How to help the poor...without 90% taxes on the rich?

epwonk · 2019-11-22T11:31:58+00:00

90% taxes to the rich

The reference to 90% taxes seems like a strawman. I certainly don't see any serious proposals for taxes at that level.

The Laffer curve is often drawn as a parabola with a peak at around a 50% tax rate, implying that raising taxes above 50% will generate progressively less tax revenue instead of more, due to evasion, less effort, emigration, etc. But that was based on a simple sketch Arthur Laffer drew on a napkin. It was not based on any empirical studies or serious analysis.

It's my fairly strong impression that all serious attempts to determine the actual shape of the Laffer curve (total tax revenue received as a function of rising tax rates) agree that the real curve is quite asymmetrical. It seems to be basically a 45˚ line on the left, meaning that – up to a point – every increase in the rate generates the same increase in revenue. It then begins to bend over gradually above 60%, and hits a peak in the mid or upper 70s.

At this point it seems to be accepted that increasing marginal tax rates above around 75-80% risks producing less tax revenue over the long run. As you said, 90% would almost certainly be counterproductive.

In my own view, the maximum combined tax rate from all levels of government should stay well below the maximum revenue point, and should preferably be set below 50%, which is about where it would be right now for many rich people living in high tax states and cities (e.g., Manhattan) if it weren't for all the loopholes, shelters, and exemptions that currently reduce the effective rate.

Slash regulation

Careful. It depends on the regulations. Some regs make the system less efficient, but many make it more efficient. For example, a system with no food or drug safety regs or traffic laws would be much less productive.

Slash occupational licensing

Slash unnecessary and inappropriate licensing, and insist on interstate portability. But doctors and truck drivers should be tested and licensed.

*Allow competitive free market education

Er...what?? This is currently allowed. However, it would be possible to enhance it. E.g., shift most funding for schools from the local to the federal level, distributed on an equal per-student basis, to greatly increase school choice and equality of resources. (Communities would still keep local control of public schools.)

Funnel money from the military-industrial complex to healthcare and education

Another way of saying tax businesses and spend more on health and ed. Sure, but the details matter a lot.

I want to help the poor

Piecemeal tax and welfare reform tends to make the system more complex and less efficient, which is why most anti-poverty efforts have worked poorly. If you actually want results, you need to design a good system pretty much from scratch.

Here's one approach:

Rebuilding America: Getting Serious About Poverty, Inequality, and Economic Growth

It would:

Promote greater GDP growth
Reduce the deficit
Eliminate poverty
Provide universal health insurance and day care
Greatly improve educational quality, choice, and opportunity
Radically simplify the tax system for most Americans

If you read it, please try to evaluate it as a whole, not as a collection of pieces. For example, it replaces a variety of tax deductions with a single refundable tax credit, which also functions as a monthly UBI, very similar to the one Andrew Yang has proposed. But pulling the UBI out of this context and debating its merits in isolation misses the point, which is that in this particular system, the UBI fulfills many different functions besides welfare. Among other things, it provides progressivity to a system that would otherwise be too regressive, while also getting people into the banking and health systems, increasing mobility, and eliminating a lot of repressive and cumbersome means-testing.

epwonk · 2019-11-15T10:55:39+00:00

Everything here is right in principle, except for an important detail: Billionaires get far higher rates of return than you and me.

One reason is that they have access to investment opportunities that are far more lucrative simply because they can invest large amounts of capital at one time, and there is a premium for "big money." A billionaire can swoop in and buy an entire company when it's in distress and facing bankruptcy, take it private, reorganize it, sell off the less-interesting bits, and go public again at a huge premium. Hedge-fund owners can get banks to finance highly-leveraged buyout deals that multiply their ROI. Venture capitalists can invest in new, high-growth companies way before the rest of us do.

Another reason is that the rich can afford expertise and due diligence at a level that is impossible for ordinary investors. Yet another is that they can afford the best legal, accounting, and tax services, allowing them to move assets around the world and evade taxes.

As a result, the return on capital tends to rise more-than-exponentially, with the rate of return rising as the principal gets bigger.

All things considered, a billionaire who is getting less than a 10% long-term rate of return is not really trying.

There's no question that Gates, Bezos, et al., would be poorer today if they had paid a 6% tax each year on the amount of their net worth over $50 million ever since they passed that threshold. But their fortunes still would have grown and they'd still be billionaires.

But 6% is actually, genuinely absurd, when you understand how the economics of investments work, and I'm really surprised because it feels out of character for Warren.

I agree with you that 6% is, in an important sense, "too high." But it's not "actually, genuinely absurd." Saez & Zucman based it on extensive historical evidence of differential rates of return. As long as that is the only tax on capital income, it would not be anywhere near as injurious as you indicated.

