This is another instalment in the series on the MMT view of taxes. I’m back from China, participating in the annual Hyman P. Minsky Summer Seminar at the Levy Economics Institute. Yesterday my colleague, Mat Forstater, gave a talk on the job guarantee and “green jobs”. Along the way he made two particularly insightful comments on MMT and taxes that I’ll use to introduce this instalment.
First, he discussed the MMT view of “modern money”—that is to say, the money that has existed “for the past 4000 years, at least, as Keynes put it in his Treatise on Money. The money of account is chosen by the sovereign and used to denominate debts, prices, and other nominal values. It is the Dollar in the US.
It is like the inch, the pound, the meter, the kilogram, the acre or the hectare—a unit of measure.
Mat put it this way: the sovereign can no more run out of “money” than it can run out of “acres” or “inches” or “pounds”. We can run out of land, but we cannot run out of acres. We can run out of trees but we cannot run out of the linear feet we use to measure them.
You cannot run out of a unit of measure!
The “dollar” is the measuring unit in which we keep our monetary records. We cannot run out.
Second, and more relevantly for our story today, Mat said that a guiding principle for choosing what to tax should be “tax bads, not goods”.
We’ve previously established that “taxes drive money”. We’ve also established that from the perspective of the sovereign that creates the money, the purpose of the monetary system is to move resources to the public sector.
Clearly we do not want to move all resources to the public sector; we want to leave some for the “private purpose”. Further, we want some “efficiency” (I’ll leave the definition of that vague for now) in this process, in the sense that while we want to move some resources to the public sector we do not want to discourage useful private sector activity.
It would be even better if this process of taxing to move resources to the public purpose actually encouraged more activity that was beneficial for pursuit of both public and private purposes.
So we need to think about what kind of tax can “drive” a currency, without diminishing private initiative.
For example: what if we taxed paid work at a rate of 15% in an effort to “drive the currency”?
Let us begin with a nonmonetized economy (say, Tribal or Feudal). The newly formed sovereign state wants to move resources to itself by imposing a wage tax of 15%, spending its dollar-denominated currency to hire labor.
From inception of our monetary system, we could not “drive” the currency because no one would work for pay. The Tribal or Feudal society members would go about their activities raising their crops and hunting their deer, with the shares of output distributed as prescribed by custom.
No one would need to work for money wages, so they could refuse the offer of currency for work. And they could avoid the tax by refusing the paid work. The optimal strategy is to avoid monetization.
The new state would offer its currency, and find no takers. It would have to resort to obvious force—send in the troops—to get resources for the public purpose.
A tax on monetary income will not “drive” a currency unless the economy is already monetized.
This is precisely what the European colonial powers found when they tried to monetize Africa.
You need a reasonably broad-based tax that is hard to avoid. It is easy to avoid a tax on money income if people can live without money income.
So what the colonizers did was to impose either a head or hut tax. Everyone has a head and a hut. From inception, that kind of tax works well to drive a currency.
(Critics please note: I am in no way advocating colonization of Africa or anywhere else. This is an historic example used to make a point. Oh, I know the trolls are going to accuse me anyway.)
Now, once you’ve monetized an economy such that a large portion of the members must work for money incomes in order to buy the necessities of life that are largely available only for monetary purchase, then you can move to other kinds of taxes.
It is very common to use wage taxes, sales taxes, profits taxes, income taxes, and wealth taxes in highly monetized economies. These will “work” once you’ve monetized the economy, although they would not “work” in an economy that was not yet monetized.
Still, are they the best way to drive the currency?
Supply Siders like George Gilder and Art Laffer had a point during the era of Reaganomics when they argued that these sorts of taxes introduce a “wedge” that discourages work effort (or sales effort). If we tax wage income at a 15% rate (think FICA tax in the US), then “on the margin” we’ve made “wage slavery” less remunerating than leisure.
(Note that the wage tax is particularly pernicious because only human labor gets taxed, while the robots get off scott-free.)
I think the Reaganites grossly overstated the effect, but beyond some point it does seem reasonable to argue that a tax on wages and other nominal income will reduce the “work effort”. In my own case, I have on occasion turned down extra paid work because the 50% or higher marginal tax rate (including all federal, state, social security, and city taxes) made leisure much more appealing.
“Work effort” from the social perspective is not normally a “bad”. Through work we can serve both the public interest and the private interest.
