Saturday, September 25, 2010

Tax the Rich

Some U Chicago professor made the impolitic observation that taxes on the "rich" don't actually fall on the rich at all. They fall on professional, college educated, working couples. He's been pilloried, and taken down the post (although I'm sure it lives on). Nevertheless, his central observation is quite correct.

$250K/year is a good income, but not nearly enough to become a Lloyd Blankfein style malefactor of great wealth. This income will not let you buy an entry level house in a good school district in California. And I'm not talking Beverly Hills style mansions here, I'm talking 2BR 2BR 50 year old light construction in Menlo Park. It is not enough to buy material political influence, a la the great Robber Barron fortunes that seem to fuel most of the non-profit industry. And if you think public schools are mediocre -- certainly they are a shadow of what they were two generations ago -- private schools will chew up a bunch of that if you have the audacity of reproducing. Never mind that your prodigy is likely to the productive and remain out of jail.

Don't get me started on college tuition.

The WSJ's advice is comical. I mean, here we have a couple who is the very model of honest, smart, hardworking citizens, actually producing real value in the society instead of being government-backed Wall Street vampires, and they are told to:
- get by with one car
- move (the claim is that Chicago, Chicago! is too expensive to live in)
- cut discretionary expenses

The biggest joke is at the end of the article:
Never, ever, ever again blog about how hard it is to live on $300,000 or $350,000 a year at a time when one middle-aged man in four can't find a full-time job, and one in five can't find any job at all.
And how exactly will yanking your kids from private school, getting rid of a car, and cutting all discretionary expense going to help the unemployed teacher, autoworker, dry cleaner, restauranteur, and gardener?

Federal taxes do not fund spending. They moderate aggregate demand. Our professional couple here is exactly the type of person an economy, and nation, wants more of. I also suspect that their discretionary spending represents marginal AD in this economy.

10 Comments:

Blogger Larry Staton Jr. said...

Law professors add real value? Not so sure about that. But your broader point is well taken.

10:45 AM  
Blogger Ohm (Ώ) said...

No matter what income level you increase taxes from, the act *by itself* will sacrifice some aggregate demand for goods, and some for financial assets like stocks. The key is in using the additional tax collected to generate moderate income jobs -- with way higher marginal propensity (Read: NEED) to consume -- in the social sector that has a deficit of facilities: e.g. Affordable Education.

This couple will be able to move to a Sunnyvale nearby, where for significantly less they'll get twice the house they now have at Menlo Park. If they have a kid NOW that needs to go to school (It'll take some time for the Govt to use the extra tax dollars to bring up Sunnyvale education near Menlo Park standards) they can move to Cupertino instead -- where for about 2/3 the price of Menlo Park they can buy same size house with school rating slightly HIGHER than Menlo Park.

If we want no discomfort to ANYONE then it pretty much means no taxes can EVER be increased! The choice with the Govt is Between bringing up the socio-economic-physical infrastructure while *net* creating high mptc income jobs adding *net AD* while helping those struggling for employment v/s Dump this agenda in order not to put this couple under any kind of marginal discomfort.

http://tiny.cc/TaxLess

I Understand your point that Govt does not need to take from Peter to give to Paul as it is fiat currency. But the following considerations apply:

1) You note rightly in your blog elsewhere that the one limitation on Govt in creating new money is that it cld create too much of it and wreck heavy inflation. The improved progressive taxation with the expiration of the tax cuts for the above 250 K layers increases the Govt'al free hand in using tax + deficit to pursue the socioeconomic need of the time.

2) Demand pull inflation is NOT the only problem around excess money in the system. The money with the top 2% folks has a natural desire for returns, which takes them to stocks, commodities, CDs, bonds et al. When they crowd around commodities, they produce externally inflicted, speculative inflation -- the Oil price boom in 2008 we know was exactly that...and played the proximate cause of the foreclosures and precipitation of this multidimensional crisis.
When they crowd around bonds and CDs, interest rates get depressed and the (rightly so) play-safe seniors get badly mauled...as they can end up with negative real rate of return, while their healthcare keeps going only up.
(Obama has come out with a good concept of allowing 100% depreciation in tax calculation if you invest your surplus in Production assets that generate Mainstreet employment, instead of financial assets)

http://www.nolanchart.com/article5909.html

I do empathize with the thought that the points at which tax rates change ought to factor in the cost of living where the assessee resides and works.250 K is not the same everywhere.

9:53 PM  
Blogger Tschäff said...

"Our professional couple here is exactly the type of person an economy, and nation, wants more of."

I think professionals will still choose to be that even if they get taxed a bit more.

Looking forward to hearing your thoughts on college tuition.

7:13 PM  
Blogger winterspeak said...

Greg: You can disagree but no dirty language. This is a family blog. I've deleted your comment, feel free to repost without the profanity.

7:39 PM  
Blogger winterspeak said...

Tschaff: Yes, I think professionals will still do what they do if they are taxed higher. They are conscientious and responsible people, and will continue to do the right thing even if penalized for it. That doesn't make the penalize wise. Or in this case "accurate" as a college educated professional couple is simply not "rich" the way this tax increased is being framed.

Ohm: There are lots of ways to support moderate to low income jobs that have nothing to do with taxation. How about sealing the border? How about deporting the masses of illegal residents that are currently competing for low income jobs, driving prices down? I look forward to Obama doing the obvious thing to help American poor.

