"There are two ideas of government. There are those who believe that if you just legislate to make the well-to-do prosperous, that their prosperity will leak through on those below. The Democratic idea has been that if you legislate to make the masses prosperous their prosperity will find its way up and through every class that rests upon it."
                                                                      ~ William Jennings Bryan, 1896

Something to consider, we have tried one theory and found it to be flawed. Why not take a shot at something different, yet still familiar enough not to frighten people and see what happens.

I propose; The Trickle-Up Economic Theory; The "Trickle-Up Effect" (a corollary to the trickle-down economic theory) states that benefiting the poor directly will boost the productivity of society as a whole and thus those benefits will, in effect, "trickle up" to benefits for the wealthy.

This theory proposes that benefits to the wealthy can be realized by an increase in sales relative to the amount of income and/or benefits that the poor are able to earn. The trickle-up effect argues itself as more effective than the trickle-down effect because people who have less tend to buy more. In other words, the poor are more inclined than the wealthy to spend their money. This being so, proponents believe if the lower, and lower-middle classes, have low unemployment and are given benefits, such as tax breaks or subsidies, the increased funds would be spent at a much higher rate than would the upper class, given similar circumstances.

Furthermore, the trickle-up effect argues that many upper-income individuals do not spend their entire yearly salary to begin with, which is an indication that they will most likely not spend any additional funds that might come to them via Capitol Gains or from Wall St. Investments.

Instead, they will save those additional funds. Ultimately, withholding those funds from the economy and increasing the gap between rich and poor. This theory goes on to suggest that the unspent funds that are withheld ultimately become sheltered from taxation, either legally or illegally, which has the ability to stall economic growth which, studies have shown, can lead to recessions or depressions in the economy.

Let's look to history for clues as which way we should try in the future:

20 of the last 28 years of presidential administrations (Reagan, Bush I and Bush II) have been an experiment in 'Trickle Down' economics. 8 years (Clinton) were spent under leadership that was not necessarily a Trickle Up or Down adherent, although he obviously leaned more Up than Down. (NOTE: I am intentionally excluding the current administration in my calculus because I believe that it is unfair to summarize, or provide a snapshot, of an administrations overall performance while still in office.)

During the 20 years under Trickle Down Republicans we saw several banking bubbles pop, a tech bubble pop, a housing bubble pop, deregulation gone mad, tax cuts for the wealthy, stagnation of wages, a squandering of surpluses, the largest bail-out in the history of man, engagement in multiple wars, defense spending thru the roof and the return of huge deficits.

In the 8 years under a Democrat we saw the lowest unemployment rate in 30 years (3.9%), wages increase, a rising standard of living and a projected 10 year budget surplus of 5.3 Trillion dollars.

These stats speak for themselves. I will leave it up to you as to the direction this country should take in the future.

~EJK

I think I've figured out why the Social Security program is in so much trouble.

The population of this country is approximately 319 Million people - but not all of them currently contribute to the Social Security Trust Fund, otherwise known as the Old Age, Survivors and Disability Insurance Program (OASDI), via payroll taxes, so that means we need to do a little math before we find the problem. So bear with me.

Of that 319 Million, the government tells us that currently 170 Million Americans are officially retired or disabled. Both are exempt from paying this tax.

That leaves 149 Million "potentially" contributing to Social Security via payroll deductions. But, we must subtract from that the approx 89 Million young people currently attending grade school and thereby unable to work.

Which leaves only 60 Million people having money taken out of their check.

Now, we have to remove 11 Million people who are employed by the Federal Government, AND the 20.2 Million people who work for State and Local Governments who contribute to an alternate pension program, which only leaves a meager 28.8 Million folks paying into Social Security.

Then there is the 15.4 Million people who work for religious organizations, the 4.5 Million individuals who work for foreign governments and the 5.5 Million of Non-resident aliens (individuals who are not U. S. residents or citizens) who qualify for an exemption from the payroll tax.

Additionally, we currently have 3.4 Million amazing "citizen soldiers" enlisted in the armed forces and/or otherwise preoccupied with the "War on Terror" who are excused from paying S.S. Taxes.