(Yes, people can and sometimes do work too much. But this is a problem that can be better treated in other ways. For example, requiring employers to pay time-and-a-half or double-time wages is a good way to discourage excessive—involuntary–overtime work.)
Apparently, the favorite tax among progressives is the corporate income tax. I read virtually every day another call to raise the corporate tax rate.
Given all the attention it gets, this topic deserves a separate treatment, so I’ll save that for another instalment. Meantime think about this: are corporate profits an “evil” that we want to banish? This is not obvious to me.
So. Tax bads, not goods.
We’ve long taxed various sins. While some confuse the purpose of sin taxes, it should be clear that the purpose of taxing bads is not to “raise revenue” but to “reduce sin”. We want to reduce the sin of smoking. Of polluting. Of high-speed trading.
I’m always surprised when my progressive friends see the “Tobin Tax” (financial transactions tax) as a potentially great source of tax revenue to “pay for” all the goodies they’d like government to provide.
No, the purpose of a Tobin Tax is to reduce turnover and it would have achieved complete success in eliminating the sin of high speed turnover if it raised no revenue at all. Ditto the cigarette tax. Ditto the carbon tax.
Admittedly, perfection is very hard to achieve—we’ve still got smokers and we’ll still have carbon polluters for a very long time.
Can we think of a tax on bads that can also “drive” a currency?
Clearly if a cigarette tax was nearly successful, reducing smoking to just a handful of addicted abusers, it would not be a very good “driver” of the currency. Only the addicts would need the currency to pay the tax, and while a few of us nonsmokers would still want to get the currency (knowing we can induce the addicts to work for us to get their means of tax settlement), most people would have no need for the currency.
But what about the “hut tax”? Almost all of us need our “hut” to live in. It is an exceedingly broad-based tax. It would drive the currency.
Where’s the “sin” in hut-living? The environmental “foot print”—the land that is cleared, the construction materials, the furnishings, and—most relevantly—the energy used to heat and cool our hut.
For that reason, a “square-foot-of-living-space” tax on huts would base the “sin tax” on a pretty good proxy for the “sin” of hut-living.
Note we’ve already got property taxes, but these are generally based on nominal value of the property. That might be a proxy for environmental “sins”, but not necessarily a good proxy. A tiny flat in Manhattan will have a nominal property value greater than a 10,000 square foot spread in the wilds of Montana.
Of course, the nominal property value tax also hits a proxy for “ability to pay”—it is a somewhat progressive tax because higher income people live in more valuable property. Thus, the property tax also assesses the sin of excessive riches.
However, the “square-foot-of-living-space” tax on huts will also tax the sinfulness of high wealth and income, since richer people tend to have bigger spreads. It is perhaps as good as the nominal property tax in taxing the sin of wealth. Worth considering, anyway.
I have long advocated a more progressive hut tax: a “cubic-foot-of-living-space” tax. It will also tax the sinfulness of environmental impact (since there is a bigger volume to heat and cool). And from casual observation, what I’ve noticed is that rich folks like really high ceilings—30 foot high in the case of entry ways.
The cubic foot tax would be highly progressive—that 10,000 square foot spread becomes 150,000 cubic feet if it has high ceilings. There’d be a strong disincentive to building the monstrosities.
We can tinker with the tax, encouraging more outdoor living if that seems to be in the public interest—more open porches equipped with rocking chairs. Or giving a break for enclosed space that is not air-conditioned.
To reward energy efficiency, there should be adjustments for going solar, wind-driven, and geothermal.
We probably also need to think about different tax rates for different parts of the country. If we want people to live in—say—Chicago, we might want to provide a lower tax rate there than in San Diego or other places with moderate climates. It depends on how environmental we want to go—I’m not sure we should have humans living in places where humans probably should not be living, but that is a matter for public discussion. We can have a higher rate in Chicago to encourage smaller spaces that need to be heated in winter and cooled in summer–but I suppose it’s already hard enough to get people to live in the cold/hot places as it is.
Note that the sin tax on huts will reduce the sin of living in high cubic foot dwellings, but it does not suffer from the eventual elimination of tax receipts that a cigarette or financial turn-over tax will face.
We can live in smaller dwellings but as long as humans have more than a virtual existence, we’ve got to live somewhere.
