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OldGimletEye

Corporate, Capital Taxation, And What To Do About It.

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http://equitablegrowth.org/equitablog/value-added/whats-the-problem-a-u-s-corporate-tax-cut-will-solve/

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Pretty much the entire conversation around possible U.S. tax reform this year has been around the idea of introducing a border adjustment tax to the corporate income tax by taxing imports and offering a deduction for exports. But there’s a lot more going on in the proposals to overhaul corporate taxation, never mind the planned changes for the individual tax code.

The tax reform proposal from House Republicans would reduce the corporate rate from 35 percent to 20 percent and allow for the immediate and full expensing of capital investments. Both of these changes have been pitched as ways to boost business investment and overall economic growth. Given previous tax reform efforts and trends among corporations, policymakers should be skeptical that these changes will do much on the growth front.

Inspired the above. I was going to put this post on the US politics thread, but as I was sitting here writing it, it got so long, I thought it deserved it’s own thread.

This is fairly long post, so sorry about that. There are a lot of issues and well as writing, things just keep getting longer.


I just wanted to write about the topic of corporate taxes, and perhaps the taxation of capital in general. Given growing wealth inequality and wage stagnation this is an extremely important topic, I think.

A few things:

1. I’m fairly convinced that raising income taxes on the wealthy doesn’t matter a whole lot with regard to economic growth. At least in the US that seems to be the case.

2. With regard to corporate taxation, things are a bit dicier. There does seem to be more empirical evidence that raising corporate taxes might be more harmful, particularly to workers.

Start with a closed economy (there is no trading between nations).

If you believe in the Chamely-Judd results of capital taxation, then the basic result here is that corporate taxes will, over time, cause there to be less capital accumulation, meaning workers will have less capital to work with which lowers their marginal product and hence their wages. Workers under the Chamely-Judd model would actually prefer capital taxes to be 0% in the long run.

Chamely-Judd even goes further and says, if government services have to be paid for, workers, if they were rational, would rather pay for those services out of their labor income.

For obvious reason, Republicans and righties probably love the Chamely-Judd result and are all like, “now you mean old Democrats don’t go around questioning the Chamely-Judd result because some of its modeling choices like perfect foresight, no wealth in the utility function, infinitely lived agents, etc, etc.”

Now think about an Open Economy:

Now forget about Chamely-Judd. Suppose trading is allowed. And capital markets are perfect. It should be obvious then that capital will flow to the country where you can get the highest returns. So if a country raises corporate taxes, then it’s possible that that capital will flee the country. Now if capital flees the country then workers get hurt because their wages will arguably take a hit.

So why have a corporate tax?

1. One reason is if the differential between income taxes and corporate taxes grows large enough, individuals, particularly wealthy ones, will try to reclassify their ordinary income as “corporate income”.

2. Because there seems to be significant evidence that, to a large extent, growing wealth inequality has been happening because capital has been taking more of the net income while labor is taking less.

3. There is evidence that a lot of corporate income is monopoly income and hence a good portion of corporate taxes will tax monopoly rents.

4. Related to point three. If a lot of corporate profit is rents, then it stands to reason that labor, management, and capital owners often fight over who gets the rents. With union power having declined, its quite possible, even probable that these rents are going to management and to share holders.

5. Raising corporate taxes might temporarily lower the level of output and wages, but it may not necessarily lower the growth path. If at least some government services have to be paid for, it’s not clear to me that workers will worse off in the long run.

6. Yes, there are empirical papers that do show that higher corporate taxes hit growth and impact wages. Some don’t though. As a first order approximation, I’d mention that between 1870-1912, in the US, when there was no corporate taxes real GDP growth per capita was 2.2%. Between 1947-1999, when corporate taxes were very much in effect, GDP growth per capita was 2.2%. Also, according to Piketty:

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The textbook model (Chamely-Judd) predicts enormous responses of aggregate capital accumulation to changes in capital tax rates, which just do not seem to be there in historical data. Capital-output ratios are relatively stable in the long run, in spot of large variations in tax rates.

7. Even if higher capital taxes do hit wages, then there is the question of whose wages? If hits mainly higher income people is it really a problem?

8. Growth to who exactly? If the extra growth from lower corporate taxes all goes to the top 1%, then why do we fuckin care?

9. Ceteris Paribus anyone? Maybe it’s the case that higher corporate taxes does lower growth, everything else equal. But, the ceteris paribus condition need not hold. If the extra revenue was put into good public investments then maybe higher corporate taxes need not be so harmful.

10. There is this view in the literature called the “New View” that basically says, corporations use retained earnings to finance new projects and don’t rely much raising capital from investors. So maybe a solution here is to lower the corporate tax rate (or maybe get rid of it) and tax dividends at the ordinary tax rate. Now just in case you missed out on the “Bush Boom” (though in fairness you wouldn’t be alone), there is at least on paper giving evidence that the tax cut on dividend income had about zero effect.

