Author Topic: Implications of 1 to 2 trillion yearly deficits as far as the eye can see ?  (Read 5777 times)

Sultan58

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This not a political question. I pretty much despise the ideologues in both parties and believe both spend like drunken sailors on what they believe their constituents want---with the primary goal being to stay in power as long as possible.

My question is exactly how long does the Fed and Congress think we can go with deficit spending?  I think everyone here understands that you can't borrow your way to prosperity and that disguising deficit spending as "investing" is a huge smokescreen. But Grandpa Powell and Granny Yellen apparently see no problem with continuing to print money.

I'm a bit surprised that inflation and debt hasn't caused interest rates to rise much....but I think it's coming. So where's the tipping point?  30 trillion? 35 trillion?  Because I don't expect any principle to be paid on this debt...EVER.  I do see taxes rising....and they likely need to--but how will others reach FIRE under a significantly increased tax burden?

Again, both parties have contributed to this huge debt......but how is it ever fixed?

maizefolk

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Again, both parties have contributed to this huge debt......but how is it ever fixed?

Historically the way debts this large are fixed is by a period of inflation (for countries which borrow in their own currency) or default (for countries which do not).

Right now US GDP is $20T and US debt is $30T. Inflate the dollar down to 10% of its current value and US nominal GDP is $200T and US debt is $30T and things look far more manageable. Of course it doesn't happen as neatly or cleanly as that: inflation can be tough to reign in once it gets started. But that's the principle of the thing.

GodlessCommie

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I honestly don't see how a country that cannot agree on Covid being real or not can fix anything. Fed isn't the problem, we the people are.

bryan995

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Again, both parties have contributed to this huge debt......but how is it ever fixed?

Historically the way debts this large are fixed is by a period of inflation (for countries which borrow in their own currency) or default (for countries which do not).

Right now US GDP is $20T and US debt is $30T. Inflate the dollar down to 10% of its current value and US nominal GDP is $200T and US debt is $30T and things look far more manageable. Of course it doesn't happen as neatly or cleanly as that: inflation can be tough to reign in once it gets started. But that's the principle of the thing.

Exactly. Either inflation or a complete collapse is inevitable.

caleb

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This not a political question. [...] I think everyone here understands that you can't borrow your way to prosperity and that disguising deficit spending as "investing" is a huge smokescreen. But Grandpa Powell and Granny Yellen apparently see no problem with continuing to print money.

Of course this is a political question, both in content and tone.

Gesturing toward "both sides" doesn't make a question non-political.
« Last Edit: August 22, 2021, 07:27:44 PM by caleb »

swaneesr

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This was from an article March 25th of this year.

————-
The Biden administration is now weighing another multitrillion-dollar infrastructure proposal, despite historically high levels of government debt. Powell declined to comment on any specific legislation, but reiterated his view that lawmakers will eventually need to address the country's long-term fiscal outlook.
"There will come a time — and that time will be when the economy is back to full employment and taxes are rolling in and we're in a strong economy again — when it will be appropriate to return to the issue of getting back on a sustainable fiscal path," Powell said. "We will need to do that, but that time is not now."

————-

Being fiscally irresponsible seems to be a problem with our current form of government. Perhaps an amendment to the US Constitution is the only way to prevent both parties from overspending. Split government is the only thing that keeps either side in check.

A non chaotic solution seems unlikely.

Swanee


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wageslave23

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How about a rule that deficit spending or any other stimulus or inflationary policy must be approved by a super majority like say 70% approval.   That way, whoever is in power has to at least have some bipartisan support for whatever spending bill they pass.  It's way too easy for politicians to spend money.  And the short term political benefits are too tempting to pass up.  There was a time that Republicans were fiscal conservatives but trump's presidency obliterated that. 

clarkfan1979

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How about a rule that deficit spending or any other stimulus or inflationary policy must be approved by a super majority like say 70% approval.   That way, whoever is in power has to at least have some bipartisan support for whatever spending bill they pass.  It's way too easy for politicians to spend money.  And the short term political benefits are too tempting to pass up.  There was a time that Republicans were fiscal conservatives but trump's presidency obliterated that.

I'm planning for inflation and federal income taxes to increase. My answer to both of those problems is real estate rentals. I have low interest debt on the real estate rentals. I am able to keep myself in a very low tax bracket with all the tax write-offs. I don't really see taxes increasing on families with an AGI of 80K or less. Our plan is to stay below that number. 

My last prediction is going to be a little crazy. In 10 years, income from a job is going to mean very little. A highly compensated employee with no assets is going to get killed by inflation and high federal income tax brackets. Going forward, the name of the game is going to be buying assets, asset management and tax strategy.

ChpBstrd

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The original question links deficit spending and its necessary money creation to inflation. This is an assumption of classical economics and monetarism: Each newly-created dollar dilutes the value of the other dollars in the system. The assumption is that dollars act like shares in a corporation when the corporation decides to split its shares; that is, they are reduced in value as the percentage of the corporation they represent is reduced. Thus, if the Treasury doubled the amount of currency in circulation, a classical economist / monetarist would expect the purchasing power of the currency to be cut in half. In other words, prices would double. This theory is intuitively attractive.

The problem with classical economics / monetarism (call it a debunking if you'd like) is that its predictions did not pan out. The supply of dollars has increased significantly since the 1980s, and particularly after 2000, and yet this period of rapidly increasing money supply was a time of falling inflation, not rising inflation. What actually happened was exactly the opposite of what the old theories would have predicted - and it happened for decades!

Money supply skyrocketed...
https://fred.stlouisfed.org/series/M2SL

...while annual inflation (change in consumer price index) ground to a crawl.
2000     3.4%
2001     2.8%
2002     1.6%
2003     2.3%
2004     2.7%
2005     3.4%
2006     3.2%
2007     2.9%
2008     3.8%
2009     -0.4%
2010     1.6%
2011     3.2%
2012     2.1%
2013     1.5%
2014     1.6%
2015     0.1%
2016     1.3%
2017     2.1%
2018     2.4%
2019     1.8%
2020     1.2%

Just think, if CPI exceeds 3% this year, it will be the first time in TEN YEARS that inflation was even that high. I was taught in macroeconomics that most economists believe 3% is right about ideal for economic growth, and it seems we can barely keep inflation up into the ideal range even while doing all these things that the theory says should have led to Venezuela / Zimbabwe levels of inflation by now.

If we zoom back and look at decade averages, we can see the falling-inflation trend extends back to the 1980s.
https://inflationdata.com/Inflation/Inflation/DecadeInflation.asp

One can only draw the conclusion that the theory didn't work. This is about the 40th year it didn't work. When experience in reality fails to support a theory - or outright contradicts it, as is the case here - the smart thing to do is throw out the theory. Whatever you do, don't act or invest on the predictions of an economic theory that has been contradicted by four decades of data gathered in the real world.




Sultan58

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This was from an article March 25th of this year.

————-
The Biden administration is now weighing another multitrillion-dollar infrastructure proposal, despite historically high levels of government debt. Powell declined to comment on any specific legislation, but reiterated his view that lawmakers will eventually need to address the country's long-term fiscal outlook.
"There will come a time — and that time will be when the economy is back to full employment and taxes are rolling in and we're in a strong economy again — when it will be appropriate to return to the issue of getting back on a sustainable fiscal path," Powell said. "We will need to do that, but that time is not now."

————-

Being fiscally irresponsible seems to be a problem with our current form of government. Perhaps an amendment to the US Constitution is the only way to prevent both parties from overspending. Split government is the only thing that keeps either side in check.

A non chaotic solution seems unlikely.

Swanee


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I keep waiting for a Fed reserve chairperson or a Sec of the Treasury or even the President to say.....NOW is the time to balance our income vs spending.  But even with strong economies, it seems they never feel its the right time.  I am convinced that moment will not arrive until interest rates/inflation shoot higher and force their hand....in other words...when all other options are exhausted....they will be forced to balance spending vs income.  Much like everyone here does with their personal budgets.  What a concept!!

In the end....its we who are electing these fools.....and not demanding term limits.....so we bear our own share of blame.

lutorm

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Why is deficit spending bad? There is no fundamental connection between federal taxes and federal spending.

If you want to see something crash the economy, try forcing the federal government to balance its budget.

Quote
There was a time that Republicans were fiscal conservatives but trump's presidency obliterated that.
I seem to remember that there is a clear pattern of every Republican administration having a higher budget deficit than the Democratic ones, going back quite aways. See https://www.politifact.com/factchecks/2019/jul/29/tweets/republican-presidents-democrats-contribute-deficit/ for example. Republicans like to talk about fiscal conservatism, but they only want to practice it under Democratic administrations.

wageslave23

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Why is deficit spending bad? There is no fundamental connection between federal taxes and federal spending.

