I'd like to see some studies about how taxation of dividend income at ordinary income rates would affect companies who accumulate huge amounts of retained earnings. Primarily because the accumulated earnings tax uses the dividend rate to tax what it defines as excessive earnings, just so we could see companies sitting on huge piles of cash from operations not just sit on them.
It would hurt stock prices for companies who aim to keep disproportionate amounts of cash on hand, because the reason to have a big war chest relative to the size of your company is to signify that your company is stable and strong. If you slice something out of that then it might disproportionally impact companies who maybe deal with more volatile sectors.
Like it probably would hurt a retail clothing operation more than it would hurt Exxon. Wall Street doesn't really doubt that Exxon is strong. But a clothing company with not much cash during a recession... untouchable to investors.
It depends. Mid-sized firms that sit on a lot of cash are usually hostile takeover targets. Additionally investors might get antsy that companies are sitting on cash and not actually doing anything with it. But I see what you mean and I agree with it. I need to look over the Bardahl Formula again
I thought capital expenditures, or business investment, closely follows consumer consumption. Someone needs to get Ronya in here
Yes but not every industry has businesses with nice smooth curves. Especially in big ticket clothing (which is where I used to work). It's very spiky.
When I was in that industry, our company was substantially smaller than some of our competitors, but our public valuation was higher because our cash to debt ratio was legendarily awesome relative to our industry, and this was in '09 at the height of financial crap, our price was rising.
If our business was commodities, it probably wouldn't have mattered.
Jasconius on
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spacekungfumanPoor and minority-filledRegistered User, __BANNED USERSregular
First off, I find it odd that a discussion one how tax reform is so hard begins with talking about how difficult it is to even define income. We've already defined income - that part is done. Because, you know, we have an income tax already.
Transitional issues aside, wouldn't it be feasible to just leave the "what is income?" part of the tax code alone (more or less) and work on eliminating exemptions?
I also find it someone curious to talk about how all these exemptions are so hard to get rid of because they represent conscious policy decisions. I mean, of course they do. The tax code just doesn't magically wink into existence, it is written as a result of politicians wanting to implement social policy. The main complaint of those in favor of tax reform (or simplification) is that these policies suck a big nut. (I also think it's amusing that a point against tax reform is that it would distort the market. The market is so distorted already that it can practically suck its own dick.)
One of my complaints about the current tax code is that it warps the impression of who's paying what. People whine about how rich folks have to pay 35% in tax. 35 whole percent! Except they only pay around 15-20% in effective taxes. Sort of like we have the highest corporate tax rates in the world, even though most of our biggest corporations pay aprroximately 0% in taxes because of exemptions.
What exactly do you think exemptions and deductions are? They are tools for arriving at your taxable income, so in a very real sense, the complaints most people seem to have about the tax code are actually about what portions of our income should be taxed.
I would argue that in order for a practice to be viewed as abusive, it would by definition have to be an unintended use of the rules as drafted (see tax shelters). When people say they want to close loopholes, they can mean that they want to plug unintended benefits in the system, or that they want to carve out specific benefits that were intentionally extended. With respect to the first category, I think it makes sense to try and fix the issues, although it is hard because the code section was put into effect to serve a legitimate purpose. When you are talking about the second category, its much easier to "fix" the problem, the question just becomes one of if it should be "fixed" or if the policy behind its original passage still makes sense.
On the rich paying less than their stated marginal tax rate, yes, this does occur, but it is not everyone who is in the upper brackets is able to get out of paying the full rate (I wish I could get my marginal tax rate down to 15%!).
I really like this OP. I think many people (mostly republicans) have this fantasy that we can easily take a chainsaw to the tax code and produce something that's simple and fair to everyone. But in reality, the economy is pretty damn complicated, so it makes sense that the tax code should also be complicated.
Of course there are some specific tax laws that are bad, or at least could be made more efficient. But overall, having many complicated exemptions allows us to target and promote good behavior. Having just a simple, ironclad tax law could screw over anyone doing anything unusual.
businesses have a much easier time getting out of tax than individual wealthy people... because there isn't a whole lot of middle ground when it comes to capital gains. You either got a return or you didn't.
but one problem is, and you can argue that audits are *supposed* to catch this, but I don't think they do a good enough job of it, is that if you are wealthy, you can really make the business tax system work for you as an individual. especially if your company is privately held.
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zepherinRussian warship, go fuck yourselfRegistered Userregular
This idea that many tax exempts are shelters is not true. IRS audits of tax exempts is quite common, and it is extemely rare for a tax exempt to lose its exempt status.
You've got your cause effect relationship wrong. Tax exempts are used as tax shelters because it is extremely rare for tax exempt to lose tax exempt status. The rules on what you can do as a non profit are tremendously loose. It is easy to abuse.
Please provide any empirical evidence you have of this widespread abuse. I ask because my own experience working with a lot of non-profits (both paying clients and pro bono) at a firm with one of the largest exempt orgs practices in the country has been that tax exempts are extremely cautious when it comes to what they can and cannot do as exempt orgs.
And the abuses I speak of not illegal, they are totally legitamate. Take a charity. I can set up a charity fund it from my business and write that off as a tax expense, fund several aspects of my life as long as it is vaguely charitable. "yeah we should do a charitable concert with Bono." "Let us have a Charitable diner auction," "I need to fly to Vegas have the charity pay for my hotel, meals car, speak for a day promote my charity." On paper it looks great. A lot of "mission trips" to Mexico are business people looking for a way to take a vacation on uncle sam.
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spacekungfumanPoor and minority-filledRegistered User, __BANNED USERSregular
I'd like to see some studies about how taxation of dividend income at ordinary income rates would affect companies who accumulate huge amounts of retained earnings. Primarily because the accumulated earnings tax uses the dividend rate to tax what it defines as excessive earnings, just so we could see companies sitting on huge piles of cash from operations not just sit on them.