11. Possible dubious mealy mouthed horseshit? See below:

A probably way too long and extremely convoluted example to make a point (Sorry):

Now lets we have this country. We’ll call it Caruso. Now lets say in the country of Caruso coconuts are everything. People consume coconuts. They get paid in coconuts. Coconuts also serve as the only capital good. Now lets say the only capitalist in Caruso is Robinson Caruso and he’s got exactly ten (10 ) workers.

Let’s say at t = 0 Caruso has 22 coconuts. Lets just say he eats two of them and the uses the rest to make more coconuts. In the next period, the total output looks like:

y = aL^.5*K^.5,  where a = 1

Let’s say Caruso gets paid up to his marginal product (so do the workers), which looks something like:

r = .5(20)^-.5 * 10^.5

which roughly means

r = 0.35 and

Caruso gets back r*k or 7 coconuts back total out of a total of about 14 Cocunuts. His workers total got paid 7.

Their individual wage looks something like:

w = .5(10)^-.5 * 20^.5

w = .70 coconuts per worker

Now, permit me to do a bit of an ass pull here, and without trying to figure what the entire path of Caruso’s Euler consumption equation would look like, let’s just say old Caruso eats 5 coconuts and then invest two.

His returns would look something like:

r = .5(22)^-.5 * 10^.5

r = 0.34

So his returns fall a bit, which is what you’d expect if you the labor stock remains fixed and the production function has constant returns to scale.

Now, roll back a bit. And lets say Caruso has this brother, we’ll call him Baruso, whose the only capitalist in The Country of Baruso. Now let’s say, the country of Baruso had basically the same production characteristics as the Country of Baruso. But, let’s just say, all of a sudden Baruso has a technology shock or something. We’ll say a = 1.3.

Now lets say, Baruso had got seven coconuts, but ate six of his. He’s going to invest his one coconut. Now, let’s say Caruso knows about the technology shock. He’s evaluating where to put his own two coconuts.

Since he knows what Baruso’s production function is like he calculates his probable return, which is:

r = 1.3 * .5(23)^-.5 * 10^.5

r = .42

Now, given this higher return in the country of Baruso, Caruso takes his two coconuts and invest them there. The workers in the Caruso don’t see higher wages because no extra invested capital was invested there while the workers in Baruso do, in part, because of Caruso’s investment there.

Now why did I go through all this?

Like what is the fuckin point here?

Caruso invested where he’d get the highest return, which was the Country of Baruso, because of a sudden technology shock. People who advocate for free trade and for free capital flows among nations would say this right and good. And this is how things should work. It’s the market being efficient. None of them say, however, this might, at times, lower or harm the wages of people in the domestic country.

However, the same people will quickly point out, that higher corporate taxes will hurt workers. It’s a bit interesting they don’t have a problem with one scenario, but then they have a problem with the other.

Now the workers on Caruso might not be so bad off, if they had enough money to invest in the country of Baruso’s technology boom, whereby they could partake in the returns to fund future consumption. But let’s say Caruso’s bust up their union, driving down their wages, so they have little to invest.

If worker power isn’t sufficient to drive up wages, then perhaps another option would be tax Caruso’s foreign returns. But, then if Baruso runs a tax shelter, then maybe not. International tax compliance might be one thing us international lefties might have to work on and think about, if we are going to make free trade work better for everyone. And I think that is important if we are going to put a stop the increasing ultra nationalism we are seeing.

This corporate tax and capital tax stuff is something us lefties are going to have to think hard about. It’s important and it’s important we don’t fuck it up. In the US, the corporate tax code is a mess. I think everyone, left or right can admit that. But, it’s usually been a Republican issue, and I think it’s a mistake to leave as only a Republican issue. Like I always say, when dirty rotten hippies stop being interested in finance, they leave it righties to talk about, and you know they’ll always try to pull a fast one when you're not lookin.

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Very interesting. It's a bit sad but revealing that no one has commented yet after 14h (a thread about Islam or immigration would have dozens of answers already).

I'm not good enough with economics to have much to contribute. Just a few thoughts.
- The fact that free trade and free capital flows leads to lower wages is obvious to me. The consequence is that while the costs of production go down, this does not lower the prices of the goods/products enough. In other words, corporations benefit from this lowering of the costs of production by making more profits, but neither the workers nor the consumers (who are really the same people of course) benefit from it (in fact, it's mostly the shareholders who do these days, right?).
In the long-run this effectively kills the middle-class. Or at least forces it to be crippled by debt.
Nothing new here.