If you want to see something crash the economy, try forcing the federal government to balance its budget.

Quote
There was a time that Republicans were fiscal conservatives but trump's presidency obliterated that.
I seem to remember that there is a clear pattern of every Republican administration having a higher budget deficit than the Democratic ones, going back quite aways. See https://www.politifact.com/factchecks/2019/jul/29/tweets/republican-presidents-democrats-contribute-deficit/ for example. Republicans like to talk about fiscal conservatism, but they only want to practice it under Democratic administrations.

Economic conditions have a lot to do with deficit levels.  Bill Clinton and a republican congress did an excellent job from a financial perspective.  If I could lock in another 8 years of that I would in a heart beat.  My point being in a system of checks and balances, somebody needs to be responsible and play the bad guy.  Seems like neither party is willing to do that.  Trump should not have been cutting taxes without cutting spending during a time of economic boom.  Just like Biden and congress should not continue to pass stimulus spending after the economy has recovered.   I guess the real issue is that deficit spending during good times was generally accepted as bad and deficit spending during difficult economic times was considered a necessary evil.  Now it seems like its always a good time to spend.

Ron Scott

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I assume any government who can create digital currency with fiat money does not need to “borrow“. They just create new money (like they printed it historically) and increase the money supply.

Some of the new money will result in more demand for goods than the supply side can handle and that will create some inflation. Hopefully most of the new money will be invested in things that enhance democratic institutions and  traditionally create economic growth over time.


ender

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I think it's worth pointing out that of the USA public debt, a majority is owed between different governmental agencies.

This gives the government a lot more options than if say 100% was owned by foreign countries.

Boll weevil

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The original question links deficit spending and its necessary money creation to inflation. This is an assumption of classical economics and monetarism: Each newly-created dollar dilutes the value of the other dollars in the system. The assumption is that dollars act like shares in a corporation when the corporation decides to split its shares; that is, they are reduced in value as the percentage of the corporation they represent is reduced. Thus, if the Treasury doubled the amount of currency in circulation, a classical economist / monetarist would expect the purchasing power of the currency to be cut in half. In other words, prices would double. This theory is intuitively attractive.

The problem with classical economics / monetarism (call it a debunking if you'd like) is that its predictions did not pan out. The supply of dollars has increased significantly since the 1980s, and particularly after 2000, and yet this period of rapidly increasing money supply was a time of falling inflation, not rising inflation. What actually happened was exactly the opposite of what the old theories would have predicted - and it happened for decades!

Money supply skyrocketed...
https://fred.stlouisfed.org/series/M2SL

...while annual inflation (change in consumer price index) ground to a crawl.
2000     3.4%
2001     2.8%
2002     1.6%
2003     2.3%
2004     2.7%
2005     3.4%
2006     3.2%
2007     2.9%
2008     3.8%
2009     -0.4%
2010     1.6%
2011     3.2%
2012     2.1%
2013     1.5%
2014     1.6%
2015     0.1%
2016     1.3%
2017     2.1%
2018     2.4%
2019     1.8%
2020     1.2%

Just think, if CPI exceeds 3% this year, it will be the first time in TEN YEARS that inflation was even that high. I was taught in macroeconomics that most economists believe 3% is right about ideal for economic growth, and it seems we can barely keep inflation up into the ideal range even while doing all these things that the theory says should have led to Venezuela / Zimbabwe levels of inflation by now.

If we zoom back and look at decade averages, we can see the falling-inflation trend extends back to the 1980s.
https://inflationdata.com/Inflation/Inflation/DecadeInflation.asp

One can only draw the conclusion that the theory didn't work. This is about the 40th year it didn't work. When experience in reality fails to support a theory - or outright contradicts it, as is the case here - the smart thing to do is throw out the theory. Whatever you do, don't act or invest on the predictions of an economic theory that has been contradicted by four decades of data gathered in the real world.

The prices of stocks, real estate, and certain collectibles (i.e. high end art) have also skyrocketed throughout the period. So there’s a chance that the theory works, we’re just looking in the wrong places for inflation.

For a while, I had bought in hard to the idea that inflation would stay long as long as unemployment was reasonably high (the logic being that labor is a driving cost, and as long as workers are widely available, you can hire without having to raise unit costs. But if unemployment is low, then you have to offer more pay to bring in a worker, and that’s going to force a rise in unit costs that will be reflected as inflation).

I’m starting to question that, or at least if it’s been oversimplified and demand somehow needs to be factored in.

I also wonder if we’d be facing this same worker “shortage” if we had done what the Europeans did by making unemployment payments through the employers so that the workers were never truly separated. Then when it’s time to restart you just go to your list of furloughed employees, not to an interview process where you’re fighting with other employers also trying to staff up.

Log

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There was a great John Oliver segment a couple(?) months ago about how much our debt is not a problem—it’s on Youtube. And a lot of deficit spending is incredibly fiscally responsible if X money spent now is going to save 10X or 100X spending in the future (see: climate change, vaccines).

If we want to talk about more responsible budgets we need to be talking taxes, taxes, taxes. Particularly estate taxes, which Republicans have been demonizing for as long as I can remember, even though anyone with a significant inheritance already received a massive headstart in life through their parents’ wealth while they were still living… or a wealth tax, which was only just seriously proposed in the US for the first time I can remember during the Democratic presidential primary by Liz and Bernie. We could also go the VAT route as proposed by Yang if there’s significant care paid in exempting essential goods and charging a higher rate on luxury goods, but that leaves a lot more room for lobbyists to corrupt the waters on defining what’s essential and what’s luxury. Income taxes alone barely touch the wealth of the wealthiest people, and if people with rich parents have access to the best education, the best physical and mental health and wellness services, and the best social connections, and then they get to inherit the family fortune with barely a scratch taken out in taxes, we’re in prime territory for an inter-generational oligarch class.

caleb

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My last prediction is going to be a little crazy. In 10 years, income from a job is going to mean very little. A highly compensated employee with no assets is going to get killed by inflation and high federal income tax brackets. Going forward, the name of the game is going to be buying assets, asset management and tax strategy.

Say more, please.

maizefolk

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I think it's worth pointing out that of the USA public debt, a majority is owed between different governmental agencies.

This gives the government a lot more options than if say 100% was owned by foreign countries.

Are you sure it's a majority?

The most recent breakdown I remember was about 1/4 owned by other branches of the federal government, ~10% by the federal reserve (okay, arguably also a branch of the federal government) and the remaining 2/3rds or so about evenly split between private US-based investors and foreign investors (private or public). But that was a couple of years ago so it's certainly possible it's changed significantly in the meantime. For example a quick check shows the federal reserve is up closer to 20% of the federal debt today.

seattlecyclone

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As long as interest rates stay low there's no real incentive to stop borrowing. $1 trillion borrowed at 2% interest adds a mere $20 billion of interest expense to the budget. The problem is there's no guarantee interest rates will stay low forever.

GodlessCommie

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As long as interest rates stay low there's no real incentive to stop borrowing. $1 trillion borrowed at 2% interest adds a mere $20 billion of interest expense to the budget. The problem is there's no guarantee interest rates will stay low forever.

Don't Pay Off Your Mortgage (or national debt)!

ender

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I think it's worth pointing out that of the USA public debt, a majority is owed between different governmental agencies.

This gives the government a lot more options than if say 100% was owned by foreign countries.

Are you sure it's a majority?

The most recent breakdown I remember was about 1/4 owned by other branches of the federal government, ~10% by the federal reserve (okay, arguably also a branch of the federal government) and the remaining 2/3rds or so about evenly split between private US-based investors and foreign investors (private or public). But that was a couple of years ago so it's certainly possible it's changed significantly in the meantime. For example a quick check shows the federal reserve is up closer to 20% of the federal debt today.

I was carelessly lumping all public debt together as well... basically debt that is almost entirely within the gov control vs external.

bmjohnson35

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I've read many articles by economists and "experts" and I don't think anyone really knows.  Keep in mind, that many of the largest national economies are is in a similar situation as the US.  Even China has serious debt issues.  The one thing unique about the US, is the fact that we are the established "standard" for currency. 