Additionally, buying and selling stock in a secondary market does not actually give the issuers any more cash: they probably already got that in an IPO, underwritten or not. Also personal use of cell phones being deducted on a business tax return is always a red flag for an IRS audit (this means it shouldn't be done), and business lunches are limited to 50%.
I'm not familiar with any studies responsive to your first question, but since the taxation of dividends at capital gains rate is a very recent phenomenon, there may well be some studies othe there.
While it is true that buying stock on a secondary market does not translate into cash on hand, it does enable you to buy another company using your stock more easily. But the bigger savings effect which I had in mind is the impact of increased savings in pension plans leading to more money for private equity investment. More money in the hands of the KKR's and Blackstone's of the world means more companies changing hands or merging.
Also, anyone can set up a nonprofit corporation, but you need to file special forms and meet certain criteria to be eligible for 501(c)(3) status, which lets you be able to deduct contributions to them (up to a certain amount)
Not really, at least if we're going by portion of income/wealth taxed. Massachusetts doesn't tax food and clothes, which are the items that don't scale by income.
It's still regressive.
You are right, but only in the narrowest and most technical sense. It is hard to imagine someone arguing that a consumption tax should not be imposed on luxury goods as a policy matter, because it can be regressive to a specific income segment which is not needy.
Yes. It's regressive, but because of which segment of society is impacted, we don't care. Which is a far cry from the claims of progressivity people were making.
Progressive does NOT mean "soak the rich", and it's offensive when people act as if it does.
This idea that many tax exempts are shelters is not true. IRS audits of tax exempts is quite common, and it is extemely rare for a tax exempt to lose its exempt status.
You've got your cause effect relationship wrong. Tax exempts are used as tax shelters because it is extremely rare for tax exempt to lose tax exempt status. The rules on what you can do as a non profit are tremendously loose. It is easy to abuse.
Please provide any empirical evidence you have of this widespread abuse. I ask because my own experience working with a lot of non-profits (both paying clients and pro bono) at a firm with one of the largest exempt orgs practices in the country has been that tax exempts are extremely cautious when it comes to what they can and cannot do as exempt orgs.
And the abuses I speak of not illegal, they are totally legitamate. Take a charity. I can set up a charity fund it from my business and write that off as a tax expense, fund several aspects of my life as long as it is vaguely charitable. "yeah we should do a charitable concert with Bono." "Let us have a Charitable diner auction," "I need to fly to Vegas have the charity pay for my hotel, meals car, speak for a day promote my charity." On paper it looks great. A lot of "mission trips" to Mexico are business people looking for a way to take a vacation on uncle sam.
As someone who grew up listening to his father - an IRS agent charged with reviewing the cases of benefit plans for compliance with the tax exemption regulations - discussing how many of these cases wind up getting the idiot in violation in hot water, let me just say that you are full of gooseshit. The main problems that the IRS faces with enforcement are that they are chronically understaffed and that they are forced to put scant resources towards unworthwhile but politically acceptable targets.
This idea that many tax exempts are shelters is not true. IRS audits of tax exempts is quite common, and it is extemely rare for a tax exempt to lose its exempt status.
You've got your cause effect relationship wrong. Tax exempts are used as tax shelters because it is extremely rare for tax exempt to lose tax exempt status. The rules on what you can do as a non profit are tremendously loose. It is easy to abuse.
Please provide any empirical evidence you have of this widespread abuse. I ask because my own experience working with a lot of non-profits (both paying clients and pro bono) at a firm with one of the largest exempt orgs practices in the country has been that tax exempts are extremely cautious when it comes to what they can and cannot do as exempt orgs.
And the abuses I speak of not illegal, they are totally legitamate. Take a charity. I can set up a charity fund it from my business and write that off as a tax expense, fund several aspects of my life as long as it is vaguely charitable. "yeah we should do a charitable concert with Bono." "Let us have a Charitable diner auction," "I need to fly to Vegas have the charity pay for my hotel, meals car, speak for a day promote my charity." On paper it looks great. A lot of "mission trips" to Mexico are business people looking for a way to take a vacation on uncle sam.
The situation you describe here would not qualify for federal tax exemption.
The article you posted is interesting. I was not in the field in 2005 (I was still in school then) but I do know that the level of scrutiny 501(c)(3) exempt organizations are under is much higher than it was in the not too distant past, and the IRS is basically viewed by the people I know at exempt orgs as being the most anti-exempt organizations that it has ever been.
Not really, at least if we're going by portion of income/wealth taxed. Massachusetts doesn't tax food and clothes, which are the items that don't scale by income.
It's still regressive.
You are right, but only in the narrowest and most technical sense. It is hard to imagine someone arguing that a consumption tax should not be imposed on luxury goods as a policy matter, because it can be regressive to a specific income segment which is not needy.
Yes. It's regressive, but because of which segment of society is impacted, we don't care. Which is a far cry from the claims of progressivity people were making.
Progressive does NOT mean "soak the rich", and it's offensive when people act as if it does.
None of the stuff Zeph exemplified specifically requires a charity. You can just do it with a regular private business. Doesn't really excuse it or make it less egregious. Though you will get taxed more, still better than paying yourself to then turn around and pay for it.
First off, I find it odd that a discussion one how tax reform is so hard begins with talking about how difficult it is to even define income. We've already defined income - that part is done. Because, you know, we have an income tax already.
Transitional issues aside, wouldn't it be feasible to just leave the "what is income?" part of the tax code alone (more or less) and work on eliminating exemptions?
