I think a flat tax is a horrible idea. Hayek thought it was good. It is't! It's a disaster as long as the return on capital is greater than growth in the GDP, which it is.
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Will Capitalism Survive/Fix This?
- Thread starter tommo
- Start date
Why not let everything operate tax free until it is converted into income either through wages, dividend or interest and then tax it at a very progressive rate? Dividends would probably be eliminated by most companies, but cap gains would be tax free. I don't understand why corporations or any business is taxed at all.I think a flat tax is a horrible idea. Hayek thought it was good. It is't! It's a disaster as long as the return on capital is greater than growth in the GDP, which it is.
Why not let everything operate tax free until it is converted into income either through wages, dividend or interest and then tax it at a very progressive rate? Dividends would probably be eliminated by most companies, but cap gains would be tax free. I don't understand why corporations or any business is taxed at all.
I mean, it's the easiest way for a government to raise money.
I think you can imagine all the ways a savvy business-owner could avoid paying tax if all he had to do was to avoid directly giving himself an income.
There is innovative thinking here which is good, but I am having trouble understanding the implementation and the consequences. After thinking about this some more, perhaps you could elaborate with a bit more detail.Why not let everything operate tax free until it is converted into income either through wages, dividend or interest and then tax it at a very progressive rate? Dividends would probably be eliminated by most companies, but cap gains would be tax free. I don't understand why corporations or any business is taxed at all.
Every tax scheme I ever come up with always breaks down at some point. In this case, the trouble with treating wages as income but profits exempt is it doesn't take into account the very very small business man who is selling his labor. I'm beginning to think this whole tax idea, and I mean all taxes of any kind are flawed and need to be re thought way outside the kitchen table we have bills and we need income box.There is innovative thinking here which is good, but I am having trouble understanding the implementation and the consequences. After thinking about this some more, perhaps you could elaborate with a bit more detail.
Hayek was opposed to progressive taxes because by taxing people progressively he believed the state was not treating everyone equally. This thinking is clearly wrong however. Brilliant as Hayek was, and despite his several important contributions to modern economics, his reasoning on progressive taxation represents a major flaw in his economic views; reasoning that can not stand up to close scrutiny.I think a flat tax is a horrible idea. Hayek thought it was good. It is't! It's a disaster as long as the return on capital is greater than growth in the GDP, which it is.
Here's why. If one ranks the dollars earned by the order in which they are earned, then the first dollar earned has rank 1, the tenth, rank 10, the thousands, rank 1000nth, the millionth, rank 1,000,000nth, etc. In progressive taxation, taxable dollars of one's income are all taxed at exactly the same rate according to rank. That is, if one person has taxable income of 30,000 and another has a taxable income of 3,000,000 both pay precisely the same rate on dollars one through 30,000! It is just that the first earner has no taxable earned income of dollars ranking above 30,000, whereas the second earner does. The first earner would happily pay a higher rate on dollars of rank greater than 30,000 if offered the option of a higher income with the stipulation that dollars of rank higher than 30,000 will be taxed at a higher rates than dollars of rank 30,000 or less.
I hate to be so pedantic, but I think this tedious example explains nicely why progressive taxation treats everyone exactly the same and therefore why Hayek's reasoning was wrong on this point.
So what is unequal about these two tax payers? Well, one has more taxable income than the other. There is no proponent of modern Western economics today that thinks everyone should have the same income. Certainly Hayek did not think that. The different amounts of total tax paid by these two example earners is not a consequence of unequal treatment by the State; it's a consequence of our inherent nature that causes one person to be different from another.
Having established that progressive taxation, in itself, does not entail the State treating people unequally. We can explore why progressive taxation is beneficial to society, and why, to the extent that progressiveness is wrung out of taxation, society is is endangered.
To be rigorous here. We would first have to establish that the more lopsided the wealth distribution in a society is, the greater the potential for societal instability. But that is a separate argument. So for the sake of expediency, let us assume that this is true. In other words, we will assume that extremes in wealth distribution are undesirable, and leave "extremes" undefined.