- What I'm wondering though is to what extent corporate taxes are going to affect investment exactly. In your example, it seems obvious that Caruso is going to invest his coconuts in Baruso. Fair enough. Is this always the case in real life though? I'm not so certain.
It's true that countries with lower corporate taxes seem more attractive for investors. But don't the returns sometimes depend on more than that? My point is, some countries with high corporate taxes can be attractive for several reasons. They be interesting markets (thanks to a wealthy middle-class) and it may be better for a corporation to have offices/factories on the ground. They may have better infrastructure and laws. They may have a better education system which means they have high-skilled workers with high productivity to hire. They may even have a welfare state that takes care of the workers' healthcare, pension... etc. In the end, it's possible that low corporate taxes are not enough to attract all investors...
Then there's also the fact that in your example you're assuming that Caruso is acting as a completely rational economic agent. But studies have shown that this is generally a mistaken assumption. In real life, maybe Caruso is patriotic enough to invest at least one of his coconuts in his own country. Or maybe he wants to be careful about the image of his brand. Or maybe he's running for office and needs local support. Or maybe he realizes that Baruso's offering high returns is only termporary and Caruso remains a better investment in the long run. There could be dozens of reasons why Caruso will not invest lall his coconuts in Baruso.

What I mean is that while it's true that high corporate taxes will discourage investment (or that high income taxes will lead to tax avoidance), there has to be a limit to that effect. There are countries with high corporate taxes that still see decent investment flows. Or to put it differently, it's not because Russia has a low corporate tax that everyone is investing there...

Generally speaking, I think the argument that high taxes hurt the economy is debatable. They hurt the economy in one way. They may help it in another. I'm not familiar with the Chamely-Judd model, but does it take into account the fact that high capital taxation could be used to redistribute the wealth by a state, thus supporting demand in that country? In other words, if we're looking at the greater picture, can't a government use keynesian policies to negate the bad consequences of high capital taxation? Am I correct in assuming that models like the Chamely-Judd model really provide us with a short-term view on economic causality while ignoring other factors? Or, to put it yet another way, wouldn't high taxes allow a state to develop a more sustainable type of economy in the long run anyway, and one which would benefit the greater number?
 

 

 

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It's a good topic but I don't know what kind of response you expect.  There are several posters who might debate your proposed model but, if anything, the past decade or more should caution us to rely much less on extrapolations from macroeconomic models. 

Corporate taxes are generally a progressive double taxation on the owners of capital, and a means to reduce tax evasive faux-corporatism by the wealthy and to extract some tax from the large amount of foreign capital invested in the US economy.  They are effectively a win for populism where the democratic majority demands them from a sense of fairness even though corporate earnings are effectively taxed twice.  

Globalization necessarily leads to a convergence of global wages, which is felt earliest and most keenly by tradeable labor and its substitutes in the developed economy.  Automation necessarily depresses wages on low skill labor first and perhaps eventually on most labor.  Corporate taxation will be a very minor secondary factor in wages for the middle class of the developed world.

Countries and even federal states have competed in a race to the bottom on tax concessions to win corporate investments resulting in new jobs.  The so-called Irish model now pursued by other developing nations already occurs between states and municipalities in the US.  In effect, they are already willing to negotiate away corporate tax obligations in order to secure improved wage opportunities for their electorate. 

The central problem with corporate tax as a progressive redistribution is that it is inherently inefficient.  Multinational companies pay very different effective tax rates than domestic companies, and global tax coordination is unlikely to get much better because there is always an incentive for someone to adopt the Irish model for a competitive advantage in attracting well paid labor opportunities.  The very existence and success of the Irish model suggests that corporate taxes are sub-optimal and will be competed away eventually.  

The second inefficiency is that corporate taxes are poorly targeted.  If they are intended to be transferred to low wage labor then the transmission process of govt budget is very ineffective.  Most govt spending does not reach those whose wages were depressed.  It would be more effective to specify special tax treatment for labor costs (e.g. >100% deductibility on wages up to a certain level), and/or set prescribed wages, etc. 

Tax policy is poorly understood by voters and generally exploited by focused lobbying.  A cleaner and simpler tax code has been demanded for decades but our system of governance seems incapable of resisting special interests.  I remember once posting that we could simplify our tax code by setting a single table of progressive tax rates on all income (corporate or personal) with a requirement that taxable income match GAAP income.  Another poster, a CPA by profession, insisted it couldn't possibly be done.  When your livelihood requires you not recognize a truth....

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On 2/25/2017 at 0:17 PM, Rippounet said:

 

-What I'm wondering though is to what extent corporate taxes are going to affect investment exactly. In your example, it seems obvious that Caruso is going to invest his coconuts in Baruso. Fair enough. Is this always the case in real life though? I'm not so certain.
It's true that countries with lower corporate taxes seem more attractive for investors. But don't the returns sometimes depend on more than that? My point is, some countries with high corporate taxes can be attractive for several reasons. They be interesting markets (thanks to a wealthy middle-class) and it may be better for a corporation to have offices/factories on the ground. They may have better infrastructure and laws. They may have a better education system which means they have high-skilled workers with high productivity to hire. They may even have a welfare state that takes care of the workers' healthcare, pension... etc. In the end, it's possible that low corporate taxes are not enough to attract all investors...
Then there's also the fact that in your example you're assuming that Caruso is acting as a completely rational economic agent. But studies have shown that this is generally a mistaken assumption. In real life, maybe Caruso is patriotic enough to invest at least one of his coconuts in his own country. Or maybe he wants to be careful about the image of his brand. Or maybe he's running for office and needs local support. Or maybe he realizes that Baruso's offering high returns is only termporary and Caruso remains a better investment in the long run. There could be dozens of reasons why Caruso will not invest lall his coconuts in Baruso

My model was completely contrived and unrealistic. It has little basis in actual reality. A real model that tried to be realistic would wouldn't assume perfect credit markets, the degree of product substitution would be important, the relative economic size of trading countries would be important, so and so forth.

