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Wednesday, February 15, 2012

Someone Please Explain How Increasing Taxes Will Create Jobs - Part 2

Link to Part 1: http://loudmouthelephant.blogspot.com/2012/02/someone-please-explain-how-increasing.html

Okay, on to Part 2.

Let's set up some ground rules. First, this, like the previous post, is not scientific. I always believe in backing what I say, or at least giving the reasons behind the opinions. That is what I'm doing with these two posts. My belief: raising taxes on millionaires is not good for creating jobs... my reasons: yesterday's and today's post. All dissenting opinions are always welcomed.

Secondly, as economics has taught me, using models, hypothetic situation analysis, heck, anecdotes, etc. in their simplest forms can help us look at a complicated situation in a simple way.

What is this about? This is the "how" behind what I believe. This is a small, simplistic, hypothetic micro-economic example. I certainly hope that it does not become a macro-level epidemic, but many macros make a micro.

With my hypothetic model, I'm establishing the givens:

- John Smith is the owner and CEO of LME LLC. ( I am keeping it as an LLC and not an INC to avoid the conversation of double/corporate taxes). If you're not familiar with LLCs, quickly - they are limited liability companies. Company's profits, in this case, the owner's income is treated as pass-through income and is simply reported as personal income (like a yearly earned salary) on a 1040 tax form.

- LME LLC has revenues of $2,000,000 per year.

- LME LLC's expenses are simple: 20 employees at $50,000 salary per year. For simplicity sake there are no additional costs, no employment taxes, health insurance paid, nothing. I'm just trying to keep it simple.

Without an extensive analysis we can see that LME LLC's income statement looks like:


So, let's add some taxes in there. Let's say John Smith's effective tax rate is 20% (yes... we know about marginal tax rates, and yes, he would be in the top 35% bracket, but his effective tax rate, after write-offs, mortgage interest deductions, etc. for this example, is 20%). With that, his take-home pay is $800,000. Simple enough.

Now, Obama gets his way and the "Buffett rule" (interestingly named after my boss) is enacted. This rule states that anyone earning $1,000,000 per year must pay at least 30% in taxes. Ceteris paribus (all other things equal)... the tax rate is the only thing that changes. With that, on his $1,000,000 income, John Smith now takes home $700,000 instead of $800,000. As you would guess, John Smith is not happy. Does the government really think he will say, "oh, sure, take $100,000 more of my money?" I don't. I think John Smith will do everything he can to retain his money.

What would John Smith do (again, reminder, this is NOT scientific and is NOT an absolute scenario)? In my opinion, John Smith, unhappy with the 12.5% pay cut, would try to maintain his lifestyle, and therefore, his $800,000 income. How would he do this? Well, quite simply (and the very crux of why I believe what I believe) he will cut three employees. You read that correctly.... he will cut three employees. Why three you ask? I think I know what you might be thinking. You might think, "but hey, he lost $100,000 in taxes, and that's only the salary of two employees... not three." Well, let's look at his new bottom line with a two-employee cut versus a three-employee cut. 

First, the two-employee cut: 


So, with the new 30% tax rate, what is John Smith's take-home pay? $770,000. Ugh. That's still a 3.75% pay cut relative to his $800,000 salary, and John Smith is not happy.

Now, let's take a look at the reason John Smith would cut three employees:


Again, with the new 30% tax rate, what is John Smith's new take-home pay? $805,000. He succeeded in not letting the tax hike affect him. 

So, in my simple example, John Smith did everything he could do (with one type of expense, there was only one thing he could do), and 3 people lost their jobs. Yes, there will be other side effects, too. The remaining 17 employees will have to work harder, but they might buckle under the added stress as well. This could cause John Smith's business to shrink and his $2,000,000 revenue might drop. Who knows? That's going down another tangent. But yes, I do believe, as it is his right to do, John Smith will cut three employees. 

At the end of the day, the already over-bloated government took in $100,000 money, and three people lost their jobs. How in the world is this good for the economy? As I stated as a side effect, John Smith's revenue might decline. Additionally, the three employees that lost their jobs lost their incomes. The businesses that they purchased goods and services from will see lower revenues. All in all, I don't see how a tax increase on millionaires, let alone anyone, would be good for the economy. 

Yes, this was a simple example. I would be interested in your take. Am I wrong? Is there a way that tax increases would be good for the economy? Good for creating jobs? Share your opinions below. Thank you. 


33 comments:

  1. Good morning LME,

    While I certainly understand your point, and it was laid out and explained very well, I just don't think it's quite that simple. I sure wish it was, because that would make everything on both sides easier, but it's not.

    I'm sure that there are some situations and examples of what you portrayed actually happening, but I'd argue that it is not common and actually incredibly rare. The LLC situation is an uncommon one to start with, and there isn't even any certainty as to whether the 'buffet rule' would apply to that type of situation (which honestly, doesn't seem likely exactly because of this argument).

    But, even if it did, your argument here banks on the fact that John Smith would be forced to cut employees to maintain his $800,000/year lifestyle; which wouldn't be maintainable at $700,000/year. This point just isn't very strong to me; I'd be hard-pressed attempting to imagine someone's life being thrown out of orbit in the difference between $700k and $800k. Heck, even if I took at 10% pay-cut right now, my life wouldn’t be all that different and I barely make a tenth of that salary.

