14 votes

How to increase taxes on the rich (if you must)

13 comments

  1. [10]
    daychilde
    Link
    Neither are poor people, and yet they seem to be demonized. Uh, no it's not. When you look at the extremity of income inequality, there is absolutely no way to justify it. Not the level of...

    Rich people are not all the same

    Neither are poor people, and yet they seem to be demonized.

    In this brief essay, I won’t comment on whether we should redistribute more. That question is hard,

    Uh, no it's not. When you look at the extremity of income inequality, there is absolutely no way to justify it. Not the level of inequality people think should exist, or even the level people think exists; those would be fine enough. But the level at which is actually is is completely extreme.

    But okay, I'll keep reading.

    earns, say, $10 million a year

    I mean, okay, but it's the billionaires and above that should be the primary focus. At least the author doesn't believe we're railing against people making 200k/yr. I'd think $10m/yr would probably be around the upper bounds for reasonable income inequality, but okay, let's keep going.

    Who should pay higher taxes? Sam Spendthrift or Frank Frugal?

    Why would how anyone spends their money be a tax issue? Do we ask the same for poor people? I suppose we do - there's people who think those on welfare somehow are able to eat steak and shrimp and drive fancy cars, when the reality is not so. That type of person might judge how someone spends their money. I don't. At least not in this context. I'd judge if someone spent money trying to impose their religion on the country, for example, or to support racism. But that's a different discussion.

    [rephrasing, so not a quote per se] Some tax plans hit the saver harder than the spender, so perhaps VAT would be better

    Sales tax is regressive. However, VAT is not quite the same since VAT doesn't (or shouldn't/wouldn't) apply to things like food.

    So why not both? Again, it's not (or shouldn't be) people making a million bucks who are the problem. It's the top thousand or so families who look at the people making $10m/yr and think of them as poor. THOSE are the target.

    I guess I have strong objections about who is or should be the main target of the discussions about income inequality. But as far as the relatively little substantive discussion in the PDF, sure, I'm open to some of these ideas.

    I also am a strong supporter of UBI. We need to make sure that nobody faces starvation in this country. And as productivity continues to rise and rise, we need to make sure a fair share of that goes into the pockets of the workers instead of increasingly putting more and more wealth in the hands of the lucky few who skim it off of the people, keeping everyone down.

    There's no excuse in this country not to have universal health care working in whatever form. There's no excuse for there not to be safety nets. There's no excuse the wealth concentrated in the hands of a tiny tiny few should mean so many live in poverty.

    Let's have a safety net for everyone. If some people don't want to work, fine, let them have a basic existence. If some people can't work due to mental or physical issues - we have the wealth to take care of them. For those that are willing and able to work, we should have protections on place for them for a safe work environment, fair wages. And while we're on it, let's talk sick time and vacation. We can do all this and still let the wealthy be wealthy. Nobody¹ wants there to be zero wealthy people. That's a distraction. We just don't want the people with billions and billions to have that much on the backs of everyone else.

    If everyone is getting a fair shake - health care, UBI, protections, etc - if in that environment some can still be ultra-ultra-rich? Well, I'm a bit less concerned.


    ¹ well, very very very few

    33 votes
    1. [9]
      skybrian
      Link Parent
      An argument for VAT is that it's a better way to tax corporations since they can avoid income tax fairly easily by increasing or playing games with expenses. (Yang uses Amazon as an example of...

      An argument for VAT is that it's a better way to tax corporations since they can avoid income tax fairly easily by increasing or playing games with expenses. (Yang uses Amazon as an example of this.) The difference between a VAT and a corporate income tax seems to be that fewer expenses can be subtracted from revenue?

      But then we should look at tax incidence. When deciding who pays a tax (the buyer or the seller) we need to take into account how prices will change. If the seller can raise prices to cover the VAT then the buyer effectively pays it. If there is enough competition then it might come out of profit margins instead.

      This might be an argument for relying more on personal income tax? Not sure about that. It's complicated.

      6 votes
      1. [2]
        daychilde
        Link Parent
        Sounds like I need to go do more reading on VAT - since we don't have it here. My understanding of VAT is that basically it was sales tax on, like, non-food items. So it targets non-essentials and...