It is, thus, a tax that will continue to “drive” the currency. I’m not saying that we should move to a “single tax”, but Henry George was sort of headed in the right direction. Once we understand what taxes are “for”, we can start to think about what kinds of taxes make sense.
More next time.
What an interesting idea. The cubic foot tax sounds like a great idea. I can’t wait to hear other ideas people have about taxes– or even other economic tools– that would encourage constructive behaviors and discourage corrupt/criminal behaviors, on the parts of both corporations and individuals.
Regarding corporate taxes, I see a large benefit to society of having an effective corporate tax rate that is at least as high as the individual tax rate. The benefit would be that that businesses would then be motivated to be in favor of spending the national and state budget wisely, rather than simply pretending to be in favor of doing so.
Right now, for example, many corporations pay very low effective tax rates– not paying their share of the taxes, I would say. Because they can shield their money from the tax man, they have no incentive to care whether e.g. the U.S. gets into more and more unnecessary wars or spends lots of public money on incompetently run private prisons or charter schools. If the government does this, it will be the middle class taxpayers who will suffer the most– not corporations, and not even the wealthy CEOs of corporations, who can also find ways to avoid taxes.
Looking at it from a purely financial point of view for the corporation owners, the incentive right now is to be in favor of spending huge amounts of money on subsidies to Big Oil, Big Agribusiness, and other crony capitalist corporations. The owner of any kind of corporation may figure “Well, I’ll scratch their corporations’ back and then maybe they’ll scratch mine.”
At the same time, the current incentive is for corporations to hold a seemingly contradictory point of view– against government spending– where the social safety net is concerned i.e. Social Security, Medicare, and Unemployment Insurance.
These two positions about government spending are really not contradictory to one another. The employer can not weasel out of paying the employer’s contribution to these sorts of social safety net programs. Because of that fact, the 2 positions on government spending are actually completely consistent. That position can be stated as: #1 I, the corporations owner, want the state/national government to spend unlimited amounts of money for programs that benefit corporations and that my corporation will not have to pay taxes to support. And #2 I want the government to spend no money at all on programs for which my corporation will have to pay taxes or other fees.
Numerous corporations now spend multi-millions on promoting these 2 budget practices through political campaign donations. And since both of these practices are highly destructive to our country as a whole, a tax policy that could change this could be very constructive. It could save money and resources, and could help keep us out of wars that may harm us far more than they help us.
I don’t think corporations should bear the burden of health care or pension plans. I think these can be much better provided by the sovereign. Look at some of the private pension plan fiascos and the various attempts of employers to avoid health benefits. Also this could help make them more competitive internationally and result in less offshoring of jobs. It would also reduce the need for pursuing tax arbitration schemes which are difficult to regulate internationally.
Two big ways to help curb the FIRE sector would be single payer to get health insurance companies out of medical care and public K-16 education to reduce the student debt problem.
Corporations don’t pay taxes, they collect them. The corporate tax burden falls on employees, suppliers, and shareholders.
Multinationals are loathe to repatriate money earned oversees on which taxes have already been paid to the foreign government because of the 35% loss due to US taxes. That particular levy would fall entirely on shareholders, to which the corporation owes a fiduciary duty. Raising the rate would only increase their reluctance.
By your rationale, no corporations should ever be taxed.
I can’t imagine multinationals are going to repatriate money earned overseas, no matter how low the tax rate is, unless it’s zero. Corporations should be taxed. If they pass the costs on to customers or shareholders or whomever,then they do. If Wal-Mart refuses to pay their employees a living wage, then they sure ought to pay taxes to help pay for the public assistance programs that they instruct employees to apply for, in their new employee paperwork.
When we have corporations spending many millions of dollars on politicians who will hand out corporate welfare and get the U.S. into horrific and expensive wars that increase terrorism and hurt our international reputation, this is a disaster. Corporations need to have a stake in the game. If they want the government to give handouts to the military industrial complex and other crony capitalist companies, then let them pay taxes to fund that, just like middle class taxpayers do. Otherwise the middle class taxpayers get all the pain and the corporations get all the gain.
One of the main things that MMT is trying to point out is that taxes don’t really pay for anything but can be productively used to try and change behavior. They, especially financial corporations, have certainly benefited from the public purse for bailouts when they should have had senior management replaced and their corporations restructured. Taxes should help encourage productive activity rather than destructive debt based corporate take-overs and stock dividend compensation. They should inhibit the FIRE sector and put the battle back between labor and capital. The tax burden should be lessened on the bottom 80% to help increase demand.