    Sure, $100k is a lot of money by itself, but there is certainly a growing level of diminishing returns as your salary increases. The difference between making $25k/y and $125k/y is HUGE, and even $125k/y and $225k/y is substantial, but $700k and $800k? I have trouble believing that kind of salary difference would bring a sense of urgency to many if practically anyone at all.

    Much less the fact for someone running their own business as well... laying off 3 people isn't as simple as 1) send pink slips to 3 employees, 2) enjoy extra money in pocket. In such a small LLC, that means he's sacrificing as much as 6% of his workforce/productivity. Where is he going to make-up for that? And is that really worth the risk? Just for a slight change in his salary?

    But let's sideline all of that thinking... since both you and I are now talking in theoreticals.

    I want to go back to your point.

    Let's say that John Smith really is that focused (or even obsessed) over every last bit of his income to the point where he'll fire people rather than take a pay cut. The argument from the right is often that if we gave him tax breaks, he would hire more people. But following your line of thinking in that if you argue that John Smith is trying to make all the money he can, if we gave him an extra $100k in income through tax breaks, why would he be any more likely to hire more people than he would be to just pocket it? Since after all, the lifestyle he could maintain at $900k/y would 'be far more desirable' than the one at $800k/y.

    Furthermore, entertaining this a bit further, in situations outside of the LLC one above, where would the extra money in tax breaks to millionaires go that would create jobs? Keeping in mind that the overwhelming majority of our consumer spending, which is without question directly related to our econimic health and job creation, is actually controlled in overwhelming majority by the middle and lower classes.

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  2. Good morning Rken – thank you for stopping by.

    I don’t think making the issue complicated is a good thing. Trying to look at things in the simplest form is what gets to the heart of a problem. Sure, it’s a hypothetical, but it is a hypothetical that highlights how things can and tend to work.

    First, I don’t believe that these situations are rare in any sense. Companies lay off workers all the time when they are faced with a diminishing bottom line. PepsiCo recently announced it was going to slash its workforce in spite of an 8% YOY increase in revenues… the catch? It’s projections for the near future were decreasing, and, like my example of Mr. John Smith, PepsiCo wasn’t happy and made the adjustment. LLCs are quite common and ever expanding (especially in the downturned economy since they are much cheaper to start than incorporating… I even owned one). Yes, the Buffett rule absolutely applies to this situation. It does not matter how the income is earned. A bottom-line income of $1,000,000 would be taxed at a 30%. Since the final net profit of an LLC is simply the owner’s income, it would be taxed under the Buffett rule at 30% if > $1,000,000.

    Your point here, “But, even if it did, your argument here … slight change in his salary (2 paragraphs)” is where much disagreement arises. First, to me, that is no one’s business. Humans value things differently, and I think it’s a dangerous day when we allow outsiders, the government, anyone that is not the individual determine the final subjective opinion of what is “huge” or “enough” or “needed” or anything like that. I absolutely don’t like the idea of the government determining this. Secondly, addressing the second paragraph starting with “much less the fact…” again, “slight change” is not for you or I and certainly not for the government to determine. Laying off people is quite simple and expecting John Smith to simply “take it” is unrealistic. Companies fight tooth and nail to keep their bottom line, so why would John Smith just instantly sacrifice $100,000?

    Yes, I do believe that John Smith is really that focused and yes, it is his right to be. It’s none of our business to stop him or judge him in that way. Also, I never did bring up the issue of tax cuts. This analysis was simply about how raising taxes might help. It seems that a common tactic on the left (not singling out you, nothing but respect for you) is to divert away to something about “well, tax breaks didn’t do it.” To play that game briefly, perhaps he would pocket it… but 1… pocketing it isn’t that bad considering he would invest it (put it back into the economy) or buy things with it (put it back into the economy)… both of which aren’t bad. Again, I’m still interested in hearing a side of how the $1.5T in tax breaks would help Obama achieve his goal of creating jobs, but I haven’t heard much from anyone yet. It seems that what I hear is that people want to determine what is right, or enough, or sufficient for everyone else around them, and in my opinion, that’s dangerous.

    If tax breaks are given (you know me, I want a flat, no loophole, no write off system) perhaps John Smith decides to grow his business and yes, does expand by hiring more. Maybe he would have to because with everyone having more money to spend from a tax break, he will see demand increase, and he will need to increase production by hiring an additional person or two.

    With all that, I do not want to see a country that has a gov’t that determines what people’s salaries should be. I also think it’s not good economics to assume people like the hypothetical John Smith wouldn’t fight for their income (everything I have learned in econ says he would). Either way, I appreciate the respectful debate, and hope you share more. Thank you!

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    1. Thanks for your feedback,

      I have quite a few comments. :)

      Regarding the LLC situation:
      Part of your justification in your lay-off situation was referencing companies that lay-off due to their bottom line, and then your Pepsi example.

      But, that is an instance involving corporate tax rates; and nothing to do with personal income taxes.

      No one on either side has come together recommending increasing corporate tax rates. In fact, both sides seem universally agreed upon the idea of reducing them (myself included). Even Obama came forward in his SOTU address saying he would like to reduce them.

      Regardless, point being that is a different subject all-together.

      The final net profit of an LLC being the owner's taxable income, is that way for a reason; because every dollar the owner re-invests into the company is deductable before taxes. A smart business man running a successful company will likely be reinvesting a large portion of that 'personal income' back into the company, and thereby earning deductions.