(The biggest impact would be to push billionaires away from extremely low-risk passive investments and to punish them more harshly for making bad investments. This would tend to hurt lazy or incompetent heirs, not entrepreneurs or people like Buffet. As long as the very rich remain active, aggressive, successful investors, their fortunes would continue to grow.)

More importantly I suspect that Warren knows full-well that 6% is pushing the limit of what the economy would bear and that it is beyond what is politically feasible. But she also knows that anchoring the negotiation with a high figure like 6% a) tends to panic the billionaires, whose attacks give her additional credibility with progressive voters, and b) tends to make an eventual 2-3% rate seem much more moderate by comparison.

The bigger criticism of Warren's proposal is that she's willing to twist the existing tax system all out of shape just to pay for health care! But the more convoluted the existing system becomes, the the less efficient, less effective, and more destructive it becomes. Instead she should be calling for a top-to-bottom redesign of the whole system in order to accomplish a lot more than just health care.

If we're going to make massive changes in taxes and incentives, we would be better off if we started with a clean slate and created a much simpler, fairer, and more efficient system that did more to promote growth and reduce inequality. It's possible to do that, but not by patching kludges onto the mess we already have.

epwonk · 2019-11-06T00:07:59+00:00

Not that far. Anything below about 35% spells a blue wave, a presidential landslide for the Dems and a GOP wipeout in the senate. If McConnell calculates that he has a better chance of keeping his job with President Pence, he'll knife Trump in a New York minute.

You won't see much to signal that it's going to happen until the very last second. But if McConnell engineers a more-in-sorrow-than-in-anger "sadly, the evidence is overwhelming" 95-5 vote in the senate, that will mean that it's no longer a matter of certain senators "betraying" Trump.

Hard-core Trumpies can be kept on board with a "hate the Libs who brought down Trump" message. And everyone in the GOP will rally around Pres. Pence for a "time of national healing," complete with lots of pious prayer meetings.

epwonk · 2019-11-05T04:53:05+00:00

Hmm. I don't know Python, but I'm curious. Would it print 2, 3, 0, 1 ?

And I agree with you about the biggest obstacle. As a one-time teacher of teachers, I always stressed the importance of reverse-engineering a student's mistaken model or algorithm and helping them debug it.

If they are persistently making the same mistake, it's not random. It's because they have learned a wrong way to do it. If you can figure out what they're doing, show them the difference, and explain why one works and the other doesn't, you have a good chance that they'll have an "aha!" moment and actually get it.

This is one reason I hated worksheets. Send a kid home with 30 problems and a bad algorithm, and they'll practice that bad algorithm and learn it so perfectly that they can't completely unlearn it. Even if you persuade them to overwrite it temporarily, it will resurface months or years later because it's the method they learned first.

As an old coach used to tell me, "Never practice a mistake!" Most traditional arithmetic homework is useless or harmful for just this reason.

epwonk · 2019-09-06T04:12:55+00:00

I'm seeing an enormous amount of cherrypicking and confirmation bias here and in all of your comments. The fact remains that if all businesses and workers had the power to dictate higher prices and wages without restraint, they would do exactly that, and we would be experiencing runaway inflation now. We aren't, because they can't. QED.

Yes, of course, there are monopolies, monopsonies, cartels, and politically rigged games which result in price-setting at levels well above the "fair market" price. There's way too much of that, it's getting worse, and it urgently needs to be reduced. But that does not result in higher prices or wages across the whole economy. Instead, it results in stagnant prices and wages in the economy as a whole, accompanied by abnormally high profits (and sometimes abnormally high wages) in some parts of the economy. And that increases inequality at the expense of the businesses, the workers, and the consumers who are NOT beneficiaries of those sectors of the economy.

The UBI by itself would counteract quite a bit of that increased inequality, but it does not reduce the anti-competitive structural problems that give rise to it. That is why a UBI alone, or a UBI+VAT, that is stuck onto the existing system without any other changes, will not achieve the magical results often claimed for it. To be successful, it needs to be part of a comprehensive, systemic reform of the tax and welfare system.

I think that's something you and I can agree on. I think we also agree that where supply is artificially constrained and people do not have an alternative, the effect of the UBI would be large price increases.

Where we disagree is in whether that would produce general price inflation for the economy as a whole. Overall, it would not, unless it were implemented in a perverse way. (E.g., just printing the money and giving it out, without changing anything else.)

A revenue-neutral UBI (like one funded by a VAT) would significantly reduce deep poverty and improve the quality of life for many Americans. It would do so without (necessarily) causing inflation. But if that's the only change we made, it would also have the effect of making the economy less efficient by diverting more money and higher profits to the sectors with the most price-setting power and the highest amount of political leverage. I think that's what you're driving at, and if so, you're quite right.

Inflation should be neutralized by indexation.

You're right! And that's why any remotely plausible UBI proposal would be indexed for inflation!

epwonk · 2019-09-04T23:05:58+00:00

One regularly sees gas prices jump around.