“By your rationale, no corporations should ever be taxed.”
It’s more like “no corporation has ever been taxed”. It’s not likely that if corporate income taxes were suddenly eliminated there would be no rush to capture additional market share by lowering prices, while preserving after-tax margins. All it would take is one competitor to do it, and the others would follow or perish.
JG would force Walmart to pay better wages. Taxing all retailers equally would not cause Walmart to change their business model, even if the tax were borne by shareholders.
Taxes don’t “fund” government spending. The government doesn’t need your tax money, it creates money from nothing.
I don’t quite get your point here. The point of corporate taxes is presumably to tax the wealthy–including the wealthy shareholders (who “are” the corporation, since they are the owners, and the owners pay the tax.) Sure, some shareholders aren’t wealthy, but the vast majority of stock (by value) is owned by the wealthy. The tax thus achieves its purpose.
And sure, some employees may be gven less pay to help balance higher corporate taxes–but that assumes corporations can dictate wages, certainly not true in a competitive labor market. Since MMT advocates competitive labor markets, and can additionally help enforce the higher wages they result in by a JG, it’s not clear that the vast bulk of higher corporate taxes won’t come from reduced profits rather than reduced wages. Capitalism is supposed to be about bargaining between labor and owners, not dictation by owners–and sometimes one side in a bargaining process simply can’t get the deal it wants. There is no inherent reason that can’t be capital, rather than labor…or is there? 🙂
Moreover, the obvious candidates to take non-trivial pay cuts would be absurdly over-payed higher management–shareholders would insist on that, one would think, so as not to pay so much of the tax themselves as owners. Again, the wealthy would pay in that case…
Finally, I don’t see what you mean by “suppliers”. Presumably you mean corporations would insist on paying them less to make up the taxes–but again, capitalism is supposed to be a competitive market for supplies. What if corporations can’t “dictate” prices to suppliers, which it would be sort of odd (and illegal) if they could…we wouldn’t call that competitive! Also, many suppliers are corporations, too, so lower prices to them just means less profits for their (wealthy) shareholders or top management–again, that is the point of corporate taxes.
None of this means I feel corporate taxes are necessarily the best solution–I’m a socialist, so I advocate eliminating all corporate forms of ownership (including their “personhood”) and replacing with democratic ownership structures (basically as cooperatives, one person one vote in decision making.) But the point is that your critique seems to implicitly argue what many others do–that in the competitive “bargain” supposedly capable of being struck between labor and capital, anything that would reduce the profits of the latter simply “can’t” happen–other capitalist mechanisms will vitiate and prevent it in the long run. Perhaps that is true, but it is not what capitalist propagandists like to portray as reality, since it reveals capitalism as simply the dictatorship of capital, rather than as a voluntary agreement between laborers and their masters…I mean benefactors. 🙂 And when people see that reality, they tend to think that maybe we shouldn’t have a capitalist system after all…
I left out customers, who probably pay most of the corporate income tax. (I must have been tired.)
To the extent that a market is competitive, whether it be for labor or inputs or products, the corporation is limited in what it can do about pricing. Few markets are truly like that in real life. Usually a corporation has some pricing power in all those areas. Large corporations are usually large customers of their suppliers, and can strike deals for discounts, using the threat of changing suppliers. Often they are also a large supplier to their customer, who may have limited choices. In retail, for instance, except when the Internet can be leveraged, consumers are not likely to visit multiple outlets for small purchases, especially if they are buying more than one item from the same store. They choose a store and pay what the seller asks. And the competitor also has to pay the same corporate income tax, so it’s mostly a wash as far as competitive pricing ability. They can all pass it on. Nowadays, corporations for the most part have the upper hand in negotiating the price of labor. That was not always so, but these days any sort of increase in the burdened cost of labor is likely to be in lieu of a raise. Increased costs due to the ACA are being passed to employees, not borne by corporations, in most cases. Full employment would pass the negotiating advantage back to labor.