That leaves only 1.4 Million Americans to do the work.

Hmm, Let's see.... Am I forgetting anyone? Um, actually yes. At any given time there are 188,000 people in hospitals across the country, not working or collecting a check, so that leaves 1,212,000 Americans to pay into the trust.

Oh, right. I almost forgot that today we have 1,211,998 people locked away in prison.

And that, my friend, leaves only TWO people to do the work and cover the social security expenses in America today.

Two!

I have identified these two as; You and Me.

And there you are,

Sitting on your butt,

At your computer,

Reading jokes.

Nice!

Real nice!

Get back to work!

~ EJK

(This is a repost due to a bug that deleted some recent posts.)

JDN 2457285 EDT 18:33.

The purpose of today's post is to correct a misconception that most people seem to have about taxes. We spend an awful lot of time fighting over who is taxed, when we should be fighting over what is taxed.

This is actually one of the few things I disagree with Bernie Sanders about. Bernie Sanders has been very focused on the fact that corporations are getting better and better at avoiding corporate taxes, resulting in reduced revenue from corporate taxes that has had to be made up from other taxes like income tax and payroll tax. He's absolutely right about the facts; corporate tax revenues have definitely been decreasing. Politifact tries so hard to avoid showing a liberal bias that they actually exhibit a conservative bias, so because he left out some subtle nuances they gave him Mostly True. (Compare to the sort of statement they give Mostly True for Rand Paul or Donald Trump, where you have to actually significantly alter what they said in order for it to be true.)

But whereas Sanders sees this as a big problem and a further sign of the growth of American plutocracy (or as I like to call it, crypto-plutocracy), I'm... actually pretty okay with corporate tax revenue declining. In fact, I wouldn't mind if we simply got rid of the corporate tax entirely and moved it all to the personal income tax and the capital gains tax.

To explain why, I need to talk about something called tax incidence.

A key insight of economics that most people miss is that the person who writes the check is not the person who actually pays the tax. The person who actually pays the tax is the person who ends up with less money after the tax is implemented.

To see why these aren't the same, imagine that there's some product which is currently selling for the absolute cheapest it could possibly be sold. We'll call them... gizmos. Suppose the price for one gizmo is $10. This is an absolute minimum. Any less, and it would cost more to make a gizmo than it is selling for. Now suppose we institute a tax of $2 on gizmos; every time you sell one, you have to pay $2. The seller writes the check.

What's going to happen to gizmos? Either they're going to stop being sold entirely, or the price is going to go up to $12. It ultimately depends on whether people are willing to pay $12 for a gizmo. If they are, the seller will end up with the same as before, and buyers will give $2 each to the government.

Or, suppose we didn't make the seller pay it. Suppose we instituted the tax on buyers; every time you buy a gizmo, you have to pay $12. What happens now? The price remains at $10, sellers are unaffected, and every buyer will have to give $2 each to the government. Or, if they aren't willing to give up $12 each time they get a gizmo, they'll stop getting gizmos. In other words, the exact same result.

It's fairly easy show, in fact, that we could divide up this tax however we want—$1 from the seller and $1 from the buyer, or $1.50 from the seller and $0.50 from the buyer, etc.—and the net effect of the tax will not change. The net effect of a tax simply does not depend on who it is collected from. It depends on three things only: The size of the tax (obviously), the demand curve, and the supply curve.

This is why it doesn't matter how much of the payroll tax is collected from employer contributions versus employee contributions. If we raise the employer contribution, wages will go down to compensate. If we raise the employee contribution, wages will go up just enough to pay the difference. All that matters is the total amount of the payroll tax and the supply and demand curves for labor.

In general, we can draw the supply (blue) and demand (red) curves; the horizontal axis is the number of gizmos sold, the vertical axis is the price of each gizmo. If we have a competitive market, the price will be at the intersection of the two curves so that supply equals demand. The area below the price line and above the supply curve (blue) is the profit for sellers; the area above the price line and below the demand curve (red) is the “surplus”, a measure of how much benefit people get from buying the product. If you'd be willing to buy a gizmo for $15 and it actually costs $10, you get $5 of surplus for buying it.