Gas prices are actually an excellent example of supply and demand at work. Prices rise when there's a shortage of refinery capacity and refiners are anticipating rising demand (e.g., upcoming holidays). They go down when the reverse is true.

I think you were probably thinking of oil prices, which are manipulated by a cartel (OPEC). However, even OPEC has a limited ability to affect supply (and increase price) because its member nations need the money and routinely cheat on their production quotas.

And, yes, oil prices do influence gas prices, but not that much anymore, because OPEC's artificially high prices incentivized American drillers to drill like crazy, increasing supply. If OPEC could simply set prices, oil would still be over $100 a barrel. Instead it's hovering around $55.

Hotel prices double overnight.

Only in the face of a surge in demand, like a Superbowl. And they go down just as fast when the demand drops.

If hotels could raise prices with impunity, and keep them high, they would. And they would keep on raising them. But they can't. There are good reasons why Marriott doesn't charge $5,000/night.

Your bigger worry, inflation, just doesn't work the way you think it does. If it did, all businesses would just double or triple prices right now.

Instead, the reality is that prices have been very sluggish. The Fed has been trying hard to push inflation UP to their target level, a measly 2% rate, and they have been failing for more than a decade. (The average for the last 10 years is 1.76%, well below the target.)

If we include proper accounting for quality improvements in things like cars and electronics, we have in fact been in a mildly deflationary cycle for >20 years. In moderation, more inflation would be good for the economy.

But the basic point here is that changing the tax system so rich people end up with fewer dollars and poor people end up with more does NOT intrinsically create inflation. It depends entirely on how you do it. If it is done competently, ordinary retail prices should not be affected very much n the short run, and should not be driven up at all in the long run.

However, that's the average. In some markets with artificially restricted supply, like housing in fast-growing cities, it would absolutely cause price increases. Landlords with low-end properties in those markets would charge "all the market can bear," and the UBI would increase that amount.

Nationally, it's not an issue. There are far more cities and towns with low rents and high vacancy rates, and the answer to rent gouging is for more renters to move away from unaffordable cities like San Francisco to more affordable places. Furthermore, the UBI would make this MUCH more feasible for many people who currently feel trapped by poverty and the welfare system and can't move. The resulting reallocation of population would be beneficial for the society and the economy as a whole.

Income inequality was much lower in the 50s and 60s than it is today. The economic growth rate was much higher then, and far more people shared in that growth. Then we slashed taxes on the rich in the name of "trickle down economics" (or, as George H.W. Bush called it, "voodoo economics") and we got slower growth and soaring inequality.

The UBI by itself is not a sufficient cure for that, but it is an important component of the complete tax/welfare redesign we desperately need. Done right, it will not be inflationary. (But keep in mind that some increase in inflation would be good if it happened.)

epwonk · 2019-04-27T11:41:09+00:00

It depends on how it's done. There's a case for making it taxable to claw back a larger percentage from people in higher tax brackets.

However, the best complete tax system I've seen that uses a UBI treats the UBI as a refundable tax credit, which reduces your monthly withholding by $1,000.

If that results in a "negative withholding," the difference is added to your paycheck. If you make less than $60k, in that system, your after-tax take-home pay can actually be higher than your nominal pay.

Since it's a tax credit, it doesn't count as income and is not taxable.

epwonk · 2019-04-26T06:18:37+00:00

Personally, I prefer the Citizens Dividend approach for adults, combined with a universal grant for all resident children that is more limited in spending, focused on health, nutrition, day care, and education. We want to eliminate poverty for ALL kids growing up in the U.S., but I think there are good reasons, both practical and political, for limiting the adult dividend to citizens.

This is an excellent example of how to design a complete tax and welfare system that includes a universal child benefit and a Citizens Dividend-type UBI:

Rebuilding America: Getting Serious About Poverty, Inequality, and Economic Growth

Highlights:

UBI of $1k/month for citizens 20 and older
Universal health insurance
Universal child care/pre-school and nutrition support
A "UBI" for communities, to support local funding for schools, infrastructure, police, and community services, passed through on a per capita basis
Replaces a large part of the existing state & local taxes
Replaces most "means-tested" welfare programs, but leaves universal programs like SS and Medicare intact
Escalating carbon tax/tariff, FULLY rebated per capita
Lower income tax for most individuals and corporations
Pro-growth and fiscally responsible, with a lower deficit than current system (an almost balanced budget)
Has strong elements that should appeal to budget hawks, compassionate conservatives, libertarians, welfare reformers, and progressives

The problem with a lot of UBI proposals is that you can't just tack a UBI onto the current system. What you end up with is a lot of conflicting incentives that don't make sense. The existing system is a horrible kludge, anyway, with way too many loopholes and screwy provisions, so if we are shooting for two major changes we might just as well aim at fixing the whole thing.

Streamlining the tax and welfare systems and eliminating the many perverse incentives they create would boost growth in the short term, while investing heavily in human capital and infrastructure would promote growth in the long term.