The point was I was mainly trying to make is what I perceive as a little bit of double dealing by some that say, "oh noes, if you raise corporate taxes wages might fall!!!" It just seems fishy to me they didn't have a problem in one possible scenario, but then they have a problem with it another context.

On 2/25/2017 at 0:17 PM, Rippounet said:

What I mean is that while it's true that high corporate taxes will discourage investment (or that high income taxes will lead to tax avoidance), there has to be a limit to that effect. There are countries with high corporate taxes that still see decent investment flows. Or to put it differently, it's not because Russia has a low corporate tax that everyone is investing there...

Well certainly, I'm not quite convinced that higher corporate taxes would be as damaging as some might claim. I think there is still some uncertainty around that matter. 

 

On 2/25/2017 at 0:17 PM, Rippounet said:

Generally speaking, I think the argument that high taxes hurt the economy is debatable. They hurt the economy in one way. They may help it in another. I'm not familiar with the Chamely-Judd model, but does it take into account the fact that high capital taxation could be used to redistribute the wealth by a state, thus supporting demand in that country? In other words, if we're looking at the greater picture, can't a government use keynesian policies to negate the bad consequences of high capital taxation? Am I correct in assuming that models like the Chamely-Judd model really provide us with a short-term view on economic causality while ignoring other factors? Or, to put it yet another way, wouldn't high taxes allow a state to develop a more sustainable type of economy in the long run anyway, and one which would benefit the greater number?
 

Chamley-Judd basically says that if government spending has to be done, laborers, if they were rational, would prefer to finance that government spending out of labor taxes rather than capital taxes.

Not that I really believe the Chamely-Judd model is correct as I think it makes some unrealistic assumptions, which I've mentioned. But, it does serve as kind of a base line model in the teaching of capital taxation. And it certainly influences a lot of people's thinking with regard to capital or corporate taxation.

Edited by OldGimletEye

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23 hours ago, OldGimletEye said:

Chamley-Judd basically says that if government spending has to be done, laborers, if they were rational, would prefer to finance that government spending out of labor taxes rather than capital taxes.

Not that I really believe the Chamely-Judd model is correct as I think it makes some unrealistic assumptions, which I've mentioned. But, it does serve as kind of a base line model in the teaching of capital taxation. And it certainly influences a lot of people's thinking with regard to capital or corporate taxation.

Has anybody tried to vary the assumptions and test the stability of the results? The way you describe it sounds less like a baseline model and more like propaganda wearing a thin veil of economic math. I don't mean that the economists were working in bad faith -- one has to start somewhere -- but one should not determine policy based on toy models.

More generally, it is really difficult to make a model like this that is useful because the real world has features which almost uniformly serve to improve capital's position:

1) Capitalists always have a seat at the table where the laws are designed and can make specific inputs into the design to serve their needs.

2) Capitalists can hire people who best understand laws and how to exploit them.

3) Capitalists can often break laws altogether (meaning, flagrantly and/or on a mass scale) with the only consequences being negligible fines.

Of course, it is always better to understand what they're doing, but they will almost always cheat you whether you understand the means by which they do it or not.

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On 26/02/2017 at 7:04 AM, Iskaral Pust said:

Corporate taxes are generally a progressive double taxation on the owners of capital, and a means to reduce tax evasive faux-corporatism by the wealthy and to extract some tax from the large amount of foreign capital invested in the US economy.

It seems to me that it would be better not to tax corporate income, but to tax all dividends (at a nice high rate), including those made to foreign investors, and crack down on non-business spending (including jail time for repeat offenders).

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41 minutes ago, felice said:

It seems to me that it would be better not to tax corporate income, but to tax all dividends (at a nice high rate), including those made to foreign investors, and crack down on non-business spending (including jail time for repeat offenders).

I would agree, although nefarious loophole-seekers become a problem no matter how the tax code is organized.   For example, stock buybacks already far exceed dividend payments because liquid stock markets mean you can take your appreciation in capital gains rather than dividend income.  Although those can be taxed too.  Or it could spur a new era of empire building in corporations where CEOs are incentivized to retain every penny and spend on acquisitions to expand their empire.

But the current system of corporate tax is definitely not working.  The incentives to play games like parking cash outside of taxable regions is the worst example.

I'm similarly a fan of wealth tax complementing income tax, but it only works if you can force everyone to declare all wealth.  As it is, the salaried middle class carry a disproportionate tax burden because their income is easiest to identify and track.

A simpler tax code and harsher enforcement would be the right direction in general but all the special interests want the exact opposite.  The biggest weakness of democracy is exploitation by the focused attention of special interests who stand to gain in much higher concentration than the average voter stands to lose.