The government can cut spending and/or increase revenue (taxes) to tackle this issue.  Interest rates and inflation can affect the rate of accumulation.  It seems extremely unlikely that we will choose to default on our debt.  Modern currencies are debt based and the Global economy is very much tied together.  Even if other countries would love to see the US fall on our face, our demise would likely trigger similar misery in their economy.

I think it's safe to say the next 50 yrs won't be like the last, but how it will play out is anyones guess. 

maizefolk

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It seems extremely unlikely that we will choose to default on our debt. 

"Choose" yes. But keep in mind that the way our debt ceiling works no active choice to default on the debt is necessary. All that is required is that the two parties be unable to agree on raising the debt ceiling and for both to be convinced that the other side will blink first and/or that voters are going to blame any negative consequences of default on the other side.

If the US defaults on its debt, I suspect the last words uttered before it happens won't be "good riddance!" or "it had to be done" but instead "...oops...".

Paul der Krake

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1) large deficits are bad and should be reined in
2) the debt ceiling political circus is stupid and should be removed

ChpBstrd

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The original question links deficit spending and its necessary money creation to inflation. This is an assumption of classical economics and monetarism: Each newly-created dollar dilutes the value of the other dollars in the system. The assumption is that dollars act like shares in a corporation when the corporation decides to split its shares; that is, they are reduced in value as the percentage of the corporation they represent is reduced. Thus, if the Treasury doubled the amount of currency in circulation, a classical economist / monetarist would expect the purchasing power of the currency to be cut in half. In other words, prices would double. This theory is intuitively attractive.

The problem with classical economics / monetarism (call it a debunking if you'd like) is that its predictions did not pan out. The supply of dollars has increased significantly since the 1980s, and particularly after 2000, and yet this period of rapidly increasing money supply was a time of falling inflation, not rising inflation. What actually happened was exactly the opposite of what the old theories would have predicted - and it happened for decades!

Money supply skyrocketed...
https://fred.stlouisfed.org/series/M2SL

...while annual inflation (change in consumer price index) ground to a crawl.
2000     3.4%
2001     2.8%
2002     1.6%
2003     2.3%
2004     2.7%
2005     3.4%
2006     3.2%
2007     2.9%
2008     3.8%
2009     -0.4%
2010     1.6%
2011     3.2%
2012     2.1%
2013     1.5%
2014     1.6%
2015     0.1%
2016     1.3%
2017     2.1%
2018     2.4%
2019     1.8%
2020     1.2%

Just think, if CPI exceeds 3% this year, it will be the first time in TEN YEARS that inflation was even that high. I was taught in macroeconomics that most economists believe 3% is right about ideal for economic growth, and it seems we can barely keep inflation up into the ideal range even while doing all these things that the theory says should have led to Venezuela / Zimbabwe levels of inflation by now.

If we zoom back and look at decade averages, we can see the falling-inflation trend extends back to the 1980s.
https://inflationdata.com/Inflation/Inflation/DecadeInflation.asp

One can only draw the conclusion that the theory didn't work. This is about the 40th year it didn't work. When experience in reality fails to support a theory - or outright contradicts it, as is the case here - the smart thing to do is throw out the theory. Whatever you do, don't act or invest on the predictions of an economic theory that has been contradicted by four decades of data gathered in the real world.

The prices of stocks, real estate, and certain collectibles (i.e. high end art) have also skyrocketed throughout the period. So there’s a chance that the theory works, we’re just looking in the wrong places for inflation.

For a while, I had bought in hard to the idea that inflation would stay long as long as unemployment was reasonably high (the logic being that labor is a driving cost, and as long as workers are widely available, you can hire without having to raise unit costs. But if unemployment is low, then you have to offer more pay to bring in a worker, and that’s going to force a rise in unit costs that will be reflected as inflation).

I’m starting to question that, or at least if it’s been oversimplified and demand somehow needs to be factored in.

I also wonder if we’d be facing this same worker “shortage” if we had done what the Europeans did by making unemployment payments through the employers so that the workers were never truly separated. Then when it’s time to restart you just go to your list of furloughed employees, not to an interview process where you’re fighting with other employers also trying to staff up.

All good points. I think the appreciation of "investable" things like stocks, RE, art, and bonds has a lot to do with rising wealth inequality. When the vast majority of the increase in money supply ended up in the hands of rich people, it was diverted into investments rather than consumption. Thus, demand for consumption items does not go up even though money supply did. Thus, inflation is low.

The top 1% of the population by wealth owns 89% of stocks; the bottom 50% hold 0.5%.
https://www.cnbc.com/2021/06/23/how-much-wealth-top-1percent-of-americans-have.html
The United States' $28T national debt is relatively small in comparison to the $42T in wealth held by the top 1%, and especially small in comparison to the $91T held by the top 10%. It seems natural that the things rich people are interested in buying - productive assets - have gone way up in price while the things poor people buy - electronics, food, rent, clothes - have not appreciated as much.

Between 2015 and 2020 I wondered exactly how low the unemployment rate could go before bidding wars erupted for wages. We spent most of 2019 below 4% unemployment - numbers so low they were rarely reached in the history of the United States. And yet inflation that year was 1.8%. We're maybe 3-5 years from again hitting that "unemployment can't get any lower" boundary, if we ever do.
https://fred.stlouisfed.org/series/UNRATE
A largely de-unionized workforce made up of dispersed specialists had a lot to do with money supply not trickling down into wages like it did in the past. So did the rapid digitization that increased the productivity of entire industries from retail to taxis. But most of all, because the increase in money supply went straight to wealthy, demand for items in the CPI bucket stayed stable. 

I agree the Europeans got it right by setting up their UI system in a way that maintains business-employee relations so that when restrictions are lifted or business conditions improve, a lot of time is saved on recruitment, training, and meaningless churn.

Luck12

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I assume any government who can create digital currency with fiat money does not need to “borrow“. They just create new money (like they printed it historically) and increase the money supply.

Some of the new money will result in more demand for goods than the supply side can handle and that will create some inflation. Hopefully most of the new money will be invested in things that enhance democratic institutions and  traditionally create economic growth over time.

You assume correctly.  Good on you for being one of the few here who gets it.  Things don't need to be "paid for", deficits and debt don't matter in and of themselves.   Only thing that matters is inflation.  The correct question is not "how are you going to pay for it?", rather it's "how will you resource it?". 

Take Medicare for All.  What's important is will we be able to have enough doctors , hospitals, etc to meet the increased demand for medical services.  What will happen to inflation as a result of increased spending on consumer goods because of people saving money they otherwise would've paid due to exorbitant medical costs.  Also what do we do about the loss of jobs (albeit most are bullshit jobs) that will occur?    That's no need for tax increases to pay for this, tax increases might be needed to control inflation, but that's not the framework and thinking that goes on in Washington.  Initially we might even need tax cuts to make up for decreased consumer demand from those who'll lose their jobs.

The Deficit Myth should be read by everyone who cares about the important deficits in our society:. the health care deficit, the education deficit, the economic mobility deficit, the deficit in worker power vs employer power, etc.  We are hamstringing ourselves by insisting that everything be paid for.  We do not need rich people's money or corporate tax money to improve society.  We just need politicians and citizens to understand how public finance actually works and to unwind the decades of lies and misinformation.  I don't want to explain b/c post is long enough already but our democracy may depend on it.
« Last Edit: August 23, 2021, 12:13:28 PM by Luck12 »

zolotiyeruki

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If we want to talk about more responsible budgets we need to be talking taxes, taxes, taxes. Particularly estate taxes, which Republicans have been demonizing for as long as I can remember, even though anyone with a significant inheritance already received a massive headstart in life through their parents’ wealth while they were still living… or a wealth tax, which was only just seriously proposed in the US for the first time I can remember during the Democratic presidential primary by Liz and Bernie. We could also go the VAT route as proposed by Yang if there’s significant care paid in exempting essential goods and charging a higher rate on luxury goods, but that leaves a lot more room for lobbyists to corrupt the waters on defining what’s essential and what’s luxury. Income taxes alone barely touch the wealth of the wealthiest people, and if people with rich parents have access to the best education, the best physical and mental health and wellness services, and the best social connections, and then they get to inherit the family fortune with barely a scratch taken out in taxes, we’re in prime territory for an inter-generational oligarch class.
There's some nuance, however, in estate taxes.  The classic example is a small business (or farm) built up by a married couple and passed to their kids, worth $1m.  Let's say you tax inheritance at 20%.  Where would the kids come up with the $200k?  The inherited asset isn't liquid, and the kids aren't likely to have $200k in cash lying around to pay those taxes.  What are you going to do, force the kids to sell the business (or farm) their parents built up?  If it were in the form of equities or bonds, sure, that's liquid.  Our current tax code exempts the first $11m/$22m for this type of reason.  But then it wallops anything over that threshold at 40%.  When people talk about how $1T is getting inherited each year without getting taxed, that's why--it's overwhelmingly estates in the low-six-figure range, and those in the really-high-wealth category do indeed get taxed at a higher rate.