        Sounds like I need to go do more reading on VAT - since we don't have it here. My understanding of VAT is that basically it was sales tax on, like, non-food items. So it targets non-essentials and is therefore at least a less regressive tax.

        I'm glad for your reply! I'll go off to learn more now :)

        edit: I had the idea of VAT a bit wrong. Basically, for anyone else confused like me: It is, at the most simple level, not about the type of product, but about the manufacturers. As something is produced and sold, each company involved pays tax relative to the amount of increased value they added to the product. https://en.wikipedia.org/wiki/Value-added_tax

        5 votes
        1. skybrian
          Link Parent
          VAT seems confusing because there are a couple different ways to calculate it that are mostly equivalent. But I think it's still true that some products can be exempted, like a sales tax? Here's...

          VAT seems confusing because there are a couple different ways to calculate it that are mostly equivalent. But I think it's still true that some products can be exempted, like a sales tax?

          Here's what I mean by it being sorta like an income tax: for a business, profits are revenue minus expenses. The "value added" in a VAT is based on revenue minus the cost of some inputs, where those inputs are a subset of expenses where the supplier already paid VAT. So the business can subtract a lot less of their costs than they could with an income tax.

          (I think. I'm not an expert on it or anything.)

          2 votes
      2. [6]
        DanBC
        Link Parent
        I don't know what definition you're using for VAT. In most places VAT is collected by the vendor businesses, but paid for by the end consumer. Businesses are exempt from paying VAT (if they've...

        An argument for VAT is that it's a better way to tax corporations since they can avoid income tax fairly easily by increasing or playing games with expenses. (Yang uses Amazon as an example of this.) The difference between a VAT and a corporate income tax seems to be that fewer expenses can be subtracted from revenue?

        I don't know what definition you're using for VAT. In most places VAT is collected by the vendor businesses, but paid for by the end consumer. Businesses are exempt from paying VAT (if they've reached certain financial thresholds).

        1 vote
        1. [5]
          skybrian
          Link Parent
          I'm no expert but that sounds kinda backwards from what I'm reading? From what I can tell, it's pretty fundamental that VAT is paid by every business in the supply chain, not just retail sales?...

          I'm no expert but that sounds kinda backwards from what I'm reading? From what I can tell, it's pretty fundamental that VAT is paid by every business in the supply chain, not just retail sales? (This is different from sales tax where wholesale purchases and products bought "for resale" don't get taxed at all.) In both VAT and sales tax, the idea is to avoid double-taxation, but they do it in different ways.

          Also, it looks like businesses below a certain size may be exempt from VAT?

          In most EU countries you can apply for a special scheme that enables you to trade under certain conditions without the need to charge VAT. If your company makes taxable supplies of goods or services below a certain annual limit, it may be exempt from VAT. This means you will not pay VAT to the tax administration but you will then not be able to deduct the input VAT or to indicate VAT on invoices. You may — if you choose — voluntarily opt for the normal VAT arrangements, in which case you must pay VAT and, consequently, can deduct the input VAT.

          From: https://europa.eu/youreurope/business/taxation/vat/vat-exemptions/index_en.htm

          As for who pays, that gets into the issue of "tax incidence". Businesses try to make their prices appear as low as possible. Putting in separate line items for taxes and/or excluding a tax from their prices is a way to do that, but what really matters is the total amount that you pay.

          From an economics perspective, who really pays a tax depends on how businesses update their prices to cover the tax. They might try to pass the entire tax on to consumers, but if the market is competitive, some of the tax might come out of their profit margins.

          4 votes
          1. [4]
            DanBC
            Link Parent
            VAT is chargeable at each stage of the supply chain, but most businesses in that supply chain will be VAT-registered and thus will claim it back. But the main point is that VAT is not a tax on...

            VAT is chargeable at each stage of the supply chain, but most businesses in that supply chain will be VAT-registered and thus will claim it back.

            But the main point is that VAT is not a tax on businesses (even though they collect it), it's a tax on end consumers.

            1. [3]
              skybrian
              Link Parent
              I understand that you're asserting that it's a tax on consumers, but how do you know that? Is it just that any business expense could be passed on to consumers? That doesn't seem to be how tax...