In this economic environment, taxes should be decreased, not increased, so your point about never being able to increase taxes is uninteresting to me right now. If the US goes the Japan route, which it may, we could be in for 30 years of stagnation and counting. How about we revisit this once inflation becomes an issue? Hopefully long before 2040.

In general, incidentally, MMT is not insightful when it comes to optimum tax policy. I guess they don't see it as a priority right now either, which is a position I have some sympathy for.

7:47 PM  
Blogger Greg said...

Right Winterspeak, sorry for the pottymouth.

Once again, from the top without the eff word.

I have a hard time sympathizing with this guy in our present environment. Yes, taxation CORRECTLY APPLIED should only be about AD regulation but the reality is, until people are educated, we are operating in a paradigm where this guys tax cut needs to be funded by teachers or policemen taking cuts.

You are right that making him cut his spending is not the answer but I'll bet dollars to donuts, this guy is probably squawking about our "unsustainable" deficit and wishes someone else to pay it back.

I say to heck with him.

4:49 PM  
Blogger winterspeak said...

Greg: Thanks.

I have no idea if Todd Henderson is concerned about the deficit or not. I'm guessing he is, since he almost certainly unaware of MMT, and he strikes me as being a responsible guy. If you're out of paradigm and think the US operates on a gold standard, then it is the responsible thing to be concerned about the deficit.

My point was simply that college educated professional couples are simply not "the rich" but they get hit by Obama's tax increase as much, if not more, as Warren Buffet and Lloyd Blankfein. This "tax increase on the rich" is nothing of the sort.

Add to the fact that the type of jobs available to college educated professional couples tend to be in higher cost areas, and you are left with high IQ, hard working, responsible people struggling to afford an entry level single family home, child care, schooling, and being told they are rich and getting their taxes raised. U Chicago prof Dick Thaler had a ridiculous op ed recently when he said the higher tax was good at reducing inequality, neglecting to mention the fact that pediatric oncologists and law professors are not known for their out of control salaries. Dick should look into the 20 hedge fund managers who make more than the most highly paid 350 CEOs combined.

Todd Henderson and his wife are smart, responsible, hard working, and instead of living the american dream they're feeling stretched. The financial crises killed their home value and their 401(k), even though they had nothing to do with it, and now they're being called "rich" and having their taxes raised to pay for the whole mess while Obama writes Goldman Sachs big cheques from the Treasury. This couple should be a role model for America, and yet they look like chumps. I'm not surprised if they feel like chumps too.

I cannot speak for Illinois, but the pensions, benefits, and perks of teachers and policemen in California are pretty out of control. We have state nurses earning $350K/year, and city managers clearing $1.5M if you include perks. Class warfare indeed!

8:07 PM  
Blogger Greg said...

Winterspeak

I actually completely agree with all the points you make.

My wife and I combined may end up next year falling into the rich category (depends on the amount of call back pay I get the rest of the year, our night work has doubled over the last 6-9 months). Am I rich? Well I do know this, I'm better off than 90-95% of people. The absolute richness is less important than the relative richness in my view. You will NEVER see me writing an op ed complaining about the stresses to MY lifestyle.

How many smart people in Chicago are working hard, acting responsibly, making 120k/yr and having their dream ripped apart as well?

One thing that NEVER gets pointed out is that in fact, the last two years everyone under 250k has gotten an additional tax break on top of the Bush tax cuts. So that means the Hendersons have in fact gotten a break as well and will likely continue to get a break since only the money OVER 250k will be taxed. If your first 250k gets a 3% break your next 250k would have to get more than a 3% increase for you to actually pay more taxes. I suspect that most everyone under 500k will actually see much increase at all.

I would like to ask that we stop calling it an Obama tax increase because this was actually how Bush set up the tax cut to begin with. This is not a blind apologetic for our hope and change president but simply requesting that we start discussing things as they are.

I'd like to see the info on nurses earning 350k. Is this with bennies too, like the city managers?

9:01 AM  
Blogger winterspeak said...

Greg: Google Nellie Larot. I did include bennies, it's $250K/year without.

I'm not sure what additional tax breaks people have gotten aside from the bush tax cuts. The tax credit was phased out for high income earners. It was also, frankly, tiny.

The fact that the partial tax cut may reduce average taxes even with higher marginal rates is neither here nor there. My point remains that folks, even if they are better off than a lot of other folks, are still far from being "rich" but are being labeled "rich" and targetted with "higher taxes on the rich". This is also irrespective of whether any particular individual feels stressed or not.

Bush setup the ridiculous expiration so it would pass CBO scoring. Total fraud, but what else is new? Nevertheless, Obama is the President so let's not treat him as a helpless little kid. It's his watch now.

9:19 AM  
Blogger Oliver said...

How about sealing the border? How about deporting the masses of illegal residents that are currently competing for low income jobs, driving prices down? I look forward to Obama doing the obvious thing to help American poor.

You must be joking! Firstly, immigrants are a major contributor to growth and get by without any of the perks and securities enjoyed by legal citizens. Secondly, if you're not comfortable with their status, legalize them. Deporting anybody but the most hardened criminals is pure xenophobia and isn't warranted by any economic let alone social arguments. I think Winterspeak is off my list from now on. Shame really - I usually enjoyed your economic viewpoints and comments elsewhere.

8:41 AM  

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