      For the most part, so long as you do your accounting and taxes properly, you can easily right-off nearly every single business expense you could have (and more) as the owner of a LLP; and thereby any income that you would otherwise use towards your company can be written off, in essence leaving you to be taxed (at the very most) at what you pocket after all of that. For your example, if John Smith is taxed at a salary of $1m, then by all intents and purposes that is exactly what he’s putting in his pocket as far as the IRS sees it. If any part of that $1m/year was meant to be reinvested into the company, then he should be doing so with it (and earning that deduction).

      So really that isn’t a case of his company’s bottom line, it’s a case of just simply him wanting more money. Because if he did want to hire more people and needed to use $100k of that $1m salary on company-related expenses, then he could very easily write-off the $100k he used and then only be taxed at $900k. You can’t count his salary as the exact same as the company’s bottom line; because his salary is only taken into play after every company expense is paid.
      ______________________________

      Regarding consumer spending/taxes:
      I’d like to point back to the fact I listed about consumer spending. You mention that ‘him pocketing it isn’t that bad because would invest it in the economy’, but part of my argument for the progressive tax rates is exactly related to that.

      Two facts there are no questions about:
      1. Consumer spending is directly related to our economic health.
      2. The overwhelming majority of consumer spending is controlled by the poor and lower/middle/upper middle class.

      The consumer spending of the wealthiest Americans, despite them owning such a disproportionately higher amount of the wealth in America, controls relatively very little of our overall consumer spending. This is obvious because the wealthiest don’t spend 90% of their income to get by, and often save/invest the majority of it. While most of the middle class spends nearly all their income on daily living and can only save very minimally.

      That said, if part of your argument is about what is good for the economy, can you see why it would be important for the overall economic health of America for the middle class to be taxed less than the wealthy? Taxing the middle class more directly reduces a large part of our consumer spending, and thereby our economic health, and jobs.

      IE: If consumer spending goes up a good deal, John Smith might have made $2.5m in revenue with his LLC (and thereby, had a salary of $1.5m). Which easily allows room for him to create jobs as well. Likewise, if it decreased, his salary would fall and by your example he would lay people off.

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    2. (cont.)
      ______________________________
      Regarding tax cuts vs. job creation:

      This is an important point to clarify here, though I think it for the most part goes without saying.

      The issue of raising taxes is a direct result of the tea party/conservative ‘balance the budget or else!’ mentality that has emerged over the last year. It is not at all meant to be related to job creation. Raising taxes never even came on the table until the balanced budget proposals where Repubclians had a staunch ‘cutcutcut’ plan, and the Dems wished to have a balance of cuts and revenue increases.

      This ‘tax the rich’ mentality that has far more to do with our budget than it does with job creation. And the budget concerns are what brought this issue to the table; not the job problem.

      ______________________________
      Regarding John Smith:

      I think it’s safe to say, this part of the argument for both of our sides is mostly unsubstantiated assumptions. :) But still fair enough to debate and important for this argument.

      But I’d like to point out, that by implying John Smith is really that focused about his salary, with utter disregard for his employees or the health/productivity of his company, you make a strong case in the implication that if he was given tax breaks he would instead pocket the extra money rather than hire more people. I realize that is a different topic all-together, but is still an important point.

      And while it isn’t my or anyone else’s place to judge whether someone losing $100k/year of a $1m/year salary makes their life more difficult than someone losing $100k/year of their $125k/salary, I think that I’m still safe in stating the implication here that money and overall life and financial security/happiness/difficulty does follow a curve of diminishing returns.

      It’s far more likely that the person making $25k/y is struggling financially much more than the person making $1m/year, and likewise someone making $25k/y taking a 10% pay-cut will likely be hurt far more than the $1m/y taking the same 10% pay cut. There are always exceptions, and it does not always apply, but statistically speaking I don’t think there’s any possible argument against that; the debate is more how much of a difference the extra money makes, which of course is impossible to truly say.

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    3. RKen – Always a good debate.

      First, true, LLC taxes and corporate taxes are different, and yes, PepsiCo does have corp taxes come into play. That wasn’t the point, however… the point was addressing that yes, sometimes you just simply need to let people go.

      For your part: “The final net profit of an … company expense is paid” regardless of the first paragraph being true, it still doesn’t get around the “Buffett rule.” If I would have made John Smith’s Revenue $3mil, and had non-employee expenses $500,000, employment expenses at $1,000,000, then he would have been able to write down the $500k and still fell under the Buffett Rule. We can change the example all day, but I’m trying to avoid that.

      The thing we can’t change is John Smith’s right and what’s inside his head. This is the part I have a problem with. As I have written about (I even commented earlier to someone in Part 1) I am vehemently against the government having a controlling hand over the people’s lives. When you say John Smith can re-invest in his company, he can. Must he? No. Should he? Who knows; that’s up to John Smith. I don’t like the government determining what’s best for him, what is the appropriate amount of income, investment, etc. Even after all that is said, under my example, he still loses $100,000 of his income (regardless of writing down expenses, etc), and, as a free human being, can choose to do as he wants. I don’t know how someone can say that he would just say “wow, great, I’m totally fine.” If that was the case, people wouldn’t move their companies overseas… they wouldn’t adjust their habits and have accountants get maximum tax refunds for them. I don’t think anyone but John Smith should be discussing what he does with his private life and company but John Smith. I absolutely do not want to put your theory or my theory or a standard government theory of diminishing returns (in actuality, utility) over someone else. John Smith’s value of his wealth is only up to John Smith.