If we add a tax, we effectively raise the price that buyers pay and lower the price that sellers receive—the difference between the two is the tax. Remember, it doesn't matter who pays the tax; what matters is the total amount of the tax on each gizmo. This introduces a new area on the graph, the number sold times the amount of the tax, which is the tax revenue (green). But it also cuts off an area of the graph, an amount of surplus that is simply lost due to inefficiency; we call this deadweight loss (brown).

Who actually gets hit by this deadweight loss depends upon how the tax affects the price and quantity sold, which in turn depends on how the supply and demand curve are shaped. If buyers are unwilling to pay more, they will bear less of the tax; we say that demand is more elastic in that case. If they are willing to pay more because they really want the good, we say that demand is inelastic.

If sellers are unwilling to sell for less, they will bear less of the tax; supply is elastic. If sellers are willing to sell for less because they can make gizmos very cheaply, they will bear more of the tax; supply is inelastic.

In the extreme case where they have these warehouses full of gizmos that they'll do anything to get rid of, supply would be perfectly inelastic and all the tax would fall upon the seller, even if the buyers had to write the checks:

In all of the previous I've been assuming that we're using some kind of sales tax (specifically an excise tax), where you pay a fixed amount for each gizmo sold. It's relatively easy to extend this to more traditional sales taxes, where you pay a fixed percentage; and by treating workers or hours of labor as “gizmos” you can apply the same basic reasoning to payroll taxes as well.

In all these cases we have a clear idea of what we are taxing—we are taxing gizmos, or we are taxing full-time workers. As a general rule, taxing something makes it more expensive, which makes people buy less of it. In technical terms, taxes disincentivize—if you put a tax on something, you tend to end up with less of that thing. Precisely how much less depends upon the supply and demand curves.

Sometimes that's exactly what you want. The reason we should have a carbon tax is that we do actually want to reduce carbon emissions. The reason we have an alcohol tax is that we're trying to reduce alcohol consumption.

But sometimes when you think you're taxing one thing, you end up really taxing something else, and thereby creating an incentive you didn't mean to.

How does this apply to corporate taxes? Well, that's the problem. It's not as clear what corresponds to the “gizmo” here, just what it is we are disincentivizing.

It might be that corporate taxes do fall entirely upon profits, in which case they're fantastic; profit really can't be discincentivized. Corporations exist to make profit; taking their profits away will make them mad at you, but it won't really change their behavior since they were already doing whatever they could to make as much profit as possible.

This is why income taxes are a good idea; as long as you have a sensible income tax system where going into a higher bracket never ends up giving you less take-home pay (a lot of people seem to think this can happen in our current system, but actually it cannot, except in a few rare cases involving eligibility for certain social welfare programs like TANF and Medicaid), and as long as you tax all forms of income equally (we do this pretty well for labor income, but we tax capital income significantly less), then there's really no incentive to do anything differently as a result of the income tax. There are a few nuances here that need to be considered involving whether you work at all, how many hours you work, and how you'll respond to risk; but basically most people work full-time at the highest salary they can find in their chosen profession, regardless of what the income tax rate may be.

But in fact I don't think corporate taxes work this way in practice. They do seem to provide some incentives, and most of those incentives are bad (they are what we call perverse incentives).

The first thing they do is provide an incentive to shift your profits to overseas subsidiaries. Suppose you make $1 billion in profits in the US. You could pay US taxes on it and end up with $650 billion to keep for yourself—or, you could set up a subsidiary in the Cayman Islands, pay that subsidiary $1 billion to do... something (it doesn't matter what), and then report that you made no profits this year because you had to spend all your money on that... very important thing the Cayman Islands subsidiary did for you. Then the Cayman Islands subsidiary reports their own profit of $1 billion, doesn't pay taxes on it because the Cayman Islands doesn't have a corporate income tax, and then sends it all straight back to you, the CEO, so that you now have the full $1 billion to work with instead of only $650 billion.