I also find it someone curious to talk about how all these exemptions are so hard to get rid of because they represent conscious policy decisions. I mean, of course they do. The tax code just doesn't magically wink into existence, it is written as a result of politicians wanting to implement social policy. The main complaint of those in favor of tax reform (or simplification) is that these policies suck a big nut. (I also think it's amusing that a point against tax reform is that it would distort the market. The market is so distorted already that it can practically suck its own dick.)
One of my complaints about the current tax code is that it warps the impression of who's paying what. People whine about how rich folks have to pay 35% in tax. 35 whole percent! Except they only pay around 15-20% in effective taxes. Sort of like we have the highest corporate tax rates in the world, even though most of our biggest corporations pay aprroximately 0% in taxes because of exemptions.
One problem is that large corporations like a complex tax code, because it acts as a barrier to entry.
Not really, at least if we're going by portion of income/wealth taxed. Massachusetts doesn't tax food and clothes, which are the items that don't scale by income.
It's still regressive.
You are right, but only in the narrowest and most technical sense. It is hard to imagine someone arguing that a consumption tax should not be imposed on luxury goods as a policy matter, because it can be regressive to a specific income segment which is not needy.
Yes. It's regressive, but because of which segment of society is impacted, we don't care. Which is a far cry from the claims of progressivity people were making.
Progressive does NOT mean "soak the rich", and it's offensive when people act as if it does.
That is a fair point.
There's a simple rule to determine progressive vs. regressive taxes.
Progressive taxes take marginal utility into account. Regressive ones don't.
Further to this, in the colloquium we read most of the in progress papers from the major writers in tax policy, and professors from Yale, Chicago, Columbia and other schools would come every week to participate in the discussion. I also had the opportunity to read most of the seminal works on tax policy as part of some other course I took in law school. It was a really great academic experience for anyone with even a passing interest in tax policy.
Who were these 'major writers', specifically? Like, what are their names?
Can I take a stab at guessing one of them was Frederic Mishkin?
With Love and Courage
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spacekungfumanPoor and minority-filledRegistered User, __BANNED USERSregular
One problem is that large corporations like a complex tax code, because it acts as a barrier to entry.
This actually does not match my experience. My clients hate dealing with accountants and tax lawyers, and just view them as cost sinks. As long as the numbers worked, my clients would definitely prefer a simpler system.
Further to this, in the colloquium we read most of the in progress papers from the major writers in tax policy, and professors from Yale, Chicago, Columbia and other schools would come every week to participate in the discussion. I also had the opportunity to read most of the seminal works on tax policy as part of some other course I took in law school. It was a really great academic experience for anyone with even a passing interest in tax policy.
Who were these 'major writers', specifically? Like, what are their names?
Can I take a stab at guessing one of them was Frederic Mishkin?
If you'd like to do your poking, you could probably look at the schedules here, instead of asking inane questions.
Further to this, in the colloquium we read most of the in progress papers from the major writers in tax policy, and professors from Yale, Chicago, Columbia and other schools would come every week to participate in the discussion. I also had the opportunity to read most of the seminal works on tax policy as part of some other course I took in law school. It was a really great academic experience for anyone with even a passing interest in tax policy.
Who were these 'major writers', specifically? Like, what are their names?
Can I take a stab at guessing one of them was Frederic Mishkin?
I honestly don't remember (this was years ago) but the professor was Daniel Shaviro, who was one of the key figures in the 1986 tax reform (the last major rewrite of the code).
All of that said, I'm not sure how popular the idea is outside of academia.
Without going into much detail, a consumption tax with a large exemption (i.e., no tax on the first $20-50k in consumption for the year) has gained widespread support among academics for a number or reasons, including the fact that it encourages saving, and saving is positively correlated with economic growth.
Wait, what?
edit: tax simplification is popular in academia, as is a consumption tax. But the reason has less to do with barriers to entry and more to do with losses in tax preparation and avoidance.
The argument to savings being incented is true, but does not lead to higher growth. Savings is obviously correlated with growth, but only if we consider things in isolation. Consumption is also positively correlated with growth. If we implement a change that increases savings but decreases consumption...
Only makes sense if we believe that the equilibrium savings rate given the tax code is incorrert for some reason, or that another savings rate would be better.
Such an argument rests on much shakier grounds than the arguments as to whether or not tax simplification is a good idea.
The issue mainly is where tax simplification can happen. And the answer there is probably "Absent a shift in the method of government away legislature and towards bureaucracy we will never have a simplified tax code"
I respectfully disagree with your assertion that the income tax exists as a brake on income inequality. The current tax brackets are among the flatest in US history, and due to the low long-term capital gains rates, the wealthy actually pay less on the bulk of their income than the poor (at least among those of the poor who pay taxes). I think that the income tax is our dominant tax as a matter of historic accident. Most of the world has moved to primarily using consumption taxes, such as a VAT.
As far as what taxation should be about, that is obviously an incredibly broad topic which I do not think we could make any meaningful progress on through discussion on an internet forum, since it is so subjective. The only thing that I will say is that any tax can be designed to raise a targetted amount of revenue, and we could easily replace the US income tax with a consumption tax on a revenue neutral or revenue positive basis.
The problem with your respectful disagreement is that it flies in the face of of the historic evidence. During the period of low income inequality in the 50's and 60's, the US had a strongly progressive income tax with high upper brackets. As the brackets were flattened, income inequality has increased.
And the evidence for a causal relationship is what?
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spacekungfumanPoor and minority-filledRegistered User, __BANNED USERSregular
Further to this, in the colloquium we read most of the in progress papers from the major writers in tax policy, and professors from Yale, Chicago, Columbia and other schools would come every week to participate in the discussion. I also had the opportunity to read most of the seminal works on tax policy as part of some other course I took in law school. It was a really great academic experience for anyone with even a passing interest in tax policy.