      I do agree with you about consumer spending for the most part. Yes, him “pocketing” the money IS investing back into the economy through whatever investments he chose. The only time “pocketing” would hurt the economy is if the wealthy simply (and literally) put money under their mattresses.

      Yes, consumer spending is what drives the economy. It needs many things though:

      - Incomes (as I’ve talked about, you don’t want to raise taxes on people like John Smith… incomes could shrink)

      - Investment (you need all people, including John Smith to invest in companies so they can grow)

      I absolutely do not see how it is good for the economy or fair to tax one group of people at a lower rate than the other. Why should we turn to our rich friends to pay for our government? We should all pay at an equal rate. To me, taking 30% from one group and 10% from another is theft. Why should one guy work 20 minutes out of every hour for the government while someone works only 6 minutes? It ultimately erodes freedom. We should all devote the same rate of time. If the poor do not like their tax burden, they should work harder to make more. Many did, why can’t they? It sounds cruel, but it’s the truth. I don’t like government discrimination no matter how “necessary” it is.

      Continued...

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    4. At the end of the day, we should tax a LOT less. We do not need the government spending $3.8 T a year ($122K per second). Most of it goes to SS and Medicare. It’s for a different discussion, but why do these programs even exist? They shouldn’t. I can take care of myself. I will always be able to afford healthcare and I will have my retirement funded. Why? Because I made the conscious choices I did to ensure that. Why should I be taxed to cover those that didn’t? That’s all I will say about that, but it plays into the argument of “we don’t need to tax anyone any more if we would just stop spending.”

      Everyone is big on spending someone else’s money, but when does it stop. We say “tax the rich more…” but we keep giving to the non-rich through social programs. When do we stop? If we have utilized all the richs’ resources, and still need to pay for the poors’ lives via social programs, what would we do? All we have done is told people, “don’t work, don’t try, you will have health, retirement, housing, food, etc. etc. etc.” Why would anyone try? Incentives are being killed and soon we will have the least productive state in our history.

      Thanks again, hope to keep the debate going. But as I’ve said, I don’t want to be taking more of John Smith’s money :-)

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    5. Yep, good discussion.

      Regarding John:
      I ended up making another reply with regard to what I believe the government should/shouldn’t do. I agree that they shouldn’t be mandating any standard theory of financial happiness/security, but I just don’t quite see a progressive tax system as them doing that.

      Regarding consumer spending:
      Therein lies the uncertainty here, and why we have these debates. This is my elongated view on it:

      Increasing consumer spending without question makes everyone happy; the economy is better, people are able to spend more, many people make more, corporations make more, and more people are employed. These are all facts.

      So what increases consumer spending? The majority of our spending being through the middle class, it is safe to say that a healthy middle class has the best effect on consumer spending. This is largely agreed upon as fact as well; when the middle class suffers, the economy does as well.

      So what makes a healthy middle class? Well, that’s easy… being able to live comfortably. If the average middle class salary falls, or if large number of them fall into unemployment, or if their tax rates increase, the ‘health’ of the middle class can suffer (and as a direct result, consumer spending).

      So at a time when the middle class is suffering, what can be done? In my view, this is where the government can help, which in part is provided through a progressive tax system. I don’t view it as punishing or taxing the rich more, and view it more as providing relief/taxing the poor less.

      And we of course feel differently on that. :)
      ______________________________

      Regarding taxes:
      This is a bit of a tangent to the original discussion, but I’m on the same boat in that we should be taxed much less. However, unfortunately due to the situation we’re in right now… I don’t believe we’ll be able to recover from our deficit and debt without both spending cuts and revenue increases.

      As it stands right now, I also agree in that our tax system is flawed. But we of course have different ideas on how it can be fixed. :)

      Regardless, I do still see the need and the value of taxes. I don’t necessarily agree with the thought of simply privatizing everything across the board; there certainly is value to government control and/or oversight/regulation in some areas (whether infrastructure, education and maybe even healthcare).

      But even still, I don’t believe in holding people’s hands or taking away incentives to work hard. Despite that I’m all for safety nets, because everyone falls on hard times no matter how hard they work to avoid them, but I don’t agree with fostering it as a way of life. America is a great country, and through our success we’re able to supply support people if they need it, but there always has to be incentive to work hard and succeed.

      But, we are still the most productive nation in the world, and productivity has continually risen… so we have to keep that mind, that overall we’re still doing very well in that sense. There’s no question that people exploit the system, but I think that is played up to be far more common than it actually is.

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  3. If Mr. Smith can cut 2 employees without reducing his revenue, he should have done so long ago. He's been wasting $100,000 a year already, so he's not a very smart businessman. If he was, he would have realized that by giving each of his employees a $1 bonus at the end of the year, he could have kept his income under one million.

    Assuming that Mr. Smith works, and all employees bring in revenue equally, you get $2,000,000/21 employees which equals $95,238 per employee. If he fires three of them, his revenue drops to $1,714,285. After expenses for 17 employees, his income before taxes is $864,285, which gives $691,428 after taxes. So he would avoid the Buffett tax, but would have $8,572 less.

    I do agree that a regressive tax situation such as this is not a good design.

