branson & Cuban can all collectively sit on their hands for extended periods of time, because they don’t need to invest their capital. They do so because they want to. So if the policy environment is unfavorable, they will stop or greatly slow that investment. Which is why it is practical to create incentives for them to deploy capital and increase the velocity of investments. Because when they do, it helps us all. When we don’t have the correct incentives…cap ex is weak.

“Or does someone need to actually do something with that capital?”

Absolutely they need to do something…which is why we need to create incentives for those with more capital to deploy it. That’s all I have been saying from the beginning.

“If anything, capital is in greater supply than labor, in first world economies.”

Labor is always in greater supply no matter where you go. Because no matter what…there are always less people with large amounts of capital…and more people who don’t have it. So we need to create incentives for people with capital to deploy it.

“But the relative scarcity or abundance of one factor or the other, at any given time, is irrelevant.”

Capital is not what is scarce. What is scarce it the willingness to deploy it. It is the incentives that are relevant. If I am a billionaire and receive no incentives to invest capital…I can go the rest of my life on debt instruments with nominal returns. I don’t have to do anything. If you give me a reason to do something more productive with my assets…I will.


LandmarkWealth profile image

LandmarkWealth 20 months ago from Melville NY

“You keep making this error. When talking about labor, you refer to individual laborers (or labor unions, or individual workers with low skills, etc). But when discussing capital, you then turn around and refer to capital in the abstract.”

It’s by no means a mistake. Capital investment is also made up of individual actors. But those individual actors that possess most of the capital respond to incentives and tend to move collectively when it’s favorable. Why ??? Because they can. Mark Cuban doesn’t have to worry about the next paycheck. He can wait to invest his capital when it makes sense. The laborer doesn’t have that luxury…he needs to be working all the time.

“I am saying labor, in the abstract, and capital, in the abstract, are both necessary.”

I agree…but one has more flexibility than the other and doesn’t have to do anything for extended periods, which then harms the other. Because they all operate as individual units, labor is limited. It needs to constantly be in motion. The incentives become almost irrelevant for labor. They will look for work all the time, because they must. The investor doesn’t need to constantly invest. A prudent and successful entrepreneur waits for the right opportunity. That being said, no matter what policy incentives exist, there will always be periodically less opportunistic times. But policy should be geared towards encouraging capital investment. One of those incentives is taxation. But that is not the only incentive.

“Now, it doesn't take a bond manager to answer this question: where does the government get the money to pay its debts? From taxes. Where do those taxes come from? Mostly from workers.”

The government doesn’t technically need tax revenue at all. Modern Money Theorists have been pointing this out for some time. Treasury bonds are a holdover from the gold standard. Since the dollar and every other global currency is now a fiat currency system…there is no need to even issue treasuries. The gov’t can create money as is sees fit and spend it via fiscal policy without ever issuing a bond again. The deficit between spending and tax revenue is how we create the monetary base. But we could simply print and spend the money without any such debt issuance. The purpose of the debt was the convertibility of the currency into a tangible asset, which no longer exists. Now, I tend to disagree with the MMT view for different reasons. While the MMT view is technically correct, it doesn’t take into account numerous other practical problems beyond the scope of this discussion.

“Because you believe the government has the ability to pay its debts. Which cannot happen if there is no production to tax. You may park your money in bonds if you think the economy will contract, but you still believe there will be an economy in the first place”

You are only partially correct here. Debt issuance is technically pointless as I pointed out above without a monetary standard which we haven’t had in decades. Although I think we should have one. The productive capacity of a nation will give strength to its currency. But every nation has the ability to pay its debts. Greece technically never even went bankrupt. It is impossible for a fiat currency to be unable to pay its debts. You can’t run out of money if the creation of money is limitless. The link between production and money is solely the purchasing power of that money. But default is not possible under a fiat currency unless a nation just chose to not pay its debt. But it is never impossible for a nation to do so. You could simply print money and spend it on infrastructure, military, entitlement etc… and never issue a treasury instrument. However, if you do so too aggressively, then the value of the currency created will obviously decline. Which is why policy should link the monetary base with productivity. Whether or not policy makers do this well is a different story.


secularist10 profile image

secularist10 19 months ago from New York City Author

"I must pay them with currency. And that predominantly comes from bank created dollars. That is all I have been saying. The investment comes before the labor. It cannot work any other way."

The issue is not what chronologically comes first. Of course you have to build the office before anybody can work in it. That's not economics, that's physics.

But why would you build an office? Because you expect it to be used. You expect someone to work in it. You are **depending** on labor and labor markets to make your investment worthwhile.

I hate to keep saying this because it makes it seem that I undervalue capital. To the contrary, I've been saying all along all pieces are equally important, they just play different roles. And they feed off of each other.