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7 minutes ago, Iskaral Pust said:

For example, stock buybacks already far exceed dividend payments because liquid stock markets mean you can take your appreciation in capital gains rather than dividend income. 

But surely capital gains are worthless to the shareholders if they don't eventually get money paid out as (taxable) dividends?

7 minutes ago, Iskaral Pust said:

I'm similarly a fan of wealth tax complementing income tax

I have reservations about that. If the wealth isn't generating income, taxing it seems unfair. Eg if the value of your house increases, having to pay more tax just to keep living there is problematic, especially for the elderly.

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23 hours ago, Altherion said:

Has anybody tried to vary the assumptions and test the stability of the results? The way you describe it sounds less like a baseline model and more like propaganda wearing a thin veil of economic math. I don't mean that the economists were working in bad faith -- one has to start somewhere -- but one should not determine policy based on toy models.

I did a bit of reading...

For starters, apparently "Chamley-Judd is a theorem dating back to the 1980s saying that in a Ramsey setting in steady-state with linearly-homogeneous production in which capital and labor are complements, where we have complete taxation of all factors of production, and a couple other things, then the optimal linear tax rate on capital eventually goes to zero. "
There are many words I don't understand here, but apparently Chamley-Judd works with a certain number of assumptions.
Then, it's apparently possible to debate it (like these guys apparently did:  https://mpra.ub.uni-muenchen.de/33209/1/Tax-Incidence.pdf  )

But honestly all that is a bit complicated for me. I'm not an economist and I hate anything looking too much like maths. Plus, I have to be intellectually honest and say that however good a theory or a model is, you'll always find someone to contradict it with google (that's how climate change denial works). So let's put aside attacks on the model itself.and use the tools we have.

There's an interesting argument I found about Chamley-Judd. The idea that while capital may be necessary to keep wages up, Chamley-Judd says nothing about where the capital is coming from. In other words the model absolutely does not prevent the taxing of wealthy capitalists. As long as there is investment, wages are not threatened. And there may be ways for "optimal capital taxation" (see: Piketty & Saez):
https://eml.berkeley.edu/~saez/piketty-saezNBER12optKtax.pdf
Which means we're back to one of the most common fallacies in the book: that it's bad for the economy to tax the rich. In fact, no, it isn't. You just have to make sure you replace them where necessary. If either the government or the workers have means to use the wealth obtained through taxes and invest it then there's no reason not to go for serious taxation.
 

Edited by Rippounet

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2 hours ago, felice said:

But surely capital gains are worthless to the shareholders if they don't eventually get money paid out as (taxable) dividends?

I have reservations about that. If the wealth isn't generating income, taxing it seems unfair. Eg if the value of your house increases, having to pay more tax just to keep living there is problematic, especially for the elderly.

No, company shares have their own value even if no dividends ever get paid - particularly in case of corporate mergers and takeovers, when shares are bought above market price by a competitor. But even if not, just owning a small percentage of a company making billions of dollars in revenue makes the stock valuable on its own. Your focus on dividends is largely misguided; in fact, companies that pay large dividends tend not to grow as fast as those that reinvest their gains. Hence, a smart long-term investment strategy is to shun dividends in favor of faster company growth. Why anybody would set the capital gains tax at a lower level than the top income tax level is mindboggling though. It basically guarantees the Buffett outcome (i.e., that employees  pay more of their income in taxes than multi-billionaires).

If the value of a house increases, likewise, there's more money to be made by selling it. But currently, that increase in value is not taxed at all while regular employees see their income cut by a considerable amount because on top of not profiting from the fruit of their labor (just their labor itself), they also have to pay taxes to a community increasingly beholden to the interest of those who own capital, but who pay far less of their income into the system that made them rich.

In other words, it should be generally more profitable to work yourself than to let others work for you, but currently, the reverse is true.

One could also exclude real estate from the wealth tax; that's relatively easy to do because in contrast to other kinds of investment, the total amount of real estate in the world (and any single country) is limited by land mass.

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Posted (edited)

20 hours ago, Altherion said:

Has anybody tried to vary the assumptions and test the stability of the results? The way you describe it sounds less like a baseline model and more like propaganda wearing a thin veil of economic math. I don't mean that the economists were working in bad faith -- one has to start somewhere -- but one should not determine policy based on toy models.

People have challenged its assumptions as not being unrealistic. But, for anyone thinking about this issue they need to be aware of the Chamely-Judd results.

I don't think the economist that came up with the model were acting in bad faith. But, they did make certain modeling choices. And those modelling choices are certainly subject to question.

Just now, Rippounet said:

https://eml.berkeley.edu/~saez/piketty-saezNBER12optKtax.pdf
Which means we're back to one of the most common fallacies in the book: that it's bad for the economy to tax the rich. In fact, no, it isn't. You just have to make sure you replace them where necessary. If either the government or the workers have means to use the wealth obtained through taxes and invest it then there's no reason not to go for serious taxation.
 

Certainly Piketty and Saez are offering an alternative model from Chamely-Judd. 

