(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.

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

"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

One problem any writer has who tries to deal with a subject that is both subtle and different from what the reader already thinks or knows is that, if the concept is different than the words needed to explain the concept either needs to be a pile of senseless jargon that the reader has a hard time remembering, or to carefully define common words and concepts to explain the subtleties they intend. Often they are the original idea mangled by misuse of others, sometimes it is taking a word of somewhat blurry definition and attempting to create a use that has more clarity at least by that particular writer. Personally, I prefer the latter refinement of what exists rather than inventing new. First, let me point out that those values I am discussing are derived from many sources; most directly from George Lakoff as each side represents the particulars of what he calls the "Strict Father Morality"(SF) and the other from what he calls "Nurtutant Parent Morality"(NP). As he points out, a great many people use these in different amounts in different aspects of their lives. Someone might treat their Family SF, their church NP, their Business SF, their local politics NP and their National Politics SF; they would be called Centrist politically, but so would a person that thought the opposite of that in every particular. And even that could be not fine enough grain as they could take different sides on different issues within each of those points. Lakoff has gone to considerable distance to point this out and calls them "Biconceptuals" and that most people may not be an even split, but will go to one side on many issues and the other on some others.

As for business, Douglas McGregor developed virtually the same dynamic (as theory “X” and Theory “Y”) in the 1960s and used them to define the SF and NP attitude in running a business, pointing out that the NP mode (theory “Y”) can be more profitable and certainly have a happier workforce. It is certainly possible that even a Dictatorship could have a "Good King" that oversees himself, and even acts as an honest agent for all of his people. In theory even the lowest peasant could feel very free in such an environment, but without an institution to codify that, it could change in a minute if the king dies and his son stands as the opposite position. Many have outlined that divide, but I will be using Lakoff's version as a common definition.

Lakoff speaks of the common vision of a nation and a family, and McGregor speaks of a business, I have sought to unify all group actions to look at their common structures and compare when they are most Functional and dysfunctional. This has led to particularizing Lakoff's SF vs NP names he has used, to four critical values, that I think that you can define 95% SF & NP general morality. In short form they are: Accountability, Empowerment, Empathy, and Reality. It is very easy to go off the rails in how different people will see those words I will try to give more detail later. In the finest detail, there is little or no middle ground, though as noted most folk flip or flop one way or the other depending on how the question is even asked, and it is more than just possible to ask the question in a way that pushes the answer to one side or the other, it is the central point of much of Lakoff's work, to not be trapped by folk who do that.

To understand how it all works one first needs to have an agreed structure and common definitions and understanding of the generic nature of groups. For any group of people to achieve a goal many people have to each do their part. The achievement itself will have costs and benefits and a lot of structure about different levels of involvement and impact that I will not be addressing here; but for simplicity's sake I will define it as an Enterprise. The borders of an Enterprise are also not "clean" as everyone's life will involve many Enterprises, most interacting to some amount with each other so trends and structure is easily lost in the minutia of each special case.For the Value of Accountability/responsibility, the  one job common to every Enterprise is the person who best expresses the common vision and organizes the other jobs and benefits of the rest of the group. Unlike most parts that people have to play this leadership position holds social or political power, and if people are going to voluntary do their part in the Enterprise, they have to believe that they are getting a fair shake that the leader is acting as the AGENT of everyone involved and not the king and must take the needs of everyone to account first and not last. If they embezzle they should have the bad life of any other embezzler caught and punished.

In NP Morality the Leader is the Agent and in SF morality they are the King, and not accountable to those they lead.

For the value of Empowerment, it should be obvious that a person who has great talent that is artificially blocked, will not be able to apply that talent for society, and while they may be injured by loss of the compensation for that talent, the entire society loses all the benefit of that talent as well. So it is "Profitable" for the society as a whole to assist even at a cost, as in general, such a cost is repaid many times over. Schools are a perfect example, but so is public transportation, from high speed rail to roads, and all the infrastructure, personal and general public, and even the knowledge commons and others I laid out here http://tinyurl.com/modsug.

This is the deepest meaning of equality, not that everyone be advanced or paid equally for any occupation, but in accordance to the talent and not the circumstances of each individual. Again, in NP morality the advancing of everyone is the goal, and each person is charged with advancing others, and by everyone advancing they also advance themselves. Built in to that is the ability to hold leadership accountable and be the ultimate “guard of the guards” while in SF morality that very freedom, is a limitation  in the particular as the individual has real choices, and it gives them the “torches and pitchforks” to hold power accountable that SF morality considers evil.

Those first two Basic Values are values of action, how you treat others and act in society. There are also two values of observation of which the first is Empathy. You cannot understand any person’s life that you cannot crawl inside and see from their life. Unless you can do this the values of action will make no sense in when or how to apply them. It has been well demonstrated that most mammals (and many other critters) possess what are called “Mirror Neurons” that enable them to see through the experience of others and understand their lives, and act based on that understanding. Very different from sympathy or pity, it can also spark outrage if the subject of observation is seen to be very unfair. Indeed, understanding fairness too is a part of mammal brain structure, as has been often demonstrated. In SF morality this is seen as weakness and every effort is to suppress or ignore it.

The last value of Reality is also hard for some to get their head around. Any person can have no other than their own belief. It cannot be imposed from outside, and thus needs to be respected. However, only Secular reality can be the final decision, not anti-religion but the best evidence based on principals of science and logic that have been being sorted out for a thousand years. In this way a person can have many ideas that contradict the beliefs of others, but must by the rules of logic or scientific method be able to define and demonstrate to be able to make that decision which the Enterprise will act on. It is the very Basic Values however that have no capability to be scientifically derived, as there is no experiment, or observation that can define the reason why NP morality is superior to SF morality. All that can be done is to deeply and logically understand that dividing line and see what is at stake. It is also, I believe, fairly well demonstrated that NP morality is more functional for the most people but that too becomes subjective for those with an NP preference. 

Unlike Lakoff (whom I’m sure would disagree) I do think that both paths are deeply and evolutionarily structural, and that brain plasticity has as much to do with experience and choices that enhance, not so much invention from a blank state, as choices from among possibilities that flowers expansion on metaphors rather than random stuffing of information as a computer does.

Both SF and NP can be very strong evolutionarily even as the SF writes the history books it is the NP that make things work and actually raises more kids. I don't think that mixing will ever be resolved more one side or the other, or that any tribe or racial group will contain more of one than the other. Which has the more political power at any given time is another matter.