I *do* think that resetting the cost basis on inherited stuff is worth exploring, though.

I'd be willing to consider a VAT, *if* it replaced every other tax out there (income, gas, inheritance, SS, etc).  In fact, I think a VAT is probably the "fairest" tax, and a wealth tax makes little sense.  All the money in the world doesn't do you any good unless and until you spend it, so a VAT neatly aligns a person's taxes with their level of consumption/benefits gained.  The issue of essential goods is a real thing, and so is the whole lobbying about what is "essential."  To solve that issue, I'd propose pairing a VAT with a basic refund.  For example, let's call it a 25% VAT on everything, and then we refund the VAT on the first $20k of spending to single people, on the first $40k to married people, and on the next $4k for each dependent.

What you end up with is something that closely resembles the FairTax.

Boll weevil

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I assume any government who can create digital currency with fiat money does not need to “borrow“. They just create new money (like they printed it historically) and increase the money supply.

Some of the new money will result in more demand for goods than the supply side can handle and that will create some inflation. Hopefully most of the new money will be invested in things that enhance democratic institutions and  traditionally create economic growth over time.

You assume correctly.  Good on you for being one of the few here who gets it.  Things don't need to be "paid for", deficits and debt don't matter in and of themselves.   Only thing that matters is inflation.  The correct question is not "how are you going to pay for it?", rather it's "how will you resource it?". 

Take Medicare for All.  What's important is will we be able to have enough doctors , hospitals, etc to meet the increased demand for medical services.  What will happen to inflation as a result of increased spending on consumer goods because of people saving money they otherwise would've paid due to exorbitant medical costs.  Also what do we do about the loss of jobs (albeit most are bullshit jobs) that will occur?    That's no need for tax increases to pay for this, tax increases might be needed to control inflation, but that's not the framework and thinking that goes on in Washington.  Initially we might even need tax cuts to make up for decreased consumer demand from those who'll lose their jobs.

The Deficit Myth should be read by everyone who cares about the important deficits in our society:. the health care deficit, the education deficit, the economic mobility deficit, the deficit in worker power vs employer power, etc.  We are hamstringing ourselves by insisting that everything be paid for.  We do not need rich people's money or corporate tax money to improve society.  We just need politicians and citizens to understand how public finance actually works and to unwind the decades of lies and misinformation.  I don't want to explain b/c post is long enough already but our democracy may depend on it.

I have a hard time buying in to simply saying deficits don’t matter. My guess is there’s a giant asterisk attached… *until they do.

As the quotes go, “if something can’t go on forever, it will stop” and “all good things must come to an end.”

Paul der Krake

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I have a hard time buying in to simply saying deficits don’t matter. My guess is there’s a giant asterisk attached… *until they do.
I think this encapsulates macroeconomics pretty well. It's a really hard field of study. People who spent their entire lives studying macro are routinely surprised by first, second, and third order effects. Steer well clear of people claiming that "we can just do X lol".

Even the most rabid MMT proponents aren't foolish enough to claim that deficits are never important. It's a matter of degree.

seattlecyclone

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There's some nuance, however, in estate taxes.  The classic example is a small business (or farm) built up by a married couple and passed to their kids, worth $1m.

Let's stop here for a moment. I know that "passing on the family farm" has long been a rallying cry in favor of limiting the estate tax. Does that make any sense at all? Why is it important, from a public policy perspective, to allow wealth to pass untaxed if it's in the form of a farm or other small business? As far as I'm concerned, none of the arguments in favor of taxing inheritances fall apart when that inheritance is a business. That inheritance is something the deceased worked hard to form, yes, just the same as if they worked hard to amass a large portfolio of stocks or real estate. There may be more emotional attachment to a business than a mutual fund, and you may have a harder time bringing yourself to sell it for a fair market price (rather than what you instinctively feel your relative's years of blood, sweat, and tears were worth), but should that actually matter when we make our laws?

Quote
Let's say you tax inheritance at 20%.  Where would the kids come up with the $200k?  The inherited asset isn't liquid, and the kids aren't likely to have $200k in cash lying around to pay those taxes.  What are you going to do, force the kids to sell the business (or farm) their parents built up?

Yes. That, or take a loan against the value of the business. If your business doesn't generate enough income to pay off a loan for 20% of its value within several years, it's not a very good business and you should sell it.

BDWW

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There's some nuance, however, in estate taxes.  The classic example is a small business (or farm) built up by a married couple and passed to their kids, worth $1m.

Let's stop here for a moment. I know that "passing on the family farm" has long been a rallying cry in favor of limiting the estate tax. Does that make any sense at all? Why is it important, from a public policy perspective, to allow wealth to pass untaxed if it's in the form of a farm or other small business? As far as I'm concerned, none of the arguments in favor of taxing inheritances fall apart when that inheritance is a business. That inheritance is something the deceased worked hard to form, yes, just the same as if they worked hard to amass a large portfolio of stocks or real estate. There may be more emotional attachment to a business than a mutual fund, and you may have a harder time bringing yourself to sell it for a fair market price (rather than what you instinctively feel your relative's years of blood, sweat, and tears were worth), but should that actually matter when we make our laws?

Quote
Let's say you tax inheritance at 20%.  Where would the kids come up with the $200k?  The inherited asset isn't liquid, and the kids aren't likely to have $200k in cash lying around to pay those taxes.  What are you going to do, force the kids to sell the business (or farm) their parents built up?

Yes. That, or take a loan against the value of the business. If your business doesn't generate enough income to pay off a loan for 20% of its value within several years, it's not a very good business and you should sell it.

Sounds like a great way to ensure that Tyson Foods, Gates, et al own and control the entire food supply. Farming and agriculture are treated differently because they are different. I can't think of a single thing that's as capital intensive with such a low rate of return. If anything this past year has shown how naive it is to offshore our economy. Luckily, there's still a strong resistance to off-shoring or wall-streeting our food supply.

seattlecyclone

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I can't think of a single thing that's as capital intensive with such a low rate of return.

I repeat: if it returns so little that you can't use a portion of the profit to pay off a 20% loan well before the next generation dies, it's a bad business and you should sell it. Your point about the strategic importance of our food supply is well taken, but if the incentives at the moment make farming a bad business then its owners are completely correct for wanting out. It shouldn't be the job of a small number of families to suffer economically for the sake the resilience of our nation's food supply. This is a separate issue from whether the estate tax is an essential tool to control wealth inequality.

zolotiyeruki

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There's some nuance, however, in estate taxes.  The classic example is a small business (or farm) built up by a married couple and passed to their kids, worth $1m.

Let's stop here for a moment. I know that "passing on the family farm" has long been a rallying cry in favor of limiting the estate tax. Does that make any sense at all? Why is it important, from a public policy perspective, to allow wealth to pass untaxed if it's in the form of a farm or other small business? As far as I'm concerned, none of the arguments in favor of taxing inheritances fall apart when that inheritance is a business. That inheritance is something the deceased worked hard to form, yes, just the same as if they worked hard to amass a large portfolio of stocks or real estate. There may be more emotional attachment to a business than a mutual fund, and you may have a harder time bringing yourself to sell it for a fair market price (rather than what you instinctively feel your relative's years of blood, sweat, and tears were worth), but should that actually matter when we make our laws?
That's a fair point, and I agree that from a high level, a business or a farm or a stock portfolio all look alike.  But in the case of a family business or farm, it's a bit different, since there is often a whole lot of uncompensated labor from the family.  I suppose the parents could handle that by gradually transferring equity in the farm/business to their kids as a sort of salary?

And how would the government go about determining a value for such a business?  Do you look at last year's earnings?  Average of several years' earnings? Earnings adjusted for growth?  Force the kids to put it on the market and see what buyers are willing to pay?  How do you account for the owner's often-unpaid hours?  I can think of all sorts of ways this could go wrong.

