City Journal Autumn 2014

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Autumn 2014
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Josh Barro
A Tax Code for Tomorrow « Back to Story

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You talk about taxing money twice which is a valid issue for corporate dividends. But why do you think capital gains are taxed twice? If I create a business and the business continually reinvests its revenue in the business, it pays no taxes. It has revenue but no profit. When I sell the business, the gain I realize was never taxed before.

The same thing applies to buying and selling publicly traded stock. The price goes up and down on a daily basis and none of that gain or loss was taxed as profit of the company and indeed sometimes has absolutely no relationship to it.
I would like to have seen Mr. Barro's comments on other alternative tax plans, notably the flat tax and FairTax plans. From all I have read about it, I think the FairTax is the best alternative.
A rich person has an ulterior motive who advocates increased taxes on himself. Buffett is no different. If he felt that he was paying too little, it would be a simple matter for him to write a check to the U.S. Government. But that’s not his goal. His company, Berkshire-Hathaway owns an insurance company, GEICO, and historically the rich have avoided estate taxes by buying ... you guessed it! ... life insurance! So naturally he is for more taxes on the rich, especially estate taxes. High estate taxes will make his life insurance company stock appreciate, undoubtedly more than offsetting his higher tax bill.
Mr. Barro - to encourage savings and investment, I like Robert Frank's idea of individuals paying a higher rate but only on income less deductions and less increases in savings. Like a consumption tax, could be administered within our existing tax system. The tax would be progressive so low income folks would pay less and wealthier folks would be encourage to save/invest more. What I like about his is that incentives are aligned - if you don't want the feds to tax your money, you save it.
The options fail to note the real "problem" of lack of progressiveness in tax rates, whether on "earned" or "unearned income." Progressiveness stops at a very low income (compared to the highest incomes) -- something like the first 1/2 inch on a 100-yard football field. The typical wage earner can hardly see the goal posts under which the uber-rich play the game. If a school teacher or fire fighter somehow earns a tripling of income, marginal tax rate increases. The quite wealthy lawyer or executive might increase earnings 1000 times with no increase in marginal rate.
The tax rate should be 2% of GLOBAL consolidated revenue, for everyone, NO deductions.
I haven't seen any mention in recent articles about indexing capital gains for inflation. If capital gains are taxed as ordinary income, then there should be some compensation for the erosion of the gains by inflation. In some cases, the "gains" would be net losses. Is it too difficult to implement? Our family held a summer home from an estate valued at $50K at the time of settlement. Twenty years later, it was sold for $100K. We paid taxes on another $50K of "gains". There's something wrong with this picture.
A couple of comments if I might. If I were king, I would tax capital gains at ordinary income rates for any gains involved in trading securities. I would exclude any investment made directly into a company where the company is the recipient of the capital involved. I agree with the point about double taxation; simple. Allow corporations to deduct dividends paid to shareholders before calculating tax. This would effectively lower tax rates for publicly held companies. Lets not forget that President Reagan's 1986 tax bill had a top rate of 28% which was applicable to long term capital gains as well as all other income. I dont need to remind you of the tremendous growth of the economy over the remaining four years.
Happy Thanksgiving!
Half of all capital gains go to the top 0.1%. It is not the tom 1%, but the top 0.1% that is being subsidized by the middle class. There is a goverment-enforced wealth redistribution in this country, but it is from the middle class to the super wealthy.
The AMT should also be fixed - it was intended to target only the super rich - now it exclusively taxes the middle class. Fix it so that incomes of a million or more are subject to AMT, and that it takes into account all income at the same rates - not only salary income.
The opposite approach will actually me much more fair. Business taxes should be lowered by 10%, while capital tax rates should go 10% up!
When federal income taxes were initially introduced in the USA all income was treated the same and only the very wealthy were taxed. In today's dollars incomes of only $1.2M were taxed - progressively - and all income being treated the same. This was a simple and fair system that we should go back to for the good of the country.
On one level the notion that not axing capital gains would lead to more investment, and hence more jobs.

However, something I have never seen discussed is what percentage of investment goes towards investing in new enterprise that can generate new jobs, vs investment in securities that have already been issued? For most individuals, the later is the type of investment they are making - they are buying a stock or bond that was already issued (sold) to someone else. Hence the investment they make is for their own gain, but has little or nothing to do with making an investment that helps create a new business or grow an existing business.
I have a few questions, too. Who today is considered a millionaire, someone who earns $1M a year or a senior who saved for 40 years and amassed a $1M savings -- which fluctuates with market values? Also, if Buffett thinks he should pay more in taxes, why doesn't he? Is he constrained from sending the government more money? If so, perhaps that rule should change. But, why does he have the right to presume that because he thinks he should pay more taxes, that I should also pay more taxes (if I am be pulled into the same category because of my savings, even though I'm living on SS, a modest retirement after 9 years with local school district, and my savings). Thank you. Jan Minot
One useful change would be disallowing normal expenses in a company's work. We do not complain of the size of an electric bill; but is deducts from profits; which is to say, the government pays part of the bill.
Likewise for a gross receipts tax. Many stores are rented at a small rent plus a percentage of receipts.
Buffett has discussed corporate taxation in his shareholder letters, and he makes the point that corporations don't pay taxes. Taxpayers pay taxes, not corporations, and corporate taxes are simply passed through to the consumer as tax payer. So the double-taxation argument isn't going anywhere.
All good ideas, but none of it will be considered. Democratic rabble rousers aren't interested in logical solutions to complex problems - they count on the carefully cultivated ignorance of their base, including the Democratic media. Through OWS the Democrats have changed the national agenda from a focus on Obama's failures to the allegation that the problem is that the "rich" aren't paying their "fair share." Anything that doesn't follow this party line will be rejected.

So, while it may make sense to consider the suggestions in this article, don't count on it. The Democrats have a vested interest in the poor staying poor, and what to the rest of us are rational arguments are lost since Democrats have a very different agenda.

Sound bitter? Yes, but it's because in my State (New Jersey) the poor have become a permanent fixture, despite billions spent on various programs the last 50 years or so. All have failed. After all these years how can one conclude anything but that creating multi-generational poverty is the goal, since no one could see what's going on - for decades now - and come to any other conclusion. Look at Obama's performance in office - does this look like the actions of someone who is truly interested in addressing anything?

Rational arguments never work since their goal isn't to solve anything, rather, to give an appearance of working to solve the problems, always at a high cost.


It is nice to see a discussion of the code that considers both fairness and economic efficiency. Too bad Mr Barro can't lead the discussions currently underway!
Isn't Buffet subject to the alternative minimum tax, that nasty little kicker on the tax form that was supposed to prevent millionaires from "getting off free"? When my wide and I do our taxes, the AMT puts us far above the 17.5% bracket.
But the laborer is, in effect, taxed twice. The company for whom he works pays taxes on its profits and it is only that profit that allows him to receive wages. His wage is limited by the profit the company makes, but his share doesn't go up when the company has an extremely good year. You might say that it doesn't go down either when the company doesn't do as well. In this case he just loses his job. The finance officer sets his wage based on sophisticated predictions about the profit margin for the company and that will certainly be extremely conservative.