Who were these 'major writers', specifically? Like, what are their names?
Can I take a stab at guessing one of them was Frederic Mishkin?
If you'd like to do your poking, you could probably look at the schedules here, instead of asking inane questions.
Tyrannus - if you are interested, and are in new york, I think the colloquium is open to all comers, on a first come first served basis. You'd just have to email Daniel Shaviro.
One problem is that large corporations like a complex tax code, because it acts as a barrier to entry.
This actually does not match my experience. My clients hate dealing with accountants and tax lawyers, and just view them as cost sinks. As long as the numbers worked, my clients would definitely prefer a simpler system.
Corporations do not necessarily prefer a complex code to a simple one. They absolutely do prefer a tax code that specifically benefits them and has been written to take their business into account, which is why they pay $Texas to lobbyists who ensure that it does. Whether or not they actually prefer complexity, the complexity is an obvious side effect of their political influence.
I submitted an entry to Lego Ideas, and if 10,000 people support me, it'll be turned into an actual Lego set!If you'd like to see and support my submission, follow this link.
Decoding the U.S. Corporate Tax (Urban Institute Press, 2009)
Taxes, Spending, and the U.S. Government's March Toward Bankruptcy (Cambridge University Press, 2007)
When Rules Change: An Economic and Political Analysis of Transition Relief and Retroactivity (University of Chicago Press, 2000)
Making Sense of Social Security Reform (University of Chicago Press, 2000)
Do Deficits Matter? (University of Chicago Press, 1997)
Yeah, Danny is certainly a trustworthy individual, and I'm sure his instructional material is in no way influenced by his personal wealth or investments.
If you'd like to do your poking, you could probably look at the schedules here, instead of asking inane questions.
It's not 'asking inane questions'. It's demanding to see the credentials of the academics the OP is citing.
Getting your economics information from the University of Chicago, Harvard or Columbia is like getting your biology information from Answers in Genesis. It's garbage that is given no respect outside of the United States, and is primarily driven by hucksters who are far more interested in protecting their portfolio performance than providing a legitimate discourse / analysis of economics.
What exactly do you think exemptions and deductions are? They are tools for arriving at your taxable income, so in a very real sense, the complaints most people seem to have about the tax code are actually about what portions of our income should be taxed.
They are not tools for deciding what counts as income. They are tools for deciding how much to take away from the money that counts as income before calculating taxes. Your original post was, perhaps unintentionally, conflating these issues.
I would argue that in order for a practice to be viewed as abusive, it would by definition have to be an unintended use of the rules as drafted (see tax shelters). When people say they want to close loopholes, they can mean that they want to plug unintended benefits in the system, or that they want to carve out specific benefits that were intentionally extended. With respect to the first category, I think it makes sense to try and fix the issues, although it is hard because the code section was put into effect to serve a legitimate purpose. When you are talking about the second category, its much easier to "fix" the problem, the question just becomes one of if it should be "fixed" or if the policy behind its original passage still makes sense.[/quote]
I would say most uses of the "loopholes" we're talking about are 100% intentional. Just because something is a terrible idea, or grossly corrupt, or would piss off any sane and decent person who thought about it for three seconds, does not mean it was unintentional.
Me, I think that the appropriate place to begin here is not "Which exemptions can we get rid of?" I think the appropriate place is to axe every last one of them and then decide which ones we should add back in. If any. I mean, if your average American making $50k per year is paying an effective rate of 15% after all his deductions, then maybe we should just eliminate the exemptions and tweak the tax rates so that he's paying 15%. Instead of forcing him to pay a CPA hundreds of dollars to realize the same tax burden.
On the rich paying less than their stated marginal tax rate, yes, this does occur, but it is not everyone who is in the upper brackets is able to get out of paying the full rate (I wish I could get my marginal tax rate down to 15%!).
Part of the problem is that the very wealthiest are seeing the bulk of their income through means covered by capital gains instead of income tax. If we axed the distinction it would address a lot of this problem, because this specific "feature" of our tax code can be manipulated all to hell and back.
I submitted an entry to Lego Ideas, and if 10,000 people support me, it'll be turned into an actual Lego set!If you'd like to see and support my submission, follow this link.
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zepherinRussian warship, go fuck yourselfRegistered Userregular
As someone who grew up listening to his father - an IRS agent charged with reviewing the cases of benefit plans for compliance with the tax exemption regulations - discussing how many of these cases wind up getting the idiot in violation in hot water, let me just say that you are full of gooseshit. The main problems that the IRS faces with enforcement are that they are chronically understaffed and that they are forced to put scant resources towards unworthwhile but politically acceptable targets.
So what you are saying is that they would be in hot water, if there was anybody to enforce it. If there is nobody to enforce the law, then it might not be a law, and companies do this shit all the time. You only hear about what your dad catches, but because they are so chronically understaffed you don't hear jack about the ones that they don't peruse, scant resources and all. I have worked on the other side of the fence with contractors and I do hear about it. Contractors pull some pretty crooked shit when it comes to the IRS. Occasionally someone gets nailed and has to pay a couple hundred grand in back taxes, but most of them don't.
There are certain distinctions of income that should be accounted for when deciding what type of tax expenditure you'd like to axe. Like, cancelled debt.
Getting your economics information from the University of Chicago, Harvard or Columbia is like getting your biology information from Answers in Genesis.
No, its not. UoC is very right wing, but Harvard and Columbia are not. Harvard, despite having Mankiw who is a political stooge, is very mainstream. Columbia has Stiglitz, who is the antithesis of the Chicago school.