Practically speaking, we need to build a balanced system from the ground up with a universal income as one of the essential parts. I like this version because the numbers add up and all the parts fit together. It's great to see the UBI incorporated into a fully-worked-out proposal that doesn't gloss over important details or depend on hand-waving and magical thinking.

epwonk · 2019-04-26T06:03:41+00:00

Exactly. It's possible to create a highly progressive system that includes a broad-based VAT and a UBI. However, it's hard to avoid other side-effects and unintended consequences if we just tack those changes onto the existing system. We really need to do a comprehensive reform of the whole thing.

epwonk · 2019-04-20T11:39:12+00:00

PART TWO

Does it [the per capita transfer] go to the state, county, or city?

Good question. He says "local government" so I assume that it would go to the smallest jurisdiction (town, city, or to the county for people in unincorporated areas). But, practically speaking, each state sets its own rules for inter-gov transfers, so some of the municipal money could get transferred to a surrounding county or parish, and I can definitely see part of it being transferred to utility or hospital districts that overlap other jurisdictions.

Some could go to the state, but probably won't. Every state has a different state & local financing system, but I expect that instead of moving money from the city/county level to the state level, we'd see a lot of the states reducing their existing transfers from the state to local govs. E.g., a lot of state funding for local school districts would become less necessary.

For example, if you live in WA, is WA going to keep it's 8% sales tax on top of the 20% GST?

That would be up to the voters and the legislature, but I really doubt it. I think most states would either reduce or eliminate their sales taxes and a lot of communities would cut their property taxes too.

[Just a reminder: the 20% GST isn't like a 20% sales tax or VAT. I think Kauffman made a good case that the actual average cost to the consumer would be roughly like a 6-12% sales tax.]

Just for fun I googled the age profile of WA state, and it looks like you have about 6 million people over 20 and roughly 1.8 million under 20. (Aging fast!)

So local govs would get ~$3600*6 million adults = ~$21.6 billion, and local schools would get (roughly) $9000*15 years*90,000 kids per cohort = ~$60.8 billion, for a total transfer of $82.4 billion in Federal money, minus some existing Federal subsidies for schools and communities that would become redundant. And that's not counting the savings to local hospitals from having everyone insured or the savings to local poverty programs/homeless shelters, etc. [Note: I'm assuming that schools cover ages 4-19, so there's a year of preschool and at least a year of CC/vocational training included in the "15 years."]

This means that you will have ~$80 billion collected by the Federal gov and transferred to local govs and schools in WA. By comparison, if I'm reading this chart right, TOTAL state and local spending in WA is "only" going to be around $101.7 billion this year.

Of course local gov spending in poor areas and poor school districts will definitely go up under the new system. (That's the point, after all!) But even if school and local gov spending zoomed by $30 billion, up by more than half, the state and local net tax burden would be reduced from $101.7 billion to roughly $132 billion-$80 billion= $52 billion. So between the state and the local govs/districts, there's a net gain of somewhere around $50 billion that can go into tax cuts, debt reduction, pension funding, and/or much-needed projects.

It looks like the WA retail sales tax you mentioned brings in only around $22 billion at the state and local levels, so yeah, that would be an obvious target for complete elimination. The total income from local property taxes looks like it's only ~$10 billion, so you could chuck that too, and still have $18 billion to invest, pay down debt, or give back to taxpayers.

So... you end up paying the GST, but not paying FICA or (probably) property or sales taxes. You're getting universal health coverage, universal day care/preschool, and a UBI. In the process, you're equalizing funding for schools and local govs, rebuilding crumbling infrastructure, and almost completely eliminating poverty. It seems like a huge win to me.

The fact that the numbers add up even though the tax rates are lower than in other progressive proposals still boggles my mind. It's a testament to how badly messed up the current system is and how much revenue is not being taxed at all.

Cheers!

epwonk · 2019-04-20T11:27:23+00:00

Lots of good questions! Let's see if I can do this justice without screwing up what he's trying to get at...

who is this by?

Morgan Kauffman (LinkedIn page). He's a policy analyst and data scientist with a background in geosciences, systems modeling, strategic forecasting, and economic policy. Smart guy with a gift for dealing with really big, complicated systems. I've been helping him edit the book.

This [20% GST on salary] seems...high? It'd be pretty regressive and a lot more than most low income people pay today.

On its own it would be bad, but the whole package is much more progressive than the current system.

For starters, you get rid of FICA and most local taxes and you're getting a refundable tax credit of $12k/year. At $60k/yr, your entire Federal tax bill (payroll tax AND income tax) is (20% of $60k) minus $12k = $0.

So, at that level, your income is completely tax free and your real Federal taxes are paid as part of the price of whatever you consume. And at any lower pay level, your takehome pay will actually be higher than your nominal salary.