To the extent that taxes would reduce profits, they would also reduce the share price, until it reaches a multiple of earnings per share that reflects the corporation’s competitive position and general market conditions and expectations. In that way the shareholders pay, but it’s a one-time thing when the tax is first imposed. Shareholders who buy while the tax is in effect pay the reduced price, and don’t bear any burden due to the tax continuing in effect as expected. And, again, all successful corporations pay the same corporate income tax, so there is no reason to believe that any of them would fail to recover that tax by raising their prices to preserve a competitive profit margin for their shareholders. Corporations that are price leaders in their markets are usually also profit leaders, not laggards. They can charge lower prices by better controlling other costs, not by absorbing the cost of corporate income taxes.
The decision to repatriate overseas profits is like an imposition of a new tax. It immediately reduces the balance sheet, and the share price, hurting existing shareholders, but just those shareholders not future ones, and only one time. And it’s up to the board of directors, representing those shareholders, to do it or not.
I think the corporate income tax should be eliminated and replaced by a business gross receipts tax, on all businesses not just corporations, with no deductions. At a rate of 3% such a tax would raise about the same revenue as the 35% corporate income tax, and it would apply to foreign as well as domestic sales, rendering the repatriation problem moot. And it would be the perfect kind of tax to be adjusted by policy to control aggregate demand. Like a sales tax, it would be passed totally to customers, which is the point if the reason for taxation is to control aggregate demand.
Personal income taxes and estate taxes can be used for reducing inequality.
In the cooperative plan, if there is not a separation of labor from ownership, and the co-op goes bust, are the personal assets of the owners at risk, as they are in a partnership or sole proprietorship? What are the options for workers who do not want to take on the risks of ownership? And if it is a limited liability entity, how is it different from the corporations and LLCs of today? Is a new employee required to buy in to the co-op, putting his own assets at risk in order to get the job? If not, how are the existing employees protected from the dilution of their ownership stakes when the business expands? If an employee quits or retires, does he cash out his ownership share? If so, how does the co-op survive a sudden, large out-migration of employees? If the business falters, who decides which employees get laid off?
A tax on living space volume might be somewhat progressive, at least moreso than a tax on living space area, so my question is this: would that tax still drive the currency if we made it much more clearly progressive by, say, excluding the first so many cubic feet of living space from the tax in addition to those incentives for adopting clean energy?
TAX BADS – clearly CentaMillionaire$ and Billionaire$ are using their wealth to buy governments and not goods! Why everyone refuses to see that as a BAD is beyond understanding by the rationa mind! Why that has been allowed to exist and continue and in fact increase, to the demise of 99.99% of the world’s population, is explained by a TAX CODE written for the exclusive benefit of the ULTRA WEALTHY who believe they are Entitled to it ALL!
“Why that has been allowed to exist and continue and in fact increase … is explained by a TAX CODE … ”
No, it’s explained by the fox guarding the hen house. The beneficiaries of the bribery are the ones responsible for writing and enforcing the laws against it. Absent an attorney general with some integrity, perhaps the enforcement responsibility should lie with some agency outside the Federal government?
What if other governments (e.g., state and local) demand taxes payable only in dollars, is it necessary for the Federal government to levy taxes at all? Could aggregate demand be managed by requiring the states to remit some of their tax receipts to be destroyed in Washington?
Of course the problem with a hut tax is that although it is great for driving the currency (and possibly a touch of redistribution), it is a lousy counter-cyclical stabilisation device.
Going just to a hut tax seems to me like going to basic income. It stuffs the auto-stabiliser function.
So don’t you in fact need some sort of a ‘wedge’ tax to make the auto-stabiliser work?
Yes, exactly. If I read the tea leaves correctly, that is coming soon …
“Once we understand what taxes are “for”, we can start to think about what kinds of taxes make sense.”
The problem with taxing “bads” is that it brings into a discussion on economics a lot of strongly felt beliefs that may not be universally shared, and that can change over time. Rather than taxing most of them, our practice has been to prohibit them, which is completely a moral (or sometimes a public safety) action, only incidentally involving economic policy. We’ve had a number of reversals of views on such things, involving not only changing mores but also scientific advances.
As you say, the goal of a sin tax is to reduce the unwanted behavior, not to raise revenue, and in order to be successful the rate must be fairly high.