Of course a lot of this dispute will come down to empirical testing. But observational data can be messy. So it's helpful to have both the data and models.

25 minutes ago, felice said:

It seems to me that it would be better not to tax corporate income, but to tax all dividends (at a nice high rate), including those made to foreign investors, and crack down on non-business spending (including jail time for repeat offenders).

Certainly the "new view" of public finance suggest that taxing dividends may not matter that much as corporations rely on retained earnings to finance new investments. There is some theory as well as empirical verification of this view. On the other hand, from what I understand this may not be simple to do, if for instance lots of share holders are foreigners (and it's not easy to tax them) or if a lot the equities are held in untaxable accounts.

Edited by OldGimletEye

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1 hour ago, theguyfromtheVale said:

No, company shares have their own value even if no dividends ever get paid - particularly in case of corporate mergers and takeovers, when shares are bought above market price by a competitor. But even if not, just owning a small percentage of a company making billions of dollars in revenue makes the stock valuable on its own. Your focus on dividends is largely misguided; in fact, companies that pay large dividends tend not to grow as fast as those that reinvest their gains. Hence, a smart long-term investment strategy is to shun dividends in favor of faster company growth.

That's forgoing short-term dividends for greater total dividends in the long run; dividends are still the point. I don't imagine a company that promised to never, ever pay out a single cent in dividends would do very well on the stock market 8) Profit from selling shares should be subject to capital gains tax, of course; but nobody would buy the shares if they didn't expect to earn dividends from them, or at least to be able to sell them for a profit to someone else who expects dividends.

1 hour ago, theguyfromtheVale said:

Why anybody would set the capital gains tax at a lower level than the top income tax level is mindboggling though.

Yep.

1 hour ago, theguyfromtheVale said:

One could also exclude real estate from the wealth tax

If you need to start adding exemptions right away, it's probably not a good idea.

15 minutes ago, OldGimletEye said:

On the other hand, from what I understand this may not be simple to do, if for instance lots of share holders are foreigners (and it's not easy to tax them) or if a lot the equities are held in untaxable accounts.

Make the company responsible for deducting the tax when it pays out the dividends; makes no difference whether the recipient is foreign or local, real person or another company.

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Why anybody would set the capital gains tax at a lower level than the top income tax level is mindboggling though.

Can you explain this?  Not being an ass, i genuinely do not understand the correlation.

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@felice

Provided you hold shares in publicly traded companies, you can always raise cash flow by selling shares.  And the company returns earnings to shareholders by buying shares.  Under current tax, paying dividends is already deeply inefficient and largely avoided, it would only get worse if you raise the tax on dividends relative to capital gains.  

I think a wealth tax would be very effective and more progressive than income tax.  You can set exemptions similar to estate tax, e.g. qualified retirement savings, primary home up to a certain value (say $2m, like the estate tax), etc, so that regular joes don't have to mortgage their home to pay the tax.  But so much wealth is shielded from estate tax, not to mention spent before death, that holders of wealth pay a lot less to society than wage slaves.  The central burden of taxation falls on employees because their income is easiest to track and tax.  We may not have Greek-level tax evasion but we do have a large gray economy of undeclared income (both at the low end and upper end via sketchy tax deductions and other filing tricks) and tax haven investments. 

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A couple of additional responses to @felice that were too long to append to my last post:

Edit to add: it's not about forgoing short term dividends for longer term earnings it's that cash does not need to be returned in the form of dividends.  That's overly simplistic.  The company, mostly, is a going concern (exceptions are oil companies with exhaustible reserves, for example) and can deliver cash via buy-backs.  Each investor can sell as much as they want, just as they could reinvest as much dividend as they want.

Edit to add: exemptions don't mean a wealth tax is an automatically bad idea.  That's like saying a standard personal exemption makes income tax a bad idea.  Any progressive tax system can decide that the first $x of income or first $y of wealth has a tax rate of 0%.  

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2 hours ago, Iskaral Pust said:

Provided you hold shares in publicly traded companies, you can always raise cash flow by selling shares.

But then you don't have the shares any more, and forfeit any future dividends you would have received from them to the purchaser.

2 hours ago, Iskaral Pust said:

And the company returns earnings to shareholders by buying shares.

If it buys the shareholders' shares, they cease to be shareholders. Unless it buys an equal portion of all shareholders' shares, in which case everyone still owns the same percentage of the company even though they have fewer shares? Which makes it functionally equivalent to a dividend payment, and should either be taxed accordingly or banned. Or do buybacks work in some other way?

2 hours ago, Iskaral Pust said:

Edit to add: exemptions don't mean a wealth tax is an automatically bad idea.  That's like saying a standard personal exemption makes income tax a bad idea.  Any progressive tax system can decide that the first $x of income or first $y of wealth has a tax rate of 0%.  

Having multiple tax brackets is quite different from specific exemptions like "primary home". But I guess wealth tax could operate perfectly well in the same way as income tax, with brackets of its own and a 0% rate on the first $2m or so irrespective of the form the wealth takes. A wealth tax only makes sense if we've got severe inequality, but since we do have severe inequality, I withdraw my objection.

