Forgive the long-winded response, but I'd like to level set everyone on some general concepts before we start the overall discussion. (For those that don't know me, I'm one of those "Goldwater Republicans" you keep hearing mentioned. I'm conservative, but not Tea Party Uncompromising.)
Wealth vs Income
For the sake of this discussion, let's define "Wealth" as the amount of money an individual has accumulated over time. This is stored in various bank accounts, a 401K, mutual funds, stocks, bonds, and other instruments. Along with any property they may have, this is effectively the definition of their net worth.
Income, on the other hand, is the amount of money they made in the previous fiscal year. That is typically in the form of: Salary Interest Income Dividends on stocks, bonds, and insurance policies Capital Gains on the sale of assets, stocks, bonds, or other instruments.
Taxation Using the above definitions, Income is currently taxed. Wealth, is not, nor is it a factor in the marginal and effective tax rates for Income. Within the Income category, Dividends, Short Term (i.e. less than 1 year) and Long Term Capital Gains are all taxed at different rates.
There are essentially two different tax rates: The marginal rate, and the effective rate. The marginal rate describes the tax rate applied to the last dollar earned. The effective rate describes the actual rate paid by dividing taxes paid by income. So using the Eisenhower example, the marginal rate of 91% applied above $400,000 actually yielded (in 1961) an effective rate of 27.9%.
Points for Discussion Here are some discussion points. My starting position is in italics.
1. Should wealth be a factor in determining marginal tax rate? Ron - No. The income that contributed to that wealth has already been taxed. It should therefore not be a factor in a subsequent tax.
SLR: No and for the reason you quoted, wealth has already been taxed and it's unfair taxation to do it twice.
Wealth vs Income
For the sake of this discussion, let's define "Wealth" as the amount of money an individual has accumulated over time. This is stored in various bank accounts, a 401K, mutual funds, stocks, bonds, and other instruments. Along with any property they may have, this is effectively the definition of their net worth.
Income, on the other hand, is the amount of money they made in the previous fiscal year. That is typically in the form of: Salary Interest Income Dividends on stocks, bonds, and insurance policies Capital Gains on the sale of assets, stocks, bonds, or other instruments.
Taxation Using the above definitions, Income is currently taxed. Wealth, is not, nor is it a factor in the marginal and effective tax rates for Income. Within the Income category, Dividends, Short Term (i.e. less than 1 year) and Long Term Capital Gains are all taxed at different rates.
There are essentially two different tax rates: The marginal rate, and the effective rate. The marginal rate describes the tax rate applied to the last dollar earned. The effective rate describes the actual rate paid by dividing taxes paid by income. So using the Eisenhower example, the marginal rate of 91% applied above $400,000 actually yielded (in 1961) an effective rate of 27.9%.
Points for Discussion Here are some discussion points. My starting position is in italics.
1. Should wealth be a factor in determining marginal tax rate? Ron - No. The income that contributed to that wealth has already been taxed. It should therefore not be a factor in a subsequent tax.
SLR: No and for the reason you quoted, wealth has already been taxed and it's unfair taxation to do it twice.
Note: SLR is not a camera but an acronym for Socialist Left Response.
2. How should Interest be taxed? Ron - Interest should not be taxed. Money held in bank accounts is held primarily by average people with relative low wealth. Anyone with significant wealth uses other vehicles to grow that wealth, not bank accounts. Interest from bonds should also be tax exempt since the bond issuer (Federal government, Municipality, Corporation) is borrowing money from the individual for their funding. The interest is the compensation to the individual for incurring risk. By not taxing it, the bonds become more attractive, thus improving the liquidity of that vehicle.
SLR: A bit stickier on this one as here on the Socialist Left we believe in taxation across the board but your points are valid and agreed on all.
3. How should dividends be taxed? Ron - Dividends should be taxed at the Capital Gains tax rate based on the duration the stock has been held. Long term holders of the stock should benefit with a lower rate, whereas traders that hold the stock only over the ex-dividend period should pay a higher rate. (Full disclosure: I'm a short term stock trader.)
SLR: Again agreed and your next point is the major consideration on this.
4. How should Capital Gains be taxed? Ron - The current system of short term and long term Capital Gains having different rates is working well. Reward the long-term investor, penalize the short-term trader.
SLR: Agreed again (astounding!) as the speculation costs everyone else more than the speculator risks and that should not get a free (i.e. relatively) ride. Agreed again on long-term and for the reason you quote because these investors make foundations whereas we perceive the speculation as destructive, particularly with regard to oil, etc.
There is room for discussion on the specific rates but that does not seem an insurmountable problem so long as the topic is approached rationally and not with the typical hysterics which usually greet the matter from politicos.
5. How should Options, Futures, and Leaps be taxed? Ron - All three are primarily speculative trades. Options and Leaps should be taxed at the highest marginal rate. These are pure speculative trades that are little different from gambling income. There are no tangible securities changing hands in over 95% of these trades. (Over 90% of Leaps and Options expire worthless.) Futures should be taxed based on whether or not the contract holder takes possession of the commodity. For the speculator - i.e. they do not own nor will they own the commodity - the contract should be taxed at the highest marginal rate. For the contract holder that does take possession of the commodity, the tax should be based on the differential price of the contract versus the value of the commodity.