Corporate taxes also provide an incentive to finance investments through debt instead of cash or equity, because debt payments are deductible while cash income and stock dividends are not. This makes corporations more dependent upon banks, and makes credit crises that much worse for our real economy.

Corporate taxes provide an incentive to pay your CEO a higher salary, because you can report that as an expense and thereby make it tax-deductible. If instead we simply taxed the CEO's income, it wouldn't matter whether you paid it as a salary or as dividends.

For these reasons and more, the real cost of corporate taxes may not be falling upon CEOs and rich shareholders. Some of it may be falling upon the rest of us, as the efforts corporations use to avoid paying taxes result in them doing things that are otherwise harmful to our economy. The truth is, we really don't understand the incidence of corporate taxes all that well—which means that when we fiddle with them, we're never quite sure what will happen.

Finally, think about what happens when you tax all profits the same regardless of whom they are going to. While most stock dividends go to the rich (the top 1% owns over half of US stocks, bonds, and mutual funds), a substantial proportion go to the middle class; about half of all Americans own stock directly or indirectly. If you taxed dividends as personal income, we could make that tax progressive, so that people who receive a lot more in dividends pay a higher rate. But when you tax profits at the corporation's end, that dividend tax becomes completely flat; you pay the same rate on your HP dividends whether you own a single share of HP or are Carly Fiorina.

I don't agree with the American Enterprise Institute on a whole lot of things, but AEI's reform plan for the corporate tax actually makes a lot of sense to me: Get rid of the corporate tax and replace it with a system whereby capital gains and dividends are taxed as ordinary income.

In addition to AEI's plan, I would then raise the rate on ordinary income, and add higher brackets like $1 million, $2 million, and $5 million. And on that part, I'm in agreement with Bernie Sanders.

JDN 2457326

This video is instructive, not as a serious economic policy argument, but as a glimpse into the thought processes of people who support conservative economic policies. It doesn't tell you much of anything about how the world works; but it does tell you about how their minds work.

[Youtube embed: https://www.youtube.com/watch?v=S6HEH23W_bM]

I don't know which is more painful to bear, the video or the transcript, but I've given you both so you at least have some choice.

Once upon a time, there were three brothers—triplets, named, Tom, Dick and Harry Class. They were raised in the same home, with the same parents, had the same IQ, same skills, and same opportunities. Each was married and had two children. They were all carpenters making $25 per hour.

While they were very similar in all these respects, they had different priorities: For example, Tom chose to work 20 hours per week, while his brother Dick worked 40 hours, and Harry 60.

It should also be noted that Harry's wife worked full-time as an office manager for a salary of $50,000. Dick's wife sold real estate 10 hours a week, and made $25,000 per year. Tom's wife did not work.

Tom and Dick spend all of their family income; since they paid into Social Security, they figured they didn't need to save for retirement. Harry and his wife, on the other hand, had, over many years, put away money each month and invested it in stocks and bonds.

Here's how it worked out:

Tom made $25,000 a year.

Dick and his wife made $75,000.

And Harry and his wife, $150,000.

When a new housing development opened up in their community, the brothers decided to buy equally-priced homes on the same private street. One day, the brothers decided to pool their funds for the purpose of improving their street. Concerned about crime and safety, and wanting a more attractive setting for their homes, the three families decided to install a security gate at the street's entrance, repave the street's surface, and enhance the lighting and landscaping.

The work was done for a total cost of $30,000.

Harry assumed they would divide the bill three ways, each brother paying $10,000.

But Tom and Dick objected. “Why should we pay the same money as you? You make much more money than we do.”

Harry was puzzled. “What does that have to do anything?” he asked. “My family makes more money because my wife and I work long hours, and because we have saved some of the money we've earned to make additional money from investments. Why should we be penalized for that?”

“Harry, you can work and save all you like,” Tom countered. “But my wife and I want to enjoy ourselves now, not 25 years from now.”