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  4. Anonymous - thank you for your comment, but why did you change the givens? Why did you alter the situation? You didn't address the situation at all, you simply altered it.

    First, let’s not change the example. There is no reason to bring up IFs. Mr. Smith had no reason to reduce his workforce. He was content, and thing were flowing smoothly until the new tax rule took place. That is the “cause” or change point in this example. Please stick with the example. If you want to counter with a different version, please address what I came up with first, then I will be happy to address yours.

    Secondly, I think you need to learn how an LLC works (this isn’t an insult to you, but it appears you do not have a general concept of it). Mr. Smith owns the LLC. He does not need to pay himself a salary; the proceeds from the business ARE his salary. The employees’ salaries are expenses. The model listed above is correct. He retains the $1,000,000 net profit of the business as personal income; that’s one of the benefits of an LLC.

    Third, I’m not sure how you think business works, but you can’t just say “well, there are 20 or 21 employees and each pulls in $2,000,000/employees.” Again, not changing the example, his bottom line taxable income is $1,000,000. That’s the end of that story. The Buffett rule reduces his take-home by $100,000, and he wants to keep his $800,000 keep so he fires two employees. You are bringing in very unsound and untrue facets that, again, not an insult, are simply not how things work.

    Would you like to address the example without changing the world as you have? Thank you.

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    1. If he can fire two or three employees without reducing his revenue, which is necessary for your example to be accurate, he was paying two or three employees he shouldn't have been paying. They were a waste of money that should have been his. His bottom line taxable income should have been $1,150,000. I am addressing the example as you set it up, and I think it is flawed for that reason. Your example is either overly simplified in that you don't take into account the impact of losing employees, or is based on an irrational actor, who is keeping an expense that has no return. In the possibility that he does have a reason for keeping employees who aren't necessary to generate revenue (family, he just likes them, whatever), he could have taken a different route to avoid paying the %30 tax by increasing his expenses to keep his income under $1 million.

      I am actually in agreement with you that a tax situation like this, where making one dollar more (going from $999,999 to $1,000,000) leads to having less after tax income is a terrible idea.

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    2. Anonymous - perhaps he didn't need to fire two or three employees and pre-tax increase he was operating at a spot he was 100% satisfied with. In my example, he might want to fire the three while knowing it would hurt his production (I acknowledged this in the post) and is willing to take his chance while trying to get the 17 to work harder.

      I actually never really went down or thought of it that way (going from $99,999 to $1,000,000) but it does make for an interesting discussion. It's a good point you have shined a light on. How many people would then be upset at a pay raise that takes them over the threshold. It creates such an odd situation.

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  5. I read both parts 1 and 2. Overall i think its a pretty decent analysis. If you didn't say that this isn't scientific, like in part one talking about the Bush tax cuts, I might have objected more. You had your opinion, you gave your reason. It's not hard to understand.

    I can kind of see Rken's point, but after reading LME's response, I tend to see why I dislike Rken's point more. As a Ron Paul supporter I completely agree with " Humans value things differently, and I think it’s a dangerous day when we allow outsiders, the government, anyone that is not the individual determine the final subjective opinion of what is “huge” or “enough” or “needed” or anything like that. I absolutely don’t like the idea of the government determining this."

    As to anon - get a clue. Your post really isn't good. You danced around and changed reality. Rken is right when he says that some things just aren't as simple. You know what is more difficult? Changing reality. This example established the reality and you couldn't come up with a rebuttal without changing the reality. Is this how you handle things? You have to effect change, not just say "well, reality is wrong, so I'm going to throw out the whole example"

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    1. Hi Nate,

      Thanks for your comments/feedback.

      One last thing I wanted to address as well, that you reiterated in your post, is that you don't want the government determining what is huge/enough/needed in regards to salary. I very much disagree with that as well.

      However, I don't necessarily agree that small increases in tax-rates incrementing along with one's salary rates (as such in a progressive tax system), is necessarily the same as the government telling you what you can make or passing assumptions on what is ‘enough’. I understand the concern and the line of thought, but I don’t quite see it the same way.

      To me, it is more about those that can afford to pay more pay more.

      Just like how someone making $25k/year and donating $1k to charity, is typically viewed as far more generous and giving than someone making $5m/year and donating $1k to charity. Or just like how someone taking a $10,000 paycut at a $5m/year salary, typically hurts far less than someone making $50k/y taking a $10,000 pay-cut.

      How much more or less it means, is of course impossible to quantify. But I don’t think it’s inappropriate for our government to establish ‘very light guidelines’ on the issue.

      By very light guidelines, I mean something like our current system. I do not think we should tax the poor at 5% and the rich at 50%+… or cap salaries, or anything like that. But a progression from ~10% to 35%? I think is completely fair.

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    2. RKen - got the email buzz on my phone that you replied to Nate's post and I had to chime in...

      First, I don't think any of us work, we spend too much time blogging all day, lol!

      The reason I had to reply is that, though you and I (I think) are good debaters, we do write a lot, and I think a lot of info gets lost in the wash.