              I understand that you're asserting that it's a tax on consumers, but how do you know that?

              Is it just that any business expense could be passed on to consumers? That doesn't seem to be how tax incidence works? Here's an introduction to tax incidence.

              1. [2]
                DanBC
                Link Parent
                In the UK a business can register for VAT (and must register if they meet certain financial thresholds). A VAT registered business buying from another VAT registered business must pay VAT on most...

                In the UK a business can register for VAT (and must register if they meet certain financial thresholds). A VAT registered business buying from another VAT registered business must pay VAT on most items it buys, but can then reclaim that VAT from the government. A person cannot register for VAT as a private individual, and they only way they can reclaim VAT is if they live outside the EU and are taking the goods home or are a sole trader (a business) registered for VAT.

                In the UK adverts for goods and services must by law include the VAT, unless they're targetted at businesses. EG, this kitchen suppliers includes price without VAT and price including VAT. https://www.lockhart.co.uk/Kitchen-Equipment/Cooking-and-Bakeware/Pots-and-Pans~c~G2H This website aimed at consumers only has the price with VAT. https://www.johnlewis.com/browse/home-garden/cooking-baking/pots-pans/_/N-7d3b

                This is because consumers pay VAT and cannot reclaim it.

                https://www.theguardian.com/money/2010/dec/31/vat-brief-history-tax

                "Value Added Tax is a misleading entrepreneurial-sounding moniker for a tax ultimately paid by the consumer. In effect, it is a general consumption tax on goods and services, calculated by adding all of the costs involved in making and distributing goods or services, minus the amount that businesses can claim back during the production process for their "inputs": the raw materials, goods and services acquired in making the finished product."

                https://en.wikipedia.org/wiki/Value-added_tax

                "A value-added tax (VAT), known in some countries as a goods and services tax (GST), is a type of tax that is assessed incrementally. Like an income tax, it is based on the increase in value of a product or service at each stage of production or distribution. However, a VAT is collected by the end retailer and is usually a flat tax, and is therefore frequently compared to a sales tax."

                https://www.investopedia.com/ask/answers/011915/what-valueadded-tax-vat-and-who-pays-it.asp

                "Only business-to-customer sales are applicable for a VAT charge. Business-to-business sales may be exempted."

                https://www.gov.uk/vat-businesses

                "VAT-registered businesses:

                must charge VAT on their goods or services
                may reclaim any VAT they’ve paid on business-related goods or services"
                

                for businesses: "You need to know the right VAT rate so you can charge it correctly and reclaim it on your purchases."

                This collection and reclamation of VAT at every step is how carousel fraud / missing trader fraud can happen.

                https://www.europol.europa.eu/crime-areas-and-trends/crime-areas/economic-crime/mtic-missing-trader-intra-community-fraud

                More complex cases of VAT fraud are typically known as carousel frauds. As part of these fraud schemes, goods are imported and sold through a series of companies before being exported again. The first company in the domestic chain charges VAT to a customer, but does not pay this to the government, becoming what is known as a "missing trader". The exporters of these goods claim and receive the reimbursement of VAT payments that never occurred.

                https://uk.reuters.com/article/uk-carousel-fraud-britain-factbox-sb/factbox-how-carousel-fraud-works-idUKTRE57J43U20090820

                A more complicated form is called “carousel fraud.” Goods are imported VAT-free but are not sold for consumption in the home market. The goods are sold through a series of companies, each liable to VAT, before being exported, possibly even back to the original seller.

                In this type of fraud, the first link in the chain often goes missing without accounting for the VAT. The final link in the chain reclaims the VAT it has paid from the government before disappearing.

                3 votes
                1. skybrian
                  (edited )
                  Link Parent
                  Thanks. Based on this and other reading I'm tentatively concluding that VAT being paid by consumers is at least conventional wisdom. It seems tax incidence can be a bit murky in general. From an...

                  Thanks. Based on this and other reading I'm tentatively concluding that VAT being paid by consumers is at least conventional wisdom.