“Fine, Tom, do what you like; it's a free country. But why should I have to pay for that?”

“I can't believe you're being so... unbrotherly,” Tom argued. “You have a lot of money, and I don't. I thought you'd be more generous.”

At this point, Dick, the peacemaker in the conversation. “I've got an idea,” Dick said. “Our combined income is $250,000, and $30,000 is 12% of that amount. Why don't we each pay that percentage of our income? Under that formula, Tom would pay $3,000, I would pay $9,000, and Harry would pay $18,000.”

“I have a much better idea,” said Tom. “And one that's fairer than what you're proposing.”
Dick and Harry turned to Tom. “Harry should pay $23,450. Dick, you should pay $6,550; and I will pay.. nothing.”

To Dick, this sounded completely arbitrary, and not really fair. But it did have one big plus: His share would be $2,450 less under Tom's formula than under his own. So, he decided to be silent.

Harry, however, was stunned. “You want me to pay almost 80% of the bill despite the fact that each of us is receiving the exact same benefits? Where did you get such a crazy idea?”

“From no less an authority than the US government,” Tom responded, as he pulled out a gray booklet. It's all right here, in the IRS tax tables. This is the progressive income tax system all US taxpayers live under, and I don't see why we should be any different. In fact, I believe all future improvements should be paid in this way.”

“Works for me,” said Dick. So, by a vote of two to one, the cost of street improvements was divided as Tom had proposed[...].

Okay, thanks for bearing with that. I know it isn't easy.

The first thing that's obviously wrong with this analogy is that everything was set up explicitly with perfect equality of opportunity, and I mean perfect.

Let's hear that one again, shall we?

They were raised in the same home, with the same parents, had the same IQ, same skills, and same opportunities. Each was married and had two children. They were all carpenters making $25 per hour.

Like, seriously, what are you smoking? This has never been anything remotely like the distribution of income in any human society ever. There has literally never been anything anywhere near that level of equality of opportunity, even in the most socially-mobile society on Earth, home of the American Dream—I'm of course talking about Denmark.

If we make the analogy even slightly more realistic, the whole thing begins to unravel.

First of all, it's not even obvious to me that the system Tom proposes is all that bad. It seems unfair in this case, because Tom could simply choose to work more hours. But all we have to do is make that no longer feasible: Tom's company will only hire him 20 hours per week, no more. He could try to find another job, but that would take time and unemployment is high. He can't make more money right now, not without a huge amount of effort and risk. Bang; suddenly it doesn't seem unfair to use flat or even progressive taxation.

The figures need not be arbitrary either. We can go with my logarithmic tax system, set p = 0.1, and the subsistence level at $25,000, which gives us:

Tom's income: $25,000 = 1 S

Tom pays: (1) - (1)^(1-0.1) = 0 S

Tom pays nothing, as in his own suggestion.

Dick's income: $75,000 = 3 S

Dick pays: (3) - (3)^(1-0.1) = 0.31 S = $7,750

Harry's income: $150,000 = 6 S

Harry pays: (6) – (6)^(1-0.1) = 0.98 S = $24,606

Total raised: $32,356

That's just slightly less progressive than Tom's proposal, but obviously more progressive than either of the other two proposals (and still would save Dick money, so he'd still vote for it at the end). And it's not based on some arbitrary throwing out of numbers; it's calculated from the assumption of logarithmic marginal utility of wealth.

Or suppose we believe that income is the result of differences in skill (I do not, but many economists seem to). Suppose we say that the three brothers do not have the same IQ: Tom has IQ 110, Dick 120, Harry 130. The reason Harry makes more money is that he's actually smarter, and can do better work.

Does he deserve to receive higher pay for his better work? I'd say so. But he already starts to look less than generous if he expects his brothers to pay the same amount even he knows they can't make as much money because they aren't as smart.

And oh, by the way, it's ridiculous to suggest they all live in the same sort of house. Tom probably lives in a slum; Dick might have a nice place in the suburbs; Harry is the only one living in a fine gated community.