Simplified tax structures are something that has widespread acceptance in academia, as they should. The issue is that flat taxes are not considered "simplified", the issue with simplification is entirely within the realm of exemptions and write offs. A smaller statutory rate combined with fewer exemptions is pretty much impossible to be worse than a higher statutory rate and more exemptions. This is supposing of course that we can somehow prevent politicians from adding exemptions... which we cannot.
This is not as true for consumption taxes, mainly because there are advantages and disadvantages for consumption taxes. Specifically we may say that a consumption tax incents savings, but similarly an income tax incents consumption. Whether or not we want to incent consumption or savings(I.E. investment) depends entirely on whether or not we believe that our nation needs more consumption or more savings.
Five years ago the consensus was that we needed more savings, but now the consensus is that we need more consumption The problem is that we cannot decide whether or not we need more of a particular aspect of GDP because that accounting may change. And when it does it will change faster than we can change our tax structure. Aruging that we should change our tax structure because we want to incent a particular aspect of GDP is akin to asking that we should change our tax structure often.
This is probably the primary answer as to why we should not have a consumption tax (assuming that it can be engineered to not be regressive) because the question of whether or not we want more savings or more consumption is subjective and changing.
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mrt144King of the NumbernamesRegistered Userregular
... Have you not been watching current events? You've just described what is happening currently. And there hasn't been a shareholder revolt.
Right now, we are in what I see as a short-term drop in corporate spending, similiar to what happened in 2008/2009, although not nearly as severe. There is still a good amount of deal activity (which is very different from 2008/2009), although the credit markets are not great (I actually think the difficulty in obtaining money on good terms is the main cause of the slow down, not a desire by companies to sit on cash reserves).
What you see is wrong and not only that, my concern is valid in spite of your misperception.
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mrt144King of the NumbernamesRegistered Userregular
I'm betting that people actually buying shit is a lot more helpful than buying stock. Plus, the former creates jobs, at least if the management doesn't decide to lay off a bunch of workers and give the CEO a huge bonus instead.
Buying stock means giving money to the companies, which they can reinvest in expanding their business. I'm honestly not sure whether consumer spending or corporate capital expenditures has a greater effect on economic growth (I think there is actually disagreement on this among academics) but both help.
This is incorrect. Only new issue of stock generate capital for a company. Stuff traded on exhanges has no benefit to the company's financials. Unless a company is willing to dilute shares to raise capital the price of a stock matters little.
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mrt144King of the NumbernamesRegistered Userregular
Getting your economics information from the University of Chicago, Harvard or Columbia is like getting your biology information from Answers in Genesis.
No, its not. UoC is very right wing, but Harvard and Columbia are not. Harvard, despite having Mankiw who is a political stooge, is very mainstream. Columbia has Stiglitz, who is the antithesis of the Chicago school.
Simplified tax structures are something that has widespread acceptance in academia, as they should. The issue is that flat taxes are not considered "simplified", the issue with simplification is entirely within the realm of exemptions and write offs. A smaller statutory rate combined with fewer exemptions is pretty much impossible to be worse than a higher statutory rate and more exemptions. This is supposing of course that we can somehow prevent politicians from adding exemptions... which we cannot.
This is not as true for consumption taxes, mainly because there are advantages and disadvantages for consumption taxes. Specifically we may say that a consumption tax incents savings, but similarly an income tax incents consumption. Whether or not we want to incent consumption or savings(I.E. investment) depends entirely on whether or not we believe that our nation needs more consumption or more savings.
Five years ago the consensus was that we needed more savings, but now the consensus is that we need more consumption The problem is that we cannot decide whether or not we need more of a particular aspect of GDP because that accounting may change. And when it does it will change faster than we can change our tax structure. Aruging that we should change our tax structure because we want to incent a particular aspect of GDP is akin to asking that we should change our tax structure often.
This is probably the primary answer as to why we should not have a consumption tax (assuming that it can be engineered to not be regressive) because the question of whether or not we want more savings or more consumption is subjective and changing.
Too bad stiglitz is a dope
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spacekungfumanPoor and minority-filledRegistered User, __BANNED USERSregular
I'm betting that people actually buying shit is a lot more helpful than buying stock. Plus, the former creates jobs, at least if the management doesn't decide to lay off a bunch of workers and give the CEO a huge bonus instead.
Buying stock means giving money to the companies, which they can reinvest in expanding their business. I'm honestly not sure whether consumer spending or corporate capital expenditures has a greater effect on economic growth (I think there is actually disagreement on this among academics) but both help.
This is incorrect. Only new issue of stock generate capital for a company. Stuff traded on exhanges has no benefit to the company's financials. Unless a company is willing to dilute shares to raise capital the price of a stock matters little.
I'd like to see some studies about how taxation of dividend income at ordinary income rates would affect companies who accumulate huge amounts of retained earnings. Primarily because the accumulated earnings tax uses the dividend rate to tax what it defines as excessive earnings, just so we could see companies sitting on huge piles of cash from operations not just sit on them.
Additionally, buying and selling stock in a secondary market does not actually give the issuers any more cash: they probably already got that in an IPO, underwritten or not. Also personal use of cell phones being deducted on a business tax return is always a red flag for an IRS audit (this means it shouldn't be done), and business lunches are limited to 50%.
I'm not familiar with any studies responsive to your first question, but since the taxation of dividends at capital gains rate is a very recent phenomenon, there may well be some studies othe there.
While it is true that buying stock on a secondary market does not translate into cash on hand, it does enable you to buy another company using your stock more easily. But the bigger savings effect which I had in mind is the impact of increased savings in pension plans leading to more money for private equity investment. More money in the hands of the KKR's and Blackstone's of the world means more companies changing hands or merging.
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spacekungfumanPoor and minority-filledRegistered User, __BANNED USERSregular
... Have you not been watching current events? You've just described what is happening currently. And there hasn't been a shareholder revolt.