There's also the question of "Why should the government tax the profits of a business, and then tax the value of the business when it sells (or is inherited), and then continue to tax the profits of the business afterward?"  The moral justification for taxing profits is that the government provides services and creates an environment where the business can make a profit.  I suppose you could make the same argument about the government providing a system where business transfers can happen in a reliable way, but not to anywhere near the degree people are talking about taxing inheritances.  Taxing it as it changes hands, based on value (which is presumably based on potential future profit) sounds an awful lot like double taxation to me.
Quote
Quote
Let's say you tax inheritance at 20%.  Where would the kids come up with the $200k?  The inherited asset isn't liquid, and the kids aren't likely to have $200k in cash lying around to pay those taxes.  What are you going to do, force the kids to sell the business (or farm) their parents built up?
Yes. That, or take a loan against the value of the business. If your business doesn't generate enough income to pay off a loan for 20% of its value within several years, it's not a very good business and you should sell it.
Value of the business is based on expected profits times a multiplier.  So if you're taking a tax based on value, you are taxing (future) profits (or past profits, if you spread that tax out over several years after the sale).  If the government is also taxing actual profits, then it's double-taxation, no?

BDWW has touched on the point of "who ends up buying the business?" as well.  It may be counterintuitive, but if goal is to prevent consolidation of wealth, reducing the exemption would seem to be ill-advised.

I can't think of a single thing that's as capital intensive with such a low rate of return.

I repeat: if it returns so little that you can't use a portion of the profit to pay off a 20% loan well before the next generation dies, it's a bad business and you should sell it.
But why should it be the government's role to make that decision by forcing the issue?  What net positive result comes from such a situation?

GodlessCommie

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In fact, I think a VAT is probably the "fairest" tax, and a wealth tax makes little sense.  All the money in the world doesn't do you any good unless and until you spend it, so a VAT neatly aligns a person's taxes with their level of consumption/benefits gained.

I would disagree here. Taxes tied to consumption are the exact opposite of fair. Poor must spend 100% of what they earn. The higher you go up the wealth ladder, the greater share of your income you can afford not to spend, until it becomes negligible. You just further entrench the situation where Buffet pays a lower tax rate than his secretary.

Luck12

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I assume any government who can create digital currency with fiat money does not need to “borrow“. They just create new money (like they printed it historically) and increase the money supply.

Some of the new money will result in more demand for goods than the supply side can handle and that will create some inflation. Hopefully most of the new money will be invested in things that enhance democratic institutions and  traditionally create economic growth over time.

You assume correctly.  Good on you for being one of the few here who gets it.  Things don't need to be "paid for", deficits and debt don't matter in and of themselves.   Only thing that matters is inflation.  The correct question is not "how are you going to pay for it?", rather it's "how will you resource it?". 

Take Medicare for All.  What's important is will we be able to have enough doctors , hospitals, etc to meet the increased demand for medical services.  What will happen to inflation as a result of increased spending on consumer goods because of people saving money they otherwise would've paid due to exorbitant medical costs.  Also what do we do about the loss of jobs (albeit most are bullshit jobs) that will occur?    That's no need for tax increases to pay for this, tax increases might be needed to control inflation, but that's not the framework and thinking that goes on in Washington.  Initially we might even need tax cuts to make up for decreased consumer demand from those who'll lose their jobs.

The Deficit Myth should be read by everyone who cares about the important deficits in our society:. the health care deficit, the education deficit, the economic mobility deficit, the deficit in worker power vs employer power, etc.  We are hamstringing ourselves by insisting that everything be paid for.  We do not need rich people's money or corporate tax money to improve society.  We just need politicians and citizens to understand how public finance actually works and to unwind the decades of lies and misinformation.  I don't want to explain b/c post is long enough already but our democracy may depend on it.

I have a hard time buying in to simply saying deficits don’t matter. My guess is there’s a giant asterisk attached… *until they do.

As the quotes go, “if something can’t go on forever, it will stop” and “all good things must come to an end.”

JFC every time this comes up the strawmen arguments abound.  Nobody fucking says they don't matter per se, even I said "they don't matter in and of themselves".   Let me repeat:  What matters is inflation, that's the constraint.  There will of course be some point where too much spending leads to too much inflation so you can't just spend anything you want.   But again that's not the lens through which policy is debated unfortunately.  Everything is debated through a "pay for" or "fiscal responsibility" lens when that makes no sense at all for a sovereign currency nation.         

zolotiyeruki

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In fact, I think a VAT is probably the "fairest" tax, and a wealth tax makes little sense.  All the money in the world doesn't do you any good unless and until you spend it, so a VAT neatly aligns a person's taxes with their level of consumption/benefits gained.

I would disagree here. Taxes tied to consumption are the exact opposite of fair. Poor must spend 100% of what they earn. The higher you go up the wealth ladder, the greater share of your income you can afford not to spend, until it becomes negligible. You just further entrench the situation where Buffet pays a lower tax rate than his secretary.
I think you may have missed the part of my post where I propose refunding some base amount to everyone, which would address the concern you raise here.

wageslave23

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In fact, I think a VAT is probably the "fairest" tax, and a wealth tax makes little sense.  All the money in the world doesn't do you any good unless and until you spend it, so a VAT neatly aligns a person's taxes with their level of consumption/benefits gained.

I would disagree here. Taxes tied to consumption are the exact opposite of fair. Poor must spend 100% of what they earn. The higher you go up the wealth ladder, the greater share of your income you can afford not to spend, until it becomes negligible. You just further entrench the situation where Buffet pays a lower tax rate than his secretary.
I think you may have missed the part of my post where I propose refunding some base amount to everyone, which would address the concern you raise here.

Not to mention, like you already said, billions of dollars don't do you any good if you don't spend it.  VAT tax is most fair because you are taxing the benefits of using the money.

ChpBstrd

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In fact, I think a VAT is probably the "fairest" tax, and a wealth tax makes little sense.  All the money in the world doesn't do you any good unless and until you spend it, so a VAT neatly aligns a person's taxes with their level of consumption/benefits gained.

I would disagree here. Taxes tied to consumption are the exact opposite of fair. Poor must spend 100% of what they earn. The higher you go up the wealth ladder, the greater share of your income you can afford not to spend, until it becomes negligible. You just further entrench the situation where Buffet pays a lower tax rate than his secretary.
I think you may have missed the part of my post where I propose refunding some base amount to everyone, which would address the concern you raise here.

I find it fascinating that we have to come up with weird schemes, entirely new tax paradigms, credit and refund rules, etc. as ideas to pay for the federal deficit. We oscillate between worrying about overtaxing poor people and killing the economy.

The U.S. enjoyed GDP growth in the 5.5% to 9.5% range and minimal deficits during the 1960s, so let's agree the country was doing something right WRT taxes and growth at that time. We would be very happy to achieve those results again some day. So what were the tax rates in 1960? Well, they started at 20% for $0-$4,000, 22% for $4,001 to $8k,... all the way up to 91% for income in excess of $400k/year. These funds built the interstate highway system, covered the GI bill, and paid for the Vietnam war and cold war among many other things.
https://taxfoundation.org/historical-income-tax-rates-brackets/
https://fred.stlouisfed.org/series/FYFSGDA188S

The deficit could be eliminated simply through progressive taxation if we wanted to, and it probably wouldn't affect the economy as much as people fear.


GodlessCommie

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I think you may have missed the part of my post where I propose refunding some base amount to everyone, which would address the concern you raise here.

I did miss that, yes. It will. I still don't see what is wrong with taxing income and, above a certain threshold, wealth.

Quote from: wageslave23
Not to mention, like you already said, billions of dollars don't do you any good if you don't spend it.  VAT tax is most fair because you are taxing the benefits of using the money.

Well, if we define "fair" as "taxing the benefits of using the money" then yes, it is most fair. Otherwise, I would suggest that most of the societies on this planet tax income precisely because people see that as fair.

I also find it extremely puzzling that people whose whole financial philosophy is to earn a lot and spend a little favor taxing spending, and not income. It's not like this scheme will favor Mustachians or anything.

zolotiyeruki

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I find it fascinating that we have to come up with weird schemes, entirely new tax paradigms, credit and refund rules, etc. as ideas to pay for the federal deficit. We oscillate between worrying about overtaxing poor people and killing the economy.

