I have been working on trying to figure out two things.
1. What the heck is going on with this economy?2. What are the politicians going to do to pay for all the fixes they are promising?
Whenever I start to research, I get pretty confused. I get distracted and even trying to write to you, I keep going off on tangents in my mind. I can't stay focused on this. I certainly hope that neither Barack Obama nor John McCain taps me as next Secretary of the Treasury. I just don't think I could stay focused.
What was that you said? If I understand you right:
A natural force guides free market capitalism through competition for scarce resources. And in a free market each greedy person will try to maximize self-interest, and their interaction with other greedy persons will lead to exchange of goods and services, enabling each to be better off than when simply producing for himself/herself. You said that in a free market, no regulation of any type would be needed to ensure that the mutually beneficial exchange of goods and services took place, since this "invisible hand" would guide market participants to trade in the most mutually beneficial manner.
So supposedly there is this hand, not the hand of God, but this other invisible hand that reaches in and keeps everybody doing what they should do economically. But "should do" for who? Did you ever imagine the New York Stock exchange? Or how about this?
I couldn't find fresher figures, but these are reflective of current realities and are from this website.
It seems to me that the invisible hand has lost it's touch or is working very hard only in favor of a very small elite group of people. If this is the best the invisible hand can do, I think we need some regulation. Here is my problem. I just don't believe that the top 1% of the population should hold and control 40% of the nation's wealth. If it were true that this top 1% had earned the right to hold that wealth, perhaps I would be convinced that they deserve this wealth and it's attending power. However, this elite has not, generally speaking, earned this wealth. They have inherited this wealth. The money that they have inherited has earned this wealth. But they, as a group, have not.
In addition, those who have earned this wealth have done so, not alone, but on the backs of working people, many of whom are working for minimum wage. According to an article from July by the Center for American Progress
Over the past year, a family of three supported by one minimum-wage earner still lived over $4,000 below the federal poverty line—earning just $12,168. That same family will now bring in $13,624 before taxes—well below the 2008 poverty line of $16,705. And when the wage reaches $7.25 in 2009, they'll earn a little over $15,000—still 18 percent below the poverty line. Minimum wage-earning households with additional members are likely to live even further below the poverty line.
What has the invisible hand been up to for these folks? Should people in the the richest nation in the world be in a situation that they work a full-time job, steadily, day in and day out, and they can't afford to feed themselves. They can't buy a dependable automobile. They can barely pay the rent on substandard housing. The working poor are further humbled (spell that shame for some) by being forced to go hat in hand and beg for food stamps, housing aid, and other assistance. This assistance comes at a high price to the broader community. We pay double or triple, for what the working poor should be receiving in a fairly earned paycheck. However, there has been some kind of sleight of invisible hand that keeps minimum earners under the very heavy thumb of employers (some wealthy, some not) screaming "I can't pay."
Meanwhile, in this very scattered letter, I want to talk about taxation. Now there is this term, marginal tax rate. I am not sure I really understand what it means. But someone said this:
The marginal tax rate is the rate of tax applied to the last dollar added to your taxable income. As your income increases more taxes are paid on this "top" level of income. For example, the income you earn from investments is added to your income from all other sources. As a result, each additional dollar of investment income is taxed at the highest rate applicable to your total income.
but
The average tax rate is calculated by dividing the total income taxes paid by your total income. The average tax rate incorporates taxes paid at all levels of income so naturally it will be less than the marginal rate, although a person’s average and marginal tax rate will be close to equal for very high-income earners (taxable income over $2,000,000).I kind of wish I understood what that means and how that affects my life. I'll keep thinking about it. Write and explain it to me. But from the Yale study that CaDh8 referred to in an earlier post, I learned this:
The reduction of marginal tax rates in the Reagan years was driven by a new policy consensus that still persists today. That consensus is that high marginal tax rates on the rich come with an unaffordably high price for the U.S. economy in the form of reduced incentives for the rich to work and to save, and increased incentives to engage in socially wasteful tax planning. And yet 1957, when Rand wrote Atlas Shrugged and the top income tax rate was 91%, falls in the middle of the period from 1951 through 1963. Those were the golden years of the U.S. economy, in which the average annual rate of productivity growth was 3.1% (compared with about 1.5% after 1981). Of course, the growth might have been even faster had the marginal tax rates been lower, but the coincidence of high rates and high productivity raises challenging questions for those who believe that high marginal tax rates carry an unacceptable cost.Somehow I think that is interesting and would support Senator Obama's Tax Plan, if I understand this correctly.