Right now, we are in what I see as a short-term drop in corporate spending, similiar to what happened in 2008/2009, although not nearly as severe. There is still a good amount of deal activity (which is very different from 2008/2009), although the credit markets are not great (I actually think the difficulty in obtaining money on good terms is the main cause of the slow down, not a desire by companies to sit on cash reserves).
What you see is wrong and not only that, my concern is valid in spite of your misperception.
I'm not really sure what you are saying, so I don't know how to respond. Please elaborate.
Except that companies changing hands and/or merging is economically neutral as far as we can tell. Ownership has no effect on productivity, management does.
If we want to say that a decreased tax on capital transfers is good, we can only say it is good because we can more readily align risk and consumption preferences. But that argument, like all arguments to preferences are flawed from the get go; we have no reason to believe that peoples preferences are correct, and in fact in many cases may have reason to believe that peoples preferences are incorrect.
What would matter would be the actual changing hands of capital, I.E. when a business itself buys or sells capital assets. This lends us to the question of what is or isn't a capital asset and i don't think this has a simple answer(whereas with an income tax, we don't care, we care about profits). The real issue here is that the majority of capital transfer which has actual productivity effects (I.E. aligns management and capital) occurs not through channels captured by capital gains, but by bonds and other forms of loans... Bonds on which the interest rate is deducted from profits...
That being said, stock prices do have effects on companies, because they effect their ability to issue bonds. But can we say that the stock price is an accurate reflection of the companys worth? Do we want to increase stock price volatility?
If i might reference Chapter 2 of The General Theory; is it a good thing if we more closely align a businesses investment decisions with the whims of the market? I do not believe that the market looks forward very well(if it did, that would assume that the future is easy to predict, which does not make sense given what we know of both history and how basic research produces valuable productivity increases), but beyond that the market is prone to fits of rational failure.
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mrt144King of the NumbernamesRegistered Userregular
Hes a dope. Hes wrong all the time about everything.
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spacekungfumanPoor and minority-filledRegistered User, __BANNED USERSregular
Getting your economics information from the University of Chicago, Harvard or Columbia is like getting your biology information from Answers in Genesis.
No, its not. UoC is very right wing, but Harvard and Columbia are not. Harvard, despite having Mankiw who is a political stooge, is very mainstream. Columbia has Stiglitz, who is the antithesis of the Chicago school.
Simplified tax structures are something that has widespread acceptance in academia, as they should. The issue is that flat taxes are not considered "simplified", the issue with simplification is entirely within the realm of exemptions and write offs. A smaller statutory rate combined with fewer exemptions is pretty much impossible to be worse than a higher statutory rate and more exemptions. This is supposing of course that we can somehow prevent politicians from adding exemptions... which we cannot.
This is not as true for consumption taxes, mainly because there are advantages and disadvantages for consumption taxes. Specifically we may say that a consumption tax incents savings, but similarly an income tax incents consumption. Whether or not we want to incent consumption or savings(I.E. investment) depends entirely on whether or not we believe that our nation needs more consumption or more savings.
Five years ago the consensus was that we needed more savings, but now the consensus is that we need more consumption The problem is that we cannot decide whether or not we need more of a particular aspect of GDP because that accounting may change. And when it does it will change faster than we can change our tax structure. Aruging that we should change our tax structure because we want to incent a particular aspect of GDP is akin to asking that we should change our tax structure often.
This is probably the primary answer as to why we should not have a consumption tax (assuming that it can be engineered to not be regressive) because the question of whether or not we want more savings or more consumption is subjective and changing.
Complexity is not just a function of politicians adding exemptions. Have you ever had occassion to look at section 409A of the code, dealing with nonqualified deferred compensation plans? 409A was basically enacted to prevent executives from choosing to defer their compensation and thereby delay taxation on that compensation. It's a simple concept, but the complexity is enourmous, and this one page section has spawned hundreds of pages of regulations, a handful of lengthy notices, and even an entire treatise half as long as the entire tax code. Despite all this guidance, questions come up nearly every day in my practice which require a lot of interpretation and expensive lawyer time to resolve, and even then, we never come to an answer which is clearly correct.
Since corporations will always want to minimize their taxes, and will always be willing to pay to do so, people like me will always be out there looking for the loopholes, prompting additional clarifications and guidance either approving or disapproving the evolving market practices. In this way, we go from a one page statute to hundreds of pages or regulations, and each page piles on more complexity which will present structuring opportunities. I don't doubt that you could draft an incredibly simple tax code which would minimize opportunities, but the trade off would be less specificity which would most likely shift the complexity to IRS decisions and other guidance which would have to be released in response to the confusion that would ensue from the more general rules. This model is actually more akin to how most federal laws work (i.e., light on regulations, highly reliant on rulings and cases) but it would also make our self-assessment scheme less precise, leading to higher collection costs since more returns would need to be reviewed for accuracy.
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Yes but not every industry has businesses with nice smooth curves. Especially in big ticket clothing (which is where I used to work). It's very spiky.
When I was in that industry, our company was substantially smaller than some of our competitors, but our public valuation was higher because our cash to debt ratio was legendarily awesome relative to our industry, and this was in '09 at the height of financial crap, our price was rising.
If our business was commodities, it probably wouldn't have mattered.
What exactly do you think exemptions and deductions are? They are tools for arriving at your taxable income, so in a very real sense, the complaints most people seem to have about the tax code are actually about what portions of our income should be taxed.
I would argue that in order for a practice to be viewed as abusive, it would by definition have to be an unintended use of the rules as drafted (see tax shelters). When people say they want to close loopholes, they can mean that they want to plug unintended benefits in the system, or that they want to carve out specific benefits that were intentionally extended. With respect to the first category, I think it makes sense to try and fix the issues, although it is hard because the code section was put into effect to serve a legitimate purpose. When you are talking about the second category, its much easier to "fix" the problem, the question just becomes one of if it should be "fixed" or if the policy behind its original passage still makes sense.