It's just that you, and our modern political thinking in general, overvalues capital at the expense of labor. And that is the source of countless problems in our economy. So to restore the balance, labor has to be "talked up."

An analogy: a traditional marriage. The husband earns the income, and the wife raises the kids, cooks and cleans. Which is more important, husband or wife? Trick question. They are both equally important. They just play different roles.

You need the money to buy the food. But to earn money you need to eat food. But to get food you need money. Around and around we go. It's symbiosis.

The temptation is to say the man's earnings makes the marriage possible. But look deeper and you see that actually he has a lot of support behind him to make that system work.

That's just one man and one woman--a very simple system. Now expand it out to the size of an entire country, and the relationships are far more complex, but no less symbiotic. In fact even more so.

"But those individual actors that possess most of the capital respond to incentives and tend to move collectively when it’s favorable."

But laborers move collectively as well, based on various incentives and influences. Same thing.

"...doesn’t have to do anything for extended periods, which then harms the other."

The same could be said of labor: workers can go on strike or stop showing up to work for whatever reason, thus hurting the capitalist right in his wallet.

"[Workers] will look for work all the time, because they must. The investor doesn’t need to constantly invest."

Workers don't need to constantly be working. Huge numbers of people drop out of the labor force on a regular basis for various reasons.

You work because you want to build more wealth or have a higher standard of living.

If you're talking about basic sustenance, an average worker can achieve that by killing his own fish in the woods. But more likely he can just take a tiny portion of the elite's wealth to survive, through public spending.

We all work, invest and produce because we are seeking higher standards of living, plain and simple. It's a free choice, it's not forced on anyone.

A capitalist that offers a crappy job will not have many takers.


LandmarkWealth profile image

LandmarkWealth 19 months ago from Melville NY

“That's not economics, that's physics”

It’s both…you need the financing to pay for the office to hire people to meet the anticipated demand, should you actually see it. No matter what…the cap ex must come first.

I overvalue capital investment because it’s harder to come by. Anything that is in limited supply or less accessible is by definition more valuable. That does not mean labor has no value, it is just less valuable. That again depends on the type of labor and the total skill set.

“An analogy: a traditional marriage. The husband earns the income, and the wife raises the kids, cooks and cleans. Which is more important, husband or wife? Trick question. They are both equally important. They just play different roles”

They are possibly equally important in a moral sense…maybe the wife is even more important from that perspective. But If I make 500k a year as an engineer, and my wife watches the kids, I am far more valuable in economic terms. If my wife dies, I can hire a full time live in nanny for far less that the 500k I am earning. So to assess economic value requires knowledge of how much the husband is making.

“But laborers move collectively as well, based on various incentives and influences. Same thing”

Labor competes against Labor for the same role. Capital investment also competes, but Capital investment is harder to come by, while labor is in excess in most areas of economics. So labor inherently will have less leverage and is less valuable. Labor must always pursue opportunity in a state of perpetual motion. While capital investors can sit around for extended periods without doing anything.

“The same could be said of labor: workers can go on strike or stop showing up to work for whatever reason, thus hurting the capitalist right in his wallet”

It could be said…but it has never really been true. Because there will always be enough people willing to cross the picket line in order to capitalize on an opportunity that they feel is fair enough. That’s why labor unions have had to resort to threats of violence and actually doing physical harm to people who cross those lines. The only way to keep the labor union intact is through some form of intimidation.

“Workers don't need to constantly be working. Huge numbers of people drop out of the labor force on a regular basis for various reasons”

They drop out because they can’t find work. But the aggregate of the labor force in the vast majority needs to be working. All billionaire venture capitalist can stop investing and live on a zero return for the rest of their lives if they chose to. Granted, they usually won’t because eventually a viable opportunity will present itself. But they could. They are not going to run out of resources…labor will if they’re not working for an extended period.

“A capitalist that offers a crappy job will not have many takers”

They offer crappy jobs to low skilled workers all the time and have a line of people waiting to take them. That’s largely because of the large number of unskilled workers. They are a dime a dozen and have to take what they can get.


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secularist10 19 months ago from New York City Author

Suppose I have a great business idea that requires 100 employees. Each employee needs at least a Bachelor's from an accredited university. Where will I set up my office? I can't go to rural India. I can't go to the Congo. I have to go where the labor is--labor that has the requisite skill set.

(I could transport workers to a foreign location, but to keep the example simple, you get the point).

So although the office will not exist without my initial investment, my investment itself depends on the existence of a labor force that has certain skills. That's what I mean by the physical reality vs. the economic process.

The decision to invest relies on the existence of a workforce to make that investment pay off.

Take the example of Singapore post-WWII. The government invested in education and skills. They improved the quality of the workforce. Then the capital came, multinationals set up shop.

Now you might say "The government would not have educated the workforce in the first place if it didn't recognize the essentialness of capital." And around and around we go again. Chicken and egg.