In the spirit of KISS (Keep It Simple, Stupid) I have tried to collect some summary ideas. I've read different descriptions of the plans, but this guy Justin Tapp seemed clear and concise to me. Plus he referenced his ideas so go to his site for more info.
The Tax Plans
I. Obama would raise income taxes on the top two tax brackets to pre-Bush levels of 36.9 and
39% respectively. (The top rate is currently 34% for people who earn more than $250,000).Obama would also impose an additional 2 to 4 percent tax on earnings for some over the existing Social Security wage cap, and bring back the phase-out of the personal exemption and certain itemized deductions for higher-income taxpayers. When added up, the top effective marginal tax rate rises by 12 to 14 percentage points, from 37.9 percent to roughly 48 to 50 percent.
Obama would also raise capital gains taxes on people earning >$250,000 to 20%, which is more than today but less than it was before 2003.
McCain would keep the top tax rates, dividends, and capital gains taxes where they're at.
II. Obama would raise corporate income taxes, but cut them for business that "invest in creating jobs in America" and eliminate capital gains tax for small businesses and start-ups.
McCain would lower corporate income taxes.
Note: Corporate tax rate is currently 35%. But there are a lot of loopholes in the tax code that keep corporations from actually paying the 35%. Obama says we need to close the loopholes.
III. McCain would double the personal exemption for families with children from $3,500 to $7,000.
Obama would give a $500 payroll tax cut to workers. He also would double the Hope credit for college to $4,000 from $2,000 and make it fully refundable.
IV. McCain would eliminate the tax exemption on employer-provided health care (raising taxable income) but would provide a tax credit of $2,500 (singles) or $5,000 (couples) to more than offset the proposed tax increase. Any of the credit not spent on insurance could be put into a health savings account.
Obama would give tax credits to businesses that provide health care to employees. Other aspects of his health care plan would supposedly reduce health care costs by $2,500 per family.
V. McCain wants to abolish the estate tax for everyone (this is a Republican plank).
Obama would eliminate the estate tax for 99.7 % of estates. He would increase the top estate tax rate ($3.5 million per person, $7 million for couples) to 45%.
VI. Obama's plan would add $3.4 trillion to the government debt over the next ten years according to the Tax Policy Center.
Senator McCain's plan would add roughly $5 trillion to the debt.
Lastly, here is a little chart showing the gut reaction of economists to the plans of the candidates. I'm wondering which plan you would prefer?
Economists on Economic Plans
Well, after all this, I can only leave you with the plea that you will answer and help straighten me out. I feel like I'm fading.
BRD
PS Do you think I'm a socialist?
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14 comments:
OK, I just wrote this whole long rebuttal to your post. I guess it was too long because when I went to post it just said "Could not process" and deleted everything.
Here is the gist. I think you are not a simple socialist, but an idealistic one. You want the best for all, but that does not make it right to take things away from the rich. If people in this country would just stop wishing things were different and start doing something to change their own lives, we would not need to take wealth away from the rich. Instead, those who are now "poor" would earn that wealth. No one has to stay at minimum wage (barring a disability or addiction, which would need treatment). If you work hard and make good choices you will move up. We need to reinforce good behavior in this country, and allow bad behavior to be punished (aka not bailing out those who make poor investments). We have messed with the invisible hand, as well as having entered the global society (where not everyone is guided by capitalism). One example is forcing banks to loan money to people who can't pay. This is messing with the invisible hand, and we have seen what has happened.
OK, well this is nothing like my first post, but it will do for now. I may have more to say as I think about this post.
Also, good explanation of the plans and of the marginal tax rate...
Also, you say it is unfair that people inherit so much wealth, but again, even if you don't think the situation is fair, the fact is that someone worked to earn that money, paid taxes, invested it in American companies, passed the money on to their family (because that is what inspired their work in the first place) and hoped that their family would have a better life. In order for those who inherit to make use of the money, they must either spend it or invest it. THis benefits them, but it also benefits the market and society. Why should they be taxed at rates like 35-55% upon their death?
Maybe I am an idealistic capitalist...
CaDh 8
Thanks for enduring the whole of this article CaDh8! I know we disagree, but not disagreably!