On the rich paying less than their stated marginal tax rate, yes, this does occur, but it is not everyone who is in the upper brackets is able to get out of paying the full rate (I wish I could get my marginal tax rate down to 15%!).
Of course there are some specific tax laws that are bad, or at least could be made more efficient. But overall, having many complicated exemptions allows us to target and promote good behavior. Having just a simple, ironclad tax law could screw over anyone doing anything unusual.
but one problem is, and you can argue that audits are *supposed* to catch this, but I don't think they do a good enough job of it, is that if you are wealthy, you can really make the business tax system work for you as an individual. especially if your company is privately held.
http://articles.latimes.com/2005/apr/06/nation/na-taxfraud6
And the abuses I speak of not illegal, they are totally legitamate. Take a charity. I can set up a charity fund it from my business and write that off as a tax expense, fund several aspects of my life as long as it is vaguely charitable. "yeah we should do a charitable concert with Bono." "Let us have a Charitable diner auction," "I need to fly to Vegas have the charity pay for my hotel, meals car, speak for a day promote my charity." On paper it looks great. A lot of "mission trips" to Mexico are business people looking for a way to take a vacation on uncle sam.
I'm not familiar with any studies responsive to your first question, but since the taxation of dividends at capital gains rate is a very recent phenomenon, there may well be some studies othe there.
While it is true that buying stock on a secondary market does not translate into cash on hand, it does enable you to buy another company using your stock more easily. But the bigger savings effect which I had in mind is the impact of increased savings in pension plans leading to more money for private equity investment. More money in the hands of the KKR's and Blackstone's of the world means more companies changing hands or merging.
Yes. It's regressive, but because of which segment of society is impacted, we don't care. Which is a far cry from the claims of progressivity people were making.
Progressive does NOT mean "soak the rich", and it's offensive when people act as if it does.
As someone who grew up listening to his father - an IRS agent charged with reviewing the cases of benefit plans for compliance with the tax exemption regulations - discussing how many of these cases wind up getting the idiot in violation in hot water, let me just say that you are full of gooseshit. The main problems that the IRS faces with enforcement are that they are chronically understaffed and that they are forced to put scant resources towards unworthwhile but politically acceptable targets.
The situation you describe here would not qualify for federal tax exemption.
The article you posted is interesting. I was not in the field in 2005 (I was still in school then) but I do know that the level of scrutiny 501(c)(3) exempt organizations are under is much higher than it was in the not too distant past, and the IRS is basically viewed by the people I know at exempt orgs as being the most anti-exempt organizations that it has ever been.
That is a fair point.
One problem is that large corporations like a complex tax code, because it acts as a barrier to entry.
There's a simple rule to determine progressive vs. regressive taxes.
Progressive taxes take marginal utility into account. Regressive ones don't.
Who were these 'major writers', specifically? Like, what are their names?
Can I take a stab at guessing one of them was Frederic Mishkin?
This actually does not match my experience. My clients hate dealing with accountants and tax lawyers, and just view them as cost sinks. As long as the numbers worked, my clients would definitely prefer a simpler system.
The people who actually do the work don't like it so much.
But I severely doubt that the tax code is favored by the majority of large companies on the grounds that it stymies competition.
http://law.nyu.edu/academics/colloquia/taxpolicy/index.htm
I honestly don't remember (this was years ago) but the professor was Daniel Shaviro, who was one of the key figures in the 1986 tax reform (the last major rewrite of the code).
All of that said, I'm not sure how popular the idea is outside of academia.
Wait, what?
edit: tax simplification is popular in academia, as is a consumption tax. But the reason has less to do with barriers to entry and more to do with losses in tax preparation and avoidance.
The argument to savings being incented is true, but does not lead to higher growth. Savings is obviously correlated with growth, but only if we consider things in isolation. Consumption is also positively correlated with growth. If we implement a change that increases savings but decreases consumption...
Only makes sense if we believe that the equilibrium savings rate given the tax code is incorrert for some reason, or that another savings rate would be better.
Such an argument rests on much shakier grounds than the arguments as to whether or not tax simplification is a good idea.
The issue mainly is where tax simplification can happen. And the answer there is probably "Absent a shift in the method of government away legislature and towards bureaucracy we will never have a simplified tax code"
And the evidence for a causal relationship is what?
Tyrannus - if you are interested, and are in new york, I think the colloquium is open to all comers, on a first come first served basis. You'd just have to email Daniel Shaviro.
Corporations do not necessarily prefer a complex code to a simple one. They absolutely do prefer a tax code that specifically benefits them and has been written to take their business into account, which is why they pay $Texas to lobbyists who ensure that it does. Whether or not they actually prefer complexity, the complexity is an obvious side effect of their political influence.
Yeah, Danny is certainly a trustworthy individual, and I'm sure his instructional material is in no way influenced by his personal wealth or investments.
:P
Thread is a waste of time.
It's not 'asking inane questions'. It's demanding to see the credentials of the academics the OP is citing.
Getting your economics information from the University of Chicago, Harvard or Columbia is like getting your biology information from Answers in Genesis. It's garbage that is given no respect outside of the United States, and is primarily driven by hucksters who are far more interested in protecting their portfolio performance than providing a legitimate discourse / analysis of economics.
They are not tools for deciding what counts as income. They are tools for deciding how much to take away from the money that counts as income before calculating taxes. Your original post was, perhaps unintentionally, conflating these issues.