The U.S. enjoyed GDP growth in the 5.5% to 9.5% range and minimal deficits during the 1960s, so let's agree the country was doing something right WRT taxes and growth at that time. We would be very happy to achieve those results again some day. So what were the tax rates in 1960? Well, they started at 20% for $0-$4,000, 22% for $4,001 to $8k,... all the way up to 91% for income in excess of $400k/year. These funds built the interstate highway system, covered the GI bill, and paid for the Vietnam war and cold war among many other things.
https://taxfoundation.org/historical-income-tax-rates-brackets/
https://fred.stlouisfed.org/series/FYFSGDA188S

The deficit could be eliminated simply through progressive taxation if we wanted to, and it probably wouldn't affect the economy as much as people fear.
If economic growth were a function of only tax rates, then this could certainly be the start of a productive discussion.

bill1827

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I'd be willing to consider a VAT, *if* it replaced every other tax out there (income, gas, inheritance, SS, etc).  In fact, I think a VAT is probably the "fairest" tax, and a wealth tax makes little sense.  All the money in the world doesn't do you any good unless and until you spend it, so a VAT neatly aligns a person's taxes with their level of consumption/benefits gained.  The issue of essential goods is a real thing, and so is the whole lobbying about what is "essential."  To solve that issue, I'd propose pairing a VAT with a basic refund.  For example, let's call it a 25% VAT on everything, and then we refund the VAT on the first $20k of spending to single people, on the first $40k to married people, and on the next $4k for each dependent.

As implemented in countries that impose VAT it is definitely not a fair tax. People on low incomes tend to spend pretty much all of their income, so would pay a large percentage of it as tax; people with great wealth spend a small proportion of their wealth so, all things being equal, would pay a smaller proportion of it as tax.

However, that's not the worst issue. VAT is an avoidable tax. The Value Added bit should give a clue. Every transaction in the supply chain generates a tax charge, but businesses reclaim the VAT that they have paid to their suppliers but charge their customers VAT and submit that VAT to the tax collector. That gives VAT registered organisations the ability to reclaim all the VAT on items that they buy: of course wealthy individuals always structure their finances so they appear to be businesses, hence they pay very little VAT.

The way that VAT raising countries try to control some of the regressive nature of the tax is to use variable rates. Essentials such as food and children's clothes are zero rated. In the UK fuel is rated at 5% instead of 20%. Of course there are stupid anomalies such as books and other printed materials being zero rated (unless they are electronic).

IOW VAT is no better than any other tax in terms of fairness and simplicity.

zolotiyeruki

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I think you may have missed the part of my post where I propose refunding some base amount to everyone, which would address the concern you raise here.

I did miss that, yes. It will. I still don't see what is wrong with taxing income and, above a certain threshold, wealth.
Here's what I find objectionable about taxing income and wealth:  If income were taxed at a flat rate, period, then I wouldn't have a problem with it.  However, we have a progressive tax structure, plus a vast array of public assistance programs.  That means that someone who earns $100k/year for ten years and then retires will pay way more in taxes than someone who earns $40k/year for 25 years.  It also means that you could retire and increase your spending, but pay lower taxes.  That seems odd to me--someone spending more is arguably benefiting more from government services, so you'd think they ought to be paying more in taxes.

Another issue with taxing income is that it leads to the ridiculously complicated tax structure we have today, with all sorts of deductions, credits, separate tax rates for long-term capital gains, AMT, IRAs, Roth accounts, having to track cost basis, exemptions, depreciation, etc, etc, etc.  In fact, the complexity of the code is a drag on the economy to the tune of hundreds of billions of dollars in just compliance costs.  A flat consumption tax does away with all the complexity that comes with taxing income.  With a consumption tax of, say, 20%, I wouldn't have to worry about whether I have enough money in my taxable accounts and Roth contributions to enable me to build a Roth ladder.  There'd be no RMDs, no pre-tax or post-tax stuff to worry about.  I wouldn't have a need to double up on charitable contributions one year, and take the standard deduction the next year, in order to maximize my deductions.  There'd be no income caps on IRA deductions, no worry about the Investment Order, etc.

Another issue I have with taxing income at varying rates is a more philosophical one:  it is an issue that allows politicians to divide people against each other.  For example, "We want more government spending, but we're going to make those other guys pay for it!  Vote for me!"  If instead, the politicians have to come to everybody with hat in hand and say "We want to implement Medicare for All (or Make our Military Bigger, or pass a big Infrastructure Bill, or whatever), but it'll mean VAT has to go from 25% to 40% for everyone," it's a lot harder to justify.  As it should be, IMO.

As for taxing wealth, I have several concerns:
1) if the goal is to increase government revenue...well, I've addressed that earlier.  Sure, you'd get some
2) if the goal is to address wealth inequality, well, you're only pulling the folks at the top down, not lifting up the folks at the bottom (see #1)
3) taxing wealth is, as I said before, double taxation.
4) how do you define wealth?  What gets included?  Your brokerage account, sure.  But does your house count against you?  What about the small business you've built from scratch?  Your car?  Your college degree?
4) the vast majority of wealth is not cash sitting in a Scrooge McDuck vault.  It's equities, real estate, that sort of thing.  Let's say you want to tax 2% of equities and bonds over a certain threshold.  The Law of Unintended Consequences is gonna bite you.  Investors will expect higher returns in order to cover the increased cost.  That'd be a nice blow to economic growth.  Let's say you still want to do it.  So a guy has to liquidate 2% of his portfolio.  Who's gonna buy it?  All the other multimillionaires out there are trying to do the same thing, and all the Joe Schmoes don't have enough money to buy them, so stock prices will take a massive nosedive, which...also hurts Joe Schmoe's investments.

zolotiyeruki

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I'd be willing to consider a VAT, *if* it replaced every other tax out there (income, gas, inheritance, SS, etc).  In fact, I think a VAT is probably the "fairest" tax, and a wealth tax makes little sense.  All the money in the world doesn't do you any good unless and until you spend it, so a VAT neatly aligns a person's taxes with their level of consumption/benefits gained.  The issue of essential goods is a real thing, and so is the whole lobbying about what is "essential."  To solve that issue, I'd propose pairing a VAT with a basic refund.  For example, let's call it a 25% VAT on everything, and then we refund the VAT on the first $20k of spending to single people, on the first $40k to married people, and on the next $4k for each dependent.

As implemented in countries that impose VAT it is definitely not a fair tax. People on low incomes tend to spend pretty much all of their income, so would pay a large percentage of it as tax; people with great wealth spend a small proportion of their wealth so, all things being equal, would pay a smaller proportion of it as tax.
I think you may have missed the part of my post where I propose refunding some base amount to everyone, which would address the concern you raise here.  Which is odd, because you quoted that exact part of my post..
Quote
However, that's not the worst issue. VAT is an avoidable tax. The Value Added bit should give a clue. Every transaction in the supply chain generates a tax charge, but businesses reclaim the VAT that they have paid to their suppliers but charge their customers VAT and submit that VAT to the tax collector. That gives VAT registered organisations the ability to reclaim all the VAT on items that they buy: of course wealthy individuals always structure their finances so they appear to be businesses, hence they pay very little VAT.
How widespread is this issue?  I've been around long enough to be rather cynical when someone makes a claim along the lines of "so-and-so doesn't pay their fair share of taxes."  There is a long and storied history of such claims falling apart under even the shallowest scrutiny.

GodlessCommie

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Another issue with taxing income is that it leads to the ridiculously complicated tax structure we have today, with all sorts of deductions, credits, separate tax rates for long-term capital gains, AMT, IRAs, Roth accounts, having to track cost basis, exemptions, depreciation, etc, etc, etc.

I don't have the bandwidth to carefully digest your entire post, and don't want to do a disservice to the work you put into writing it. I'll mention, though, that complexity is not an attribute of income tax specifically. It's just a consequence of having an old tax code + political system that makes big changes difficult, but small favors easy. If our system started as VAT-based, it would have grown into a complicated mess it is today, too. In fact, you started with a tax + refund scheme. Every interest will lobby for its own refund, it's own favorable rate, etc. If we can't make a income-based system simple, we can't make a VAT-based system simple, either. 

scottish

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I'd be willing to consider a VAT, *if* it replaced every other tax out there (income, gas, inheritance, SS, etc).  In fact, I think a VAT is probably the "fairest" tax, and a wealth tax makes little sense.  All the money in the world doesn't do you any good unless and until you spend it, so a VAT neatly aligns a person's taxes with their level of consumption/benefits gained.  The issue of essential goods is a real thing, and so is the whole lobbying about what is "essential."  To solve that issue, I'd propose pairing a VAT with a basic refund.  For example, let's call it a 25% VAT on everything, and then we refund the VAT on the first $20k of spending to single people, on the first $40k to married people, and on the next $4k for each dependent.