Of course now they can't be building the same fence (also: shades of the Trump Fence?) or the same roads; they have to be participating in some larger project with implications for the whole community. Let's say they're hiring a police officer to protect the city. Well, whose part of the city is he likely to protect? You guessed it: Harry's. So tell me again why Tom should pay just as much for it?

But we're not done by any means. Let's go a bit further down the road of inequality of opportunity, and say that they all grew up in different neighborhoods; Harry was raised in that fancy gated community, Dick in that nice suburb, and Tom in that bleak, crime-ridden slum. He doesn't make as much money because the struggle to survive made it hard to succeed in school.

Or suppose they did grow up together, and do have the same skills, but Harry is rich because he won a $3 million lottery that he put into stocks and bonds which now provides him with that $150,000 per year (that's 5%, pretty conservative). Doesn't it seem fair that because he just got lucky he should be expected to share that bounty with others?

Finally, let's suppose that Harry was Dad's favorite, and inherited $3 million. Is it not now apparent that he has not a leg to stand on when he asks that the others pay anything at all? Yet inheritance is one of the primary drivers of wealth in our society (and all societies), as noted by that well-known socialist rag The Economist: “Mr Piketty estimates that 12% of those born in 1970 may cross this threshold [...] [wherein they] will receive a sum in the form of inherited wealth that is larger than the lifetime income earned by the bottom 50% of the population.”

And that's not even getting into things like racial discrimination. What if they're not brothers, but tom is Black and the other two are White, but they all share the same last name because Tom is the great-grandchild of a slave who was raped by Harry's great-grandfather? Tom has been discriminated against his whole life, Harry inherited the wealth from the slave plantation, and now Harry has the audacity to say that taxing him at a higher rate is unfair?

Oh, and did I mention that these income ratios are remarkably equal compared to the actual reality?

In the video, the ratio of incomes is $150,000 to $25,000, which is only 6 to 1.

That's not an accident, by the way; it's simply impossible to have the level of inequality we actually have under a system where everyone makes a similar wage. Almost everyone works about 40 hours per work; very few work less than 20 by choice; almost no one works over 80. That would only be a 4 to 1 income ratio, or 8 to 1 if you include two-income households. The actual income ratio between top 1% and bottom 5% is more like 80 to 1. The actual income ratio between CEOs and their employees is now above 400 to 1. The full scale of incomes across the United States, from the lowest poverty measure of $5,000 per year to Bill Gates at about $10 billion per year, is 2 million to 1.

Take a look at these graphs, which I made from the World Top Incomes Database:

Including capital gains, the top 0.01% makes over 4% of the income—meaning they are 400 times as rich as the average person. Furthermore, that share has been rising since the 1980s—since Reaganomics.

If one person makes 3 or 6 times as much as another person, as in the video, we can reasonably believe that they actually do work 3 or 6 times as hard. It's even more likely that they are 3 or 6 times more productive, which is not at all the same thing (if a kindergartner and a quantum physicist solve the same math problem, the physicist is surely more productive, even though the kindergartner would have to work a lot harder to get it done at all). Even 400 times as productive we might be able to imagine in certain extreme cases—Jonas Salk, Albert Einstein. But when one person makes 2 million times as much as another—as, let me remind you, is true, right now, here in these United States of America—it becomes obvious that this is not a question of higher productivity but a question of higher power. It could be political power, market power, or even old-fashioned physical force—but it's clearly power.

But this sort of video does give us a glimpse into the minds of those who would think otherwise, those who honestly believe that differences in income are just differences in work ethic; many are rich, and honestly think they earned what they have (even if their father loaned them more money than most people will ever have); but a surprising number are poor, and actually seem convinced that they deserve their own lot because they just didn't work hard enough (even as they work two jobs, care for their sick grandmother, and still can't make their rent on time). These are the people who talk about “lazy freeloaders” and “free stuff”.

They think that an analogy which abstracts away from all the real causes of inequality and assumes an impossible standard of equal opportunity is nonetheless a solid critique of our tax system.

And that's pretty terrifying. Happy Halloween?