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Buybacks reduce the number of shares outstanding without reducing the value of enterprise other than the cash spent to buy back, so the value per share increases pro-rata.  If you buy back $1m worth of shares, then the market value of the remaining shares increases by $1m.  Fewer shares now each own a slightly larger % of the same company.  The $1m has been given to the shareholders in an intangible but liquid form that they can choose to liquidate and realize whenever is convenient. And the $1m "distribution" is now taxable as capital gains rather than income.  So long as you think of companies and stock markets as going concerns, and stock holdings as liquid and near infinitely divisible, then you never need dividends.  The company itself is like a perpetual bank account and you can "withdraw" from the bank account by selling some of your ownership of the account.  Just like selling your bonds allows you to call in part of a debt owed to you without actually calling in the debt. 

There are other problems with buybacks unrelated to tax, but for this topic it is sufficient that they are an alternative to dividends to avoid income tax, even before we think of increasing the tax on dividends.  You would need to also increase tax on capital gains.  There is a strong case that a progressive tax system would like higher taxes on capital gains but that leads to unintended consequences of reducing capital investment and therefore labor productivity and therefore real wage growth -- circling back to the point in the OP. 

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21 hours ago, Iskaral Pust said:

I would agree, although nefarious loophole-seekers become a problem no matter how the tax code is organized.   For example, stock buybacks already far exceed dividend payments because liquid stock markets mean you can take your appreciation in capital gains rather than dividend income.  Although those can be taxed too.  Or it could spur a new era of empire building in corporations where CEOs are incentivized to retain every penny and spend on acquisitions to expand their empire.

But the current system of corporate tax is definitely not working.  The incentives to play games like parking cash outside of taxable regions is the worst example.

I'm similarly a fan of wealth tax complementing income tax, but it only works if you can force everyone to declare all wealth.  As it is, the salaried middle class carry a disproportionate tax burden because their income is easiest to identify and track.

A simpler tax code and harsher enforcement would be the right direction in general but all the special interests want the exact opposite.  The biggest weakness of democracy is exploitation by the focused attention of special interests who stand to gain in much higher concentration than the average voter stands to lose.

Isk - a buyback doesn't necessarily mean that a particular holder will receive CG.  A holder might, but it depends on how much they hold and how much they tender in the US.  Also, in the US right now, CG and qualified dividends are taxable at the same rate to US holders.  The big difference is that you don't get basis recovery for a dividend (defined as such - depends on whether the amount is notionally paid out of current or accumulated "earnings and profits), but that's just a timing issue at the end of the day because notionally the value of the corporation should be reduced by the dividend paid.

Also, I understand the intellectual appeal of a "simpler" tax code, but that ignores the fact that financial transactions are incredibly complex, and much of the complexity in tax laws is designed to take into account business realities.  I completely agree however, that trying to implement social or business policy through the code is a horrible idea and allows for exploitation of the tax system by special interests (I'm looking at you, oil and gas, real estate).  That stuff should all go (including popular things like the mortgage interest rate deduction, except it's really hard to unwind because of the effect on markets).

22 hours ago, felice said:

It seems to me that it would be better not to tax corporate income, but to tax all dividends (at a nice high rate), including those made to foreign investors, and crack down on non-business spending (including jail time for repeat offenders).

So, you don't tax corporate income.  Fine.  Are you taxing the income on a flow through basis?  That's really, really complicated (tracking, basis adjustments, etc.).  Do you have a retained earnings tax?  In your world, what is non-business spending by a corporation?  How do you define that (and if you are going to have jail time, you better believe that the definition should be very, very, very specific).  Why do you object to it if it is not deductible?  Dividends to foreign investors are taxed right now at 30% in the US, except to the extent that they are exempt under the terms of an applicable double tax treaty.  If your problem is current treaty policy/treaty shopping, that is a separate point and something that the US and the OECD are very focused on.

18 hours ago, theguyfromtheVale said:

No, company shares have their own value even if no dividends ever get paid - particularly in case of corporate mergers and takeovers, when shares are bought above market price by a competitor. But even if not, just owning a small percentage of a company making billions of dollars in revenue makes the stock valuable on its own. Your focus on dividends is largely misguided; in fact, companies that pay large dividends tend not to grow as fast as those that reinvest their gains. Hence, a smart long-term investment strategy is to shun dividends in favor of faster company growth. Why anybody would set the capital gains tax at a lower level than the top income tax level is mindboggling though. It basically guarantees the Buffett outcome (i.e., that employees  pay more of their income in taxes than multi-billionaires).

If the value of a house increases, likewise, there's more money to be made by selling it. But currently, that increase in value is not taxed at all while regular employees see their income cut by a considerable amount because on top of not profiting from the fruit of their labor (just their labor itself), they also have to pay taxes to a community increasingly beholden to the interest of those who own capital, but who pay far less of their income into the system that made them rich.