As implemented in countries that impose VAT it is definitely not a fair tax. People on low incomes tend to spend pretty much all of their income, so would pay a large percentage of it as tax; people with great wealth spend a small proportion of their wealth so, all things being equal, would pay a smaller proportion of it as tax.
I think you may have missed the part of my post where I propose refunding some base amount to everyone, which would address the concern you raise here.  Which is odd, because you quoted that exact part of my post..
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However, that's not the worst issue. VAT is an avoidable tax. The Value Added bit should give a clue. Every transaction in the supply chain generates a tax charge, but businesses reclaim the VAT that they have paid to their suppliers but charge their customers VAT and submit that VAT to the tax collector. That gives VAT registered organisations the ability to reclaim all the VAT on items that they buy: of course wealthy individuals always structure their finances so they appear to be businesses, hence they pay very little VAT.
How widespread is this issue?  I've been around long enough to be rather cynical when someone makes a claim along the lines of "so-and-so doesn't pay their fair share of taxes."  There is a long and storied history of such claims falling apart under even the shallowest scrutiny.

I often think about fair taxation.   Economists like to claim that progressive taxation if 'fair', but of course it's not.   By any mathematical fairness model, progressive taxation is unfair to the people earning the most money who pay way more than their fair share.    An arguably fair taxation system would be a fixed rate (say 30%?) of your income.

That's not to say a fair taxation system would be good for society though.   But I find the misuse of the word 'fair' a bit grating, especially when everyone is calling me an 'elite' because I have an engineering job that puts me in the top 5% of income earners in Canada and I've spent the last 30 years saving and investing so that we're relatively wealthy compared to the median.   A little appreciation for supporting their lifestyle might be nice.

There really isn't anything stopping anyone from doing what all of us here on this forum are doing...   You just need the desire, discipline and patience.      Anyway, back on topic.

seattlecyclone

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There's some nuance, however, in estate taxes.  The classic example is a small business (or farm) built up by a married couple and passed to their kids, worth $1m.

Let's stop here for a moment. I know that "passing on the family farm" has long been a rallying cry in favor of limiting the estate tax. Does that make any sense at all? Why is it important, from a public policy perspective, to allow wealth to pass untaxed if it's in the form of a farm or other small business? As far as I'm concerned, none of the arguments in favor of taxing inheritances fall apart when that inheritance is a business. That inheritance is something the deceased worked hard to form, yes, just the same as if they worked hard to amass a large portfolio of stocks or real estate. There may be more emotional attachment to a business than a mutual fund, and you may have a harder time bringing yourself to sell it for a fair market price (rather than what you instinctively feel your relative's years of blood, sweat, and tears were worth), but should that actually matter when we make our laws?
That's a fair point, and I agree that from a high level, a business or a farm or a stock portfolio all look alike.  But in the case of a family business or farm, it's a bit different, since there is often a whole lot of uncompensated labor from the family.  I suppose the parents could handle that by gradually transferring equity in the farm/business to their kids as a sort of salary?

You should pay your staff, even and especially if they're family. If you can't afford to do this, you are unable to run your business successfully and you should sell it. Paying your family workers in equity during your life instead of leaving it all to them in your will would seem to lessen the amount of estate tax due, yes.

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And how would the government go about determining a value for such a business?

How do they do it today for businesses held in estates that exceed the exemption threshold? Accountants and appraisers hired by the estate make an educated guess, write it down on the estate tax return, and if the IRS cares to dispute it they have a process for resolving that difference of opinion.

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There's also the question of "Why should the government tax the profits of a business, and then tax the value of the business when it sells (or is inherited), and then continue to tax the profits of the business afterward?"  The moral justification for taxing profits is that the government provides services and creates an environment where the business can make a profit.  I suppose you could make the same argument about the government providing a system where business transfers can happen in a reliable way, but not to anywhere near the degree people are talking about taxing inheritances.  Taxing it as it changes hands, based on value (which is presumably based on potential future profit) sounds an awful lot like double taxation to me.

Sure, it's double taxation. So what? The gross sales of a business are commonly taxed, and then the net income is taxed separately. If the remainder is distributed to individual shareholders in a corporation, those dividends will be taxed again. Every step of the way the government is going to take a piece. Depending on you look at it, you can have much more than double taxation on a string of transactions. The transfer of small business equity on death is just one more in a long list of transactions that can be taxed.

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BDWW has touched on the point of "who ends up buying the business?" as well.  It may be counterintuitive, but if goal is to prevent consolidation of wealth, reducing the exemption would seem to be ill-advised.

Yes and no. Perhaps if family farms are sold to giant corporations there are fewer legal owners of farmland, but those corporations are themselves owned by a multitude of different individuals. Their shares will be subject to estate tax the same as anyone else. I view the estate tax as a pretty essential tool to stopping the formation of a hereditary upper class. The revenue raised from the tax is helpful for the budget, sure, but that's a secondary concern in my mind.

I do agree with you in part that consumption taxes are preferable to income taxes in many situations. The maxim "if you want less of something, tax it" rings true to me. We're seeing the beginning of a planetary environmental catastrophe that is the result of excessive consumption, so yeah we should tax consumption more...carbon emissions especially. Income, on the other hand, is something that we generally want to encourage rather than discourage.

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I can't think of a single thing that's as capital intensive with such a low rate of return.

I repeat: if it returns so little that you can't use a portion of the profit to pay off a 20% loan well before the next generation dies, it's a bad business and you should sell it.
But why should it be the government's role to make that decision by forcing the issue?  What net positive result comes from such a situation?

The positive result is limiting generational wealth transfer and helping to level the playing field for the next generation. If the remaining family can find a buyer for just the 20% share being taxed away instead of assuming a loan for that amount, and want to continue running their marginal business with limited profit from then on, more power to them.

bill1827

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I'd be willing to consider a VAT, *if* it replaced every other tax out there (income, gas, inheritance, SS, etc).  In fact, I think a VAT is probably the "fairest" tax, and a wealth tax makes little sense.  All the money in the world doesn't do you any good unless and until you spend it, so a VAT neatly aligns a person's taxes with their level of consumption/benefits gained.  The issue of essential goods is a real thing, and so is the whole lobbying about what is "essential."  To solve that issue, I'd propose pairing a VAT with a basic refund.  For example, let's call it a 25% VAT on everything, and then we refund the VAT on the first $20k of spending to single people, on the first $40k to married people, and on the next $4k for each dependent.

It's not uncommon. Basically if you are a trader (which includes the self employed) with sufficient turnover (>£85,000 p.a. at the moment) you have to register for VAT. Once VAT registered you can claim VAT back on all your inputs. If your turnover is small you have to be careful not to reclaim too much or you will get investigated by the Inland Revenue, but the larger you are the more you can get away with.

As implemented in countries that impose VAT it is definitely not a fair tax. People on low incomes tend to spend pretty much all of their income, so would pay a large percentage of it as tax; people with great wealth spend a small proportion of their wealth so, all things being equal, would pay a smaller proportion of it as tax.
I think you may have missed the part of my post where I propose refunding some base amount to everyone, which would address the concern you raise here.  Which is odd, because you quoted that exact part of my post.

I didn't miss it. I addressed it by saying how VAT using countries address that issue.

However, that's not the worst issue. VAT is an avoidable tax. The Value Added bit should give a clue. Every transaction in the supply chain generates a tax charge, but businesses reclaim the VAT that they have paid to their suppliers but charge their customers VAT and submit that VAT to the tax collector. That gives VAT registered organisations the ability to reclaim all the VAT on items that they buy: of course wealthy individuals always structure their finances so they appear to be businesses, hence they pay very little VAT.
How widespread is this issue?  I've been around long enough to be rather cynical when someone makes a claim along the lines of "so-and-so doesn't pay their fair share of taxes."  There is a long and storied history of such claims falling apart under even the shallowest scrutiny.

It's not uncommon. If you run a business (including being self employed) you have to register for VAT if your turnover is more than £85,000 p.a. That gives you the opportunity to reclaim VAT on all your inputs, as long as you can justify them as a legitimate business expense, so many items which are basically for personal use can have VAT reclaimed. If you are a limited company you have more options to reduce your tax liability, and you can be sure that people will do that.

JLee

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I think you may have missed the part of my post where I propose refunding some base amount to everyone, which would address the concern you raise here.

I did miss that, yes. It will. I still don't see what is wrong with taxing income and, above a certain threshold, wealth.
Here's what I find objectionable about taxing income and wealth:  If income were taxed at a flat rate, period, then I wouldn't have a problem with it.  However, we have a progressive tax structure, plus a vast array of public assistance programs.  That means that someone who earns $100k/year for ten years and then retires will pay way more in taxes than someone who earns $40k/year for 25 years.  It also means that you could retire and increase your spending, but pay lower taxes.  That seems odd to me--someone spending more is arguably benefiting more from government services, so you'd think they ought to be paying more in taxes.