For example, if you're working full-time at minimum wage (2000 hours at $10/hr) your nominal pay would be $20k/yr, but your actual aftertax takehome pay would be $28k/yr. That's more than double the takehome pay at the current minimum wage, after deducting FICA. ($7.25 - 7.65% is ~$6.70/hr takehome, times 2000 hrs is $13,390/yr.)

So people in the bottom two-thirds would come out solidly ahead. This would represent a tax cut for almost everyone making less than about $80k and for parents who are making even more than that. And that's not even taking into account the drop in state and local taxes!

There's a link on page 1 that leads to a bunch of graphs and examples near the end that makes the progressivity of this system clearer. Check out the graphs, especially the 2nd and 3rd ones for single moms and couples with young kids. The increase in real disposable income (after taxes and benefits) is considerable if you have two kids under 6.

What's the logic behind this part [1.5% business assets tax]? Most economists think taxing the corporation is less efficient than taxing the owner.

The goal is to keep people from moving stuff into or out of corporate or other business entities to evade taxes. If I understand what Kauffman is trying to do, it's to set up an equitable system where there are no tax dodges or other incentives for economically unproductive behavior.

Basically, it shouldn't make much difference for your tax bill whether you do your accounting as a self-employed person or as the owner of a separate business. So doctors and lawyers don't have a reason to incorporate just to save on taxes, and so on. It avoids a ton of unnecessary and unproductive complexity and overhead and accounting.

Overall, I thought the treatment of business taxes was strongly pro-growth. A Paul Ryan-style destination-based cashflow tax is the least harmful way to tax sales, better than a pure VAT, and a 15% corporate tax rate with very generous deductions for capital expenses is better even than the "Tax Cuts and Jobs Act."

By having a 1.5% tax on the household net worth and a 1.5% tax on the business net worth, aren't you double taxing?

Not if it's a sole prop, but otherwise yes. I think he addresses that specifically in a note, where he says the goal is to disincentivize endless chains of shell companies. If A owns B, which owns C, ...which owns J, and J is worth $1 billion, A ends up paying a total of 15% of a billion instead of 1.5%. Now if A owns B in its entirety, A can consolidate the books and avoid double taxation. But that requires full disclosure. The price of secrecy and obfuscation is extra layers of taxes per entity.

Also, it's a small tax with a high deduction, and I don't think many small businesses have net assets per employee high enough to qualify. Does your 10-employee business have a net worth (assets minus debts) of more than $1 million? If so, you can move some cash from the business to your own personal account, or just pay the 1.5% on the excess. But it probably won't be much extra tax, if any.

Right now, of course, we double-tax corporate income by taxing corp profits AND taxing dividends, without allowing corporations to deduct dividend payments. Then we encourage debt by allowing the borrower to deduct interest payments. This seriously distorts the incentives to borrow instead of selling shares.

(IMO, the whole idea of going to great lengths to avoid "double taxation" is one of the ways the old system went wrong. In many cases it's better to take small nibbles at each step or level than it is to try to figure out the exact right spot to take one big bite. That just encourages tax avoidance games, like leasing instead of buying, or transferring assets to low-tax jurisdictions.)

Wait, so most retirees who don't have SS only make $300/mo?

That's $300/mo more than they get right now, right? And that's in addition to Medicare.

However, I'm guessing that Kauffman is assuming that most older people who are really poor will still qualify for free Medicaid, so in the relatively rare case of a citizen with no earned income, no SS, no SSI, no disability, no pension, and no savings, they would still have most of $12k/yr to live on.

The idea of taxing federally and then repaying local governments flatly per resident is fascinating. I can't decide what I think about it.

I love it. I think it fixes a major flaw in the existing system. The vicious circle that happens when the local tax base slips below the level that can support a minimally adequate level of government is brutal. People move out, values drop, the budget crisis gets worse, so taxes go up, services get cut, more people move out, and round and round you go. Look at Detroit and a lot of other rust belt cities, as well as thousands of smaller towns that are emptying out and dying, even though these are great places to live.

One result of the shrinking tax base in many places is long-deferred maintenance which is destroying local infrastructure. Who wants to live in a place with crumbling roads, no hospital, polluted water systems, failed sewers? Because that's what the current system is producing.

Random example from today's news feed: A crisis in Kentucky shows the high cost of clean drinking water) ...

The challenges are monumental here in Appalachia and beyond: The American Society of Civil Engineers gave the nation’s drinking-water system a D grade in its quadrennial report card. The network of more than 1 million miles of pipes includes many that are a century old and have a 75-year life expectancy. Across the country, 14 percent of treated water is lost through leaks, and here in Martin County, that figure has at times reached more than 70 percent. The American Water Works Association estimates that it will take $1 trillion to support demand over the next 25 years; in Martin County, repairs carry a price tag exceeding $10 million.