Re: the marriage. The analogy was not strictly about economics. I was just pointing out that, as far as that relationship is concerned, both parties are necessary. Whether the husband makes $20k or $500k makes little difference as to his structural role in the marriage.

The structural role of each component is what I'm concerned with.

Indeed, you could hire a nanny. Why would you do that? Because you still need someone to cook and clean.

In the same way, your wife could divorce you and find another husband who makes 10 times as much. Either way, both components are structurally necessary, even if an individual component is expendable.

Laborers are expendable/ replaceable. Labor, as a category, is not.

You keep bringing up low-skilled labor because they are obviously replaceable.

But look at high-skilled or specialized labor. They command high salaries and have significant power.

Whether a CEO or an engineer or a high-powered attorney, the market determines that this person's work is extremely valuable. Thus they are far less expendable than a cashier at Walmart.

That CEO or attorney does not need to be constantly looking for work the way a day laborer does. Rather, he will be constantly solicited by clients and potential employers.

A rich capitalist can sit on his money if he chooses. But so can the attorney or the CEO. Whoever they are, if they have a ton of money, they can relax. A capitalist who is going broke from bad investment decisions doesn't have that luxury.

This is why it's disingenuous to compare a rich capitalist with a dishwasher. Compare a rich capitalist to a rich worker and things get much more interesting.

There have been many cases in history where capitalists were harmed, financially, by striking workers.


LandmarkWealth profile image

LandmarkWealth 19 months ago from Melville NY

Or you might make an investment to train people to get the degree from an accredited university in return for a contract to work for you for X number of years. Companies make such offers of education reimbursement all the time. The point is that whether you need educated labor, or unskilled labor…with the exception of a few fields…they’re both in much more excess than those who can and will commit capital expenditures. Which is why we need incentives to those expenditures. Because the labor is already in large supply.

“The decision to invest relies on the existence of a workforce to make that investment pay off”

The decision to invest creates the workforce, which creates the demand.

Where did singapore gov’t get the money to invest in education and skills ??? They had to first get the commitment from private entities to utilize their nation. Any gov’t can spend infinite amounts of money on education and infrastructure. But the money the money they print is worthless without the productive capacity of a nations private enterprise behind it. That productivity required the commitment of private capital first. And that happened in Singapore primarily because they made it very easy from a regulatory and taxation standpoint to go into business there. So they attracted a lot of foreign capital investment.

“Whether the husband makes $20k or $500k makes little difference as to his structural role in the marriage.”

It does in economics….because when you take the emotional aspect out, the role of the wife can be easily replaced if the husband with the high income chooses to do so. If the wife is married to a man with little income, and can find a husband who makes more because she is attractive enough to another person, than she became more valuable. If she can’t because she is too ugly, then she has less leverage. Perhaps her good looks make her more valuable. Perhaps she has nothing to offer. Whatever the reason, the person with the larger value holds the cards. But there are still differences in value. And both could choose to remain single…and do without the structure if they chose to. And in reality…relationships often work that way. Women stay with men because of money all the time, and have little say in the relationship. They become labor. And men stay with women because of money, looks or whatever all the time. Then they become labor. If you don’t like it, the one with the leverage will tell you to take a walk. The one with the perceived greater value often controls the relationship. Relationships are often just like economic systems, if not one on their own. The structural components are always there, but one holds leverage over the other and is inherently more valuable…otherwise they couldn’t exercise control.

(By the way…I am not suggesting that’s what a marriage should be based on. But it often is)

Neither labor or capital is totally replaceable. I am not suggesting that. I am simple pointing out what has always been true in economics. That which is in fewer supply is more valuable. In economics…labor is in greater supply. It doesn’t need incentives to work in most cases. It works to survive. Capital investors make investments when the perceived opportunity is right…and not any other time. So they need incentive. Which is why we tax capital investment differently.

“Whether a CEO or an engineer or a high-powered attorney, the market determines that this person's work is extremely valuable. Thus they are far less expendable than a cashier at Walmart.”

No argument there. As I referenced earlier, the value of labor is based on the skill set. The high powered attorney will become the employer if he isn’t happy with his current employer. In fact they themselves are often capital investors as well. While they may work for a law firm, they may also be partners/investors in a private REIT…or a venture capital firm. But they won’t do that without the right incentives. The Walmart employee won’t likely do that…which is why they work at Walmart.

“There have been many cases in history where capitalists were harmed, financially, by striking workers.

The above statement is true. Except it typically requires the use of violence, or political corruption. Because striking workers can’t stop those unaffiliated with their cause any other way. When workers in the private sector are permitted to vote freely, they walk away from organized labor regularly. That has more to do with the fact that organized labor tends to screw the workers ten times more than the employer does.

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