In other words, it should be generally more profitable to work yourself than to let others work for you, but currently, the reverse is true.

One could also exclude real estate from the wealth tax; that's relatively easy to do because in contrast to other kinds of investment, the total amount of real estate in the world (and any single country) is limited by land mass.

Right, the capital gains preference has very little support.  If we got rid of the CG preference, a TON of complexity would disappear from the Code overnight.  Also, you clearly don't live in a city.  I live on an island that has taken the Archimedes paradox approach to the amount of available real estate :P

16 hours ago, felice said:

That's forgoing short-term dividends for greater total dividends in the long run; dividends are still the point. I don't imagine a company that promised to never, ever pay out a single cent in dividends would do very well on the stock market 8) Profit from selling shares should be subject to capital gains tax, of course; but nobody would buy the shares if they didn't expect to earn dividends from them, or at least to be able to sell them for a profit to someone else who expects dividends.

Yep.

If you need to start adding exemptions right away, it's probably not a good idea.

Make the company responsible for deducting the tax when it pays out the dividends; makes no difference whether the recipient is foreign or local, real person or another company.

Why are you proposing to add the withholding burden to the company (or, more accurately, the paying agents)?  A public company has NO IDEA who owns its shares.  Realistically what happens is that if it declares a dividend, it pays the gross amount of the dividend to (effectively) DTC.  DTC then pays on the dividend to its member firms.  The member firms then pay on to brokers.  Brokers then pay on to beneficial owners.  There are a chain of withholding forms that back up these payments so that at the end of the day the last person in the chain before the beneficial owner has the withholding obligation.  I suppose you could have each holder give the equivalent of a W-4 to a broker, and do it the same way, but the broker has no way of knowing what that person's net income is, which would mean that you'd have effective withholding at the top marginal rate to individuals who would then have to seek a refund at the end of the year, which seems.....wrong (you are effectively building in an interest free loan to the government on dividends to anyone who isn't taxed at the top marginal rate). 

 

11 hours ago, Iskaral Pust said:

Buybacks reduce the number of shares outstanding without reducing the value of enterprise other than the cash spent to buy back, so the value per share increases pro-rata.  If you buy back $1m worth of shares, then the market value of the remaining shares increases by $1m.  Fewer shares now each own a slightly larger % of the same company.  The $1m has been given to the shareholders in an intangible but liquid form that they can choose to liquidate and realize whenever is convenient. And the $1m "distribution" is now taxable as capital gains rather than income.  So long as you think of companies and stock markets as going concerns, and stock holdings as liquid and near infinitely divisible, then you never need dividends.  The company itself is like a perpetual bank account and you can "withdraw" from the bank account by selling some of your ownership of the account.  Just like selling your bonds allows you to call in part of a debt owed to you without actually calling in the debt. 

There are other problems with buybacks unrelated to tax, but for this topic it is sufficient that they are an alternative to dividends to avoid income tax, even before we think of increasing the tax on dividends.  You would need to also increase tax on capital gains.  There is a strong case that a progressive tax system would like higher taxes on capital gains but that leads to unintended consequences of reducing capital investment and therefore labor productivity and therefore real wage growth -- circling back to the point in the OP. 

Isk - I would need to find the articles, but I think there is a fair amount of scholarship suggesting that the effect of higher capital gains taxes is largely overestimated, for many reasons including the amount of capital tied up in tax-exempt pension type vehicles.

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17 hours ago, Swordfish said:

Can you explain this?  Not being an ass, i genuinely do not understand the correlation.

Capital gains are a form of income. In fact, they are the primary form of income of the rich. The're also only available to the rich in meaningful amounts because in order to make enough of a living from capital gains one needs to own a considerable amount of disposable capital to begin with.  By setting the capital gains tax at a lower rate than the income tax, we're essentially taxing the middle class (who earn  considerable wages but usually do not own millions in savings) at more than twice the rate we're taxing the rich. Which is a major factor in the rise in inequality.

51 minutes ago, Mlle. Zabzie said:

Right, the capital gains preference has very little support.  If we got rid of the CG preference, a TON of complexity would disappear from the Code overnight.  Also, you clearly don't live in a city.  I live on an island that has taken the Archimedes paradox approach to the amount of available real estate :P

I do live in a city. In fact, I've only lived in cities all my life. It's just that most European cities have building codes that limit the height of most buildings... Also, even if we were only to build skyscrapers from now on, while that might increase the amount of habitable space by a factor of 100, there'd still be a hard limit on how high we can build and, consequently, how much real estate we get.

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1 hour ago, theguyfromtheVale said:

Capital gains are a form of income. In fact, they are the primary form of income of the rich. The're also only available to the rich in meaningful amounts because in order to make enough of a living from capital gains one needs to own a considerable amount of disposable capital to begin with.  By setting the capital gains tax at a lower rate than the income tax, we're essentially taxing the middle class (who earn  considerable wages but usually do not own millions in savings) at more than twice the rate we're taxing the rich. Which is a major factor in the rise in inequality.

Got it.  Thanks.

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