      I had to chime in about this: "To me, it is more about those that can afford to pay more pay more. "

      That's the part that scares me. While it might seem abhorrent to you or me that someone with $10,000,000 can't afford certain things, again, that's not the power I want someone to have. That's none of my business. Rken's opinions, LME's opinions, nate's opinions, and the gov't should not have that power. It's kind of like (this is a stretch, I know) free speech. Looking at the Westboro Baptist Church, for instance, I absolutely can't stand what they do, what they say, and how they do it. It goes 100% against what I believe in (not on a religious sense, but just on a wth are you doing sense), but, as disgusting as it is to me... my opinion of them should not govern them. For all I know, their opinions and views could be right; mine could be wrong. To me, this is similar. No matter how much crazy money someone has, it's not our right to determine what someone else can afford. Just the notion that the government can stagger our tax rates based on what IT DEEMS is a dangerous power we give to the gov't.

      Sorry to but in to your convo.... just had to get that out there. I'd be willing to bet that Nate works (I do too, but at a computer with many liberties) and might not have the free time to get back to blogging like I do :-)

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    3. Ha, yeah... I'm a bit lucky at work in some ways where I'm either swamped, incredibly busy, and can barely breath. Or, I have absolutely nothing at all to do.

      Yesterday was one of those busy days, but as I'm sure you can tell today isn't lol.

      And yeah, again, always a very good discussion and you make good points. Particularly the Westborough point brings a good light to your frame of thinking, and supports your argument well.

      I think my view on this can be simplified more to the idea that, I don't necessarily look at a progressive tax system as an opinion-moderated system. Sure, in discussing it there's little I/we can do but provide an opinion on who can afford what more, but I think there's also a quantifiable numerical difference as well.

      What that is? I can't say. Unfortunately such a statistical analysis does not exist, and would be incredibly difficult to do accurately. And it's such a subjective situation that no modeling, no matter how detailed, can accurately cover it.

      But, that said, I do think that observing the trends is appropriate in this situation.

      Sure, for something as big, important, and powerful as our government the idea of allowing them to legislate on trends sounds scary and like it shouldn’t be within their capabilities. I see your thinking in that. But I think that so long as its done conservatively in a way that makes sense, in a situation where it can benefit (and how much/if it all it benefits is part of the opinion aspect in this discussion), and it is controlled... I think it's fine.

      I say controlled, and by that I mean I would of course be right beside you standing against our government if they sought to bump the top tax rate up to 75%. But a 30%? I think is perfectly within reason.

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  6. Saw this on CNN. Lots of interesting poitns, it's a lot better than the junk on cnn.

    I'm conservative and I do ask RKen:

    Knowing a progressive rate system is unfair (LME calls it discriminatory and I agree) what would it take for you to agree to flat rate taxes.

    I am not wealthy. I have a wife and 2 kids and me and my wife make about $48 thousand a year together. I am in favor of a flat tax. I live in a poorer neighborhood and though I know it's not addressed here, social programs are abused. What would it take for you to agree on a flat tax? I'm tired of seeing my neighbors not work and I'm tired of them using the government to get by. If we make them pay some taxes, the might get up and go to work.

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    1. Thanks for the comment. I'll do my best to answer any questions on my arguments or line of thought.

      That said, I think your question seems to have much more to do with other aspects of our government than a flat tax vs progressive tax system.

      I agree with you completely that in some cases social programs are abused beyond reason, and that people shouldn't be able to get away with paying absolutely no taxes (especially in earning substantial refunds) outside of extremely rare, case-by-case circumstances. We’re on the same page there.

      But, I don’t see the relation in a flat tax system solving our social program problems. Both of those problems can be addressed while still maintaining a progressive system.

      As for what would it take for me embrace a flat tax system? I don’t quite think I ever could fully embrace one as long as the incomes and standards of living can vary on such an exponential scale.

      If it helps illustrate my point, asking me to embrace a flat tax system, would be equivalent to asking me to agree that:
      Person A: Makes $25,000/y
      Person B: Makes $100,000,000/y
      - A yearly donation of $1,000 to charity as equally generous and meaningful for person A as for person B.
      - A $10,000 pay cut has the same financial hardship consequences on person A as for person B.
      - Every extra dollar of income means just as much to person A as it does to person B.
      - Person A will always (or even often) have just as much discretionary income as person B.
      - Person A always worked harder than person B.

      None of which I feel are true for all situations. In fact, most of which are rarely ever true.

      Again, there are exceptions to the above, but generally the trends say that those making far less can afford to spare less of their money than those making far more. And I agree with that idea strongly enough to support a progressive tax system over a flat one.

      I again don’t see a progressive system as a system of ‘taxing the rich more’, as much as I see it as ‘taxing the poor less.’ Cup half full or half empty type thing.

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  7. Ok... so you make a Million dollers a year and you complain? I make 18k a year, if all goes well. How does this affect the working lower class?

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    1. Anonymous - Thank you for stopping by. I'm not sure I understand you question.

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  8. An interesting analysis of progressive taxation and top marginal rates: http://pubs.aeaweb.org/doi/pdfplus/10.1257/jep.25.4.165

    Their determination is that the optimal highest marginal tax rate (including all taxes) is 73%

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  9. You can't use anecdotes to defend tax cuts for the rich.

    That's not proper arguing skills.

    That's a cop out.

    Try again.

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    1. Mudd - Thanks for stopping by.

      Well, if you have read through this blog, you would see that we are big on having opinions that are backed. In this two-part post, I took a position that the $1.5 T tax increase the president proposes in his budget would not help in his plan for job creation. I gave the reasons why I believe what I do. Most people in this blog do that, and regardless of left or right, it's a great thing, and it's a great way to learn from each other and share information.