I must defend one concept. If the working poor are working fulltime and not earning a living wage, how, pray tell, will they ever be able to get ahead. Will they ever be able to save enough money to go to college? No. Will they be free of the humility of forms of public assistance? No. Whatever it takes, a living wage for the working poor must be achieved. If necessary, it could be done with a government subsidy to some small businesses, but people who work full time at a legitimate employment should be able to pay for basic necessities. If they cannot, then their employers are scoundrels and oppressors and can look forward to a peoples revolution.
I don't disagree with your point that someone who works full time and is a good and hard worker should be able to support their family by the work of their hands. My disagreement is that this hypothetical person would actually be stuck at a minimum wage job. And I confess, maybe I am naive, but here in Columbia, TN at least, a barely passible worker can make $8 an hour today. A good worker can make ten, plus overtime, just to start with no skills at all. Not that this is a wonderful wage, and to do all the things you are talking about it is not enough. But I am basically saying that it is not up to the government alone to set these wage standards. It is OK for a 15 year old to get paid $5/hour to help at a day care, while a 40 year old can't support a family on that. But a 40 year old should not be left with only this one job option. So I guess I am saying that the government would be better served to train those without training and give additional assistance (as they already do) to the fatherless and the widow (and the single mother or father). Do what the private sector cant, and monitor the private sector to ensure that there is not corruption or abuse. Again, maybe I am naive, but my underlying philosophy is that people, no matter where they are now, have the strength and power to better themselves. I fear that if the government starts to take over...to control us all...then none of us will be able to do that.
Oh, and I remembered one thing lost in my first post. The flat or fair tax. I won't get into all the details, but what I like is that it still makes allowences for the poor while fairly taxing the rest of us. Under some versions the rich would be taxed much more because it is a consumption tax and they spend more. But the big thing is the millions...maybe billions saved in expense and in man hours preparing taxes, managing the IRS, and other tax collection costs. Also, it would remove some of the power that the lobbyist groups have over the Congress. Right now, Congress can use complicated tax laws to give favors and penalize others. A more fair system would refocus Congress on other things and remove this point of manipulation.
Anyway, just another thought...
I agree that a total revamp of the system of taxation might indeed bring clarity to the system while clearing legislators' desks. I'd be game to see if a flat tax would work. (No cheating for the fat cats though.)
I do think that you are naive about available jobs at the low end of the scale. But I am willing to admit that I may be naive about how intransigent some of the poor are in their refusal to work hard. Some.
And much of this points back to inadequacies in the experience of education in the US. (Note: I say experience of ed rather than the education system because I don't know whose fault it is.) How can it be that people spend 12 years in school and can't read well? Whose fault is that? If a student really wants to learn, they can, but many don't. They choose not to and somehow the system allows it.
Then there is television and the exaltation of ignorance!
Yes, maybe I will write a post on education addressed "Dear Bart Simpson" or "Dear Boy meets World" and could then discuss the exaltation of ignorance. :)
I think we are both right. I think there are some who won't work hard enough and some who can't find work enough to provide. We are both talking to the "some people". And I am glad we can discuss these two sides this way. Both need work, that is for sure, and intelligent discussions on these topics will be imperative no matter who gets elected.
On education, one comment. Did you know that in Chicago the cost PER YEAR of the average student is $18,000 for public school? I got this info from someone who lives there, but I don't think this is much more than numbers from around the country. Even the more prestigious private schools cost less per person. So how can our schools continue to fail when SO much money is dumped in? Why are our public schools not as prestigious as the private ones, when they are getting as much, if not more, money per person? Could it be that "more money" (remember, it is for the children, says Bredesen every time he wants to add another tax)won't solve this problem? Because I agree that, as long as the education system is weak, you will have employment problems all the way up the food chain. And we as taxpayers should be getting more for our money, I think.
http://marketplace.publicradio.org/display/web/2008/10/22/wilkinson/
This story was great and touches on these topics in a both cynical and bipartisan way. Perfect.
:) I think you may enjoy it.
Loved the Marketplace schtick about wealth redistribution. All that he said is true. And I think that no matter what they say about taxation, it is the expenditure of government that drives taxation. Bush has been dandy at that. And one could remind ourselves that Clinton did pretty well with budget balancing. (I understand that it is more complex than which party they belonged to.)