We except as correct, as it can be simply established as true, that the return on capital is greater than the growth rate in GDP. What this means in practical terms is that in the natural course of time those whose entire income comes from labor wages will build wealth more slowly than those whose entire income comes from invested capital. And their will be a spectrum of combination incomes between these two extremes. In general then, it is self-evident that due to returns on capital > GDP growth, the more lopsided the distribution of capital within a society is, the greater will be the rate at which wealth disparity increases. A progressive tax taxes dollars of higher rank at a greater rate. And dollars of higher rank make a greater contribution to capital. To the extent that taxes are progressive, the rate of increase in wealth disparity is therefore reduced.
This seems a benefit to society in terms of increased stability, and therefore greater progressiveness, up to the point where personal industriousness begins to be lost, is beneficial. A flat tax represents the total abandonment of progressiveness, and thus is most harmful to society in greatly accelerating the rate at which wealth disparity increases.
The effect of decreased progressiveness on the growth rate of wealth disparity can be seen perfectly illustrated in U.S. economic data from about 1980 forward. We began a steep loss of progressiveness in the 1980's and the acceleration of wealth disparity since is dramatic. It is to be noted that there is a compounding in this effect that causes it to follow an exponential function and thus a small loss in progressiveness can, given time , be quite destabilizing.
One way to counter the pernicious effects of excessive wealth disparity would be to tax capital earnings at higher rates. We currently tax it at lower rates than earned income. I haven't seen any initiatives along the lines of increasing tax rates on capital earnings, i.e., what the IRS calls 'unearned income,' but there is this and other potential remedies waiting in the wings. We are not done for by any means, but we are by and large a nation driven to action by crises; when the crisis arrives, we act, but often not before.
_____________________
An argument can be made, and often is, that greater wealth among a few at the very top of the wealth distribution need not be accompanied by redistribution of wealth upward. And probably theory can support that notion so long as a nations aggregate wealth can expand at a sufficient rate. In practice, this seems not to be true in the specific example of the United States economy from 1980 forward. In constant dollars, a rapid acceleration in wealth accumulation among a very few at the top of the distribution appears to have been accompanied by little or no accumulation among a large portion of the population and a small decrease in wealth among a substantial number nearer the bottom of the distribution. It is difficult not to conclude that there has been at least some redistribution. Any redistribution upward, of course, entails the greatest risk of societal instability. Those at the bottom of the wealth distribution would answer a resounding "NO" to Ronald Reagan's question, "Are you better off...?"
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Hayek was opposed to progressive taxes because by taxing people progressively he believed the state was not treating everyone equally. This thinking is clearly wrong however. Brilliant as Hayek was, and despite his several important contributions to modern economics, his reasoning on progressive taxation represents a major flaw in his economic views; reasoning that can not stand up to close scrutiny.
Here's why. If one ranks the dollars earned by the order in which they are earned, then the first dollar earned has rank 1, the tenth, rank 10, the thousands, rank 1000nth, the millionth, rank 1,000,000nth, etc. In progressive taxation, taxable dollars of one's income are all taxed at exactly the same rate according to rank. That is, if one person has taxable income of 30,000 and another has a taxable income of 3,000,000 both pay precisely the same rate on dollars one through 30,000! It is just that the first earner has no taxable earned income of dollars ranking above 30,000, whereas the second earner does. The first earner would happily pay a higher rate on dollars of rank greater than 30,000 if offered the option of a higher income with the stipulation that dollars of rank higher than 30,000 will be taxed at a higher rates than dollars of rank 30,000 or less.
I hate to be so pedantic, but I think this tedious example explains nicely why progressive taxation treats everyone exactly the same and therefore why Hayek's reasoning was wrong on this point.
So what is unequal about these two tax payers? Well, one has more taxable income than the other. There is no proponent of modern Western economics today that thinks everyone should have the same income. Certainly Hayek did not think that. The different amounts of total tax paid by these two example earners is not a consequence of unequal treatment by the State; it's a consequence of our inherent nature that causes one person to be different from another.
Having established that progressive taxation, in itself, does not entail the State treating people unequally. We can explore why progressive taxation is beneficial to society, and why, to the extent that progressiveness is wrung out of taxation, society is is endangered.
To be rigorous here. We would first have to establish that the more lopsided the wealth distribution in a society is, the greater the potential for societal instability. But that is a separate argument. So for the sake of expediency, let us assume that this is true. In other words, we will assume that extremes in wealth distribution are undesirable, and leave "extremes" undefined.