      Your comment... well... I don't really know. First, I never said anything about fixing our current situation with "tax cuts for the rich (something I do favor,... well, tax cuts for everyone)"... but no, I never said that. I am against raising them. The rich already pay enough in taxes, and I don't think our country should continually turn to the group that pays the most already and keep asking for more and more and more.

      With that, care to offer why our situation described above doesn't work? Care to back what you say? I believe it's a fine example? Can you show how it isn't? Can you give a better situation of your own.

      Coming here and stating what you stated without reasoning doesn't really help. I hope you plan to come back and give some fact-backed, insightful opinions to our ongoing debate.

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  10. Hello LME and Rken. I certainly hope the world is treating you like kings.

    I have read some of your posts back and forth (and I thought I could get wordy in my posts), you both have left out something in your arguments.

    First, business owners are a different type of person. They are planners, analytical, driven and risk takers (financially speaking). No business owner ever says, "My goal next year is to have sales 10% LESS than last year or the same as last year(unless they are planning to close)". In fact a lot of them have long term plans and budgets.

    So, while Mr. Smith may show a profit $1 Million or whatever the hypothetical figure was, he most likely doesn't take all of that money home. Mr. Smith most likely wants to expand his business and purchase another plant/office/distribution center or whatever. He is saving his money to purchase that or maybe even a competitors business.

    Another thing, if Mr Smith had a loan on his plant/office etc., his principal payments are not tax deductible (because he is claiming depreciation). Depreciation is the closest damn thing to rocket science you will ever see with out actually getting into rocket science. My point is, some of that "profit" is merely on paper (in some cases). It is possible to show a profit and run a negative cash flow (depreciation).

    If you want some hypothetical, let's assume Mr. Smith has some delivery trucks. After purchasing the trucks he paid sales tax, in a lot of states he would have paid an ad valorum tax or a property tax every year, then after 4 or 5 years when Mr. Smith sells that truck, he pays a CAPITAL GAINS tax on that truck for the difference between the sales price and the depreciated value. Suppose he purchased the truck for $100,000 depreciated the full amount over the 5 years and then sold it for $30,000 to put towards the price of a new $120,000 truck. Well he now owes a capital gains tax of (15%) $4,500. Now he only has $25,500 to put towards the new truck. Now he dips into those retained earnings (that progressives hate he still has)to pay for the rest of the truck.


    While I do respect LME's effort to keep things simplistic, taxes and business are not simplistic, unfortunately.

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    1. In the delivery truck example above under the "Buffet Rule" because Mr.Smith had income over $1 Million, he now owes $9,000 in tax from selling his depreciated equipment (as opposed to $4,500 per truck). If Mr. Smith did not have the retained earnings to dip into, he may have to delay his purchase of the new delivery truck or worse--borrow.

      Oh yeah, and since Mr.Smith has this delivery truck he is now paying Federal Highway Use Tax, fuel taxes, weight distance taxes, ad valorum taxes in certain states that he may deliver his widgets to or drive through to deliver his widgets, all before ever paying an income tax. That's not to mention payroll taxes and state and federal unemployment taxes.

      Now, RKen, you may be wondering how that would affect employee retention at LME LLC. Well, Mr. Smith may say to himself "Gee all of these fuel tax reports and government regulations over these 5 trucks (to deliver widgets) combined with the increase in the capital gains rate, I think I'll call ABC Trucking down the road. Perhaps I can just get rid of all my delivery trucks, the 5 drivers and the mechanic. I can focus then on making and selling more widgets."

      ABC Trucking gives Mr. Smith rates on delivering his widgets. He calculates it out and decides the best thing for LME LLC is to outsource the delivery of widgets because it would leave him more capital for expansion and enable him to eliminate 6 jobs he no longer needs. So he sells the 5 trucks and pays the capital gains tax and lets his 5 drivers and mechanic go. He'll quickly recoup the additional capital gains tax he had to pay through the elimination of the six employees.

      I do realize that my example has strayed from the original simplistic scenario first presented, however, I also saw some comments about the "Buffet Rule". So that is exactly how the "Buffet Rule" could apply to a small widget maker like LME LLC (assuming of course they manufacture widgets).

      You guys have a great evening.

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    2. @slim

      I'm pretty far left. I'm a pretty big critic of this blog's positions up to and including this one. I will say though, that, especially from economists' standards, this piece is well written. I don't agree that it's overly simple. That is the point of an economic example/experiment. Though I disagree with LME and Pachyderm pride all the time, a simple example like the one he/she has written above is on the money (example wise, i disagree with the concept). It keeps all variables the same except for one and that's taxes. It conveys the point well, and shows the cause and effect of one changed variable. You're bringing in trucks and all these things, what if LME LLC was a webdesign company? No overhead, just designers on their computers at home. Then yes it might just be that the only expenses are employee's salaries. Again, i'm a self admitted flower girl leftie, i thiink we should tax the rich a ton, but, as far as the example itself goes, this is pretty good.

      Take care slim! :)

      LME, you aren't getting a pass, let me do some research and i will come up with a formal response

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    3. Hello to you too slim, hope life is treating you well too!

      I have to point out one aspect of the depreciation problem you mentioned that changes what you said quite a bit. Though, it makes things complicated. :(

      If you purchase a vehicle for business use, you actually are able to deduct the yearly depreciation of that (or any other owned) asset on a year to year basis all the way until you've deducted the entire value of your vehicle (which can of course, take 10-20 years due to limits on depreciation). So your example is actually a bit off, by my understanding of the situation.