Taxing square or cubic feet of living space sounds good on the surface, but may have unintended consequences. A co-worker of mine said she had 28 brothers and sisters (only 3 shared the same parents as her, the rest were foster children, usually 4-8 at a time). I think it would be a very bad idea to have a high rate tax on the foster children’s bedrooms that would have discouraged her parents from being foster parents. A low rate tax, on the other hand, would do little to discourage the rich from building houses with high ceilings. You could say you’ll have an exception for foster parents, but what about people whose ethnic and religious beliefs tend to produce large families? Can they be discriminated against for their ethnicity or religion?
If it is good public policy to discourage people from having homes on the scale of Al Gore’s mansion, then it can simply be prohibited by law. If state and local taxes are sufficient to drive the currency, there’s no need to tax ordinary people for the “sins” of the ultra-rich.
Right. Better to tax the carbon-based energy used to heat and cool the house, since that is the real problem…
Randy, why didn’t you focus on taxing economic rent – financial rents, monopoly rents, resource rents, land rents? I would have thought you were familiar with the arguments for such from Michael Hudson.
Maybe a derivatives tax as well. It would have the benefit of forcing OTCs into the light as the tax couldn’t be assessed otherwise.
A hot money tax, though that would be more difficult as other countries would have to get on board. Still I think it would be easier to implement rhat Piketty’s wealth tax.
Interesting fodder for thought experiment, Dr. Wray.
Sin taxes, yes as a moral action but after that taxes should target idle money that is not or will not move around in the active economy. Taxes, after all, are only to make space for govt spending and govt action should be to move money from static locations to economically active locations. Note that treasuries do just that. Taxes should too.
A sizeable proportion of that “idle” money is that which is being saved by middle-income people in preparation for those really long retirements that exist today. Is that money really “idle”? Is it not just an attempt by those people to even out consumption through their lifetime? Very steep inheritance taxes seem to me to be a much better method of fixing such things while encouraging heirs and their parents to build new human capital since they’ll know that the old capital depreciates to zero upon death.
If high energy consumption is what’s bad, then tax energy consumption, not the poor proxy, dwelling volume. Old homes, prior to air conditioning, had high ceilings and large windows to keep living space reasonably cool in summer and brightly lit by daylight. The “bad” is greenhouse gas production not high ceilings.
U.S. corporate taxes and taxes on high incomes were much higher in the 1950’s than now. Government at all levels invested more percentage wise in education, infrastructure, research and development than today. Higher tax rates on high personal incomes and large corporations would discourage the “bads” of hoarding and economic rent collection. High tax rates on inherited fortunes would increase social mobility and discourage modern day feudalism. Taxing historic homes with high ceilings would achieve none of the above.
An intriguing idea!
Sadly I could see it being one that’s mainly for discussion and not reality, oh boy the fit that would be thrown over something like this… we could get behind the sin tax on smokes and I’m sure a financial transaction tax, but on basically house size? The heavy handed government pushing us down the Road to Serfdom and all that jazz. Would like to see it debated though, interesting how it could work as both a “sin” tax but still a currency driver.
I am with Neil Wilson though, surely it can’t work as an automatic stabilizer much at all.
Since you don’t advocate any “single tax” perhaps this would be best as a state solution to revenue, coupled with the income/payroll/sales taxes at the federal level as a stabilizer?
I’m not sure about a hut tax based on the energy needed to heat and cool our huts. Many huts have solar panels here in Western Australia, in which case people would be crying foul if they paid the same hut tax as their neighbours with the same sized house but no solar panels.
Neil: JG is countercyclical. HUT+JG. Still, I said I was not pushing Hut as the only tax.
Ben: I’m not against idea of taxing derivatives, with a goal of eliminating the sin of CDSs. However, what I’d do immediately is to prevent any chartered bank from owning or selling any derivatives. Period. There is no public purpose in letting them use derivs for gambling or for shifting risks. Good underwriting requires they live with the risks they create.
Jeff: Hold your horses. Rent is sinful.
Silkee: Sure, we can exempt the first 2000 c.f. of hut from tax. Yes, will still drive currency unless Bill gates decides to live in a small condo.
Jill: I’ll write on corp tax. In spite of what the Supreme Ct says, corps are not people.
“unless Bill gates decides to live in a small condo.”
If I were Bill Gates, and the hut tax was high enough to be of concern to me, I would have several options.
Most obviously, I could reduce my annual contributions of $millions to the Bill and Melinda Gates Foundation and use that money to pay the tax instead, and continue to live in my mansion on the lake.