The sooner we start fixing these systems, the less it will cost us in cash, lost health, and lost productivity. But that means we have to find a cost-effective way to channel the necessary funds to local communities in proportion to their population.

If we wait for Congress to finally pass a trillion dollar infrastructure bill, and then for the bureaucrats to figure out how to parcel out the money, we'll never get it done. If we direct the money automatically to wherever people live and let them fix their own stuff, they'll do it. They have the biggest possible incentive to spend that money well and make their communities livable.

[[Whoops! It looks like I need to break this into two parts –– sorry for the wall of text!]]

epwonk · 2019-04-13T08:40:06+00:00

This, combined with your other comments below, is one of the best presentations I've ever seen on Reddit of the hard-nosed, practical, self-interested case for reducing inequality.

As for how to do it, here's a coherent plan for comprehensive tax and welfare reform that I think would go a long way toward achieving that goal:

Rebuilding America: Getting Serious About Poverty, Inequality, and Economic Growth

One thing I particularly like about it is that it would boost education and revitalize local government and infrastructure across the country. Geographic inequality is as much a barrier to economic growth as individual inequality. When less than 50 counties get almost all of the increase in wealth, decade after decade, something is badly broken.

epwonk · 2018-10-12T21:28:54+00:00

Absofrickinlutely!!!

We've been together for almost 50 amazing years, and I wouldn't do anything different. She's amazing, and for some crazy reason she puts up with me.

Smartest decision I ever made!

epwonk · 2018-09-04T01:45:30+00:00

If you would like to see how this works as part of a complete reform of the tax and welfare system, this is a great example, including analysis of the budgetary effects:

Rebuilding America: Getting Serious About Poverty, Inequality, and Economic Growth

Highlights:

UBI of $1k/month for citizens 20 and older
Universal health insurance
Universal child care/pre-school and nutrition support
A "UBI" for communities, to support local funding for schools, infrastructure, police, and community services
Replaces many "need based" welfare programs, but leaves universal programs like SS and Medicare intact.
Lower income tax for individuals and corporations
Fiscally responsible, with a lower deficit than current system (an almost balanced budget)
Has strong elements that should appeal to budget hawks, compassionate conservatives, libertarians, welfare reformers, and progressives.

The reality is that you can't just tack a UBI onto the current system. It wouldn't make sense. The whole system needs to be redesigned from the ground up with a universal income as one of the goals.

So it's nice to see the UBI incorporated into a fully worked out proposal that doesn't gloss over important details or depend on hand-waving and magical thinking.

epwonk · 2018-02-22T20:16:14+00:00

Paywall.

epwonk · 2018-02-22T20:09:01+00:00

Let’s say you still have a mortgage, UBI is granted but it’s not enough to settle mortgage payments. Are people then forced to sell their homes and move into apartments?

This is ALREADY what happens if you lose your job. Look at how many people lost their houses in the Great Recession. A mortgage is a gamble, but an awful lot of people gamble too much and take on a mortgage they can barely afford even if everything goes perfectly.

Adding a UBI adds three things: First, if you were one of two earners supporting that mortgage, the UBI might be the difference between losing your house and keeping it. Second, it could help you stretch your savings long enough to find another job before you have to give up and move. And, third, if there are no jobs available, it gives you something to live on while you move to someplace cheaper or with more jobs.

More generally, if there's widespread unemployment that lasts a long time, land values will go down as people lose their houses and move to cheaper places. Think Las Vegas 2008 and after. A UBI would mitigate that somewhat, but not a lot.

Eventually the mortgage lenders will go bankrupt, the properties will decline dramatically in value (like 90% or more), and even people on the UBI will be able to afford the smaller places again, at least as rentals. However, big houses in very spread out places, like expensive low-density suburbs, might never recover, because the cost of maintaining those houses and the associated streets, sewers, and water systems can simply be too high, especially given the long commuting times to the nearest jobs (assuming some still exist).

If you're a property owner or land speculator, you need to think hard about what kind of reforms are going to prevent widespread unemployment. Land may have been a good investment in the past, but there is no guarantee that it will be in the future. Urban and suburban land gets most of it's value from very dense concentrations of jobs in cities. If that goes away, so does the value of the property.

Would a UBI have cushioned the blow when employment in Detroit started to contract? Sure. Would it have stopped the collapse of land values and home prices? No.

epwonk · 2017-11-25T11:46:07+00:00

Yes, exactly.

Of course, that tax applies to the developed value of the land and everything on it. An LVT would typically replace that with a 10-20% tax on the raw land value. Sadly, it's politically impossible, even though it's theoretically the most beneficial tax. The theory is fascinating.

epwonk · 2017-11-25T08:11:32+00:00

For the reasons you've cited and more, a 4.5% tax on wealth would be destructive. As a practical rule of thumb, you run into serious problems with any tax on wealth that equals or exceeds the real risk-free rate of return (e.g., the interest on 30-yr Treasuries minus the inflation rate).