I would argue that in order for a practice to be viewed as abusive, it would by definition have to be an unintended use of the rules as drafted (see tax shelters). When people say they want to close loopholes, they can mean that they want to plug unintended benefits in the system, or that they want to carve out specific benefits that were intentionally extended. With respect to the first category, I think it makes sense to try and fix the issues, although it is hard because the code section was put into effect to serve a legitimate purpose. When you are talking about the second category, its much easier to "fix" the problem, the question just becomes one of if it should be "fixed" or if the policy behind its original passage still makes sense.[/quote]
I would say most uses of the "loopholes" we're talking about are 100% intentional. Just because something is a terrible idea, or grossly corrupt, or would piss off any sane and decent person who thought about it for three seconds, does not mean it was unintentional.
Me, I think that the appropriate place to begin here is not "Which exemptions can we get rid of?" I think the appropriate place is to axe every last one of them and then decide which ones we should add back in. If any. I mean, if your average American making $50k per year is paying an effective rate of 15% after all his deductions, then maybe we should just eliminate the exemptions and tweak the tax rates so that he's paying 15%. Instead of forcing him to pay a CPA hundreds of dollars to realize the same tax burden.
Part of the problem is that the very wealthiest are seeing the bulk of their income through means covered by capital gains instead of income tax. If we axed the distinction it would address a lot of this problem, because this specific "feature" of our tax code can be manipulated all to hell and back.
No, its not. UoC is very right wing, but Harvard and Columbia are not. Harvard, despite having Mankiw who is a political stooge, is very mainstream. Columbia has Stiglitz, who is the antithesis of the Chicago school.
Simplified tax structures are something that has widespread acceptance in academia, as they should. The issue is that flat taxes are not considered "simplified", the issue with simplification is entirely within the realm of exemptions and write offs. A smaller statutory rate combined with fewer exemptions is pretty much impossible to be worse than a higher statutory rate and more exemptions. This is supposing of course that we can somehow prevent politicians from adding exemptions... which we cannot.
This is not as true for consumption taxes, mainly because there are advantages and disadvantages for consumption taxes. Specifically we may say that a consumption tax incents savings, but similarly an income tax incents consumption. Whether or not we want to incent consumption or savings(I.E. investment) depends entirely on whether or not we believe that our nation needs more consumption or more savings.
Five years ago the consensus was that we needed more savings, but now the consensus is that we need more consumption The problem is that we cannot decide whether or not we need more of a particular aspect of GDP because that accounting may change. And when it does it will change faster than we can change our tax structure. Aruging that we should change our tax structure because we want to incent a particular aspect of GDP is akin to asking that we should change our tax structure often.
This is probably the primary answer as to why we should not have a consumption tax (assuming that it can be engineered to not be regressive) because the question of whether or not we want more savings or more consumption is subjective and changing.
What you see is wrong and not only that, my concern is valid in spite of your misperception.
This is incorrect. Only new issue of stock generate capital for a company. Stuff traded on exhanges has no benefit to the company's financials. Unless a company is willing to dilute shares to raise capital the price of a stock matters little.
Too bad stiglitz is a dope
I'm not really sure what you are saying, so I don't know how to respond. Please elaborate.
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Except that companies changing hands and/or merging is economically neutral as far as we can tell. Ownership has no effect on productivity, management does.
If we want to say that a decreased tax on capital transfers is good, we can only say it is good because we can more readily align risk and consumption preferences. But that argument, like all arguments to preferences are flawed from the get go; we have no reason to believe that peoples preferences are correct, and in fact in many cases may have reason to believe that peoples preferences are incorrect.
What would matter would be the actual changing hands of capital, I.E. when a business itself buys or sells capital assets. This lends us to the question of what is or isn't a capital asset and i don't think this has a simple answer(whereas with an income tax, we don't care, we care about profits). The real issue here is that the majority of capital transfer which has actual productivity effects (I.E. aligns management and capital) occurs not through channels captured by capital gains, but by bonds and other forms of loans... Bonds on which the interest rate is deducted from profits...
That being said, stock prices do have effects on companies, because they effect their ability to issue bonds. But can we say that the stock price is an accurate reflection of the companys worth? Do we want to increase stock price volatility?
If i might reference Chapter 2 of The General Theory; is it a good thing if we more closely align a businesses investment decisions with the whims of the market? I do not believe that the market looks forward very well(if it did, that would assume that the future is easy to predict, which does not make sense given what we know of both history and how basic research produces valuable productivity increases), but beyond that the market is prone to fits of rational failure.
Complexity is not just a function of politicians adding exemptions. Have you ever had occassion to look at section 409A of the code, dealing with nonqualified deferred compensation plans? 409A was basically enacted to prevent executives from choosing to defer their compensation and thereby delay taxation on that compensation. It's a simple concept, but the complexity is enourmous, and this one page section has spawned hundreds of pages of regulations, a handful of lengthy notices, and even an entire treatise half as long as the entire tax code. Despite all this guidance, questions come up nearly every day in my practice which require a lot of interpretation and expensive lawyer time to resolve, and even then, we never come to an answer which is clearly correct.
Since corporations will always want to minimize their taxes, and will always be willing to pay to do so, people like me will always be out there looking for the loopholes, prompting additional clarifications and guidance either approving or disapproving the evolving market practices. In this way, we go from a one page statute to hundreds of pages or regulations, and each page piles on more complexity which will present structuring opportunities. I don't doubt that you could draft an incredibly simple tax code which would minimize opportunities, but the trade off would be less specificity which would most likely shift the complexity to IRS decisions and other guidance which would have to be released in response to the confusion that would ensue from the more general rules. This model is actually more akin to how most federal laws work (i.e., light on regulations, highly reliant on rulings and cases) but it would also make our self-assessment scheme less precise, leading to higher collection costs since more returns would need to be reviewed for accuracy.