      Additionally, your exemplified depreciation rate is slightly exaggerated, though I understand you were just using simple numbers for clarity in your point. Believe me, I agree in that depreciation might as well be rocket science, but you typically won't see anything fully-depreciate to 0 in five years.

      And if it did, by then you would've written off the entire expensive of the purchase to begin with. Which, puts you on the winning side no matter what you sell it for.

      IE: Sticking with your example, while he may have owed $4.5k in capital gains, he would've been able to write-off $100k worth of depreciation. Which at a 30% tax rate, saved him $30,000 in taxes.

      So he didn't make out so bad after all!

      All of that said, I certainly understand your example and how other aspects come into play in making tough decisions as a business owner. There’s no question money can be tight, and running your own business is difficult and involves tough choices. But, at the same time I think that the LLC example is by far the less common situation of the millionaire.

      Delete
    4. Anonymous, I read the first several posts of LME and RKen. The "Buffet Rule" was mentioned, other hypotheticals were made. I simply used an example that would incorporate the Buffet Rule into the equation.

      I was not criticizing LME neither.

      You are not alone in your wanting "to tax the rich a ton". Most Marxist and Progressives feel that way too.

      Delete
    5. Oops, I was not criticizing LME EITHER not neither. I have spell check, apparently I needed dumba$$ check on that one. LOL

      Delete
    6. RKen, also over the same period of time where he saved $30,000 in taxes he paid $250,000 in wages (5 year depreciation schedule which is common on that type of equipment, LME's example is $50k per year which is average for truck drivers), $19,125 in payroll taxes, $2,750 in Federal Highway Use Taxes, about another $14,500 in fuel taxes and collected $14,125 in payroll taxes from the employee. Then after paying all those taxes, he got to pay an income tax.

      But the law requires that LME LLC have workmans comp insurance. Therefore, LME LLC further stimulates the economy because to remain in compliance with the law he pays about $6,000 per year workers comp for that employee. $30,000 over the 5 year period.

      Then LME LLC would be required by law to carry at least $750,000 worth of liability insurance, which would cost about $6,000 a year per truck too. Another $30,000 into the economy over that 5 year period.

      Over the five years that LME LLC owns the vehicle it will require maintenance in which LME could either hire their own mechanics or outsource it, which again contributes to the economy.

      So that $30,000 (your number) worth of tax deduction brought $50,500 in taxes (excluding Income Taxes) to the Treasury, $250,000 in wages into the economy, $30,000 in workers comp insurance premiums and at least another $30,000 in liability insurance premiums into the economy. It looks like the government "didn't make out so bad after all" either. Then the govt gets Income Taxes from LME LLC and they will zap him for some capital gains when he sells the truck. I hate that you think he hasn't paid his fair share yet.

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  11. Anonymous....Flower Girl Leftie.....why don't you identify yourself better on here if you come here regularly? I am not being critical. I see RKen on here and like trading posts with him. There are a lot of folks that post as Anonymous. I always wondered how many were repeat posters and how many were one and done posters (Anonymous).

    Again, I am not calling you out or anything, just trying to say it's nice to identify who you are trading thoughts with. LME gets a lot of comments from Anonymous, I'm sure he doesn't know who all of them are.


    BTW, I loved your "self admitted flower girl leftie" line. Perhaps that would be a good screen name.

    Everybody that uses a screen name always seems to be reasonable, rational and cordial. This is a great site for exchanging thoughts most people support their claims with sources. Sure there are some people hop on here post talking points, mindless drivel, and even crude crap, but they usually do it under Anonymous (and I am not saying that you have done anything like that).

    You take care as well (pardon my bad manners for failing to do that in my first reply), Anonymous.

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    1. I will think about it.

      Apology accepted <3

      Delete
  12. Government Jobs


    -Snake Plissken

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  13. Hi all,

    Great exchanges with talking points on each side. I don't think raising taxes - on anyone - is a good idea. But, then again, I'm not an economist, so I 'did my own homework.' I looked into our history - our worst case scenerio... the Great Depression.

    This is what I found, in just a few minutes of research.

    'For those that haven't seen this, here's the highest bracket tax rates from 1925-1945, including the depression years of 1930-1940.Raising tax rates didn't shorten the depression back then, nor will it shorten it in the future. It's been tried.'

    http://taxprof.typepad.com/taxprof_blog/2008/11/tax-rates-during-the-great-depression.html

    http://radioviceonline.com/looking-back-at-the-great-depression-tax-rates-and-more/

    http://marginalrevolution.com/marginalrevolution/2008/11/understanding-f.html

    As I said, I'm no economist... that said, today about 1/2 of our citizens pay zero in federal income tax. Many recieve refunds for monies never paid in. Our 'social saftey nets' suck up most of the tax reciepts - before anything else gets paid.

    We cannot 'tax and spend' our way out of this mess and I see tax increases on 'the rich' having a negative impact on our entire economy. Business owners take risks, to acquire wealth. Many businesses fail - and those owners are left holding the bag, but still they try. That's their business and none of the Gov.s

    If taxes on those succesful businesses are raised, they will, as LME said, be forced lay off employees - or - they'll be forced to raise prices to cover their new cost of doing business.

    Either way, the economy suffers.
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