We probably should talk about education. But my head hurts when I think about it. One certainly would think that with 18,000 to spend, or even 6 or 7,000, we ought to be able to get some educating done. And perhaps that is where the exaltation of ignorance plays its part. When are American children going to return to the days of eager learning? Not, I think, if they while away their evening hours watching South Park and playing violent video games.
Geez, we're talking taxes and it's not even April yet!
So here's the rundown on marginal vs. average tax rate. A very simplified example for illustration purposes only.
Say there are these tax brackets: 0% for income less than $20, 50% for income between $20 and $60, 75% for income over $60.
Say you make $100. Your last dollar would fall in the 75% tax bracket, so we’d say that your “Marginal Tax Rate” (aka, the tax rate for the last dollar) is 75%.
However, your average tax rate is only 50%. Here’s how:
Tax rate x (income at that tax rate) = Taxes
0% x $20 = $0 paid for income less than $20
50% x ($60 – $20) = $20 paid for income between $20 & $60
75% x ($100 – $60) = $30 paid for income over $60
0 + 20 + 30 = $50 = Total Taxes Paid
$50 / $100 = 1/2 or 50% as your average tax rate
If you made $50, your marginal tax rate would be 50%, and your average tax rate would be 30% (you pay $15 taxes for $50 earnings). If you made $21, your marginal tax rate would still be 50%, but your average tax rate would only be 2.38% ($.50 taxes on $21 earnings). If you made $61, your marginal tax rate would be 75%, but your average tax rate would be 34% ($21.75 paid on $61 earnings).
Simple, right? Remember, the actual tax code is much MUCH more complex. I think 6 or 7 different tax brackets (referring to marginal tax rate), plus you have to factor in tax credits, tax refunds, income deductions, etc etc etc. Also, this illustration is JUST for income taxes. It does NOT include payroll taxes (aka Medicare, Social Security, Unemploymen, etc), which are partly paid by your employer and partly deducted from your paycheck. It’s pretty darn complex.
The explanation gets its own post. My thoughts on the different tax breaks comes shortly.
OK. So here’s my thoughts—I don’t mind if the top tax bracket is higher. After all, if .40 of each dollar above $250,000 gets taken by the tax man, you’re still making a heck of a lot of money. I’m generally fine with the rich folks paying a bigger chunk of the tax burden, especially if it is from income taxes.
What I don’t agree with is the way Obama is giving a ‘tax cut’ to the middle class. It’s not really a ‘tax cut’ at all (eg. A decrease in the marginal tax rate for a given income level), but rather a series of ‘tax credits’ for various reasons. The Wall Street Journal does a pretty good job of explaining it. http://online.wsj.com/article/SB122385651698727257.html
Really, what I’d like to see is a simplification of the tax code (which neither candidate is doing, unfortunately). Corporations pay X% of profits, no matter what (end loopholes). Rather than 3 or 4 or 5 different deductions from a paycheck, plus a filing for additional taxes at the end of the year (April 15), have 1 income tax that you pay. Marginal (progressive) taxes are ok, and probably preferable to a flat tax (which hurts low-income families more since they have less discretionary income). Capital gains for individuals should be taxed, and possibly at a higher rate if your income is higher (this prevents the rich from being paid low wages, but making more money through investments that are not subject to payroll taxes).
Also, the government needs to give you a clear statement at the end of the year that goes something like this: “You/your household made $XX dollars this year through income, capital gains, etc. Of this, you paid $XX in federal taxes, which means that your tax rate was X%. Thank you for supporting the operations of the Federal Government.” This can help people understand if their taxes actually go up, down, or stay the same from one year to the next, and give them a basis for evaluating whether a politician’s claims during a campaign were actually carried out. Right now, all we can do is guess, and hope that the politicians are telling the truth.
Since I’m from Chicago, my experience leads me to believe that the surest way to tell if a politician is lying is to see if his/her lips are moving. Let’s make this whole thing more transparent, and perhaps we’ll have a better way to fix what ails us.
Josh,
Thanks so much for the clarification. This helps quite a bit. I think that your idea for a simplified tax system would be something that most of us "middle" people would really appreciate. Plus the end-of-year statement would be helpful. The government could even say, "Thank you!"
BRD
This was a great addition to the discussion. Because of the complexitites and loopholes I fear that much of the time the discussion that we laymen have is really just theoretical because you can say "Corporations should not pay 39% tax rate", but if they are able to avoid a good portion of that, the we are talking about apples and oranges. I like the statement...and the thank you too!
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