We except as correct, as it can be simply established as true, that the return on capital is greater than the growth rate in GDP. What this means in practical terms is that in the natural course of time those whose entire income comes from labor wages will build wealth more slowly than those whose entire income comes from invested capital. And their will be a spectrum of combination incomes between these two extremes. In general then, it is self-evident that due to returns on capital > GDP growth, the more lopsided the distribution of capital within a society is, the greater will be the rate at which wealth disparity increases. A progressive tax taxes dollars of higher rank at a greater rate. And dollars of higher rank make a greater contribution to capital. To the extent that taxes are progressive, the rate of increase in wealth disparity is therefore reduced.
This seems a benefit to society in terms of increased stability, and therefore greater progressiveness, up to the point where personal industriousness begins to be lost, is beneficial. A flat tax represents the total abandonment of progressiveness, and thus is most harmful to society in greatly accelerating the rate at which wealth disparity increases.
The effect of decreased progressiveness on the growth rate of wealth disparity can be seen perfectly illustrated in U.S. economic data from about 1980 forward. We began a steep loss of progressiveness in the 1980's and the acceleration of wealth disparity since is dramatic. It is to be noted that there is a compounding in this effect that causes it to follow an exponential function and thus a small loss in progressiveness can, given time , be quite destabilizing.
One way to counter the pernicious effects of excessive wealth disparity would be to tax capital earnings at higher rates. We currently tax it at lower rates than earned income. I haven't seen any initiatives along the lines of increasing tax rates on capital earnings, i.e., what the IRS calls 'unearned income,' but there is this and other potential remedies waiting in the wings. We are not done for by any means, but we are by and large a nation driven to action by crises; when the crisis arrives, we act, but often not before.
_____________________
An argument can be made, and often is, that greater wealth among a few at the very top of the wealth distribution need not be accompanied by redistribution of wealth upward. And probably theory can support that notion so long as a nations aggregate wealth can expand at a sufficient rate. In practice, this seems not to be true in the specific example of the United States economy from 1980 forward. In constant dollars, a rapid acceleration in wealth accumulation among a very few at the top of the distribution appears to have been accompanied by little or no accumulation among a large portion of the population and a small decrease in wealth among a substantial number nearer the bottom of the distribution. It is difficult not to conclude that there has been at least some redistribution. Any redistribution upward, of course, entails the greatest risk of societal instability. Those at the bottom of the wealth distribution would answer a resounding "NO" to Ronald Reagan's question, "Are you better off...?"
I'm in favor of progressive taxation, I was probably throwing the baby out with the bathwater when it came to simplifying taxes in a way that doesn't unduly burden people who can't afford to hire full-time tax professionals. Perhaps a tax based on a sloping function?
My progressive income tax has rates from 1% all the way to 99%. 1% on the first 10k over the exemption. 99% only on like the last 100 million of annual income. No deductions though, not mortgage not charitable.
Well, I'm sure between 1 and 99 there exists an optimal rate for the government's income vs. productivity.
In any case, domestic tax code aside, I still wonder whether there exists an answer to globalization while maintaining or improving a domestic status quo. It is a natural effect of capitalism that production should leave for where labor is cheaper; is the only inevitable circumstance that foreign labor has to become expensive enough to reach parity with domestic workers? Isn't protectionism anti-capitalist?
Well, I'm sure between 1 and 99 there exists an optimal rate for the government's income vs. productivity.
In any case, domestic tax code aside, I still wonder whether there exists an answer to globalization while maintaining or improving a domestic status quo. It is a natural effect of capitalism that production should leave for where labor is cheaper; is the only inevitable circumstance that foreign labor has to become expensive enough to reach parity with domestic workers? Isn't protectionism anti-capitalist?
You don't have it exactly right; it is natural for capital to flow to where its application yields the greatest after tax profit. Labor is only one factor of production; at the risk of tautology, I must point out that it would move to cheap labor where labor is cost is the most important factor of production.
That is not the case for all products and where it does apply the other factors of production cannot be made negative by the location. As technology progresses, labor decreases as a production consideration...both effecting domestic manufacturing employment but more significantly removing the labor advantage of offshore production.