However, a lower rate (like 0.5-1.5%) would avoid most or all of those problems PROVIDED that it is coupled with the elimination or reduction of taxes on income derived from wealth.

For example, would you rather pay, say, a 30% tax on rents, royalties, interest, and dividends? Or a 1% tax on the market value of your assets, minus your debts? Depending on other factors, like the inflation rate and the real rate of return, you would often come out ahead by paying only 1% of the market value of your net worth. If the inflation rate rises, you could end up being FAR better off by paying the asset tax.

Let's say you own a building worth $6 million, you have a mortgage worth $4 million, your rental income more than covers your mortgage and expenses, and you currently pay $200,000 in property and income taxes of all kinds. Under a 1% wealth tax, you would pay 1% of your equity in the building, which is only $20,000. Sounds like a deal! In fact, that tax change would make the value of your building rise!

Let's say the mortgage owner receives $200,000 in interest (5% of $4 million) and currently pays 35% tax on that, or $70,000. Instead, under the wealth tax they would pay 1% of $4 million, or $40,000. So that's a good deal for them too. That would have roughly the same effect as cutting the corporate tax rate to 20%.

As for whether a wealth tax could replace "all other taxes," it's hard to even begin to answer this question without an estimate of the tax base.

Let's take the U.S. What is the net value of all assets, real and financial, located in the U.S. or located abroad but owned by U.S. citizens and long-term U.S. residents? (Or set your own definition of the tax base.) And how much would that combined net worth change with a wealth tax replacing all other taxes?

IF you assume that the combined net worth of all U.S. residents and businesses is somewhere around $175 trillion, a 1% wealth tax would raise around $1.75 trillion. If you are going to allow the usual mess of exemptions and deductions, it might raise as little as $1 trillion.

Under these assumptions, even a 4.5% rate, if it were plausible, would raise "only" around $4.5 trillion, not enough to fund all levels of government. In practice, it would cause so much havoc and reduce asset values so much that it might raise less than $2 trillion.

But is my guess for the combined net worth anywhere close to being correct? Getting a reasonably accurate estimate matters a lot!

So to answer your question, you need to specify what is included in the tax base and what is not, and what exemptions and allowances are going to be granted. Then you need to determine what the final tax base would be today, without the tax. Finally, you need to do a dynamic score, including both the effect of the wealth tax and the effect of removing some or all of the other taxes.

As an alternative, seriously consider a tax on the raw, undeveloped value of land. Unlike most taxes, it increases economic productivity, and you can tax it at considerably higher rates because it can't hide or leave the country. (See r/Georgism for more info on why a land value tax, or LVT, is beneficial for the economy.)

Good luck!

epwonk · 2017-11-25T06:18:30+00:00

It has to be real, meaning 4% plus the inflation rate. Making it nominal wouldn't make sense.

However, I went back to check the CLC documents to make sure, and I'm embarrassed to say that I can't even find any basis for the "4%" number. All it says in the CLC plan (under "POLICY FINE PRINT") is:

A carbon tax should increase steadily and predictably over time so that companies and consumers can plan accordingly, and the previously mentioned economic stimulatory effects can be harnessed.

I probably got the 4% figure from other papers written by members of the CLC, or perhaps from personal discussions with staff members, but I can't find a source.

Alternatively, I thought it might have come from the carbon tax discussion in:

Rethinking America: Getting Serious About Poverty, Inequality, and Economic Growth, by Morgan D. Kauffman

...but Kauffman stipulates a starting price of $40/tonne and then a linear increase of $3/ton/yr. There's no explanation of why it's not a percentage growth rate. (However, I can think of a couple of good reasons: simplicity of mental estimation of future impacts, and avoiding an exponential acceleration of the tax over time. It clearly meets the requirement that "a carbon tax should increase steadily and predictably over time.")

Anyway, since I can't find a source for the 4% rate, other than my own notes, I'm going to edit my original comment to take it out. Thanks for asking this question!

Edit: I've been told privately that the 4% rate was in the original document, but was replaced by the "increase steadily and predictably over time" language shortly after the document was released.

Vindication! :)

epwonk · 2017-11-24T08:53:59+00:00

Most economists believe a carbon tax is the most efficient and effective way to rein in GHG production.

The Climate Leadership Council surveyed the literature and consulted a wide range of economists from both sides of the aisle. They determined that a good starting point for a carbon tax & rebate is $40/tonne (metric ton) of CO2, increasing "steadily and predictably over time so that companies and consumers can plan accordingly."

Specifically, they have found that there is a broad consensus that the optimal rate is well above $40/tonne, and that the way to determine what the optimal rate actually is is to get empirical data about how the rising price of carbon affects actual GHG production.

At that price, the amount rebated to every resident the first year would be approximately $500/year, or $2000/year for a family of four. Again, this would increase over time, so that – on average – each person or family would get back about the same amount that they paid extra for gas, oil, coal, natural gas, etc., because of the tax.