                  It seems tax incidence can be a bit murky in general. From an old working paper at the World Bank:

                  Incidence studies can usefully be characterized as the "quantification of incidence assumptions." That is, economic theory provides "best guesses'' as to the incidence of various taxes among such broad groups as consumers, workers, and owners of capital, or burdens on such finely delineated groups as consumers of tobacco products, workers in a given Industry, corporate shareholders, etc. These group burdens are then attributed to income classes on the basis of the best available information on the distribution of the economic activity bearing the tax (consumption, labor income, capital income, cigarette smoking, or whatever) among the income classes. The tax burdens are ordinarily expressed as effective tax rates, that is, as percentages of income in each income class, so that a judgment can be made about the progressivity of the various taxes.

                  Clearly the results of such studies of tax incidence can be no better than the incidence assumptions and data underlying them. In some cases, for example, an excise tax on tobacco products or even a broad-based value added tax, tax incidence may be relatively straight-forward: smokers and consumers, respectively, probably pay these two taxes. 2 But in other cases, including the corporation income tax and the property tax, the answer is far less clear. Theory may give conflicting answers, even for thoughtful analysts, and empirical evidence is woefully deficient and ambigious. Even worse, "standard" incidence assumptions are often uncritically applied in situations in which they are not appropriate. Finally, the data required for a careful analysis of tax incidence often do not exist, especially in developing countries, Thus results for effective tax rates reported to the second decimal place exhibit "misplaced concreteness." Analysts are lucky if they know the last digit before the decimal with any confidence, and should not pretend otherwise. Unfortunately, few admit the weaknesses of their analyses (even if they recognize them), and the reader is often left to his or her own devices in discovering what has been done that may not be legitimate.

                  2 votes
  2. [2]
    Loire
    Link
    This is not my expertise but isn't Spendthrift doing more for the economy by having his income flow through wine/car/clothing/etc companies while Frugal is hoarding his capital long term...

    This is not my expertise but isn't Spendthrift doing more for the economy by having his income flow through wine/car/clothing/etc companies while Frugal is hoarding his capital long term sequestering it from the economy? And after multiple decades, barely releasing it be granting it to an institution that itself will likely hoard the majority of it forever?

    Why is "saving" what amounts to hundreds of millions of dollars seen as a net benefit for the economy?

    12 votes
    1. skybrian
      Link Parent
      I agree that saving money doesn't do much by itself. It's essentially passive. Some people argue that saving money in a bank account allows it to be invested, but if you spent the money it would...

      I agree that saving money doesn't do much by itself. It's essentially passive. Some people argue that saving money in a bank account allows it to be invested, but if you spent the money it would be in a different bank account, plus you caused or rewarded some economic activity. Either way, some bank somewhere has a low-interest loan in the form of a deposit.

      But, Mankiw stacks the deck by saying that Frugal is an active investor who is actually good at picking profitable companies. (Hard to do!)

      Also, while spending causes economic activity, not all economic activity is the same. The people who are catering to Spendthrift's whims could be doing something better with their lives. Spending could be worse than doing nothing if it competes with other spending that's more helpful. Though, it does redistribute the money, reducing long-term inequality, and whoever gets the money as salary or whatever can then go out and spend it on something better.

      So, it depends. I'm not sure that's the strongest part of the essay but I agree with the larger point that rich people aren't all the same. Frugal is sort of neutral compared to someone like Bill Gates who funds charity work that wouldn't have been done at the same scale otherwise and encourages other billionaires to do the same. (Frugal's charity work is mediocre in comparison too.)

      3 votes
  3. skybrian
    (edited )
    Link
    From the essay:

    From the essay:

    First, if you find something like plan A attractive and you recognize the equivalence of plan A and plan B, you should find something like plan B attractive. Many critics of universal basic income fail to make this leap because they do not notice the equivalence of these two approaches. Once you see the equivalence, Plan B is easier to embrace. And it looks even better when you realize that universal benefits and flat taxes are easier to administer than means-tested benefits and progressive taxes.

    The second lesson from this example is how misleading it can be to focus on taxes and transfers separately. It is accurate to say that Plan A has lower taxes, more progressive taxes, and more progressive transfers. But so what? Those facts do not stop it from being precisely equivalent to plan B. The equivalence is clear only when taxes and transfers are considered together.

    4 votes