SLR: Unbelievable. Agreed again as anyone who buys simply to turn it back around again to tack a skim charge onto it is not doing fair business.
6. Should Social Security Income and Pension Income be taxed? Ron - This should be based on wealth. Here we need to discuss the cutoff point, however the value typically associated with "How much do you need to retire" is currently $5 Million. Therefore, I submit that anyone with wealth > $5 Millions should be ineligible for Social Security benefits. Pensions, on the other hand, are due the individual regardless of wealth. If the pension received is commensurate with everyone else in the company hired that year with the same years of service, then it should not be taxed. If, however, a larger pension was granted as part of the individual's compensation - which is typical for higher executives - then the delta should be taxed at that individual's marginal tax rate.
SLR: Stunning as again agreement and your cut-off as lower than the one I suggested but that precise amount is open to reasonable negotiation. The SLR has no significant point of disagreement and believes any which may come into it should be easily resolved with reasonable discussion.
7. Should Social Security Payroll Tax have an upper limit? Ron - No. Eliminating the upper limit of the Payroll Tax would add significant capital to the fund without causing stress to the workers paying into it.
SLR: Apparently I'm a Goldwater Republican as well but one more point to verify that as well.
8. How many tax brackets should there be and what should be the marginal rate for each bracket? Ron - I don't believe in penalizing anyone for earning - keyword "earning" - more money. I therefore do not believe in tax brackets. Without tax brackets, there's no need for a marginal tax rate. Rather, I would set a single flat rate that applies to all. That single rate would be lower than the effective rate currently paid by the majority of individuals if it's applied equally to all income levels.
SLR: Finally! There's provisional agreement on this as it's agreed on principle to make taxation fair across the board so long as it pays the bills and we have seen from the endless budget shortfalls they are not. Understood the government must reduce spending substantially and there's plenty of room for discussion on how to accomplish that but the budget process is only for the purpose of paying the freight so the SLR sees that secondary discussion as external. The primary concern for budgeting is for the current billing year and it must be paid in full.
SLR offers for consideration:
The financial problem outstanding is what pays down the national debt as this does not appear to address that major budgetary drain. The general thinking with the SLR has been to raise taxes on the filthy rich because they're the only ones with the wherewithal to pay it down without substantial increases in taxes for everyone. No need to flog the disease of interest paid on the national debt as the approach for many years has been the same as with teenagers and credit cards when they feel it's ok so long as they make the minimum payment which may not even be enough to cover the interest for the period. Meanwhile, the debt continues to increase.
Likely, this has hit TEGO (Their Eyes Glaze Over) with many so it would be perilous to continue into the discussion in the current response but we don't have a strong suggestion on how to accomplish the pay-down aspect and it's not a topic for improv.
The editorial aspect is mystification as to why Congress cannot work these deals and we come up, time and again, with threats to shut down the government to blackmail compliance. We know where that responsibility lies but it's not our purpose here to flog them, only to observe that problem exists as well and creates a substantial block to reasonable discussion. With that crowd, typically I'll get shouted down as a Commie liberal but the fact remains I'm not. My only expectation is fairness and taking care of business.
To the Socialist Commie Pinkos in the crowd, it is not a sellout of socialism because no government, socialist or other, can run for free. For our view of socialism, so long as the financial burden of doing that is fairly imposed, it will be acceptable. Note there is likely substantive disagreement on how the government spends money but that is a separate discussion from the fundamental of paying the freight.
This discussion is continued in a more-recent article, Kannafoot Offering on Paying Down the Debt - He Welcomes Rational Critique.
1 comment:
Try this thought for paying down the debt. Consider first that national expenditure through most of the 2000s was approximately 33% of the GDP. It spiked temporarily to 41%, but for the most part, it's been 33%. Now, I still believe that's too high and would rather see it capped - via Constitutional Amendment - closer to 27%, but the actual value is negotiable. The concept regarding a balanced budget amendment is to cap expense to a percentage of the GDP. When the latter goes up, by definition, there's more money in the overall economy and when it goes down the opposite is true and you must therefore spend less.
Now about that pesky debt. Step 1: Separate it in its entirety into a separate fund. Year 1, the contents of that fund equal the total amount of debt plus interest owed. Step 2: Issue "Callable Debt Reduction Bonds" to the American people in 2, 5, 10, 20, and 30 year increments. The Yield on those bonds will be 80% of the yield on regular Treasure instruments for the same duration, however the yield will be 100% tax free at all levels. That makes them very attractive. Since they are Callable, in years where the GDP is higher than average, you payoff the higher yielding bonds in the mix.
At any point in time, the total value of bonds that may be issued is equal to the principle remaining in the pool. If I've done my math right, this allows us to gradually pay down the outstanding debt in that pool while - thanks to the BBA - we do not incur any additional debt.
Shoot holes in it, because this was a very quick brain dump, so there must be flaws.
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