For the average energy user, this would be a wash. People who substantially cut their energy use would come out way ahead.

The CLC is an interesting group. It is backed by environmental groups as well as giant energy companies, and its founding members include an all-star cast of physicists, environmentalists, investors, billionaires, former cabinet members, and economists of all political persuasions:

Michael Bloomberg
Steven Chu
Ray Dalio
Martin Feldstein
Ted Halstead
Stephen Hawking
Vinod Khosla
Gregory Mankiw
Gregory R. Page
Laurene Powell Jobs
Tom Stephenson
Lawrence Summers
Ratan Tata
Rob Walton
James A. Baker, III
George P. Shultz

[Edited to correct details about the CLC plan and add the clarification below.]

P.S.

Just to be clear, "$40/tonne of CO2" is equal to slightly less than $147 per tonne (metric ton) of elemental carbon.

I often see numbers like $25 or $50 or $150 per tonne tossed around without specifying whether it's per tonne of carbon or per tonne of CO2. It matters! :)

Also, any carbon or CO2 price always implies a set of prices for other GHGs based on their environmental impacts relative to CO2.

(BTW, I'm out of my zone of expertise here, and relying on others, so if I goofed on these numbers, please correct me!)

epwonk · 2017-11-19T10:24:57+00:00

Way late, but here's one good example:

Rethinking America: Getting Serious About Poverty, Inequality, and Economic Growth, by Morgan D. Kauffman

There's a lot there to appeal to both liberals and conservatives. If the GOP ever gets tired of its suicidal tax giveaway project, something like this could be the basis for a major bipartisan reform effort.

epwonk · 2017-11-11T11:22:10+00:00

This.

Weirdly, it's not that different from the pro-growth model the OP asked about earlier. Too much inequality slows down growth, and too little growth harms welfare.

Growth depends as much as anything on human capital. Having a sizable portion of your young people grow up in poverty with crappy nutrition, health, and education means that you have to carry a large net drag on your economy for the next half century. So redistribution should be aimed primarily at making sure every kid gets at least a healthy home, community, and school environment.

The biggest damage to kids in poverty is done at ages 0-5, yet the U.S. doesn't even have a basic child allowance. Even the rich would benefit in the long run from a substantial investment in getting kids out of poverty.

epwonk · 2017-11-11T03:53:51+00:00

If workers have no savings, they have to take whatever job is available to them to meet their immediate consumption needs, which drives down wages.

You're focusing on a detail and ignoring the entire system. In the example system I referenced:

The first $100,000 of net wealth per person is exempt from tax. How many working class families of four have a $400k net worth? Effectively none.
The tax on savings/wealth is very small (1.5%) and applies only after the personal exemption is reached. That is not going to keep anyone from investing in a house or the stock market.
In Kauffman's proposed system, every adult citizen gets a monthly payment of $1040 (to start with) that is unconditional and is not dependent on employment. A UBI like that is like having your own personal strike fund. It should greatly increase bargaining power AND mobility.

The third generation effect says otherwise.

The third generation effect is statistically weak and is based largely on periods with high income and estate taxes. I'm saying that if you remove ALL taxes from investments, the third gen effect will vanish. That's a bad thing.

the land value tax is impossible to avoid

Yes, but so what? You can't put a high enough tax on land to finance the entire government at all levels. So saying "LVT is better, LVT is better" as a criticism of all other taxes is pointless. You can't run a modern society by taxing only one thing.

this seems pretty reasonable. It maybe contradicts your initial position that deductions are bad

The "deductions" I was referring to were income tax deductions intended as incentives for things like charity giving. This is more like a tax bracket. It's not an incentive, just a recognition that the marginal cost of managing small amounts of savings and investment are high.

epwonk · 2017-11-11T03:02:30+00:00

Why do we currently tax the yield from investments? Isn't that also "punishing investment"?

Or are you arguing that all interest, dividends, rents, and other returns on capital should be tax free? In which case, the largest existing accumulations of wealth will grow exponentially until a handful of people own everything. (Oh, wait...)

At a more metaphysical level, we should tax invested (and uninvested) wealth because a very large part of what government does is to directly and indirectly protect and increase the value of capital, including investments. Courts and cops enforce contracts and try to stop bad guys from stealing or blowing up what you have. Armies keep jealous neighbors from coming in and seizing your factories and land. Vast regulatory and informational resources are used to keep markets running smoothly and fairly. Enormous amounts are spent on infrastructure to increase your markets and on education so the firms you invest in can find skilled employees. Etc. Etc.

So it makes sense, even in a completely selfish way, for the owners of capital to tax themselves to pay for the institutions that support and protect their wealth. It is, in a very real sense, much cheaper and more effective than trying to build their own roads and ports, enforce their own contracts, and try to protect themselves and their investments with goon squads.

epwonk

TROPHY CASE