Less obviously, I could move my official residence to that small condo, and sell the mansion to Microsoft Corp. for use as a CEO office, with some work space and some space to rest and eat during my 20-hour work days. There would be an agreement that I could use part of the office to entertain guests, if they wouldn’t fit in the condo.
The problem with high tax rates is the massive incentive to arrange affairs so as to avoid the tax. (Never mind the issue that the ultra-rich can buy loopholes that exempt themselves from the high rate.) That is why the high-bracket taxpayers of today, at 35%, pay more of the Federal income tax than the high-bracket taxpayers of yore, at rates much higher than 35%, even though the total tax as a % of GDP has remained fairly constant.
High tax rates, if they can be enforced, are a good way to discourage unwanted activities. It works for smokes and booze. To raise revenue, the best taxes are low rate and broad based.
That’s already taken care of by the rules of setting up a foundation (there are various flavors of foundations, and they require a licensed Level Four tax attorney who is tested annually at NYU). Only 11,000 sq ft of Gates’ current spread is considered “living space,” but it’s a small portion of the entire main building, and a much smaller portion of the entire property that the compound sits on.
Gates doesn’t make annual contributions to the foundation. He is required to spend 10% of the foundation’s annual income on the foundation’s issues. The other 90% can be retained for running the foundation, paying expenses, and ensuring the foundation’s longevity (investments). I can’t remember what the tax implications are, but they are de minimus. I don’t think you have to pay taxes on the 90%, but I think you do on the 10% if you don’t spend the requirement on what you created the foundation for. A Level Four attorney explained it to me before. There are only 100-125 Level Fours in the country. Each state has two except for the larger wealth states like California and New York.
Foundations are like mini-governments within the large government.
“Neil: JG is countercyclical. ”
Yes I know. But is it wise and theoretically sound to rely on just one side of the auto-stabiliser equation?
And of course that leaves you open to the basic income argument on the other side. Why not just fix the income and vary the tax instead.
(In my role as devil’s advocate I hasten to add. The ‘You’ll have a job and low taxes’ is a much better sales pitch IMV).
Can you discuss more how you would coordinate few simple taxes/rates and inflation in a complex multi-sectoral economy with varying price pressures/sources? Thanks
“We’ve previously established that ‘taxes drive money’”.
I take your statement to mean that taxation forces money to move from on economic entity to another. Are you also saying that our economy cannot work without taxes?
No, read the previous posts again. “Taxes drive money” means that the reason fiat money has value is that the sovereign demands it in payment of taxes (or fees, etc.).
Ideally I agree with an outright ban, which I would extend to HFT and futures contracts for speculation rather than hedging real transactions. I’m just musing as to whether a tiny tax on two-party derivatives (which would force them into greater transparency) would be sufficient to move activity to exchanges all on its own. Along the lines of using a transaction tax to reduce or eliminate HFT without legislating it out of existence.
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As above, if you want a counter cyclical (property) tax it has to be land (value i.e location). Land value bubbles go hand in hand with financial crises.
In practical (and political) terms you need something that is easy to assess, I see this ruling out a volume of living space tax. As all modern day Georgists know you also need a good counter to the ‘poor widow’ (in a drafty mansion) bogey.
I looked up George, and found that there are some obvious holes in his theory. The biggest one, I think, is that the value of vacant land depends heavily on the investments made by owners of nearby properties. The example given is the building of Disney World in the swamplands near Orlando. Disney still owns a lot of undeveloped land in the area. If they were taxed on the increase in its value due to their investment in the developed plots, the premise of the scheme is invalidated.
I agree that taxing labor is counterproductive, which is why I believe the FICA tax and the federal income tax should be abolished. This would probably be all the economy needs to get us to full employment.
Way more than necessary, I would think. The output gap is only about $1T, and each of those taxes brings in almost $1T nowadays. Adding $2T to incomes would drive GDP to the limit in less than a year, and if nothing else is done we’d find out whether fiscal policy really can cause inflation or not.
What is sinful about wealth?
I agree with Jeff. All sources of economic rent should be taxed heavily. There is no more efficient and fair tax base than rent. Read Michael Hudson’s writings on this topic and your view of the world will change.
Henry R: Wealth derived from rent is sinful because it is unearned. If you look at the filthy rich, their fortunes are mostly based on rent. Rent is generated by the community and should not accrue to individuals. We would have a more just society if all sources of rent were taxed for the public purpose.