Another issue with taxing income is that it leads to the ridiculously complicated tax structure we have today, with all sorts of deductions, credits, separate tax rates for long-term capital gains, AMT, IRAs, Roth accounts, having to track cost basis, exemptions, depreciation, etc, etc, etc.  In fact, the complexity of the code is a drag on the economy to the tune of hundreds of billions of dollars in just compliance costs. A flat consumption tax does away with all the complexity that comes with taxing income.  With a consumption tax of, say, 20%, I wouldn't have to worry about whether I have enough money in my taxable accounts and Roth contributions to enable me to build a Roth ladder.  There'd be no RMDs, no pre-tax or post-tax stuff to worry about.  I wouldn't have a need to double up on charitable contributions one year, and take the standard deduction the next year, in order to maximize my deductions.  There'd be no income caps on IRA deductions, no worry about the Investment Order, etc.

Another issue I have with taxing income at varying rates is a more philosophical one:  it is an issue that allows politicians to divide people against each other.  For example, "We want more government spending, but we're going to make those other guys pay for it!  Vote for me!"  If instead, the politicians have to come to everybody with hat in hand and say "We want to implement Medicare for All (or Make our Military Bigger, or pass a big Infrastructure Bill, or whatever), but it'll mean VAT has to go from 25% to 40% for everyone," it's a lot harder to justify.  As it should be, IMO.

As for taxing wealth, I have several concerns:
1) if the goal is to increase government revenue...well, I've addressed that earlier.  Sure, you'd get some
2) if the goal is to address wealth inequality, well, you're only pulling the folks at the top down, not lifting up the folks at the bottom (see #1)
3) taxing wealth is, as I said before, double taxation.
4) how do you define wealth?  What gets included?  Your brokerage account, sure.  But does your house count against you?  What about the small business you've built from scratch?  Your car?  Your college degree?
4) the vast majority of wealth is not cash sitting in a Scrooge McDuck vault.  It's equities, real estate, that sort of thing.  Let's say you want to tax 2% of equities and bonds over a certain threshold.  The Law of Unintended Consequences is gonna bite you.  Investors will expect higher returns in order to cover the increased cost.  That'd be a nice blow to economic growth.  Let's say you still want to do it.  So a guy has to liquidate 2% of his portfolio.  Who's gonna buy it?  All the other multimillionaires out there are trying to do the same thing, and all the Joe Schmoes don't have enough money to buy them, so stock prices will take a massive nosedive, which...also hurts Joe Schmoe's investments.

If you don't think that is by design, I have some news for you.

https://www.propublica.org/article/inside-turbotax-20-year-fight-to-stop-americans-from-filing-their-taxes-for-free

zolotiyeruki

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Another issue with taxing income is that it leads to the ridiculously complicated tax structure we have today, with all sorts of deductions, credits, separate tax rates for long-term capital gains, AMT, IRAs, Roth accounts, having to track cost basis, exemptions, depreciation, etc, etc, etc.
I don't have the bandwidth to carefully digest your entire post, and don't want to do a disservice to the work you put into writing it. I'll mention, though, that complexity is not an attribute of income tax specifically. It's just a consequence of having an old tax code + political system that makes big changes difficult, but small favors easy. If our system started as VAT-based, it would have grown into a complicated mess it is today, too. In fact, you started with a tax + refund scheme.
That's a fair point--maintaining the simplicity of a VAT would require either extraordinary discipline (by politicians? ha!) or a constitutional amendment.

If you don't think that is by design, I have some news for you.

https://www.propublica.org/article/inside-turbotax-20-year-fight-to-stop-americans-from-filing-their-taxes-for-free
Yeah, this is a perfect example of rent-seeking, and in my opinion, is absolutely despicable.
I think you may have missed the part of my post where I propose refunding some base amount to everyone, which would address the concern you raise here.  Which is odd, because you quoted that exact part of my post.

I didn't miss it. I addressed it by saying how VAT using countries address that issue.
I'm reading and re-reading your quote, and I don't see where you explained how countries address the issue of people skirting around VAT.  Are your referring to the variable rates? If so, I don't see how variable rates help enforce VAT.  What am I missing from what you wrote?
Quote
However, that's not the worst issue. VAT is an avoidable tax. The Value Added bit should give a clue. Every transaction in the supply chain generates a tax charge, but businesses reclaim the VAT that they have paid to their suppliers but charge their customers VAT and submit that VAT to the tax collector. That gives VAT registered organisations the ability to reclaim all the VAT on items that they buy: of course wealthy individuals always structure their finances so they appear to be businesses, hence they pay very little VAT.
How widespread is this issue?  I've been around long enough to be rather cynical when someone makes a claim along the lines of "so-and-so doesn't pay their fair share of taxes."  There is a long and storied history of such claims falling apart under even the shallowest scrutiny.
It's not uncommon. If you run a business (including being self employed) you have to register for VAT if your turnover is more than £85,000 p.a. That gives you the opportunity to reclaim VAT on all your inputs, as long as you can justify them as a legitimate business expense, so many items which are basically for personal use can have VAT reclaimed. If you are a limited company you have more options to reduce your tax liability, and you can be sure that people will do that.
Right, I get the idea of how people *can* try to skirt around VAT.  But is there any data on how prevalent it is?  Besides, that sounds not like a way to skirt around VAT, but rather a way to plump up deductions against earnings.  Raw materials that a company uses in producing a good are very different from, say, a company truck that is used to transport them, or a computer used for accounting.  Am I missing a key aspect of VAT?

Sure, it's double taxation. So what? The gross sales of a business are commonly taxed, and then the net income is taxed separately. If the remainder is distributed to individual shareholders in a corporation, those dividends will be taxed again. Every step of the way the government is going to take a piece. Depending on you look at it, you can have much more than double taxation on a string of transactions. The transfer of small business equity on death is just one more in a long list of transactions that can be taxed.
Quote
BDWW has touched on the point of "who ends up buying the business?" as well.  It may be counterintuitive, but if goal is to prevent consolidation of wealth, reducing the exemption would seem to be ill-advised.
Yes and no. Perhaps if family farms are sold to giant corporations there are fewer legal owners of farmland, but those corporations are themselves owned by a multitude of different individuals. Their shares will be subject to estate tax the same as anyone else. I view the estate tax as a pretty essential tool to stopping the formation of a hereditary upper class. The revenue raised from the tax is helpful for the budget, sure, but that's a secondary concern in my mind.

I do agree with you in part that consumption taxes are preferable to income taxes in many situations. The maxim "if you want less of something, tax it" rings true to me. We're seeing the beginning of a planetary environmental catastrophe that is the result of excessive consumption, so yeah we should tax consumption more...carbon emissions especially. Income, on the other hand, is something that we generally want to encourage rather than discourage.
Quote
But why should it be the government's role to make that decision by forcing the issue?  What net positive result comes from such a situation?
The positive result is limiting generational wealth transfer and helping to level the playing field for the next generation. If the remaining family can find a buyer for just the 20% share being taxed away instead of assuming a loan for that amount, and want to continue running their marginal business with limited profit from then on, more power to them.
If I may, it sounds like your positions are that 1) limiting generational wealth transfer is a worthy objective, and its side-effects (e.g. corporate consolidation) are acceptable, and that 2) double taxation is ok, and 3) a consumption tax is preferable to income tax.

I agree wholeheartedly with you on 3).  I strongly disagree with you on 2), but that's a whole other discussion (when you talk about gross sales being taxed, what are you referring to?  Sales tax?  Because that's administered by the states, not the federal government, unless you're talking about gasoline).  On 1) I understand there's a very real emotional component to it, but does "limiting generational wealth transfer," actually lead to sustainable, long-term economic benefit for lower economic classes?  Or does it simply disappear into the endless rat hole of government spending?
« Last Edit: August 25, 2021, 08:18:57 AM by zolotiyeruki »

Tyler durden

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Been a while since I've seen it so I looked it up again. Regardless of how high we raise taxes, the revenue the Federal government collects never really goes about 20% of our GDP. So it seems people adjust behavior based on tax rates. Essentially taxing more may help some, but we need to spend less than about 18-19% of our GDP to maintain a balanced budget

*Edit to add "its the spending stupid"

https://reason.com/2010/11/29/the-remarkably-stable-amount-o/



« Last Edit: August 25, 2021, 10:04:40 AM by Tyler durden »